THE MONEY PROBLEM

Chapter XVI.

INTEREST



NO subject within the field of Economic Science has excited so prolonged, so universal, or such bitter contention as that with which we have now to deal, nor have the effects of any Economic system upon social life and civilization been more marked.

Originally denounced as immoral by the founders of the Christian Church, and legally prohibited for many centuries, it has become the very foundation upon which our so-called Christian Civilization is built.  The practice of charging for the loan—formerly termed Usury—was expressly forbidden among the Jews by the laws of Moses.  Permission to exact usury from the Gentiles was, however, granted—a permission of which the Jews were not slow to avail themselves, and to which is attributable more than to any other cause the terrible persecutions they underwent during the Middle Ages, as well as in later times.

Usury, or, as it is now designated, Interest, was condemned by ancient writers like Plato and Aristotle, the Mahommedan Koran forbade it, and under the Christian Church’s influence the severest penalties were inflicted by States against usurers.  Even now the system is controlled in most countries by special legislation which limits the percentage which may be charged for the loan.

Notwithstanding that interest is now legitimised universally, there still remains considerable prejudice and a feeling that it is based upon injustice.

Quite recently, during the trial of a famous libel suit in the Courts of France, an eminent advocate (for the defence) spoke as follows :—

“ St. Gregory of Nyssa, the immortal thinker of the fourth century, wrote these lines :—


“ ‘ He who would give the name of robbery or
‘ parricide to the iniquitous invention of interest would
‘ not be very far from the truth.  What, indeed, does
‘ it signify if you have made yourselves masters of the
‘ wealth of another by scaling walls or by killing
‘ passers-by, or if you have acquired what belongs to
‘ you by the mercyless method of the loan ? ’


“ If anyone had prophesied to St. Gregory as follows :—


“ ‘ A day will come when what thou treatest as
‘ robbery and assassination will become the law of
‘ the world, and when an Attorney-General will
‘ indict in an assize court the writers who share thy
‘ opinion.  The whole of society will be founded upon
‘ usury.  They will build a temple which they will call
‘ a Stock Exchange.  This temple will fill the place of
‘ thy cathedrals, even as thy cathedrals have filled the
‘ place of the temple of Venus or Jupiter.  The priests
‘ serving in this new temple will be called bankers,
‘ stockbrokers and financiers.  They will swindle
‘ others out of all the gold that will insure to them
‘omnipotence.  They will buy everything that is
‘ buyable, and some of the things that are not.  And
‘ vain revolts against their frightful empire will serve
‘ only to make more manifest its terrible solidity ! ’


“ If anyone had prophesied that to St. Gregory, St. Gregory, who believed in God, would have joined his hands and cried :  ‘ Lord, deliver us from such a moral malady ! ’

“ The malady has run its course.”1

The problem of interest is clearly stated by the Austrian Economist, Professor Bohm-Bawerke, in his great work on Capital and Interest (I quote from Professor William Smart’s translation) :—

“ It is generally possible for anyone who owns capital to obtain from it a permanent net income, called Interest.

“ This income is distinguished by certain notable characteristics.  It owes its existence to no personal activity of the capitalist, and flows in to him even where he has not moved a finger in its making.  Consequently it seems in a peculiar sense to spring from capital, or, to use a very old metaphor, to be begotten of it.  It may be obtained from any capital, no matter what be the kind of goods of which the capital consists ;  from goods that are barren as well as from those that are naturally fruitful ;  from perishable as well as from durable goods ;  from goods that can be replaced, and from goods that cannot be replaced ;  from money as well as from commodities.  And, finally, it flows in to the capitalist without ever exhausting the capital from which it comes, and therefore, without any necessary limit to its continuance.  It is, if one may use such an expression about mundane things, capable of an everlasting life.

“ Thus it is that the phenomenon of interest, as a whole, presents the remarkable picture of a lifeless thing producing an everlasting and inexhaustible supply of goods.  And this remarkable phenomenon appears in economic life with such perfect regularity that the very conception of capital has not infrequently been based on it.

“ Whence and why does the capitalist, without personally exerting himself, obtain this endless flow of wealth ?

“ These words contain the theoretical problem of interest.”

