The Abolition of Interest (1890)
To-day, a weekly newspaper published in Boston in 1890, printed an editorial on the subject of interest which contained so many vulnerable points that the editor of Liberty was moved to criticize it. After pointing out the errors and fallacies in the editorial, he proceeded:
The modern opponents of interest are perfectly willing to consider facts tending to refute their position, but no facts can have such a tendency unless they belong to one of two classes: first, facts showing that interest has generally (not sporadically) existed in a community in whose economy money was as important a factor as it is with us today and in whose laws there was no restriction upon its issue; or, second, facts showing that interest is sustained by causes that would still be effectively, invincibly operative after the abolition of the banking monopoly. I do not find any such facts among those cited by To-day. The array is formidable in appearance only. Possession of encyclopedic knowledge is a virtue which Spencer sometimes exaggerates into a vice, and a vice which some of his disciples too seldom reduce to the proportions of a virtue.
To the economic truism I will give a little more attention, its irrelevancy being less apparent. Here it is: “The existence of interest depends, of course, primarily upon the existence of private property.” I call this a truism, though the word “primarily” introduces an element of error. If we are to inquire upon what interest primarily depends, we shall start upon an endless journey into the realm of metaphysics. But without entering that realm we certainly can go farther back in the series than private property and find that interest depends still more remotely upon the existence of human beings and even of the universe itself. However, interest undoubtedly depends upon private property, and, if this fact had any significance, I should not stop to trifle over the word “primarily.” But it has no significance. It only seems to have significance because it carries, or seems to be supposed to carry, the implication that, if private property is a necessary condition of interest, interest is a necessary result of private property. The inference, of course, is wholly unwarranted by logic, but that it is intended appears from a remark almost immediately following: “Expectations have been entertained that it [interest] will eventually become zero; but this stage will probably be reached only when economic products become common free property of the human race.” The word “probably” leaves the writer, to be sure, a small logical loophole of escape, but it is not expected that the reader will notice it, the emphasis being all in the other direction. The reader is expected to look upon interest as a necessary result of private property simply because without private property there could be no interest. Now, my hat sometimes hangs upon a hook, and, if there were no hook, there could be no hanging hat; but it by no means follows that because there is a hook there must be a hanging hat. Therefore, if I wanted to abolish hanging hats, it would be idle, irrelevant, and illogical to declare that I must first abolish hooks. Likewise it is idle, irrelevant, and illogical to declare that before interest can be abolished private property must be abolished. Take another illustration. If there were no winter, water-pipes would never freeze up, but it is not necessary to abolish winter to prevent this freezing. Human device has succeeded in preventing it as a general thing. Similarly, without private property there would be no borrowing of capital and therefore no interest; but it is claimed that, without abolishing private property, a human device — namely, money and banking will, if not restricted, prevent the necessity of borrowing capital as a general thing, and therefore virtually abolish interest; though interest might still be paid in extraordinary cases, just as water-pipes still freeze up under extraordinary conditions. Is this claim true? That is the only question.
This claim is met in the single relevant sixteenth of To-day’s article. But it is met simply by denial, which is not disproof. I give the writer’s words:
“The most popular fallacy upon the subject now is that the rate of interest can be lowered by increasing the amount of currency. What men really wish to borrow usually is capital, — agencies of production, — and money is only a means for the transfer of these. The amount of currency can have no effect upon the abundance of capital, and even an increase in the abundance of capital does not always lower the rate of interest; this is partly determined by the value of capital in use.”
