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steady. Some of Adam Smith's fundamental ideas — such as
the correspondence of price with cost of production, the equality
of profits, and that ordinary profit was double interest — had
come down from an earlier economic world, many of whose
usages and traditions survived. He referred phenomena, which
were really vestiges of an old stationary economy, to a new and
progressive one slowly emerging, under which free competition
was about to supersede custom, law, and official control, and to
transform a standstill and uniform world into one of infinite
diversity, and change, and incessant movement. His own
observations show that industrial and commercial progress was
already creating wide divergence of prices, profits, and interest
from old standards. The period was one of transition, which
at length brought the old economic regime to a close, and
established one of which production on a large scale, specula-
tion, unlimited competition, and ceaseless fluctuations of prices^
profits, and interest are essential features. We are thus brought
back to the questions, What are tlie modern conditions deter-
mining the rate of interest, and whether its continuous decline
is an inevitable consequence of social progress ? These inquiries
involve topics transcending the province of economics ; but even
those that are strictly within it deeply concern the future of the
civilized world.

Why, then, is the rate of interest on the best security only
three per cent, in Great Britain, while it is higher in the United
States, and even in Holland, formerly the stock example of low
interest ? The answer which a cliapter of Mr. Mill's ' Political
Economy' suggests, and which is true so far as it goes, though
inadequate, is that the desire and the means of accumulation
have led in this country to the existence of a quantity of capital
which its owners are led by the preference of other pursuits, or
of ease and leisure, above commercial business, to lend instead
of personally employing ; while there is, on the other Imnd, a
demand on the part of people engaged in trade for loans. Tho
consequent equation of demajid and supply results in a rate of



254 TJie History and Future of Interest and Profit.

commercial interest which indirectly governs the price of the
funds and the income from such investments, trade being the
chief competitor with Government stock and similar securities
for loanable capital. In connexion with this explanation, it
should be borne in mind that the increasing accumulation is not
the only cause that has vastly augmented the supply of loanable
capital. The greater part of the movable and immovable pro-
perty accumulated in a country, in goods, machines, materials,
cattle, buildings, and soforth, never directly enters the loan
market ; and in former times such accumulations would not
have affected the rate of interest even indirectly. But banking
and credit have rendered the intervention of money no longer
necessary to effect loans, unless in a panic. A vast quantity of
wealth, not itself directly loanable, is practically converted by
credit into productive capital, of which borrowers get the com-
mand. The manufacturer and the merchant obtain, through
the intervention of banks, advances of the fixed or circulating
stock they stand in need of. In former times they must first
have obtained a loan of money in sterling coin. Credit, though
unfortunately called money in city phraseology, is neither money
nor capital, but it acts as the representative of both in the loan
market, and has virtually multiplied beyond calculation the
supply of loans. Yet, vastly as it has augmented the supply, it
has not tended only to lower interest, for it has also vastly
augmented the demand. The holder of goods can get advances
on his stock, and is often a borrower. The operation and
activity of modern credit are, moreover, connected with a system
of industrial and commercial enterprise which creates a pro-
digious need of the loan of capital to carry it on. It is
impossible, accordingly, to lay down any general proposition
respecting the effect of credit on the rate of interest. At one
time it augments chiefly the demand for loanable capital, and
at another time the supply. The difficulty is thickened by the
close connexion between the action of credit on capital on the
one hand, and on the circulation and prices on the other. When
credit expands in the loan market, it is active also in the market
for commodities, and prices rise, giving promise of profit ; when



The History and Future of Interest and Profit. 255

it collapses in the former, it contracts in the latter, and prices
fall, to the discouragement of enterprise. The chief fluctuations
of both interest and prices thus find their explanation in credit,
which is not, like coin, a given quantity, but subject to sudden
expansion and contraction.

