Capital and Interest: A Critical History of Economical Theory

The canon doctrine of interest had to all appearance reached its zenith sometime during the thirteenth century. Its principles held almost undisputed sway in legislation, temporal as well as spiritual. Pope Clement V, at the Council of Vienna in 1311, could go so far as to threaten with excommunication those secular magistrates who passed laws favourable to interest, or who did not repeal such laws, where already passed, within three months.
*31 Nor were the laws inspired by the canon doctrine content with opposing interest in its naked and undisguised form; by the aid of much ingenious casuistry they had even taken measures to prosecute it under many of the disguises by which the prohibition had been evaded.
*32 Finally, literature no less than legislation fell under the sway of the canon doctrine, and for centuries not a trace of opposition to the principle of the prohibition dared show itself.

There was only one opponent that the canon doctrine had never been entirely able to subdue, the economic practice of the people. In face of all the threatened penalties of earth and heaven, interest continued to be offered and taken; partly without disguise, partly under the manifold forms which the inventive spirit of the business classes had devised, and by which they slipped through the meshes of the prohibitionist laws in spite of all their casuistry. And the more flourishing the economical condition of a country the stronger was the reaction of practice against the dominant theory.

In this battle victory remained with the more stubborn party, and that party was the one whose very existence was endangered by the prohibition.

One of its first results, not marked by much outward circumstance, but actually of great importance, was obtained even when the canon doctrine was still, to all appearance, at the height of its authority. Too weak to hazard open war against the principle of prohibition, the business world yet managed to prevent its strict and complete legal enforcement, and to establish a number of exceptions some direct and some indirect.

The following, among others, may be regarded as direct exceptions: the privileges of the Mons de Piété, the toleration of other kinds of banks, and the very extensive indulgence shown to the usury practices of the Jews—an indulgence which, here and there, was extended, at least by secular legislation, into a formal legal permission.
*33

Of indirect exceptions there were: the buying of annuities, the taking of land in mortgage for lent money, the use of bills of exchange, partnership arrangements, and above all, the possibility of getting compensation from the borrower in the shape of
interesse on the deferred payment (
damnum emergens et lucrum cessans). Independent of this, the lender had had a claim to compensation in the shape of
interesse, but only in the case of a culpable neglect (technically called
mora) on the part of the borrower to fulfil his contract obligations; and the existence and amount of the
interesse had to be authenticated in each case. But now a step farther in this direction was taken, although under protest of the strict canonists, by the introduction of two contract clauses. Under one clause the borrower agreed beforehand that the lender should be released from the obligation of authenticating the borrower’s
mora; and under the other a definite rate of
interesse was agreed on in advance. Practically it came to this, that the loan was given nominally without interest, but that the creditor actually received, under the name of
interesse, a regular percentage for the whole period of the loan, the borrower by a fiction being put in
mora for that period.
*34

Practical results like these had in the long run their effect on principles.

To the observer of men and things it must in time have become questionable whether the obstinate and always increasing resistance of practical life really had its root, as the canonists affirmed, only in human wickedness and hardness of heart. Those who took the trouble to go more deeply into the technicalities of business life must have seen that practice not only would not, but could not dispense with interest; that interest being the soul of credit, where credit exists to any considerable extent interest cannot be prevented; and that to suppress it would be to suppress nine-tenths of credit transactions. They must have seen, in a word, that, even in a half-developed system of economy, interest is an organic necessity. It was inevitable that the recognition of such facts that had for long been commonplaces among practical men, should in the end force its way into literary circles.

The effects which it there exerted were various.

One party remained unshaken in their theoretical conviction that loan interest was a parasitic profit, admitting of no defence before any strict tribunal; but they consented to a practical compromise with the imperfection of man, on which they laid the blame of its obstinate vitality. From the standpoint of an ideal order of society, interest could not be permitted, but men being so imperfect, it cannot conveniently be eradicated, and so it were better to allow it within certain limits. This was the view taken, among others, by several of the great reformers,
e.g. as Zwingli,
*35 by Luther in his later days (although earlier he had been a relentless enemy of usury),
*36 and, with still greater reserve, by Melanchthon.
*37

It had naturally a great effect on public opinion, and indirectly also on the later development of law, that such influential men as these declared for tolerance in the matter. However, as they were guided in their conduct not by principles, but altogether by motives of expediency, their views have no deeper importance in the history of theory, and we need not pursue them farther.

Another party of thinking and observing men went farther. Convinced by experience of the necessity of loan interest, they began to re-examine the theoretical foundations of the prohibition, and finding that these would not bear investigation, they commenced to write in opposition to the canon doctrine, basing their opposition on principles. This movement becomes observable about the middle of the sixteenth century, gathers impetus and power in the course of the seventeenth, and towards its end obtains so distinct an ascendency that during the next hundred years it has only to do battle with a few isolated writers who still represent the canon doctrine. And towards the end of the eighteenth century if any one had professed to defend that doctrine with the old specific arguments, he would have been thought too eccentric to be taken seriously.