After exposing every theory hitherto advanced in favor and against interest to the most searching and merciless criticism, he concludes that interest is just, because “ The loan is a real exchange of present goods against future goods.  Present goods invariably possess a greater value than future goods of the same number and kind, and therefore a definite sum of present goods can, as a rule, only be purchased by a larger sum of future goods.  Present goods possess an agio in future goods.  This agio is interest.  It is not a separate equivalent for a separate and durable use of the loaned goods, for that is inconceivable ;  it is a part equivalent of the loaned sum, kept separate for practical reasons.  The replacement of the capital plus the interest constitutes the full equivalent.”

In short, a loan transaction may be represented thus :  A = (A+ ΔA) t, where A = the sum loaned = present goods :  t = time of maturity of loan.  ΔA = increment of A = interest.

In spite of the elaborate defence of interest by the great Austrian Economist, I do not think the last word has been said on this subject, nor do I believe its apologists have yet rendered the system invulnerable to attack.  The main contention they make as shewing the justice of interest, is that capital assists in production, rendering labor more productive, and hence capital is clearly entitled to a return for its use.  And since in the hands of the owner it is likewise productive, and he is enabled to get a return (called natural interest) by using it himself, he is naturally justified in demanding a return equivalent to this.  At first sight this seems plausible enough ;  but loans are not made from capital which its owners can themselves use profitably.  It is surplus wealth that is usually put out at interest.

Consideration of certain examples given by Economists to illustrate the origin of interest will make this clearer :  take for instance the well-known, oft-quoted, illustration of Bastiat.

The story concerns two carpenters, James and William, one of whom, at the expense of ten days’ labor, produces capital in the shape of a plane.  The other, for some unaccountable reason, instead of making a plane, borrows his neighbour’s, proposing at the end of twelve months to return him a new one.  To this James, the capitalist, objects, on the ground that by lending it he deprives himself of the advantage its use affords in lightening his toil, and for which he is entitled to compensation over and above the return of a new plane.  He demands, additional to the new plane, a plank.  The agreement is concluded, and at the end of the year James receives a plane and a plank.  He lends the plane again for another year, receiving another plane and plank, and continues to lend, year after year, until his son becomes possessed of the plane, and he in turn acts the part of capitalist by lending the plane on interest.  This annual gift of a plank is called by economists a natural and just remuneration for the “power which exists in the tool to increase the productiveness of labor.”  William, the borrower, is said to be no worse off than if he had not borrowed the plane, since its use has made his labor more productive.  This is substantially the celebrated argument of Bastiat, that has been cited thousands of times as a clinching demonstration of the justice of usury.

The answer which the opponent of interest would naturally make to this illustration is that it lacks probability.  Why should James lend the only plane he has ?  He made it to use.  What is he going to do without it ?  Make another ?  Then who supports him while he is making planes ?  Again, William is also a plane maker, since he must make and return a new one at the end of the year.  Why does he not make one at the beginning of the year and avoid borrowing ?  Why cannot William turn capitalist ?  The illustration seems absurd on its very face.  Men do not lend that for which they have themselves immediate use.  It is surplus wealth that is converted into capital, not that necessary for immediate consumption.  To make the story analogous to that which it is intended to illustrate, James should have at least two or more surplus planes, in which event his demand for a plank in compensation for the loss of advantage which the use of a plane affords him, is nonsense.  He is merely lending that which he has no use for ;  hence, the act of lending entails neither loss, deprivation, nor inconvenience of any sort.  He gets a new plane back, and is no worse off at the end of the year for having made the loan.  On the contrary, he is much better off—better in several ways.  First, in receiving a new plane he preserves his wealth, which is naturally perishable.  Were he to refuse to lend it, it would eventually deteriorate.  The wood might warp and split, the steel rust, and ultimately the plane become useless.  Secondly, by lending, he helps William.  William is a member of society, just as James is, and the condition of society is dependent upon its members.  The more William advances the better for society, and the better for James.  The condition of individuals affects society, and the condition of society reacts on all its members.  This fact many writers have hitherto been blinded to, notwithstanding its vast economic importance.  Current political economy seems to lose sight of the fact that under the terms capital and labor, it is really dealing with flesh and blood, and not with machines.

It is the contention of Economists that if interest were abolished the production of capital would be curtailed—a contention that appears to me unsound.  The contrary seems to me to be true.  The great desire on the part of mankind is to escape from that condition which renders labor obligatory.  Now the system of interest offers a means by which producers may retire from the field of production.

