Legal and Market Interest Rates

¹¹ In our North American and West Indian colonies, both wages and interest, and consequently profits, are higher than in England.

Both the legal and market interest rates in the colonies run from 6-8%. High wages and high profits, however, rarely go together, except in the peculiar circumstances of new colonies.

Compared to other countries, a new colony:

• is more under-stocked relative to its territorial size for some time,
• is more under-peopled relative to the size of this stock,
• has more land than they have stock to cultivate,
• uses its stock to cultivate the most fertile and best situated land with access to waterways.

Such land is frequently bought at a price below the value even of its natural produce. Stock employed to buy and improve such lands must yield a very large profit and interest.

Its rapid accumulation and high profits enables the planter to increase employment faster than he can find workers in a new settlement. Those whom he can find, therefore, are very liberally rewarded. As the colony increases, profits gradually decrease.

When the most fertile and best situated lands have been all occupied, less profit can be made from the remaining inferior land. This creates less interest.

In most of our colonies, both the legal and the market interest rate have been considerably reduced within the last century. As riches, improvement, and population have increased, interest has declined.

The wages do not sink with the profits. The demand for labour increases with the increase of stock, whatever be its profits.

After profits are reduced, stock continues to increase much faster than before. This holds true for industrious nations advancing in wealth, as with industrious individuals. A great stock with small profits generally increases faster than a small stock with great profits.

“Money makes money,” says the proverb. When you have the seed money, it is often easy to get more. The great difficulty is to get that seed money.

In Book 2, Chapter 3, I shall explain the connection between the increase of stock and the increase of the demand for labour, with regard to the accumulation of stock.

¹² The following may sometimes raise profits, and with them the interest of money, even in a country fast advancing to wealth:

• the acquisition of new territory, or
• the acquisition of new branches of trade.

The limited stock of the country is applied only to those branches which afford the greatest profit.

Part of what was employed in other trades, is withdrawn and turned into some of the new and more profitable ones. In all those old trades, the competition becomes less. Less supply becomes available.

It raises prices and yields more profit to the dealers. They can then afford to borrow at a higher interest.

After the Seven Years’ war, credit-worthy people, and some of the biggest companies in London, borrowed at 5%.

They used to borrow at 4-4.5%. This was caused by the great increase of territory and trade without the reduction in the capital stock of society. New businesses were carried on by the old stock. It lowered unemployment and created greater profits because of the reduced competition. I will show next why Great Britain’s capital stock was not reduced even after the enormous cost of that war. Wages and Stock are Inverse of Profits and Interest

¹³ The capital stock of society is the fund which maintains industry.

The reduction of this stock lowers wages, raises profits, and consequently, raises the interest of money. With lower wages, businesses can make products more cheaply than before. The fewer products in the market allow them to sell their products dearer. Their goods cost them less, and they get more for them. Their profits are augmented at both ends. This affords them a large interest.

The great fortunes so suddenly and easily acquired in Bengal and the British settlements in the East Indies, prove that as wages are very low, so profits and interest are very high in those ruined countries. In Bengal, money is frequently lent to farmers at 40-60%. The succeeding crop is mortgaged for the payment.

The interest eats up the profits which eats up landlord’s rent. Before the fall of the Roman republic, the same usury was common in the Roman provinces under the ruinous administration of their proconsuls. The virtuous Brutus lent money in Cyprus at 48%, based on Cicero’s letters.