The Natural Economic Order/Part V/Chapter 8

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We have just shown that when a general rise of prices (trade-boom, trade-prosperity) is expected, the rate of interest contains, besides capital-interest and a premium for risk, a third component, a hausse-premium. (The money-giver's share in an expected rise of prices.) From this it follows that if we wish to determine the variation in capital-interest, we cannot at once compare the rates of interest at the different periods. To do so would be as futile as to compare money-wages in different countries, at different times, without at the same time taking into account the prices of commodities.

But as the hausse-premium occurs only during a rise of prices and at once disappears when the rise of prices comes to an end, we can assume that the rate of interest during periods of falling prices, many of which are recorded in history, consists only of pure capital-interest and a premium for risk. The rate of interest during such periods is therefore a reliable index of the movements of capital-interest.

A continuous general fall of prices occurred, as is well-known, during the period from about the century before the birth of Christ to about the year 1400.[1] During this long period the monetary circulation was confined to gold and silver (paper-money did not yet exist), and the mines of these metals, especially the Spanish silver mines, were exhausted. Partly owing to prohibitions of interest (though these were often inoperative) the gold handed down from former times circulated with difficulty and was gradually lost. This general fall of prices has been proved by well-known facts and is, indeed, nowhere denied.

In Gustav Billeter's "History of the Rate of Interest in Greece and Rome up to the Reign of Justinian" the following facts are recorded:

p.163: "At Rome from the time of Sulla (82 B.C. to 79 B.C.) we already find the rate of interest fixed in its chief types, namely 4% to 6%."

p.164: "Cicero writes at the end of the year B.C. 62 'Persons of repute, with good credit, find money in plenty at 6%'." Billeter adds "This tacitly expresses a falling tendency and, in fact, we find shortly afterwards a lower rate."

p. 167: " The rate of interest at the time of the civil wars (about the year 29 B.C.) was 12% and even persons with good credit were obliged to pay this rate. From 4-6% the rate of interest had thus reached 12%. But it soon sank back to the old level of 4%."

(The temporary rate of interest of 12% in war time is perhaps sufficiently explained by an unusually high premium for risk. We must also take into account the possibility that in spite of the general scarcity of money, prices may occasionally have increased from local or temporary causes, and that the rate of interest may therefore occasionally have contained a hausse-premium. A change in the rate of circulation of money, caused possibly by a change in the administration of the laws against interest, would suffice to explain such phenomena.)

p.180: In the Roman Empire before the reign of Justinian: "For safe investments we find 3-15%, but 3% is extremely rare; this rate appears plainly to be the lowest even for investments resembling annuities. 15% is altogether rare; 12% is not exactly rare, but not typical; 10% is rare. The typical rate lies between 4 and 6%. Within these limits we can find no differentiation due to place or time; the only differentiation is due to the nature of the investment, 4% being a low rate, 6% quite the normal rate, and 5% the intermediate rate for very safe investments; these rates being also normal for ordinary security. The normal rate of interest when expressly stated is 4-6%, never 12%. The rate of capitalisation is 4% and 3.5%."

p. 180: The time of Justinian (527-565 A.D.) "The conclusions to be drawn are therefore that under special circumstances the rate of capitalisation can rise to near 8% and fall to about 2% or 3%. Examination of the average rates gave 5% as probably normal, generally a little too high; 6%-7% also as an average rate but somewhat high, so that this rate could not be considered quite normal. We can probably assume that a rate a little below 5%, to about 6%, was the true average."

Billeter's researches here come to an end. Let is recapitulate his results:

In Sulla's time (82-79 B.C.) the rate of interest was 4-6%. In Cicero's time (62 B.C.) money was plentiful at 6%. After a short interruption caused by war (29 B.C.) the former rate of interest, 4%, reappeared. During the period of the Roman Empire before Justinian, the usual rate was 4%-6%. During the reign of Justinian, 527-565, the average rate of interest was 5-6%.

What is the meaning of these figures? They mean that during a period of 600 years the rate of interest tended to remain at almost exactly the same level as at present, 1,500 years later. The rate of interest of 4-6% was perhaps slightly higher than at the present day, but the difference can be ascribed to the premium for risk which, in classical times and during the Middle Ages, was higher than at present when legislation, morality and the Church have extended their protection to interest.

These figures prove that interest is independent of economic, political and social circumstances. They give the lie to all the economists who have hitherto attempted to explain interest, particularly to those who hold some form of the theory of productivity (the only current theory with even the semblance of truth). That the same interest is paid for modern means of production such as steam threshing-machines, self-binders, double-barrelled guns and dynamite, as was paid 2000 years ago for reaping-hook, flail, cross-bow or wedge proves plainly enough that interest is not dependent upon the usefulness or efficiency of the means of production.

These figures mean that interest is due to circumstances that made their influence felt 2,000 years ago, and that this influence continued during a period of 600 years in almost exactly the same strength as at the present day. What are these circumstances ? Not one of the current theories of interest gives even a hint in answer to this question.

Billeter's investigations unfortunately end at the period of Justinian and, as far as I know, there is no trustworthy investigation of the following period up to the time of Columbus. It would, indeed, be difficult to obtain reliable data relating to this period, at any rate in Christian countries; for the prohibition of interest became more and more strict, and the monetary circulation, and with it commerce, decreased in consequence of the progressive scarcity of the precious metals. From 1400 onwards begins the depreciation on a large scale, of the monetary standard, and the recognition of pure capital-interest in the rate of interest becomes impossible. For this period Billeter would have had to combine his investigations with statistics of prices, to separate the hausse-premium from the rate of interest.

