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Wednesday, November 27, 2013

What Regulates Interest?

What is interest? It is the service rendered, after a free bargain, by the borrower to the lender, in remuneration for the service he has received by or from the loan. By what law is the rate of these remunerative services established? By the general law that regulates the equivalent of all services; that is, by the law of supply and demand.
The more easily a thing is procured, the smaller is the service rendered by yielding it or lending it. The man who gives me a glass of water among the springs of the mountains does not render me so great a service as he who allows me one in the desert of Sahara. If there are many planes, sacks of corn, or houses, in a country, the use of them is obtained, other things being equal, on more favorable conditions than if they were few, for the simple reason that the lender renders in this case a smaller relative service.
It is not surprising, therefore, that the more abundant capital is, the lower is the interest. Is this saying that it will ever reach zero? No; because, I repeat it, the principle of a remuneration is in the loan. To say that interest will be annihilated, is to say that there will never be any motive for saving, for denying ourselves, in order to form new capitals, nor even to preserve the old ones. In this case, the waste would immediately create a void, and interest would soon reappear.
In that, the nature of the services of which we are speaking does not differ from any other. Thanks to industrial progress, a pair of stockings, which used to be worth six shillings, has successively been worth only four, three, and two. No one can say to what point this value will descend; but we can affirm that it will never reach zero, unless the stockings finish by producing themselves spontaneously. Why? Because the principle of remuneration is in labor; because he who works for another renders a service, and ought to receive a service. If no one paid for stockings they would cease to be made; and, with the scarcity, the price would not fail to reappear.
The sophism I am now combating has its root in the infinite divisibility that belongs to value, as it does to matter.
It may appear at first paradoxical, but it is well known to all mathematicians, that, through all eternity, fractions may be taken from a weight without the weight ever being annihilated. It is sufficient that each successive fraction be less than the preceding one, in a determined and regular proportion.
There are countries where people apply themselves to increasing the size of horses, or diminishing in sheep the size of the head. It is impossible to say precisely to what point they will arrive in this. No one can say that he has seen the largest horse or the smallest sheep’s head that will ever appear in the world. But he may safely say that the size of horses will never attain to infinity, nor the heads of sheep be reduced to nothing. In the same way, no one can say to what point the price of stockings nor the interest of capital will come down; but we may safely affirm, when we know the nature of things, that neither the one nor the other will ever arrive at zero, for labor and capital can no more live without recompense than a sheep without a head. The arguments of Mr. Proudhon reduce themselves, then, to this: Since the most skillful agriculturists are those who have reduced the heads of sheep to the smallest size, we shall have arrived at the highest agricultural perfection when sheep have no longer any heads. Therefore, in order to realize the perfection, let us behead them.
I have now done with this wearisome discussion. Why is it that the breath of false doctrine has made it needful to inquire into the innate nature of interest? I must not leave off without remarking upon a beautiful moral which may be drawn from this law: “The reduction in the rate of interest is proportional to the abundance of capital.” This law being granted, if there is a class of men to whom it is more important than to any other that stocks of capital should accumulate, multiply, abound, and super-abound, it is certainly the class that borrows capital directly or indirectly; it is those men who operate upon materials, who gain assistance by tools, who live upon accumulations produced and saved by other men.
Imagine, in a vast and fertile country, a population of a thousand inhabitants, destitute of all capital as thus defined. It will assuredly perish by the pangs of hunger. Let us suppose a case hardly less cruel. Let us suppose that ten of these savages (for persons without capital are savages) are provided with tools and provisions sufficient to work and to live themselves until harvest time, as well as to remunerate the services of ninety laborers. The inevitable result will be the death of nine hundred human beings. It is clear, then, that since 990 men, urged by want, will crowd upon the supports that would only maintain a hundred, the ten capitalists will be masters of the market. They will obtain labor on the hardest conditions, for they will put it up to auction or the highest bidder. And observe this—if these capitalists entertain such pious sentiments as would induce them to impose personal privations on themselves, in order to diminish the sufferings of some of their brethren, this generosity, which attaches to morality, will be as noble in its principle as useful in its effects. But if, duped by that false philosophy that persons wish so inconsiderately to mingle with economic laws, they take to remunerating labor in excess of what it is worth, and in excess of what they are able to pay, far from doing good, they will do harm. They will give double wages, it may be. But then, forty-five men will be better provided for, while forty-five others from the diminution in the supply of capital, will augment the number of those who are sinking into the grave. Upon this supposition, it is not the deprivation of wages that primarily works the mischief, but the scarcity of capital. Low wages are not the cause, but the effect of the evil. I may add that they are to a certain extent the remedy. It acts in this way: it distributes the burden of suffering as much as it can, and saves as many lives as a limited quantity of available sustenance permits.
Suppose now, that instead of ten capitalists, there should be a hundred, two hundred, five hundred—is it not evident that the condition of the whole population, and, above all, that of the mass of the people will be more and more improved? Is it not evident that, apart from every consideration of generosity, they would obtain more work and better pay for it?—that they themselves will be in a better condition to accumulate capital, without being able to fix the limits to this ever-increasing facility of realizing equality and well-being? Would it not be madness in them to accept and act upon the truth of such doctrines as Proudhon and John Ruskin teach, and to act in a way that would reduce the source of wages, and paralyze the activity and stimulus of saving? Let them learn this lesson, then. Accumulations of capital are good for those who possess them: who denies it? But they are also useful to those who have not yet been able to form them; and it is important to those who have them not that others should have them.
