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only by a searching investigation of its actual movements that
the laws by which these movements are governed can be known.
It is not meant that deduction has no place in economic
science ; every inference from, or application of, a general
principle is a deduction. What is meant is, that political
economy has not reached the stage of a deductive science ; that
the fundamental laws of the economic world are still imperfectly
known ; and that they can be fully known only by patient
induction. The aphorism of Bacon, moreover, respecting the
application of human laws, should be constantly present to the
mind of the student of economic laws : — ' Consequentiae non
est consequentia ; sed sisti debet extensio intra casus proximos :
alioqui labetur ad dissimilia, et magis valebunt acumina
iugeniorum quam auctoritas legum.' The theory of profits,
prices, and taxation, referred to in a previous page, affords an
instructive instance. That everyone desires money is a conse-
quence of the fact that money is the common medium of
exchange, and purchases everything. But every subsequent
link in the chain of circumstances deduced in the orthodox
theory is defective — that there is a consequent equality of both



Tha Statist, January 4th, 1879.
R



242 TJie Known and Unknown in the Economic World.

wages and profits ; that prices are, therefore, in proportion to
cost of production ; and that a tax on any special trade or
commodity falls necessarily on the consumer, and cannot fall
on the producer. Small capitalists have been driven out of
several trades by taxation, and it is thus possible that in parti-
cular cases so-called indirect taxation, by ruining producers,
may cause the stock-in-trade to be sold at a sacrifice to
consumers.

Two conclusions at least, it is hoped, many readers will
concur in — that the economic world is still, in a great measure,
an unknown one; and that to know it economists must ex-
plore it, as geographers have explored the world of physical
geography.



XVIII.

THE HISTORY AND FUTURE OF INTEREST AND

PROFIT.*

The history of interest, whicli involves that of profit, is con-
nected with fundamental changes in human society, and in the
ideas and feelings on which it rests. It raises, too, economic
and social problems of no little importance for the future of the
civilized world. Once it was a question wholly of moral and
religious sentiment, at length embodied in positive law, whether
interest were permissible, and, if so, what rate should subsist.
A generation ago in this country all restraint of its rate,
together with all other interference on the part of society at
large, or the State, with pecuniary dealings between adult men,
seemed definitely abandoned. But on the Continent of Europe
the legitimacy of interest is vehemently disputed by the adherents
of Socialism ; a feeling against it is growing up in the United
States ; and even in England, although no special question about
interest has been raised, there are indications of a tendency to
revert to ancient ideas on kindred subjects.

The mediaeval reprobation of interest under the name of
usury has often been ascribed to the Christian Church, but
its origin may be traced to a much earlier stage of society.
Churchmen and canonists, doubtless, appealed to Christian
doctrine, as well as to Aristotle's doctrine, that interest is
unnatural, because money, unlike corn and cattle, is barren and
cannot beget money ; and since nothing is lost by the loan of
an unproductive commodity, they argued that the lender was

* Fortnightly Review, November 1st, 1881.
R 2



244 The History and Future of Interest and Profit.

in equity entitled to no recompense. But Aristotle himself
unconsciously sought to justify a notion inherited from pre-
historic times, when the members of each community still
recognized each other as kinsmen ; when communism in property
existed, at least in practice, and no one who had more than he
needed could refuse to share his superfluous wealth with a
fellow-tribesman in want. Tacitus, who remarks that usury
was unknown to the ancient Grermans, tells also that anyone
might enter the house of a German, and ask for what he
pleased : receiving it as a matter of course, and placed under no
obligation by the gift. Describing, in like manner, the ancient
customs of the Eskimo, Dr. Bink says that if anyone had
anything to spare, it was ranked among goods that were
possessed in common ; and if a man borrowed the boats or
weapons of another, he was not bound to give the owner any
compensation for damage or loss. The usages and sentiments
of archaic communism survived in various forms long after
private property, even in land, had grown up. Far down in
the middle ages, the rich man who closed his hall-door, and
dined in a private room with his family, was a byword for
extraordinary selfishness and meanness. Many other mediaeval
customs and opinions had their original source in pre-historic
tribal and family ideas, and in the practices of a stage of social
evolution when each little community deemed itself one in blood
and ancestral gods, and individual proprietary rights were most
imperfectly developed. The maxim ' Natura non facit saltum'
is true of the social as of the physical world. The structure of
English mediaeval society, especially on its economic side, had
throughout a foundation of which the original type must be
looked for in archaic kinship. The guild was a brotherhood
bearing all the marks of deriving its organization and funda-
mental ideas from the ancient joint family. The township or
village community had been constituted either by actual kinsmen
or by a body of men organized as such. The typical town was an
expansion of the township. The nation was an amalgamation of
tribes whose tribal ideas survived in various forms. On all sides
social structures, practices, and notions existed, descending from



