This regulation, instead of preventing, has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of the money, but for the risk which his creditor runs by accepting a compensation for that use.He is obliged, if one may say so, to insure his creditor from the penalties of usury.
In countries where interest is permitted, the law, in order to prevent the extortion of usury, generally fixes the highest rate which can be taken without incurring a penalty.This rate ought always to be somewhat above the lowest market price, or the price which is commonly paid for the use of money by those who can give the most undoubted security.If this legal rate should be fixed below the lowest market rate, the effects of this fixation must be nearly the same as those of a total prohibition of interest.The creditor will not lend his money for less than the use of it is worth, and the debtor must pay him for the risk which he runs by accepting the full value of that use.If it is fixed precisely at the lowest market price, it ruins with honest people, who respect the laws of their country, the credit of all those who cannot give the very best security, and obliges them to have recourse to exorbitant usurers.In a country, such as Great Britain, where money is lent to government at three per cent and to private people upon a good security at four and four and a half, the present legal rate, five per cent, is perhaps as proper as any.
The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate.If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest.Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition.A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors.
The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other.A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.
No law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made.
Notwithstanding the edict of 1766, by which the French king attempted to reduce the rate of interest from five to four per cent, money continued to be lent in France at five per cent, the law being evaded in several different ways.
The ordinary market price of land, it is to be observed, depends everywhere upon the ordinary market rate of interest.The person who has a capital from which he wishes to derive a revenue, without taking the trouble to employ it himself, deliberates whether he should buy land with it or lend it out at interest.The superior security of land, together with some other advantages which almost everywhere attend upon this species of property, will generally dispose him to content himself with a smaller revenue from land than what he might have by lending out his money at interest.These advantages are sufficient to compensate a certain difference of revenue; but they will compensate a certain difference only; and if the rent of land should fall short of the interest of money by a greater difference, nobody would buy land, which would soon reduce its ordinary price.On the contrary, if the advantages should much more than compensate the difference, everybody would buy land, which again would soon raise its ordinary price.When interest was at ten per cent, land was commonly sold for ten and twelve years' purchase.As interest sunk to six, five, and four per cent, the price of land rose to twenty, five-and-twenty, and thirty years' purchase.The market rate of interest is higher in France than in England; and the common price of land is lower.In England it commonly sells at thirty, in France at twenty years'
purchase.
CHAPTER V
Of the Different Employment of Capitals THOUGH all capitals are destined for the maintenance of productive labour only, yet the quantity of that labour which equal capitals are capable of putting into motion varies extremely according to the diversity of their employment; as does likewise the value which that employment adds to the annual produce of the land and labour of the country.
A capital may be employed in four different ways: either, first, in procuring the rude produce annually required for the use and consumption of the society; or, secondly, in manufacturing and preparing that rude produce for immediate use and consumption; or, thirdly, in transporting either the rude or manufactured produce from the places where they abound to those where they are wanted; or, lastly, in dividing particular portions of either into such small parcels as suit the occasional demands of those who want them.In the first way are employed the capitals of all those who undertake the improvement or cultivation of lands, mines, or fisheries; in the second, those of all master manufacturers; in the third, those of all wholesale merchants; and in the fourth, those of all retailers.It is difficult to conceive that a capital should be employed in any way which may not be classed under some one or other of those four.
Each of these four methods of employing a capital is essentially necessary either to the existence or extension of the other three, or to the general conveniency of the society.