An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (ebook reader macos .TXT) 📕

or encroaching upon some other source of revenue, such as the property or

the rent of land.

The stock which is lent at interest is, no doubt, occasionally employed in

both these ways, but in the former much more frequently than in the latter.

The man who borrows in order to spend will soon be ruined, and he who lends

to him will generally have occasion to repent of his folly. To borrow or to

lend for such a purpose, therefore, is, in all cases, where gross usury is

out of the question, contrary to the interest of both parties; and though it

no doubt happens sometimes, that people do both the one and the other, yet,

from the regard that all men have for their own interest, we may be assured,

that it cannot happen so very frequently as we are sometimes apt to imagine.

Ask any rich man of common prudence, to which of the two sorts of people he

has lent the greater part of his stock, to those who he thinks will employ

it profitably, or to those who will spend it idly, and he will laugh at you

for proposing the question. Even among borrowers, therefore, not the people

in the world most famous for frugality, the number of the frugal and

industrious surpasses considerably that of the prodigal and idle.

The only people to whom stock is commonly lent, without their being expected

to make any very profitable use of it, are country gentlemen, who borrow

upon mortgage. Even they scarce ever borrow merely to spend. What they

borrow, one may say, is commonly spent before they borrow it. They have

generally consumed so great a quantity of goods, advanced to them upon

credit by shopkeepers and tradesmen, that they find it necessary to borrow

at interest, in order to pay the debt. The capital borrowed replaces the

capitals of those shopkeepers and tradesmen which the country gentlemen

could not have replaced from the rents of their estates. It is not properly

borrowed in order to be spent, but in order to replace a capital which had

been spent before.

Almost all loans at interest are made in money, either of paper, or of gold

and silver ; but what the borrower really wants, and what the lender readily

supplies him with, is not the money, but the money’s worth, or the goods

which it can purchase. If he wants it as a stock for immediate consumption,

it is those goods only which he can place in that stock. If he wants it as a

capital for employing industry, it is from those goods only that the

industrious can be furnished with the tools, materials, and maintenance

necessary for carrying on their work. By means of the loan, the lender, as

it were, assigns to the borrower his right to a certain portion of the

annual produce of the land and labour of the country, to be employed as the

borrower pleases.

The quantity of stock, therefore, or, as it is commonly expressed, of money,

which can be lent at interest in any country, is not regulated by the value

of the money, whether paper or coin, which serves as the instrument of the

different loans made in that country, but by the value of that part of the

annual produce, which, as soon as it comes either from the ground, or from

the hands of the productive labourers, is destined, not only for replacing a

capital, but such a capital as the owner does not care to be at the trouble

of employing himself. As such capitals are commonly lent out and paid back

in money, they constitute what is called the monied interest. It is

distinct, not only from the landed, but from the trading and manufacturing

interests, as in these last the owners themselves employ their own capitals.

Even in the monied interest, however, the money is, as it were, but the deed

of assignment, which conveys from one hand to another those capitals which

the owners do not care to employ themselves. Those capitals may be greater,

in almost any proportion, than the amount of the money which serves as the

instrument of their conveyance; the same pieces of money successively

serving for many different loans, as well as for many different purchases.

A, for example, lends to W �1000, with which W immediately purchases of B

�1000 worth of goods. B having no occasion for the money himself, lends the

identical pieces to X, with which X immediately purchases of C another �1000

worth of goods. C, in the same manner, and for the same reason, lends them

to Y, who again purchases goods with them of D. In this manner, the same

pieces, either of coin or of paper, may, in the course of a few days, serve

as the Instrument of three different loans, and of three different

purchases, each of which is, in value, equal to the whole amount of those

pieces. What the three monied men, A, B, and C, assigned to the three

borrowers, W, X, and Y, is the power of making those purchases. In this

power consist both the value and the use of the loans. The stock lent by the

three monied men is equal to the value of the goods which can be purchased

with it, and is three times greater than that of the money with which the

purchases are made. Those loans, however, may be all perfectly well secured,

the goods purchased by the different debtors being so employed as, in due

time, to bring back, with a profit, an equal value either of coin or of

paper. And as the same pieces of money can thus serve as the instrument of

different loans to three, or, for the same reason, to thirty times their

value, so they may likewise successively serve as the instrument of

repayment.