The History and Future of Interest and Profit. 245

a time when neighbourhood was scarcely possible without blood
relationship or formal adoption, unless in the case of the
conquered serf. The feeling of actual kinship might have
disappeared in that of membership of a local community bound
together by ancient customs, rights, and obligations, but neither
townsmen nor countrymen could have conceived individuals
dwelling in the same place, without bond, connexion or reciprocal
duties, each pursuing what life and occupation he thought fit,
controlled neither by his neighbours, nor by ancient local usage.
The theory of mediaeval prices had grown out of the archaic
idea that the vendor of a commodity or the labourer for hire in
a neighbourhood was either a member by descent or adoption of
the local community, or its servant, and in either case bound to
conform to its usages, to render to it honest and loyal service,
and to accept customary or equitable remuneration. And the
connexion is close between the prohibition of interest and the
penalties in the early statutes against forestalling, engrossing,
and regrating. The forestaller was regarded as seeking an
exorbitant profit, not by honest work, but simply out of the
necessities of a neighbour, who stood in the shoes of the ancient
kinsman, and had inherited, as it were, the moral rights of one.
A man was held entitled to a fair price, determined commonly
by custom or authority, for work or produce, but not to a profit
on buying or storing up things of which his fellow-townsmen
stood in need. Dr. W. von Ochenkowski, in a recent work of
merit, ' Englands wirthschaftliche Entwickelung im Ausgange
des Mittelalters,' lays too exclusive a stress on the duty which
the mediaeval citizen owed to the State. That duty plays an
important part in mediaeval economy ; but Dr. von Ochenkowski
overlooks the nearer duty which the burgher owed to the civic
body, and the inhabitant of a township or manor to the little
village community and its lord.

The fundamental idea of modern English economy — that
every man should be free to follow his own pecuniary interest
as he thinks fit without fraud— does not distinctly emerge until
the sixteenth century, in which Shakespeare deplored the decline
of the loyalty of the antique world, 'when service sweat for



246 The History and Future of Interest and Profit.

duty, not for mead.' Yet we may detect in commercial towns
an earlier break with antiquity in respect of dealings between
lenders and borrowers. Two opposite practices in relation to
the payment of ^interest co-existed in the fourteenth century,
oae descending from social infancy, the other developed in the
progress of intercourse between mercantile people — among
whom, moreover, the clergy were in no great esteem — by
experience of the needs of trade. There were ordinances of the
Mayor of London against usury, but they were rarely enforced,
and seem to have been chiefly oimed against foreigners and
the high rate of interest they exacted. The civic authorities
formally sanctioned in the case of citizens what would now be
regarded as an enormous rate of interest, and passed accounts
in which it was charged, as in accordance with ' the custom
of the city.' The city records show that the fortune of a ward
was customarily intrusted to his guardian to employ in his own
business, paying interest at ten per cent. Thus, in 1374, the
account of a mercer was duly presented respecting ' £300
belonging to a minor, son of a late citizen, and delivered to the
mercer to trade with.' The mercer ' charges himself with £300
so received, and with the increase by way of profit, four shillings
being paid yearly for the use of every pound according to the
custom of the city, of which he asks that he maybe allowed two
shillings in the pound for his trouble, according to the custom
of the city.'* The customary rate of profit is here computed at
twenty per cent., the customary interest at ten per cent., or half
profit ; the rate of profit being ' double interest,' as Adam
Smith says it was in his time, four hundred years afterwards.
The Act 37 Edward III., c. xi., which puts merchants, citizens,
and burgesses with a capital of £1000 on the same footing in
point of expendible income as landowners with £200 a-year,
proves that twenty per cent, was then considered the customary
rate of profit in the commercial towns of the kingdom. It is
observable, too, that ten per cent., the customary rate of interest
among the tradespeople of London in Edward III.'s reign, is

* Eiley's Memorials of Lond(m, p. 378. Compare a fishmonger's account, iJirf.^
pp. 446, 447.



