Capital Lent at Interest

The stock which is lent at interest is always considered as a capital by the lender. He expects that in due time it is to be restored to him, and that, in the mean time, the borrower is to pay him a certain annual rent for the use of it. The borrower may use it either as a capital, or as a stock reserved for immediate consumption. If he uses it as a capital, he employs it in the maintenance of productive labourers, who reproduce the value, with a profit. He can, in this case, both restore the capital, and pay the interest, without alienating or encroaching upon any other source of revenue. If he uses it as a stock reserved for immediate consumption, he acts the part of a prodigal, and dissipates, in the maintenance of the idle, what was destined for the support of the industrious. He can, in this case, neither restore the capital nor pay the interest, without either alienating or encroaching upon some other source of revenue, such as the property or the rent of land.

The lender always regards money lent at interest as capital. The lender expects it to be repaid in due course. Meanwhile, the borrower must pay a certain amount each year for its use. The borrower may use the money as capital or reserve it for immediate consumption. If used as capital, it pays productive workers, who reproduce its value and generate a profit. The borrower can then repay the capital and pay the interest without selling or drawing on another source of income. If the borrower reserves the money for immediate consumption, the borrower acts wastefully. The money meant to support industrious workers is squandered on supporting idle people. In that case, the borrower can neither repay the capital nor pay the interest without selling or drawing on another source of income, such as land or the rent from it.

The stock which is lent at interest is, no doubt, occasionally employed in both these ways, but in the former much more frequently than in the latter. The man who borrows in order to spend will soon be ruined, and he who lends to him will generally have occasion to repent of his folly. To borrow or to lend for such a purpose, therefore, is, in all cases, where gross usury is out of the question, contrary to the interest of both parties; and though it no doubt happens sometimes, that people do both the one and the other, yet, from the regard that all men have for their own interest, we may be assured, that it cannot happen so very frequently as we are sometimes apt to imagine. Ask any rich man of common prudence, to which of the two sorts of people he has lent the greater part of his stock, to those who he thinks will employ it profitably, or to those who will spend it idly, and he will laugh at you for proposing the question. Even among borrowers, therefore, not the people in the world most famous for frugality, the number of the frugal and industrious surpasses considerably that of the prodigal and idle.

Money lent at interest is certainly sometimes used in both these ways, but much more often in the former than in the latter. A man who borrows money to spend will soon be ruined. The man who lends to him will generally come to regret his folly. Unless the interest is exorbitant, borrowing or lending for such a purpose is therefore against the interests of both parties. People certainly do both sometimes. But everyone cares about their own interests, so we can be sure this cannot happen as often as we sometimes imagine. Ask any reasonably prudent rich man which kind of person he has lent most of his money to. Is it those he thinks will use it profitably, or those who will spend it idly? He will laugh at you for asking. Even borrowers are not the people most famous for thrift. Yet among them, the thrifty and industrious considerably outnumber the wasteful and idle.

The only people to whom stock is commonly lent, without their being expected to make any very profitable use of it, are country gentlemen, who borrow upon mortgage. Even they scarce ever borrow merely to spend. What they borrow, one may say, is commonly spent before they borrow it. They have generally consumed so great a quantity of goods, advanced to them upon credit by shop-keepers and tradesmen, that they find it necessary to borrow at interest, in order to pay the debt. The capital borrowed replaces the capitals of those shop-keepers and tradesmen which the country gentlemen could not have replaced from the rents of their estates. It is not properly borrowed in order to be spent, but in order to replace a capital which had been spent before.

The only people commonly lent capital without being expected to use it very profitably are country landowners who borrow against their estates. Even they hardly ever borrow just to spend. One might say that they have usually spent what they borrow before they borrow it. They have generally consumed so many goods supplied on credit by shopkeepers and tradespeople that they must borrow at interest to pay the debt. The borrowed capital replaces the capital of those shopkeepers and tradespeople, which the landowners could not have repaid from their estate rents. Strictly speaking, they do not borrow the money to spend it, but to replace capital already spent.

Almost all loans at interest are made in money, either of paper, or of gold and silver; but what the borrower really wants, and what the lender readily supplies him with, is not the money, but the money’s worth, or the goods which it can purchase. If he wants it as a stock for immediate consumption, it is those goods only which he can place in that stock. If he wants it as a capital for employing industry, it is from those goods only that the industrious can be furnished with the tools, materials, and maintenance necessary for carrying on their work. By means of the loan, the lender, as it were, assigns to the borrower his right to a certain portion of the annual produce of the land and labour of the country, to be employed as the borrower pleases.