The first combatants of the new school were the reformer Calvin and the French jurist Dumoulin (Carolus Molinaeus).

Calvin has defined his attitude towards our question in a letter to his friend Oekolampadius.
*38 In this letter he does not treat it comprehensively, but he is very decided. At the outset he rejects the usual authoritative foundation for the prohibition, and tries to show that, of the writings adduced in its support, some are to be understood in a different sense, and some have lost their validity through entire change of circumstances.
*39

The proof from authority being thus disposed of, Calvin turns to the rational arguments usually given for the prohibition. Its strongest argument, that of the barrenness of money (
pecunia non parit pecuniam), he finds of “little weight.” It is with money as it is with a house or a field. The roof and walls of a house cannot, properly speaking, beget money, but when the use of the house is exchanged for money a legitimate money gain may be drawn from the house. In the same way money can be made fruitful. When land is purchased for money, it is quite correct to think of the money as producing other sums of money in the shape of the yearly revenues from the land. Unemployed money is certainly barren, but the borrower does not let it lie unemployed. The borrower therefore is not defrauded in having to pay interest. He pays it
ex proventu, out of the gain that he makes with the money.

But Calvin would have the whole question judged in a reasonable spirit, and he shows, by the following example, how the lender’s claim of interest may, from this point of view, be well grounded.

A rich man who has plenty of landed property and general income, but little ready money, applies for a money loan to one who is not so wealthy, but happens to have a great command over ready money. The lender could with the money purchase land for himself, or he could request that the land bought with his money be hypothecated to him till the debt is wiped out. If, instead of doing so, he contents himself with the interest, the fruit of the money, how should this be blameworthy when the much harder bargain is regarded as fair? As Calvin vigorously expresses it, that were a childish game to play with God, “Et quid aliud est quam puerorum instar ludere cum Deo, cum de rebus ex verbis nudis, ac non ex eo quod inest in re ipsa judicatur.”

He concludes then that the taking of interest cannot be universally condemned. But neither is it to be universally permitted, but only so far as it does not run counter to fairness and charity. In carrying out this principle he lays down a number of exceptions in which interest is not to be allowed. The most noteworthy of these are: that no interest should be asked from men who are in urgent need; that due consideration should be paid to the “poor brethren”; that the “welfare of the state” should be considered; and that the maximum rate of interest established by the laws should in no case be exceeded.

As Calvin is the first theologian, so Molinaeus is the first jurist to oppose the canon prohibition on theoretical grounds. Both writers agree in their principles, but the way in which they state them differs as widely as do their callings. Calvin goes shortly and directly at what to him is the heart of the matter, without troubling himself to refute secondary objections. Thus he gets his convictions more from impressions he receives than from logical argument. Molinaeus, on the other hand, is inexhaustible in distinctions and casuistry. He is indefatigable in pursuing his opponents in all their scholastic turnings and twistings, and takes the most elaborate pains to confute them formally and point by point. Moreover, although more cautious in expression than the impetuous Calvin, he is quite as frank, pithy, and straightforward.

The principal deliverance of Molinaeus on the subject is the
Tractatus Contractuum et Usurarum redituumque pecunia Constitutorum,*40 published in 1546. The first part of it has a great resemblance, perhaps accidental, to Calvin’s line of argument. After a few introductory definitions, he turns to the examination of the
jus divinum, and finds that the relevant passages of Holy Writ are misinterpreted. They are not intended to forbid the taking of interest in general, but only such interest as violates the laws of charity and brotherly love. And then he also introduces the effective illustration used by Calvin of the rich man who purchases land with borrowed money.
*41

But further on the reasoning is much fuller than that of Calvin. He points out conclusively (No. 75) that in almost every loan there is an
“interesse” of the creditor—some injury caused or some use foregone,—the compensation for which is just and economically necessary. This compensation is interest or
usura, in the right and proper sense of the word. The laws of Justinian which allow interest, and only limit its amount, are consequently not to be considered unjust, but actually in the interest of the borrower, inasmuch as the payment of a moderate interest gives him the chance of making a greater profit (No. 76).

Later (No. 528) Molinaeus passes under review the chief arguments of the canonists against interest, and completely refutes them by a running commentary.

To the old objection of Thomas Aquinas, that the lender who takes interest either sells the same thing twice, or sells something that has no existence at all (
vide p. 22), Molinaeus answers that the use of money is a thing independent of the capital sum, and consequently may be sold independently. We must not regard the first immediate spending of the money as its use: the use that follows—the use of those goods that a man has acquired by means of the loaned money, or has got command over—is also its use (Nos. 510, 530). If, further, it be maintained that, along with the money itself, its use also has passed over into the legal property of the borrower, and that he therefore is paying in interest for his own property, Molinaeus answers (No. 530) that one is quite justified in selling another man’s property if it be a debt due him, and that this is exactly the case with loans: “Usus pecuniae mihi pure a te debitae est mihi pure a te debitus, ergo vel tibi vendere possum.”

