"Money might be very abundant in ordinary commerce and have very little value in it, and exchange for a very small quantity of commodities, and the interest of money might be at the same time very high." And in § 78, he says that in the value of money compared to commodities, it is the money considered as metal which is the object of valuation. In the valuation of the interest of money, it is the use of the money during a certain time which is the object of valuation. The fact is that there are two ways in which the Value of money may be estimated. One is the actual quantity of merchandise or debts that it may purchase or be exchanged for; and the other is the Profit which may be made by its use in purchasing either merchandise or debts. Now, in speaking of the Value of Money with respect to commodities, it is usual to speak of the quantity of commodities it will purchase; when speaking of the Value of Money with respect to debts it is usual to speak of the Profits. Debt being a saleable commodity, it is necessary, as we have already observed, to fix upon a unit of debt for the purposes of commerce, as is done with respect to every other commodity which is bought and sold. The unit of debt commonly used is £100 payable one year after date. If a sum of money be paid down for such a debt, that money is the price of the debt; and, of course, the Value of Money with respect to debt varies exactly according to the quantity of debt it will purchase, just as it does in respect to any other merchandise. There are two ways of buying and selling such debt in commerce. The Profit is agreed upon, and in one method the full sum is advanced, and in exchange for that there is received the Right to demand the sum together with the Profit at the end of the year. In this case the Profit is called INTEREST. In the other the Profit agreed upon is retained by the lender at the time of the advance, and the difference is paid down, and the lender, in exchange for it, receives the Right to demand the full sum at the end of the year. In this method the Profit is called DISCOUNT. Thus, if the unit of debt to be bought is £100 and the Profit £5— In the case of Interest the lender pays down £100 and in exchange for it receives the right to demand £105 at the end of the year. In the case of Discount the lender pays down £95 and receives in exchange the Right to demand £100 at the end of the year. Now, in commercial usage it is very common to call the Profit, the Value of Money; and if the Profit rose from 3 to 6 per cent., it would be said that the Value of money had doubled, because twice as much Profit would be made by its use. Now, when this is clearly explained, it is evident that there is no confusion at all in the matter. Traders distinctly understand what they mean by using this form of expression. An ambiguous term is where a word denotes different things in nature which are not understood by those who use it; such as the word LOAN denotes two operations of a distinct nature; and this difference is not observed by those who use it, and who consequently deduce very erroneous inferences from such use. But many words have two distinct meanings in the same science, and when these different senses are clearly understood by those who cultivate such sciences, such terms are not ambiguous, nor is there any confusion. Traders perfectly understand the two distinct senses in which the term Value of Money is used, and, consequently, among them there is no ambiguity and no confusion-though we often find great confusion among writers who do not understand commerce. In different points of view, then, the term Value of Money is applied to the QUANTITY of merchandise of any sort purchasable with money; and to the PROFITS to be made by trading with money and when this is clearly understood the formula we have given in a preceding chapter is strictly accurate― The Value of Money varies inversely as PRICE, and directly as PROFITS. 34. Of the two methods of trading in money, Insurance and other Companies which make advances to landowners and others adopt the method of Interest: but Bankers invariably adopt the method of Discount. Now, as by interest a profit of £5 is made on the advance of £100, and by Discount a profit of £5 is made on the advance of £95, it is evident that Discount is more profitable than Interest. So long as the Profits are moderate the difference is not very material; but when the Profits become high the difference increases in an enormous ratio, as a few simple examples will shew. Suppose a money-lender discounts a bill at 20 per cent., he advances £80, and at the end of the year receives £100; and the Profit is clearly 25 per cent. If he discounts a bill at 50 per cent., he advances £50, and at the end of the year receives £100; the Profit exactly equals the advance, or is 100 per cent. Suppose a man lent £100 at 100 per cent. interest, he would receive £200 at the end of the year: if he discounted a bill at 100 per cent., he would advance nothing, and receive £100 at the end of the year; that is, the Profit would be infinite! It would be out of place in this work to investigate the mathematical formulæ relating to Interest and Discount, but we may give a table shewing the difference in profit made by these modes of trading Table shewing the Profits per cent. and per annum at A consideration of this table will shew how Bankers' profits increase when discount becomes high; and also what discounting a bill at 50 and 60 per cent.