by
Frédéric Bastiat

Introduction

My object in this treatise is to examine into the real nature of the Interest of Capital, for the purpose of proving that it is lawful, and explaining why it should be perpetual. This may appear singular, and yet, I confess, I am more afraid of being too plain than too obscure. I am afraid I may weary the reader by a series of mere Truisms. But it is no easy matter to avoid this danger, when the facts, with which we have to deal, are known to every one by personal, familiar, and daily experience.

But, then, you will say, “What is the use of this treatise? Why explain what everybody knows?”

But, although this problem appears at first sight so very simple, there is more in it than you might suppose. I shall endeavor to prove this by an example. Mondor lends an instrument of labor to-day, which will be entirely destroyed in a week, yet the capital will not produce the less interest to Mondor or his heirs, through all eternity. Reader, can you honestly say that you understand the reason of this?

It would be a waste of time to seek any satisfactory explanation from the writings of economists. They have not thrown much light upon the reasons of the existence of interest. For this they are not to be blamed; for at the time they wrote, its lawfulness was not called in question. Now, however, times are altered; the case is different. Men, who consider themselves to be in advance of their age, have organized an active crusade against capital and interest; it is the productiveness of capital which they are attacking; not certain abuses in the administration of it, but the principle itself.

A journal has been established to serve as a vehicle for this crusade. It is conducted by M. Proudhon, and has, it is said, an immense circulation. The first number of this periodical contains the electoral manifesto of the people. Here we read, “The productiveness of capital, which is condemned by Christianity under the name of usury, is the true cause of misery, the true principle of destitution, the eternal obstacle to the establishment of the Republic.”

Another journal, La Ruche Populaire, after having said some excellent things on labor, adds, “But, above all, labor ought to be free; that is, it ought to be organized in such a manner, that money lenders and patrons, or masters, should not be paid for this liberty of labor, this right of labor, which is raised to so high a price by the traffickers of men.” The only thought that I notice here, is that expressed by the words in italics, which imply a denial of the right to interest. The remainder of the article explains it.

It is thus that the democratic Socialist, Thoré, expresses himself:

“The revolution will always have to be recommenced, so long as we occupy ourselves with consequences only, without having the logic or the courage to attack the principle itself. This principle is capital, false property, interest, and usury, which by the old régime, is made to weigh upon labor.

“Ever since the aristocrats invented the incredible fiction, that capital possesses the power of reproducing itself, the workers have been at the mercy of the idle.

“At the end of a year, will you find an additional crown in a bag of one hundred shillings? At the end of fourteen years, will your shillings have doubled in your bag?

“Will a work of industry or of skill produce another, at the end of fourteen years?

“Let us begin, then, by demolishing this fatal fiction.”

I have quoted the above, merely for the sake of establishing the fact, that many persons consider the productiveness of capital a false, a fatal, and an iniquitous principle. But quotations are superfluous; it is well known that the people attribute their sufferings to what they call the trafficking in man by man. In fact, the phrase tyranny of capital has become proverbial.

I believe there is not a man in the world, who is aware of the whole importance of this question:

“Is the interest of capital natural, just, and lawful, and as useful to the payer as to the receiver?”

You answer, no; I answer, yes. Then we differ entirely; but it is of the utmost importance to discover which of us is in the right; otherwise we shall incur the danger of making a false solution of the question, a matter of opinion. If the error is on my side, however, the evil would not be so great. It must be inferred that I know nothing about the true interests of the masses, or the march of human progress; and that all my arguments are but as so many grains of sand, by which the car of the revolution will certainly not be arrested.

But if, on the contrary, MM. Proudhon and Thoré are deceiving themselves, it follows, that they are leading the people astray — that they are showing them the evil where it does not exist; and thus giving a false direction to their ideas, to their antipathies, to their dislikes, and to their attacks. It follows, that the misguided people are rushing into a horrible and absurd struggle, in which victory would be more fatal than defeat, since, according to this supposition, the result would be the realization of universal evils, the destruction of every means of emancipation, the consummation of its own misery.