Almost all loans that charge interest are made in money, whether paper money, gold, or silver. But what the borrower really wants, and what the lender readily supplies, is not the money itself. It is the value of the money, or the goods it can buy. If the borrower wants the loan to buy supplies for immediate use, only those goods can become supplies. If the borrower wants it as capital to employ workers, only those goods can supply the workers with the tools, materials, and living necessities needed for their work. Through the loan, the lender, in effect, transfers to the borrower a right to a certain share of the country’s annual produce from land and labor. The borrower can use that share as they please.

The quantity of stock, therefore, or, as it is commonly expressed, of money, which can be lent at interest in any country, is not regulated by the value of the money, whether paper or coin, which serves as the instrument of the different loans made in that country, but by the value of that part of the annual produce, which, as soon as it comes either from the ground, or from the hands of the productive labourers, is destined, not only for replacing a capital, but such a capital as the owner does not care to be at the trouble of employing himself. As such capitals are commonly lent out and paid back in money, they constitute what is called the monied interest. It is distinct, not only from the landed, but from the trading and manufacturing interests, as in these last the owners themselves employ their own capitals. Even in the monied interest, however, the money is, as it were, but the deed of assignment, which conveys from one hand to another those capitals which the owners do not care to employ themselves. Those capitals may be greater, in almost any proportion, than the amount of the money which serves as the instrument of their conveyance; the same pieces of money successively serving for many different loans, as well as for many different purchases. A, for example, lends to W £1000, with which W immediately purchases of B £1000 worth of goods. B having no occasion for the money himself, lends the identical pieces to X, with which X immediately purchases of C another £1000 worth of goods. C, in the same manner, and for the same reason, lends them to Y, who again purchases goods with them of D. In this manner, the same pieces, either of coin or of paper, may, in the course of a few days, serve as the Instrument of three different loans, and of three different purchases, each of which is, in value, equal to the whole amount of those pieces. What the three monied men, A, B, and C, assigned to the three borrowers, W, X, and Y, is the power of making those purchases. In this power consist both the value and the use of the loans. The stock lent by the three monied men is equal to the value of the goods which can be purchased with it, and is three times greater than that of the money with which the purchases are made. Those loans, however, may be all perfectly well secured, the goods purchased by the different debtors being so employed as, in due time, to bring back, with a profit, an equal value either of coin or of paper. And as the same pieces of money can thus serve as the instrument of different loans to three, or, for the same reason, to thirty times their value, so they may likewise successively serve as the instrument of repayment.

The amount of stock, or, as it is commonly called, money, that can be lent at interest in a country does not depend on the value of the paper money or coins used to make loans. Instead, it depends on the value of part of the annual produce. As soon as this produce comes from the ground or from the hands of productive workers, it is set aside to replace capital. This is capital that its owner does not care to take the trouble of employing personally. Such capital is commonly lent and repaid in money. It therefore makes up what is called the monied interest. The monied interest is distinct from the landed interest and from the trading and manufacturing interests. In trade and manufacturing, owners employ their own capital. Even in the monied interest, however, money is only a kind of deed of assignment. It transfers from one person to another capital that its owner does not care to employ personally. The value of that capital may exceed the amount of money used to transfer it by almost any proportion. The same pieces of money can serve in many different loans, as well as in many different purchases. For example, A lends W £1,000. W immediately uses it to buy £1,000 worth of goods from B. B has no need for the money, so B lends the very same pieces to X. X immediately uses them to buy another £1,000 worth of goods from C. In the same way and for the same reason, C lends them to Y, who then uses them to buy goods from D. In this way, the same coins or paper money may serve in three different loans and three different purchases within a few days. Each loan and each purchase is equal in value to the whole amount of that money. The three moneylenders, A, B, and C, transferred to the three borrowers, W, X, and Y, the power to make those purchases. Both the value and the usefulness of the loans lie in that power. The stock lent by the three moneylenders equals the value of the goods it can purchase. It is three times greater than the value of the money used to make the purchases. Yet all those loans may be perfectly well secured. The goods bought by the borrowers may be used in ways that, in due time, bring back an equal value in coins or paper money, together with a profit. The same pieces of money can thus serve as the means of making different loans worth three times their value. For the same reason, they can serve in loans worth thirty times their value. They can likewise serve in turn as the means of repaying those loans.