Universally, there is a struggle on the part of wealth producers to put by sufficient capital, the interest upon which will enable them to live comfortably without work.  The higher the rate of interest, the less capital it is necessary to create to achieve this end, and vice versa.  Therefore, the lower the rate of interest, the fewer will be those able to retire from wealth production, and the greater will be the production of capital.  If interest were abolished, the desire to escape the irksomeness of toil would be none the less keen, and since this escape would depend upon the creation of sufficient wealth for support by the consumption of principal, it seems to me apparent that the incentive to wealth production would be greater without interest than with it.

It is also taken for granted that loans would cease if interest were abolished.  Why should a man lend his wealth without having some benefit over and above the mere return of the wealth loaned ?  The answer to this is that wealth is perishable.  If we confine ourselves to the consideration of commodities—omitting those forms of wealth included under land, natural opportunities, money, bonds and legal claims—we shall see that wealth is naturally and inevitably perishable.  The vast bulk of wealth is consumed soon after it is produced.  Imagine, for the sake of argument, a society where the capitalist’s wealth consisted wholly of perishable commodities.  Knowing that such wealth would decay and disappear within a certain time, would not an offer to take it and return its equivalent at some future time, or say in instalments paid regularly at the end of certain periods, be readily accepted without interest ?  In fact, would not such an offer meet with, and merit, a reward ?  Surely the man who saves for me wealth which otherwise would perish, is entitled to a remuneration.  Under modern conditions the loan, however, takes a very different form.

By virtue of certain legal enactments, wealth is, as stated by Professor Bohm-Bowerke, immortalised.  By a system of exchange a man’s surplus commodities are converted into money, and when capital is borrowed it usually takes the money form, so that perishable wealth is transformed into an order on wealth producers at all future times to reproduce wealth in any form, and at any time the holder may choose.  To negotiate a loan the modern industrian has recourse to the bank, and it is in this direction that our present investigation must be conducted.

When a merchant seeks to negotiate a loan of money from a bank he must first provide security, either in the form of collateral or personal credit for the return of the money, so that the element of risk is eliminated ;  in fact, it is customary for banks to exact a deposit of collateral of much greater worth than the amount of the loan.  Having provided sufficient wealth to guarantee the return of the sum borrowed, he has further to agree to pay a percentage as interest.  Let us take a special case.  A manufacturer, having been informed that there was likely to be a strike amongst the coal miners, and, in consequence, the price of coal would advance, he determined to lay in a good supply.  He applied to his bank for the loan of 5,000 for six months.  He offered as security for the loan, a mortgage worth 10,000 on an improved property in a neighbourhood where rents were advancing ;  the loan was made, and at the end of the six months he returned the 5,000, plus 100 interest.  The information regarding the strike proved to be erroneous, and in place of the price of coal advancing as he expected, it actually declined, and he found he had paid 500 more than if he had waited and bought it as required.  He therefore lost not only this amount and the interest on the loan, but had to pay for the storage of some of the coal during this period.  The question arises, what did the bank give in exchange for the 100 ?  It made no sacrifice, nor underwent any risk, since it held the power to convert the amount covered by the mortgage into currency.  The wealth of the bank was not decreased by one penny in making the loan.  What justification was there in asking a sum for the loan of the money ?  This is the real interest problem under modern industrial conditions.

Economists would say that the bank was deprived of the use of the money during the six months which it might have profitably invested to bring a return.  It is customary in giving illustrations and examples on this subject for writers to say that the borrower gained considerably by the use of the loan, and then to add that the bank might have placed the money in the same investment, and made all the profit, and that the payment of interest is only fair, since without the loan the borrower could not have made the profit.  But the instances of such investments being unprofitable are by no means uncommon—in fact, it is questionable whether fully one-half are not so, and, if the bankers undertook to direct the investment, it is doubtful whether they would be any more successful than the average merchant and manufacturer.