When all this has been said, we are still far from an
adequate view of the movements of interest. The supply of
capital and the demand for it determine the shares of lenders
and borrowers in the revenue derived from its employment in
business, but do not determine the revenue to be shared. The
price of stock and the rate of interest on such securities are
governed by the competition of investments, of which trade is
the chief ; and the terms which trade can offer must depend on
the expected profit. If the rate of profit anticipated in business
be twenty per cent, at the least, a much higher rate of interest
will evidently follow a given state of supply and demand in the
loan market, than if no higher profit than ten per cent, could be
looked for. Interest fluctuates from causes independent of the
rate of profit, and bears no fixed proportion to it— sometimes
varying in an opposite direction when the immediate need of
loans is urgent. But only high profit can permanently support
high interest, and low profit can afford only a low recompense
to the lender of capital. The rate of profit determines in
general both the maximum and the minimum of interest ; the
maximum must be below it, or the borrower would make
nothing, and the minimum must not be so low as to di'ive the
owners of capital to employ it themselves, instead of lending it,
or to spend it. Thus before we can adequately explain the
causes governing interest, we must ascertain those determining
profit. For the like reason we can make no answer to the
inquiry whether interest tends to rise or to fall in the progress
of society, until we have learned the tendency of profit in that
respect. In speaking of profit, however, it is not meant here
that there is in modern trade any customary, equal, or average
rate, such as is talked of in text-books. The mediaeval rate of
profit was a customary one, and the commercial rate of interest
was then a customary one likewise. Now profit is uncertain,



256 TJie History and Future of Interest and Profit.

variable, and speculative ; nevertheless, interest still bears an
essential relation, thougb not a fixed proportion to it, beings
higher when and where high profits are frequent and probable^
than where the returns are commonly small. The rate of profit
can no longer be described as ' double interest,' but unless the
returns to capital ordinarily exceeded bare interest, and afforded
remuneration for its active employment, borrowing in business
would cease.

The inquiry whether the rate of profit necessarily declines
as the world grows older has a double claim to attention,
possessing an intrinsic importance apart from its relation to the
future of interest. Historical and surrounding facts seem at
the first view to support the doctrines of those economists who
regard a tendency of profit to a minimum as an inevitable
consequence of social progress and an established economic law.
The actual fall of interest from ten to three per cent, seems
presumptive evidence of a fall of profit on the whole hitherto,
since interest bears always a relation to profit. And though
individual traders now sometimes make more than the ordinary
mediaeval profit of four shillings in the pound, no one supposes
that, gains and losses together, profit approaches an average of
twenty per cent, on all the capital in trade. In Adam Smith's
time the market rate of interest was generally below five per
cent., yet merchants thought double interest good profit. The
economic world of his day, it is true, resembled the mediaeval
more than the modem world in the narrow dimensions of trade,
the lack of movement and change, and the influence of custom.
Yet there were essential differences. Prices and profits were
not artificially kept to a certain standard by guilds, civic
authorities, and laws. A natural tendency of profit to decline
from age to age could hardly, therefore, be inferred from its
lower level in the eighteenth century than in the fourteenth.
A fortiori no such inference can be drawn from a comparison of
mediaeval profit with its rate under the industrial and commer-
cial system of our own time. In the middle ages each trade
was in the hands of a limited and organized body; capital,
competition, and production were subject to various restrictions ;



The History and Future of Interest and Profit. 257

prices were customary, or regulated ; the total amount of profit
was accordingly small, but the rate was high. Under unlimited
competition, unrestricted production, and uncontrolled prices,
had the state of society permitted of such a system, profit would
have varied much in individual cases and in different employ-
ments ; its aggregate amount might have been much greater,
because the amount of capital would have been so, but the
mean rate would in all probability have been considerably
lower.