The History and Future of Interest and Profit. 247

the rate permitted by the Act of Henry VIII. in a.d. 1546,
which first legalized interest, so that it seems to have been still
regarded at the latter period not only as the traditional rate, but
also as moderate and reasonable.

We must not, indeed, take the profit and interest customary
in commercial towns in the reign of Edward III. as repre-
senting rates current throughout the country. The profits of
agi'iculture after the pestilence in the middle of the fourteenth
century, lowered as they were by the rise of wages consequent
on depopulation, could not have borne a rate of interest ap-
proaching to ten per cent, on the capital engaged in ordinary
farming. Outside of the region of town trade no regular or cus-
tomary rate prevailed. Unless among townspeople, money in
the Middle Ages was usually borrowed not to make profit, but
because the borrower was in need, and the interest was often
extortionate. In many cases the penalties on usury prevented
loans altogether. The amount of accumulation, moreover, in
the Middle Ages was small, and but little of it took the form
of coin, the only loanable form of capital, even townspeople
commonly investing their savings in land, cattle, sheep, plate,
household stuff, and clothing. The amount of capital that
could be put into trade was limited in various ways, and, save
in trade, loans for interest were surrounded with danger, dis-
credit, and trouble. Money, too, that is to say coin, was scarce.
The English silver mines had become exhausted in the four-
teenth century :* the Papal See caused a constant drain of
treasure; foreign war was another source of pecuniary loss;
and base money from abroad supplanted the sterling coin of
the realm. Monasteries and great landowners not un frequently
raised loans, but there was so little lending throughout the
country, that we may confine our attention to the towns.

Several questions arise with respect to interest and profit
in the towns. How did so high a rate of interest as ten per
cent, come to subsist in mediaeval trade ? "Why did it continue

* See Dr. Georg Schanz's excellent work, Englische Eandehpolitik , gegen Ende
des Mittelalters, i. pp. 492-494.



I

248 The History and Future of Interest and Profit.

at the same rate, neither fluctuating from time to time, nor
declining on the whole, as it has done in modern times ? How-
was a customary profit of twenty per cent, established ? The
high rate of interest in the Middle Ages has often been ascribed
to the insecurity of capital. But unless in foreign commerce —
which as yet was chiefly in foreign hands, and in which there
was danger of both piracy and shipwreck, and great gains and
great losses were made — trade risks were less in the Middle
Ages than they are now. Trade, in general, was carried on in
a small, customary, circumspect way, regulated by guilds and
civic authority ; demand and prices could generally be estimated
beforehand ; and there was little or no speculation. The rate
of commercial interest was not determined by the demand for,
and supply of, money ; had it been so, it would have varied
from time to time, instead of remaining steady at ten per cent.
Its explanation must be sought, first of all, in the rate of profit.
Modern economists have for the most part assumed that com-
petition proportions prices to cost of production and equalizes
profits. Mediaeval economy was based on very different prin-
ciples, yet it brought about a much closer approximation of
profits to equality, and a much closer correspondence of prices
with outlay, labour, and sacrifice. The mediaeval theory was,
that the trader owed to the community to which he belonged
good articles for reasonable and moderate remuneration, and
should not seek his own ' singular profit ; ' while he was, on
the other hand, entitled to such profit and prices as yielded
a sufficient livelihood to himself and his family — the family
forming an important unit in the social economy. In Elfric's
' Colloquy of the Eleventh Century,' the Merchant says, ' I say
that I am useful to the King and to ealdormen and to the rich
and to all people. I ascend my ship with my merchandise and
sail over the sealike places, and sell my things, and buy things
which are not produced in this land.' To the question, ' Will
you sell your things here as you bought them there?' he
answers, 'I will not, because what would my labour benefit
me ? I will sell them dearer here than I bought them there,
that I may get some profit to feed me, my wife and children.'



