CHAPTER XIII

SOCIAL AND PRESUMPTIVE JUSTIFICATIONS OF INTEREST

As we saw in the last chapter, interest cannot be conclusively justified on the ground of either productivity or service. It is impossible to demonstrate that the capitalist has a strict right to interest because his capital produces interest, or because it renders a service to the labourer or the consumer. A part, probably a small part, of the interest now received can be fairly justified by the title of sacrifice. Some present owners of capital would not have saved had they not expected to receive interest. In their case interest may be regarded as a just compensation for the sacrifice that they underwent when they decided to save instead of consuming.

_Limitations of the Sacrifice Principle_

Nevertheless these men would suffer no injustice if interest were now to be abolished. Up to the moment of the change, they would have been in receipt of adequate compensation; thereafter, they would be in exactly the same position as when they originally chose to save rather than consume. They would still be able to sell their capital, and convert the proceeds to their immediate uses and pleasures. In this case they would obviously have no further claim upon the community for interest. On the other hand, they could retain the ownership of their capital, and postpone its consumption to some future time. In making this choice they would regard future as more important than present consumption, and the superiority of future enjoyment as sufficiently great to compensate them for the sacrifice of postponement. Hence they would have no moral claim to interest on the ground of abstinence. In general, then, the sacrifice-justification of interest continues only so long as the interest continues. It extends only to the interest received by certain capitalists in certain circumstances, not to all interest in all circumstances. Therefore, it presents no moral obstacle to the complete abolition of interest.

Since probably the greater part of the interest now received cannot be justified on intrinsic grounds, and since that part of it which is thus justified could be abolished consistently with the rights of the recipients, let us see whether it is capable of justification for reasons of social welfare. Would its suppression be socially beneficial or socially detrimental?

_The Value of Capital in a No-Interest Régime_

The interest that we have in mind is pure interest, not undertaker's profit, nor insurance against risk, nor gross interest. Even if all pure interest were abolished the capitalist who loaned his money would still receive something from the borrower in addition to the repayment of the principal, while the active capitalist would get from the consumer more than the expenses of production. The former would require a premium of, say, one or two per cent. to protect him against the loss of his loan. The latter would demand the same kind of insurance, and an additional sum to repay him for his labour and enterprise. None of these payments could be avoided in any system of privately directed production. The return whose suppression is considered here is that which the capitalist receives over and above these payments, and which in this country seems to be about three or four per cent.

Would capital still have value in a no-interest régime, and if so how would its value be determined? At present the lower limit of the value of productive capital, as of all other artificial goods, is fixed in the long run by the cost of production. Capital instruments that do not bring this price will not continue to be made. In other words, cost of production is the governing factor of the value of capital from the side of supply. It would likewise fix the lower limit of value in a no-interest régime; only, the cost of producing capital instruments would then be somewhat lower than to-day, owing to the absence of an interest charge for the working capital during the productive process.

But the cost of production is not a constant and accurate measure of the value of artificial capital. The true measure is found in the revenue or interest that a given piece of capital yields to its owners. If the current rate of interest is five per cent., a factory that brings in ten thousand dollars net return will have a value of about two hundred thousand dollars. This is the governing factor of value from the side of demand. In a no-interest economy the demand factor would be quite different. Capital instruments would be in demand, not as revenue producers, but as the concrete embodiments, the indispensable requisites of saving and accumulation. For it is impossible that saving should in any considerable amount take the form of cash hoards. In the words of Sir Robert Giffen: "The accumulations of a single year, even taking it at one hundred and fifty millions only, ... would absorb more than the entire metallic currency of the country [Great Britain]. They cannot, therefore, be made in cash."[142] The instruments of production would be sought and valued by savers for the same reason that safes and safety deposit boxes are in demand now. They would be the only means of carrying savings into the future, and they would necessarily bring a price sufficiently high to cover the cost of producing them. One man might deposit his savings in a bank, whence they would be borrowed without interest by some director of industry. When the owner of the savings desired to recover them he could obtain from the bank the fund of some other depositor, or get the proceeds of the sale of the concrete capital in which his own savings had been embodied. Another man might prefer to invest his savings directly in a building, a machine, or a mercantile business, whence he could recover them later from the sale of the property. Hence the absence of interest would not change essentially the processes of saving or investment. Capital would still have value, but its valuation from the demand side would rest on a different basis. It would be valued not in proportion to its power to yield interest, but because of its capacity to become a receptacle for savings, and to carry into the future the consuming power of the present.

