4. With the growth of cities developed a new class of wealthy men and a new view of wealth. The student of history knows of the conflict that grew up during the Middle Ages between the cities and the landed aristocracy. It found its cause in economic conditions. There were obvious differences between the wealth of the feudal landlords, and the wealth that grew up in cities. One must be used mostly on the spot, the other can be moved. The fruits of one are perishable for the most part; the fruits of the other can be kept for a longer period. The methods of agriculture are exceptionally stable; production by handicraftsmen is dependent on the peculiar skill of the workman, giving greater room for invention and a premium on skill. The one industry may be carried on by servile labor; the other can be efficiently followed only by free workers having the ambition to excel.

Contrast between city wealth and feudal estates in the Middle Ages.

The use of money grew up in the city. The density of population made it easy, the growth of wealth made it possible, and the nature of the exchanges made it necessary. Whereas the relation of landlord and serf under the renting contract continues from year to year, the relation of the buyer and seller of shoes, hats, etc., in the city, is temporary, these things forming only a part of man's economic needs. Barter with a particular individual is much more inconvenient if exchange is only occasional than where the contract is a continuing one, and there is an annual balancing and settlement of accounts. So, as city industry and commerce grew the use of money increased, both in small neighborhood trade and in the larger transactions with distant countries; and thus the business methods of the cities grew into sharper contrast with those of the rural districts.

Money thus more used in city trade.

Money loaned and borrowed in cities.

5. The loan and hire of wealth in medieval cities came to be expressed as a money loan. The loan of money and of other wealth expressed in terms of money, began in the cities. The use of money and the expression of the value of things in terms of money was common there throughout the Middle Ages. Moreover, as the movable forms of wealth multiplied, the agreement to return borrowed wealth in kind became impossible in cities; the loan in terms of money became the only practicable thing. A merchant embarking on a trading expedition must have such a number and variety of goods, that he finds it both very difficult to rent them and wasteful in time to enumerate them and return them in like kind. It therefore became usual to make a loan either of the things expressed in terms of money, or of money with which to buy the things, thereby reducing to a single, simple, easily interpreted contract, the indebtedness which the borrowing of a thousand different things occasioned.

The medieval opposition to loans at interest.

Such a contract differed not in economic purpose, but only in form and terms of obligation, from the renting of wealth. The church writers, however, got much confused in regard to the nature of money loans. They did not see that it was things which the merchant wished to borrow. They did not see that the money loan was simply a more convenient mode of tranferring the use of wealth from one person to another. The moralists and lawmakers of that day said: Money is unfruitful, therefore taking interest for it is robbery. We cannot follow here the controversy as to the justice of interest on money which involved other ideas than those mentioned, but even to the present time traces of the old fallacy may be seen more or less plainly in the economic theory as well of conservative writers as of the socialistic opponents of interest. The principal sum expressed in the loan contract was called the capital sum, from caput, head, and the amount paid for its use was first called usury, money for the use. How the word interest came to take its place, and the word usury came to mean excessive interest is one of the most interesting chapters in economic history. The term capital then came to be connected with city wealth, with movable forms of wealth, with things supposed to be peculiarly " the product of labor"; and interest was assumed to be connected only with this capital. The term rent on the other hand was connected especially with the use of land. The connection was a historical accident, but it has had an important influence on economic theory.

6. The owners of city wealth and of country landed estates often were opposed as well in social and political as in economic affairs. The practical economic questions of the Middle Ages and the practical political questions largely turned on these two groups of interests. The men of wealth in the cities, the merchants and manufacturers, often were found opposed to the landed aristocracy. This social division between the commercial and agricultural classes doubtless helped to strengthen the prejudgment as to the nature of the two kinds of wealth. Indeed, in view of the situation, it may have been in a measure justifiable and expedient to contrast the thought of city wealth, which has come to be called capital, with that of landed wealth. But even if it were, it is now misleading and erroneous to continue the use of such concepts in a new country and in our modern conditions.

Rivalry of the commercial and land-holding classes in Europe.

Indeed, for centuries the sharper features of the contrast have been steadily softened. The money economy of the city gradually spread to the rural districts, but never entirely displaced barter, which lingers everywhere. Important steps toward a money economy were the commuting of forced or customary labor of the serfs into a money payment to the lord, and at the same time the substitution of money payments for payments in kind (use of lands, specified goods, etc.) to the peasants. Thus arose a free peasant class receiving wages. But land continued to be rented and landed estates to be hereditary throughout Europe. As they did not pass from hand to hand as a commercial or marketable form of wealth, their value was rarely, if ever, expressed in terms of money and as a ratio to the rent they bore. The result was the fixing of the erroneous idea that agricultural wealth is essentially different in the character of its service and yield from wealth used in manufactures. One phase of the error was the idea held by the physiocratic writers and by Adam Smith that in agriculture "nature labors along with man," while in manufacture "nature does nothing, man does all." This view was corrected by later critics (Buchanan, Ricardo, and others), but the main portion of the fallacy persisted in the supposed contrast between the characters of the services performed by natural resources and by artificially produced wealth.

Land continues to be rented while city wealth is borrowed in money form.

Extension of the use of the money loan and of the capital concept.