2. BASIC INTEREST

Orthodox and Marxian economists are agreed that interest is an inseparable concomitant of private ownership of the means of production. "Those who reject communism, community of property, and desire liberty in economic life, must accept an economic system founded upon interest, that is, capitalism." So say all who have hitherto investigated the problem of interest. The investigators differ, indeed, widely in their moral judgement of interest, but that is a matter of secondary importance which does not help to clarify the problem. Whether interest, as the socialists aver, is the result of forcible appropriation, of an immoral abuse of economic power, or whether, on the contrary, the orthodox economists are right in ascribing it to the economic virtues of order, industry and thrift, is of little importance to the dispossessed workers, to the proletariat which has to bear the burden of interest.

In conformity with the above doctrine Marx and his followers are compelled to seek the origin of interest (surplus-value) in the factory or, at least, in the separation of the workers from the means of production; and there, in fact, they claim to have found it.

Nevertheless I shall now proceed to prove that interest has no connection with private ownership of the means of production; that interest is found where no mass of dispossessed workers (proletariat) exists or has existed; that interest has never been determined by thrift, order, industry and efficiency. I shall reject the above theories of capital and show that interest springs from the ancient form of money handed down to us from the times of the Babylonians, Hebrews, Greeks and Romans, and that is it protected by the physical, or legally acquired advantages of that form of money.

Curiously enough Marx also began his inquiry into the nature of interest by investigating money. (*The reason why, in the following pages, I frequently probe weak places in Marx's theory of interest, is simply that, of all the socialistic theories, his is the only one which has any influence upon the political struggles of our time. Marx's theory is for the proletariat a dangerous apple of discord witness the two sections of the German Socialistic party, both holding Marx's theory of interest as a dogma, and at present settling their differences with rifles and hand-grenades.) But unfortunately at the critical moment, in spite of Proudhon's warning, he made a false assumption. Like the orthodox apologists of interest he assumed that money and commodities are equivalents.

(*Two commodities are "equivalents" if neither is in a privileged position in relation to the other, and if they can be exchanged without profit. If, for example, usurers, savers or misers, when considering whether it is more advantageous to hoard commodities or money, are always forced to the conclusion that it is immaterial for their purpose which they choose, then a dollar's worth of gold and a dollar's worth of commodities are equivalents. But if savers and speculators conclude that a dollar's worth of money is for their purpose preferable to a dollar's worth of commodities, then the equivalence assumed by Marx does not exist.)

Through this fatal mistake Marx went astray at the outset.

Marx finds nothing to criticise in money. Money, as adopted by us from the Babylonians, Israelites, Greeks and Romans, is a complete and perfect medium of exchange which has from the beginning brilliantly fulfilled its function. The fact that during the Middle Ages an economic system founded on money, and consequently the division of labour, could not develop, because of scarcity of the money-material; that the prohibition of interest by the Popes paralysed an economic system founded on money - although this prohibition was simply the forcible establishment of the equivalence of money and commodities assumed by Marx - is not sufficient to shake Marx's belief that money is a perfect medium of exchange, that it is a true, universal "equivalent". Needless to say, therefore, that Marx recognises no special form of power founded on money; he is forced to deny that mankind is exploited by a golden "International", composed of speculators and usurers. A speculative scheme on the Stock-Exchange is to him mere cheating, not robbery with violence. The speculator operates by fraud, not force; he is only a thief. Robbery requires the use of force, and force is the attribute, not of the money-magnates, but of the owners of the means of production. Money and commodities are, in short, at all times and in all places equivalents, and it makes no difference whether the money is held by a purchaser buying for his own consumption, or by a purchaser buying as a merchant. In Marx's own words "Gold and silver are not by nature money, but money is by nature gold and silver, witness the coincidence of their natural properties and its functions." (* Marx, Kapital I.II)

Dies Kind, kein Engel ist so rein,
Lasst's eurer Huld empfohlen sein!

This Marxian hymn in praise of gold and of the gold standard has completely diverted the attention of the proletariat from money, and has placed speculators, usurers and rogues under the direct protection of the dispossessed classes. Hence the present tragic farce wherein, throughout the world, "the watchmen at the gates of Mammon's temple have been replaced by the Red Guard".

It is a remarkable fact that in the social-democratic press and propaganda literature the words "interest" and "money" never occur !

