commodities, and they are not increased in a similar ratio, the only effect can be a general rise of prices; and no change can take place in the rate of interest: but if the increased quantity of money be used in the purchase of debts, for a similar reason, the inevitable effect will be a raising of the price of debts, i. e., a lowering of the rate of interest. But as commercial debts are usually created for the purpose of increasing the production of commodities, such a use of money does call an increased quantity of commodities into existence; and, consequently, no change in the value of money with respect to them need occur.

And, of course, if the increased quantity of money be used partly to purchase commodities, and partly to purchase debts, both effects will be produced: the price both of commodities and debts will be raised; neither however so much as if the increased quantity of money were used exclusively in either way. Therefore the prices of commodities will be raised and the rate of interest will be lowered. And this is exactly what did happen after the discovery of America. Hume and many other writers have observed that though the prices of all things rose greatly, they did not rise in proportion to the increased quantity of money. Smith and Hume also say that numerous writers observed that the rate of interest also fell very considerably. The reason of these two effects is perfectly plain. Part of the increased quantity of money was used to purchase commodities directly, and part was used to purchase debts; and consequently the price of both was raised; that is, the price of commodities rose and the rate of interest fell.

The truth of these remarks is shewn by the immense raising of the price of debts, i. e., lowering the rate of discount, the immensely increased production of commodities of all kinds, and the slight change which has taken place in the value of agricultural products effected by the institution of Banks. We have in a previous chapter fully exhibited the mechanism of banking; and shewn how utterly erroneous is the common opinion as to the effect of banking.—that it is merely lending out money collected from the community: though even if it were confined to that, it would greatly reduce the rate of discount. But we have shewn that all banking in this country consists in the creation of Credit, several times exceeding the quantity of money deposited. This increased quantity of Credit produces all the effects of an increased

quantity of money in aiding in the production of commodities, as well as in lowering the rate of discount. And it is precisely because these creations of credit are mainly used to increase the quantity of commodities, that they have produced, comparatively speaking, so little effect on prices. It has been calculated that in the form of banking deposits alone in England Credit has been created to the amount of £800,000,000; and this produces exactly the same effects as so much money.

Thus we see how bankers can exist with such very low profits. Ordinary traders often make profits at the rate of several thousand per cent. per annum, and no one complains: and the reason is that they deal with their own capital and on comparatively small amounts.

But a banker's own capital is but a very small part of what he trades with. He opens a shop for the purpose of buying other people's capital, either with a simple promise to pay, which costs nothing, or sometimes with a promise to pay a moderate interest. Having collected this basis of bullion, he then offers to buy commercial debts: and he also buys these with a simple promise to pay-his own credit-which costs him nothing, but for which he charges exactly the same as if it were money. By this means he is enabled for all practical purposes to multiply the money in his keeping several times; and he is enabled to give a higher price for the debts he buys. And when many bankers carry on the same kind of business simultaneously, they, of course, bid against one another, and this raises the price of debts, i. e., lowers the rate of discount, exactly as an equal quantity of money would do. This, then, shews how erroneous is the absolute doctrine that an increase of money cannot lower the rate of interest: and also when Mill says "The rate of interest, then, depends essentially and permanently, on the comparative amount of real capital offered and demanded in the way of loan"-such a doctrine is utterly unintelligible unless credit be admitted to be Capital; because all banking loans are new creations of credit, and it is this enormous creation of credit which has brought the rate of discount so low in this country.

42. To appreciate more fully the great reduction in the rate of interest which the modern system of banking has effected, we have 1 Principles of Political Economy, B. III., ch. 23, § 4.

only to consider the usual rates which prevailed before the invention of the system, and which still prevail when transactions are in actual money.

At Athens, Solon, after his great measure of the Seisachtheia, with a sagacity which was 23 centuries in advance of the human race, abolished imprisonment for debt, and left interest absolutely free, and we find that it varied from 12 to 36 per cent. We may consider that 18 per cent. was about the medium rate, as in the only case in which it was fixed by law-in that of a husband who repudiated his wife, and refused to restore her dowry-it was fixed at that rate. Isæus says that Stratocles had lent out 40 minæ at interest at 9 oboli per mina per month, which is 18 per cent. : and Timarchus borrowed at the same rate.3 Eschines Socraticus borrowed money at 36 per cent. from a banker to set up perfumery shop, but finding it did not pay at that rate, obtained the sum from another person at 18 per cent.4 The Clazomenians, owing their troops 20 talents, paid them 4 talents as interest, or 20 per cent.5 At Corcyra, about 300 B.C., the State ordered some funds to be invested at the rate of 2 per cent. per month, or 24 per cent. per annum, on perfect security. Niebuhr says that 18 per cent. is the usual rate of interest in the Levant at the present day.