A capital lent at interest may, in this manner, be considered as an assignment, from the lender to the borrower, of a certain considerable portion of the annual produce, upon condition that the burrower in return shall, during the continuance of the loan, annually assign to the lender a small portion, called the interest; and, at the end of it, a portion equally considerable with that which had originally been assigned to him, called the repayment. Though money, either coin or paper, serves generally as the deed of assignment, both to the smaller and to the more considerable portion, it is itself altogether different from what is assigned by it.

Capital lent at interest may be seen as a transfer from the lender to the borrower. The lender transfers a substantial portion of the annual produce to the borrower. In return, the borrower agrees to transfer a small portion to the lender each year while the loan continues. This portion is called interest. At the end of the loan, the borrower transfers a portion equal to the amount originally transferred. This is called repayment. Money, whether coins or paper, generally serves as the means of transferring both portions. But the money itself is entirely different from what it transfers.

In proportion as that share of the annual produce which, as soon as it comes either from the ground, or from the hands of the productive labourers, is destined for replacing a capital, increases in any country, what is called the monied interest naturally increases with it. The increase of those particular capitals from which the owners wish to derive a revenue, without being at the trouble of employing them themselves, naturally accompanies the general increase of capitals; or, in other words, as stock increases, the quantity of stock to be lent at interest grows gradually greater and greater.

As the share of a country’s annual produce set aside to replace capital increases, the moneyed interest naturally grows with it. This share is set aside as soon as the produce comes from the ground or from the hands of productive workers. As capital generally increases, so does the capital whose owners want an income without the trouble of employing it themselves. In other words, as capital increases, the amount available to lend at interest gradually grows.

As the quantity of stock to be lent at interest increases, the interest, or the price which must be paid for the use of that stock, necessarily diminishes, not only from those general causes which make the market price of things commonly diminish as their quantity increases, but from other causes which are peculiar to this particular case. As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arises, in consequence, a competition between different capitals, the owner of one endeavouring to get possession of that employment which is occupied by another; but, upon most occasions, he can hope to justle that other out of this employment by no other means but by dealing upon more reasonable terms. He must not only sell what he deals in somewhat cheaper, but, in order to get it to sell, he must sometimes, too, buy it dearer. The demand for productive labour, by the increase of the funds which are destined for maintaining it, grows every day greater and greater. Labourers easily find employment; but the owners of capitals find it difficult to get labourers to employ. Their competition raises the wages of labour, and sinks the profits of stock. But when the profits which can be made by the use of a capital are in this manner diminished, as it were, at both ends, the price which can be paid for the use of it, that is, the rate of interest, must necessarily be diminished with them.

As the amount of capital available to lend at interest increases, the rate of interest necessarily falls. Interest is the price paid for using that capital. The rate falls partly for the general reasons market prices usually fall as supply increases. But it also falls for other reasons peculiar to lending capital. As capital increases in a country, the profits that can be made by using it necessarily fall. It becomes increasingly difficult to find a profitable use for new capital within the country. As a result, owners of capital compete with one another. Each tries to take over business already occupied by another. But in most cases, an owner can hope to displace a competitor only by offering better terms. The owner must not only sell goods somewhat cheaper. Sometimes the owner must also pay more to obtain goods to sell. As the funds set aside to pay productive workers increase, demand for their labor grows every day. Workers easily find jobs, but owners of capital find it difficult to hire workers. Competition among owners raises wages and lowers profits. When the profits from using capital are reduced at both ends in this way, the price paid for its use must necessarily fall with them. That price is the rate of interest.

Mr Locke, Mr Lawe, and Mr Montesquieu, as well as many other writers, seem to have imagined that the increase of the quantity of gold and silver, in consequence of the discovery of the Spanish West Indies, was the real cause of the lowering of the rate of interest through the greater part of Europe. Those metals, they say, having become of less value themselves, the use of any particular portion of them necessarily became of less value too, and, consequently, the price which could be paid for it. This notion, which at first sight seems so plausible, has been so fully exposed by Mr Hume, that it is, perhaps, unnecessary to say any thing more about it. The following very short and plain argument, however, may serve to explain more distinctly the fallacy which seems to have misled those gentlemen.