It is still more remarkable that although Marx's own formula for the normal process of exchange M-W-M' (Money, Wares, Surplus-Money, buying in order to sell at a profit) is a contradiction of the equivalence he had affirmed between wares and money, he seeks the explanation of the contradiction elsewhere, namely in the long chain of intermediate stages.

This "long chain" is simply the process of production; the chain begins and ends in the factory. The employer is not, says Marx, one of many exploiters, he is the exploiter. Exploitation takes place nowhere but in the pay-office.

(* "True commercial capital is the purest expression of the circuit M-W-M' (Money, Wares, Surplus-Money; buying in order to sell at a profit). And the movement takes place wholly within the sphere of circulation. But since it is impossible to deduce from the circulation alone the conversion of money into capital (the formation of surplus value), it would appear that merchants' capital is an impossibility as long as equivalents are exchanged, that it can therefore originate only through the two-fold advantage gained over both the selling and the buying producers by the merchant who pushes himself parasitically in between them. If the transformation of merchants' money is to be explained otherwise than by the producers being simply cheated, a long chain of intermediate stages is necessary." Capital I.V.)

To explain the contradiction felt by Marx between the formula M-W-M' and the alleged equivalence of money and commodities I shall not require this chain of intermediate stages; I shall dangle my hook before the mouth of interest and draw it directly, visible to all men, from its element. I shall reveal that the force expressed by the formula M-W-M' lies directly in the act of exchange; shall show that money in the form we have blindly adopted from antiquity is not an "equivalent"; that it can circulate only according to the formula M-W-M'; that every nation which, to stimulate the division of labour and to facilitate the exchange of commodities, adopted this form of money, was inevitably forced into capitalism, into an economic system based on interest.

The force that makes money circulate according to the formula M-W-M', that is, the capitalistic quality of money, originates as follows:

1. Money is the essential condition of a highly developed division of labour.
2. The physical properties of the traditional form of money (metal money and paper-money) allow it to be withdrawn indefinitely from the market without material cost of storage; whereas producers (workers), to whom money is essential for effecting exchanges, are compelled, by the constantly increasing losses connected with the storage of wares, to create a demand for money.

(* Wares decay, at different rates indeed, but with some unimportant exceptions (precious stones, pearls, precious metals), they all decay. Care bestowed upon the wares can retard, but cannot prevent their decay. Rust, rot, breakage, damp, drought, heat, frost, worms, flies, ants, moths, beetles, fire, etc. join in the work of destroying wares. If a merchant closes his store for a year, he must write off 10-20 % of his capital because of this decay, in addition to the outlay for rent and taxes. But if the possessor of money closes his safe for a year he suffers no loss. Gold treasure found among the ruins of Troy has not lost demonstrably in weight and is worth 2790 marks per kilogram at the counters of the Reichsbank today.

It is often stated in this connection that as wine becomes more valuable during storage, it is therefore, apparently, an exception to the general rule that the storage of wares always means a loss. Wine, however, (like a few other products) is not a manufactured product but a natural product which, at the beginning of the storage period, has not reached the stage of development at which it becomes fit for human consumption. The juice that flows from the wine-press into the casks is must which only gradually becomes wine. It is this process of converting wine into a finished product that increases its value, not the storage itself. If this were not so, the increase in value would continue, which is not the case. The storage itself causes, as always, expense: rent for storage space, casks, bottles, years of care, breakage, etc.)

3. The merchant can therefore force the possessors of wares to make him a special payment in return for the fact that he refrains from arbitrarily postponing, delaying, or, if necessary, preventing the exchange of wares by holding back his money.
4. Interest on commercial capital is composed of this regular payment which, distributed over the total annual transactions, amounts, as we know from thousands of years of experience, to about 4 or 5% per annum of the capital sum involved.