At Rome interest does not at first appear to have been regulated by law, but the debts of the common people having given rise to much discord and sedition, chiefly in consequence of the extreme severity of the law of debt, interest was limited by the Code of the XII. tables to unciarium fœnus. The meaning of this term has given rise to much difference of opinion among the learned, but Niebuhr and Walther agree that it means 10 per cent. per annum. All persons who took interest beyond this were obliged to restore it fourfold; a thief was obliged to return double what he had stolen. In 408 legal interest was reduced to one half, and in 413 it was abolished altogether. And in 430, in consequence of a creditor having abused his rights, imprisonment for debt was abolished except by the sentence of a court.

8

Afterwards, but at what time does not distinctly appear, centesima usara was established as the legal rate. Niebuhr supposes

1 Demosthenes, c. Neæram, p. 1362.

Eschines, c. Timarch, p. 127.

Pseud-Aristot. Economics, II., 17. 7 Tacit. Ann. VI., 16.

Cato de

2 Supra Hagniæ hered., p 293. Lysias frag. in Athenæus, l. 13. 6 Hist. of Rome, Vol. III., p. 64. Re rusticâ. 9 Livy, VIII., 28.

this was a foreign rate first adopted by Sylla.1 Centesima usura was the same as asses usuræ, or one per cent. per month, or 12 per cent. per annum. And this continued to be the legal rate of interest up to Justinian, who reduced it one half. Verres is said to have lent the public money on his own account to the publicani in Sicily at bina centesima, or 24 per cent.; and Cicero says that the wealthy Romans lent money at 48 per cent. in the Greek provinces. Smith sneers at the virtuous Brutus for lending money at 48 per cent. in Cyprus.

Fufidius exacted quinas usuras, or 60 per cent. from his reprobate clients, and Juvenal3 speaks of a man who offered triple usury, or 36 per cent., but could find no one to lend him at that

rate.

43. The Mosaic interdict of usury was adopted and confirmed by the rulers of the Christian church. Money-lenders, never a very popular class anywhere, were laid under the Divine curse; the consequence of which was that in the sixth century the Jews had become the great money-lenders of Christendom. As the Jews had no hopes for the future, another sin, more or less, could not influence their destiny. While, therefore, usury was strictly forbidden to Christians, the Jews were not molested, and from that era we may date the strong bias of the children of Israel to this species of trading, which was further strengthened and aggravated by the subsequent treatment they received in every country in Europe. When it was further discovered that the prince of the pagan philosophers concurred with the Divine legislator in condemning interest on loans of money, it became a settled dogma, just as certain as the stability of the earth, that any Christian who lent out money at interest cut off from himself all hopes of final salvation. The irresistible temptation of profit, however, induced many Christians to prefer seizing a present gain, at the risk of a doubtful penalty. The active spirit of commerce demanded the use of capital, and the instinctive sense of mankind rejected the revolting absurdity that he who furnished the means, and risked the loss of his fortune, should not participate in the profits; and numerous subterfuges were devised, so that while the name of usury was avoided, the thing might be done.

Nowhere were the inconveniences and absurdity of the doctrine 1 Hist. of Rome, Vol. III., p. 61. 2 Hor. Sat., 7. 2, 16. 3 Sat. IX.. 7.

of the wicked nature of interest felt more strongly than at the fountain of infallibility, the Papal Court itself, and nowhere was greater ingenuity shewn to circumvent its own dogmas. A capital was collected for the purpose of lending money to the poor for a certain time on pledges, without interest. To forward these objects the Popes dispensed to those who contributed to them, indulgences with liberal prodigality. Burdensome vows were allowed to be commuted into donations to lending houses. A rich donation effaced the stain on the birth of wealthy libertines. But as these establishments required the services of a staff of officials, and as there could be no profits to pay them a salary, the Popes endeavoured to induce their servants to forego mundane comforts and necessaries in consideration of an unlimited supply of metatemporal blessings.

Such an organisation as this, however, could be of no long endurance. If it were a charitable thing to advance money for nothing to persons after they had become poor, it was far more prudent and sensible to lend them money at a moderate interest to help them to trade, and to prevent them becoming poor. Rich persons found that papal indulgences were but a poor return for hard cash and as in the course of business the institutions incurred some loss, they were obliged to borrow money at interest to pay their expenses. The Popes, therefore, determined to allow the lending houses to receive interest for as much of their capital as was necessary to defray their expenses. When this breach was made, the next step was not long following. In order to attract a sufficient quantity of capital, those who advanced money were allowed to receive a moderate interest for its use, which was not entered in the balance sheet as "Interest"-that would have been damnable-but was concealed under the euphemism of "establishment charges." The Papal bull allowed it to be given pro indemnitate.

However cunningly and speciously this "artful dodge" was devised to do the thing they dared not name, the lynx-eyed divines soon saw through the trick, and a violent ferment immediately arose, and it was fiercely debated whether it was lawful to do evil-i. e., take interest-in order that good might come. When this tempest was at its height it was quelled by a folly of equal magnitude with itself. The Pope issued a bull declaring these holy mountains of piety, sacri monti di pietà, to be legal, and