Mr Locke, Mr Lawe, and Mr Montesquieu, along with many other writers, seem to have believed that interest rates fell across most of Europe because the discovery of the Spanish West Indies increased the supply of gold and silver. They say that these metals became less valuable, so the use of any given amount necessarily became less valuable too. As a result, the price that could be paid for its use also fell. This idea seems plausible at first. But Mr Hume has so thoroughly exposed its flaws that perhaps nothing more needs to be said. The following short, simple argument, however, may make clearer the error that seems to have misled these gentlemen.

Before the discovery of the Spanish West Indies, ten per cent. seems to have been the common rate of interest through the greater part of Europe. It has since that time, in different countries, sunk to six, five, four, and three per cent. Let us suppose, that in every particular country the value of silver has sunk precisely in the same proportion as the rate of interest; and that in those countries, for example, where interest has been reduced from ten to five per cent. the same quantity of silver can now purchase just half the quantity of goods which it could have purchased before. This supposition will not, I believe, be found anywhere agreeable to the truth; but it is the most favourable to the opinion which we are going to examine; and, even upon this supposition, it is utterly impossible that the lowering of the value of silver could have the smallest tendency to lower the rate of interest. If £100 are in those countries now of no more value than £50 were then, £10 must now be of no more value than £5 were then. Whatever were the causes which lowered the value of the capital, the same must necessarily have lowered that of the interest, and exactly in the same proportion. The proportion between the value of the capital and that of the interest must have remained the same, though the rate had never been altered. By altering the rate, on the contrary, the proportion between those two values is necessarily altered. If £100 now are worth no more than £50 were then, £5 now can be worth no more than £2:10s. were then. By reducing the rate of interest, therefore, from ten to five per cent. we give for the use of a capital, which is supposed to be equal to one half of its former value, an interest which is equal to one fourth only of the value of the former interest.

Before the discovery of the Spanish West Indies, 10 percent seems to have been the usual interest rate across most of Europe. Since then, it has fallen to 6, 5, 4, and 3 percent in different countries. Suppose that in each country, the value of silver has fallen in exactly the same proportion as the interest rate. For example, suppose that a country’s interest rate has fallen from 10 to 5 percent. There, the same quantity of silver would now buy exactly half as many goods as before. I believe this supposition will not be found true anywhere. But it is the supposition most favorable to the opinion we are about to examine. Even so, a fall in the value of silver could not possibly have the slightest tendency to lower interest rates. If £100 in those countries is now worth no more than £50 was then, £10 must now be worth no more than £5 was then. Whatever lowered the value of the capital must also have lowered the value of the interest, in exactly the same proportion. The proportion between the value of the capital and that of the interest would have stayed the same, even if the rate had never changed. Changing the rate, on the other hand, necessarily changes the proportion between those two values. If £100 now is worth no more than £50 was then, £5 now can be worth no more than £2 and 10 shillings were then. So, by reducing the interest rate from 10 to 5 percent, we pay interest worth only one quarter of its former value. We pay this for the use of capital that is assumed to be worth half its former value.

An increase in the quantity of silver, while that of the commodities circulated by means of it remained the same, could have no other effect than to diminish the value of that metal. The nominal value of all sorts of goods would be greater, but their real value would be precisely the same as before. They would be exchanged for a greater number of pieces of silver; but the quantity of labour which they could command, the number of people whom they could maintain and employ, would be precisely the same. The capital of the country would be the same, though a greater number of pieces might be requisite for conveying any equal portion of it from one hand to another. The deeds of assignment, like the conveyances of a verbose attorney, would be more cumbersome; but the thing assigned would be precisely the same as before, and could produce only the same effects. The funds for maintaining productive labour being the same, the demand for it would be the same. Its price or wages, therefore, though nominally greater, would really be the same. They would be paid in a greater number of pieces of silver, but they would purchase only the same quantity of goods. The profits of stock would be the same, both nominally and really. The wages of labour are commonly computed by the quantity of silver which is paid to the labourer. When that is increased, therefore, his wages appear to be increased, though they may sometimes be no greater than before. But the profits of stock are not computed by the number of pieces of silver with which they are paid, but by the proportion which those pieces bear to the whole capital employed. Thus, in a particular country, 5s. a-week are said to be the common wages of labour, and ten per cent. the common profits of stock; but the whole capital of the country being the same as before, the competition between the different capitals of individuals into which it was divided would likewise be the same. They would all trade with the same advantages and disadvantages. The common proportion between capital and profit, therefore, would be the same, and consequently the common interest of money; what can commonly be given for the use of money being necessarily regulated by what can commonly be made by the use of it.