(The fact that Pope Clement V at the Council of Vienna (1311) could threaten with excommunication lay princes who passed laws favourable to interest shows the weakness of commerce at that date and the infrequency of loan-transactions. It was possible to treat isolated sinners with severity; but if commerce had been brisk and the breaking of the prohibition a daily occurrence, the Pope could not have dared to use such a threat. The proof of this is that when commerce increased, the opposition of the Church to interest at once fell away).

With the expansion of base coinage in the fifteenth century (which had the same effect on prices as the invention of paper-money) and with the opening of the silver mines in the Harz mountains, in Austria and in Hungary, an economic system based on money become possible in many parts of Europe; and with the discovery of America began the great price-revolution of the sixteenth and seventeenth centuries. Prices rose steadily and the rate of interest was burdened with a heavy hausse-premium. It is not surprising, therefore, that during this period the rate of interest was very high.

From Adam Smith's "Wealth of Nations" I take the following figures: In 1546, 10% was fixed as the maximum legal rate of interest. This law was renewed by Queen Elizabeth in 1566, and 10% remained the legal rate until 1624.

At the latter date the price-revolution had almost come to an end and the general rise of prices proceeded more quietly. Simultaneously the rate of interest fell. The legal rate was reduced in 1624 to 8% and, shortly after the restoration of the Stuarts (1660), to 6%. In 1715 it was reduced to 5%.

Adam Smith remarks that the legal regulation of the rate of interest appears always to have followed, not to have preceded, the market rate.

Since the time of Queen Anne (1703-1714) 5% seems to have been above, rather than below, the market rate. This is natural, since at that period the price-revolution was complete. The rate of interest now consisted solely of pure capital-interest and a premium for risk.

"Before the last war", writes Adam Smith, "the Government borrowed at 3 %, and private persons with good credit borrowed in the capital and in many other parts of the kingdom, at 3%, 4 and 4.5%."

That is, exactly the conditions which we have at the present day.

Are further facts necessary to prove that pure capital-interest is a fixed magnitude; that it never falls below 3%, or rises above 4-5:%; that fluctuations in the rate of interest are not due to fluctuations in the rate of basic interest ? When has the rate of interest risen in modern times ? Only in conjunction with a rise in the prices of commodities. After the Californian gold discoveries the rate of interest rose to such a height that, in spite of the increased price of wheat, German landowners with debts drew public attention to their plight. The increased prices of wheat were absorbed by increased demands for wages. And when the Californian mines became exhausted, prices fell, in company with the rate of interest. Then came the war-indemnity from France, high prices and a high rate of interest. After the great collapse in 1873 both prices and the rate of interest fell. During the last periods of economic prosperity, 1897 to 1900, and 1904 to 1907, the rate of interest rose. Prices then fell and with them the rate of interest. At present prices are slowly rising; so is the rate of interest. In short, if one deducts from the rate of interest the hausse-premium due to the general rise of prices, what remains, namely pure interest, is a fixed quantity.

But for variations in the price-level, the rate of interest would have remained at 3 - 4% during the last 2,000 years.

Why does interest never fall below 3 % ? Why does interest never, even temporarily, even for one day in the year, even for one year in the century, even for one century in two thousand years, fall to zero ?

The answer has been given in this book.


I now conclude my exposition of The Natural Economic Order, my aim being, not to furnish detailed solutions of separate economic problems, but to indicate the formulae by which such problems can be solved. No separate economic problem, however, has hitherto been brought to my notice which could not be satisfactorily solved by application of the formulae, Free-Land and Free-Money.

Those who raise objections to The Natural Economic Order should begin by asking themselves whether they do not belong to the numerous class of persons who profess the following creed: "I hate disturbance, I hate civil strife and international warfare. I am steeped in pacifism and only ask to be allowed to live in peace with my fellow-countrymen and all the world - on my income derived from rent and interest."

To the criticism of these good people I reply: "With your objections you are merely searching for some means of escape, whereas in reality there is no escape. Nothing that I say has any effect on you, for your personal wishes, unconnected with the subject under discussion, again and again block the road to understanding. Your perverted impulse of self-preservation resists acceptance of my theory and prevents you from finding the answers to your own objections. Consider the young man to whom Jesus said: 'Go and sell what thou hast and give to the poor, and come and follow me.' But the young man went away sorrowful, for he had great possessions."

Everyone would of course like to enjoy the blessings of civil and international peace, and at the same time live on capital-interest. But those who have discovered that the possibility of doing so is a Utopian fantasy, an illusion of naive minds; those who recognise that war and interest are inseparable, must choose one or other of these alternatives: Either interest and war, or earned income and peace. Such persons, if really animated by peaceful, Christian feelings, will accept with enthusiasm the latter alternative; such persons have the right inner preparation for understanding The Natural Economic Order, it is for them that the book has been written, and it is they also who, undeterred by opposition, will carry through the reforms it proposes.


  1. In the cities of France, Italy and Spain which lowered the monetary standard or, in other words, which practised so-called debasement of the coinage, the fall of prices came to an end sooner.