tion of the lenders, as to make them either forbear to accumulate, or endeavor to increase their income by engaging in business on their own account, and incurring the risks, if not the labors, of industrial employment.

On the other hand, the capital owned by persons who prefer lending it at interest, or whose avocations prevent them from personally superintending its employment, may be short of the habitual demand for loans. It may be in great part absorbed by the investments afforded by the public debt and by mortgages, and the remainder may not be sufficient to supply the wants of commerce. If so, the rate of interest will be raised so high as in some way to reëstablish the equilibrium. When there is only a small difference between interest and profit, many borrowers may no longer be willing to increase their responsibilities and involve their credit for so small a remuneration; or some who would otherwise have engaged in business, may prefer leisure, and become lenders instead of borrowers; or others, under the inducement of high interest and easy investment for their capital, may retire from business earlier, and with smaller fortunes, than they otherwise would have done. Or, lastly, there is another process by which, in England and other commercial countries, a large portion of the requisite supply of loans is obtained. Instead of its being afforded by persons not in business, the affording it may itself become a business. A portion of the capital employed in trade may be supplied by a class of professional money lenders. These money lenders, however, must have more than a mere interest; they must have the ordinary rate of profit on their capital, risk and all other circumstances being allowed for. But it can never answer to any one who borrows for the purposes of his business, to pay a full profit for capital from which he will only derive a full profit; and money lending, as an employment, for the regular supply of trade, cannot therefore be carried on except by persons 16*

VOL. II.

who, in addition to their own capital, can lend their credit, or in other words, the capital of other people; that is, bankers, and persons (such as bill brokers) who are virtually bankers, since they receive money in deposit. A bank which lends its notes, lends capital which it borrows from the community, and for which it pays no interest. A bank of deposit lends capital which it collects from the community in small parcels; sometimes without paying any interest, as is the case with the London private bankers; and if, like the Scotch, the joint stock, and most of the country banks, it does pay interest, it still pays much less than it receives; for the depositors, who in any other way could mostly obtain for such small balances no interest worth taking any trouble for, are glad to receive even a little. Having this subsidiary resource, bankers are enabled to obtain, by lending at interest, the ordinary rate of profit on their own capital. In any other manner, money lending could not be carried on as a regular mode of business, except upon terms on which none would consent to borrow but persons either counting on extraordinary profits, or in urgent need; unproductive consumers who have exceeded their means, or merchants in fear of bankruptcy. The disposable capital deposited in banks, or represented by bank notes, together with the funds belonging to those who, either from necessity or preference, live upon the interest of their property, constitute the general loan fund of the country; and the amount of this aggregate fund, when set against the habitual demands of producers and dealers, and those of the government and of unproductive consumers, determine the permanent or average rate of interest; which must always be such as to adjust these two amounts to one another.* But, while the whole of this

I do not include in the general loan fund of the country the capitals, large as they sometimes are, which are habitually employed in speculatively

mass of lent capital takes effect upon the permanent rate of interest, the fluctuations depend almost entirely upon the portion which is in the hands of bankers; for it is that portion almost exclusively, which, being lent for short times only, is continually in the market seeking an investment. The capital of those who live on the interest of their own fortunes, has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.

3. Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. The willingness to lend is greater than usual at the commencement of a period of speculation, and much less than usual during the revulsion which follows. In speculative times, money-dealers, as well as other people, are inclined to extend their business by stretching their credit; they lend more than usual, (just as other classes of dealers and producers employ more than usual,) of capital which does not belong to them. Accordingly, these are the times when the rate of interest is low; though for this too, (as we shall immediately see,) there are other causes. During the revulsion, on the contrary, interest always rises inordinately, because, while there is a most pressing need

buying and selling the public funds and other securities. It is true, that all who buy securities add, for the time, to the general amount of money on loan, and lower pro tanto the rate of interest. But as the persons I speak of, buy only to sell again at a higher price, they are alternately in the position of lenders and of borrowers; their operations raise the rate of interest at one time, exactly as much as they lower it at another. Like all persons who buy and sell on speculation, their function is to equalize, not to raise or lower the value of the commodity. When they speculate prudently, they temper the fluctuations of price; when imprudently, they often aggravate them.

on the part of many persons to borrow, there is a general disinclination to lend. This disinclination, when at its extreme point, is called a panic. It occurs when a succession of unexpected failures has created in the mercantile, and sometimes also in the non-mercantile public, a general distrust in each other's solvency; disposing every one not only to refuse fresh credit, except on very onerous terms, but to call in, if possible, all credit which he has already given. Deposits are withdrawn from banks; notes are returned on the issuers in exchange for specie; bankers raise their rate of discount, and withhold their customary advances; merchants refuse to renew mercantile bills. At such times the most calamitous consequences were formerly experienced from the attempt of the law to prevent more than a certain limited rate of interest from being given or taken. Persons who could not borrow at five per cent., had to pay, not six or seven, but ten or fifteen per cent., to compensate the lender for risking the penalties of the law; or had to sell securities or goods for ready money at a still greater sacrifice. These evils have been less felt, since mercantile bills have been exempted by statute from the operation of the usury laws.

Except at such periods, the amount of capital disposable on loan is subject to little other variation than that which arises from the gradual process of accumulation; which process, however, in the great commercial countries, is sufficiently rapid to account for the almost periodical recurrence of these fits of speculation; since, when a few years have elapsed without a crisis, and no new and tempting channel for investment has been opened in the mean time, there is always found to have occurred in those few years so large an increase of capital seeking investment, as to have lowered considerably the rate of interest, whether indicated by the prices of securities or by the rate of discount on bills; and this diminution of interest tempts the

possessors to incur hazards in hopes of a more considerable

return.

The demand for loans varies much more largely than the supply, and embraces longer cycles of years in its aberrations. A time of war, for example, is a period of unusual drafts on the loan markets. The government, at such times, generally incurs new loans, and as these usually succeed each other rapidly as long as the war lasts, the general rate of interest is kept higher in war than in peace, without reference to the rate of profit, and productive industry is stinted of its usual supplies. During a part of the last war, the government could not borrow under six per cent., and of course all other borrowers had to pay at least as much. Nor does the influence of these loans altogether cease when the government ceases to contract others; for those already contracted continue to afford an investment for a greatly increased amount of the disposable capital of the country, which, if the national debt were paid off, would be added to the mass of capital seeking investment, and (independently of temporary disturbance) could not but, to some extent, permanently lower the rate of interest.

The same effect on interest which is produced by government loans for war expenditure, is produced by the sudden opening of any new and generally attractive mode of permanent investment. The only instance of the kind in recent history, on a scale comparable to that of the war loans, is the absorption of capital in the construction of railways. This capital must have been principally drawn from the deposits in banks, or from savings which would have gone into deposit, and which were destined to be ultimately employed in buying securities from persons who would have employed the purchase money in discounts or other loans at interest; in either case, it was a draft on the general loan fund. It is, in fact, evident, that unless