CHAPTER IX. ON THE LAWS WHICH REGULATE THE HIRE OF CAPITAL, AND ON THE IMPOLICY OF USURY LAWS.

WHEN a person has more capital than he wants to employ in his own particular business, he very naturally prefers to let other people have the use of it, to permitting it to lie idle and unproductive, and for this use he will charge such sum per annum as the competition of the market will enable him to obtain. If his capital consist of lands or houses, the compensation which he derives from its use is called rent. If it consists of ships, it is called freight. If it consists of horses and carriages, it is called hire. If it consists of railroads, bridges, or canals, it is called toll. If it consists of commodities, it is called profit; and if it consists of money, it is called interest. In all these cases except the two last, the specific things loaned or hired are returned to their proprietors. In the case of commodities, a sum of money equal in value to the commodities purchased, with the seller’s profit added, is the uniform mode of replacing this species of hired capital. In the ease of money, another sum, though not consisting of the identical pieces of coin, equal in value to the amount of the sum loaned, with the interest, is the uniform mode of replacing this species of hired capital.

In all countries where the competition of the market is permitted to operate without legislative restrictions, it is evident that the charge for the use of capital in any of its forms can never be permanently or materially higher or lower than that medium which presents the common ground upon which it is the interest of the capitalist and the person with whom he deals, to meet. If lands, houses, horses, wagons, railroads, bridges, and canals, be abundant in proportion to the demand, the charge for the use of them will be proportionally low. If they be scarce, it will be proportionally high. The same is true of commodities, under which head is included merchandise and produce of every description, and which, with the metallic money, constitute what is called the circulating capital of a country, without which neither lands, houses, ships, horses, wagons, railroads, bridges nor canals, would be of any immediate value.

Now although metallic money constitutes one of the forms in which capital is hired by persons who wish to employ capital in any industrious pursuit, yet, as observed in the last chapter, it is never the identical thing that is wanted, except indeed by gold and silver ware manufacturers for the purpose of melting. Money is merely hired as the instrument by which raw materials, agricultural produce, or merchandise, are more conveniently to be obtained by the borrower, or by those in his employ to whom he has paid it away as wages; and it must therefore be very evident, that as a component part of the total mass of the circulating capital, it is governed by the same laws as those by which the rest of this mass is governed. In other words, the rate of interest in a country is determined by the aggregate quantity of circulating capital, metallic money itself included. If that be abundant, interest will be low, as in England and Holland; and if that be scarce interest will be high, as in all the new states of our Union.

The unfortunate existence, however, in many countries, and amongst them our own, of laws restricting the charge which the owner of capital in the form of money shall derive from its hire, disturbs in some degree the natural operation of things, and prevents that uniform relation which profit and interest would otherwise invariably bear to each other. By imposing a penalty upon loans at a higher rate of interest than six per cent, per annum, for example, the most usual rate established by our state laws, capital is either driven out to more favored quarters, or prevented from flowing in, in either of which events the mass of the circulating capital is diminished, and consequently the hire for its use augmented. In addition to this, too, a burdensome tax is imposed upon the industry of the country, by compelling those who have not the best security to offer, which embraces a large portion of the industrious classes, to resort to lenders, who in addition to the fair value of the money, and a reasonable allowance for the risk of loaning on personal security, which would be the uniform market price in the absence of usury laws, must be paid for the odium and risk they incur by violating the laws of the land. There is no sound reason why the charge for the use of money should be fixed by law, that would not equally apply to fixing by law the rent of lands and houses, or the freight of ships, the hire of horses and carriages, or the profit on merchandise sold. The lending of money for a year is nothing but selling capital upon a credit for a year, and so convinced of the absurdity of discriminating between a sale of money, and a sale of goods is a large proportion of the capitalists of every country, that evasions of the usury laws are every where practised by expedients which it is not easy to prevent. Some of these expedients will be treated of in a future part of this work, but a very common one is that practised almost daily on the stock exchanges of New York and Philadelphia, whereby under a. fictitious purchase of stock for cash, and a fictitious sale on credit of the same ideal stock, through the agency of a broker, money is loaned at a rate as far above the legal rate as covers the risk of trusting to personal security, as well as the charge for the odium and hazard incurred by an illegal transaction.*

These remarks on the value of money, as a component part of the circulating capital of a country, it will be observed, have reference to that general and enduring state of things, which covers a period of years. Thus, I would say, that capital is more plenty in the United States in the year 1840 than it was in the year 1798. In the latter year the Federal government could not borrow money at less than eight per cent. It could now borrow at five per cent., and has even, at one period since the year 1815, borrowed at four and a half per cent. Most of the Atlantic states, and some of the western states, have of late years borrowed money at five per cent., and it may be remarked, that although the market price of public stocks may be temporarily affected by various causes, yet no permanent influence can be exerted upon them, unless a diminution of the aggregate mass of the circulating capital of the country, that is, of the national wealth, should take place.* The fluctuations in the money market of merchants and stock-jobbers, and even at times in the market of mortgages, by which sometimes a high rate of interest is paid for capital, are generally of a temporary nature, and to be accounted for upon the principle that wherever there is credit, and especially if there be banks, there will at times be over-trading and over-speculation. The rate of interest upon capital must in the long run be governed by the rate of profit to be made by its employment; whilst for short periods, it will depend upon the ratio of the supply to the demand, and upon the security offered in the money market.