This is just what M. Proudhon has acknowledged, with perfect good faith. “The foundation stone,” he told me, “of my system is the gratuitousness of credit. If I am mistaken in this, Socialism is a vain dream.” I add, it is a dream, in which the people are tearing themselves to pieces. Will it, therefore, be a cause for surprise, if, when they awake, they find themselves mangled and bleeding? Such a danger as this is enough to justify me fully, if, in the course of the discussion, I allow myself to be led into some trivialities and some prolixity.

Capital and Interest

I address this treatise to the workmen of Paris, more especially to those who have enrolled themselves under the banner of Socialist democracy. I proceed to consider these two questions:

1st. Is it consistent with the nature of things, and with justice, that capital should produce interest?

2nd. Is it consistent with the nature of things, and with justice, that the interest of capital should be perpetual?

The working men of Paris will certainly acknowledge that a more important subject could not be discussed.

Since the world began, it has been allowed, at least in part, that capital ought to produce interest. But latterly it has been affirmed, that herein lies the very social error which is the cause of pauperism and inequality. It is, therefore, very essential to know now on what ground we stand.

For if levying interest from capital is a sin, the workers have a right to revolt against social order, as it exists; it is in vain to tell them that they ought to have recourse to legal and pacific means, it would be a hypocritical recommendation. When on the one side there is a strong man, poor, and a victim of robbery — on the other, a weak man, but rich, and a robber — it is singular enough, that we should say to the former, with a hope of persuading him, “Wait till your oppressor voluntarily renounces oppression, or till it shall cease of itself.” This cannot be; and those who tell us that capital is, by nature, unproductive, ought to know that they are provoking a terrible and immediate struggle.

If, on the contrary, the interest of capital is natural, lawful, consistent with the general good, as favorable to the borrower as to the lender, the economists who deny it, the tribunes who traffic in this pretended social wound, are leading the workmen into a senseless and unjust struggle, which can have no other issue than the misfortune of all. In fact, they are arming labor against capital. So much the better, if these two powers are really antagonistic; and may the struggle soon be ended! But if they are in harmony, the struggle is the greatest evil which can be inflicted on society. You see, then, workmen, that there is not a more important question than this: “Is the interest of capital lawful or not?” In the former case, you must immediately renounce the struggle to which you are being urged; in the second, you must carry it on bravely, and to the end.

Productiveness of capital — perpetuity of interest. These are difficult questions. I must endeavor to make myself clear. And for that purpose I shall have recourse to example rather than to demonstration; or rather, I shall place the demonstration in the example. I begin by acknowledging, that, at first sight, it may appear strange that capital should pretend to a remuneration; and, above all, to a perpetual remuneration. You will say, “Here are two men. One of them works from morning till night, from one year’s end to another; and if he consumes all which he has gained, even by superior energy, he remains poor. When Christmas comes, he is no forwarder than he was at the beginning of the year, and has no other prospect but to begin again. The other man does nothing, either with his hands or his head; or, at least, if he makes use of them at all, it is only for his own pleasure; it is allowable for him to do nothing, for he has an income. He does not work, yet he lives well; he has everything in abundance, delicate dishes, sumptuous furniture, elegant equipages; nay, he even consumes, daily, things which the workers have been obliged to produce by the sweat of their brow; for these things do not make themselves; and, as far as he is concerned, he has had no hand in their production. It is the workmen who have caused this corn to grow, polished this furniture, woven these carpets; it is our wives and daughters who have spun, cut out, sewed, and embroidered these stuffs. We work, then, for him and ourselves; for him first, and then for ourselves, if there is anything left. But here is something more striking still. If the former of these two men, the worker, consumes within the year any profit which may have been left him in that year, he is always at the point from which he started, and his destiny condemns him to move incessantly in a perpetual circle, and a monotony of exertion. Labor, then, is rewarded only once. But if the other, the ‘gentleman,’ consumes his yearly income in the year, he has, the year after, in those which follow, and through all eternity, an income always equal, inexhaustible, perpetual. Capital, then, is remunerated, not only once or twice, but an indefinite number of times! So that, at the end of a hundred years, a family, which has placed 20,000 francs, at five per cent., will have had 100,000 francs; and this will not prevent it from having 100,000 more, in the following century. In other words, for 20,000 francs, which represent its labor, it will have levied, in two centuries, a ten-fold value on the labor of others. In this social arrangement, is there not a monstrous evil to be reformed? And this is not all. If it should please this family to curtail its enjoyments a little — to spend, for example, only 900 francs, instead of 1,000 — it may, without any labor, without any other trouble beyond that of investing 100 francs a year, increase its capital and its income in such rapid progression, that it will soon be in a position to consume as much as a hundred families of industrious workmen. Does not all this go to prove, that society itself has in its bosom a hideous cancer, which ought to be eradicated at the risk of some temporary suffering?”