Finally, to the argument of the natural barrenness of money Molinaeus replies (No. 530) that the everyday experience of business life shows that the use of any considerable sum of money yields a service of no trifling importance, and that this service, even in legal language, is designated as the “fruit” of money. To argue that money of itself can bring forth no fruit is not to the point, for even land brings forth nothing of itself without expense, exertion, and human industry. And quite in the same way does money when assisted by human effort bring forth notable fruits. The rest of the polemic against the canonists has little theoretical interest.

On the basis of this comprehensive consideration of the subject, Molinaeus ends by formulating his thesis (No. 535): First of all, it is necessary and useful that a certain practice of taking interest be retained and permitted. The contrary opinion, that interest in itself is absolutely objectionable, is foolish, pernicious, and superstitious (
Stulta illa et non minus perniciosa quam superstitiosa opinio de usura de se absoluta mala) (No. 534).

In these words Molinaeus sets himself in the most direct opposition to the Church’s doctrine. To modify them in some degree—as a Catholic might be compelled to do from other considerations—he makes certain practical concessions, without, however, yielding anything in principle. The most important of these is that, on grounds of expediency, and on account of prevailing abuses, he acquiesces for the present in the Church’s prohibition of interest pure and simple in the shape of undisguised usury, wishing to retain only the milder and more humane form of annuities,—which, however, he rightly looks on as a “true species of usury business.”
*42

The deliverances of Calvin and Molinaeus remained for a long time quite by themselves, and the reason of this is easily understood. To pronounce that to be right which the Church, the law, and the learned world had condemned with one voice, and opposed with arguments drawn from all sources, required not only a rare independence of intellect, but a rare strength of character which did not shrink from suspicion and persecution. The fate of the leaders in this movement showed clearly enough that there was cause for fear. Not to mention Calvin, who, indeed, had given the Catholic world quite other causes of offence, Molinaeus had much to suffer; he himself was exiled, and his book, carefully and moderately as it was written, was put on the Index. Nevertheless the book made its way, was read, repeated, and published again and again, and so scattered a seed destined to bear fruit in the end.
*43

Passing over the immediate disciples of Calvin, who naturally agreed with the views of their master, there were few writers in the sixteenth century who ventured to argue in favour of interest on economical grounds. Among them may be specially mentioned the humanist Camerarius,
*44 Bornitz,
*45 and above all, Besold.

Besold argues fully and ably against the canon doctrine in the dissertations entitled
Questiones Aliquot de Usuris, (1598), the work with which he began his very prolific career as a writer.
*46 He finds the origin of interest in the institutions of trade and commerce, in which money ceases to be barren. And as every man must be allowed to pursue his own advantage, so far as that is possible without injury to others, natural justice is not opposed to the taking of interest. Like Molinaeus, whom he often quotes with approval, he adduces on its behalf the analogy between the loan against interest and the hire against payment. The loan at interest stands to the loan not at interest in the same relation as the hire against payment—which is perfectly allowable—to the Leihe, where no payment is required (
commodatum). He points out very well that the height of loan interest must at all times correspond with the height of natural interest, the latter indeed being the ground and source of the former; and he maintains that, where, owing to the use of money, the current rate of profit is higher, a higher limit of loan interest should be allowed (p. 32). Finally, he is as little impressed by the passages in Holy Writ which have been interpreted as forbidding interest (p. 38, etc.) as by the arguments of the “philosophers,”—considering these arguments very weak if one looks at the matter from the proper standpoint (p. 32).

From this short abstract it will be seen that Besold is a frank and able follower of Molinaeus. From Molinaeus indeed, as the numerous quotations show, he has taken the better part of his doctrine.
*47 But it would be difficult to find in his writings any advance on that author.
*48

This is still more true of the great English philosopher Bacon, who wrote on the subject almost contemporaneously with Besold. He is not misled by the old ideas of the “unnaturalness” of interest. He has enough intellectual freedom and apprehension of the needs of economic life to weigh impartially its advantages and disadvantages, and to pronounce interest an economical necessity. But nevertheless he gives it sufferance only on the ground of expediency. “Since of necessity men must give and take money on loan, and since they are so hard of heart (
sintque tam duro corde) that they will not lend it otherwise, there is nothing for it but that interest should be permitted.”
*49

In the course of the seventeenth century the new doctrine made great strides, particularly in the Netherlands. There the conditions were peculiarly favourable to its further development. During the political and religious troubles among which the young free state was born, men had learned to emancipate themselves from the shackles of a slavish following of authority. It happened too that the decaying theory of the fathers of the Church and of the scholastics nowhere came into sharper conflict with the needs of actual life than in the Netherlands, where a highly developed economy had created for itself a complete system of credit and banking; where, consequently, transactions involving interest were common and regular; and where, moreover, temporal legislation, yielding to the pressure of practice, had long allowed the taking of interest.
*50 In such circumstances a theory which pronounced interest to be a godless defrauding of the debtor was unnatural, and its continuance for any length of time was an impossibility.

Hugo Grotius may be regarded as forerunner of the change.

His attitude towards our subject is peculiarly nondescript. On the one hand, he clearly recognises that it is not possible to base the prohibition theoretically in natural right, as the canonists had done. He sees no force in the argument of the barrenness of money, for “houses also, and other things barren by nature, the skill of man has made productive.” To the argument that the use of money, consisting as it does in being spent, cannot be separated from money itself, and therefore cannot be paid for independently, he finds an apt rejoinder; and, speaking generally, the arguments which represent interest as contrary to natural right appear to him “not of a kind to compel assent” (
non talia ut assensum extorqueant). But, on the other hand, he considers the passages in Holy Writ forbidding interest to be undoubtedly binding. So that in his conclusions he remains—in principle at least—on the side of the canonists. Practically he does resile from the principle of prohibition by allowing and approving of many kinds of compensation for loss, for renunciation of profit, for lender’s trouble and risk,—describing these as “of the nature of interest.”
*51

Thus Grotius takes a hesitating middle course between the old and the new doctrine.
*52

Undecided views like these were speedily left behind. In a few years more others openly threw overboard not only the rational basis of the prohibition as he had done, but the prohibition itself. The decisive point was reached shortly before the year 1640. As if the barriers of long restraint had all been torn down in one day, a perfect flood of writings broke out in which interest was defended with the utmost vigour, and the flood did not fall till the principle of interest, in the Netherlands at least, had conquered. In this abundant literature the first place, both in time and rank, was taken by the celebrated Claudius Salmasius. Of his writings, which from 1638 followed each other at short intervals, the most important are:
De Usuris, 1638;
De Modo Usurarum, 1639;
De Foenore Trapezitico, 1640. To these may be added some shorter controversial writings that appeared under the pseudonym of Alexius a Massalia:
Diatriba de Mutuo: mutuum non esse alienationem, 1640.
*53 These writings almost by themselves determined the direction and substance of the theory of interest for more than a hundred years, and even in the doctrine of to-day, as we shall see, we may recognise many of their after-effects. His doctrine therefore deserves a thorough consideration.

The views of Salmasius on interest are put together most concisely and suggestively in the eighth chapter of his book
De Usuris. He begins by giving his own theory. Interest is a payment for the use of sums of money lent. Lending belongs to that class of legal transactions in which the use of a thing is made over by its owner to another person. In the case where the article in question is not perishable, if the use that is transferred is not to be paid for, the legal transaction is a Commodatum: if it is to be paid for, the transaction is a Locatio or Conductio. In the case where the article in question is a perishable or a fungible thing, if the use is not to be paid for, it is a loan bearing no interest (
mutuum): if to be paid for, it is a loan at interest (
foenus). The interest bearing loan accordingly stands to the loan which bears no interest in exactly the same relation as the Locatio to the Commodatum, and is just as legitimate as it.
*54

The only conceivable ground for judging differently about the allowableness of payment in the case of the Commodatum (where a non-perishable good, as a book or a slave, is lent) as compared with the Mutuum (where a fungible good, like corn or money, is lent) might be the different nature of the “use” in the two cases. In the circumstances of the latter—where a perishable or fungible good is transferred—the use consists in one complete consumption; and it might be objected that, in such a case the use of a thing could not be separated from the thing itself. But to this Salmasius answers: (1) Such an argument would lead as well to the condemning and abolition of the loan bearing no interest, inasmuch as it is impossible, in the case of a perishable thing, to transfer a “use,” whose existence is denied, even if no interest is asked for it. (2) On the contrary, the perishableness of loaned goods constitutes another reason why the loan should be paid. For in the case of the hire (
locatio) the lender can take back his property at any moment, because he remains the owner of it. In the case of the loan he cannot do so, because his property is destroyed in the consumption. Consequently the lender of money suffers delays, anxieties, and losses, and by reason of these the claim of the loan to payment is even more consistent with fairness than that of the Commodatum.

After thus stating his own position Salmasius devotes himself to refuting the arguments of his opponents point by point. As we read these refutations we begin to understand how Salmasius so brilliantly succeeded where Molinaeus a hundred years before had failed, in convincing his contemporaries. They are extremely effective pieces of writing, indeed gems of sparkling polemic. The materials for them were, of course, in great part provided by his predecessors, principally by Molinaeus;
*55 but the happy manner in which Salmasius employs these materials, and the many pithy sallies with which he enriches them, places his polemic far above anything that had gone before.

