Mercantilism, Usury Laws, Stamped Money, Under-Consumption Theories

January 3, 2020

Book 6 Short Notes Suggested by the General Theory

Section 1

FOR 200 years, people saw a national advantage in a favourable balance of trade, and grave danger in an unfavourable balance, particularly if it results in an efflux of the precious metals.

But this changed in the past 100 years.

Most statesmen, practical men in most countries, and nearly half of them even in Great Britain, the home of the opposite view, have remained faithful to the ancient doctrine.

Whereas almost all economic theorists have held that anxiety concerning such matters is absolutely groundless except on a very short view. This is because the mechanism of foreign trade is self-adjusting.

Attempts to interfere with it are futile and will greatly impoverish those who practise them because they forfeit the advantages of the international division of labour.

The older opinion is Mercantilism. The newer one is Free Trade.

Modern economists believe that:

  • the international division of labour produces gains which outweigh the gains claimed by mercantilism
  • the mercantilist argument is fully based on an intellectual confusion

Marshall,[1] for example, although his references to Mercantilism are not altogether unsympathetic, had no regard for their central theory as such and does not even mention those elements of truth in their contentions which I shall examine below.[2]

In the same way, the theoretical concessions which free-trade economists have been ready to make in contemporary controversies, relating, for example, to the encouragement of infant industries or to the improvement of the terms of trade, are not concerned with the real substance of the mercantilist case.

During the fiscal controversy of the first quarter of the present century I do not remember that any concession was ever allowed by economists to the claim that Protection might increase domestic employment. It will be fairest, perhaps, to quote, as an example, what I wrote myself. So lately as 1923, as a faithful pupil of the classical school who did not at that time doubt what he had been taught and entertained on this matter no reserves at all, I wrote= “If there is one thing that Protection can not do, it is to cure Unemployment. … There are some arguments for Protection, based upon its securing possible but improbable advantages, to which there is no simple answer. But the claim to cure Unemployment involves the Protectionist fallacy in its grossest and crudest form.”[3]

As for earlier mercantilist theory, no intelligible account was available; and we were brought up to believe that it was little better than nonsense. So absolutely overwhelming and complete has been the domination of the classical school.

Section 2

Let me first state in my own terms what now seems to me to be the element of

Mercantilist doctrine has some scientific truth.

Its claimed advantages are national advantages and not global ones.

When a country is growing rapidly in wealth, the further progress of this happy state of affairs is liable to be interrupted, in conditions of laissez-faire, by the insufficiency of the inducements to new investment.

Given the social and political environment and the national characteristics which determine the propensity to consume, the well-being of a progressive state essentially depends, for the reasons we have already explained, on the sufficiency of such inducements.

They may be found either in home investment or in foreign investment (including in the latter the accumulation of the precious metals), which, between them, make up aggregate investment. In conditions in which the quantity of aggregate investment is determined by the profit motive alone, the opportunities for home investment will be governed, in the long run, by the domestic rate of interest; whilst the volume of foreign investment is necessarily determined by the size of the favourable balance of trade.

Thus, in a society where there is no question of direct investment under the aegis of public authority, the economic objects, with which it is reasonable for the government to be preoccupied, are the domestic rate of interest and the balance of foreign trade.

If the wage-unit is somewhat stable and not liable to spontaneous changes of significant magnitude (a condition which is almost always satisfied), if the state of liquidity-preference is somewhat stable, taken as an average of its short-period fluctuations, and if banking conventions are also stable, the rate of interest will tend to be governed by the quantity of the precious metals, measured in terms of the wage-unit, available to satisfy the community’s desire for liquidity.

At the same time, in an age in which substantial foreign loans and the outright ownership of wealth located abroad are scarcely practicable, increases and decreases in the quantity of the precious metals will largely depend on whether the balance of trade is favourable or unfavourable.

Thus, as it happens, a preoccupation on the part of the authorities with a favourable balance of trade served both purposes; and was, furthermore, the only available means of promoting them. At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favourable balance of trade were the only direct means at their disposal for increasing foreign investment.

At the same time, the effect of a favourable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment. There are, however, two limitations on the success of this policy which must not be overlooked.