Yes, if the laboring classes knew their true interests, they would seek to know with the greatest earnestness what circumstances are, and what are not favorable to saving, in order to encourage the former and to discourage the latter. They would sympathize with every measure that encourages the rapid accumulation of capital. They would be enthusiastic promoters of peace, liberty, order, security; the unity of classes and peoples, economy, moderation in public expenses, simplicity in the machinery of government; for it is under the sway of all these circumstances that saving does its work, brings plenty within the reach of the masses, invites those persons to become the owners of capital who were formerly under the necessity of borrowing under hard terms They would repel with energy the war-like spirit, which diverts from its true course so large a part of human labor; the monopolizing spirit, that deranges the equitable distribution of riches, in the way by which liberty alone can realize it; the multitude of public services which attack our purses only to check our liberty; and, in short, those subversive, hateful, thoughtless doctrines, that alarm capital, prevent its formation, oblige it to flee, and finally to raise its price, to the especial disadvantage of the workers, who bring it into existence.
Take for example the revolution that overthrew the government of France, and disturbed society in February, 1848, is it not a hard lesson? Is it not evident that the insecurity it has thrown into the world of business on the one hand; and, on the other, the advancement of the fatal theories to which I have alluded, and which, from the clubs, have almost penetrated into the regions of the legislature, have everywhere raised the rate of interest? Is it not evident that from that time the laboring classes of France have found greater difficulty in procuring those materials, tools, and provisions, without which labor is impossible? Is it not that which has caused stagnation of business; and does not paralysis of industry in turn lower wages? Thus there is a deficiency of work to those who need to labor, from the same cause that loads the objects they consume with an increase of price, in consequence of the rise of interest. High interest and low wages signify in other words that the same article preserves its price, but that the remuneration of the capitalist has invaded, without profiting himself, that of the workman.
A friend of mine, commissioned to make inquiry into Parisian industry, has assured me that the manufacturers have revealed to him a very striking fact that proves, better than any reasoning can, how much insecurity and uncertainty injure the formation of capital. It was noted that during the most distressing period of this revolution the popular expenditures for personal gratification did not diminish. The small theatres, the public-houses, and tobacco depots, were as much frequented as in prosperous times. On inquiry, the operatives themselves explained this phenomenon as follows: “What is the use of economizing? Who knows what will happen to us? Who knows that interest will not be abolished? Who knows but that the State will become a universal and gratuitous lender, and that it will annihilate all the fruits that we might expect from our savings?” Well! I say that if such ideas could prevail during two single years, it would be enough to turn our beautiful France into a Turkey—misery would become general and endemic, and, most assuredly, the poor would be the first upon whom it would fall.
Laboring men! They talk to you a great deal of the artificial organization of labor; do you know why they do so? Because they are ignorant of the laws of its natural organization; that is, of the wonderful organization that results from liberty. You are told that liberty gives rise to what is called the radical antagonism of classes; that it creates, and makes to clash, two opposite interests—that of the capitalists and that of the laborers. But we ought to begin by proving that the antagonism exists by a law of nature; and afterwards it would remain to be shown how far the arrangements for intervention are superior to those of liberty, for between liberty and intervention I see no middle path. Again, it would remain to be proved that intervention would always operate to your advantage, and to the prejudice of the rich. But, no; this radical antagonism, this natural opposition of interests, does not exist. It is only an evil dream of perverted and intoxicated imaginations. No; a plan so defective has not proceeded from the Divine Mind. To affirm it, we must begin by denying the existence of God. And see how, by means of social laws, and because men exchange amongst themselves their labors and their products, a harmonious tie attaches the different classes of society one to the other! There are the landowners; what is their interest? That the soil be fertile, and the sun beneficent: and what is the result? That wheat abounds, that it falls in price, and the advantage turns to the profit of those who have had no patrimony. There are the manufacturers—what is their constant thought? To perfect their labor, to increase the power of their machines, to procure for themselves, upon the best terms, the raw material. And to what does all this tend? To the abundance and the low price of produce; that is, all the efforts of the manufacturers, and without their suspecting it, result in a profit to the public consumer, of which each of you is one. It is the same with every profession. Now, the capitalists are not exempt from this law. They are very busy making schemes, economizing, and turning them to their advantage. This is all very well; but the more they succeed, the more do they promote the abundance of capital, and, as a necessary consequence, the reduction of interest. Now, who is it that profits by the reduction of interest? Is it not the borrower first, and finally, the consumers of the things the capital contributes to produce?
It is therefore certain that the final result of the efforts of each class is the common good of all.
You are told that capital tyrannizes over labor. I do not deny that each one endeavors to draw the greatest possible advantage from his situation; but in this sense, he realizes only that which is possible. Now, it is never more possible for capitalists to tyrannize over labor, than when capital is scarce; for then it is they who make the law—it is they who regulate the rate of sale. Never is this tyranny more impossible to them than when capital and capitalists are abundant; for in that case, it is labor which has the command. [Where there is one to sell and two to buy, the seller fixes the price; where there are two to sell and one to buy, the buyer always has the advantage.—Editor.]
Away, then, with the jealousies of classes, ill-will, unfounded hatreds, unjust suspicions. These depraved passions injure those who nourish them in their heart. This is no declamatory morality; it is a chain of causes and effects, which is capable of being rigorously, mathematically demonstrated. It is not the less sublime in that it satisfies the intellect as well as the feelings.
I shall sum up this whole dissertation with these words: Workmen, laborers, destitute and suffering classes, will you improve your condition? You will not succeed by strife, insurrection, hatred, and error. But there are three things that always result in benefit and blessing to every community and to every individual who helps to compose it; and these things are—peace, liberty, and security.

Bastiat Collection Pocket Edition

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