Reasons for interest.—The propriety of interest under any circumstances has often been questioned, and its rightfulness is still bitterly disputed. Both church and state have at times denounced the receiving of interest as criminal. Yet in actual practice of commercial life throughout the world interest has been sustained in all ages. The Jewish law prohibited interest between neighbors, where the reason for borrowing was assumed to be poverty, but authorized it in dealings with foreigners, where the transaction was assumed to be in trade. The principle upon which interest in all productive industry is actually founded is that capital, gained by exertion and saved by self-control, secures to its present possessor such advantages of time and choice of use for his abilities as can be given by nothing else. In the study of production we have seen that time-saving is an important result of capital in its various forms. A carpenter's kit of tools represents a value in use equal at least to the time he might consume in making them. He can afford to keep them for another's use only while they bring to him the advantage of that time-saving. His neighbor is willing to secure him in that advantage by paying him for the use of the [pg 284] tools all, or nearly all, that he gains by using tools over what he would have without them. The borrower will still be the gainer by opportunity to do work not possible without the tools. The bargain between borrower and lender, like any bargain, is a fair one only when both are benefited. The limits of fairness in the deal are naturally reached when a clear understanding of all conditions is had in open market. Neither borrower nor lender can take advantage of the other without fraud. Neither is under obligation to give to the other without an equivalent. The whole question rests upon service rendered, as truly as in any other bargain.

A large proportion of the opposition to interest arises from a misconception of the phrase, “borrowed money.” The fact is that borrowing and lending have to do chiefly with other forms of wealth. Most notes are given for the transfer of all sorts of property under a promise to return equal value in the future. Money may not enter into the transaction at all, except as the standard of value is in terms of money. Even when money is exchanged for a note, the borrower hastens to part with the money for the tools or provisions which make him a profitable producer. In payment of his note he offers money again, simply because it commands every desirable form of value for the owner of the wealth. If a farmer wants a wagon without the present means to buy, he offers the dealer his promise to pay after six months, when the corn crop just planted shall have matured. If the dealer cannot afford to hold the note because he needs the capital in his business, that others may be supplied with wagons, either the farmer [pg 285] or the dealer carries the note to some one who can afford to wait for returns, which may be either a banker, whose business provides just such accommodation, or a neighboring farmer who has just sold his wool. In either case, the first farmer borrows what he wants in carrying on his business, and at the end of six months, through a similar transaction of finding some one ready to take his product, pays his note with corn. (See p. 164.)

Interest is never confined to money transactions, nor even to those in which terms of money are used. All owners of productive wealth gain interest in its use as truly as in lending it. The farmer is not a money-lender in general, because his wealth will bring him larger profit by its use as stock or machinery. Even when he borrows from his neighbors, it is possible that he secures a larger interest, though he calls it profit, than he pays the lender. Interest is often paid in kind. The laughable story of borrowing a hen from one neighbor and a sitting of eggs from another, to be returned after a time with advantage, is actually paralleled by some transactions. A friend of mine having a magnificent pasture agreed with his neighbor, who owned a fine flock of ewes, to pasture that flock for three years, returning at the end of that time just twice the number of sheep received. He explained to me that he had made a great bargain, since the wool would pay for the use of the pasture, and he should have at the end of the three years a flock about equal to the flock he returned. This bargain involved interest at the rate of 33-? per cent, without any terms of money, and an indefinite profit to the owner of the pasture in [pg 286] addition to an average price for such use. This profit is his return for the risk undertaken; since he promised to double the flock under any circumstances, and if foot-rot or scab had ruined the flock under his management, he would still have the same obligation toward the owner.

Such bargains will always be made so long as both parties are benefited, for no possible construction of laws and no diatribes of fanatics can prevent them. Any calculation as to the enormous growth of wealth by interest is more than balanced by a similar calculation of the multiplication of wealth by production. If Abraham's shekels at compound interest make an impossible sum of money, Abraham's flock of sheep with the ordinary rate of increase makes an equally impossible worldful.

Varying rates of interest.—Interest rates are subject to fluctuation and variations under the natural relations of borrowers and lenders very much as are prices of commodities. Variations, in comparison of different regions, are due to several causes. In any community where enterprise is great and industrial forces are unusually productive, the interest rates are high as compared with another community with few competitors in industrial enterprise and less productive forces. Thus in countries having new land producing large crops with moderate exertion and an increasing population ready to put in such crops, the return for the use of capital in provisions, stock and machinery is great, and the lender gets high rates of interest. If, added to this apparent productiveness, there are risks of failure from [pg 287] droughts, storms and injurious insects, the bargain is more favorable to the lender in expressed terms, though it may be less favorable in actual results. Thus risk enters practically into calculations of interest, whatever the circumstances.

Interest varies in the same region with a variation of energy and productive enterprise or of the speculative spirit undertaking great improvements, and on the other hand with any change of circumstances affecting universal credit. Distrust on the part of anybody reduces the readiness with which borrowers find lenders. In times of widespread lack of confidence, when all credit becomes debt, the borrower is likely to offer unusual rates of interest. And the few who are willing to lend at all expect enormous profits in such interest.

