T. E. Cliffe (Thomas Edward Cliffe) Leslie.

Essays in political economy online

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probably vary from time to time in the future as it has done in
the past.

If profit, then, be subject to no law of inevitable decline, can
interest be so ? It is almost needless to say that no inference
can be drawn from its lower level in modern times than in the
Middle Ages, since the mediaeval rate of profit was fixed, and
interest bore a fixed proportion to it. Now, profit is indeter-
minate and fluctuating ; interest, too, fluctuates from causes
independent of profit, affecting the loan market, such as the
state of credit, the foreign exchanges, the movements of bullion
actual or anticipated, the harvests, Government and foreign
loans, and political events and prospects. The movement of
interest in trade may consequently be different from, and even
opposite for the moment to, its movement in respect of other

264 The History and Future of Interest and Profit.

investments. The price of Government stock might be high,
and interest on such securities falling, while the rate of discount
showed that men of business were eager for loans, either because
credit had been shaken, or because a shock to it or a scarcity of
money was apprehended, or, on the other hand, because a specu-
lative mania had arisen. Or again, people in trade might be
slow to accept short loans on very favourable terms, because
waiting for a turn in commercial affairs, while stable and
permanent investments like the funds or land mortgages
returned a high interest. Yet ^he main cause determining,
throughout the whole field open to capital, the general tenor of
the movement of interest, is the rate of commercial profit. Let
new channels of trade offer bountiful returns for a series of
years, and the savings of the country would flow into them, the
price of Consols would fall, and mortgagors would pay dearly
for loans. The main reason why the rate of interest has been
constantly higher in the United States than in England is that
the prolific natural resources of America have afforded a richer
field for the employment of capital than was found in this island.
The chief cause of the rise of interest in Holland is that Dutch
capital has found in colonial undertakings, American invest-
ments, foreign commerce, and husbandry at home, more profitable
employment than lay open to it a century ago. And the sta-
tionary state ultimately reached by the whole civilized world
may possibly be that of a stationary population, whose savings
are more productively employed than those of the present gene-
ration, and yield a higher interest.

"We have yet to consider how profit is distributed between
lenders and borrowers of capital, and what proportion falls to
the share of the former. Gross profit, according to Mr. Mill, is
made up of three elements : — interest, or the reward of simple
abstinence ; insurance, or the compensation for risk ; and the re-
muneration for superintendence or management. This analysis
however, errs in treating insurance as a constituent of profit.
The sum spent in insuring the goods of a manufacturer or
merchant against fire or shipwreck forms part of his outgoings,
not of his profit upon them. He may spend what he receives

The Hktorf/ and Future of Interest and Profit. 265

both as interest and as recompense for management, but wliat
comes to him as insurance should be laid by to provide against
accident or loss, and is not expendible income. It is true, since
losses and accidents may be escaped, that men in a trade exposed
to them who do not insui'e may get a higher profit from the
higher prices caused by the risk. They have played double or
quits, and have won. But if all risk in trade, and therefore
insurance, could be extinguished, the total amount of profit
would not be diminished, as it would be by the extinction of
interest, or of the earnings of management. On the contrary,
were the same amount of insurance required in all trades alike,
its elimination would be a saving, and a source of additional
profit all round. The mistaken classification of insurance with
the elements of profit, instead of with those of cost of production,
is connected with the common inaccuracy of treating interest as
higher in proportion to risk. Interest proper is net income, and
safely expendible as such ; the provision against loss of the
principal is not so. As in the case of profit, however, particular
lenders may be gainers by the risk of losses which do not actually
befall them, though nothing may be gained from it by lenders
all round. How far risk attracts or repels capital depends
indeed partly on national character and the temper of the age.
But the presumptuous trust in their own good fortune, which
Adam Smith imputes to the greater part of mankind, tends to
make the losses resulting from risk exceed, on the whole, the