This paragraph, though introduced with a rather nonchalant air, seems to have been the objective point of the entire article. All the rest was apparently written to furnish an occasion for voicing the excessively silly notion that “the amount of currency can have no effect upon the abundance of capital.” As I have already said, to show how silly it is, it is only necessary to slightly change the wording of the phrase. Let it be stated thus: “The abolition of currency can have no effect upon the abundance of capital.” Of course, if the former statement is true, the latter follows. But the latter is manifestlyabsurd, and hence the former is false. To affirm it is to affirm that currency does not facilitate the distribution of wealth; for if it does, then it increases the effective demand for wealth, and hence the production of wealth, and hence the abundance of capital. It is true that “an increase in the abundance of capital does not always lower the rate of interest.” An extra horse attached to a heavy load does not always move the load. If the load is heavy enough, two extra horses will be required to move it. But it is always the tendency of the first extra horse to move it, whether he succeeds or not. In the same way, increase of capital always tends to lower interest up to the time when interest disappears entirely. But though increased capital lowers interest and increased currency increases capital, increased currency also acts directly in lowering interest before it has increased the amount of capital. It is here that the editor of To-day seems to show unfamiliarity with the position of the opponents of interest. It is true that what men really wish to get is capital; the agencies of production. And it is precisely because money is “a means for the transfer of these” that the ability to issue money secured by their own property would make it unnecessary for them to borrow these agencies by enabling them to buy them. This raises a question which I have asked hundreds of times of defenders of interest and which has invariably proved a “poser.” I will now put it to the editor of To-day. A is a farmer owning a farm. He mortgages his farm to a bank for $1,000, giving the bank a mortgage note for that sum and receiving in exchange the bank’s notes for the same sum, which are secured by the mortgage. With the bank-notes A buys farming tools of B. The next day B uses the notes to buy of C the materials used in the manufacture of tools. The day after, C in turn pays them to D in exchange for something that he needs. At the end of a year, after a constant succession of exchanges, the notes are in the hands of Z, a dealer in farm produce. He pays them to A, who gives in return $ 1,000 worth of farm products which he has raised during the year. Then A carries the notes to the bank, receives in exchange for them his mortgage note, and the bank cancels the mortgage. Now, in this whole circle of transactions, has there been any lending of capital? If so, who was the lender? If not, who is entitled to any interest? I call upon the editor of To-day to answer this question. It is needless to assure him that it is vital.
To-day’s rejoinder to my criticism of its article on interest is chiefly remarkable as an exhibition of dust-throwing. In the art of kicking up a dust the editor is an expert. Whenever he is asked an embarrassing question, he begins to show his skill in this direction. He reminds one of the clown at the circus when “stumped” by “the ring-master to turn a double somersault over the elephant’s back. He prances and dances, jabbers and gyrates, quotes Latin forwards and Greek backwards, declaims in the style of Dr. Johnson to the fish-wife, sings algebraical formulae to the music of the band, makes faces, makes puns, and makes an excellent fool of himself; and when at the end of all this enormous activity he slyly slips between the elephant’s legs instead of leaping over his back, the hilarious crowd, if it does not forget his failure to perform the prescribed feat, at least good-humoredly forgives it. But I am not so good-natured. I admit that, as a clown, I find the editor interesting, but his performance, appropriate enough in a Barnum circus ring, is out of place in the economic area. So I propose to ignore his three pages of antics and note only his ten-line slip between the elephant’s legs, or, laying metaphor aside, his evasion of my question.
I had challenged him to point out any lending of capital in a typical banking transaction which I had described. He responds by asking me to define capital. This is the slip, the evasion, the postponement of the difficulty. He knows that, if he can draw me off into a discussion of the nature of capital, there will be an admirable opportunity for more clownishness, since there is no point in political economy that lends itself more completely to the sophist’s art than this. But I am not to be turned aside. I stick to my question. In regard to the notion of capital the editor of To-day will find me, so far as the immediate question at issue is connected with it, the most pliable man in the world. I will take the definition, if he likes, that was given in the previous article in To-day. There it was said that money was one thing and capital another; that capital consists of the agencies of production, while money is only a means for the transfer of these; that what men really want is not money, but capital; that it is for the use of capital that interest is paid; and that this interest, this price for the use of capital, lowers, generally speaking, as capital becomes plentier, and probably cannot disappear unless abundance of capital shall reach the extreme of common property. Now I have shown (at least I shall so claim until my question is answered) that in the most ordinary form of transaction involving interest — namely, the discounting of notes — there is absolutely no lending of capital in the sense in which capital was used in To-day’s first article, and the consequence, of course, is that that defence of interest which regards it as payment for the use of capital straightway falls to the ground. But if the editor of To-day does not like the view of capital that was given in the article criticized, he may take some other; I am perfectly willing. He may make a definition of his own. Whatever it may be, I, for the time being and for the purposes of this argument, shall say “Amen” to it. And after that I shall again press the question whether, in the transaction which I described, there was any lending of anything whatever. And if he shall then answer, as a paragraph in his latest article indicates, “Yes, the bank lent its notes to the farmer,” I shall show conclusively that the bank did nothing of the kind. If I successfully maintain this contention, then it will be demonstrated that the interest paid in the transaction specified was not paid for the use of anything whatever, but was a tax levied by monopoly and nothing else.