The question whether the abolition of interest by the State would be socially helpful or socially harmful is mainly, though not entirely, a question of the supply of capital. If the community would not have sufficient capital to provide for all its needs, actual and progressive, the suppression of interest would obviously be a bad policy. Most economists seem inclined to think that this condition would be realised; that, without the inducement of interest, men would neither make new savings nor conserve existing capital in sufficient quantity to supply the wants of society. Very few of them, however, pretend to be able to prove this proposition. So many complex factors with regard to the possibilities of saving and the motives of savers, enter into the situation that no opinion on the subject can have any stronger basis than probability. As a preliminary to our consideration of the question of abolition, let us inquire whether there exists any definite relation between the present supply of capital and the current rate of interest.

_Whether the Present Rate of Interest Is Necessary_

It is sometimes contended that the interest rate must be kept up to the present level if the existing supply of capital is to be maintained. The underlying assumption is that some of the present savers would discontinue that function at any lower rate, with the consequence that the supply of capital would fall below the demand. Owing to this excess of demand over supply, the rate of interest would rise, or tend to rise, to the former level. Therefore, the rate existing at any given time is the socially necessary rate. The rate of interest is said to be analogous to the rate of wages. For example; of ten thousand men receiving five dollars a day, nine thousand may be willing to work for four dollars rather than quit their present jobs. But the other thousand set their minimum price at five dollars. If the wage is reduced to four dollars these men will get employment elsewhere, thus causing such an excess of demand over supply as to force the wage rate back to five dollars. The same thing, it is contended, will happen when the high-priced section of the savers, "the marginal savers," discontinue saving on account of the artificial lowering of the rate of interest.

The analogy, however, is misleading. The "marginal" one thousand wage earners refuse to work for four dollars a day because they can get better compensation in some other occupation. This phenomenon has been proved over and over again by observation and experience. On the other hand, there is no experience, no positive evidence, which shows or tends to show that any _necessary_ group of present savers would discontinue or materially reduce their accumulations if they were no longer able to secure the present rate of interest. If the rate were lowered simultaneously in all civilised countries the dissatisfied savers, unlike the dissatisfied labourers, would not be able to get a better price for their capital elsewhere. Their only alternative would be to spend their actual or potential savings for present enjoyment. Now we have no empirical data to justify the assumption that any considerable number of savers would choose this alternative in preference to, say, three or two per cent. interest. The fact that any group of savers at present gets and insists on getting a higher rate, merely proves that they can get it, and that they are selfish enough to take advantage of the possibility. We know that some men who now obtain six per cent. interest would accept two rather than cease to save; yet they do not hesitate to demand six per cent. So far as we know, all present savers might take the same attitude. At any rate, we can not conclude that they would not take less from the fact that they now get more. Why then does not the rate of interest fall? If all present savers are getting a higher rate than is necessary to induce them to save, why do they not increase their savings to such an extent that the supply of capital will exceed the present volume of demand, and thus lead to a decline in the rate of interest? This is what happens when the price of consumption-goods rises appreciably above the minimum level that satisfies the most high-priced or "marginal" producers. There is, however, an important difference between the two cases. The capacity to produce more goods is practically unlimited, and the corresponding desire is also unlimited, so long as the price of the product exceeds the cost of production. The capacity to save is not unlimited, and the desire to save is neutralised and sharply restricted by other and more powerful desires. Hence it is quite possible that the price of capital, i.e., interest, is determined to only a slight degree by the "cost" of saving, being mainly dominated and regulated from the side of demand.