Similar variations in rates of interest are found between different classes of borrowers, due to the variation of risk. Thus promises to pay on demand, with personal security of two good paymasters, will usually be accepted at very low rates of interest, since the owner of wealth so loaned feels sure of having the wealth when he wants it. Government loans in times of peace and prosperity being essentially without risk, approach very near the same low rate of interest, since the owner of these securities believes himself at any time able to command the use of his wealth for any purpose by a transfer of these securities. If for any reason, official or legislative, public confidence is disturbed, rates of interest on such securities rise proportionally through the sale at a discount. Even a law prohibiting such sale would have exactly the contrary [pg 288] effect to that intended, because of creating additional distrust. Loans upon time, if secured by productive landed estate not subject to unusual risks, can usually be made at moderate rates, and form a fair basis for judging the normal interest in any region. Loans secured by chattel mortgage bring higher rates, because the chattels involved are a less certain means of payment than landed estate. Loans secured upon unproductive lands, whether in prospective farms or city lots, are made at high rates, not only because these lands fail to furnish in themselves the means of interest payment, but because they represent the speculative energy of their owners with unmeasured risk. All these variations and fluctuations are found in every community, and grow out of the natural wants of borrowers and the natural feelings of lenders. Custom may have something to do with rates in special cases, as it has to do with wages and retail prices, but in the range of frequent dealing between borrowers and lenders rates follow the higgling of the market as truly as prices of commodities.

Usury laws.—It has been the custom for ages to distinguish between interest and usury, interest being supposed to be a fair payment for use of borrowed wealth and usury a larger payment in the distress of a borrower. Usury once meant only use, the equivalent of interest, but since it was once prohibited by law in England, the name is now attached to what is still prohibited by law, an interest above a definite rate prescribed by statute. The object of such legal restrictions is evidently protection of the borrower against [pg 289] extortion. Yet it is practically proved by experience of the world that such restrictions operate against the borrower by limiting lenders in open market and sometimes closing the market entirely. The would-be borrower, under adverse conditions in the market, is obliged to find in some byway a lender whose scruples against infringement upon the law may be overcome by extra payment. Under such circumstances there is no market rate, and borrowers bind themselves in numerous ways to special payments not in direct conflict with the letter of the law. Evasions of restrictions under such circumstances are inevitable. A farmer buys a hundred-dollar horse, giving a note, payable in one year without interest, for $120; or he sells his note to a neighbor at what he will give; or he goes to a broker and pays him a commission for securing a loan at the legal rate of interest. Even at a bank, prohibited by law from taking more than the legal discount on the pain of losing its charter, a borrower may give his note for $500, tacitly agreeing to leave on deposit a fifth of the sum, thus paying interest on $500 for the use of $400.

All these forms of evasion are easily adopted with very little possibility of conviction, even when usury is charged. Even in the most flagrant violation of laws the chances of conviction are greatly restricted by the fact that a prosecuting witness, who, after making a contract in violation of law, takes advantage of that law to violate his contract, destroys all credit for himself, and so comes under the ban of society. The best methods of public restriction against extortion of any [pg 290] kind in interest, in rent or in prices of commodities are those that provide for publicity of contracts. Where no legal restrictions upon rates of interest are fixed, current rates are much more likely to be public and widely advertised, and extortion is less possible than where the law encourages secret contracts by the need of evasion. It is quite possible that society will find a way of securing against the extortion of pawn-shops and secret brokerage by a public organization competing honestly for the same patronage. Such companies have been organized in a few cities with success in meeting the wants of the distressed, under such restrictions of charter and management as insure fair dealing. It seems as possible to regulate such matters by license and inspection as it is to control the hack-men of a whole city.

Loan associations.—It is proper in this connection to refer to loan associations, the growth of recent years. The purpose of such associations is direct coÖperation in borrowing and lending among neighbors similarly situated as to property. They are especially adapted to assist wage-earners in securing comfortable homes, for which they can pay gradually from their earnings. The system, however, has been widely extended, to the advantage of different classes of property owners, even to the establishment of coÖperative banks among farmers. The essentials to success and safety in such associations are, first, that they shall be strictly local, confined to territory within which mutual acquaintance can give a fair basis for genuine credit; second, the objects sought by individual borrowers must be fairly equal in [pg 291] risk as well as in ends to be served; third, the management must be thoroughly trustworthy, with a genuine interest of all shareholders in the selection of officers; fourth, all shareholders should have similar relations to the association as both borrowers and lenders, and each shareholder's responsibility should cease at the final settlement of his obligation; fifth, provision should be made for frequent auditing of accounts, official reports and inspection.

Uses of interest.—In closing the subject of interest, it is well to recall the fact that interest exists in the very nature of productive energies, and that ability to transfer the use of property in any form of capital without transferring the interest is most useful to society. It sustains the aged, who must otherwise be wholly dependent, and the childhood of the race in all development of body, mind and soul. Interest sustains the mass of educational and charitable institutions, as well as the individual life of multitudes whose present earnings could not keep body and soul together. Moreover, the possibility of paying interest secures to the enterprising young men of the world the opportunity to make their highest energies productive. Thus the matter of interest pervades the thrift of society as well as the sustenance, and cultivates everywhere that present economy which provides for the rainy day. The fact that nearly one-fifteenth of the population of the United States are depositors in savings banks alone proves the extent and importance of interest to the general welfare. With added facilities for depositing small savings in postal savings banks, the advantage would be still more widely [pg 292] felt, and the general economy in the use of both earnings and capital would be promoted. All this extension of interest-bearing increases the tendency everywhere noticed to a diminution of current rates. With a multiplication of capital in any community, the rates of wages increase, while the rates of interest diminish. Both tendencies are natural effects of the same cause.