If the domestic rate of interest falls so low that the volume of investment is sufficiently stimulated to raise employment to a level which breaks through some of the critical points at which the wage-unit rises, the increase in the domestic level of costs will begin to react unfavourably on the balance of foreign trade, so that the effort to increase the latter will have overreached and defeated itself.

If the domestic rate of interest falls so low relatively to rates of interest elsewhere as to stimulate a volume of foreign lending which is disproportionate to the favourable balance, there may ensue an efflux of the precious metals sufficient to reverse the advantages previously obtained.

The risk of one or other of these limitations becoming operative is increased in the case of a country which is large and internationally important by the fact that, in conditions where the current output of the precious metals from the mines is on a relatively small scale, an influx of money into one country means an efflux from another; so that the adverse effects of rising costs and falling rates of interest at home may be accentuated (if the mercantilist policy is pushed too far) by falling costs and rising rates of interest abroad.

Spain’s economic history in the latter part of the 15th and 16th centuries provides an example of a country whose foreign trade was destroyed by the effect on the hourly-common-wage of an excessive abundance of the precious metals.

Great Britain in the pre-war years of the 20th century is an example where the excessive facilities for foreign lending and the purchase of properties abroad frequently stood in the way of the decline in the domestic rate of interest which was required to ensure full employment at home.

The long history of India is an example of impoverishment by a preference for liquidity amounting to so strong a passion that even an enormous and chronic influx of the precious metals has been insufficient to bring down the rate of interest to a level which was compatible with the growth of real wealth.

Nevertheless, if we contemplate a society with a somewhat stable wage-unit, with national characteristics which determine the propensity to consume and the preference for liquidity, and with a monetary system which rigidly links the quantity of money to the stock of the precious metals, it will be essential for the maintenance of prosperity that the authorities should pay close attention to the state of the balance of trade.

For a favourable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavourable balance may soon produce a state of persistent depression. It does not follow from this that the maximum degree of restriction of imports will promote the maximum favourable balance of trade.

The earlier mercantilists laid great emphasis on this and were often to be found opposing trade restrictions because on a long view they were liable to operate adversely to a favourable balance. It is, indeed, arguable that in the special circumstances of mid-nineteenth-century Great Britain an almost complete freedom of trade was the policy most conducive to the development of a favourable balance. Contemporary experience of trade restrictions in post-war Europe offers manifold examples of ill-conceived impediments on freedom which, designed to improve the favourable balance, had in fact a contrary tendency.

There are strong presumptions of a general character against trade restrictions unless they can be justified on special grounds.

The advantages of the international division of labour are real and substantial, even though the classical school greatly overstressed them. The fact that the advantage which our own country gains from a favourable balance is liable to involve an equal disadvantage to some other country (a point to which the mercantilists were fully alive) means not only that great moderation is necessary, so that a country secures for itself no larger a share of the stock of the precious metals than is fair and reasonable, but also that an immoderate policy may lead to a senseless international competition for a favourable balance which injures all alike.[4]

A policy of trade restrictions is a treacherous instrument even for the attainment of its ostensible object. This is because private interest, administrative incompetence and the intrinsic difficulty of the task may divert it into producing results directly opposite to those intended.

Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and which for many years I taught;— against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time.

We, the faculty of economists, are guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft.

Under the influence of this faulty theory the City of London gradually devised the most dangerous technique for the maintenance of equilibrium which can possibly be imagined, namely, the technique of bank rate coupled with a rigid parity of the foreign exchanges.

This meant that the objective of maintaining a domestic rate of interest consistent with full employment was wholly ruled out. Since, in practice, it is impossible to neglect the balance of payments, a means of controlling it was evolved which, instead of protecting the domestic rate of interest, sacrificed it to the operation of blind forces. Recently, practical bankers in London have learnt much, and one can almost hope that in Great Britain the technique of bank rate will never be used again to protect the foreign balance in conditions in which it is likely to cause unemployment at home. Regarded as the theory of the individual firm and of the distribution of the product resulting from the employment of a given quantity of resources, the classical theory has made a contribution to economic thinking which cannot be impugned.

It is impossible to think clearly on the subject without this theory as a part of one’s apparatus of thought. I must not be supposed to question this in calling attention to their neglect of what was valuable in their predecessors.