These are, it appears to me, the sad and irritating reflections which must be excited in your minds by the active and superficial crusade which is being carried on against capital and interest. On the other hand, there are moments in which, I am convinced, doubts are awakened in your minds, and scruples in your conscience. You say to yourselves sometimes, “But to assert that capital ought not to produce interest, is to say that he who has created instruments of labor, or materials, or provisions of any kind, ought to yield them up without compensation. Is that just? And then, if it is so, who would lend these instruments, these materials, these provisions? who would take care of them? who even would create them? Every one would consume his proportion, and the human race would never advance a step. Capital would be no longer formed, since there would be no interest in forming it. It will become exceedingly scarce. A singular step toward gratuitous loans! A singular means of improving the condition of borrowers, to make it impossible for them to borrow at any price! What would become of labor itself? for there will be no money advanced, and not one single kind of labor can be mentioned, not even the chase, which can be pursued without money in hand. And, as for ourselves, what would become of us? What! we are not to be allowed to borrow, in order to work in the prime of life, nor to lend, that we may enjoy repose in its decline? The law will rob us of the prospect of laying by a little property, because it will prevent us from gaining any advantage from it. It will deprive us of all stimulus to save at the present time, and of all hope of repose for the future. It is useless to exhaust ourselves with fatigue; we must abandon the idea of leaving our sons and daughters a little property, since modern science renders it useless, for we should become traffickers in men if we were to lend it on interest. Alas! the world which these persons would open before us as an imaginary good, is still more dreary and desolate than that which they condemn, for hope, at any rate, is not banished from the latter.” Thus in all respects, and in every point of view, the question is a serious one. Let us hasten to arrive at a solution.

Our civil code has a chapter entitled, “On the manner of transmitting property.” I do not think it gives a very complete nomenclature on this point. When a man by his labor has made some useful things — in other words, when he has created a value — it can only pass into the hands of another by one of the following modes: as a gift, by the right of inheritance, by exchange, loan, or theft. One word upon each of these, except the last, although it plays a greater part in the world than we may think.

A gift, needs no definition. It is essentially voluntary and spontaneous. It depends exclusively upon the giver, and the receiver cannot be said to have any right to it. Without a doubt, morality and religion make it a duty for men, especially the rich, to deprive themselves voluntarily of that which they possess, in favor of their less fortunate brethren. But this is an entirely moral obligation. If it were to be asserted on principle, admitted in practice, or sanctioned by law, that every man has a right to the property of another, the gift would have no merit, charity and gratitude would be no longer virtues. Besides, such a doctrine would suddenly and universally arrest labor and production, as severe cold congeals water and suspends animation, for who would work if there was no longer to be any connection between labor and the satisfying of our wants? Political economy has not treated of gifts. It has hence been concluded that it disowns them, and that it is therefore a science devoid of heart. This is a ridiculous accusation. That science which treats of the laws resulting from the reciprocity of services, had no business to inquire into the consequences of generosity with respect to him who receives, nor into its effects, perhaps still more precious, on him who gives; such considerations belong evidently to the science of morals. We must allow the sciences to have limits; above all, we must not accuse them of denying or undervaluing what they look upon as foreign to their department.