Profit, then, includes two elements only — interest for the
mere loan of capital, or an equivalent where the capital is the
employer's own, and the additional return resulting from its
active employment in production. This second element is not
liappily called wages of superintendence or earnings of manage-
ment. Eegarding it in that light, Mr. Alfred Marshall and
some eminent foreign economists consider it simply as a species
of wages, determined by the same causes that govern the
recompense of skilled labour in general, such as the rarity of
the faculties and acquisitions requu-ed, and the amount of toil
undergone. Were there no other constituent than this, iu

266 The History and Future of Interest and Profit.

addition to interest, in gross profit, interest would absorb a
greater share of profit than it does, and therefore be higlier
than it actually is. The surplus above interest arising from
the active employment of capital is in proportion, not to the
difficulty and trouble of management, but to the amount of
the capital. If two companies, one employing twice as much
capital as the other, can make a good profit by selling at a
particular time or place, the gain of each will be in proportion
to the business done and the amount of the sales ; and one
will make twice as much as the other, although the skill and
exertion required to conduct the operations in the two cases
may be the same. There may be a manager of each company
who gets a fixed salary, and this, doubtless, is wages ; but the
profit on the transaction will be so much per cent, on each
company's capital, and may far exceed the manager's pay.
The shares of interest on the one hand, and of the return for
the employment of the capital on the other hand, are deter-
mined by the supply of and demand for it in the loan market.
The proportions will vary in different countries and ages,
according, in a great measure, to the attraction or repulsion
that active trade has for the owners of capital. The rate of
interest, in short, is determined by no invariable rule ; but, like
that of profit, seems subject to no law of inevitable decline — at
least until great astronomical and geological changes supervene,
and the whole solar system begins to approach the end of its

So far the future of interest and profit has been considered
with reference to economic conditions alone. But is it certain
that economic conditions exclusively will henceforth control
them ? The policy of society in reference to both has been
determined by various conceptions. Archaic notions and feel-
ings founded on kinship, Greek philosophy, Roman law, Chris-
tianity, Catholic theology, commercial ideas, the modern regard
for individual liberty, political economy, have all played a part
in their history. Other sources and modes of thought have yet
to be reckoned with — democracy, the views of the working
classes, German and French Socialism, the subtler shapes of

The Historij and Future of Interest and Profit. 267

Socialism whicli ostensibly seek only to enlarge the intervention
of the State in the economical sphere, and new conceptions of
moral and social duty. The authority of the economic theory
hitherto dominant with respect to individualism, competition,
and non-interference, is visibly shaken even in England. The
notion that all capital should belong to the State for the benefit
of the "working classes has many strenuous adherents in Ger-
many and France, notwithstanding the wide distribution of
property in those countries, but for which it would have already
overcome all opposition. The favour with which Mr. Henry
George's ' Progress and Poverty ' has been received in the
United States makes a curious revelation of the tendencies of
educated thought in a country where individual energy has
worked under the most propitious conditions. Mr. George,
indeed, proposes to confiscate land-rent only without compensa-
tion ; but rent in a vast number of cases is virtually a form of
interest, being the return to an investment by purchase or
outlay. Protection, again, is a revival of the medioeval regu-
lation by law or authority of trade, prices, and profit ; and the
policy of most civilized countries is protective. In England, a
generation ago, when at length Bentham's * Defence of Usury*
had led to the abolition of a legal limit to interest, much more
seemed to be swept away. The change apparently formed part
of a wider and deeper change in social opinion and legislative
policy, and belonged to a general movement of thought,
emancipating conduct from a multitude of ancient
restraints in the name of morality or religion. Yet, little as
people are dreaming of it at present, there are indications of a
tendency on the part of English society to slide back to the
mediteval system of regulating contracts, bargains, pecuniary
dealings, and prices by authority. Fair wages, fair profits, and
fair rents are now objects more or less distinctly conceived by
many who, ten years ago, regarded buying in the cheapest
and selling in the dearest market as the sole rule in all
questions of contract. No one, perhaps, in England at tliis
moment thinks of controlling interest ; yet propositions are now
often put forward respecting wages and profit involving the