Nevertheless, as a contribution to statecraft, which is concerned with the economic system as whole and with securing the optimum employment of the system’s entire resources, the methods of the early pioneers of economic thinking in the sixteenth and seventeenth centuries may have attained to fragments of practical wisdom which the unrealistic abstractions of Ricardo first forgot and then obliterated.

There was wisdom in their intense preoccupation with keeping down the rate of interest by means of usury laws (to which we will return later in this chapter), by maintaining the domestic stock of money and by discouraging rises in the hourly-common-wage. In their readiness in the last resort to restore the stock of money by devaluation, if it had become plainly deficient through an unavoidable foreign drain, a rise in the wage-unit[5], or any other cause.

III

Professor Heckscher has a great work on Mercantilism.

(1) Mercantilist thought never supposed that there was a self-adjusting tendency by which the rate of interest would be established at the appropriate level. On the contrary they were emphatic that an unduly high rate of interest was the main obstacle to the growth of wealth;

They were even aware that the rate of interest depended on liquidity-preference and the quantity of money. They were concerned both with diminishing liquidity-preference and with increasing the quantity of money, and several of them made it clear that their preoccupation with increasing the quantity of money was due to their desire to diminish the rate of interest.

Heckscher sums up this aspect of their theory as follows= The position of the more perspicacious mercantilists was in this respect, as in many others, perfectly clear within certain limits. For them, money was — to use the terminology of to-day — a factor of production, on the same footing as land, sometimes regarded as “artificial” wealth as distinct from the “natural” wealth; interest on capital was the payment for the renting of money similar to rent for land.

In so far as mercantilists sought to discover objective reasons for the height of the rate of interest — and they did so more and more during this period — they found such reasons in the total quantity of money. From the abundant material available, only the most typical examples will be selected, so as to demonstrate first and foremost how lasting this notion was, how deep-rooted and independent of practical considerations.

Both of the protagonists in the struggle over monetary policy and the East India trade in the early 1620’s in England were in entire agreement on this point. Gerard Malynes stated, giving detailed reason for his assertion, that “Plenty of money decreaseth usury in price or rate” (Lex Mercatoria and Maintenance of Free Trade, 1622). His truculent and rather unscrupulous adversary, Edward Misselden, replied that “The remedy for Usury may be plenty of money” (Free Trade or the Meanes to make Trade Florish, same year).

Josiah Child was the omnipotent leader of the East India Company and its most skilful advocate. He discussed (1668) how far the legal maximum rate of interest, which he emphatically demanded, would result in drawing “the money” of the Dutch away from England.

He found a remedy for this dreaded disadvantage in the easier transference of bills of debt, if these were used as currency. He said, “will certainly supply the defect of at least one-half of all the ready money we have in use in the nation”.

Petty, the other writer, who was entirely unaffected by the clash of interests, was in agreement with the rest when he explained the “natural” fall in the rate of interest from 10 per cent to 6 per cent by the increase in the amount of money (Political Arithmetick, 1676), and advised lending at interest as an appropriate remedy for a country with too much “Coin” (Quantulumcunque concerning Money, 1682).

This reasoning, naturally enough, was by no means confined to England. Several years later (1701 and 1706), for example, French merchants and statesmen complained of the prevailing scarcity of coin (disette des espèces) as the cause of the high interest rates, and they were anxious to lower the rate of usury by increasing the circulation of money.[7] The great Locke was, perhaps, the first to express in abstract terms the relationship between the rate of interest and the quantity of money in his controversy with Petty.[8]

He was opposing Petty’s proposal of a maximum rate of interest on the ground that it was as impracticable as to fix a maximum rent for land, since “the natural Value of Money, as it is apt to yield such an yearly Income by Interest, depends on the whole quantity of the then passing Money of the Kingdom, in proportion to the whole Trade of the Kingdom (i.e. the general Vent of all the commodities)”.[9]

Locke explains that Money has two values:

  • its value in use which is given by interest rate “and in this it has the Nature of Land, the Income of one being called Rent, of the other, Use[10]”,
  • its value in exchange “and in this it has the Nature of a Commodity”, its value in exchange “depending only on the Plenty or Scarcity of Money in proportion to the Plenty or Scarcity of those things and not on what Interest shall be”.

