Essays: Moral, Political, and Literary

ESSAY IV

Essay_251-300.indd 295 12/27/11 8:59 PM ESSAY IV OF INTEREST NOTHING is esteemed a more certain sign of the flourishing condition of any nation than the lowness of interest: And with reason; though I believe the cause is somewhat different from what is commonly apprehended. Lowness of interest is generally ascribed to plenty of money. 1 But 1[Mercantilist writers had held that a lowering of interest, or the price paid for the use of resources over time, is one of the benefits of increasing the quantity of money. Hume continues his attack on mercantilism by denying that rates of interest are caused by the quantity of money in circulation. Hume turns to his theory of human nature as well as to historical examples in order to prove that low interest is produced ultimately by the growth of industry and commerce, which reduces the proportion of borrowers and increases the number of lenders with savings available to supply the demand for money. For an assessment of Hu me's views on interest, see Rotwein, David Hume: Writings on Economics, pp. lxvii-lxxii.) Essay_251-300.indd 296 12/27/11 8:59 PM 296 ESSAY IV money, however plentiful, has no other effect, iffixed, than to raise the price of labour. Silver is more common than gold; and therefore you receive a greater quantity of it for the same commodities. But do you pay less interest for it? Interest in BATAVIA and jAMAICA is at 10 per cent. in PORTUGAL at 6; though these places, as we may learn from the prices of every thing, abound more in gold and silver than either LONDON or AMSTERDAM. Were all the gold in ENGLAND annihilated at once, and one and twenty shillings substituted in the place of every guinea, would money be more plentiful or interest lower? No surely: We should only use silver instead of gold. Were gold rendered as common as silver, and silver as common as copper; would money be more plentiful or interest lower? We may assuredly give the same answer. Our shillings would then be yellow, and our halfpence white; and we should have no guineas . No other difference would ever be observed; no alteration on commerce, manufactures, navigation, or interest; unless we imagine, that the colour of the metal is of any consequence . Now, what is so visible in these greater variations of scarcity or abundance in the precious metals, must hold in all inferior changes. If the multiplying of gold and silver fifteen times makes no difference, much less can the doubling or tripling them. All augmentation has no other effect than to heighten the price of labour and commodities; and even this variation is little more than that of a name. In the progress towards these changes, the augmentation may have some influence , by exciting industry; but after the prices are settled, suitably to the new abundance of gold and silver, it has no manner of influence. An effect always holds proportion with its cause. Prices have risen near four times since the discovery of the INDIES; and it is probable gold and silver have multiplied much more: But interest has not fallen much above half. The rate of interest , therefore, is not derived from the quantity of the precious metals. Essay_251-300.indd 297 12/27/11 8:59 PM 297 OF INTEREST Money having chiefly a fictitious value,a the greater or less plenty of it is of no consequence, if we consider a nation within itself; and the quantity of specie, when once fixed, though ever so large, has no other effect, than to oblige every one to tell outoa greater number of those shining bits of metal, for clothes, furniture or equipage, without encreasing any one convenience of life. If a man borrow money to build a house, he then carries home a greater load; because the stone, timber, lead, glass, &c. with the labour of the masons and carpenters, are represented by a greater quantity of gold and silver. But as these metals are considered chiefly as representations , there can no alteration arise, from their bulk or quantity, their weight or colour, either upon their real value or their interest. The same interest, in all cases, bears the same proportion to the sum. And if you lent me so much labour and so many commodities; by receiving five per cent. you always receive proportional labour...