jim.shamlin.com

Causes of the Interest of Money

Just as the prices of goods are negotiated between buyers and sellers, so is the interest on loans negotiated between creditor and debtor, the creditor considering his desire to profit and the debtor considering his willingness to pay a given price.

The man who loans money runs the risk of not being repaid at all, or in some instances the expenses and lawsuits of collecting from a borrower who is reluctant to repay, and foregoes the profit he may have made by employing it in some productive enterprise.

Those men who have the skill and the idea for productive enterprise, but who lack the capital to initiate it, seek credit and will pay interest to the degree they predict their ability to profit. Even established producers or traders, having identified an unusual opportunity to profit, will take loans provided the terms are agreeable rather than forego the opportunity to seize the opportunity at all.

The established farmer or craftsman generally has a reserve of his past profit to pay the expenses he must undertake to produce a product, but the journeyman has none. He cannot buy leather to make shoes or seed to plant crops, nor pay any workmen, and thus cannot produce - to loan him the capital enables him to be productive and repay the debt when his product is sold.

Borrowers are eager to have money when they borrowed, but resentful when asked to repay according to the terms of there agreement. A few may have been ticked by a crafty creditor, but more often they are undone by their own optimistic predictions of the profitability of the enterprise for which they borrowed.

A borrower who has a history of keeping his word may find credit at a low rate, but one who is known to be delinquent in repayment may find creditors reluctant to loan to him, and must pay a higher rate to cajole a creditor into taking that risk. The man of no reputation, such as a journeyman who has never before taken a loan, is regarded with some degree of suspicion.

In general, an undertaker whose plans promise to produce a higher rate of profit is preferred by creditors, as he will be more likely to repay a loan even if his outcome is less than anticipated. However, creditors also prefer substantial loans: a water carrier who can borrow 1 ounce of silver and gain 5,000% by his trade - but a creditor would prefer to loan 1,000 ounces to one craftsman rather than loan one ounce to 1,000 water carriers.

Cantillon also touches on the notion of trade credits, in which goods are loaned rather than money. It is customary for a brewer to provide a few barrels of beer to a tavern, to be paid after the tavern owner has sold it to his own customers.

It is the same custom for many retailers to pay for goods some time after receiving them, and it is also quite common for retailers to bankrupt themselves for their inability to pay - for the retailer must take as his loss any borrowed goods that he is unable to sell.

The availability of loans facilitates production, and the author regards as "casuists" those who object to high rates of interest. They imagine interest to be arbitrary and believe it is the greed of creditors to demand high rates of interest, but fail to consider the risk that lenders take. For example, fishwives in London pay 260% interest and higglers in Paris have been known to pay 430%, yet it is also observer that the debtors so often default that there are few lenders who have profited from such loans.

To suggest that such loans could be made at a lower rate ignores the losses taken from default - and also ignore that prohibiting high rates of interest do not lead to lower rates of interest, but the evaporation of credit to risky borrowers, meaning that many will be unable to obtain the capital to be productive at all.

(EN: The author misses the most effective retort to such arguments - which is that if it were profitable to provide low-interest loans to risky enterprises, it would be done - and if the objectors thought it really were possible, it would be a great opportunity to invest their own money in making such loans. Ultimately, they are very liberal in suggesting others should undertake behavior that they, themselves, are unwilling to undertake.)

It is generally observed that the lowest classes of individuals must pay the highest rate of interest while those who are wealthy are charged less. This is no matter of prejudice or exploitation, but merely of the level of risk of non-repayment they pose. Those individuals of intelligence and foresight, who are accurate in their predictions and reputable in their character, tend to be very successful in commerce and grow wealthy. Those whose ambition exceeds their intelligence, who are haphazard and dishonest, tend to remain justly in a state of poverty.

There is also some defense of moneylending as a necessity for the economic development of a nation. It is by the ability to obtain a loan that a talented person who is not wealthy can practice their profession, giving product an employment to their markets in the process.