Even though many of the present savers and owners of capital should diminish or discontinue their functions on account of a fall in the rate of interest, a reduction would not necessarily take place in the supply of capital. The function of these "marginal savers" would in all probability be performed by other persons, who would be compelled to increase their accumulations in order to provide as well for the future as they had previously been able to provide with a smaller capital at a higher rate of interest.[143]

_Whether at Least Two Per Cent. Is Necessary_

While admitting that the present rate is unnecessarily high, Professor Cassel maintains that a certain important class of savers would diminish very considerably their accumulations if the interest rate should fall much below two per cent. This class comprises those persons whose main object in saving is a fund which will some day support them from its interest. At six per cent. a person can accumulate in about twelve years a sum sufficient to provide him with an interest-income equal to the amount annually saved. For example; two thousand dollars put aside every year, and subjected to compound interest, will aggregate in twelve years a principal capable of yielding an annual income of two thousand dollars. At two per cent. the same amount of yearly saving will not lead to the same income in less than thirty-five years. If the rate be one and one-half per cent., forty-seven years will be required to produce the desired income. Hence, concludes Cassel, if the rate falls below two per cent. the average man will decide that life is too short to provide for the future by means of an interest-income, and will expect to draw upon his principal. This means that he will not need to save as much as when he sought to accumulate a capital large enough to support him out of its interest alone.

The argument is plausible but not conclusive. If the rate of interest is so low that a man must save for forty-seven years in order to obtain a sufficient interest-income to support him in his declining years, he will rarely attain that end. In the great majority of instances men who are unable to save more annually than the amount that they will need each year in old age, will expect and be compelled to use up a part or all of their capital in the period following the cessation of their economic usefulness. Nevertheless, it does not follow that they will save less at one and one-half per cent. than at six per cent. The determining factor in the situation is the attitude of the saver toward the _capital sum accumulated_. He either desires or does not desire to leave this behind him. In the latter case he will save only as much as is necessary to provide an annual income composed partly of interest and partly of the principal. If this contemplated income is two thousand dollars, and the rate of interest is six per cent., he will not need to save that much annually for as long a period as ten years. He can diminish either the yearly amount saved or the length of time devoted to saving. On the other hand, if the rate is only one and one-half per cent. he will be compelled to save a larger total in order to secure an equal accumulation and an equal provision for the future. In all cases, therefore, in which the saving is carried on merely for the saver's own lifetime it will be increased instead of decreased by a low rate of interest.

If the saver does desire to bequeath his capital he will not always be deterred from this purpose merely because he is compelled to use some of the capital for the satisfaction of his own wants. Take the man who can save two thousand dollars a year, and with the rate of interest at six per cent. assure himself an interest-income of the same amount, and who intends to leave the principal (some thirty-three thousand dollars) to his children. Should the rate fall to one and one-half per cent. he would be unable to accumulate and bequeath nearly such a large sum. Surely this fact, discouraging as it is, will not determine him to save nothing. He will not, as Cassel's argument assumes, decide to leave nothing to his children, and content himself with that amount of saving which will suffice to provide for his own future. In all probability he will try to accumulate a sum which, even when diminished by future deductions for his own wants, will approximate as closely as possible the amount that he could have bequeathed had the rate remained at six per cent. This means that he will save more at the low than at the high rate of interest.

The relative insignificance of the sum which would be saved at a low rate might sometimes, indeed, deter a person from saving for testamentary purposes. With the rate at six per cent., a man might be willing to save six hundred dollars a year for a sufficiently long period to provide a legacy of twenty thousand dollars to an educational institution. With the rate at one and one-half per cent., the amount that he could hope to accumulate would be so much smaller that it might seem to him not worth while, and he would decline to save the six hundred dollars annually. Cases of this kind, however, always involve the secondary objects of saving, the luxuries rather than the necessaries of testamentary transmission. They do not include such primary objects as provision for one's family. When the average man finds that he cannot leave to his family as much as he would desire, as much as he would have bequeathed to them at a higher rate of interest, he will strive to increase rather than decrease his efforts to save for this purpose.