Meantime it is comforting to reflect that my labor has not been entirely in vain. As a consequence of my criticism of To-day’s article on interest, the editor has disowned it (though it appeared unsigned and in editorial type), characterized it as “trivial” (heaven knows it had the air of gravity!), and squarely contradicted its chief doctrinal assertion. This assertion was that “the amount of currency can have no effect upon the abundance of capital: It is contradicted in these terms: “Evidently money is a necessary element in the existing industrial plexus, and increase of capital is dependent upon the supply of a sufficient amount of money.” After this I have hopes.
“An Enquirer” wrote to the editor of Liberty confessing her incapacity to understand why he advocated the abolition of rent and interest. She cited the case of a cook loaning her savings to a young man who needed some ready cash, and she wanted to know what was wrong with this. Mr. Tucker told her:
My enquiring friend is by no means stupid. Her argument is well and clearly stated and is indicative of the habit of thought. Neither is she ignorant or superficial in the sense in which those terms are usually employed for the general characterization of personality. She has simply failed to acquaint herself with the position of the Anarchistic opponents of interest, the soundness of which her native power of penetration will enable her to see when once she has become familiar with it.
Wherein consists her misapprehension? In this; that she supposes the Anarchists to condemn the contract between the borrower and the lender, per se; whereas the truth is that they condemn, not the contract, but the conditions of compulsory restriction and limitation under which such contract is now necessarily made if made at all, and in the absence of which it would be prevented, not by law or by invasion of any kind, but by simple competition, from embodying the element of interest on capital.
Take the case which she cites. No Anarchist disputes that it is perfectly legitimate for the young man in question to borrow either of the cook or of the bank upon such terms as may be agreed upon in a free market. The complaint of Anarchism is that the market is not free, and that the transactions effected therein are necessarily tainted with injustice. At present, if the young man borrows, whether of the cook or of the bank, the terms of contract are dictated to his disadvantage, by means of a legal privilege or monopoly enjoyed by the bank. Neither cook nor bank will lend to the young man unless he can give a note the redemption of which is considered sure and is generally made sure by a lien upon actual property. Upon being thus secured, the lender supplies the borrower with other notes, intrinsically no stronger, but in the redemption of which not only the lender and borrower but the entire community have reason to have confidence. That is to say, the lender, either by issuing his own universally known notes or by furnishing equally well known notes previously issued by others, virtually indorses the borrower’s note, or, in still other words, insures his credit. For this service what does he charge? A price as low as that for which any one else is willing and able to perform the same service. Now, the Anarchists assert that there are large numbers of people who are willing, either individually or by forming themselves into banking associations, to perform this service at something less than one per cent., and that the only reason why they are not able to do so is that they are prevented by law. The grounds upon which they base this assertion are, first, the fact that prices in a free market tend toward cost of production and performance, which, in the matter of insurance of credit, is shown by banking statistics to be about one-half of one per cent., and, second, the existence of Federal laws imposing a tax of ten per cent. on all banks of issue not complying with the provisions of the national banking act, and of State laws making it a crime to circulate as currency other notes than those specifically authorized by statute. To this it is no answer to say that all persons are equally free to comply with the provisions of the national banking, act; for these provisions by their very nature, limiting the basis of currency to government bonds, limit the volume of the currency, and in any business a limitation which reduces the output is as truly a restriction of competition as a limitation specifying that only certain persons shall engage in the business. Now, if the above facts and the assertions based on them are correct, it is obvious that, but for these, the price of insuring credit would fall to less than one per cent., this small percentage paying not dividends to stockholders, but the salaries of banking officials, providing for incidental expenses, and making good any deficiencies from bad debts. Thus is justified the Anarchistic contention that interest upon capital is dependent upon the restrictions surrounding the contract between borrower and lender; for surely “An Enquirer’s” young man would not be willing to pay the cook six per cent. for money when he could borrow of a bank for one per cent., or able to exact ten per cent. for his house from a homeless man when the latter could hire money at one per cent. with which to buy or build a house.