If from historical we turn to surrounding facts, the state of
trade and agriculture in this country during recent years is
regarded by many as indicating more than a temporary fall
in the profit of British capital. The novel feature of reduced
assessments to the income-tax, especially under Schedule D,
and diminished proceeds of the legacy and succession duties,
exhibit a retrogression only partially accounted for by diminished
incomes, expenditure, and savings of landlords and farmers.
But the most prosperous countries, the United States and
France for example, have their unprosperous periods. The
tendency towards more stringent protection abroad is not to be
regarded without anxiety ; yet our trade statistics prove that
an immense market is still open to our productions, and that
British energy hitherto has surmounted opposition. A falling-
off in the foreign demand for British produce, such as is
sometimes argued from the small proportion of exports, would
have the opposite effect of diminishing the proj)ortion of im-
ports, by altering the equation of international demand to the
disadvantage of Great Britain. A diminution of exports might
result from hostile tariffs, but imports would fall off more. A
good market abroad for our exports raises their value measured
in foreign commodities, and swells the amount of goods given
for them ; wliile a declining demand in foreign countries would
compel us to give more for our imports ; the ratio of exports
would increase, exporters would sell at ever-increasing dis-
advantage and diminishing profits. Yet even in such an event
it could not be inferred that the advance of society lowers
the returns to capital, but only that national ignorance and

s



258 The History and Future of Interest and Profit.

international jealousy may do so in commerce as well as in war.
The chief unsoundness in the actual state of matters, and the
most threatening indication for the immediate future, lie in
two circumstances independent of foreign countries, namely,
that our trade is carried on in uncircumspect, over-speculative,
aud haphazard manner, and that the immense fabric of our
system of credit rests on so narrow and precarious a basis tliat
it might suddenly be overthrown altogether. The gradual and
spontaneous growth, however, with better communication and
commercial information, of a better organization of our indus-
trial economy, is not to be despaired of. With respect to
agriculture, on the other liand, it is not enough to say with
Mr. Bright that adverse seasons have caused the depression of
the profits of British farming and the ruin of many farmers.
Farming that pays only in fine seasons must be a losing
business in such a climate as ours. It is no mere question of
sunshine ; nor will five thousand or more miles, at which
engineers will smile in spite even of Lord Derby, protect the
British corn-grower from loss in competition with American
produce under present conditions. Cereals, however, play a
minor and diminishing part in British rural economy, and even
as regards them, the exhaustion of virgin soil and the increase
of population may alter the terras at which the Transatlantic
grower can hereafter sell. On the whole, the present situation
forebodes no lasting depression of the profits of British capital.
But the question as to the tendency of profit to fall is not
to be answered by reference to the particular case of Great
Britain, still less its state at this moment. It involves a con-
sideration of the general causes on which profit depends, and
the conditions under which they will operate as ages advance
and capital accumulates. Adam Smith thought that the mere
growth of capital necessarily entailed a fall of profit. ' When,'
in his words, ' the stocks of many rich merchants are turned
into the same trade, their mutual competition tends to lower
profit; and when there is a like increase of stock in all the
difi'erent trades carried on in the same society, the same com-
petition must produce the same effect in them all.' Were this



The Ilhtorjj and Future of Interest and Profit. 259

reasoniug correct, profit must iuevitaLly decliue in every pros-
perous country. But tliere is a flaw in the argument. When
in a single trade alone the goods for sale increase, the com-
petition of the sellers may force them to accept reduced prices
and lower profits, because the general produce and revenue of
the country may not have increased in proportion. But when
capital and production take larger dimensions in all husinesses
alike, all producers have more to exchange, the general revenue
is greater, and no class need get less for its goods in the market.
It might even be that no increase of capital or production in
any pre-existing employment would follow an augmentation of
the total amount. A new trade was a rare thing in Adam
Smith's days ; now scores grow up every year, and new trail es
may both absorb much new capital and create new markets for
the produce of old trades. If the growth of capital lower profit,
it must be either by raising wages or by forcing resort to inferior
or more costly instruments of production.

A later theory of a tendency of profits to a minimmn is that
an increased cost of subsistence follows the advance of popula-
tion ; so that, to obtain a sufficient supply of labour when capital
is increasing, emploj'ers must raise wages and submit to a de-
crease of profit until a stationary state is reached, at which the
further increase of capital is arrested. This theory is defective
in two opposite ways. On the one hand, it omits all but one
of the causes tending to a depression of profit; on the other, it
overlooks both counteracting agencies, and the j)ossibility of a
change in the fundamental conditions determining the move-
ment of population. The soil, in the first place, is not the only
natural agent whose productiveness diminishes. Mines of all
kinds would be exhausted even by a stationary population,
whereas the productiveness of agriculture would increase with
agricultural skill, were the number of consumers to remain
constant. The cost of land, too, rises for all pui-poses of pro-
duction, and not in agriculture alone. Many emploj^ments
again besides agriculture yield diminishing returns to successive
applications of capital, because the best places are taken by the
first-comers, and those who come later must work in worse

S 2



260 The History and Future of Interest and Profit

situations. The first roads, canals, and railways in a country
are usually those, as M. Leroy-Beaulieu has observed, between
the chief centres of population, wealth, and business, and
traverse the districts where traffic and movement are greatest,^
later lines of communication running through poorer and less
populous localities. The best sites for docks, wharves, ware-
houses, shops, and other places of business are, for the most
part, the first occupied. When any new and lucrative enter-
prise is started, or any invention or novel production is intro-
duced, a crowd of competitors follow, and profits fall off. Nor
is an increased cost of food the only cause tending to raise
wages; it is not the cause that has raised them in England
during the last twenty years. Facilities for migration, emi-
gration, and combination, together with greater intelligence,
knowledge, and self-respect on the part of the working classes,
have produced the rise.

Yet there is another side to the subject. The rate of profit
depends on the ratio of the gross returns to the total outgoings —
on the cost and efficiency of all the instruments of production,
not of labour alone. Given the entire produce of the capital,
labour, and natural resources of a country, in order to ascertain
how much is profit, we should know not only how much falls to
the share of human labourers, but also how much must be
applied to the maintenance of fixed and circulating capital,
including animals, seed, materials, fuel, machinery, buildings;
how much, too, must be paid as rent for the use of natural
agents ; and how much is to be deducted in taxation and legal
expenses, or what is the cost of protection and of the other
advantages of government. In a country whose natural re-
sources are abundant and prolific, efficiently co-operating with
capital and labour at small cost, and whose government and
legal system are inexpensive, both wages and profit may be
high. If the soil and climate be favourable, mines of all kinds
rich and easily worked, the structure of the country lending
itself to cheap and rapid locomotion, taxes and law costs small,
it is plain that the return to capital, alike in agriculture, manu-
factures, and commerce, may give a large surplus in profit,



The History and Future of Interest and Profit. 2G1

althougli at the same time the reward of labour is abundant.
And what the bounty of nature may effect may be ejffected hy
the art of man. Better machinery may be applied at once to
the factory, the farm, and the locomotive: while chemistry
■cheapens and improves the cultivation of the ground, it maj^ do
like service in every branch of manufactui'e. Less costly and
more efficient means of heating and lighting every place of
production and business may be discovered. The gcnei'al rate
of profit might thus be sustained by the progress of science,
tliough population were advancing. No speculation respecting
the economic future of the civilized world which does not take
account of the inexhaustible resources of science, and of the
progressive development of the human faculties for discovery
and invention, has now much claim to attention. Labour, in
the narrow sense, is not, as political economists as well as * social
democrats' have assumed, the sole cause of profit. There might
be production and profit without the employment of a single
human labourer, and profit in that case would be greater or less,
according to the qualities of the other agents, and the manner
in which they were used. A company in a new colony, where
hii-ed labour was not to be had, might carry on a great business
by the aid of animals, machines, and natural agents ; the profit
depending partly on the cost, partly on the powers of these
animate and inanimate coadjutors. And the progress of indus-
trial art constantly augments the number and efficiency, and
diminishes the expense, of some of these auxiliaries. The fact
that the best steam-engines still waste the greater part of the
fuel is enough to show that the field for economic invention in
mechanics is immense. Again, if it be true that the first
railways are the best situated, and bring in the largest returns,
it is true also that commerce and industrial movement have a
constant tendency to spread, and to create markets and traffic
where there had been stagnation. The tendency of many great
enterprises, like the Suez Canal, is to become more remunerative.
Fifty years ago the farthest- seeing mind could not have formed
a conception of the profitable occupations that steam would
p)rovide for fresh accumulations of capital, and steam is perhaps