Speaking generally, then, we conclude that the assumption underlying Professor Cassel's theory is contradicted by our experience of human motives and practices. Men who save mainly for a future interest-income, at the same time wishing to keep the principal intact until death, and who could have fully realised this desire under a high interest régime, will not become entirely indifferent to it when they find that they cannot attain it completely. They will ordinarily try to leave behind them as large a capital or principal as they can. Hence they will save more rather than less.

_Whether Any Interest Is Necessary_

Perhaps the best known recent statement of the opinion that interest is inevitable, appears in Professor Irving Fisher's "The Rate of Interest."[144] While he does not assert explicitly that sufficient capital would not be provided without interest, and even admits that in certain circumstances interest might disappear, the general logic and implications of his argument are decidedly against the supposition that society could ever get along without interest. He lays such stress upon the factor of "impatience," i.e., man's unwillingness to wait for future goods, as to suggest strongly that other causes of interest, and the number of savers free from "impatience," are quite insignificant. Now, if "impatience" were the only cause of interest the latter must continue as long as "impatience" continues; and if practically all savers, actual and possible, are completely dominated by "impatience" the abolition of interest would be socially disastrous. However, neither of these assumptions is demonstrable. We have just seen that the present rate of interest has other causes than "impatience"; that a large proportion of savers insist upon getting the present rate, not because they require it to offset their "impatience," but simply because they can obtain it, and because they prefer it to the lower rate. Therefore, the mere existence of the present rate does not prove it to be necessary. By the same argument it is evident that the existence of any interest does not demonstrate the necessity of some interest. In the second place, the number of savers, present and prospective, whose "impatience" is so weak as to permit them to save without interest, is probably greater than the average reader of Professor Fisher's pages is led to assume. The question whether interest is necessary cannot be answered by reference to the general fact of human "impatience"; it demands a preliminary analysis of the extent to which "impatience" affects the different classes of savers.

With interest abolished, those persons who were willing to subordinate present secondary satisfactions to the primary future needs of themselves and their families, would save at least as much for these purposes as when they could have obtained interest. Most of them would probably save more in order to render their future provision as nearly as possible equal to what it would have been had interest accrued on their annual savings. Whether a person intended to leave all his accumulations, or part of them, or none of them to posterity, he would still desire them to be as large as they might have been in a régime of interest. In order to realise this desire, he would be compelled to increase his savings. And it is reasonable to expect that this is precisely the course that would be followed by men of average thrift and foresight. Such men regard future necessaries and comforts, whether for themselves or their children, as more important than present non-essentials and luxuries. Interest or no interest, prudent men will subordinate the latter goods to the former, and will save money accordingly.

When, however, both future and present goods are of the same order and importance, the future is no longer preferred to the present. In that case the preference is reversed. The luxuries of to-day are more keenly prized than the luxuries of to-morrow. If the latter are to be preferred they must possess some advantage over the luxuries that might be obtained here and now. Such advantage may arise in various ways; for example, when a man decides that he will have more leisure for a foreign journey two years hence than this year, or when he prefers a large amount of future enjoyment at one time to present satisfactions taken in small doses. But the most general method of conferring advantage upon the secondary satisfactions of the future as compared with those of the present, is to increase the quantity. The majority of foreseeing persons are willing to pass by one hundred dollars' worth of enjoyment now for the sake of one hundred and five dollars' worth one year hence. This advantage of quantity is provided through the receipt of interest. It affects all those persons whose saving, as noted in the last chapter, involves a sacrifice for which the only adequate compensation is interest, and likewise all those persons who are in a position to choose between present and future luxuries. Were interest suppressed these classes of persons would cease to save for this kind of future goods.