Thus, Locke was the parent of twin quantity theories. He held that:

  1. The interest rate depended on the proportion of the quantity of money (allowing for the velocity of circulation) to the total value of trade.
  2. The value of money in exchange depended on the proportion of the quantity of money to the total volume of goods in the market.

But — standing with one foot in the mercantilist world and with one foot in the classical world[11] — he was confused on the relation between these two proportions. He overlooked altogether the possibility of fluctuations in the love for future money.

He explained that a reduction in interest rates has no direct effect on the price-level. It affects prices “only as the Change of Interest in Trade conduces to the bringing in or carrying out Money or Commodity, and so in time varying their Proportion here in England from what it was before”, i.e. if the reduction in the rate of interest leads to the export of cash or an increase in output.

But he never proceeds to a genuine synthesis.[12]

How easily the mercantilist mind distinguished between the rate of interest and the marginal efficiency of capital is illustrated by a passage (printed in 1621) which Locke quotes from A Letter to a Friend concerning Usury= “High Interest decays Trade.

The advantage from Interest is greater than the Profit from Trade, which makes the rich Merchants give over, and put out their Stock to Interest, and the lesser Merchants Break.” Fortrey (England’s Interest and Improvement, 1663) affords another example of the stress laid on a low rate of interest as a means of increasing wealth. The mercantilists did not overlook the point that, if an excessive liquidity-preference were to withdraw the influx of precious metals into hoards, the advantage to the rate of interest would be lost.

In some cases (e.g. Mun) the object of enhancing the power of the State led them, nevertheless, to advocate the accumulation of state treasure. But others frankly opposed this policy= Schrötter, for instance, employed the usual mercantilist arguments in drawing a lurid picture of how the circulation in the country would be robbed of all its money through a greatly increasing state treasury

he, too, drew a perfectly logical parallel between the accumulation of treasure by the monasteries and the export surplus of precious metals, which, to him, was indeed the worst possible thing which he could think of. Davenant explained the extreme poverty of many Eastern nations — who were believed to have more gold and silver than any other countries in the world — by the fact that treasure “is suffered to stagnate in the Princes’ Coffers”.

If hoarding by the state was considered, at best, a doubtful boon, and often a great danger, it goes without saying that private hoarding was to be shunned like the pest. It was one of the tendencies against which innumerable mercantilist writers thundered, and I do not think it would be possible to find a single dissentient voice.[13]

(2) The mercantilists were aware of the fallacy of cheapness and the danger that excessive competition may turn the terms of trade against a country. Thus Malynes wrote in his Lex Mereatoria (1622)= “Strive not to undersell others to the hurt of the Commonwealth, under colour to increase trade= for trade doth not increase when commodities are good cheap, because the cheapness proceedeth of the small request and scarcity of money, which maketh things cheap= so that the contrary augmenteth trade, when there is plenty of money, and commodities become dearer being in request”.[14]

Heckscher sums up mercantilist thought= In the course of a century and a half the standpoint was formulated again and again in this way, that a country with relatively less money than other countries must “sell cheap and buy dear…”

Even in the original edition of the Discourse of the Common Weal, that is in the middle of the 16th century, this attitude was already manifested. Hales said, in fact, “And yet if strangers should be content to take but our wares for theirs, what should let them to advance the price of other things (meaning= among others, such as we buy from them), though ours were good cheap unto them? And then shall we be still losers, and they at the winning hand with us, while they sell dear and yet buy ours good cheap, and consequently enrich themselves and impoverish us.

Yet had I rather advance our wares in price, as they advance theirs, as we now do; though some be losers thereby, and yet not so many as should be the other way.” On this point he had the Unqualified approval of his editor several decades later (1581).

In the 17th century, this attitude recurred again without any fundamental change in significance. Thus, Malynes believed this unfortunate position to be the result of what he dreaded above all things, i.e. a foreign under-valuation of the English exchange.

The same conception then recurred continually. In his Verbum Sapienti (written 1665, published 1691), Petty believed that the violent efforts to increase the quantity of money could only cease “when we have certainly more money than any of our Neighbour States (though never so little), both in Arithmetical and Geometrical proportion”.

