name, the Marquis Beccaria, in a Discourse on Public Economy of Commerce, published about the year 1769, in enumerating the principal means by which a government may promote trade, mentions expressly the low interest of money.1 The circumstance which has misled all these writers has evidently been, that inseparable connexion which was before fully illustrated between a flourishing commerce and a low rate of interest. As the latter of these results naturally and necessarily follows from the former, they were led to imagine, that if the effect could only be secured by the direct interposition of law, it would draw along with it, as consequences, all those happy concomitants or causes with which they had found it connected in the course of their observations.

Having mentioned Locke's Treatise on Interest, (which was written in opposition to Child,) I cannot help observing, that although he declares in favour of a legal rate of interest,2 yet all his reasonings lead to an opposite conclusion. And, indeed, the arguments he alleges in favour of a legal rate are so trifling, and so slightly urged, that he was probably prevented, merely by a respect for established opinions, from pushing his conclusion to its full extent. The passage deserves to be quoted in his own words :

"It is necessary that there should be a stated rate of interest, and in debts and forbearances, where contract has not settled it between the parties, the law might give a rule, and courts of judicature might know what damages to allow. This may, and therefore should, be regulated.

"That in the present current of running cash, which now takes its course almost all to London, and is engrossed by a very few hands in comparison, young men, and those in want, might not too easily be exposed to extortion and oppression, and the dexterous and combining money-jobbers not have too great and unbounded a power to prey upon the ignorance or necessity of borrowers. There would not be much danger of this if money were more equally distributed into the several

'Monthly Review, Vol. XLI. p. 176.

2 Vol. II. p. 31.—[First Considerations of Interest and Money.]

quarters of England, and into a greater number of hands, according to the exigencies of trade.

"If money were to be hired as land is, or to be had, as corn or wool, from the owner himself, and known good security be given for it, it might then, probably, be had at the market (which is the true) rate, and that rate of interest would be a constant gauge of your trade and wealth. But, when a kind of monopoly, by consent, has put this general commodity into a few hands, it may need regulation, though what the stated rate of interest should be, in the constant change of affairs and flux of money, is hard to determine. Possibly, it may be allowed, as a reasonable proposal, that it should be within such bounds as should not, on the one side, quite eat up the merchant's and tradesmen's profit and discourage their industry; nor, on the other hand, so low, as should hinder men from risking their money in other men's hands, and so rather choose to keep it out of trade, than venture it upon so small a profit. When it is too high, it so hinders the merchant's gain that he will not borrow; when too low, it so hinders the monied man's profit that he will not lend; and in both these ways it is an hindrance to trade."

In stating these observations, I would, by no means, be understood to deny, that low interest is a cause as well as an effect of National Wealth, or that it ought to be an object with a statesman to favour as much as possible its reduction, by the general plan of his policy. I only speak of the inefficacy of particular regulations to that purpose, unless they are so accommodated to the actual circumstances of a country that the same consequences would spontaneously have taken place in the natural course of things, without the interposition of the legislator.

The importance of low interest to the progress of National Wealth follows, as an obvious consequence, from the remarks formerly made on the accumulation of stock. "The proprietor," says Turgot," who lends money, ought to be considered as a dealer in a commodity absolutely necessary for the production of riches, and which cannot be at too low a price. To charge

this commerce, therefore, with duties, would be as unreasonable as to lay a duty on a dung-hill, which is to manure the land." The truth is, that a decrease in the market rate of interest (so far as it is in the power of laws to favour it, by their general spirit and tendency) is the only safe and effectual encouragement which a statesman can give to national industry. It will afterwards appear, that the regulations of commerce, which have been commonly employed for that purpose, (such as prohibitions, monopolies, bounties, drawbacks, &c.,) are not merely useless, but positively hurtful. They may, indeed, encourage particular branches of industry, but it is at the expense of other branches, from which they withdraw their natural share of the capital of the country. Nor do they always succeed in advancing even those trades which they favour, inasmuch as by multiplying their productions beyond their due proportion, they must, in some instances, have the effect of overstocking the market. Hence the only equitable and advantageous encouragements to industry are those which favour all its branches alike; and such, precisely, is the effect of a low rate of interest." It enables individuals with the same given resources, to put larger capitals in motion, leaving them, in the employment of their capitals, entirely to the guidance of their own prudential views of profit, and extending to all equally the means of applying their industry to their favourite objects.

