may retain this certificate himself, as long as he pleases; or he may sell it, at any moment, to any purchaser who may want it. Hence, money may always be borrowed, under these circumstances, at the lowest rates.

SECTION III.

OF THE RATE OF INTEREST, AS AFFECTED BY THE USE OF CAPITAL.

When, however, the risk is the same, we find interest higher in some countries than in others; and higher in the same country at one time than at another. Thus, when the security is equally good, interest is higher in this country than in Great Britain; and, in this country, it is higher in the new, than in the older states. And, we also find, that it is lower now, in Great Britain, than formerly; and that it generally becomes less, as a community grows older.

This shows that there must be causes of variation in interest, aside from that of risk. A few of these remain to be considered.

I. The average Profit of Capital. The profit of capital is that annual value which it yields to the possessor, after he has deducted the principal, and paid the expenses incident to his actual operation. Thus, if, by the use of one thousand dollars for a year, I am, after replacing the principal and all the cost of my operation one hundred dollars richer, this one hundred dollars is the profit of my capital. Now, the greater this is at any time, the greater will be the sum which I shall be willing to pay for the use of one thousand dollars. If, by the use of capital, I can, after paying all expenses, realize twenty

per cent., I can afford to pay more for the use of it, than if, after paying all expenses, I could realize only five per cent.

To specify the various causes on which the difference of profit of capital depends, perhaps would be impossible. Those which seem to me of the most

general importance, are:

1. Fertility of Land. He who wished to borrow money to invest in agriculture, could afford to pay higher interest, when the land produced fifty bushels to the acre, than when it produced only twentyfive bushels to the acre, provided he could procure the land for the same purchase money.

2. Productiveness of Industry. The use of natural agents adds greatly to the value annually produced from a given amount of capital. This will tend to raise the price of capital; since a man will give more for money to invest in a machine which will produce one thousand dollars a year, than in one which will produce only five hundred dollars. It is true that the influx of capital will tend to bring any one branch of industry, in process of time, to the general level. But that progressive increase of productiveness, which belongs to the progress of civilization, tends to keep up the price of capital, which would, otherwise, fall unreasonably low.

3. The Demand for Exchange. The greater the demand for exchange, the more profitable must be that capital which is invested in exchange. In a town where mercantile business is brisk, and a man can sell all his stock at a good profit, two or three times in the course of a year, money will bear a higher nterest than in a town where exchanges are slow, and he must keep his goods on hand for a year

or two.

II. The Ratio between Supply and Demand. This produces the same effect upon the rate of interest, as upon every thing else. Whatever be the profit of capital, if the supply be very small, the price will rise in proportion; since he, who by employing it at

a high price, can make a small profit, will rather so employ it, than, by doing without it, make no profit at all. Thus, if by the use of one thousand dollars for a year, I could realize five hundred dollars, I might be willing to pay two hundred for the use of it, rather than not to have it; for, in the latter case, I should gain nothing. If, then, there were but little capital in the market, and many persons were as willing to give this rate of interest as myself, I should be obliged to give it. But if, on the contrary, there were many persons desirous of lending, and much capital in the market, and I were the only person who would be willing to give this interest, they would underbid each other, and I should be able to procure it of him who would loan it to me at the lowest rate. I might then be able to borrow it for one hundred and fifty, one hundred, or sixty dollars per annum.

Hence, the rate of money will vary in any country, according to the effect of these two circumstanIn a new and prosperous country, interest is always high. This results from several reasons.

ces.

1. Land is very cheap, and at first is all of very nearly the same market price. In many cases, it can be had for almost nothing.

2. Land is very fertile. The produce of a soil when new is generally greater than ever afterwards. 3. The soil, never needing manure, requires but small investments of capital, and these are very richly repaid.

4. The inhabitants of a new country can carry with them but few of the conveniences of life. These must be purchased after they arrive there, and must either be made on the spot, or be imported. Neither of these can be done without capital. And, as the demand for these conveniences is imperative, and as the income of land is abundant, the settlers are willing to pay a high price for them. Hence, the profit, both of mechanical and of commercial labor,

is very great; and the price which is paid for capital is very high.

5. The inhabitants of a new country have generally very numerous exchanges with the aborigines. Such exchanges are exceedingly profitable. But these cannot be carried on without capital; and, of course, capital, on this account, always bears a very high price.

On the contrary, the supply of capital, in a new country, is generally small.

1. Emigrants are, by no means, the most wealthy classes of a community. Those who are living in peace and prosperity at home, are not generally those who are most willing to brave the perils and hardships of the wilderness.

2. Those who are not inclined to expose their persons to the hardships of a new country, are not inclined to send their capital where they are not present to watch over it themselves. Hence, it is difficult, for a while, for a new people to borrow; and they can overcome this difficulty only by the payment of a high interest.

These are, as I suppose, the causes of the high rate of interest in new countries, on the borders of civilization, and generally, wherever savage and civilized nations intermingle.

As a country becomes settled, however, these causes begin to operate less powerfully; and thus, the rate of interest gradually diminishes.

1. The annual produce of the earth is, year after year, changed into fixed capital; and thus the demand for capital is supplied from themselves.

2. The fertility of the soil diminishes, so that it will afford to pay less interest.

3. Land is sold at different prices, according to its fertility; and as it rises in price, the degree of profit to the purchaser is diminished.

4. The wants of the natives are supplied; and, hence, one source of gain is dried up.

5. A more perfect knowledge of the country, and more perfect confidence in its prosperity, diminish the unwillingness of persons in older countries to loan; and hence, capital from abroad, may be procured with greater facility.

Hence, the gradual operation of these causes, must tend to reduce the rate of interest in different countries to the same average.

Hence, the constant tendency of civilization is to the reduction of the rate of interest. As capital becomes more abundant, in proportion to the uses that are to be made of it, it commands a less price; that is, a man can gain less than formerly with a capital of one thousand dollars; and hence, he is willing to pay a less interest for it. But it is also to be remembered, that a much larger proportion of men are worth one thousand dollars than formerly, and that for one that was worth one thousand dollars, fifty years ago, there are fifteen or twenty who are worth ten thousand dollars now; that is, men, with the same labor, are able to secure as many or more comforts than formerly; but they are obliged to do it by the use of a larger amount of capital. They are obliged to labor with a larger capital, but that large amount is as easily procured as a less amount was formerly. Hence, the complaint so frequently heard of the increasing difficulty of accumulating property, is really unfounded; and, taking the difficulty or ease of procuring capital into the account, the more advanced periods of society are as favorable as any to the industrious classes.

III. The rate of interest is affected by the freedom of capital. By freedom of capital, I mean the unfettered liberty of the individual to employ his capital in any innocent way that he pleases. When this liberty is enjoyed, every one chooses that way in which he supposes that he shall be most successful; that is, in which he will reap the largest profit. The larger the profit he realizes, the larger will be the interest which he will be willing to pay. When he is