The Iltstory and Future of Interest and Profit. 249

Anything above a fair profit was regarded, like extortionate
interest, as usurious, because out of proportion to labour and
cost. Thus the ' Ordinances of the Plumbers,' approved by
the Mayor and Aldermen of London in the thirtieth year of
Edward III., ordain ' that everyone of the trade shall do his
work well and lawfully, and that for working a clove of lead
for gutters or for roofs of houses, he shall take only one half-
penny, and for working a clove for furnaces, belfrys and con-
duit pipes, one penny. Also that no one for any singular
profit shall engross lead coming to the said city for sale, to the
damage of the commonalty, but that all persons of the said
trade, as well poor as rich, shall be partners therein at their
desire.' There were many ordinances, both royal and municipal,
in the fourteenth century for the sale of various commodities
* at reasonable prices.' The general standard of ' reasonable '
€r fair price and profit was custom. Where the seasons, as in
the case of food, or other circumstances made a customary price
impossible, the local authorities or the central government itself
intervened to prevent sellers from taking advantage of the ne-
cessities of buyers. There was abundance of self-seeking and
^reed of lucre, as well as of hypocrisy, in the mediaeval world,
but they worked not through competition, but through combi-
nation ; towns, guilds, companies, classes, grasping at exclusive
privileges, monopolies, and gains. Men pursued their prey, as
it were, in troops and packs. What was sought was not the
gain of individuals as such, but of communities, corporations,
fraternities, and orders.

The causes determining mediaeval profit may then be easily
understood. Its high rate was not the result, as in new coun-
tries in modern times, of a great productiveness of labour and
capital, aided by prolific natural agents. In a small, and,
compared with our own, a nearly stationary commercial world —
where the number of persons engaged in each trade was limited
by guild ordinances, or by the governing body of the town ;
where every business was carried on in accordance with usage
or rule, even the amount of capital or work being often re-
stricted; where prices were controlled by custom, public opinion,



250 The History and Future of Interest and Profit.

autliority, or positive law — the ordinary rate of profit miglit be
without difficulty measured, indirectly regulated, and kept at a
high level. Twenty per cent, came accordingly to be the cus-
tomary rate of profit in the fourteenth century, and seems to
have continued so long afterwards. Again, the customary rat©
of interest in mediaeval trade was half profit, or ten per cent.,
not because the competition of lenders and borrowers resulted
in such a rate — for competition would have produced a fluc-
tuating, not a stable or customary rate — but, it may be rea-
sonably conjectured, on the samo principle that prevailed in
the common European tenure of metayage, that the person
furnishing the capital should get half of the produce, and the
person performing the labour the other half. Throughout the
greater part of Europe down to the sixteenth century the pre-
vailing rate of interest was ten per cent., and twenty per cent.,
or double interest, appears to have been the customary profit,
at least in common opinion.

The statute of Henry YIII.'s reign (37 Henry YIII.,
A.D. 1546), which legalized interest at ten per cent., though
prohibiting higher rates as usurious, opens a new epoch in the
history of the subject. Interest was now distinguished from
Tisury. The same cause that had led the civic authorities of
London two centuries earlier to sanction trade loans at that
rate, now acted on the Legislature with respect to all loans.
Economic considerations prevailed over early moral ideas and
later theological dogmas. The extension of manufactures and
commerce called for an extension of credit, and interest was the
foundation or raison cVetre of credit. The change was connected,
too, with the Reformation and the decline of ecclesiastical
authority, while the position and influence of merchants and
citizens had risen. There was, at the same time, a general
tendency of legislation towards a relaxation of restraints on the
disposition and use of property, of which the Statutes of Fines
and of Wills are instances ; commercial policy and the dictates
of experience superseding the notions of both archaic and feudal
society respecting the inalienability of family property. Theo-
logy recovered ground for the moment in Edward YI.'s reign,