It may not be unwelcome to some of my readers to have a few complete examples of Salmasius’s style. They will serve to give a more accurate idea of the spirit in which people were accustomed to deal with our problem in the seventeenth century, and far into the eighteenth, and to make the reader better acquainted with a writer whom nowadays many quote, but few read. I therefore give below in his own words one or two passages from the polemic.
*56

What follows has less bearing on the history of theory. First comes a long-winded, and, it must be confessed, for all its subtlety a very lame attempt to prove that in the loan there is no alienation of the thing lent—a subject to which also the whole
Diatriba de Mutuo is devoted. Then follows the reply to some of the arguments based by the canonists on fairness and expediency; such as, that it is unfair to the borrower, who assumes the risk of the principal sum lent him, to burden him with interest in addition, and to make him hand over the fruit of the money to another who takes no risk; that usury would lead to the neglect of agriculture, commerce, and the other
bonae artes, to the injury of the common weal, and so on. In replying to this latter argument Salmasius gets an opportunity of commending the use of competition. The more usurers there are the better; their emulation will press down the rate of interest. Then, from the ninth chapter onwards, with extraordinary display of force and erudition, with many passages full of striking eloquence, but, it must be said, with endless prolixity, comes the disproof of the argument that interest is “unnatural.” Quite at the end (
De Usuris, chap. xx.), the question is finally put whether interest, thus sanctioned by the
jus naturale, also expresses the
jus divinum, and this naturally is answered in the affirmative.

These are the essential features of Salmasius’s doctrine. Not only does it indicate an advance, but it long indicates the high-water mark of the advance. For more than a hundred years any development there was consisted in nothing more than the adoption of it in wider circles, the repetition of it with more or less skilful variations, and the adapting of its arguments to the fashion of the time. But there was no essential advance on Salmasius till the time of Smith and Turgot.

As the number of those who accepted the doctrine represented by Salmasius increased, so did the number of those who adhered to the canon doctrine diminish. This defection, as may be easily understood, went on more rapidly in the Reformation countries and in those speaking the German language, more slowly in countries purely Catholic and in those speaking the Romance tongues.

In the Netherlands, as I have already said, the works of Salmasius were almost immediately followed by a whole series of writings of similar tenor. As early as the year 1640 we meet with the works of Kloppenburg, Boxhorn, Maresius, Graswinckel.
*57 A little later, about 1644, the
Tafelhalterstreit*58 gave occasion to a fiery literary feud between the two parties, and in 1658 this practically ended in a victory for the supporters of interest. Within the next few years, among the ever-increasing adherents of the new theory, stands out prominently the renowned and influential lawyer Gerhard Noodt, who in his three books,
De Foenore et Usuris, discusses the whole interest question very thoroughly, and with great knowledge of facts and literature.
*59 After that there are fewer and fewer expressions of hostility to interest, especially from professional men; still they do occur occasionally up till the second half of the eighteenth century.
*60

In Germany, whose political economy during the seventeenth and even during the eighteenth century is not of much account, the Salmasian doctrine made its way slowly and unsensationally, gaining nothing in development. On German soil the power of practical life was very clearly shown. It was to its pressure that the revolution in opinion was due, theory meanwhile halting clumsily behind the reform in public opinion and legislation. Half a century before the first German lawyer, in the person of Besold, had given his approval to it, the taking of interest, or at least the claim to a fixed
interesse arranged in advance (which practically came to the same thing), was allowed in much of the German local law;
*61 and when in 1654 the German imperial legislation followed this example,
*62 few theorists sided with Besold and Salmasius. So late as 1629 it was possible for one Adam Contzen to demand that lenders at interest should be punished by criminal law like thieves, and that all Jews should be hunted out of the country like
venenatae bestiae.*63 Not till the end of the seventeenth century does the conviction of the legitimacy of interest become firmly established in theory. The secession of such prominent men as Pufendorf
*64 and Leibnitz
*65 to the new doctrine hastened its victory, and in the course of the eighteenth century it is at last gradually taken out of the region of controversy.

In this position we find it in the two great cameralists who flourish at the end of our period, Justi and Sonnenfels. Justi’s
Staatswirthschaft*66 does not contain a single line relating to the great question on which in former times so many bulky volumes had been written, certainly none that could be taken as a theory of interest. He tacitly assumes it as a fact requiring no explanation that interest is paid for a loan; and if in one or two short notes (vol. i. § 268) he speaks against usury, he understands by that—but still tacitly—only an excessive interest.

Sonnenfels is not so silent on the subject as Justi. But even he, in the earlier editions of his
Handlungswisenschaft*67 never once touches on the controversy as to the theoretic legitimacy of interest. In the fifth edition (published 1787) he refers to it, indeed, but in the kind of tone which one usually adopts towards a foregone conclusion. In a simple note on p. 496, he dismisses with a few decided words the prohibition of the canonists, ridicules their absurd way of writing, and finds it preposterous to forbid 6 per cent interest for money when 100 per cent can be got when money is changed into commodities.