During the period between the writing and the publication of this work, Coke declared, “If our Treasure were more than our Neighbouring Nations, I did not care whether we had one fifth part of the Treasure we now have” (1675).[15]

(3) The mercantilists were the originals of “the fear of goods” and the scarcity of money as causes of unemployment which the classicals were to denounce two centuries later as an absurdity= One of the earliest instances of the application of the Unemployment argument as a reason for the prohibition of imports is to be found in Florence in the year 1426…. The English legislation on the matter goes back to at least 1455

An almost contemporary French decree of 1466, forming the basis of the silk industry of Lyons, later to become so famous, was less interesting in so far as it was not actually directed against foreign goods. But it, too, mentioned the possibility of giving work to tens of thousands of unemployed men and women.

The first great discussion of this matter, as of nearly all social and economic problems, occurred in England in the middle of the 16th century or rather earlier, during the reigns of Henry VIII and Edward VI. In this connection we cannot but mention a series of writings, written apparently at the latest in the 1530’s, two of which at any rate are believed to have been by Clement Armstrong…. He formulates it, for example, in the following terms= “By reason of great abundance of strange merchandises and wares brought yearly into England hath not only caused scarcity of money, but hath destroyed all handicrafts, whereby great number of common people should have works to get money to pay for their meat and drink, which of very necessity must live idly and beg and steal” The best instance to my knowledge of a typically mercantilist discussion of a state of affairs of this kind is the debates in the English House of Commons concerning the scarcity of money, which occurred in 1621, when a serious depression had set in, particularly in the cloth export. The conditions were described very clearly by one of the most influential members of parliament, Sir Edwin Sandys. He stated that the farmer and the artificer had to suffer almost everywhere; that looms were standing idle for want of money in the country, and that peasants were forced to repudiate their contracts, “not (thanks be to God) for want of fruits of the earth, but for want of money”.

The situation led to detailed enquiries into where the money could have got to, the want of which was felt so bitterly. Numerous attacks were directed against all persons who were supposed to have contributed either to an export (export surplus) of precious metals, or to their disappearance on account of corresponding activities within the country.[17]

Mercantilists were conscious that their policy, as Professor Heckscher puts it, “killed two birds with one stone”. “On the one hand the country was rid of an unwelcome surplus of goods, which was believed to result in unemployment, while on the other the total stock of money in the country was increased”[18] with the resulting advantages of a fall in the rate of interest. It is impossible to study the notions to which the mercantilists were led by their actual experiences, without perceiving that there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. The weakness of the inducement to invest has been at all times the key to the economic problem. To-day the explanation of the weakness of this inducement may chiefly lie in the extent of existing accumulations; whereas, formerly, risks and hazards of all kinds may have played a larger part. But the result is the same. The desire of the individual to augment his personal wealth by abstaining from consumption has usually been stronger than the inducement to the entrepreneur to augment the national wealth by employing labour on the construction of durable assets.

(4) The mercantilists were under no illusions as to the nationalistic character of their policies and their tendency to promote war.

It was national advantage and relative strength at which they were admittedly aiming.[19] We may criticise them for the apparent indifference with which they accepted this inevitable consequence of an international monetary system. But intellectually their realism is much preferable to the confused thinking of contemporary advocates of an international fixed gold standard and laissez-faire in international lending, who believe that it is precisely these policies which will best promote peace. For in an economy subject to money contracts and customs more or less fixed over an appreciable period of time, where the quantity of the domestic circulation and the domestic rate of interest are primarily determined by the balance of payments, as they were in Great Britain before the war, there is no orthodox means open to the authorities for countering unemployment at home except by struggling for an export surplus and an import of the monetary metal at the expense of their neighbours. Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbours’ as the international gold (or, formerly, silver) standard. For it made domestic prosperity directly dependent on a competitive pursuit of markets and a competitive appetite for the precious metals.

When by happy accident the new supplies of gold and silver were comparatively abundant, the struggle might be somewhat abated. But with the growth of wealth and the diminishing marginal propensity to consume, it has tended to become increasingly internecine.

The part played by orthodox economists, whose common sense has been insufficient to check their faulty logic, has been disastrous to the latest act. For when in their blind struggle for an escape, some countries have thrown off the obligations which had previously rendered impossible an autonomous rate of interest, these economists have taught that a restoration of the former shackles is a necessary first step to a general recovery. In truth the opposite holds good.

