When the plentifulness of money in the state is due to a continuous Balance of trade, this money first passes through the hands of Undertakers, and although it increases consumption it does not fail to bring down the rate of interest, because most of the Undertakers then acquire enough capital to carry on their business without money, and even become lenders of the sums they have gained beyond what they need to carry on their trade. If there are not in the state a great number of noblemen and rich people who spend heavily then the abundance of money will certainly bring down the rate of interest, while increasing the price of goods and merchandise in exchange. This is what usually happens in Republics which have neither much capital nor considerable landed property and grow rich merely by foreign trade. But in states which have a large capital and great landowners the money brought in by foreign trade increases their rents, and enables them to incur heavy expenditure which maintains several Undertakers and mechanics besides those who trade with the foreigner. This always keeps interest at a high rate in spite of the abundance of money.
When the nobility and landowners ruin themselves by extravagances, the money lenders who have mortgages on their lands often acquire the absolute ownership of them, and it may well arrive in the state that the lenders are creditors for much more money than there is circulating there, in which case one may consider them as subaltern owners of the land and goods mortgaged for their security. If not their capital will be lost by bankruptcies.
In the same way one may consider the owners of shares and public funds as subaltern owners of the revenues of the state devoted to payment of their interest. But if the Legislature were compelled by the necessities of the state to employ these revenues for other purposes, the shareholders or owners of public funds would lose everything without the money circulating in the state being diminished on that account by a single liard.
If the Prince or administrators of the state wish to regulate the current rate of interest by law, the regulation must be fixed on the basis of the current market rate in the highest class, or thereabout. Otherwise the law will be futile, because the contracting parties, obedient to the force of competition or the current price settled by the proportion of lenders to borrowers, will make secret bargains, and this legal constraint will only embarrass trade and raise the rate of interest instead of settling it. The Romans of old after several laws to restrict interest passed one to forbid altogether the lending of money.
This law had no more success than its predecessors. The law of Justinian to restrain patricians from taking more than 4 per cent, those of a lower order 6 per cent, and traders 8 per cent was equally amusing and unjust, whilst it was not forbidden to make 50 and 100 per cent profit in all sorts of business.
If it is allowable and respectable for a landlord to let a farm to a poor farmer at a high rental, risking the loss of the rent of a whole year, it seems that it should be permissible to a lender to advance his money to a needy borrower, at the risk of losing not only his interest or profit but also his capital, and to stipulate for so much interest as the borrower will freely consent to pay him. It is true that Loans of this character make more people wretched. Making away with both capital and interest they are more impotent to recover themselves than the farmer who does not carry off the land. But the bankruptcy laws being favourable enough to debtors to allow them to start again it seems that usury laws should always be adjusted to market rates, as in Holland.
The current rate of interest in a state seems to serve as a basis and measure for the purchase price of land. If the current interest is 5 per cent or one-twentieth part the price of land should be the same. But as the ownership of land gives a standing and a certain jurisdiction in the state it happens that when interest is one-twentieth part, the price of land is at 1/24 or 1/25, though mortgages on the same land hardly pass the current rate of interest.
After all, the price of land, like all other prices, naturally settles itself by the proportion of sellers to buyers, etc.; and as there will be many more buyers in London, for example, than in the Provinces, and as these buyers who live in the capital will prefer to buy land in their locality rather than in distant Provinces, they will rather buy land in the vicinity at 1/30 or 1/35 than land at a distance 1/25 or 1/22. There are often other reasons of expediency affecting the price of land, unnecessary to mention here, since they do not invalidate our explanations of the nature of interest.