This special payment, sharply to be distinguished from commercial profit (*Commercial profit is what remains over for the merchant after he has paid the interest on his capital. The profit of a merchant dealing exclusively in merchandise bought on credit is pure commercial profit, for he must hand over the interest spoken of above (No. 3) to his capitalist. He is thus a sort of bank-messenger for his capitalist.), cannot of course be exacted by the ordinary purchaser impelled by his bodily wants (also called consumer), for here the possessor of money can as little postpone or renounce the purchase of wares as the producer can postpone or renounce their sale. Only the merchant approaching the market as owner of money can exact this tribute - the man who buys as a merchant, that is, with the purpose of selling again; the man who is free to buy, but can, if he thinks fit, abstain from buying, without incurring the pangs of hunger; the man, in short, who buys a cargo of wheat although one sack of wheat may suffice for his personal consumption. The merchant is of course in need of commercial profit, and he can obtain it only through the purchase of commodities. The impulse stimulating the merchant's purchases of commodities is not, however, physical necessity, but the wish to obtain the commodities as cheap as possible and, with this object, to use as a weapon every turn of the market and every weakness discoverable in the seller. If the seller's position is weakened by waiting, the merchant lets him wait. In general the merchant does all he can to increase the embarrassment of the seller (producer, worker) and the facts set forth under the above three headings are a constant source of embarrassment. The consumer, under the pressure of personal wants, cannot wait, although his money would allow him to do so; neither can the producer wait, although his personal wants would in many cases allow him to do so. But the possessor of money coming forward as a merchant, the holder of the universal, essential medium of exchange, can wait and thereby embarrass both producer and consumer by holding back the medium of exchange. And in commerce one man's embarrassment is another man's capital. If producers and consumers were not separated by time and place they would be able to manage, as still happens in barter, without the merchant's money; but as things stand at present, the intervention of the merchant, and consequently interest, is, for by far the largest part of production, a necessity.

Because of the latter fact we can leave the consumer's money quite out of our calculation. All commodities and all money pass through the hands of the merchant. For this reason we need here consider only the laws of circulation of the merchant's money.

(*Readers with any difficulty in recognising that merchant's money and consumer's money obey different laws of circulation should reflect a moment upon the mechanism by which savers' money is drawn back into circulation as a medium of exchange.)

Having established these facts I shall next answer the question: What circumstances limit the amount of interest that money can exact for performing the function of exchange ? The reason for considering this question at once is that the answer best reveals the true nature of interest on money.

If money is capital because it can arbitrarily interrupt the exchange of commodities, it will be asked why interest does not rise by the full amount of the advantage we derive from the use of money in our economic system; an advantage measurable by the difference in efficiency between division of labour and primitive production. Similarly the question is justified, why landowners, when fixing their rents, do not in every case apply the law of the "iron wage"; or why the shareholders in the Suez Canal, when fixing the canal dues, are not exclusively influenced by competition of the sea-route around the Cape of Good Hope.

But the tribute which money claims for its use follows other laws than those governing the use of land; it more resembles the tribute exacted by the robber barons of the Middle Ages. Merchants who were forced to use a road which passed the baron's castle were thoroughly plundered; dues of 30, 40, 50% were exacted. But if the merchant had a choice of other roads, the baron became more modest, he guarded his road, improved its surface, built bridges, protected it from other robbers and, if need were, even reduced the toll, to prevent the merchant from avoiding the road altogether.

It is the same with money; money also knows that competitors will appear if it sets its tribute too high.

(I shall prove later than in money-lending there can never be competition. The competitors just mentioned make their appearance, not when money is being lent, but when it is being exchanged for wares).

It is clear that the division of labour could be much further developed than at present. The gold standard is a world standard, so when considering it we must consider the economic system of the whole world. But three-quarters of the inhabitants of the world still cling to primitive production. Why ? Partly because the exchange of commodities by money is too heavily burdened by interest. This expense must cause producers to forego the production of commodities for exchange (wares) in certain branches of their activity, or even in general, and to continue the primitive system of production. The choice between production of goods for home use and wares for market depends on an arithmetical calculation, and the interest with which the production of wares is burdened may often enough lead to preference being given to primitive production. Many German small farmers for example, may prefer to feed pigs with their potatoes and to kill the pigs for their own use, if meat is slightly increased in price because of the interest exacted by the agent of exchange. The small farmer will then produce fewer wares (potatoes for the market) and more goods for his own consumption. For this reason he will require less money.

This part of production must not, even in Germany, be underestimated, and here money must moderate its demand for interest, to avoid forcing modern production back into primitive production. In Asia and Africa the bulk of the population acts like the German small farmer described above.

If, now, the possessors of money demand too large a tribute from the wares, that part of present-day production which oscillates about the marginal utility of the division of labour is abandoned, and primitive production takes its place.

The demand of too large a tribute by money reduces the production of wares (commodities for exchange) and correspondingly increases primitive production. This means that the supply of wares decreases. Prices therefore rise.

For the present we simply register this fact.