268 The History and Future of Interest and Profit.

regulation of lootb, and indirectly, therefore, of interest, which
follows the movement of profit. Ten years ago no English
statesman would have listened to a proposal to regulate rent in
any part of the United Kingdom hy statute or judicial decision.
Yet the principle of the Act by which judicial rents are now
introduced into Ireland is no other than that of the mediaeval
law against usury, that the owner of property should not be
permitted to take advantage of his neighbour's necessity to
extort a high price for the loan of it. The establishment of
rings and corners, and of bulling and bearing in English trade,
might considerably alter public opinion with regard to the
mediaeval laws against forestalling and engrossing. Demo-
cratic legislation will assuredly intervene in directions not in
accordance with the doctrines that have commended themselves
hitherto to the minds of great capitalists or landowners. Ideas
of moral and social obligations, too, seem likely to play a
greater part in the commercial sphere than they have ever done
since Adam Smith based a complete economic code on the
desire of every man to better liis own condition, and some of
these ideas may make light of that code.

The misfortune is that great general principles, like that of
tlie freedom of contract, are now abandoned in a moment to
promote a particular measure, perhaps expedient or necessary
in itself and defensible on special grounds, like the Irish Land
Act. Mediteval economy has been ignorantly decried ; there
was much in it that was good in design and suited to the time ;
yet let us not ignorantly go back to it from a notion that we
are following new and advanced guides. Let us look steadily
before us ; and if we are to revert to an ancient system which
tolerated no individual liberty in production or exchange, let
us, at least, do so advisedly and deliberately, not sliding back
into it unconsciously.




It seems to he still a matter of doubt with many whether
the new mines have actually diminished the purchasing power
of gold, or have only contributed the additional currency
required by the increase of the world's commodities and trade.
Fortunately for those who care to pursue the inquiry, the very
causes which, by their complexity and fluctuating character,
make it vain to seek an exact measure of the effect of the new
gold on prices, are in themselves subjects of great interest ; for
the history of prices is interwoven with the history of the pro-
gress and fortunes of mankind. Several writers on the gold
question have drawn conclusions from the fall in the value of
both the precious metals after the discovery of America ; but,
without a careful comparison of the economical conditions of
that epoch and the present, no sort of inference can be rationally
made ; and the comparison — one might say the contrast —
abounds in instruction apart from the light it throws on tlie
monetary problem. The proper region of money is the region
of industry, roads, navigation, and trade ; and prices tend to
approach to equality as tliese are improved, as men become
equally civilized, and as political disorders cease to interrupt
human intercourse and prosperity. At this day, in the most
civilized countries, the precious metals serve two masters— war
and commerce ; but in those least ci^dlized they serve none.
The currents from the mines may vibrate through a third of the

* Macmillan's Majazine, August, 1864.

270 TJie Distrihiition and Value of the Precious Metals

habitable globe, but tbey bave no conductors tbrougb more
than half of Asia and South America, or through almost the
whole of Africa. In the sixteenth centmy, the bulk of the
people of Europe itself could seldom, if ever, have touched a
coin from the mines of Mexico or Peru. There was no even
distribution through Christendom of the treasure which the
Spaniards tore from the New World ; and on this and other
accounts prices rose unequally in different places, and not at
all in some. In the chief towns of Spain they seem to have
risen even before the fifteenth century had closed ; and in the
Netherlands their ascent was much earlier than in England,
where the state of the cuiTency before 1560, and the drain con-
sequent on its debasement, together with the foreign expenditure
of the Grovernment, both retarded and concealed the first symp-
toms of the falling value of the precious metals. During the first
sixteen years after the mine of Potosi was opened,* although
prices measured in base coin rose rapidly in England, they
rose in no proportion to the increase of silver and gold in the
world. There was, as it were, a hole in the English purse ; and
the ancient fine coin of the realm ran out into the foreigner's
hands as fast as the new base coin w'as poured in (just as eagles
and dollars liave been driven from the American States by the
issues of paper). Moreover, war with France and Scotland
drew much money out of England, and most of the treasure
netted upon trade was hoarded, or made into plate. But with
Elizabeth came peace with France and a reformation of the
currency : silver flowed fast into the Poyal Mint ; old fine coin
retm-ned into the market ; and prices, instead of falUng in pro-
portion to the improvement of the cm-rency, continued to rise,
because the new issues exceeded the old, and the increase of
commodities, great as it was, did not keep pace with the
increase of money and men in the most prosperous parts of the
country. Prices depend on the quantity of money in proportion
to commodities — not on its quality — whether it be made of