According to Professor Taussig, "most saving is done by the well-to-do and the rich."[145] On this hypothesis it seems probable that the abolition of interest would diminish the savings and capital of the community very considerably; for the accumulations of the wealthy are derived mainly from interest rather than from salaries. On the other hand, the suppression of interest should bring about a much wider diffusion of wealth. The sums formerly paid out as interest, would be distributed among the masses of the population as increased wages and reduced costs of living. Hence the masses would possess an immensely increased capacity for saving, which might offset or even exceed the loss of saving-power among those who now receive interest-incomes.[146]

To sum up the results of our inquiry concerning the necessity of interest: The fact that men now receive interest does not prove that they would not save without interest. The fact that many men would certainly save without interest does not prove that a sufficient amount would be saved to provide the community with the necessary supply of capital. Whether the savings of those classes that increased their accumulations would counteract the decreases in the saving of the richer classes, is a question that admits of no definite or confident answer.

_The State Is Justified in Permitting Interest_

If we assume that the suppression of interest would cause a considerable decline in saving and capital, we must conclude that the community would be worse off than under the present system. To diminish greatly the instruments of production, and consequently the supply of goods for consumption, would create far more hardship than it would relieve. While "workless" incomes would be suppressed, and personal incomes more nearly equalised, the total amount available for distribution would probably be so much smaller as to cause a deterioration in the condition of every class. In this hypothesis the State would do wrong to abolish the system of interest.

If, however, we assume that no considerable amount of evil would follow, or that the balance of results would be favourable, the question of the proper action of the State becomes somewhat complex. In the first place, interest could not rightfully be suppressed while the private taking of rent remained. To adopt such a course would be to treat the receivers of property incomes inequitably. Landowners would continue to receive an income from their property, while capital owners would not; yet the moral claims of the former to income are no better than those of the latter. In the second place, the State would be obliged to compensate the owners of existing capital instruments for the decline in value which, as we have already seen, would occur when the item of interest was eliminated from the cost of reproducing such capital instruments. It would likewise be under moral obligation to compensate landowners for whatever decrease in value befell their property as a result of the abolition of rent.

Nevertheless, the practical difficulties confronting the legal abolition of interest are apparently so great as to render the attempt socially unwise and futile. In order to be effective the prohibition would have to be international. Were it enforced in only one or in a few countries, these would suffer far more through the flight of capital than they would gain through the abolition of interest. The technical obstacles in any case would be well nigh insuperable. If the attempt were made to suppress interest on producing capital, as well as on loans, the civil authorities would be unable to determine with any degree of precision what part of the gross returns of a business was pure interest, and what part was a necessary compensation for risk and the labour of management. Should the State try to solve this problem by allowing the directors of industry varying salaries to correspond with their comparative degrees of efficiency, and different rates of insurance-payments to represent the different risks, it would inevitably make some allowances so low as to discourage labour and enterprise, and others so high as to give the recipients a considerable amount of pure interest in the guise of profits and salaries. Should it fix a flat rate of salaries and profits, the more efficient undertakers would refuse to put forth their best efforts, and the more perilous enterprises would not be undertaken. The supervision of expenses, receipts, and other details of business that would be required to prevent evasion of the law, would not improbably cost more than the total amount now paid in the form of interest. On the other hand, if the method of suppression were confined to loans it would probably prove only a little less futile than the effort to abolish interest on productive capital. The great majority of those who were prevented from lending at interest would invest their money in stocks, land, buildings, and other forms of productive property. Moreover, it is probable that a large volume of loans would be made despite the prohibition. In the Middle Ages, when the amount of money available for lending was comparatively small, and when State and Church and public opinion were unanimous in favour of the policy, the legal prohibition of loans was only partially effective. Now that the supply of and the demand for loans have enormously increased, and interest is not definitely disapproved by the Church or the public, a similar effort by the State would undoubtedly prove a failure. Even if it were entirely successful it would only decrease, not abolish, interest on productive capital.[147]

In view of the manifold and grave uncertainties of the situation, it is practically certain that modern States are justified in permitting interest.

