This section is from the "The Science Of Wealth" book, by Amasa Walker.
What is paid for the use of money, or any other form of loanable capital, is called "interest." Hence the term" usury." It is all the reward that capital receives, not embraced in the term "rent." It ordinarily insures the return made for the employment of money, because loans are commonly made in that form; but the idea of interest is general to all articles having value, but not bringing rent.
Interest has its justification in the right of property. If a man can claim the ownership of any kind of wealth, he is the owner of all it fairly produces. Past labor has all the sacredness of present labor, and as justly claims its reward. An associate in production, it is entitled to a share in the product. Whoever by labor produces wealth, and by self-denial preserves it, should be allowed all the benefit that wealth can render in future production. This is the only condition upon which the largest accumulation of wealth can be secured; it presents the only motive that can withstand the impulse to immediate gratification. The desire to gain and the desire to spend are both in human nature, and are conflicting passions. What one takes, the other must relinquish. If, therefore, the desire to spend is unchecked, all wealth and physical well-being disappear in riot and wastefulness. There is the further consideration, that, since to loan capital is to incur risk, that risk should be compensated. It has been a favorite idea with many visionary writers, that interest can be entirely done away with. Proudhon and others have speculated and theorized much on this subject; but nothing can be more idle. We can no more get rid of interest than value: both are in the laws of nature. Yet this has been, in the view of many, the philosopher's stone, that was to transmute all baser metals into gold. It is akin to the idea that credit can be made to take the place of value, and is sustained by the same sort of reasoning as that "property is a crime; a monopoly that must be destroyed."
We will notice briefly a few of the main principles that govern the rate of interest the world over.
1st, Interest, in its general rate, will be determined by the productiveness of labor in the community where it is employed. It is evident the reward of capital cannot be larger than the total profits of business, because it would no longer be used; nor can it be equal to these profits, for no one would be disposed to employ it and pay out his whole profits for its use. Interest must, therefore, be less than the aggregate amount of the returns of production; and finding, as it does, a competitor in the power of present labor, capital will be obliged to submit to an equitable division.
If, then, the productiveness of labor is very great, if the industry of the community yields easily and richly, capital will naturally obtain a large reward; while, if Nature be niggardly in her gifts, each of the parties must be content with a pittance.
2d, Interest will be governed by the law of supply and demand This is so evident as not to require argument or proof, hardly illustration. Old countries abound in accumulations of capital. Interest is there found cheap. In all new countries, there is a youthfulness of capital; there has not been time to develop the powers of production; and hence interest is high. The United States of America afford a most striking example in point. There is a vast amount of uncultivated but fertile land, while the amount of capital with which to cultivate it is comparatively small. So of its manufacturing capacities. Hence there is a high general rate of interest. This is governed by the supply and demand, i.e. by the laws of value alone, and should never be interfered with by legal enactments.
This is a lesson mankind have been slow to learn; yet the most commercial nation in the world (Great Britain) has abolished all usury laws. The experiment was at first made with great caution, limiting the exemption to a particular kind of paper, and the time in which it should operate to a few months; but it was found so perfectly satisfactory to the community, that, after a fair trial, the abolition of the usury laws was made final and complete.
But, upon a question so much in dispute, it may be desirable to give the principal reasons why the matter of interest should not be interfered with by law.
(a) When it is made a penal offence to take over a certain per cent interest (say six), if money is worth more, as it often will be, it must be obtained by some indirect process. Most persons do not like to directly violate a law, however foolish or unjust they may deem it to be; consequently, they will attempt to evade it. There is no difficulty in this. A note may be sold to a broker for what it will bring; and the broker buys it with funds furnished by the capitalist, who stands behind the curtain while the borrower pays the broker for getting the money he might otherwise have obtained directly of the capitalist himself. The law has not prevented the usury, only increased the rate. The broker feels no responsibility; for he is only an agent between the parties. The capitalist has no scruples; for he is not known in the transaction. Instead of this, the borrower and lender should be brought face to face, in an open market, where each could be protected by law in the transaction; and then a fair, unrestricted competition would assure the lowest rate of interest, obtained in the most economical manner.