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II.

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BOOK manufacturing interefts, as in thefe laft the owners themselves employ their own capitals. Even in the monied intereft, however, the money is, as it were, but the deed of affignment, which conveys from one hand to another those capitals which the owners do not care to employ themselves. Thofe capitals may be greater in almost any proportion, than the amount of the money which ferves as the inftrument of their conveyance; the fame pieces of money fucceffively ferving for many different loans, as well as for many different purchases. A, for example, lends to W a thousand pounds, with which W immediately purchases of B a thousand pounds worth of goods. B having no occafion for the money himself, lends the identical pieces to X, with which X immediately purchases of C another thousand pounds worth of goods., C in the fame manner, and for the fame reafon, lends them to Y, who again purchases goods with them of D. In this manner the fame pieces, either of coin or of paper, may, in the course of a few days, ferve as the inftrument of three different loans, and of three different purchases, each of which is, in value, equal to the whole amount of thofe pieces. What the three monied men A, B, and C, affign to the three borrowers, W, X, Y, is the power of making thofe purchases. In this power confift both the value and the ufe of the loans. The stock lent by the three monied men, is equal to the value of the goods which can be purchased with it, and is three times greater than that of the money with which the purchases are made. Thofe loans, however, may be all per

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IV.

fectly well fecured, the goods purchased by the CHA P. different debtors being fo employed, as, in due time, to bring back, with a profit, an equal value either of coin or of paper. And as the fame pieces of money can thus ferve as the inftrument of different loans to three, or for the fame reafon, to thirty times their value, fo they may likewife fucceffively ferve as the inftrument of repayment.

A capital lent at intereft may, in this manner, be confidered as an affignment from the lender to the borrower of a certain confiderable portion of the annual produce; upon condition that the borrower in return fhall, during the continuance of the loan, annually affign to the lender a smaller portion, called the intereft; and at the end of it, a portion equally confiderable with that which had originally been affigned to him, called the repayment. Though money, either coin or paper, ferves generally as the deed of affignment both to the smaller, and to the more confiderable portion, it is itself altogether different from what is affigned by it.

In proportion as that fhare of the annual produce which, as foon as it comes either from the ground, or from the hands of the productive labourers, is deftined for replacing a capital, increases in any country, what is called the monied interest naturally increases with it. The increase of thofe particular capitals from which the owners wish to derive a revenue, without being at the trouble of employing them themselves, naturally accompanies the general increase of capitals; or,

II.

BOOK in other words, as ftock increafes, the quantity of ftock to be lent at interest grows gradually greater and greater.

As the quantity of flock to be lent at interest increases, the intereft, or the price which must be paid for the use of that stock, neceffarily diminishes, not only from thofe general caufes which make the market price of things commonly diminish as their quantity increases, but from other caufes which are peculiar to this particular cafe. As capitals increase in any country, the profits which can be made by employing them neceffarily diminish.

It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arifes in confequence a competition between different capitals, the owner of one endeavouring to get poffeffion of that employment which is occupied by another. But upon moft occafions he can hope to juftle that other out of this employment, by no other means but by dealing upon more reasonable terms. He must not only fell what he deals in fomewhat cheaper, but in order to get it to fell, he must fometimes too buy it dearer. The demand for productive labour, by the increase of the funds which are destined for maintaining it, grows every day greater and greater. Labourers easily find employment, but the owners of capitals find it difficult to get labourers to employ. Their competition raises the wages of labour, and finks the profits of ftock. But when the profits which can be made by the use of a capital are in this manner diminished,

IV.

nished, as it were, at both ends, the price which CHA P. can be paid for the use of it, that is, the rate of intereft, muft neceffarily be diminished with them.

Mr. Locke, Mr. Law, and Mr. Montefquieu, as well as many other writers, feem to have imagined that the increase of the quantity of gold and filver, in confequence of the difcovery of the Spanish West Indies, was the real caufe of the lowering of the rate of intereft through the greater part of Europe. Thofe metals, they fay, having become of less value themselves, the use of any particular portion of them neceffarily became of less value too, and confequently the price which could be paid for it. This notion, which at first fight seems fo plaufible, has been fo fully exposed by Mr. Hume, that it is, perhaps, unneceffary to fay any thing more about it. The following very fhort and plain argument, however, may ferve to explain more diftinctly the fallacy which feems to have mifled thofe gentlemen.

Before the discovery of the Spanish West Indies, ten per cent. feems to have been the common rate of intereft through the greater part of Europe. It has fince that time in different countries funk to fix, five, four, and three per cent. Let us fuppofe that in every particular country the value of filver has funk precifely in the fame proportion as the rate of intereft; and that in thofe countries, for example, where intereft has been reduced from ten to five per cent., the fame quantity of filver can now purchase just half the quantity of goods which it could have purchased before.

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II.

BOOK before. This fuppofition will not, I believe, be found any-where agreeable to the truth, but it is the most favourable to the opinion which we are going to examine; and even upon this fuppofition it is utterly impoffible that the lowering of the value of filver could have the fmallest tendency to lower the rate of intereft. If a hundred pounds are in thofe countries now of no more value than fifty pounds were then, ten pounds muft now be of no more value than five pounds were then. Whatever were the caufes which lowered the value of the capital, the fame muft neceffarily have lowered that of the intereft, and exactly in the fame proportion. The proportion between the value of the capital and that of the intereft, must have remained the fame, though the rate had never been altered. By altering the rate, on the contrary, the proportion between those two values is neceffarily altered. If a hundred pounds now are worth no more than fifty were then, five pounds now can be worth no more than two pounds ten fhillings were then. By reducing the rate of intereft, therefore, from ten to five per cent., we give for the use of a capital, which is fuppofed to be equal to one-half of its former value, an intereft which is equal to onefourth only of the value of the former intereft.

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Any increase in the quantity of filver, while that of the commodities circulated by means of it remained the fame, could have no other effect than to diminish the value of that metal. nominal value of all forts of goods would be greater, but their real value would be precisely

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