From his “Essays.”
LOWNESS of interest is generally ascribed to plenty of money. But money, however plentiful, has no other effect, if fixed, than to raise the price of labor. 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 ten per cent., in Portugal at six; though these places, as we may learn from the prices of everything, 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 color 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 labor 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.
Money having chiefly a fictitious value, 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 out a greater number of those shining bits of metal, for clothes, furniture, or equipage, without increasing 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, etc., with the labor 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 color, 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 labor and so many commodities; by receiving five per cent. you always receive proportional labor and commodities, however represented, whether by yellow or white coin, whether by a pound or an ounce. It is in vain, therefore, to look for the cause of the fall or rise of interest in the greater or less quantity of gold and silver, which is fixed in any nation.
High interest arises from three circumstances: a great demand for borrowing; little riches to supply that demand; and great profits arising from commerce: and the circumstances are a clear proof of the small advance of commerce and industry, not of the scarcity of gold and silver. Low interest, on the other hand, proceeds from the three opposite circumstances: a small demand for borrowing; great riches to supply that demand; and small profits arising from commerce,—and these circumstances are all connected together, and proceed from the increase of industry and commerce not of gold and silver.
