Less fluctuating, both in price and quantity, than tobacco, this article has ever been, and bids fair long to be, a most important item in the business of Baltimore.

These which have now been enumerated are among the most important branches of business pursued, and among the most noticeable of the business facilities of Baltimore. It were idle to attempt to enumerate all. These convey, perhaps, something like an adequate idea of what has been, is, and may be done in this important central city. From the time of its settlement its growth has been steady and rapid, and its citizens have ever evinced patriotism and enterprise: and though it has many of the disadvantages for the laboring poor which always exist in large and crowded cities, yet its elevated site and the practicability of indefinite extension on all sides, mitigate many of these misfortunes, if they cannot wholly remove them.

Could a member of that Congress which, on the 20th of December, 1776, was gathered in the building now used as a store, on the south-east corner of Baltimore and Liberty streets, be summoned back from his long sleep, again to enter that old familiar hall, and cast his eyes around, and thence survey the town at his feet, and observe how that, then the most western building in the town, is now almost in its center, and to note the ten thousand indications of growth, and progress, and future greatness, he might well be overwhelmed with joy at the view of the stupendous fabric reared on the foundation he was then engaged in laying, and exclaim, This, and the other marts like this, are commendation enough of American institutions; this, and the other marts like this, are THE NOBLEST EULOGY ON THE UNION OF THE STATES."

Art. IV. INTEREST OF MONEY.

NUMBER IV.*

As I have already stated, interest is the price paid for the use of money. The use of money has an exchangeable value; and interest is the estimate put upon that value.

This species of price differs from price generally, in the circumstance that it is commonly stated in the form of a per centage on the very thing for the use of which the price is paid. It results from this circumstance, that one distinction, which in my last article I mentioned as valid in relation to price generally, namely: that between real and nominal price, does not hold in the sense there explained, in relation to interest. For, though the money, the use of which is the object of this species of price, should vary in value, the price itself, being a per centage on the money, varies accordingly. Thus when the sum of $100 comes to possess double the value which it did five years before, and the value of its use is consequently doubled, any per centage on $100 is likewise doubled in value. The price keeps an equal pace, in increase or decrease of value, with the article for which it is paid.

* The first of this series of papers, embracing a brief account of opinions and practice concerning interest, from the earliest to the present time, was publshed in the Merchants' Magazine for April, 1849, (vol. xx., page 364;) a second appeared in March, 1850, (vol. xxii., page 273--278,) furnishing a definition of the term, and some general account of money. The third number appeared in May, 1850, (vol. xxii., page 492-499,) relating to certain terms, &c., connected more or less closely with the subject of price.

The distinction between natural and market price, however, is as valid in this case as in any other. The natural price of the use of money is that rate of interest at which the productive agency employed in acquiring the use purchased is fairly recompensed; its market price is that rate of interest, either above, equal to, or below the former, which can be readily obtained from borrowers.

As in other cases, so in this, it is the market price alone which is of much practical importance. The natural price of the use of money is perhaps more difficult of determination than the natural price of any other article. The market rate of interest is influenced just in the same way as the market price of any other commodity. We will consider somewhat particularly the principal grounds of its fluctuation.

It is to be observed, in the first place, that interest, like other price, is sometimes a credit price, and sometimes a cash price. Cash price is not so common in purchasing the use of a thing, as in purchasing a thing itself; but still it does occur very often. Thus the price paid for the use of a horse may be a cash price; by which is here meant a price paid when the use of the horse commences. The rent of a house may be paid on taking possession. A man's wages may be stipulated for and received in advance. So, indeed, as to all prices of use, interest as well as others. This may at first seem strange to some readers. But so it is. What is called discount involves the principle of cash-interest. For instance, a man carries to a bank a note for $1,000, payable at the end of six months, and receives cash for it, the interest for the six months being deducted. Supposing interest to be reckond at 7 per cent per annum, he receives $965. Now, what is this ration but the payment of cash-interest for a loan? The applicant borrows $1,000, pays $35 in cash as interest, and furnishes a satisfactory guaranty for the repayment of the principal. All transactions of discount, therefore, are only the payment of cash price for the use of money.