If there is a flaw in the Anarchistic argument, I wait for “An Enquirer” to point it out. For her sake I have told an old story to the readers of Liberty; but then, I expect to have to tell it many times again.
Mr. J. K. Ingalls, in a letter to the editor of Liberty arguing that interest is unescapable, asserted that there is an economic interest as well as economic rent, and that it differs from that which is captured by the stronger and more cunning from the weaker and more stupid through the enforcement of barbarous (not economic) laws and customs; and he also asserted that interest is derived from the increase of any labor over its bare support. Mr. Tucker met the issue squarely:
MR. Ingalls gives no clear definition or measure of the term “economic interest.” Economic rent is measured by the difference between the poorest land in use and the grades superior thereto. But what measures economic interest? Is it the difference between the product of labor absolutely destitute of capital, and that of labor possessing capital in varying degrees? But in that case economic interest is not entirely “derived from the increase of any labor over its bare support,” since the product of labor absolutely destitute of capital would be less than a starvation wage to a man living in the midst of our civilization. Or is it measured by the difference between the product of labor possessing the poorest capital in use, and that of labor possessing better capital? Which at once gives rise to another question: what is the poorest capital in use, and how is it to be recognized as such? In the absence of a satisfactory answer to this question, Mr. Ingalls’s economic interest must be looked upon as a decidedly indeterminate economic factor. All that his theory means, so far as I can grasp it, is that interest exists because people can do more with capital than without it, and that interest actually is, in fact, this surplus obtained by the employment of capital.
Now, so defining interest, the Anarchists do not wish to abolish it. Such a wish would be absurd, for it would be a wish to lessen the world’s wealth and productive power. To Anarchists the only consequence of this new definition is the necessity of finding another term to represent that which they do wish to abolish; namely, payment by borrower to lender for the use of capital.
But, once this necessary term is found or devised, the old question recurs: will free and mutual banking make it possible to procure capital without paying for its use?
To the determination of this question three other questions lead up, and I will put them to Mr. Ingalls straightway.
If a thousand men engaged in different lines of business unite to form a bank of issue; and if this bank of issue unites with other similar banks for clearing purposes; and if said bank lends its naturally well-known circulating credit to its members (or to others, for that matter) against conditional titles to actual and specific values given by the borrowers, — do these loans of the bank’s credit cost the bank anything beyond the salaries of manager and assistants, rent of building, expenditure for paper and printing, losses by depreciation of securities, and sundry incidentals?
Do not statisticians and economists agree that a discount of one-half of one per cent. covers the expenses referred to in the preceding questions?
If men were free to unite in the formation of such banks of issue, and subject to no penalty or tag whatsoever for so doing, would not competition between the banks thus formed force the price of the service rendered by them down to cost; that is, one-half of one per cent., — or to a figure closely approximating it?
Now, I insist, and I have a right to insist, that Mr. Ingalls shall answer these three fair and pertinent questions directly, without extraneous discussion, without any mingling of considerations or speculations not absolutely essential to the answers. For either these direct answers will be what I think they must be, and then the case of the Anarchists (so far as finance is concerned) is established; or else they will be something else, and then the case of the Anarchists falls.
If it falls, of course I shall have nothing more to say, and the publication of Liberty will be discontinued; but, if it is established, then I shall be ready to discuss with Mr. Ingalls those interesting but at present non-essential questions of collection of debts, enforcement of contracts, the comparative good and evil of discounting the future results of labor, etc., etc., etc.