It is the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbours at the same time. And it is the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade.[20]

IV

The mercantilists perceived the existence of the problem without being able to push their analysis to the point of solving it. But the classical school ignored the problem, as a consequence of introducing into their premisses conditions which involved its non-existence; with the result of creating a cleavage between the conclusions of economic theory and those of common sense.

The extraordinary achievement of the classical theory was to overcome the beliefs of the “natural man” and, at the same time, to be wrong. As Professor Heckscher expresses it= If, then, the underlying attitude towards money and the material from which money was created did not alter in the period between the Crusades and the 18th century, it follows that we are dealing with deep-rooted notions. Perhaps the same notions have persisted even beyond the 500 years included in that period, even though not nearly to the same degree as the “fear of goods”. … With the exception of the period of laissez-faire, no age has been free from these ideas. It was only the unique intellectual tenacity of laissez-faire that for a time overcame the beliefs of the “natural man” on this point.[21]

It required the unqualified faith of doctrinaire laissez-faire to wipe out the “fear of goods” … [which] is the most natural attitude of the “natural man” in a money economy. Free Trade denied the existence of factors which appeared to be obvious, and was doomed to be discredited in the eyes of the man in the street as soon as laissez-faire could no longer hold the minds of men enchained in its ideology.[22] I remember Bonar Law’s mingled rage and perplexity in face of the economists, because they were denying what was obvious. He was deeply troubled for an explanation. One recurs to the analogy between the sway of the classical school of economic theory and that of certain religions. For it is a far greater exercise of the potency of an idea to exorcise the obvious than to introduce into men’s common notions the recondite and the remote. V There remains an allied, but distinct, matter where for centuries, indeed for several millenniums, enlightened opinion held for certain and obvious a doctrine which the classical school has repudiated as childish, but which deserves rehabilitation and honour.

I mean the doctrine that the rate of interest is not self-adjusting at a level best suited to the social advantage but constantly tends to rise too high, so that a wise Government is concerned to curb it by statute and custom and even by invoking the sanctions of the moral law. Provisions against usury are amongst the most ancient economic practices of which we have record.

The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds. And naturally so, since certain of the risks and hazards of economic life diminish the marginal efficiency of capital whilst others serve to increase the preference for liquidity.

In a world, therefore, which no one reckoned to be safe, it was almost inevitable that the rate of interest, unless it was curbed by every instrument at the disposal of society, would rise too high to permit of an adequate inducement to invest.

I was brought up to believe that:

  • the Medieval Church’s view on interest rates was inherently absurd
  • the subtle discussions distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory.

But I now read them in an honest intellectual effort to keep separate what the classical theory has inextricably confused together:

  • interest rate*
  • the marginal efficiency of capital

*Superphysics Note= Interest rate is the profits in lending capital. Return on capital is the profits in using capital yourself

The schoolmen’s disquisitions were directed towards a formula allowing the schedule of the marginal efficiency of capital to be high, while using rule, custom, and the moral law to keep down interest rates.

Even Adam Smith was extremely moderate in his attitude to the usury laws. For he was aware that:

  • individual savings may be absorbed either by investment or by debts
  • there is no security that savings will be lent

He favoured low interest rates so that savings would be invested instead of being lent.

Bentham

This is why he defended a moderate application of the usury laws in a passage for which he was severely taken to task by Bentham.[23][24]

Bentham criticized:

  • Adam Smith’s Scotch caution as too severe on “projectors”
  • that a maximum interest rate would leave too little margin for the reward of legitimate and socially advisable risks.

Bentham defined “projectors” as people who pursue wealth by invention or improvement, needing wealth in the process. Of course Bentham is right in protesting the laws which stand in the way of taking legitimate risks. He says= “A prudent man will not pick out the good projects from the bad, for he will not meddle with projects at all.”[25]

It may be doubted, perhaps, whether the above is just what Adam Smith intended by his term. Or is it that we are hearing in Bentham (though writing in March 1787 from “Crichoff in White Russia”) the voice of nineteenth-century England speaking to the eighteenth? For nothing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency.