5. COMPLETION OF THE FREE-MONEY THEORY OF INTEREST

We have called money basic capital because it prepares the road for so-called real capital, and asserted in this connection that real capital owes its interest-earning capacity solely to the fact that money, through forced crises, forced unemployment, that is, through fire and sword, prepares the market conditions which enable real capital to exact interest equal to basic interest. But we must also be able to prove that interest upon real capital is so governed by basic interest that it must necessarily again conform to basic interest if, for any reason, it temporarily deviates therefrom.

For we assert that demand and supply determine interest on real capital - and thereby recognise that interest is subject to many influences.

What we have to prove, therefore, is this: That if from other causes interest on real capital rises above basic interest it must inevitably, from the nature of things, fall again until it reaches the level of basic interest. And conversely, if interest on real capital falls below basic interest, it will be automatically raised again to this level by money. Basic interest is therefore always the maximum and the minimum return usually to be expected from real capital. Basic interest is the point of equilibrium about which interest on all forms of real capital oscillates.

But if this is so, we must also be able to prove that if the artificial obstacles to the formation of so-called real capital, caused by the present form of money, are removed, the supply of such capital, resulting from the now untrammelled work of the people, will sooner or later, without the intervention of any other agent, cover demand in the sense that interest throughout the world, wherever there is free-trade and freedom of movement, will fall to zero.

(Capital interest is an international quantity, it cannot be eliminated by one country alone. If, for instance, houses in Germany yielded no interest, and such interest were still obtainable in France, no houses would be built in Germany. German capitalists would send their surplus across the frontier by purchasing French bills of exchange with the proceeds of which they would build houses in France).

We must therefore prove:

1. That the power and means exist of drowning interest in a sea of real capital, within a reasonable time.
2. That the impulse or will to produce real capital, such as tenement-houses, factories and ships, does not decrease when such things no longer yield interest.

That interest on real capital can at any time deviate in an upward or downward direction from basic interest is easily proved as follows:

Let us suppose that three-quarters of mankind are carried off by the plague. The present ratio between proletariat and real capital would be fundamentally changed; to every tenant there would be four houses, to every farm labourer four ploughs, to every gang of workmen four factories. Under these circumstances real capital would no longer yield interest; the competition of house-owners would depress rents, and the competition of employers would reduce profits to such an extent that probably not even the full costs of upkeep and amortisation could be recovered.

During the years of crisis from 1890 - 1895, for example, it was possible to inhabit, rent-free, the finest houses in the provincial capital of La Plata in Argentina. The house-owners were unable to obtain even enough rent to cover repairs.

Under such circumstances only one form of capital would continue to exist, namely money. For although all other capital objects would have lost the power of exacting interest, money would have no need to reduce its claim for interest, even if 99% of the population had died out. The produce of the interest-free instruments of production, the wares, would still be compelled to pay the same interest for their exchange, just as if nothing had happened.

The case we have supposed throws a vivid light upon the nature of money and upon the relation of money to real capital.

If we assume that the quantity of money in circulation was unaffected by the plague, the disproportion between money and commodities would cause a rise of prices, but the relatively large stock of money would not reduce interest, since, as we have proved, competition between money-lenders is impossible. Gross interest would even be increased by the rise of prices. (See later, Chapter 7, "The Components of Gross Interest").

Under the circumstances we have imagined it is obvious that no one would give money for the construction of a factory. Money would be given for that purpose only when, partly through an increase of population, partly through fires and other accidents, to which must be added the passage of time, the supply of real capital had so decreased that the original ratio of real capital to population, and with it the level of basic interest had been reached. Why this must happen we have already explained.

Thus interest on so-called real capital can at any time, as the result of exceptional circumstances, fall below basic interest; but the natural agents of destruction to which real capital is subject (see the annual statistics of shipwrecks and ships broken up, railway accidents, fires, and the sums annually written off for depreciation in every factory), in conjunction with the circumstance that money permits no production of new real capital until the interest upon existing real capital reaches the level of basic interest, necessarily re-establish the former relation between the demand and supply of real capital.

But we must also prove that interest upon real capital cannot permanently rise above basic interest.

That it can rise above basic interest under special circumstances, and that it has actually done so for decades at a time in countries with relatively large immigration, we readily admit. For this is a conclusive proof of the theory of interest whereby demand and supply alone determine whether real capital produces interest, and the amount of interest it produces.

The amount of capital in houses, instruments of production, shops, railways, canals, harbours and so forth that fans to each workman's family in the United States is unknown to me. It may be $5.000 or it may be $10,000. Suppose it is only $5,000. To provide shelter and means of production for the 100,000 immigrant families annually landing in America, the Americans would then have to provide 500 million dollars annually in new houses, factories, railways, ships.

If an German workmen were to emigrate to the United States, everything needed to employ and house these masses would be wanting. The want of factories, machinery and houses would depress wages and at the same time enormously increase house-rent. Interest upon real capital would rise high above basic interest.

Usually this process is completely concealed from immediate observation, since capital goods rise in price with the rise in the yield of interest. A house which can be sold for $10,000 because it brings in $500 interest, rises in price to $20,000 if interest on the house rises to $1.000. Arithmetically the house then yields only 5%. For it is basic interest that serves as the basis for calculating the price.

We must next be able to explain the fact that every rise in the rate of interest upon real capital above basic interest inevitably, naturally and automatically causes a steadily increasing new production of houses, factories, etc., and that, under pressure of this supply, the interest on such things soon falls back to the point of equilibrium or limit, namely basic interest - as automatically as, in the opposite case, it rises to this Emit. We must prove that there are no economic or psychological obstacles to interfere with this process. The will to work, the power of working and natural resources must at all times and in all places suffice to provide capital in such quantities that the supply of this capital is bound to reduce interest to the limits of basic interest.

(Flürscheim's (* "The Economic Problem," Michael Flürscheim, 1910) statement that "Interest is the father of interest" is no absurdity. Flürscheim means that the burden of interest prevents the people from producing the amount of real capital necessary for the elimination of interest; just as rent prevents peasants from buying the rented land they occupy.

But the statement that "Interest is the father of interest" also implies that rising interest must cause an unlimited further rise of interest. If, as Flürscheim claims, the law of falling bodies is applicable to interest when interest begins to fall, the law must apply in the reverse direction when interest begins to rise. This contradiction was insoluble by the methods of investigation employed by Flürscheim).

That such quantities of real capital are forthcoming we see from the fact that the United States, in a comparatively short period of time, have passed from demand to supply in the international capital market; that they have carried out the great undertaking at Panama with their own resources; that they have rescued many a princely house in Europe from ruin with their daughters' dowries; that they are seeking other outlets abroad for their surplus capital. This proof is all the more convincing, first because the great influx of destitute immigrants into the United States created an abnormal increase of demand for real capital, and secondly because the formation of real capital was frequently interrupted by devastating economic crises. Such is the fact; we now need the explanation.

The interest produced by so-called real capital stimulates saving, and the higher the interest, the greater is the stimulus to saving. It is indeed true that the higher the interest, the greater also is the burden of interest, and the more difficult it is for those who have to pay interest to create, by saving, a capital of their own. But in the present order of things new capital is only to a small extent formed from the surpluses of the earning, interest-paying classes.

New capital is chiefly formed from the surpluses of capitalists, and these surpluses naturally increase with the increase of the capitalists, income, that is, with the increase of interest upon capital.

We must here keep the following fact in mind:

The income of the earning class increases if interest falls, whereas the income of the capitalistic class increases if interest rises. Employers' income consists partly of the wages for their work, and partly of interest upon capital; in their case, therefore, the effect of changes in the rate of interest depends upon what proportion of their income is derived from interest, and what proportion from wages for their work.

The earning class is, therefore, better able to save when interest is falling, and the capitalistic class when interest is rising. It would be a fallacy, however, to conclude from this that the function of saving, as a whole, and the increase of capital, is unaffected by the fact that interest rises or falls.

For in the first place an increase of income has an effect upon the spending, and therefore upon the saving of a capitalist, different to its effect upon the spending and saving of a worker. With the capitalist the increase of income does not meet so many wants awaiting satisfaction, often for decades. The capitalist finds it easier to save the whole increase of his income, but the worker's impulse to save only comes after the satisfaction of many other needs.

Again the capitalist's only method of providing for his children is saving. With the birth of the third child he must increase his capital if he wishes to make the mode of life possible for his children, for which, by his example, he has educated them. The worker has no such cares, he need not bequeath anything to his children, for they will support themselves by work.

The capitalist therefore must save; he must increase his capital (although this increase depresses interest) to provide his increasing offspring with the life of ease befitting their station. And if, as a rule, he must save, we can assume that he will also, as a rule, employ the surplus derived from an increase of interest to create new capital.

From this we can conclude that an increase of interest, though it always takes place at the expense of the workers and small savers, must nevertheless increase, rather than diminish, the sums available in a country for the creation of new real capital. An increase of interest increases the forces that depress interest. And the higher the interest, the greater is this pressure.

We cannot indeed give examples of this; statistical proofs of what we have just stated are not possible, for the statistics available under the gold standard are unsuitable. If Carnegie had given his workers 20% or 50% more wages he would probably never have reached his first million. In that case would the steel-factories (built by Carnegie from his savings) which increased the supply of real capital, drove up wages and depressed interest, have been built from the savings of the workers ? Would not the workers, perhaps, have preferred to spend the 20% or 50% increase of wages on sufficient food for their children, on healthier houses, on soap and baths ? In other words, would the workers, collectively, have brought together as great a surplus for the construction of new steel-works as Carnegie alone, with his modest personal wants ? (To preserve the existing ratio between the demand and supply of real capital, the workers would even have to produce a much greater mass of real capital. For their present scanty wages cause an appalling infant mortality which the increase of wages would have reduced. The resulting great increase in the number of workers would have increased the demand for means of production).

We are at first inclined to answer the above question with a categoric negative - and thereby to commit a gross error. For what did Carnegie achieve by the multiplication of real capital, by his personal thrift? He again and again reduced the interest on real capital below basic interest and thereby caused crisis after crisis. The good man in this way destroyed or prevented the formation of as much real capital as, by wise management, he brought into existence. If Carnegie had distributed the surplus of his undertakings to the workmen in the form of increased wages, it is true that only the smaller part of these increased wages would have been saved for new real capital; the rest would have been dissipated in orgies of pork and beans, or soap. But on the other hand the intervals between one crisis and the next would have lengthened. The workers would consequently have lost less by forced unemployment, and would have made up for the greater sum spent. The effect upon interest would have been the same; that is, without Carnegie's thrift, the supply of real capital would have been the same today as with his thrift.

The difference between what Carnegie could personally save and what the workers could have saved is regularly and inevitably destroyed by economic crises.

The capitalist's impulse of self-preservation and the fact that he must assure the future of his children force him to provide a surplus and, what is more, an interest-bearing surplus. He must provide this surplus even if his income decreases; indeed, his impulse of self-preservation bids him increase the strictness of his saving in direct proportion to the decline of interest. If, for example, a capitalist wishes, by increasing his capital, to compensate the loss of income caused by a fall of interest from 5 to 4%, he must increase his capital one-fifth by economising on his personal expenses.

If interest rises, capitalists can save; if interest falls, they must save. In the first case the amount saved will, indeed, be greater than in the second case, but that does not limit the importance of the fact for the determination of interest. It remains true that the greater the fall in interest, the more the capitalist must, by reducing personal expenses, draw on his income to form new real capital even although it is precisely the increase of real capital that has caused his difficulty.