Sonnenfels’s contempt for the canon doctrine carries all the more weight that he has nothing good to say of interest in other respects. Influenced by Forbonnais he finds its origin in an interception of the circulation of money by the capitalists, out of whose hands it can only be attracted by a tribute in the shape of interest.
*68 He ascribes to it many injurious effects; such as, that it makes commodities dear, reduces the profits of industry, and allows the owner of money to share in these profits.
*69 Indeed in one place he speaks of the capitalists as the class of those “who do no work, and are nourished on the sweat of the working classes.”
*70

But alongside of expressions like these we find the accepted Salmasian doctrine. In one place, quite in the spirit of Salmasius, Sonnenfels adduces as arguments for the capitalists’ claim, the want of their money, their risk, and the uses they might have got by the purchase of things that produced fruit.
*71 In another place he recognises that a lowering of the legal rate is not the best means to repress the evils of high interest.
*72 At another time he finds that, since the above mentioned conditions that determine interest are variable, a fixed legal rate is generally unsuitable as being either superfluous or hurtful.
*73

The deep silence which Justi maintains, if considered along with the inconsistent eloquence expended by Sonnenfels, seems to me to be a very characteristic proof of two things; (1) that, when these men wrote, the Salmasian doctrine had already secured so firm a footing in Germany, that even writers who felt most hostile towards interest could not think of going back to the strict canonist standpoint, but (2) that up till now the acceptance of the Salmasian doctrine had not been accompanied by any kind of further development in it.

England appears to have been the country where the throwing off of the canon doctrine was attended with the least amount of literary excitement. Through the rapid rise of its commerce and industry, interest transactions had early entered into its economy, and its legislation had early given way to the wants of industrial life. Henry VIII had by 1545 removed the prohibition of interest, and replaced it by a simple legal rate. For a little, indeed, the prohibition was reimposed under Edward VI, but in 1571 it was once more taken off by Queen Elizabeth, and this time for ever.
*74 Thus the theoretical question whether loan interest was justifiable or not was practically answered before there was any theoretic economic doctrine, and when an economic literature at last emerged, the prohibition, now removed, had but little interest for it. All the more strongly was its attention drawn to a new controverted question raised by the change in legislation—the question whether there should be a legal rate, and what should be the height of it.

These circumstances have left their stamp on the interest literature of England during the seventeenth and eighteenth centuries. We find numerous and eager discussions as to the height of interest, as to its advantages and disadvantages, and as to the advisability, or otherwise, of limiting it by law. But they now touch only rarely, and then, as a rule, quite casually, on the question of its economic nature, of its origin, and of its legitimacy. One or two short proofs of this stage in the development of the problem will suffice.

Of Bacon, who flourished very shortly after the age of the prohibition, and had avowed himself, on very shallow practical grounds, in favour of interest, we have already spoken.
*75 Some twenty years later, Sir Thomas Culpepper, himself a violent opponent of interest, does not venture to put forward the canon arguments under his own name, but characteristically passes over the subject with the remark that he leaves it to the theologians to prove the unlawfulness of interest, while he will limit himself to showing how much evil is done by it.
*76 In doing so, however, he directs his attacks not so much against interest in general as against high interest.
*77

In the same way another writer, very unfavourably disposed towards interest, Josiah Child, will no longer meddle with the question of its lawfulness, but simply refers
*78 the reader who wishes to go deeper into the matter to an older and apparently anonymous work, which appeared in 1634 under the title of “The English Usurer.” Further, he frequently calls interest the “price of money,”—an expression which certainly betrays no deep insight into its nature; expresses his opinion in passing that through it the creator enriches himself at the expense of the debtor; but all the same contents himself with pleading for the limitation of the legal rate, not for entire abolition.
*79

His opponent, again, North, who takes the side of interest, conceives of it quite in the manner of Salmasius, as a “rent for stock,” similar to land-rent; but cannot say anything more, in explanation of either of them, than that owners hire out their superfluous land and capital to such as are in want of them.
*80

Only one writer of the seventeenth century forms any exception to this superficial treatment of the problem, the philosopher John Locke.

Locke has left a very remarkable tract on the origin of loan interest, entitled “Some Considerations of the Consequences of lowering the Interest and raising the Value of Money” 1691. He begins with a few propositions that remind one very much of the canonists’ standpoint. “Money,”
*81 he says, “is a barren thing, and produces nothing; but by compact transfers that profit, that was the reward of one man’s labour, into another man’s pocket.” Nevertheless Locke finds that loan interest is justified. To prove this, and to bridge over his own paradox, he uses the complete analogy that, in his opinion, exists between loan interest and land-rent. The proximate cause of both is unequal distribution. One has more money than he uses, and another has less, and so the former finds a tenant for his money
*82 for the very same reason as the landlord finds a tenant for his land, namely, that the one has too much land, while the other has too little.