Barter has the same effect upon the demand for money, for the medium of exchange, if money claims too high a rate of interest. Money indeed owes its existence to the difficulties of barter. It was invented to overcome these difficulties. But if money claims too high a tribute for performing the work of exchange, barter can often successfully resume competition with it, especially when, as in many parts of Asia and Africa, producers and consumers are not separated by time and place. The more the exchange of products is burdened with money-interest, the easier it is for barter to challenge the supremacy of money. Products sold by barter reach the consumer without the payment of interest. For which of the parties should pay interest ? (* If potatoes are bartered for fish, and each party burdens his product with 10 % interest, the two demands for interest cancel each other. But this by no means excludes the possibility of interest derived from loans, as distinct from interest derived from barter.) It is clear, therefore, that if money is to replace barter, it cannot demand any tribute it chooses, especially as the owners of products can overcome the obstacle to barter, their separation in time and place, by arranging to meet on certain days in certain places (market-days).

(* Barter is not quite so difficult as is usually represented. The difficulty that those who hold the products I need, do not always need my products, or do not need them in just the quantity corresponding to the quantity (often indivisible) of products they have to offer, has been much exaggerated. In reality this difficulty is resolved by the appearance of the merchant. For a merchant who buys everything can sell everything. He can always pay me with what I need. If I bring him an elephant-tusk I can obtain any of the commodities in his shop, and in just the quantity I require. At the present day commerce is carried on in this manner among the German colonists of Southern Brazil. These German colonists seldom receive money for their produce.)

In this way they demolish the foundation upon which money is built, namely the demand for the medium of exchange embodied in the wares. Commodities reaching the consumer by barter are lost to money, just as a gypsy in his cart is a customer lost to the railway.

For our present purpose we need not calculate what fraction of the world's production oscillates between barter-sales and money-sales, what quantity of commodities is excluded by too high a demand for interest from using the medium of exchange. It is sufficient if we have demonstrated that barter is a competitor of money whose chances of success increase in proportion to the amount of interest demanded by money. If interest rises, many commodities are diverted from money-sales to barter-sales, and the demand for money decreases. Prices therefore rise, exactly as with an increase of primitive production. This fact also, we are content for the present simply to record.

Bills of exchange have the same effect as primitive production and barter, if the claims of money are raised too high. Commodities sold by means of bills of exchange also escape the interest-tribute to money - and a high rate of interest stimulates a more extended use of bills of exchange.

Bills of exchange are not, indeed, as safe and convenient as money; in many cases they cannot replace money at all, as is apparent from the fact that they are frequently exchanged (discounted) at the bank for money, although they suffer thereby a deduction. This would not happen if the bill of exchange could always replace ready money. Nevertheless, bills of exchange, particularly in wholesale commerce and as a reserve, have often only small disadvantages in comparison with money. A slight rise in the rate of interest can in such cases cause a preference for bills of exchange.

Money-interest affects the use of bills of exchange as an increase of railway fares affects the use of canals. The higher the rate of interest, the greater is the stimulus to avoid this tribute to money by the use, in commerce, of bills of exchange. For the same reason everything that artificially increases the natural disadvantages of bills of exchange (in comparison with money) must strengthen the position of money and increase the tribute it demands. If the rate of interest is lowered to 5% by the competition of bills of exchange, it will rise to 5.25 - 5.5 - 6%, if the use of bills of exchange is made difficult by alarming news or by a stamp-duty. The greater the insecurity of bills of exchange, the higher is the rate of interest demanded by money; the more heavily bills of exchange are burdened by stamp-duties, the higher are the claims of its competitor, that is, the higher the rate of interest. If we burden bills of exchange with a tax of 1%, the deduction made by the bank when changing a bill of exchange (discount) will rise 1%. If bills of exchange are taxed 5%, the deduction will rise from 5% to 10%. (Unless the other competitors of money, barter and primitive production, intervene).

(For this reason the State is illogical in proposing to increase its revenue by a stamp-duty upon bills of exchange when at the same time it complains of being able to place its loans only at a high rate of interest. The State, as a debtor, should, on the contrary, abolish the tax upon bills of exchange in order to reduce the interest upon its loans. What the State lost in stamp-duties it would gain a hundred-fold by the decrease of interest upon its loans. At the same time the burden of interest upon the whole nation would be lightened).

