supposed to be equal to one half of its former value, an interest which is equal to one fourth only of the value of the former interest." The fact is simply this, that the interest comprehends two elements, one part of the profits paid for the use of the money, the other as insurance for the risk of loss. Now, no diminution in the value of money with respect to commodities can make the slightest difference in respect to these two elements. Whatever the quantity of goods be, more or less, that £100 will purchase, the part of the profits paid for the use of the money will still be the proportion of the £100. Nor can any alteration in the value of money have the slightest effect in influencing the risk of the transaction. Whether the usual price of goods be £100 or £50, it can make no difference in the proportion of the profits agreed to be paid for the use of £100, nor in the risk, consequently it can have no influence whatever on the rate of interest. The evident proof of this is, that in America, where, of course, money has diminished in value with respect to commodities just as in the rest of the world, 10 per cent. is quite a common rate of discount for the best mercantile paper. In California, where bullion was almost a drug, during the six years ending 1856, interest varied from 1 to 2 and 3 per cent. per month, or from 18 to 24 and 36 per cent. per annum.

Hume also observes the same thing" 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 commonly ascribed to plenty of money. But money, however plenty, has no other effect, if fixed, 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 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 1 Essays. Part II Essay 4: Of Interest,

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.

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"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, &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 of the sum. And if you lent me so much labour and so many commodities, by receiving five per cent. you always receive proportional labour 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."

We see in the above extract that Hume is not consistent with himself. He first asserts that an increase of the quantity of money can have no effect on the rate of interest, and he then admits that the rate of interest had fallen one half since the discoveries in America and afterwards he expressly admits that the abundance of riches to supply the demand for borrowing lowers the rate of interest.

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39. As, then, it is unquestionably certain that a diminution in the value of money, both with respect to debts and commodities, may be caused by an increase of capital or money, it becomes a very important and a rather subtle question, to determine under what circumstances either or both of these results is produced. And it is a question of peculiar interest at the present time, when the abundance of the Australian and Californian gold fields would lead many persons to expect a similar alteration of value as took place at the discovery of America.

We do not speak of Australia and California themselves, where gold was a positive drug for some time, but of the effects which may be anticipated in the old established countries of Europe. It is evident that as an increase in the quantity of money is capable of acting on its value, both with regard to debts and commodities, its first effects will be manifested in respect of that on which it first acts. Now, under the artificial system of the currency produced by modern banking, the supplies of gold invariably find their way into banks in the first instance. And the business of banking, as we have seen, consists in buying debts in a peculiar way. Now, the banks having an unusual quantity of money lodged with them,

are of course eager to employ it profitably, and in order to do this they lower the rate of discount, i. e., they give a higher price for debts. Now, though a bill of exchange in its proper sense always represents a past operation, yet they are brought for sale to bankers chiefly for the sake of funds to employ in a future operation. Now, leaving out of the question any part of the rate of discount which may be due to the risk, a high rate of discount is a proof and a sign of the activity of enterprise. And whenever the high rate of discount arises from the activity of enterprise, it may be laid down as a certainty that there is abundance of enterprise ready to start into existence, and which is only curbed by the high rate of discount. As soon as the rate of discount is lowered, this enterprise is called into existence, and new operations of all kinds are commenced; and as the increase of operations just corresponds to the increase of capital, no diminution in the value of money, with respect to commodities, takes place, though it does with respect to debts. An example of the truth of what we say occurred in the year 1844, when from various circumstances an unusual quantity of capital was accumulated in the hands of bankers, and the rate of discount fell to two per cent., but no increase in the prices of goods generally took place; that is, there was a great diminution in the value of money with respect to debts, but no diminution in its value with respect to commodities.

40. But however enterprising the country may be, there is a limit to its enterprise, and as soon as that limit is reached, an increased quantity of money can lead to no fresh enterprise; the consequence of which is very manifest. The quantity of money being continually added generates no fresh enterprise, is forced into the previously existing channel of circulation, as it is called, and having no fresh work to do, it merely requires a greater quantity of money to do the same work that a less quantity did before. That is to say, a diminution in the value of money with respect to commodities takes place. One hundred pounds perhaps will now only do the same work that fifty did before, a permanent alteration takes place in the exchangeable relations of bullion and commodities, and the rate of interest will spring back to its former level. Because, as we have already observed, the interest is always a definite portion of the profits. And the ratio of £5 to £100 must always be the same, whatever quantity of goods that £100

will purchase, be it much or little. We therefore obtain this fundamental law of the effect of the increase of the quantity of money: That as long as the increase of the quantity of capital affects the value of money with respect to debts, it has no effect on its value with respect to commodities: and as soon as it begins to affect its value with respect to commodities it ceases to affect its value with respect to debts. We have illustrated the first part of this proposition by a reference to the case of England in 1844, as a proof of the truth of the latter part of it, we may take the cases of California and Australia, where the exchangeable relation of bullion and commodities were so very different from England, yet the rate of interest is very much higher.

41. Hume says "Nor is the case different with regard to the second circumstance which we propose to consider, namely, the great or little riches to supply the demand. This effect also depends on the habits and ways of living of the people, not on the quantity of gold and silver. In order to have in any State a great number of lenders, it is not sufficient nor requisite that there be great abundance of the precious metals. It is only requisite that the property or command of that quantity, which is in the State, whether great or small, should be collected in particular hands, so as to form considerable sums, or compose a great moneyed interest. This begets a number of lenders, and sinks the rate of usury; and this I shall venture to affirm, depends not on the quantity of specie, but on particular manners and customs, which make the specie gather into separate sums or masses of considerable value.”

In this extract Hume has touched the right point. It depends on the manner in which money is used whether it produces a fall in the rate of interest or not. He himself in this essay quotes Garcilasso de la Vaga as saying that interest in Spain fell nearly a half immediately after the discovery of the West Indies.

The fact is that both these phenomena-a raising of the price of commodities, and a raising of the price of debts, i. e., a lowering of the Rate of Interest, are examples of the great General Law of Economics. An increased quantity of money may be used in two distinct ways either in the purchase of commodities, or in the purchase of debts. If it is entirely used in the purchase of Essay on Interest.