* In 1545. The increase of the precious metals before that year was not

In the Sixteenth and Nineteenth Centuries. 271

■metal or paper. Prices accordingly iu England, before 1560,
rose in proportion to the increase of base money, and not in
proportion to its baseness. One Englishman alone, however,
down to 1581, seems to have connected the phenomenon of
extraordinary dearness in the midst of extraordinary plenty,
which was the common complaint, with the mines of the New
World.* With others it was a cry of class against class, for
covetousness, extortion, extravagance, and luxury ; and of all
classes against the landlords for exorbitant rents and enclosures.
The complaint against enclosures, that they fed sheep instead
of men, was no new one ; it had been a popular grievance for
more than a century, and a subject of legislation before the
discovery of America. A recent writer, nevertheless, supposes
that at the period of Stafford's ' Dialogues,' ' the foreign demand
springing from the increased supply of the precious metals fell
principally upon wool. The price of wool, accordingly, rose
more rapidly than that of other industrial products in England;
the profits of sheep-farming outran the profits of other occupa-
tions, and the result was, that extensive conversion of arable
land into pasture which the interlocutors in the Dialogues
describe, and which was undoubtedly the proximate cause of
the prevailing distress.'! But the truth is, that corn was
not, as this theory assumes, at once comparatively scarce
and comparatively cheap : the real paradox is, that it was,
like other articles of food, extraordinarily plentiful in the
country, and extraordinarily dear in and near the capital

* William Stafford, the supposed author of the famous ' Dialogues,' published
in 1581. He says : — ' Another cause I conceive to be the great plenty of treasure
which is walking in these parts of the M'orld, far more than our forefathers have
seen. Who doth not understand of the infinite sums of gokl and silver which are
gathered from the Indies and other countries, and so yearly transferred into these
coasts?' &e. &-C. — See Harl. Misc. vol. ix.

t Political Economy as a Branch of General Education. By J. E. Cainies. Esq.
It is immaterial to the point in question above, but not to the monetary histury of
the period, to observe that unmanufactured wool was then far from being the cliief
export from England, and that the loom was then, as now, England's chief mine.
But had the price of wool been disproportionately high, and led to the growth of
sheep in place of corn, the price of mutton should have been comparatively low,
whereas its price, like that of beef, was extravagantly high in compaiisun with all
former rates.

272 The Distribution and Value of the Precious Metals

and chief towns.* England had become rich, both in money
and in commodities, but not in roads and means of carriage ;
and wool had risen only with all other produce of the realm
within reach of the chief markets. The gains of the wool-
grower were not greater than those of the clothier, the hatter,
the shoemaker, the blacksmith, the butcher, the baker, or the
tillage farmer, in most places near the chief centres of increasing
population and trade. f Before the New World was discovered,
and down to the eve of Elizabeth's reign, the extension of
pasture had caused much real dir^tress. But, for a generation
before the ' Dialogues,' tillage had increased and prospered ;
and the popular charge against the landlords had become an
anachronism. Poverty and suffering, it is true, still existed
side by side with rapidly-increasing wealth, but not through the
scarcity of corn. Food of all sorts, though abundant in the
country, was dear beyond precedent in and around the places
where the population had multiplied fastest. The old feudal
and ecclesiastical economy of society had broken up ; monasteries
and noble houses no longer maintained swarms of serfs, and
paupers, and waiting and fighting men ; the nobility and gentry
were deserting the country for the town ; a long peace, while it
had swelled the general nimibers of the people, had extinguished