_Civil Authorisation not Sufficient for Individual Justification_

This justification of the attitude of the State does not of itself demonstrate that the capitalist has a right to accept interest. The civil law tolerates many actions which are morally wrong in the individual; for example, the payment of starvation wages, the extortion of unjust prices, and the traffic in immorality. Obviously legal toleration does not _per se_ nor always exonerate the individual offender. How, then, shall we justify the individual receiver of interest?

As already pointed out more than once, those persons who would not save without interest are justified on the ground of sacrifice. So long as the community desires their savings, and is willing to pay interest on them, the savers may take interest as the fair equivalent of the inconvenience that they undergo in performing this social service. The precise problem before us, then, is the justification of those savers and capitalists who do not need the inducement of interest, and whose functions of saving and conserving capital are sufficiently compensated without interest.

It is a fact that the civil law can sometimes create moral rights and obligations. For example; the statute requiring a person to repair losses that he has unintentionally inflicted upon his neighbour is held by the moral theologians to be binding _in conscience_, as soon as the matter has been adjudicated by the court. In other words, this civil regulation confers on the injured man property rights, and imposes on the morally inculpable injurer property obligations. The civil statutes also give moral validity to the title of prescription, or adverse possession. When the alien possessor has complied with the legal provisions that apply, he has a moral right to the property, even though the original owner should assert his claim at a later time. Some moral theologians maintain that a legal discharge in bankruptcy liberates the bankrupt from the moral obligation of satisfying his unpaid debts. Several other situations might be cited in which the State admittedly creates moral rights of individual ownership which would have no definite existence in the absence of such legal action and authorisation.[148]

This principle would seem to have received a particularly pertinent application for our inquiry in the doctrine of _præmium_ legale as a title of interest on loans. In the "Opus Morale" of Ballerini-Palmieri can be found a long list of moral theologians living in the seventeenth and eighteenth centuries who maintained that the mere legal sanction of a certain rate of interest was a sufficient moral justification for the lender.[149] While holding to the traditional doctrine that interest was not capable of being justified on intrinsic grounds, these writers contended that by virtue of its power of eminent domain the State could transfer from the borrower to the lender the right to the interest paid on a loan. They did not mean that the State could arbitrarily take one man's property and hand it over to another, but only that, when it sanctioned interest for the public welfare, this extrinsic circumstance (like the other "extrinsic titles" approved by moralists) annulled the claim of the borrower in favour of the lender. In other words, they maintained that the money paid in loan-interest did not belong to either borrower or lender with certainty or definiteness until the matter was determined by economic conditions and extrinsic circumstances. Hence legal authorisation for the common good was morally sufficient to award it to the lender. More than one of them declared that the State had the same right to determine this indeterminate property, to assign the ownership to the lender, that it had to transfer property titles by the device of prescription. And their general position seems to have been confirmed by the response of the Congregation of the Poenitentiaria, Feb., 1832, to the Bishop of Verona, the substance of which was that a confessor might adopt and act upon this position.[150]

And yet, neither this nor any of the other precedents cited above, are sufficient to give certain moral sanction to the practice of interest-taking by those persons who would continue to save if interest were abolished. All the acts of legal authorisation that we have been considering relate to practices which are beneficial and necessary to society. Only in such cases has the State the moral authority to create or annul property rights. In the seventeenth and eighteenth centuries the legal authorisation of a certain rate of interest made that rate morally lawful simply because this legal act gave formal and authoritative testimony to the social utility of interest-taking. The State merely declared the reasonableness, and fixed the proper limits of the practice. The beneficent effect of interest-taking upon society was its underlying justification, was the ultimate fact which made it reasonable, and which gave to the action of the State moral value. Had the taking of interest on loans not been allowed the bulk of possible savings would either not have been saved at all, or would have been hoarded instead of converted into capital. And that money was badly needed in the commercial and industrial operations of the time. Hence the owners of it were in the position of persons who regarded saving and investing as a sacrifice for which interest was a necessary and proper compensation. To-day, however, there are millions of persons who would continue to perform both these functions without the inducement of interest. Therefore, the public good does not require that they should receive interest, nor that the State should have the power to clothe their interest-incomes with moral lawfulness. Inasmuch as the State is not certain that the abolition of interest would be socially expedient or practically possible, it is justified in permitting the institution to continue; but it has no power to affect the morality of interest-taking as an individual action.