A capital lent at interest may, in this manner, be considered as an

assignment, from the lender to the borrower, of a certain considerable

portion of the annual produce, upon condition that the burrower in return

shall, during the continuance of the loan, annually assign to the lender a

small portion, called the interest ; and, at the end of it, a portion

equally considerable with that which had originally been assigned to him,

called the repayment. Though money, either coin or paper, serves generally

as the deed of assignment, both to the smaller and to the more considerable

portion, it is itself altogether different from what is assigned by it.

In proportion as that share of the annual produce which, as soon as it comes

either from the ground, or from the hands of the productive labourers, is

destined for replacing a capital, increases in any country, what is called

the monied interest naturally increases with it. The increase of those

particular capitals from which the owners wish to derive a revenue, without

being at the trouble of employing them themselves, naturally accompanies the

general increase of capitals ; or, in other words, as stock increases, the

quantity of stock to be lent at interest grows gradually greater and

greater.

As the quantity of stock to be lent at interest increases, the interest, or

the price which must be paid for the use of that stock, necessarily

diminishes, not only from those general causes which make the market price

of things commonly diminish as their quantity increases, but from other

causes which are peculiar to this particular case. As capitals increase in

any country, the profits which can be made by employing them necessarily

diminish. It becomes gradually more and more difficult to find within the

country a profitable method of employing any new capital. There arises, in

consequence, a competition between different capitals, the owner of one

endeavouring to get possession of that employment which is occupied by

another; but, upon most occasions, he can hope to justle that other out of

this employment by no other means but by dealing upon more reasonable terms.

He must not only sell what he deals in somewhat cheaper, but, in order to

get it to sell, he must sometimes, too, buy it dearer. The demand for

productive labour, by the increase of the funds which are destined for

maintaining it, grows every day greater and greater. Labourers easily find

employment; but the owners of capitals find it difficult to get labourers to

employ. Their competition raises the wages of labour, and sinks the profits

of stock. But when the profits which can be made by the use of a capital

are in this manner diminished, as it were, at both ends, the price which can

be paid for the use of it, that is, the rate of interest, must necessarily

be diminished with them.

Mr Locke, Mr Lawe, and Mr Montesquieu, as well as many other writers, seem

to have imagined that the increase of the quantity of gold and silver, in

consequence of the discovery of the Spanish West Indies, was the real cause

of the lowering of the rate of interest through the greater part of Europe.

Those metals, they say, having become of less value themselves, the use of

any particular portion of them necessarily became of less value too, and,

consequently, the price which could be paid for it. This notion, which at

first sight seems so plausible, has been so fully exposed by Mr Hume, that

it is, perhaps, unnecessary to say any thing more about it. The following

very short and plain argument, however, may serve to explain more distinctly

the fallacy which seems to have misled those gentlemen.

Before the discovery of the Spanish West Indies, ten per cent. seems to have

been the common rate of interest through the greater part of Europe. It has

since that time, in different countries, sunk to six, five, four, and three

per cent. Let us suppose, that in every particular country the value of

silver has sunk precisely in the same proportion as the rate of interest;

and that in those countries, for example, where interest has been reduced

from ten to five per cent. the same quantity of silver can now purchase just

half the quantity of goods which it could have purchased before. This

supposition will not, I believe, be found anywhere agreeable to the truth ;

but it is the most favourable to the opinion which we are going to examine;

and, even upon this supposition, it is utterly impossible that the lowering

of the value of silver could have the smallest tendency to lower the rate of

interest. If �100 are in those countries now of no more value than �50 were

then, �10 must now be of no more value than �5 were then. Whatever were the

causes which lowered the value of the capital, the same must necessarily

have lowered that of the interest, and exactly in the same proportion. The

proportion between the value of the capital and that of the interest must

have remained the same, though the rate had never been altered. By altering

the rate, on the contrary, the proportion between those two values is

necessarily altered. If �100 now are worth no more than �50 were then, �5

now can be worth no more than �2:10s. were then. By reducing the rate of

interest, therefore, from ten to five per cent. we give for the use of a

capital, which is supposed to be equal to one half of its former value, an

interest which is equal to one fourth only of the value of the former

interest.

An increase in the quantity of silver, while that of the commodities

circulated by means of it remained the same, could have no other effect than

to diminish the value of that metal. The nominal value of