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 borrower in return shall, during
the continuation 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.