The correct answer as to why interest is chargeable and obtainable on loans of the nature similar to the example given, is because the demand for money is practically always in excess of the supply—a condition existing by virtue of special legislation.  The purchase of commodities and the payment of debts are effected in the legalised medium of exchanges, and mortgages are not legalised means of payment, whilst bank notes and coin are, and so the holder of mortgages and every other form of wealth except gold and government or bank money, is unable to pay his debts unless he can exchange his wealth for money by means either of a sale or the loan.  The loan is really an exchange of stationary for circulating credit, of special for general purchasing power, and interest is a tax for the privilege of converting the one into the other.  All the bank has done was to enable the manufacturer to fluidize his wealth.  Governments having conferred this privilege upon one form of wealth, gold, has thus given the power of those controlling this metal to exact a tax upon all other wealth.  Interest is therefore the price of a legally created monopoly.

The money loan is not “an exchange of present goods for future goods,” but merely an exchange of one form of purchasing power for another.  As I have shewn in previous chapters, the general purchasing power of legal tender is a legally acquired privilege, whilst purchasing power comes from and is due to Society.  It is not due to anything existing in any metal or instrument, nor to any quality possessed by it, except the function granted by legislation of paying debts.  Money is essentially a social instrument, and interest is the price paid by borrowers for the privilege given to gold and bank notes.  The merchant who bought the coal would certainly not have paid interest for the 5,000 if mortgages had the same rights of monetisation as gold.

After all, the judgment which must eventually be passed upon interest as a legalised system will depend upon its social results.  Is it socially beneficial or injurious ?  Does it make for the prosperity and happiness of nations, or for their misery and destruction ?  If the former, why have Governments interfered so often in seeking to control and limit interest charges ?  And if five per cent. is a national blessing, why is not ten per cent. a still greater advantage ?  Governments have not sought—except in a few isolated cases—to limit rent charges, nor have they stipulated to what extent a merchant may make profits in trade.

Why has this one system been of so much greater solicitation on the part of governors, rulers, and legislatures, than the other factors of distribution, rent, wages and profits ?  Why have the religions of nearly all lands denounced and forbidden it ?

It seems to me that experience must have taught nations in the past that usury is fraught with danger, and only possible within strictly defined limits.  Money is the life-blood of trade, and therefore of wealth production, and anything that interferes with its free circulation must be as serious a menace to a nation’s welfare, as interference with the circulation of the blood would be to the life of a human being.

Interest is necessarily a tax upon production—for surely, if a nation could procure for its trade a non-interest bearing currency, it would be in a better and more prosperous condition than where a tax is imposed ?  Money being the tool of trade, the less one has to pay for the use of this tool the greater the wealth he will be able to secure to himself.  The rate of interest, in fact, determines often whether an industry can be worked profitably or not.  Nay more, it determines whether nations shall prosper or become bankrupt.  Startling as it may appear, it is nevertheless an easily demonstrated fact, that under the current rates of interest, the debtor classes of nearly all civilised nations are rushing into bankruptcy.  The fact is that the wealth production of nations cannot keep pace for long with their interest charges.  In fact, interest as a universal working principle is—at all ordinary rates—an impossibility.  Five per cent. interest means a doubling of wealth every twenty years.  At compound interest it is doubled in about 14¼ years.  Let us take a broad survey of this question.

Suppose the Pilgrim Fathers had invested the little capital they brought from the old world on a five per cent. usury basis, the people of this country2 would owe them more than all the wealth they possess.

“Suppose,” says Proudhon,3 “that a man in the reign of St. Louis had borrowed 100 francs, and had refused—he and his heirs after him—to return it.  Even though it were known that the said heirs were not the rightful possessors, and that prescription had been interrupted always at the right moment, nevertheless, by our laws, the last heir would be obliged to return the 100 francs with interest, and interest on interest, which in all would amount to 107,854,010,777,600 francs ;  which is 2,696 times the capital of France, or more than twenty times the value of the terrestrial globe ! ”

“ Suppose, when Virginia was settled in 1607, England had sold to the first settlers the whole of the United States for $1,000 and had taken a mortgage for this sum covering the whole property, but instead of paying the interest yearly at seven per cent., the settlers had agreed to take up their bonds at the end of every six months and add in the interest.  Allow the $1,000 and the accruing interest to remain outstanding until 1860, and then become due.  Although our prosperity has far surpassed that of any other nation, yet our property of every description would not pay the debt.  Interest at seven per cent. doubles the principal in ten years and one month.  In 100 years and ten months the debt would have amounted to $1,024,900 ;  and in 201 years and eight months to $1,048,576,000.  Add fifty years and five months to 1859, and the sum would amount to $33,554,432,000.4

But it is not necessary to go back so many years to show the impossibility of interest as a universal working principle.  Usury is always increasing more rapidly than wealth.  It knows no period of depression, no time of stagnation, no failure of crops, no unfortunate speculations, no condition of ill-health and inability to produce.  It takes no holiday, and refuses even to keep the Sabbath.  It forever goes on as regular as time, and as relentlessly as gravitation, counting and adding to men’s burdens, piling them higher and higher, until the loan becomes too great, and there is a financial crash.  No system of production has yet been discovered capable of maintaining this regular, never-failing supply which usury demands.