The History and Future of Interest and Profit. 251

when ' a Bill against Usmy,' in 1552, enacted that the late
statute sanctioning interest should be ' utterly abrogate, void,
and repealed.' But in 1571, an Act of Elizabeth, following
that of Henry VIII., again legalized interest at ten per cent.
Thenceforward the Legislature intervened only to lower the
legal rate, which early in the seventeenth century was reduced
to eight, afterwards to six, and in the middle of the eighteenth
century to five per cent. These reductions might appear at first
sight like attempts to tighten restrictions on dealings between
lender and borrower ; but they simply followed at a distance a
fall in the market rate, which always averaged below the legal
maximum. During Elizabeth's reign, though the Queen herself,
at her accession, had borrowed at twelve per cent, on account of
the supposed insecurity of her throne, the market rate sank far
below the lawful ten per cent. Throughout the seventeenth
century the usual rate was five per cent. In the eighteenth
century the interest on the National Debt stood at one time so
low as three per cent. The immense loans contracted by the
Government during the long war with France afterwards caused
a considerable rise ; but the permanent tendency of the rate in
modern times, amid frequent fluctuations, has been to decline.
In the later Middle Ages it stood, as we have seen, at ten per
cent. ; while in the present year, according to the price of the
Funds, it has kept close to three per cent. What have been
the causes of this fall ? What conditions now govern the rate
of interest ? How are its incessant fluctuations on the one
hand, and its decline in the long run, on the other hand, in
contrast with its stationary rate in former years, to be explained ?
Is a continuous fall to be looked for in the future ?

Many eminent writers before Adam Smith supposed that
the fall in the rate of interest after the middle of the sixteenth
century had been caused by the change in the purchasing power
of money, consequent on the influx of silver from America.
Money, they said, was worth less, and therefore less was given
for the use of it. But, as Adam Smith has replied, the change
in the purchasing power of money affected both interest and
principal alike, and could not alter the proportion. Yet the



252 The History and Future of Interest and Profit.

■writers referred to were not wrong in ascribing the reduction of
interest mainly to the increase of money, though mistaken in
their view of its mode of operation. It was by augmenting,
not the sums of money in the market for commodities, but the
stocks of money entering the loan market, that the new silver
lowered interest. The sudden descent in the market rate in
Elizabeth's reign, already alluded to, may be traced mainly to
two causes — the increase of silver in Europe after 1545, when
the mines of Potosi were discovered, and the new coinage under
the great queen. In 1523, it had been computed in Parliament
that the total amount of money in the kingdom did not exceed
a million. Elizabeth's mint coined more than five millions.
Old men, says Harrison, in his description of England in her
reign, could remember when it was rare for a farmer to have so
much as six shillings in hand ; whereas, when he wrote, it was
common for one to have as much as six or seven years' rent by
him, thougli rents had enormously risen. Little of the coin
thus accumulated in the country was put out at interest ; but in
London and other commercial towns stores of money did not
lie idle.

The steadiness of the mediaeval rate of commercial interest
has already been accounted for by the steadiness of the rate of
profit on the one hand, and the fact that half profit was accounted
fair interest on the other, in conformity with the principle com-
monly followed in farm tenures throughout Europe — that the
person advancing the capital was entitled to half the produce.
According to Adam Smith, interest in his time bore the same
proportion to profit. * Double interest,' he says, ' is in Great
Britain what the merchants call a good, moderate, reasonable
profit — terms which, I apprehend, mean no more than a common
«,nd usual profit.' Whether this estimate was strictly accirrate
may be questioned. The rate of profit was no longer as certain
as it had been under the mediaeval system. Nevertheless, the
philosopher lived in an age in which custom was still 'the
principal magistrate of man's life.' Trade was carried on in
the main by customary methods. In old and well-known
employments, to which he limited the doctrine of the equality



I



The History and Future of Interest and Profit. 253^

of profits, the rate may have been tolerably well ascertained and
uniform ; and the steadiness of profit tended to make interest



Online LibraryT. E. Cliffe (Thomas Edward Cliffe) LeslieEssays in political economy → online text (page 23 of 41)