The Natural Economic Order/Part I/Chapter 14
In making up his accounts, the settler on freeland must enter a charge for interest on his working capital. Interest must be separated from the proceeds of his labour, no matter whether the capital is his own or borrowed. For interest has nothing in common with labour; it is governed by entirely different laws.
And the working landowner must also make this separation of capital-interest from the proceeds of his labour.
If both settlers on freeland and farmers on rented land have to pay the same rate of interest for the necessary capital, it might be imagined that the rate of interest had no effect on rent. But that is an error. With labour and means of production any amount of new land can be created, often in close proximity to cities. And the lower the rate of interest, the easier it is to reclaim waste tracts. The employer demands from the reclaimed land only an amount of interest equal to the rent of a field bought for the same capital outlay. With freeland of the first and second classes freight sometimes swallows up the larger part of the product of labour, but with reclaimed freeland it is capital-interest that absorbs the expected rent. Whatever the nature of the proposed reclamation, whether it is the drainage of the Zuider Zee, recently decided upon, or the cultivation of moorland, or the clearing of virgin forests, or the irrigation of deserts, or the blasting and removal of rocks, the first question is always the amount of interest on the capital required, which is then compared with the rent demanded for land of the same quality. If the rate of interest is high, the comparison Will be discouraging, and the moor will be left uncultivated. If, on the other hand, the rate of interest is low, the undertaking will promise success. If the rate of interest fell from 4 to 1%, for example, many land improvements which cannot be undertaken today would become profitable.
With interest at 1% it would pay to turn the water of the Nile into the Arabian desert, to dam off the Baltic and pump it dry, to put the Luneburg Heath under glass for the culture of cocoa and pepper. With interest at 1% the farmer could also plant orchards where today he cannot do so because of the interest he would have to pay for 5 or 10 years on the capital invested while waiting for the future harvests. In a word, at 1 % it would be possible and profitable to bring all deserts, swamps and moors into cultivation. All the above proposals are not, of course, to be taken literally.)
A fall of the rate of interest would not only enlarge the area under cultivation, it would also enable men to extract double or treble the amount of produce from the present area through extended use of machinery, construction of roads, replacing of hedges by fences, construction of pumping stations for irrigation, drainage of the soil, planting of orchards, provision of appliances to protect the fields from frost and a thousand similar improvements. This, again, would necessitate a reduction of the cultivated area, and make freeland, the great menace to rent, more accessible.
A reduction of the rate of interest would, further, allow transport-facilities for wheat from abroad, (seaports, canals, ocean steamers, railways, silos) to be run more cheaply, which would lower the freight charges on the produce of freeland. And every dollar saved here means a dollar less for rent. Now the interest on the money invested in means of transport constitutes a very considerable part of freight charges. For the European railways in 1888, with an average rate of interest of 3.8%, the ratio between working costs (upkeep of the permanent way, salaries and wages, coal, etc.) and interest was 135:115. Interest, therefore, very nearly , equalled the running costs, so that a reduction of the rate of interest from 4 to 3% would have allowed a reduction of the freight charges of nearly one eighth. Running costs = 4, interest on capital = 4, freight charges = 8 " = 4, " = 3, " = 7 " = 4, " = 2, " = 6 " = 4, " = 1, " = 5 " = 4, " = 0, " = 4
That is to say, with interest at 0% railway freights might be reduced by one half. With ocean freights the ratio of 9 costs to interest is not the same, although here, too, interest plays an important part: ships, working capital, harbours, canals (Panama, Suez), coaling stations, equipment of coal mines etc. - all this demands the regular rate of interest, and this interest is a component of freights, a charge on the labour-proceeds of freeland-settlers of the first and second classes, which are of such decisive importance for wages and rent.
Thus the reduction or elimination of interest would reduce freights by one half, and in this manner freeland would, economically speaking, be brought 50% nearer, the competition of foreign wheat becoming correspondingly keener.
But what would happen to rent if the arable area close at hand were multiplied in this manner beyond the need for it ? What would happen to rent if freeland, which determines wages, could be increased at pleasure, and that too, close at hand, so that the difference between the product of labour of the freeland-farmer and the proceeds of his labour became less and less ? Why emigrate to far-off Canada, to Manitoba, and from there ship wheat burdened with freight costs, to Holland, if we are able to grow the wheat on the soil of our own Zuider Zee? If the rate of interest falls to 3, 2, 1 or 0%, every country will be able to provide bread for its population. The limit to intensive cultivation is set by interest. The lower the rate of interest, the more intensive is the cultivation of the soil.
We can here observe the close alliance that exists between interest and rent. So long as there are wastes, marshes and deserts to reclaim, so long as land can be technically improved, a high rate of interest, the ideal of the capitalist, is at the same time the bulwark of the landowner. If the rate of interest fell to zero, rent would not, indeed, disappear completely, but it would be dealt a staggering blow.
of a fall of interest on the rent of building land is complex. Interest on the building capital is a far larger component of house-rent than is the ground-rent (in the country and in small towns the ground-rent is often less than 5 % of the rent of a house, whereas interest on the building capital in such cases forms 90% of the total rent). A fall of interest to 1 % or 0 % would therefore mean a great reduction of house-rent, and this of course would react on the amount of accommodation claimed by the individual families. The masses which today, because of high house-rents resulting from interest, must content themselves with very inadequate housing accommodation, would demand, and be able to pay for, roomier dwellings. But roomier dwellings mean larger building sites and therefore increased ground-rents. On the other hand a fall in the rate of interest would reduce railway and train fares, and the consequent shifting of the population to the suburbs would tend to counteract the rise of ground-rents in the city. )