We who assert that in the nature of things real capital must multiply until it destroys itself or, in other words, until interest disappears completely, can see in the above fact a conclusive proof of what we have yet to show, namely that when interest falls, the will and need to create new interest-depressing capital enterprises must continue to exist - on condition, of course, that we remove the obstacles to the creation of such enterprises, caused by our traditional form of money.

If the rate of interest falls from 5 to 4%, the capitalist must, by reducing his personal expenses, raise his capital from 8 to 10. If interest falls from 5 to 4%, the capitalist will therefore renounce his plan of a summer residence for his family and build, instead, a tenement-house in the city. And this new tenement-house will still further depress the interest upon house-capital. For capital in general it would be better if the capitalist built the summer residence and not the tenement-house. For the individual capitalist, however, the opposite is true.

If interest (under the pressure of the new tenement-house) falls further from 4 to 3%, the capitalist must still further reduce his expenses. Instead of paying, as he had contemplated, the debts of a princely son-in-law, he must give his daughter to a building-contractor. The tenements erected with the dowry would then produce interest, but at the same time still further depress the rate of interest. And so on.

The nature of the capitalist, his impulse of self-preservation - the impulse in which the human will is strongest - makes it certain that the greater the fall of interest, the greater must be the percentage of the capitalist's income set aside by him to create new real capital which, in its turn, still further depresses interest.

Expressing what has been said in figures we have the following picture:

and the greater the fall in the rate of interest, the greater is the sum destined for new capital enterprises which depress, and finally eliminate interest. Capitalists would save from necessity, and workers would save because they could now at last satisfy the impulse of saving. Thus the nature of new real capital forces it, as it were, to commit suicide.

The greater the fall in interest, the greater the amount of real capital created which, in its turn, depresses interest. Possibly the physical law of falling bodies is applicable to interest - but only, of course, after removal of the obstacles which the traditional form of money opposes to the creation of such masses of real capital.

The objection has here been raised that if real capital were free from interest no one would build a tenement-house, factory, brick-oven, etc. Savings would be spent upon pleasure-trips instead of upon flats in which others would live in rent-free dissipation.

But more is here asserted than the expression "free from interest" implies. House-rent is only partly composed of interest. Interest on the building capital is a component of house-rent, but there are other components such as: ground-rent, repairs, depreciation, taxes, insurance, the expense of cleaning, heating, care-taking, furnishing, and so forth. Interest is often 70 or 80% of the rent, but often, in the centre of a city, as little as 20 or 30%. Even when interest disappeared completely from house-rent there would always remain expenses enough to prevent everyone from claiming a palace.

It is the same with the other forms of real capital, which cause their users, besides interest, other expenses such as upkeep, depreciation, insurance, ground-rent, taxes, etc. - expenses which generally equal or exceed the amount of interest. House-capital is here, indeed, in a relatively privileged position. In 1911 2,653 German limited liability companies with 9,201,313,000 marks capital wrote off 439,900,475 marks as depreciation, that is, on the average about 5%. But for the annual renewals (in addition to improvements) nothing would be left of such capital in 20 years.

But quite apart from this, the objection does not hold good, especially in the case of persons who have up to the present lived from unearned income.

These persons will, as we saw, be forced to greater thrift by the decrease of capital-interest, and they will be still more careful, when interest disappears entirely, to consume as slowly as possible their remaining investments, which will then no longer be capital. And this they can achieve by spending for their personal requirements only part of the sum annually written off their capital as depreciation, and by devoting the remainder to the construction of new houses, ships, etc. which will, indeed, yield no interest, but will at least give them security against immediate loss. If they keep the money (Free-Money) they will, in addition to receiving no interest, suffer an actual loss. By building new houses they will avoid this loss.