If, now, instead of a tax, we imagine a premium (of any kind) upon bills of exchange, it is clear that, with such a premium, the circulation of bills of exchange could also be stimulated or retarded; stimulated by raising the premium, retarded by lowering it.

But is not the saving of interest afforded to commerce by the circulation of bills of exchange such a premium, rising and falling with the interest upon money ? The circulation of bills of exchange increases, therefore, in direct proportion to the increase of interest upon money.

But wherever bills of exchange circulate, corresponding quantities of commodities circulate in the opposite direction. These commodities also, are lost to the demand for money. Money has been deprived of them by bills of exchange. There is thus a corresponding decrease in the demand for ready-money. Prices therefore rise in proportion to the increase in the circulation of bills of exchange, and the circulation of bills of exchange increases with the increase of interest upon money. This fact, also, we at present simply record.

Money is not, therefore, an absolute monarch of the market. It has competitors, and for that reason it cannot set the rate of interest as high as it chooses.

The objection may here be made that money is often, particularly in modern cities, indispensable, that in most cases it could even claim the larger share of commodities as payment for performing the function of exchange without causing a return to barter or primitive production. Even if the deduction (discount) were 50%, money could not, in many cases, be replaced by bills of exchange.

And bills of exchange pass only from one trusted hand to another. They are not sufficiently divisible for the needs of retail commerce. They are subject to certain laws and bound to certain times and places. All this greatly restricts their radius of action.

These facts could be used in support of the objection that in all such cases payment for the function of exchange would be much higher than at present, if money really exacts interest because it can arbitrarily postpone the exchange of wares.

But this objection leaves out of account a fact which we learned in the third part of this book, namely that a general rise of prices forces money into the market. A general rise of prices of commodities means for the possessor of money a loss exactly proportionate to the rise of prices, and the only way of avoiding this loss is to offer the money in exchange for commodities. A general rise of prices means, for our traditional form of money, a compulsory circulation similar in many of its effects to the compulsory circulation of Free-Money. During a rise of prices everyone endeavours, by purchasing commodities, to avoid the loss which threatens his money-by passing on the loss to others.

We can therefore say that to raise the tribute claimed by money above a certain level automatically liberates the forces which again reduce the tribute.

The reverse is true when money-interest falls below this limit. Owing to the lessened cost of commerce, the division of labour is introduced where primitive production was hitherto profitable, and money-sales take the place of barter. At the same time bills of exchange lose their attraction (with money at 0% they would disappear). These circumstances, namely an increase in the production of wares (at the cost of primitive production) and a simultaneous increase in the offer of wares for ready money (at the cost of the circulation of bills of exchange) would depress prices and impede the exchange of wares. And the resulting embarrassment of producers would again bring money into use with increased interest.

The forces liberated by money-interest (through its effect upon the interest-free competitors of money, and consequently upon prices) have thus an automatic regulating effect upon interest itself. so that the upper limit of money-interest is also its lower limit. (The fact that the rate of interest on bills of exchange [discount] is subject to great variations, is not, as we shall show later, a proof to the contrary).

Interest upon money must therefore always fall back to the point at which it stimulates or restricts primitive production, barter, or the circulation of bills of exchange.

There is even at the present day a general opinion that the rise or fall of interest is determined by competition among those who lend money.

This opinion is wrong. There is no such thing as competition between money-lenders; competition is here an impossibility. If the money offered for loan by capitalists is drawn from the existing circulation, the capitalists, by lending this money, merely fill the holes they have dug by withdrawing it. Ten, a hundred or a thousand money-lenders mean ten, a hundred or a thousand holes dug by these money-lenders in the path that money has to pursue. The greater the amount of loan-money offered, the larger are these holes. (* In the celebrated crisis which swept over the United States in 1907, it was Morgan who "hastened to the rescue" of the Government with a loan of 300 million dollars. Where did these dollars come from ? They were urgently needed dollars. Morgan had previously withdrawn them from circulation and thereby brought his country into trouble. When the slump in stocks had taken place and the differential gains been pocketed, the rogue generously, out of pure patriotism, offered them to the Government.) Thus, other things being equal, a demand for loan-money must always arise exactly equal to the amount of money that the capitalists have to lend. Under these circumstances we can no longer speak of competition capable of influencing the rate of interest. If this were competition, the fact that changes of residence take place at Martinmas should influence rents. But rents are not influenced, since the increase in the number of those seeking houses is balanced by the increase in the number of vacant houses. These changes of residence in themselves have no influence whatever upon rents, and it is the same with the competition of money-lenders. Money is here merely taking part in a general Martinmas flitting.