If the amount of silver increased while the goods circulated with it stayed the same, the only effect would be to reduce the value of silver. The nominal value of all kinds of goods would rise, but their real value would stay exactly the same. They would be exchanged for more pieces of silver. But they would still command the same amount of labor and support and employ the same number of people. The country’s capital would remain the same. But transferring an equal share of it from one person to another might require more pieces of silver. The transfer documents would be more cumbersome, like those drawn up by a wordy lawyer. But what was transferred would be exactly the same and could produce only the same effects. The funds available to support productive labor would remain the same, so the demand for that labor would also remain the same. Its price, or wages, would therefore be higher in name but the same in reality. Workers would be paid in more pieces of silver, but those pieces would buy only the same amount of goods. Profits on capital would be the same, both in name and in reality. Wages are usually measured by the amount of silver paid to the worker. So when that amount increases, wages appear to increase, though they may sometimes be no greater than before. But profits on capital are not measured by the number of pieces of silver paid. They are measured by the proportion those pieces bear to the total capital used. For example, in a particular country, the usual wage might be said to be 5 shillings a week, and the usual profit on capital 10 percent. But the country’s total capital would be the same as before. So competition among the separate portions of capital owned by individuals would also be the same. They would all trade with the same advantages and disadvantages. The usual proportion between capital and profit would therefore be the same, as would the usual rate of interest on money. What people can usually pay to use money is necessarily governed by what they can usually earn by using it.

Any increase in the quantity of commodities annually circulated within the country, while that of the money which circulated them remained the same, would, on the contrary, produce many other important effects, besides that of raising the value of the money. The capital of the country, though it might nominally be the same, would really be augmented. It might continue to be expressed by the same quantity of money, but it would command a greater quantity of labour. The quantity of productive labour which it could maintain and employ would be increased, and consequently the demand for that labour. Its wages would naturally rise with the demand, and yet might appear to sink. They might be paid with a smaller quantity of money, but that smaller quantity might purchase a greater quantity of goods than a greater had done before. The profits of stock would be diminished, both really and in appearance. The whole capital of the country being augmented, the competition between the different capitals of which it was composed would naturally be augmented along with it. The owners of those particular capitals would be obliged to content themselves with a smaller proportion of the produce of that labour which their respective capitals employed. The interest of money, keeping pace always with the profits of stock, might, in this manner, be greatly diminished, though the value of money, or the quantity of goods which any particular sum could purchase, was greatly augmented.

An increase in the goods circulating within the country each year would, by contrast, have many other important effects. It would raise the value of money, but only if the amount of money circulating those goods stayed the same. The country’s capital might remain the same in name, but it would actually increase. It might still be expressed as the same amount of money, but it would command more labor. It could support and employ more productive labor, increasing the demand for that labor. Wages would naturally rise with demand, though they might appear to fall. Workers might be paid less money, but that smaller amount might buy more goods than a larger amount had before. Profits on capital would fall, both in reality and in appearance. As the country’s total capital increased, competition among the individual capitals that made it up would naturally increase as well. Their owners would have to accept a smaller share of what the labor employed by their respective capitals produced. Interest on money always keeps pace with profits on capital. In this way, interest might fall greatly, even though the value of money increased greatly. In other words, any given sum of money would buy many more goods.

In some countries the interest of money has been prohibited by law. But as something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it. This regulation, instead of preventing, has been found from experience to increase the evil of usury. The debtor being obliged to pay, not only for the use of the money, but for the risk which his creditor runs by accepting a compensation for that use, he is obliged, if one may say so, to insure his creditor from the penalties of usury.

Some countries have banned charging interest by law. But money can be used to earn something everywhere, so something should be paid for its use everywhere. Experience has shown that this law increases the evil of usury instead of preventing it. The borrower must pay not only for the use of the money, but also for the lender’s risk in accepting payment. The borrower must, so to speak, insure the lender against the penalties for usury.

In countries where interest is permitted, the law in order to prevent the extortion of usury, generally fixes the highest rate which can be taken without incurring a penalty. This rate ought always to be somewhat above the lowest market price, or the price which is commonly paid for the use of money by those who can give the most undoubted security. If this legal rate should be fixed below the lowest market rate, the effects of this fixation must be nearly the same as those of a total prohibition of interest. The creditor will not lend his money for less than the use of it is worth, and the debtor must pay him for the risk which he runs by accepting the full value of that use. If it is fixed precisely at the lowest market price, it ruins, with honest people who respect the laws of their country, the credit of all those who cannot give the very best security, and obliges them to have recourse to exorbitant usurers. In a country such as Great Britain, where money is lent to government at three per cent. and to private people, upon good security, at four and four and a-half, the present legal rate, five per cent. is perhaps as proper as any.

