Capital and Interest: A Critical History of Economical Theory

There are some goods the individuality of which is of no importance,—goods that are only taken account of by their kind and amount,
quae pondere, numero, mensura consistunt. These are called in law fungible goods.
*74 Since no importance attaches to their individuality, the replacing goods perfectly supply the place of the replaced goods. For certain purposes of practical legal life these goods could be treated without difficulty as identical. Particularly was this the case in such legal transactions as related to the giving away and getting back of fungible goods. Here it suggested itself as convenient to conceive of the giving back of an equal amount of fungible goods as a giving back of the very same goods; in other words, to feign identity between the fungible goods given back and those given away.

So far as I know, the old Roman sources of law do not put this fiction formally. They say quite correctly of it that, in the loan,
tantundem or
idem genus, not simply
idem is given back. But at any rate the fiction is there. If,
e.g. the so-called
depositum irregulare, where the depositary was allowed to employ on his own account the sum of money given over to his safe keeping, and to replace the deposit in other pieces of money, was treated as a
depositum,*75 this construction can only be explained by supposing that the lawyers invoked the assistance of the fiction whereby the pieces of money replaced were considered identical with those given in for safe keeping. Modern jurisprudence has occasionally gone farther, and spoken explicitly of a “legal identity” between fungible goods.
*76

From this first fiction it was but a step to a second. If it once came to be thought that, in the loan and in similar transactions, the same goods were given back that the debtor had received, the further idea was logically bound to follow, that the debtor had retained the goods lent him during the whole period of the loan, had kept them unbroken, and had used them unbroken; that the use obtained from them was therefore a durable use; and that where interest was paid it was paid just for this durable use.

This second step in the fiction the jurists did make. They knew quite well, to begin with, that they were only dealing with a fiction. They knew quite well that the goods given back are not identical with the goods received; that the debtor does not hold and possess these goods during the whole period of the loan;—the fact being that, to attain the purpose of the loan, the debtor must, as a rule, very soon entirely part with the goods. Lastly, they knew quite well that, for the same reason, the debtor does not get any durable use out of the goods lent. But for the practical purposes and requirements of both parties it was the same as if everything actually were what it pretended to be, and therefore the jurists could employ the fiction. They gave expression to this fiction in the sphere of their science when, on the ground of it, they confirmed the expression for loan interest that had already found a home in the speech of the people,
usura, money paid for use; when they taught that interest was paid for the use of the sum lent; and when they made out a usufruct even in perishable goods. This usufruct of course was only a quasi-usufruct, the lawyers being quite aware that they were only dealing with a fiction. On one occasion they even expressed this pointedly, in correcting a legislative act that had given the fiction too realistic an expression.
*77

Finally, after many centuries of teaching that the
usura was money paid for use, and in an age when the better part of the living spirit of classical jurisprudence had fled, and had consequently been replaced by a greater reverence for transmitted formulas, the justification of loan interest was sharply attacked by the canonists. One of their strongest weapons was the discovery of this fiction in regard to the uses of perishable goods. For the rest, their argument appeared so convincing that one could scarcely see how loan interest was to be saved, if the premiss were granted that there is no such thing as an independent use of perishable goods. Thus the fiction all at once attained an importance it never had before. To believe in the actual existence of the
usus was the same thing as to approve of interest; not to believe in it seemed to force one to condemn it. To save interest in this dilemma, people were inclined to give the legal formula more honour than it deserved; and Salmasius and his followers exerted themselves to find reasons which would allow them to take the formula for the fact. The reasons they did find were just good enough to convince people eager to be convinced,—as already won over by a demonstration that was in other respects excellent,—that Salmasius, on the whole, had right on his side; while his opponents, who were evidently wrong as regards the chief point, were suspected even on those points where they were occasionally right. So it happened—not for the first, and certainly not for the last time—that under the pressure of practical exigencies an abortive theory was born, and the old fiction of the lawyers proclaimed as fact.

Thus it has remained ever since, at least in political economy. While the newer jurisprudence drew back for the most part from the doctrine of Salmasius, modern political economy has held by the old stock formula taken from the legal
répertoire. In the seventeenth century the formula had served to support the practical justification of interest; in the nineteenth it did as good service in affording a theoretical explanation of it, which people would have been embarrassed to get otherwise. This puzzling “surplus value” had to be explained. It appeared to hang in the air. Something was wanted to hang it from. And there, in the most welcome way, the old fiction offered itself. As beseemed its rising claims as a theory, it was dressed out in all sorts of new accessories, and so was worthy at last, under the name of
Nutzung, to take the highest place of honour, and become the foundation stone of a theory of interest as distinctive as it is comprehensive.