But if the money offered for loan is new money, say from Alaska, this new money will drive up prices, and the increased prices will force all who are obliged to borrow money for an enterprise to increase the amount of the loan demanded, by the amount of the rise of prices. Instead of 10,000 dollars, a builder will need 11-12-15,000 dollars to build the same house, so the increased supply of loans due to the new money will automatically cause a corresponding increase in the demand for loans. In this way the influence of the new money upon the rate of interest is soon cancelled. The fact that an increase of the quantity of money in circulation (due to discovery of gold or issue of paper-money) not only does not cause a fall but actually causes a rise in the rate of interest will be explained later.

Competition between money-lenders which could affect the rate of interest does not, therefore, exist; such competition is an impossibility.

The only competition which can restrict the power of money is competition in the three forms already enumerated; primitive production, barter and bills of exchange. An increase in the tribute claimed by interest automatically causes an increase of primitive production, an increase of barter and an increased circulation of bills of exchange. The result is a general rise in the price of commodities which makes the possessors of money more accommodating. (For the better understanding of this sentence we refer the reader to a later chapter "Components of Gross Interest").

Only one straight line can be drawn between two points; the straight line is the shortest, and the shortest - translated into economic terms - is the cheapest.

The shortest and therefore the cheapest road between producer and consumer is money. (With primitive production, goods do, indeed, make a still shorter journey, namely from hand to mouth. But this form of production is less fruitful than the production of wares which results from the division of labour).

The other roads (barter, bills of exchange) which commodities can use to reach the consumer are longer and more expensive. If it were otherwise, if ready money had no advantages, as a medium of exchange, over bills of exchange, why would anyone give $105 in bills of exchange for $100 in money?

But the shortest and cheapest road can be closed by the possessor of money, and he never leaves it open unless he is paid for the advantages of the straight road, money, over the devious roads. If he demands more than this difference, commodities choose the longer road; if he demands less, money is overburdened, that is, commodities which would otherwise have been sold by means of bills of exchange and so forth, now claim ready-money. The demand for money increases, prices fall, and when prices are falling, the whole circulation of money is arrested.

Money claims interest for each time it is used, somewhat as a cab claims a fare. Interest is counted among the general expenses of commerce and collected with these - it is immaterial whether as a deduction from the price paid the producer or as an addition to the price demanded from the consumer. As a rule the merchant can estimate by experience the price which he can obtain from the consumer. From this price he deducts the costs of commerce, wages for his own work (net profit of commerce), and interest. Interest is calculated by the average time, known to the merchant by experience, which elapses between the purchase and the sale of his merchandise. What remains is for the producer. If, for example, the retail price of a box of cigars in Berlin is ten marks, the cigar-manufacturer in Munich of course knows that he cannot claim the full ten marks for himself. He must reduce the price to the cigar-merchant in Berlin sufficiently to enable the latter to pay for carriage, shop-rent and his own services, from the difference between the factory price and the retail price. And something more must remain, since the cigar-merchant is obliged to "put money into his business". This money usually comes directly or indirectly from the banks or savings-banks which of course give it only for interest. The cigar-merchant must obtain this interest from the above mentioned difference in price. If that is not possible with present prices, he waits; and while he waits, the manufacturer and consumer must also wait. Not a single cigar can pass from the factory to the lips of the smoker without paying a tribute to money. Either the manufacturer must moderate the price asked for, or the consumer must increase the price offered. The capitalist regards the outcome with indifference, for in either case he receives his tribute.

Interest is therefore simply added to the other costs of commerce. These are, in general, the reward for work done. The carter feeds his horse, greases the axles, sweats and curses; it is only just that he should be paid. The merchant keeps his shop, pays his rent, broods and calculates; he, also, should receive something. But the banker, the savings-bank, the money-lender-what is their service ?

A king stands beside the barrier; he obstructs the stream of commerce across the frontier and says "The tithe is mine!" A moneylender stands beside his safe, he obstructs the exchange of commodities which requires its contents, and says "Interest is mine King and money-lender render no service, they exact a tribute simply by obstruction, interest is thus, like import-duties, a tribute, with the difference that the king uses import-duties to pay State-expenses, whereas the capitalist keeps the money-interest for himself. Money-interest is our payment for the activity of the capitalist - and this activity consists of putting obstacles in the way of commerce.