But why does the borrower consent to pay interest for the money lent? Again, on the same ground as the tenant consents to pay rent for the use of land. For money—of course only through the industry of the borrower, as Locke expressly adds—is able when employed in trade to “produce” more than 6 per cent to the borrower, just in the same way as land, “through the labour of the tenant,” is able to produce more fruit than the amount of its rent. If, then, the interest which the capitalist draws from the loan is to be looked on as the fruit of another man’s labour, this is only true of it as it is true of rent. Indeed, it is not so true. For the payment of land-rent usually leaves the tenant a much smaller proportion of the fruit of his industry than the borrower of money can save, after paying the interest, out of the profit made with the money. And so Locke comes to the conclusion: “Borrowing money upon use is not only, by the necessity of affairs and the constitution of human society, unavoidable to some men; but to receive profit from the loan of money is as equitable and lawful as receiving rent for land, and more tolerable to the borrower, notwithstanding the opinion of some over-scrupulous men” (p. 37).

It will scarcely be maintained that this theory is particularly happy. There is too marked a contrast between its starting-point and its conclusion. If it be true that loan interest transfers the hard-earned wage of the man who works into the pocket of another man who does nothing, and whose money besides is a “barren thing,” it is absolutely inconsistent to say that loan interest is nevertheless “equitable and lawful.” That there is undoubtedly an analogy between interest and the profit from land rent, was very likely to lead logically to a conclusion involving land rent in the same condemnation as interest. To this Locke’s theory would have presented sufficient support, since he expressly declares rent also to be the fruit of another man’s industry. But with Locke the legitimacy of rent appears to have been beyond question.

But, however unsatisfactory Locke’s theory of interest may be, there is one circumstance at any rate that confers on it an important interest for us; in the background of it stands the proposition that human labour produces all wealth. In the present case Locke has not expressed the proposition so much as made use of it, and has not, indeed, made a very happy use of it. But in another place he has given it clear utterance where he says: “For it is labour indeed that put the difference of value on everything.”
*83 We shall soon see how great a place this proposition is to have in the later development of the interest problem.

A certain affinity to Locke’s conception of loan interest is shown somewhat later by Sir James Steuart. “The interest,” he writes, “they pay for the money borrowed is inconsiderable when compared with the value
created (as it were) by the proper employment of
their time and talents.” “If it be said that this is a vague assertion, supported by no proof, I answer, that
the value of a man’s work may be estimated
by the proportion between the manufacture when brought to market
and the first matter.”*84

The words I have emphasised indicate that Steuart, like Locke, looks upon the whole increment of value got by production as the product of the borrower’s labour, and on loan interest, therefore, as a fruit of that labour.

If, however, both Locke and Steuart were quite uncertain as to the nature of that which we now call the borrower’s natural profit, they were far from making any mistake about the fact that loan interest has its origin and its foundation in this profit. Thus Steuart in one place writes: “In proportion, therefore, to the advantages to be reaped from borrowed money, the borrowers offer more or less for the use of it.”
*85

Generally speaking, in England the literature on the subject took great pains to discuss the connection between loan interest and profit. In doing so it certainly did not surpass the Salmasian doctrine in clearness as to principles, but it enriched it by extending its knowledge of details. The favorite inquiry was, whether a high loan interest is the cause or the effect of a high profit. Hume passes judgment on the controversy by saying that they are alternately cause and effect “It is needless,” he says, “to inquire which of these circumstances, to wit,
low interest or low profits, is the cause and which the effect. They both arise from an extensive commerce, and mutually forward each other. No man will accept of low profits where he can have high interest; and no man will accept of low interest where he can have high profits.”
*86

Of more value than this somewhat superficial opinion is another discovery associated with the name of Hume. It was he who first clearly distinguished the conception of money from that of capital, and showed that the height of the interest rate in a country does not depend on the amount of currency that the country possesses, but on the amount of its riches or stocks.
*87 But it was not till a later period that this important discovery was applied to the investigation of the source of interest.

How strange in the meantime the once widespread doctrine of the canonists had become to the busy England of the eighteenth century may be seen by the manner in which Bentham could treat the subject, towards the end of that century, in his
Defence of Usury, 1787. He no longer thinks of seriously attempting to justify the taking of interest. The arguments of the ancient writers and of the canonists are only mentioned to afford welcome matter for witty remarks, and Aristotle, as the discoverer of the argument of the sterility of money, is bantered in the words: “As fate would have it, that great philosopher, with all his industry and all his penetration, notwithstanding the great number of pieces of money that had passed through his hands (more perhaps than ever passed through the hands of philosopher before or since), and notwithstanding the enormous pains he had bestowed on the subject of generation, had never been able to discover in any piece of money any organs for generating any other such piece.”

Italy stood immediately under the eye of the Roman church. But Italy was the country in Europe that earliest attained a great position in trade and commerce; and on that account it was bound to be the first to find the pressure of the canon prohibition unbearable. The general attitude towards it may be explained by two considerations; that nowhere in Europe did the prohibition of interest remain in fact more inoperative, and that nowhere in Europe was it so late before the theorists ventured to oppose the Church’s statute.