By way of caution, let me add that the Anarchists do not look forward to a time when there will be no sporadic cases of payment for the use of capital, — such, for instance, as the example cited by Mr. Ingalls where an inducement is given to the endorser of a note. They simply claim that under freedom borrowing and lending will so generally take the shape of an exchange of credits at the mere cost of the exchange that interest — or, rather, what we used to call interest before Mr. Ingalls appropriated the term to a different purpose-will disappear as an influential economic factor.
Mr. Ingalls then offered his answers to the three questions propounded by the editor of Liberty, and Mr. Tucker dissected them as follows:
To my first question Mr. Ingalls answers that the bank of my hypothesis could issue its notes at a cost not exceeding its running expenses and incidental losses. So far, then, my claim is sustained. For he answers further that such a bank could not exist in the absence of a motive for its existence. It remains for me, then, only to supply the motive. The task is easy. The thousand business men of my hypothesis would unite to form a bank of issue, and would connect this bank of issue with other similar banks for clearing purposes, because thereby they could establish a collective credit having circulating power, which each of them could obtain in exchange for his equally good but less reputable individual credit, having to pay therefore nothing but the cost of this exchange of credits. In other words, these business men would form such a bank as I describe in order to borrow money at less than one per cent. instead of paying, as they do now, from four to fifteen per cent. Is the motive sufficient?
To my second question Mr. Ingalls answers that the cost above referred to would probably be met by a discount of one-half of one per cent. Sustained again. I have not to discuss here why bank employees “should be expected to work for bare support.” It suffices for the argument to know that what these employees are now willing to accept for their services can be paid to them out of funds provided by a discount of one-half of one per cent. And this Mr. Ingalls admits. When we have exhausted the present issue, then I will consider with him how many tears I can afford to shed over the sad fate of those bank presidents for whom a discount of one-half of one per cent. provides salaries of only ten, fifteen, and twenty thousand dollars.
To my third question Mr. Ingalls answers that under free conditions competition would tend to reduce discount to its lowest term, — ordinarily something above cost. I take it that Mr. Ingalls means by this that in banking — a business which under freedom is accompanied by no physical conditions that place a natural limit upon competition — the force of competition would have a tendency of the same strength as that which it has in other businesses similarly free from physical limitations, in other words, that the tendency would be strong enough to cause the price to hover around the cost limit, now rising a little above it, now falling a little below it, but averaging cost, or perhaps a shade more. If this is his meaning, then I am sustained again.
The discussion now centers, therefore, upon the following question, which I put to Mr. Ingalls:
Is the desire to borrow money at less than one per cent., instead of at four per cent. or more, a sufficient consideration to induce business men to form such banks as I have described?
If Mr. Ingalls answers that it is not, he must show why it is not. If he answers that it is, then the proposition which, according to Mr. Ingalls, has never been demonstrated, will have received its demonstration; the proposition, namely, that free and mutual banking will make it possible to procure capital without paying for its use (the discount being charged, not for the use of capital, but to meet expenses incidental to the transfer of capital).
With apology to Mr. Ingalls for my persistence, I must continue the “unilateral inquest” a little further, regretting that I have not been relieved from doing so by an unequivocal answer to my last question. The qualified answer that Mr. Ingalls gives is this: The desire to borrow at less than one per cent. is a sufficient motive to business men as borrowers to induce them to embark in mutual banking, but the desire to lend at more than four per cent. is a sufficient motive to business men as lenders to keep them from embarking in mutual banking. Now I must ask for answers to the following questions:
Does the business man who. has capital but lacks cash — that is, the business man who wishes to borrow — sacrifice, by engaging with others in mutual banking, any opportunity of lending (at four per cent. or any other rate) which he enjoys before so engaging?
If so, what?
If not; if the business man in question, by embarking with others in mutual banking, does not thereby damage himself as lender; is not the desire to borrow at less than one per cent. a sufficient consideration to induce him to so embark?
I respectfully insist on answers to these questions. Mr. Ingalls is a very able and sincere writer on economic problems. He deservedly exercises an influence on the class of people to whom Liberty appeals. Repeatedly during its publication he has come forward with a denial of the position that mutual banking will make it possible to borrow money without interest. I have now determined to force him, once and for all, to make good this denial by proof, or else to retract it.