It may be the good fortune of these pages to break the spell under which the custom of centuries has laid our conception. It may be that the net
Nutzung of capital will be relegated finally to that domain from which it never should have emerged—the domain of fiction, of metaphor, which, as Bastiat once remarked with only too much truth, has so often turned the science from the right path. With it many a deeply rooted conviction will have to be given up—not the Use theory only, in the narrower and proper sense of the word, which makes the
Nutzung the chief pillar in the explanation of interest, but a number of other convictions also, which are commonly accepted outside the rank of the Use theorists, and which employ that conception along with others. Among other things will go the favourite construction of the loan as a transfer of uses, as having its analogue in rent and hire.

But what is to be put in its place?

To answer that does not, strictly speaking, belong to our present critical task; it is a matter for the positive statement which I have reserved for the second volume of this work. It may, however, with some justice be expected that, when I assume the doctrine of the canonists as regards one of its principal points, I should at least indicate how we are to escape the obviously false conclusions of the canonists. Consequently I shall briefly indicate my own view on the nature of the loan; of course under the reservation of returning to more exact treatment of it in my next volume, and meantime asking my readers to postpone their final verdict on my theory till such time as I have stated it in detail, and connected it with the entire theory of interest.

I may best take up the subject at the old canonist dispute. In my opinion the canonists alone were wrong in their conclusions, while both parties were wrong in the reasoning which led them to their conclusions. The canonists remained in the wrong, because they made only one mistake in their reasoning. Salmasius made two mistakes, but of these the second cancelled the harm done by the first, so that after a very tumultuous course his argument ended in reaching the truth. I explain this as follows:—

Both parties agree in regarding it as an axiom that the capital sum replaced on the expiry of the loan contract is the equivalent, and, indeed, is the exact and full equivalent, of the capital sum originally lent. Now this assumption is so false that the wonder is how it has not long ago been exposed as a superstition. Every economist knows that the value of goods does not depend simply on their physical qualities, but, to a very great extent, on the circumstances under which they become available for the satisfaction of human needs. It is well known that goods of the same kind,
e.g. grain, have a very different value in varying circumstances. Among the most important of the circumstances that influence the value of goods, outside of their physical constitution, are the time and place at which they become available. It would be very strange if goods of a definite kind had exactly the same value at all places where they might be found. It would be strange, for instance, if a cwt. of coal at the pit-brow had exactly the same value as a cwt. of coal at the railway terminus, and if that again had exactly the same value as a cwt. of coal at the fireside. Now it would be quite as strange if £100 which are at my disposal to-day should be exactly equivalent to £100 which I am to receive a year later, or ten or a hundred years later. On the contrary it is clear that, if one and the same quantity of goods falls to the disposal of an economical subject at different points of time, its economical position will, as a rule, come under a different influence, and, in conformity with that, the goods will obtain a different value. It is impossible to agree with Salmasius and the canonists, and assume it as a self-evident principle that there is a complete equivalence between the present goods given in loan and the goods of like number and kind returned at some distant period. Such an equivalence, on the contrary, can only be a very rare and accidental exception.

It is very evident from what source both parties obtained the quite unscientific view of the equivalence between the sum of capital given out and that received back. It is from the old legal fiction of the identity between fungible goods of similar kind and number. If, on the strength of this fiction, the loan is conceived of as if it meant that the same £100, which the creditor advances to the debtor, is given back by the debtor to the creditor on the expiry of the loan, then of course this replacement must be looked on as entirely equivalent and just. It was the common mistake of the canonists and of their opponents that they fell into this trap laid for them in the first part of the legal fiction. It was the sole mistake of the canonists and the first mistake of Salmasius. The further development was simply this:—

The canonists remained in error because this was their only mistake. Once they had made it they began at the wrong time to be sharp-sighted, and to expose the assumed independent use of the loaned goods as a fiction. With that fell away every support that could properly have been given to interest, and they were bound—falsely, but logically—to pronounce it wrong. But the first error that Salmasius had made, in the fiction of the identity between the capital received and the capital paid back, he rectified by a second; he refined that fiction as regards the loan of
money, and held that in this case the borrower possessed the “use” of the loaned goods all the time of the loan.

The truth is in neither reading.
The loan is a real exchange of present goods against future goods. For reasons that I shall give in detail in my second volume, present goods invariably possess a greater value than future goods of the same number and kind, and therefore a definite sum of present goods can, as a rule, only be purchased by a larger sum of future goods. Present goods possess an agio in future goods.
This agio is interest. It is not a separate equivalent for a separate and durable use of the loaned goods, for that is inconceivable; it is a part equivalent of the loaned sum, kept separate for practical reasons. The replacement of the capital + the interest constitutes the full equivalent.
*78