The right of inheritance, against which so much has been objected of late, is one of the forms of gift, and assuredly the most natural of all. That which a man has produced, he may consume, exchange, or give; what can be more natural than that he should give it to his children? It is this power, more than any other, which inspires him with courage to labor and to save. Do you know why the principle of right of inheritance is thus called in question? Because it is imagined that the property thus transmitted is plundered from the masses. This is a fatal error; political economy demonstrates, in the most peremptory manner, that all value produced is a creation which does no harm to any person whatever. For that reason, it may be consumed, and, still more, transmitted, without hurting any one; but I shall not pursue these reflections, which do not belong to the subject.

Exchange is the principal department of political economy, because it is by far the most frequent method of transmitting property, according to the free and voluntary agreements of the laws and effects of which this science treats.

Properly speaking, exchange is the reciprocity of services. The parties say between themselves, “Give me this, and I will give you that;” or, “Do this for me, and I will do that for you.” It is well to remark (for this will throw a new light on the notion of value), that the second form is always implied in the first. When it is said, “Do this for me, and I will do that for you,” an exchange of service for service is proposed. Again, when it is said, “Give me this, and I will give you that,” it is the same as saying, “I yield to you what I have done, yield to me what you have done.” The labor is past, instead of present; but the exchange is not the less governed by the comparative valuation of the two services; so that it is quite correct to say, that the principle of value is in the services rendered and received on account of the productions exchanged, rather than in productions themselves.

In reality, services are scarcely ever exchanged directly. There is a medium, which is termed money. Paul has completed a coat, for which he wishes to receive a little bread, a little wine, a little oil, a visit from a doctor, a ticket for the play, etc. The exchange cannot be effected in kind; so what does Paul do? He first exchanges his coat for some money, which is called sale; then he exchanges this money again for the things which he wants, which is called purchase; and now, only, has the reciprocity of services completed its circuit; now, only, the labor and the compensation are balanced in the same individual, — “I have done this for society, it has done that for me.” In a word, it is only now that the exchange is actually accomplished. Thus, nothing can be more correct than this observation of J.B. Say: “Since the introduction of money, every exchange is resolved into two elements, sale and purchase. It is the reunion of these two elements which renders the exchange complete.”

We must remark, also, that the constant appearance of money in every exchange has overturned and misled all our ideas; men have ended in thinking that money was true riches, and that to multiply it was to multiply services and products. Hence the prohibitory system; hence paper money; hence the celebrated aphorism, “What one gains the other loses;” and all the errors which have ruined the earth, and imbrued it with blood. After much research it has been found, that in order to make the two services exchanged of equivalent value, and in order to render the exchange equitable, the best means was to allow it to be free. However plausible, at first sight, the intervention of the State might be, it was soon perceived that it is always oppressive to one or other of the contracting parties. When we look into these subjects, we are always compelled to reason upon this maxim, that equal value results from liberty. We have, in fact, no other means of knowing whether, at a given moment, two services are of the same value, but that of examining whether they can be readily and freely exchanged. Allow the State, which is the same thing as force, to interfere on one side or the other, and from that moment all the means of appreciation will be complicated and entangled, instead of becoming clear. It ought to be the part of the State to prevent, and, above all, to repress artifice and fraud; that is, to secure liberty, and not to violate it. I have enlarged a little upon exchange, although loan is my principal object: my excuse is, that I conceive that there is in a loan an actual exchange, an actual service rendered by the lender, and which makes the borrower liable to an equivalent service, — two services, whose comparative value can only be appreciated, like that of all possible services, by freedom. Now, if it is so, the perfect lawfulness of what is called house-rent, farm-rent, interest, will be explained and justified. Let us consider the case of loan.

