II.

BOOK stock to be lent at intereft grows gradually greater and greater.

As the quantity of ftock to be lent at interest increases, the intereft, or the price which must be paid for the use of that stock, neceffarily diminishes, not only from thofe general caufes which make the market price of things commonly diminifh as their quantity increafes, but from other caufes which are peculiar to this particular cafe. As capitals increase in any country, the profits which can be made by employing them neceffarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arifes in confequence a competition between different capitals, the owner of one endeavouring to get poffeffion of that employment which is occupied by another. But upon most occafions he can hope to juftle that other out of this employment, by no other means but by dealing upon more reasonable terms. He must not only fell what he deals in fomewhat cheaper, but in order to get it to fell, he must fometimes too buy it dearer. The demand for productive labour, by the increase of the funds which are deftined for maintaining it, grows every day greater and greater. Labourers eafily find employment, but the owners of capitals find it difficult to get labourers to employ. Their competition raises the wages of labour, and finks the profits of ftock. But when the profits which can be made by the ufe of a capital are in this manner diminished, as it were, at both ends, the price

IV.

which can be paid for the use of it, that is, the c H A P. rate of interest, must neceffarily be diminished with them.

MR. Locke, Mr. Law, and Mr. Montefquieu, as well as many other writers, feem to have imagined that the increase of the quantity of gold and filver, in confequence of the difcovery of the Spanish West Indies, was the real caufe of the lowering of the rate of intereft through the greater part of Europe. Thofe metals, they fay, having become of lefs value themselves, the use of any particular portion of them neceffarily became of less value too, and confequently the price which could be paid for it. This notion, which at first fight feems fo plaufible, has been fo fully exposed by Mr. Hume, that it is, perhaps, unneceffary to say any thing more about it. The following very fhort and plain argument, however, may serve to explain more diftinctly the fallacy which feems to have misled those gentle

men.

BEFORE the discovery of the Spanish West Indies, ten per cent. feems to have been the common rate of intereft through the greater part of Europe. It has fince that time in different countries funk to fix, five, four, and three per cent. Let us fuppofe that in every particular country the value of filver has funk precifely in the fame proportion as the rate of intereft; and that in those countries, for example, where interest has been reduced from ten to five per cent., the fame quantity of filver can now purchase just half the quantity of goods which it could have purchased before.

D 4

II.

BOOK before. This fuppofition will not, I believe, be found any-where agreeable to the truth, but it is the most favourable to the opinion which we are going to examine; and even upon this fuppofition it is utterly impoffible that the lowering of the value of filver could have the fmallest rendency to lower the rate of intereft, If a hundred pounds are in thofe countries now of no more value than fifty pounds were then, ten pounds must now be of no more value than five pounds were then. Whatever were the causes which lowered the value of the capital, the fame must neceffarily have lowered that of the intereft, and exactly in the fame proportion. The proportion between the value of the capital and that of the intereft, must have remained the fame, though the rate had never been altered. By altering the rate, on the contrary, the proportion between those two values is neceffarily altered. If a hundred pounds now are worth no more than fifty were then, five pounds now can be worth no more than two pounds ten fhillings were then. By reducing the rate of intereft, 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 intereft which is equal to onefourth only of the value of the former interest.

ANY increase in the quantity of filver, while that of the commodities circulated by means of it remained the fame, could have no other effect than to diminish the value of that metal. The nominal value of all forts of goods would be greater, but their real value would be precifely

the

IV.

the fame as before. They would be exchanged CHAP. for a greater number of pieces of filver; but the quantity of labour which they could command, the number of people whom they could maintain and employ, would be precifely the fame. The capital of the country would be the fame, though a greater number of pieces might be requifite for conveying any equal portion of it from one hand to another. The deeds of affignment, like the conveyances of a verbose attorney, would be more cumbersome, but the thing affigned would be precifely the fame as before, and could produce only the fame effects. The funds for maintaining productive labour being the fame, the demand for it would be the fame. Its price or wages, therefore, though nominally greater, would really be the fame. They would be paid in a greater number of pieces of filver; but they would purchase only the fame quantity of goods. The profits of stock would be the fame both nominally and really. The wages of labour are commonly computed by the quantity of filver which is paid to the labourer. When that is increafed, therefore, his wages appear to be increased, though they may fometimes be no greater than before. But the profits of ftock are not computed by the number of pieces of filver with which they are paid, but by the proportion which those pieces bear to the whole capital employed. Thus in a particular country five fhillings a week are faid 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 fame

as

BOOK as before, the competition between the different

II.

capitals of individuals into which it was divided would likewife be the fame. They would all trade with the fame advantages and difadvantages. The common proportion between capital and profit, therefore, would be the fame, and confequently the common intereft of money; what can commonly be given for the ufe of money being neceffarily regulated by what can commonly be made by the ufe of it.

ANY increase in the quantity of commodities annually circulated within the country, while that of the money which circulated them remained the fame, would, on the contrary, produce many other important effects, befides that of raising the value of the money. The capital of the country, though it might nominally be the fame, would really be augmented. It might continue to be expreffed by the fame 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 confequently the demand for that labour. Its wages would naturally rife with the demand, and yet might appear to fink. They might be paid with a fmaller quantity of money, but that smaller quantity might purchase a greater quantity of goods than a greater had done before. The profits of ftock 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 compofed, would naturally be augmented along with