-which we occasionally hear of in courts of law-means. 35. Supposing, however, the rate of interest to be free and unfettered, as it now is, it is very easy to see the considerations which would govern it. In the first place, as the interest is always a part of the profits realised, it is clear that the first element which will determine it will be the expected rate of profit. The next is the proportion between capital and the demand for it. If capital be very scarce, and those who want to borrow it numerous, they, of course, will naturally give a greater proportion of the profits to the capitalists. But if capital be abundant, and those who want to borrow it be fewer, the capitalists will have to be contented with a smaller proportion of the profits, and the rate of interest will fall. These considerations shew at once that interest conforms to the rule we have already established for prices, for the profits expected to be realised by means of the capital are the intensity of the service rendered; and the number of those who want to borrow compared to the quantity of capital to be lent, represents the power of the buyer over the seller. Hence, interest varies directly as the profits, and inversely as the proportion of the supply to the demand. The preceding considerations shew that the Interest of money is precisely analogous to the Rent paid by a farmer to a landlord. They are each of them paid out of the profits realised, and they are the hire paid by the borrower for the use of trading capital, and they generally bear some proportion to the profits, but what proportion that will be, is modified by particular circumstances in each case. These considerations contain the general principles which govern interest under ordinary circumstances, but, of course, in times of great commercial difficulty, both general and particular sums are paid for the use of money very much higher than the usual rates, which are also called interest; but these are exceptional cases, and are paid, not out of the legitimate profits of business, but for some great exigence, as for the use of sums for a short time to stave off ruin, or other penalties which may attach to a trader for failing to meet his engagements. The sums paid in such abnormal instances are not fairly to be called interest. It is evident that interest cannot continue for any time to exceed profits, any more than cost of production can continue to exceed value. If it does, the supply of commodities will be limited until the value exceeds the cost: so if interest exceeds profits production will be limited until the profits are raised. Hence, the most powerful method of curbing over-production is to raise the rate of discount so as to annihilate profits. 36. We must also observe, that though rent and interest are analogous in their nature, so far as they are each the remuneration paid for the temporary use of a species of capital, yet they proceed in opposite directions in the progress of society, the reason of which is very obvious. In an early stage of society land is very abundant, and food is very abundant, consequently when every one can buy land for himself, he will not hire any, and even if he does, the rent must be very low, because the price of food out of which rent comes is very low. On the other hand, capital or money is very scarce, and there is a great demand for it as well as for labour, consequently wages and interest will be very high. But as population and wealth increase, the land becomes more scarce, and the demand for food increases, which raises the price of food. There is less land to be sold, and its price is much higher, consequently many persons who prefer that mode of life, and cannot afford to buy land, are obliged to hire it and pay rent for it, and as the price of food increases, rent increases too. On the other hand, each successive generation adds to the accumulation of capital; the number of persons who have disposable capital to lend increases, and this naturally diminishes interest, more especially as profits, out of which interest is paid, also naturally diminish from the effects of competition. The fact is, that these two species of capital, land and money, are subject to inverse conditions in the progress of society. The demand for land increases faster than the supply, the supply of money increases faster than the demand. These are the causes which permanently govern the market rate of interest in different countries; but in the same country the market rates of different species of securities differ, and their rates vary from time to time according to circumstances; but yet they will all be found to be governed by one general rule. In considering the question we have hitherto not admitted any idea of the danger of the security, but we have supposed the investment to be perfectly safe; and it is only the sum paid and received for the use of the money under a full sense of the security of the investment that should be strictly termed interest. But |