SECTION CLXXXIII.. Effect of Increased Demand for Loans.

EFFECT OF INCREASED DEMAND FOR LOANS.

The price paid for the use of capital naturally depends on the relation between the supply and demand, and especially of circulating capital. The increase of the supply need no more unconditionally lower the rate of interest than the price of any other commodity. If 50 hunters kill 1,000 deer yearly, and give 100 deer per annum as interest to the capitalists who provided them with ammunition and rifles, a second capitalist with an equal number of rifles and an equal amount of ammunition may appear on the scene. If now 2,000 deer a year are killed, the rate of profit of the capitalists will probably remain the same. But if the woods are not rich enough in game for this, or the hunters not numerous enough, too indolent, or too easily satisfied, the rate of interest falls.[183-1]

The difficulties in the way of the desired increase of capital are here of great importance. The smaller the surplus over and above their absolutely necessary wants, which the people produce, the less their tendency to make savings, the less the inclination to capitalization; and the less the security afforded by the law is, the higher must the rate of interest be to induce people to face these difficulties. We may very well transfer the idea of cost of production to this condition.[183-2]

The demand for capital depends, on the one hand, on the number and the solvability of borrowers, especially of non-capitalists like landowners and workmen; and, on the other hand, on the value in use of the capital itself. Hence the growth of population is, other circumstances being the same, a means to raise the rate of interest; because it infallibly increases the competition of borrowers of capital, even if the increased rate must take place at the expense of wages. The solvability or paying capacity of the land-owning class as contrasted with the capitalists can, in the last analysis, depend only on the extent and fertility of their lands and on the quality of their agricultural husbandry; the solvability or paying capacity of the working class, only on their skill and industry. Where these have grown, an increase of the rate of interest may be found in connection with an absolute growth of the rate of wages and of rent, because the aggregate income of the nation has become greater.

The value in use of capital, which is more homogeneous in proportion as it has the character of circulating capital (res fungibiles) is, in most instances, synonymous with the skill of the working class, and the richness of the natural forces connected with it. The deciding element, therefore, is the yield of the least productive investment of capital which must be made to employ all the capital seeking employment. This least productive employment of capital must determine the rate of interest customary in a country precisely as cost of production on the most unfavorable land determines the price of corn (§§ 110, 150), and as the result of the work of the laborer last employed does the rate of wages. (§ 165.)

What portion of the total national income, after deduction is made of rent, shall go to the capitalists and what portion to the working class, will depend mainly on whether the capitalists compete more greedily for labor or the laboring classes for capital.[183-3] If, for instance, capital should increase more rapidly than population, there must be a relative increase in wages, and vice versa.[183-4] This is true especially of that peculiar kind of higher wages which we shall (§ 145, ff.) designate as the "undertaker's profit." The smaller the number of persons engaged in enterprises is, in comparison with the number of retired persons who live on their rents, incomes, etc., the smaller is the portion of the so-called net profit of enterprise the latter must be satisfied with in the shape of interest.[183-5]

Only Ricardo himself (ch. 21) and his school postulate altogether too unconditionally that their wants would always coincide with the minimum of maintenance or support. Thus, for instance, J. S. Mill, Principles, IV, ch. 3, 4. However, Mill instead of Ricardo's "wages" employs the better expression, "cost of labor." Senior teaches that the distribution of the aggregate result between laborers and capitalists depends on the anterior course of both classes: on the value of the capital previously employed by capitalists to produce the means of satisfying working men's wants, and on the number of workmen which the previous laboring population have brought into existence. (Outlines, 188 ff.) Concerning von Thünen's vain attempt at a general formula, see supra, § 173. Fourier's idea that 5/12 of the product should be distributed among labor, 3/12 among talent, and 4/12 among capital, is entirely baseless. (N. Monde, 309 ff.) Considérant, Destinée sociale, 192 ff. As early a writer as H. Boden, Fürstliche Machtkunst, 1700 and 1740, 42, came strikingly near the truth. According to him, a low rate of interest is produced by four circumstances: surplus capital, a dearth of landed estates, a want of credit and exact justice, and lastly, the heavy taxation of capital.]