Of the three competitors of money that set the limits to money-interest, which is the most important ? In commercially developed countries and in ordinary times, the bill of exchange, in less developed countries, the other two competitors. Suppose, for example, Germany were a self-contained economic State with its own paper-money standard. Without bills of exchange money would then be able to exact a very high tribute before primitive production and barter could intervene with sufficient force to cause the rise of prices necessary for the liberation of money. (* For the better understanding of this statement I again refer to the chapter at the end of this book on "The Components of Gross Interest.") One is even justified in assuming that without bills of exchange, (including, of course, credit sales, deferred payments and so forth), money would, under such conditions, raise the interest-tribute until it very nearly equalled the advantage derived from the division of labour - as is strikingly proved by the abandonment of work in times of crisis. Primitive production and barter are only quite exceptionally, and to a small extent, of use to the unemployed. An unemployed worker can mend his trousers, shave himself and cook his own meals. He can bake his own bread, perhaps teach his own children and, instead of going to the theatre he can write a comedy for his family-if hunger leaves him so disposed.

But if bills of exchange are with us the most important regulator of interest, primitive production and barter are the chief regulators of interest in undeveloped countries such as Asia and Africa, where bills of exchange are little used. That primitive production and barter must be effective regulators in such countries is plain from the fact that in earlier times, when the division of labour had been adopted only by a fraction of the population, for example under the Romans, or in England under Queen Elizabeth, the rate of interest was about what it is at the present day. (The facts are set out at the end of this book).

The constancy of the rate of pure money-interest is most remarkable and justifies the assumption that the three totally different regulators of interest, adapted to such totally different stages of culture, are interdependent and supplementary. For example, a highly developed division of labour, not capable of great further extension, makes barter and primitive production impossible, but produces the degree of culture, the social, legal and commercial organisation, under which the circulation of bills of exchange expands and prospers. The 36 billion marks of bills of exchange which circulated in Germany in 1907 are a better measure of the development of German commerce than the network of railways and other external signs of progress.

On the other hand where the stage of culture excludes the substitution of bills of exchange for money, primitive production and barter are the faithful guardians that prevent money from raising its claim for interest above a certain level.

Let us summarise what has been said in this section:

Money-interest is the product of an independent capital, namely money, and is comparable with the tolls exacted in the Middle Ages by robber barons, and until lately by the State, for the use of the roads. Interest on money is not influenced by interest on so-called real capital (houses, factories) though the converse, as we shall see later, is true. The competition of money-lenders has no influence upon money-interest. Money-interest is limited only by the competition of the other forms of exchange, namely barter and bills of exchange, and of primitive production.

When money is lent, the ownership of the money is changed, but nothing is changed in the money itself; just as nothing is changed if the toll-gate is closed and the toll collected, not by the toll-keeper himself, but by his wife. The substitution of bills of exchange and barter, on the contrary, is not an ineffective personal change of this kind, for it means effective competition to money through the provision of other roads for the exchange of commodities.

Through the rise of prices caused by bills of exchange, primitive, production and barter, the circulation of money is subjected to an economic compulsion which prohibits the abuse, beyond certain limits, of the power of money, even in relation to commodities which cannot be exchanged by way of barter or bills of exchange. It is here the same as with wage-earners whose wages are determined by the proceeds of labour of emigrants even although they themselves do not all threaten to emigrate. (See Part 1, Distribution).

Money-interest is exacted from the wares, that is, directly from the circulation of wares and money. (We have already noted that Marx denied this possibility). Interest upon money is quite independent of the existence of a proletariat deprived of the means of production; it would be no whit less if all the workers were provided with their own instruments of production. Interest on money would in that case be levied by the merchant (possessor of money) from the workers when they were handing him over their produce. It would be levied because the merchant, by withholding his money, could prohibit the exchange of the wares produced by the workers - without direct loss to himself, and with direct, inevitable loss to them, since all wares, with a few unimportant exceptions, lose daily in quantity and quality and, in addition, cause considerable expense for storage and caretaking.

Interest upon money we shall call from now on "basic interest". (* The use of the term basic interest for money-interest, in contrast to the interest on "real" capital (houses, factories, and so forth) will serve to emphasise the distinction between the two forms of interest.)