Mr. Ingalls seems to imagine that the answers which he now gives to my last series of questions are as equivocal as his answer to my previous question. Not so. The terms in which he answered my previous question implied two opposite motives influencing at the same time a business man fulfilling a double capacity, — a borrower and lender, — and canceling each other. As my question did not concern men, who, as individuals, were in the market as lenders, but only those who were in the market as borrowers, this answer was equivocal. But the answers now given to my last questions distinctly recognize the borrowing business man and the lending business man as two individuals, and this recognition removes all the equivocation; for the desire of a lender to lend at a high rate cannot cancel the desire of a borrower to borrow at a low rate, provided the borrower, by association with other borrowers, can provide himself with a source from which to borrow at a low rate, — a condition not as paradoxical as it seems, since the fact of association creates a credit that before had no existence.
The present answers, then, being straight-forward and satisfactory, let us review the admissions which I have secured. Mr. Ingalls has admitted that business men desiring to borrow have an adequate motive for embarking in mutual banking; he has admitted that the loans of a mutual bank’s credit would cost the bank nothing but running expenses and incidental outlays and losses; he has admitted that this cost would probably be covered by a discount of one-half of one per cent.; and he has admitted that, “in the absence of State or collective meddling, competition would tend unquestionably to reduce discount to its lowest term, which would ordinarily be something above cost.” I have interpreted this last admission as meaning that in banking the force of competition would have a tendency of the same strength as that which it has in other businesses similarly free from physical limitations, — in other words, that the tendency would be strong enough to cause the price to hover around the cost limit, now rising a little above it, now falling a little below it, but averaging cost, or perhaps a shade more. In neither of the two articles which Mr. Ingalls has written since this interpretation appeared has he taken any exception to it. I am justified therefore in assuming that he admits this also.
Now, this series of admissions constitutes the entire case for mutual banking. Whether or not it was ever demonstrated before that mutual banking would abolish the payment of interest for the use of borrowed money, I have now led Mr. Ingalls to demonstrate this himself. His declarations show that under freedom the rate of discount would fall to nearly one-half of one per cent. This is equivalent to the abolition of the payment of interest, for in such a money market an individual case of interest payment would cut no figure economically, any more than one’s occasional payment of a quarter to an urchin for delivering a letter cuts a figure now that letter-postage has fallen to two cents. Mr. Ingalls has formally allowed that mutual banking will do all that it claims for itself, and he is forever debarred from repeating that denial or doubt of its claims which has been heard from him at intervals for many years. I began this little campaign of question and answer for the purpose of silencing this gun, and I have effectually done it.
At present Mr. Ingalls finds. but one course open to him; — viz., to deny that he ever denied. The plea comes at a suspiciously late hour. Strange that he did not advance it in response to my first questions four months ago, and thus save much time, trouble and ink. But never mind; late or not is it true?
Mr. Ingalls denied, — or, if he did not deny, he expressed a doubt equivalent to a denial and equally calling for proof that mutual banking can eradicate usury, and the phraseology shows that he meant by this to deny that mutual banking can eradicate the payment of a premium for the use of money. And, if I had his entire writings for the last fifteen years before me, I could point out equally conclusive instances. As I have not, I can only say that I remember such.
Thus ends this matter. Now Mr. Ingalls desires me to discuss with him the question of the existence of what he calls economic interest, — that is, the question whether people can do more with capital than without it. He asks me to retract my “denial of the existence of economic interest.” I pledge him my word that I will retract it as soon as he shall quote to me the passage in which the denial occurred. There exists no such passage. To have denied so trite a truth would have been no less remarkable than Mr. Ingalls’ grave persistence in affirming it. I do not approve the new use that Mr. Ingalls makes of the word, interest, but I have nothing to say in dispute of the entirely undisputed idea which he expresses by the phrase, “economic interest.” When he denied my position, I had a right to expect him to answer my questions. When he shall show that I have denied his position, he will have a similar right to expect me to answer his questions. And, if he drives me into a corner, I swear that he shall hear no complaint from me that he is trying to “force answers.”