_How the Interest-Taker Is Justified_

Although the interest received by the non-sacrifice savers is not clearly justifiable on either intrinsic or social grounds, it is not utterly lacking in moral sanctions. In the first place, we have not contended that the intrinsic factors of productivity and service are _certainly_ invalid morally. We have merely insisted that the moral worth of these titles has never been satisfactorily demonstrated. Possibly they have a greater and more definite efficacy than has yet been shown by their advocates. In more concrete terms, we admit that the productivity of capital and the service of the capitalist to the community, are possible and doubtful titles to interest. A doubtful title to property is, indeed, insufficient by itself. In the case of the interest receiver, however, the doubtful titles of productivity and service are reinforced by the fact of possession. Thus supplemented, they are sufficient to justify the non-sacrifice saver in giving himself the benefit of the doubt as regards the validity of his right to take interest. To be sure, this indefinite and uncertain claim would be overthrown by a more definite and positive title. But no such antagonistic title exists. Neither the consumer nor the labourer can show any conclusive reason why interest should go to him rather than to the capitalist. Hence the latter has at least a presumptive title. In the circumstances this is morally sufficient.

To this justification by presumption must be added a justification by analogy. The non-sacrifice savers seem to be in about the same position as those other agents of production whose rewards are out of proportion to their sacrifices. For example; the labourer of superior native ability gets as much compensation for the same quality and quantity of work as his companion who has only ordinary ability; and the exceptionally intelligent business man stands in the same relation to his less efficient competitor; yet the sacrifices undergone by the former of each pair is less than that suffered by the latter. It would seem that if the more efficient men may properly take the same rewards as those who make larger sacrifices, the non-sacrifice capitalist might lawfully accept the same interest as the man whose saving involves some sacrifice. On this principle the lenders who would not have invested their money in a productive enterprise were nevertheless permitted by the moralists of the post-mediæval period to take advantage of the title of _lucrum cessans_. Although they had relinquished no opportunity of gain, nor made any sacrifice, they were put on the same moral level as sacrificing lenders, and were allowed to take the same interest.

As a determinant of ownership, possession is the feeblest of all factors, and yet it is of considerable importance for a large proportion of incomes and property. In the distribution of the national product, as well as in the division of the original heritage of the earth, a large part is played by the title of first occupancy. Much of the product of industry is assigned to the agents of production mainly on the basis of inculpable possession. That is; it goes to its receivers automatically, in exchange for benefits to those who hand it over, and without excessive exploitation of their needs. Just as the first arrival on a piece of land may regard it as a no-man's territory, and make it his own by the mere device of appropriation, so the capitalist may get morally valid possession of interest. Sometimes, indeed, this debatable share, this no-man's share of the product of industry, is secured in some part by the consumer of the labourer. In such cases their title to it is just as valid as the title of the capitalist, notwithstanding the doubtful titles of productivity and service which the latter has in his favour. First occupancy and possession are the more decisive factors. In the great majority of instances, however, the capitalist is the first occupant, and therefore the lawful possessor of the interest-share.

The general justification of interest set forth in the immediately preceding paragraphs is supplemented in the case of the great majority of capital owners by the fact that their income from this source is relatively insignificant. The average income of the farmers of the United States is only 724 dollars per year, and of this 322 dollars is interest on the capital invested in the farm.[151] Even when we make due allowance for the high purchasing power of farm incomes, due to the lower cost of foodstuffs and house rent, the total amount of 724 dollars provides only a very moderate living. Consequently the great majority of farmers can regard the interest that they receive as a necessary part of the remuneration that is fairly due them on account of their labour, sacrifices, and risks. So far as they are concerned, the justification of interest, as interest, is not a practical question. The same observation applies to the majority of urban business men, such as small merchants and manufacturers. Their interest can be justified as not more than fair wages and profits.