Suppose two men exchange two services or two objects, whose equal value is beyond all dispute. Suppose, for example, Peter says to Paul, “Give me ten sixpences, I will give you a five-shilling piece.” We cannot imagine an equal value more unquestionable. When the bargain is made, neither party has any claim upon the other. The exchanged services are equal. Thus it follows, that if one of the parties wishes to introduce into the bargain an additional clause, advantageous to himself, but unfavorable to the other party, he must agree to a second clause, which shall re-establish the equilibrium, and the law of justice. It would be absurd to deny the justice of a second clause of compensation. This granted, we will suppose that Peter, after having said to Paul, “Give me ten sixpences, I will give you a crown,” adds, “you shall give me the ten sixpences now, and I will give you the crown-piece in a year;”it is very evident that this new proposition alters the claims and advantages of the bargain; that it alters the proportion of the two services. Does it not appear plainly enough, in fact, that Peter asks of Paul a new and an additional service; one of a different kind? Is it not as if he had said, “Render me the service of allowing me to use for my profit, for a year, five shillings which belong to you, and which you might have used for yourself”? And what good reason have you to maintain that Paul is bound to render this especial service gratuitously; that he has no right to demand anything more in consequence of this requisition; that the State ought to interfere to force him to submit? Is it not incomprehensible that the economist, who preaches such a doctrine to the people, can reconcile it with his principle of the reciprocity of services? Here I have introduced cash; I have been led to do so by a desire to place, side by side, two objects of exchange, of a perfect and indisputable equality of value. I was anxious to be prepared for objections; but, on the other hand, my demonstration would have been more striking still, if I had illustrated my principle by an agreement for exchanging the services or the productions themselves.

Suppose, for example, a house and a vessel of a value so perfectly equal that their proprietors are disposed to exchange them even-handed, without excess or abatement. In fact, let the bargain be settled by a lawyer. At the moment of each taking possession, the ship-owner says to the citizen, “Very well; the transaction is completed, and nothing can prove its perfect equity better than our free and voluntary consent. Our conditions thus fixed, I shall propose to you a little practical modification. You shall let me have your house to-day, but I shall not put you in possession of my ship for a year; and the reason I make this demand of you is, that, during this year of delay, I wish to use the vessel.” That we may not be embarrassed by considerations relative to the deterioration of the thing lent, I will suppose the ship-owner to add, “I will engage, at the end of the year, to hand over to you the vessel in the state in which it is to-day.” I ask of every candid man, I ask of M. Proudhon himself, if the citizen has not a right to answer, “The new clause which you propose entirely alters the proportion or the equal value of the exchanged services. By it, I shall be deprived, for the space of a year, both at once of my house and of your vessel. By it, you will make use of both. If, in the absence of this clause, the bargain was just, for the same reason the clause is injurious to me. It stipulates for a loss to me, and a gain to you. You are requiring of me a new service; I have a right to refuse, or to require of you, as a compensation, an equivalent service.” If the parties are agreed upon this compensation, the principle of which is incontestable, we can easily distinguish two transactions in one, two exchanges of service in one. First, there is the exchange of the house for the vessel; after this, there is the delay granted by one of the parties, and the compensation correspondent to this delay yielded by the other. These two new services take the generic and abstract names of credit and interest. But names do not change the nature of things; and I defy any one to dare to maintain that there exists here, when all is done, a service for a service, or a reciprocity of services. To say that one of these services does not challenge the other, to say that the first ought to be rendered gratuitously, without injustice, is to say that injustice consists in the reciprocity of services — that justice consists in one of the parties giving and not receiving, which is a contradiction in terms.

To give an idea of interest and its mechanism, allow me to make use of two or three anecdotes. But, first, I must say a few words upon capital.

There are some persons who imagine that capital is money, and this is precisely the reason why they deny its productiveness; for, as M. Thoré says, crowns are not endowed with the power of reproducing themselves. But it is not true that capital and money are the same thing. Before the discovery of the precious metals, there were capitalists in the world; and I venture to say that at that time, as now, everybody was a capitalist, to a certain extent.

What is capital, then? It is composed of three things:

1st. Of the materials upon which men operate, when these materials have already a value communicated by some human effort, which has bestowed upon them the principle of remuneration — wool, flax, leather, silk, wood, etc.

2nd. Instruments which are used for working — tools, machines, ships, carriages, etc.

3rd. Provisions which are consumed during labor — victuals, stuffs, houses, etc.