In countries where interest is permitted, the law generally sets a maximum rate to prevent usury. Anyone who charges more faces a penalty. The legal rate should always be somewhat above the lowest market rate. That is the rate usually paid by borrowers who can offer the most reliable security. If the legal rate is set below the lowest market rate, the effects are almost the same as a total ban on interest. The lender will not lend money for less than its use is worth. The borrower must also compensate the lender for the risk of accepting the full value of that use. If the legal rate is set exactly at the lowest market rate, honest people who respect their country's laws will not lend to anyone who cannot offer the very best security. This forces those borrowers to turn to usurers who charge exorbitant rates. In a country like Great Britain, the government borrows at three percent. Private borrowers with good security pay four or four and a half percent. The current legal rate of five percent is perhaps as suitable as any.

The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent. the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.

The legal interest rate should be somewhat above the lowest market rate, but not much above it. Suppose, for example, that Great Britain fixed the legal rate as high as eight or ten percent. Most of the money available for lending would go to reckless spenders and speculative schemers. Only they would be willing to pay such high interest. Prudent people would not compete for these loans. They would pay for the use of money only a part of what they expected to earn with it. Much of the country's capital would thus be kept out of the hands most likely to use it profitably and advantageously. Instead, it would be placed in the hands most likely to waste and destroy it. On the other hand, the legal interest rate may be fixed only slightly above the lowest market rate. In that case, lenders always prefer prudent borrowers to reckless spenders and speculative schemers. A lender gets almost as much interest from prudent borrowers as he dares to charge the others. His money is also much safer in the hands of prudent borrowers. Much of the country's capital is thus placed in the hands most likely to use it advantageously.

No law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made. Notwithstanding the edict of 1766, by which the French king attempted to reduce the rate of interest from five to four per cent. money continued to be lent in France at five per cent. the law being evaded in several different ways.

No law can lower the usual interest rate below the lowest ordinary market rate when the law is made. In 1766, the French king issued an edict to lower the interest rate from five to four percent. Despite this edict, money continued to be lent in France at five percent. People found several ways to evade the law.

The ordinary market price of land, it is to be observed, depends everywhere upon the ordinary market rate of interest. The person who has a capital from which he wishes to derive a revenue, without taking the trouble to employ it himself, deliberates whether he should buy land with it, or lend it out at interest. The superior security of land, together with some other advantages which almost everywhere attend upon this species of property, will generally dispose him to content himself with a smaller revenue from land, than what he might have by lending out his money at interest. These advantages are sufficient to compensate a certain difference of revenue; but they will compensate a certain difference only; and if the rent of land should fall short of the interest of money by a greater difference, nobody would buy land, which would soon reduce its ordinary price. On the contrary, if the advantages should much more than compensate the difference, everybody would buy land, which again would soon raise its ordinary price. When interest was at ten per cent. land was commonly sold for ten or twelve years purchase. As interest sunk to six, five, and four per cent. the price of land rose to twenty, five-and-twenty, and thirty years purchase. The market rate of interest is higher in France than in England, and the common price of land is lower. In England it commonly sells at thirty, in France at twenty years purchase.

The ordinary market price of land, it should be noted, depends everywhere on the usual market interest rate. A person with capital may want an income from it without the trouble of using it personally. That person must decide whether to buy land or lend the money at interest. Land is more secure, and almost everywhere it has other advantages as a form of property. These advantages will generally make a person willing to accept less income from land than from lending money at interest. They can make up for a certain difference in income, but only up to a point. If land rent fell too far below the interest on money, nobody would buy land. This would soon lower its ordinary price. On the other hand, the advantages of land might more than make up for the difference in income. Then everybody would buy land, and its ordinary price would soon rise. When interest was ten percent, land commonly sold for ten or twelve times its annual rent. As interest fell to six, five, and four percent, land prices rose to twenty, twenty-five, and thirty times annual rent. The market interest rate is higher in France than in England, and the usual price of land is lower. In England, land commonly sells for thirty times its annual rent. In France, it sells for twenty times its annual rent.