Again, there is a large number of interest receivers who are entirely dependent upon this kind of income, and who obtain therefrom only a moderate livelihood. They are mainly children, aged persons, and invalids. Unlike the classes just described, they cannot justify their interest as a fair supplement to wages; however, they may reasonably claim it as their equitable or charitable share of the common heritage of the earth. If they did not receive this interest-income they would have to be supported by their relatives or by the State. For many reasons this would be a much less desirable arrangement. Consequently their general claim to interest is supplemented by considerations of human welfare.

The difference between the ethical character of the interest discussed in the last two paragraphs and of that received by persons who possess large incomes, is too often overlooked in technical treatises. Every man owning any productive goods is reckoned as a capitalist, and assumed to receive interest. If, however, a man's total interest-income is so small that when combined with all his other revenues it merely completes the equivalent of a decent living, it is surely of very little significance as interest. It stands in no such need of justification as the interest obtained by men whose incomes amount to, say, ten thousand dollars a year and upwards.

Still another confirmatory title of interest is suggested by the following well known declaration of St. Thomas Aquinas: "The possession of riches is not in itself unlawful if the order of reason be observed: that a man should possess justly what he owns, and _use_ it in a proper manner for himself and others."[152] Neither just acquisition nor proper use is alone sufficient to render private possessions morally good. Both must be present. As we have seen above, the capitalist can appeal to certain presumptive and analogous titles which justify practically his acquisition of interest; but there can be no doubt that his claim and his moral power of disposal are considerably strengthened when he puts his interest-income to a proper use. One way of so using it is for a reasonable livelihood, as exemplified in the case of the farmers, business men, and non-workers whom we considered above. Those persons who receive incomes in excess of their reasonable needs could devote the surplus to religion, charity, education, and a great variety of altruistic purposes. We shall deal with this matter specifically in the chapter on the "Duty of Distributing Superfluous Wealth." In the meantime it is sufficient to note that the rich man who makes a benevolent use of his interest-income has a special reason for believing that his receipt of interest is justified.

The decisive value attributed to presumption, analogy, possession, and doubtful titles in our vindication of the capitalist's claim to interest, is no doubt disappointing to those persons who desire clear-cut mathematical rules and principles. Nevertheless, they are the only factors that seem to be available. While the title that they confer upon the interest receiver is not as definite nor as noble as that by which the labourer claims his wages or the business man his profits, it is morally sufficient. It will remain logically and ethically unshaken until more cogent arguments have been brought against it than have yet appeared in the denunciations of the income of the capitalist. And what is true of him is likewise true of the rent receiver, and of the person who profits by the "unearned increment" of land values. In all three cases the presumptive justification of "workless" incomes will probably remain valid as long as the present industrial system endures.

FOOTNOTES:

[142] "Growth of Capital," p. 152.

[143] Cf. Gonner, "Interest and Saving," p. 73; Cassel, "The Nature and Necessity of Interest," ch. iv.

[144] New York, 1907.

[145] "Principles of Economics," II, 42.

[146] Cf. Hobson, "The Economics of Distribution," pp. 259-265.

[147] Cf. Fisher, "Elementary Principles of Economics," pp. 396, 397. However, he does not discuss in this passage the possibility of suppressing interest on productive capital by a direct method.

[148] Cf. Lehmkuhl, "Theologia Moralis," I, nos. 917, 965, 1035.

[149] Vol. 3, pp. 617-629; 2d ed.

[150] Ballerini-Palmieri, loc. cit.; cf. Van Roey, op. cit., pp. 73-75.

[151] Cf. _American Economic Review_, March, 1916; p. 46.

[152] "Contra Gentiles," lib. 3, c. 123.