Everything that could be done to evade the formally valid prohibition was done; and it seems that these attempts were sufficiently successful for all the requirements of practical life. The most convenient forms of evasion were offered by the traffic in bills, which had its home in Italy, and by the stipulation of
interesse for “indemnification.” The temporal legislation offered ready and willing assistance to such evasion from a very early period by allowing the interest to be arranged beforehand, at a fixed rate of percentage on the capital lent. It only fixed a maximum which could not be exceeded.
*88

On the other hand, no Italian writer appears to have made any open theoretic attack on the canon doctrine before the eighteenth century. Galiani in 1750 mentions Salmasius as the first who had given a complete statement of the doctrine of interest from the new point of view; and, in Italian literature previous to that time, the only mention he can find of the subject is the quarrel which had flared up a little before between the Marchese Maffei and the preaching monk Fra Daniello Concina.
*89 Other prominent writers of the same period usually quote among their predecessors Salmasius as most important, and after him some other foreigners, as Locke, Hume, and Forbonnais; but the first name that occurs among native writers is the Marchese Maffei.
*90 Here again, in Italy also, we find Salmasius accepted as the pioneer of the new views.

The tardy acceptance which his doctrine met in that country does not appear to have been attended by any special improvement on it. There is only one writer who can be excepted from this criticism, Galiani. But he deals with the question of the nature and legitimacy of loan interest in a way that is altogether peculiar.

If interest, he says,
*91 really were what it is usually taken to be, a profit or an advantage which the lender makes with his money, then indeed it would be objectionable, for “whatever profit, be it great or small, that is yielded by naturally barren money, is objectionable; nor can any one call such a profit the fruit of exertion, when the one who puts forth the exertion is the one who takes the loan, not the one who gives it” (p. 244).

But interest is not a true profit at all; it is only a supplementing of that which is needed to equalise service and counter-service. Properly speaking, service and counter-service should be of equal value. Since value is the relation in which things stand to our needs, we should be quite mistaken were we to seek for such an equivalence in an equality of weight, or in number of pieces, or in external form. What is required is simply an equality of use. Now in this respect present and future sums of money of equal amount are not of equal value, just as in bill transactions equally large sums of money are not of equal value at different places. And just as the profit of exchange (
cambio), notwithstanding that it seems to be an additional sum (
soprappi�), is in truth an equalisation, which, when added sometimes to the money on the spot, sometimes to the foreign money, establishes the equality of real value between the two, so is loan interest nothing else than the equalisation of the difference there is between the value of present and future sums of money (p. 243, etc.)

In this interesting idea Galiani has hit on a new method of justifying loan interest, and one which relieves him from a certain doubtful line of argument that his predecessors were obliged to take. Salmasius and his followers, to avoid the reproach of destroying the equality between service and counter-service, were obliged to attempt to prove that in perishable as well as in durable things, and even in articles actually consumed at the beginning of the loan period, there is an enduring use which may be separately transferred, and for which a separate remuneration, namely, interest, is rightly claimed. This line of reasoning, always somewhat fatal, was rendered superfluous by the aspect which Galiani now gave to the argument.

But unfortunately the inference which Galiani draws from this idea is very unsatisfactory. The reason that present sums of money are, as a rule, more valuable than future sums he finds exclusively in the different degree of their security. A claim to future payment of a sum of money is exposed to many dangers, and on that account is less valued than an equally large present sum. In so far as interest is paid to balance these dangers, it appears in the light of an insurance premium. Galiani gives this conception very strong expression by speaking in one place of the “so-called fruit of money” as a price of heart-beats (
prezzo del batticuore), p. 247; and at another time he uses the very words that that thing which is called the fruit of money might be more properly called the price of insurance (p. 252). This was of course thoroughly to misunderstand the nature of loan interest.

The way in which later Italian authors of the eighteenth century treated the interest problem is less worthy of notice. Even the more prominent men among them, such as Genovesi
*92 and Beccaria,
*93 as also those who wrote monographs on the subject, like Vasco,
*94 follow for the most part in the tracks of the Salmasian doctrine, now become traditional.

The most worthy of mention among those is Beccaria. He draws a sharp distinction between
interesse and
usura. The former is the immediate use of a thing, the latter is the use of a use (
l’utilità dell’ utilità). An immediate use (
interesse) is rendered by all goods. The special
interesse of money consists of the use which the goods represented by it may render, for money is the common measure and representative of the value of all other goods. Since, in particular, every sum of money represents, or may represent, a definite piece of land, it follows that the
interesse of the money is represented by the annual return of that land. Consequently it varies with the amount of this return, and the average rate of money-interesse is equalised with the average return of land (p. 116).

In this analysis the word
interesse evidently means the same thing as we should call natural profit, and in it accordingly we may find an attempt—although a primitive one—to explain the existence and amount of natural interest by the possibility of a purchase of land. As we shall see later, however, the same thought had already, some years before, received much fuller treatment from another writer.

In one place Beccaria also touches on the influence of time, first brought forward by Galiani, and speaks of the analogy between exchange interest, which is an
interesse of place, and loan interest, which is an
interesse of time (p. 122), but he passes over it much more cursorily.