* ' Albeit,' says a historian of that age, ' there he much more ground eared now
almost in every place than hath been of late years, yet such a price continueth in
each town and market that the artificer and poorlabouiing man is not able to reach
unto it, but is driven to content himself with horse-corn : I mean beans, peas, oats,
tares, and lentils.' — Harrison's Description of Great Britain. And again, 'There
are few towns in England that have not their weekly markets, whereby no occupier
shall have occasion to travel far off with his commodities, except it be to seek
for the highest prices, which commonly are near unto great cities.' And the
knight in the Dialogues says : — ' I say it is long of you, husbandmen, that we are
forced to raise our rents, by reason we must buy so dear all things we have of
you, as corn, cattle, goose, pig, chicken, butter, and eggs. Cannot you,
neighboui', remember that I could, in this town, buy the best pig for fourpence,
which now costeth twelvepence? It is likewise in greater ware, as beef or

t'One cause of corn being cheap in some places was that the gains of the farmer
had stimulated agriculture and produced unusual abundance. Harrison accordingly
says: — ' Certainly the soil is now grown to be much more fruitful than in times past.
The cause is that our countiymen are grown to be much more painsful and skilful
through recompense of gain than hitherto they have been.'

In the Sixteenth and Nineteenth Centuries. 273

the calling of the soldiers; and labourers seeking bread were
gathering to the chief centres of employment and wealth. The
dearness of provisions in and within reach of the markets
where the competition of mouths was thus greatest was caused,
not by a decrease of tillage, nor yet by the increase of money
alone, but in part by the fact that the increasing supplies which
were wanted were drawn at an extravagant cost of carriage from
limited districts, pack-horses being the principal means of
land transport from the country to the town. For a similar
reason food is now extravagantly dear at the mines of British
Columbia, and not merely on account of the plenty of gold, for
it is cheaper at San Francisco than in London. The price of
meat was even more unequal than that of bread in town and
country generally, because there were few roads by which cattle
could be driven to market. Corn was, as it still is, more portable
than fresh meat ; but the means of carrying even corn were so
scanty and costly that it was often at a famine price in one
place and cheap in another not far off. Wool, again, was more
portable than corn, and might be sent to market with profit
from districts too remote to supply corn or fresh meat. These
circumstances explain the inconsistency of statements in the
* Dialogues,' and other writings of that period, respecting the
prices of corn and meat, and the numbers of the population.
Cheapness and dearness, plenty and scarcity, of corn and other
food, depopulation and rapidly increasing numbers, really co-
existed in the kingdom. There were places from which the
husbandman and labourer disappeared, and the beasts of the
field grazed where their cottages had stood ; and there were
places where men were multiplying to the dismay of statesmen.
There were places where corn was above the labourer's reach,
and places where it had come Kttle or not at all within the waves
of the monetary revolution about all the chief centres of traffic.
In every locality, and with respect to every commodity, the
range of prices was determined by the quantity of money cir-
culating there on the one hand, and the quantity of commodities,
or their cost of production, on the other ; and these proportions
varied in different places, in different years, and with respect to


274 The Distribution and Value of the Precious Metals

different commodities. In the very year after Stafford's tract
was published, ' all the commodities of Greece, Syria, Egypt,
and India, were obtained by England much cheaper than for-
merly,'* by a direct trade with Turkey, which saved the charges
of the Venetian carrier. Nor was the rise of corn or meal
general throughout the country, for the cost of carriage cut off
the remoter places altogether from the markets in which the
new gold and silver abounded. Most writers, from Adam Smith
downwards, have taken the price of corn in or near the principal
markets of the most opulent and commercial countries as the
measure of the effect of the mines in the sixteenth century,
and have treated the fall in the value of money as general and

Online LibraryT. E. Cliffe (Thomas Edward Cliffe) LeslieEssays in political economy → online text (page 25 of 41)