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There is one considerable distinction, however, between the loan of money and most other loans, which makes the price of the former a credit-price, in a peculiar sense. There is not only risk, as in other cases of the price of use, that the price will never be paid, but there is also much more risk than in ordinary cases of other loans, that the thing borrowed will itself never be returned. When a house is let, the owner knows that, even if the rent is not paid, he cannot lose his right of property in the house. That is his so long as it exists at hire. So, too, in general, when a man lends a horse, he knows there is little danger of losing the animal itself, except by dishonest procedure; and wherever the horse is taken, if the owner can find him and identify him, his property must be restored. In the case of wages, in which a man lends his physical or mental ability, there is, of course, no risk at all of the loss of what is lent. When money is lent, however, it is commonly so disposed of that the principal is as much hazarded as the interest. This peculiar risk has, of course, its influence upon the rate of interest. There is no right of property attached to the particular pieces of money which are lent. Hence it is that interest is generally highest in countries where the rights of property are the least respected. It is generally high, for example, in despotic countries, where no man can rely even on continued possession of what he actually holds, and still less on an enforcement of his claims upon what has left his hands. Where popular violence bears great sway, men refuse to lend money, except at very high interest. In Europe, in the middle ages, as I have stated in a former article, interest was more exorbitant than

it would otherwise have been, because of the great risk respecting repayment, which arose from the common practice of both governments and people to disregard the rights of lenders. Anything which tends to guarantee good faith between debtor and creditor, tends to lower credit prices.

There are numerous special circumstances which increase risk, in particular cases, and consequently in those cases increase the rate of interest. Among these circumstances are the character of the borrower for probity and punctuality, the manner in which the money is to be invested, &c., &c. Risks at sea are peculiarly dangerous. Accordingly, the interest of money to be invested in marine ventures is commonly very high. Money lent on what is called post-obit bond, usually bears high interest. An heir, for example, borrows money on condition of repaying it, with interest, when he comes into possession of the expected inheritance. The bond which he gives for the performance of this condition is called a post-obit bond. Clearly, there is great risk in a loan upon such a bond. The heir may die sooner than the person from whom the inheritance would otherwise fall to him. The property may, for some reason, be differently bestowed by the will of the owner.

It is customary to speak of the increase of interest, on the score of risk, as an increase which the lender makes in order to indemnify himself for that risk. The expression is inaccurate. A risk cannot be indemnified. An indemnity is a recompense for a loss. When a man is indemnified, all is well with him. How, then, is high interest an indemnity to the lender? If his loan is not repaid, with the interest stipulated, it is but a poor satisfaction or solace to him that if he had been paid in accordance with the bond he holds, he would have been well paid. True, when a man makes many separate loans, he may, in some sense, speak of high interest as an indemnity; for what he receives from one party may recompense a loss in respect to another. But this is not what is generally intended by the expression; for it is used in relation to all loans at great risk, without reference to the question whether or not other loans are made by the same individual. To speak of high interest as insurance against risk is equally objectionable. It is neither indemnity nor insurance.

The increase of interest on account of risk, is, in truth, referable to the principle of a wager. The interest must be high enough to tempt the lender to encounter a great hazard. For the chance of unusual profit, he consents to an unusual risk of all.

Having considered the effect produced on interest by the risk of non-payment, let us now inquire respecting the more fundamental principles which determine its market rate. The main causes of the elevation or depression of the market rate of interest, while the natural rate continues the same, may, as I have stated was the case in regard to price generally, be comprehended under the one great principle of demand and supply; the operation of which, in this case, is the same that I have described it to be as to other price.

In my opinion, the representations of Smith and Say, in relation to this subject, are quite defective and incorrect. These two writers give very different accounts of the sources of supply, in the case of loans; and though Say's statement is certainly nearer the truth than Smith's, I think both have fallen far short of it. Smith says that the quantity of money to be lent is regulated "by the value of that part of the annual produce, which, as soon as it comes either from the ground, or from the hands of the productive laborers, is destined not only for replacing a capital, but such a capital as the

owner does not care to be at the trouble of employing himself." (1.) This is a very inadequate statement. Can no money be lent but what is derived from the annual produce of labor? There is a manifest absurdity in such a restriction on the supply of money. Cannot the very property on which the annual produce accrues, be sold, and the sum which is received for it be then lent? Will not a man's capital command money as well as his revenue? As I have already suggested, Say's account of the matter is nearer the truth than that we have just considered. Indeed, his language in stating generally the source of supply for the purpose of loans is perfectly correct and adequate, if taken in a larger sense than that to which he unreasonably restricts it. He declares this source of supply to be disposable capital--i. e., as he defines it, "so much capital as the owners have both the power and the will to dispose of. (2.) He proceeds, however, to limit this capital in an unjustifiable manner. He says: "A capital already vested and engaged in production, or otherwise, is no longer in the market,... unless the employment be one from which capital may be easily disengaged." "Capital lent to a trade, and liable to be withdrawn at short notice," "especially capital employed in the discount of bills of exchange," "capital employed by the owner on his own account, in a trade that may be soon wound up; in that of a grocer, for instance," and, of course, capital actually held in the form of money, are the only specifications of disposable capital which he presents. He expressly affirms that "capital embarked in the construction of a mill, or other fabric, or even in a moveable of small dimensions, is fixed capital," and cannot be considered as affecting the rate of interest. In regard to money, he makes two precisely opposite assertions. As I have intimated above, he says in one passage:"Of all values, the one not immediately disposable is that of money." (3.) Only three or four pages further on, he says in a note, that gold and silver "form an item of capital, but not of disposable or lendable capital; for they are already employed, and not in search of employment." It would seem that no more direct contradiction is possible.