A shareholder in the Norddeutscher Lloyd, for example, who, under the Free-Money reform, will receive no dividends, will not ask the company to pay out his full share of the sums set aside for depreciation (with which the company at present builds new ships). He will content himself with part of his share in order to postpone as long as possible the day on which the last dollar of his investment will be repaid him. New ships will always, there fore, be built, even although, instead of interest, they only produce the sums written off for depreciation. It is true that even so the last ship of the Norddeutscher Lloyd would in time fall to pieces if others did not take the place of the ex-capitalist living from the amounts written off his capital; that is, if the workers, relieved of the burden of interest, did not assume the function that the ex-capitalist could no longer fulfil. New savers would replace the part of the depreciation consumed by the ex-capitalist - though only, indeed, with the same purpose of being able to live upon and consume in old age the sums written off for depreciation.

Houses, factories, ships, etc. need not, therefore, produce interest to attract from all sides the means for their production. After the introduction of Free-Money these things would prove to be the best means of storing savings. By investing their savings in houses, ships, factories, which bring in no interest but resolve themselves again into sums set aside for depreciation, savers would avoid the expense of storage and caretaking - and that too from the day they made the surplus to the day on which they consumed it. As decades often lie between these two dates (for example in the case of a youth saving for old age) the advantages of such investments to the savers are obvious.

Interest is, no doubt, a special attraction for the saver. But this special attraction is not necessary, for even without it the impulse of saving is sufficiently strong. Interest, again, may be a great incentive to saying, but the obstacles to saving caused by interest are also great. Because of the burden of interest, saving at present means, for the majority of mankind, severe privation, renunciation, hunger, cold, semi-suffocation. Precisely because of the interest which workers must raise for others, the proceeds of labour are so reduced that for most workers saving is an impossibility. So if interest is an incentive, it is still more an obstacle to saying. Interest limits the possibility of saving among workers to small classes, and the capability of saving to the few individuals in these classes with courage enough to face continual privation. If interest falls to zero the proceeds of labour rise by the whole amount of the burden of interest, and the possibility and capability of saving are correspondingly increased. It is certainly easier to save $5 from $200 than from $100. If with $100 wages a man, partly because of the stimulus of interest, deprives his stomach of $10 for his own and his children's benefit, with $200 wages he could probably, from the natural impulse of saying, set aside, if not $110 at any rate much more than $10.

Saving is practised throughout nature without the incentive of interest. Bees and marmots save, although their stores bring them no interest and many enemies. Primitive peoples save although interest among them is unknown. (* African negroes, Red Indians, Hottentots, have never obtained interest from their savings, yet none of them would exchange these savings (provisions) for the savings of our proletariat (savings-bank book).) Why should civilised man act otherwise ? Men save to build a house, they save for marriage, illness, old age; and in Germany they even save for masses for the repose of their souls and for a burial fund, although burial brings the corpse no interest. And when did the proletariat begin to save for the savings-bank ? Did the money formerly hidden in mattresses yield interest ? Yet such a form of saving was customary until 30 years ago. Winter provisions, too, bring no interest but much annoyance.

(* That the prohibition of interest by the medieval Popes prevented the growth of an economic system based on money (the scarcity of the precious metals was a contributing cause), shows that the impulse of saving was obeyed even without interest. The savers hoarded the money.)

Saving means that the saver produces more wares than he consumes. But what does the individual saver, or the population, do with this surplus of wares ? Who keeps the wares and who pays the cost of keeping them ? If we answer here: "The saver sells his surplus produce", we merely transfer the problem from the seller to the buyer. To the population in general this answer does not, obviously, apply.

If a person saves, that is, produces more wares than he consumes, and finds someone to whom he can lend his surplus on condition that after a certain period his savings are to be given back without interest but without loss, the saver has concluded an extraordinarily advantageous bargain. For he avoids the expense of upkeep of his savings. He gives 100 tons of fresh wheat as a young man and receives 100 tons of fresh wheat, of equally good quality, in his old age. (See the Story of Robinson Crusoe, p. 365).