All forms of wealth production are fitful, irregular, and subject to fluctuations.  One season’s harvests are abundant and the next a failure.  This year’s fruit crop may prove enormous, and the next spring’s frosts may kill all the blossoms.  The consequence is that though for a limited period production may make rapid progress, yet, like the hare and the tortoise, usury invariably overtakes and keeps ahead of production.

“ The borrowed capital of the United States,” says a writer in the Arena,5 “ claims more in remuneration than the country can produce.  Every dollar invested in business claims a return called interest.  Every dollar representing debts unpaid, claims a like remuneration.  This must all be paid out of the production of each year, and from each year’s product men must be fed and clothed and sheltered.  The wealth of the world must be kept up.  Buildings, machinery, everything must be kept in repair ;  and improvements for use in the future must be taken from the stock of the present.  There is not wealth enough to meet all these obligations, and the business of the world must go into the hands of a receiver every now and then, so that a new start in business may be made.  The country, with all its allied industries, is analogous to a mammoth business concern.  When it contracts greater liabilities than it can meet it fails, and we have a financial panic.

“ This state of bankruptcy is chronic.  Counting everything, the liabilities of the country are always greater than its assets.  The industrial world is always in a state of potential bankruptcy, but credit tends to keep it out of the hands of a receiver.  Then the same persons are in part debtors and creditors, and this, with our frequent liquidations, aids in keeping us from continual financial panic.  Any disturbing of credit precipitates a crisis.

“ An odd proposition, but one capable of mathematical demonstration, is that the very foundation principles of our industrial system lead us to recognize obligations which we can never pay.  A simple, specific statement of what they are compels us to admit that they are too large to meet.

“ The present wealth of the United States may be placed in round numbers at $72,000,000,000.  That fully eighty per cent. of this sum pays interest may be verified by any person who cares to give the subject thought.  If any of the money in business bears interest, all money invested in business must likewise bear interest, otherwise nobody would assume business risks.  But we may arrive at the same conclusion by a process quite different.

“ Something like eighty per cent. of the wealth of the country is in the hands of about 250,000 persons, or about one two-hundred-fortieth of the population.  This excludes the wealth of well-to-do farmers and merchants ;  and it goes without saying that nine-tenths of this wealth held by the immensely rich is interest-bearing.  Nearly all of it is lent, or if not lent out is invested in some business where interest on the money invested is added to the return or profits of the undertakers.  The wealth in the hands of farmers and merchants is paying interest on all that is not used for the personal wants of themselves and their families ;  and even many of the homesteads of the country are paying interest. ...

“ At least one half of such wealth is interest-bearing.  An examination of the mortgage lists of the several States will more than bear out this estimate.  We are, then, paying fixed charges, as the railroads put it, on about $55,000,000,000 of the country’s wealth.  The net rate will average five per cent.;  and taking into consideration commissions and other charges, six per cent. is a low estimate of the gross rate.  The interest on $55,000,000,000 at six per cent. is $3,300,000,000 per year.  To get the average interest charges for the last decade we must take the average of interest-paying capital, which is about $50,000,000,000.  We have, then, an average yearly interest of $3,000,000,000, a sum which more than absorbs the entire yearly increase of wealth in the United States.  During the last decade the wealth of this country has increased about $22,000,000,000.

“ During the same period the interest charges were $30,000,000,000.  Adding but the single item of interest on personal business obligations to the standing debt of the people, the assets of the country’s citizens will, in the short period of ten years, fall $8,000,000,000 below their liabilities.  The principal falls due in that time, and the business of the country, if fixed in the hands, would bankrupt in that time.  It does actually feel the shock.  But the fact that many persons are creditors as well as debtors, and the debtors and creditors change places, puts off the final accounting.  The tendency of the enormous fixed charges on business is to amass the wealth of the country in the hands of large property owners, who are almost exclusively creditors.