Without these things, the labor of man would be unproductive, and almost void; yet these very things have required much work, especially at first. This is the reason that so much value has been attached to the possession of them, and also that it is perfectly lawful to exchange and to sell them, to make a profit of them if used, to gain remuneration from them if lent.

Now for my anecdotes.

The Sack of Corn

Mathurin, in other respects as poor as Job, and obliged to earn his bread by day-labor, became, nevertheless, by some inheritance, the owner of a fine piece of uncultivated land. He was exceedingly anxious to cultivate it. “Alas!” said he, “to make ditches, to raise fences, to break the soil, to clear away the brambles and stones, to plough it, to sow it, might bring me a living in a year or two; but certainly not to-day, or to-morrow. It is impossible to set about farming it, without previously saving some provisions for my subsistence until the harvest; and I know, by experience, that preparatory labor is indispensable, in order to render present labor productive.” The good Mathurin was not content with making these reflections. He resolved to work by the day, and to save something from his wages to buy a spade and a sack of corn; without which things, he must give up his fine agricultural projects. He acted so well, was so active and steady, that he soon saw himself in possession of the wished-for sack of corn. “I shall take it to the mill,” said he, “and then I shall have enough to live upon till my field is covered with a rich harvest.” Just as he was starting, Jerome came to borrow his treasure of him. “If you will lend me this sack of corn,” said Jerome, “you will do me a great service; for I have some very lucrative work in view, which I cannot possibly undertake, for want of provisions to live upon until it is finished.” “I was in the same case,” answered Mathurin, “and if I have now secured bread for several months, it is at the expense of my arms and my stomach. Upon what principle of justice can it be devoted to the realization of your enterprise instead of mine?”

You may well believe that the bargain was a long one. However, it was finished at length, and on these conditions:

First. Jerome promised to give back, at the end of the year, a sack of corn of the same quality, and of the same weight, without missing a single grain. “This first clause is perfectly just,” said he, “for without it Mathurin would give, and not lend.”

Secondly. He engaged to deliver five litres on every hectolitre. “This clause is no less just than the other,” thought he; “for without it Mathurin would do me a service without compensation; he would inflict upon himself a privation — he would renounce his cherished enterprise — he would enable me to accomplish mine — he would cause me to enjoy for a year the fruits of his savings, and all this gratuitously. Since he delays the cultivation of his land, since he enables me to realize a lucrative labor, it is quite natural that I should let him partake, in a certain proportion, of the profits which I shall gain by the sacrifice he makes of his own.”

On his side, Mathurin, who was something of a scholar, made this calculation: “Since, by virtue of the first clause, the sack of corn will return to me at the end of a year,” he said to himself, “I shall be able to lend it again; it will return to me at the end of the second year; I may lend it again, and so on, to all eternity. However, I cannot deny that it will have been eaten long ago. It is singular that I should be perpetually the owner of a sack of corn, although the one I have lent has been consumed for ever. But this is explained thus: It will be consumed in the service of Jerome. It will put it into the power of Jerome to produce a superior value; and, consequently, Jerome will be able to restore me a sack of corn, or the value of it, without having suffered the slightest injury; but quite the contrary. And as regards myself, this value ought to be my property, as long as I do not consume it myself; if I had used it to clear my land, I should have received it again in the form of a fine harvest. Instead of that, I lend it, and shall recover it in the form of repayment.

“From the second clause, I gain another piece of information. At the end of the year, I shall be in possession of five litres of corn, over the 100 that I have just lent. If, then, I were to continue to work by the day, and to save a part of my wages, as I have been doing, in the course of time I should be able to lend two sacks of corn; then three; then four; and when I should have gained a sufficient number to enable me to live on these additions of five litres over and above each, I shall be at liberty to take a little repose in my old age. But how is this? In this case, shall I not be living at the expense of others? No, certainly, for it has been proved that in lending I perform a service; I complete the labor of my borrowers; and only deduct a trifling part of the excess of production, due to my lendings and savings. It is a marvellous thing, that a man may thus realize a leisure which injures no one, and for which he cannot be envied without injustice.”