262 The History and Future of Interest and Profit.

a feeble agent compared with some future sources of power.
The facilities for the migration and emigration of labour may
tend to raise wages at the expense of profit ; but they are
connected with causes which constantly enlarge the sphere for
capital in the application of neglected or imperfectly developed
resources, both in old and new regions. The overflov/ of British
capital to foreign countries has two aspects. Mr. Mill has con-
templated it as a sign of the fall of profit in old countries ; but
it may be regarded also as an example of the tendency of social
progress to find fresh fields of eniployment for their accumu-
lations. Students of Mr. Herbert Spencer's works know,
moreover, that there is reason to question the undiminished
fecundity of the population of the civilized world, which the
theory of a decline of profit assumes. Civilization makes con-
stantly greater demands on the nervous system, enlarges the
brain, and multiplies its expenditure of physical power, thereby
diminishing the quantity expendible on the increase of the race,
while at the same time raising the standard of wants, and
augmenting prudence. One and the same cause — the increase
of cerebral force and activity, and therewith of science, fore-
sight, and adaptation of means to ends — tends to add to the
industrial productiveness of the people of the West, and to
slacken the growth of their numbers, although a different future
may be before the people of the East. The time must indeed
come, after countless ages, when the decline of solar and terres-
trial heat shall arrest the mental advancement of the human
race, and make the returns to capital and industry dwindle.
But within economic as distinguished from astronomical and
geological periods, there seems no ground for concluding that
in the more civilized parts of the globe man must press con-
stantly closer and closer on the means of subsistence, and thrift
and enterprise consequently obtain a decreasing reward. Were
population stationary, it may perhaps be argued, the price of
labour would rise to such a pitch from the accumulation of
capital as to leave little or no profit. The answer is, that the
accumulation would not take the form of wages, but of new
mechanical and other agencies for aiding production, which



The History and Future of Interest and Profit. 2G3

would benefit tlie laboiu'er as a consumer without raising the
cost of his services. One remote difficulty, indeed, raises a
formidable, and at present insoluble problem, namely, What is
to be done for coal and iron when the mines become exhausted ?
Yet the men of a former age might have regarded the disap-
pearance of forests, and the consequent rise in the cost of wood,
with equal embarrassment. It is at least certain that the earth
contains resources now undreamt of, which science is sure to
reveal ; or, rather, which the mind of man, the real cause of all
wealth and profit, is sure to discover. Some of the chief sources
of modern profit must ultimately fall short ; but food is not
likely to be among the number, because the number of human
beings can be kept within bounds — as it is already in France
and amoug the old American families in the States of New
England — and substitutes for those which must fail may be in
the womb of time. No certain conclusion respecting the future
of profit can be reached, but the theory of its tendency to a
minimum has no claim to the character of a law of social
progress, ignoring, as it does, some of the chief results of that
progress, and its chief cause — the constant improvement of
human faculties. Profit may uniformly fall from its first high
level in new countries like the Western States of America, yet
may not continuously decline in old countries. The rate will



Online LibraryT. E. Cliffe (Thomas Edward Cliffe) LeslieEssays in political economy → online text (page 24 of 41)