“ The mightier the fortune, the more interest it draws and the more exempt it is from the dangers of speculation.

“ Fortunes go on piling up under the laws of interest, and after all checks and counter-tendencies are allowed for, the country has a panic—becomes bankrupt—every twenty years.

“ There is a well-defined financial flurry of more or less violence, every decade, or even oftener.  The fact is that whenever the creditor class demands its money there is a panic, for there is not money enough in the country to satisfy the demand, and all property must be turned over to meet liabilities.  Indeed, the cash in the country is principally in the hands of the creditor class, having piled up there under the laws of interest.

“ During times of confidence business is kept moving by a shifting of liabilities, but in times of doubt and uncertainty, from whatever cause brought about, the business of the country finds it impossible to meet its obligations and is obliged to file into bankruptcy.  The cleverest of speculators cannot long keep up their business by borrowing from one to pay another, unless debts are very small as compared with the capital invested.  Just so the business of the country, taken as a whole—the piling up of debts always ends in collapse.  It is nonsense to say that want of confidence is the cause.  Unless the ground principles of business produce instability, want of confidence can have no effect.  Men realize that the business of the world cannot pay its debts, and therefore lose confidence.”

Now, a scientific principle is one which is universally applicable to the phenomena with which it deals.  The greater the field over which it operates, the more is its truth and exactness established.  Interest, as we have seen, becomes impossible as soon as applied universally or over a considerable period.  It is only applicable on a small scale or for a limited period.

Every certain period there is a universal breakdown ;  panics and bankruptcy become world-wide ;  interest-bearing wealth is swept away, and equilibrium is restored only after interest-bearing capital has been greatly reduced.  In fact, capital is being constantly devoured to pay interest on other capital.  Here is a builder whose vacant house refuses to pay the ground rent ;  finally the house is seized for the rent.  There, a manufacturer, unable to pay the interest on borrowed money, is compelled to assign his machinery, buildings and grounds to the usurer.  This is of such ordinary and every-day occurrence that it excites no comments and scarcely any notice ;  yet it is only by the continual destruction of capital that rent and interest are maintained.  Wealth under usury devours itself.  Startling as it may seem, it is an indisputable fact that panics, bankruptcies and failures are absolutely necessary in order to keep the system alive.  Wealth cannot be produced at a sufficiently rapid rate to meet its demands ;  hence capital, after devouring its own children, devours itself.  The first capital sacrificed is that which is the least strongly intrenched.  It is the small capitalist who goes under first, then the next, and so on, until the wealth lent on interest is reduced to balance production.  The most strongly intrenched is that which absorbs the less powerful.  By this means national debts and government bonds bear interest in times of severest panics and business depression ;  and this is why they are considered the most desirable and safest kind of investment.  Usury, like gravitation, causes large bodies to attract and eventually absorb smaller ones.  The small capital of individuals is being constantly absorbed by the greater capital of corporations.  This is its inevitable tendency.  The forces of attraction and absorption are as strong, constant and relentless in the monetary as in the physical world.

“ Usury,” says Lord Bacon, “ bringeth the treasure of a realm into few hands.”

Usury is suicidal, and abstinence leads to death.  The more abstinence is practised, the more capital is piled up ;  the more capital, the greater the amount swallowed by interest ;  the greater the volume of wealth taken on interest, the heavier the burden on labor ;  and the heavier the burden upon labor, the less wealth labor is capable of producing.

It seems to me therefore, when considered on sufficiently broad grounds, interest is not a desirable nor a socially beneficial institution.  It leads to bankruptcy, and is the parent of those financial disturbances which some writers have ridiculously attributed to sun spots.  It forces the industrial world into liquidation every few years.  It has created and perpetuated an idle rich class, which, as Professor Cairnes asserted, “ is a formidable obstacle to economic laws, and from the existence of which no public benefit of any kind arises.”

Finally, as a universal principle it is impossible.




1 M. de St. Audan’s Defence of Jean Grave.

2 United States.

3 “ What is Property?” Humboldt Series.

4 “ Capital and Interest.” Kellogg.

5 I.W. Bennett in March No. 1894.