Among the other mischievous effects of raising supplies on the funding system, its tendency to increase the market rate of interest is one of the most important. Immense sums, which would otherwise have been employed in the various departments of useful industry, are kept disengaged for speculations in the funds; and a shock is frequently given to the trade and manufactures of the kingdom by a sudden abstraction of capital, in consequence of those high temptations to lenders which it is necessary for Government to hold out in times of difficulty.

* [Réflexions sur la Formation et la Distribution des Richesses, § xcv. Euvres, Vol. V. p. 123.]

1 Gale's Second Essay on Public Credit.

It is, however, chiefly against the agricultural improvement of the country that public loans operate. The high profits of trade enable persons of good credit to elude the laws against usury, by expedients which custom authorizes, and which actual circumstances render absolutely necessary. The shortness of the period too, to which their temporary accommodations generally extend, while it enhances the rate of interest, leaves the money-lender at all times the ready command of his capital. The case is widely different with those who have occasion to borrow money for agricultural speculations, which afford but moderate profits, and which, from their slow returns, require loans of a more permanent nature. This is felt severely in the present times, even by those who have landed security to offer, and who, accordingly, are frequently reduced to the ruinous resource of raising money on annuities; consequences, undoubtedly, of the most alarming sort to the country in general, but which necessarily result from the high rate of interest obtainable upon government securities.

Although, therefore, it seems to be impossible for a statesman, by an arbitrary reduction of the legal rate of interest, to accelerate the national prosperity at pleasure, it is equally clear, on the other hand, that the general plan of its policy may influence, to a great degree, this essential requisite to improvement.

How much the inconveniences, which have just been mentioned as resulting from public loans, are aggravated by the Anti-usurious Laws, is sufficiently evident. The tendency of such restraints on the commerce of money being obviously to raise the rate of interest in the market. M. Turgot has made some good observations on this point, in his Essay on Money Loans, formerly referred to, [supra, p. 157.]

I shall conclude this subject with remarking, that the prejudices and laws with respect to Compound Interest are entirely of a piece with those which have been now under our consideration, originating in the same idea, that the protection of the borrower requires the interposition of the legislator, in every instance, in a greater degree than that of the lender.

VOL. IX.

N

It appears from an Epistle of Cicero to Atticus, that compound interest was not then, in every case, contrary to law; for he says, that usura centesimæ cum anatocismo anniversario might be enacted.' But this law was abrogated by Justinian;2 and in modern Europe compound interest is almost universally reprobated as the worst species of usury and extortion. In reason and equity, however, there seems to be no foundation. for this opinion; the same principles which justify simple interest, concluding decisively in favour of compound interest, when the principal is withheld after being demanded; and, accordingly, Henry de Cocceii pronounced, long ago, that usuræ usurarum, or anatocismus, is perfectly agreeable to the law of nature.

"Jure naturæ usuras usurarum semper deberi, puto, etsi promissæ non fuerint. Is enim qui mea pecunia utitur, ac pro eo usu annuas usuras promittit, nec solvit has ipsas usuras, plus suo habet; utitur jure alieno; mihi aliquid abest, unde lucrum capere possem si debitor usuras solvisset: adeoque ex natura obligationis sequitur, æstimationem ejus, quod facto debitoris mihi abest, id est, usuras usurarum, solvi debere."3 The argument, however, is stated much more forcibly by Mr. Bentham, who has allotted a separate section of his Treatise to the discussion of this very question. The substance of his reasoning may be collected from the following abstract:

"If the borrower pays his interest at the day, and thereby performs his engagement with punctuality, the lender has it in his power to secure compound interest, by lending it out again immediately. If he fails of receiving it, he is by so much a loser. The borrower, by paying it at the day, is no loser; if he does not pay it at the day he is by so much a gainer; and what is worse, the gain which the law in its tenderness thus bestows on him, is a reward which it holds out in many cases for breach of faith, for indolence, and for negligence. The loss, on the other hand, which it thus throws on

1 Lib. V. Epist. ult.

2 See Grotius, Lampredi, and H. Cocceii.

3 [H. Cocceii ad] Grotium, De Jure Belli, &c., Lib. II. cap. xii. 22. [Edit. Lausanne, 1751, Tom. II. p. 721.]