In considering these statements of Says, I may remark, in the first place, that I dislike the use of the expression disposable capital. It is too general in its meaning for the application which is made of it. Disposable means what can be disposed of; and hence disposable capital includes not only such capital as the owners desire to dispose of, (which is the sense given to it by Say,) but all such as they could dispose of, if they would. Now, in truth, in this sense, all capital is disposable; for what capital is there which a man cannot transfer to another? Thus, strictly speaking, though disposable capital is the source of supply for pecuniary loans, the supply itself consists of only a portion of that capital, namely: such portion as the owners are willing to devote to loans.

Say lays considerable stress, in this connection, on a distinction between fixed and circulating capital. This distinction, as laid down by Adam Smith, (4.) (who does not, however, apply it to this subject,) may be expressed by saying that fixed capital does not leave its owner's hands, while circulating capital is what furnishes a revenue only by being transferred. A man's farm and agricultural implements are said to fall under the former designation; a merchant's goods, and sums paid in wages, under the latter.

(1.) Wealth of Nations, Book II., c. 4.
(3.) Ibid.

(2.) Say's Pol. Econ., Book II., c. 8, 31.
(4.) Wealth of Nation, Book II., c. 1.

I do not know of any considerable practical value which this distinction would possess, could it be maintained. Nor do I think it of a well-marked character. What is called fixed capital, may change hands, and yield a profit to the former owner from the transfer. What is called circulating capital, may be held in the same hands for an indefinite period. What can be the utility of a distinction so contingent? Look, for example, at an application which is made of it by Smith himself. Laboring cattle are a fixed capital; cattle bought in and fattened for sale are a circulating capital; cattle kept for increase, or for their milk, are a fixed capital. Now suppose they are kept with no one exclusive purpose; suppose their owner is ready to sell them, if he can get a good price for them, and meanwhile uses them as laboring cattle, or derives a profit from their milk, what species of capital are they then? The distinction is not one in the things themselves; it is only a distinction in the designs of their owner, and the things are one species of capital or another, according to the manifold fluctuation of those designs. A bull raised for labor is fixed capital. Had the same animal been raised for sale, it would have been circulating capital; the sale of it as circulating capital to a man who intended to employ it in the increase of his stock of cattle, would change it at once into fixed capital.

Now it is to this circulating capital that Say restricts the expression disposable capital. According to his representation, the two terms are sy

nonymous.

It is my opinion, as I have said, that even the account which Say gives of the topic under consideration, falls far short of the truth. I take the broad position that there is no species of capital which is not disposable capital, and may not affect the market rate of interest. Any capital which the owner does not wish to employ himself, may be the foundation of a loan at interest. For example, suppose a man possesses a farm which he cannot conveniently cultivate himself, he may say to his neighbor, who is, perhaps, less pressed with occupation than he is, "You shall have my farm for $20,000, and you may postpone payment as suits your convenience, if you will give me your note for the same, with interest. Such a transaction might occur as to every item of what Smith, Say, and others call fixed capital, which could be found in a whole country. Of ten men living together in the same city, nine may, in this way, put together all their capital, of whatever species, into the hands of the tenth, in the shape of loans on interest. This is too plain to need further remark. The supply of capital for loans, then, depends on the amount of property, of any description, which its owners are willing to trust in other hands than their own.

In the case just stated, in respect to the ten men, it would not be necessary to the transaction that a single cent's worth of what Say calls disposable capital, should be concerned, except the pen, ink, and paper by which the transfers were executed.

It would be an idle objection to the propriety of my example, to say that no loan of money, in the form of money, would occur in such a case. The question is merely whether money would, in this way, be at interest. Most certainly it would be so, as much as under any circumstances of loan. To remove, however, the slightest ground of objection, let us suppose that the tenth of the ten men mentioned possesses $1,000 in gold and silver, and that the capital of each of the nine is worth $1,000, but is vested in other property than money, which property they are desirous of selling. The monied man may now go to the first of the nine, and purchase his property, paying