The simple restitution, without interest, of the borrowed savings represents, therefore - if we leave money out of the account - a considerable piece of work done by the debtor or borrower, namely the payment of the expense of upkeep of the borrowed savings. The saver himself would have had to bear this expense if he had found nobody to take charge of his savings. True, the borrowed goods do not cause the borrower any expense of upkeep since he consumes them in his undertaking (example: borrowed seed-wheat). But when loans are made without interest, the borrower transfers this advantage, which is really his, to the lender, without receiving any return service. If lenders were more numerous than borrowers, borrowers would claim payment for this advantage in the shape of a deduction from the amount of the loan (Negative interest).

Thus from whatever view-point the problem of loans without interest is examined, no obstacles of a natural order can be discovered. On the contrary, the greater the fall of interest, the greater the incentive to the multiplication of houses, factories, ships, canals, railways, theatres, crematoria, tramways, lime-kilns, blast-furnaces, etc.; and the work upon such enterprises reaches its highest intensity when they produce no interest at all.

To Boehm-Bawerk it is obvious that a "present good" must be more highly valued than a "future good", and upon this assumption his new theory of interest is based. But why is this assumption supposed to be obvious ? Boehm-Bawerk himself gives the somewhat strange reply: Because wine can be bought which becomes annually better and dearer in the cellar. (* Compare footnote p. 374.) But because wine-and among all commodities Boehm-Bawerk discovered no second with this wonderful property - automatically, it seems, without labour or costs of any kind and without, therefore, costs for storage, becomes annually dearer and better in the cellar, do the remaining commodities, potatoes, flour, powder, lime, hides, wood, iron, silk, wool, sulphur, ladies' costumes, also become annually better and dearer. If Boehm-Bawerk's explanation is correct, we have here a complete solution of the social problem. We need only pile together sufficient products (the inexhaustible fertility of modern production and the army of unemployed workers provide an excellent opportunity), and the whole population can, without work of any kind, live from the proceeds of these commodities which will constantly become better and dearer (a difference in quality can always, in economic life, be traced to a difference in quantity). It is indeed not easy to see why one should not make the opposite deduction: Because all commodities, with the exception of money and wine, soon fall into decay, therefore wine and money fall into decay! Yet up to the time of his death (1914) Boehm-Bawerk was the foremost authority on interest, and his works were translated into many languages.

The anxieties of savers do not in themselves concern us, as our sole purpose is to establish the fundamental theory of interest; but it may perhaps contribute to the elucidation of our theory if we examine these anxieties more closely.

Let us assume, therefore, that after gold has been removed from the path of circulation of commodities someone wishes to save in order to live without work or care in his old age. The question at once arises: What form will he give his savings ? The plan of piling up his own produce or the produce of others may at once be dismissed; and a hoard of Free-Money is also impossible. The first practicable solution would be loans without interest to employers, artisans, farmers and merchants who wished to enlarge their businesses; and in the case we are considering, the longer the term of repayment, the better. The saver of course runs the risk of not being repaid his money. To eliminate this risk, however, he can compel his debtor to pay a special contribution to cover risk, such as is added to the interest on every loan at the present day. But if the saver wishes to be quite secure from such loss he will use his savings to build, say, a house for letting. With the sums annually written off for depreciation, which are at the present day also included in house-rent, the tenants will gradually repay the whole cost of building. And the form of building chosen will be determined by the amount of depreciation the saver wishes to receive annually. He will build a stone house if he wishes to receive 2% depreciation annually; he will put his savings into shipbuilding if 10% depreciation suits him better; or, if he needs his money soon, he can buy a powder-factory, when the sum set aside for annual depreciation will be 30%. In short, he will have ample choice.

Just as the toil that the children of Israel, 4,000 years ago, put into the building of the Pyramids becomes living again today, without loss, if the stones are rolled from the summit, so the savings built into an interest-free house will appear again, undiminished, in the rent, in the form of sums annually set aside for depreciation. The saver will not, indeed, receive interest, but he will retain the priceless advantage of carrying his surplus without loss, through the period in which he does not require it, to the period in which he desires to use it.

A person who builds a tenement-house with the purpose of letting it free from interest is thus in the same position as a person who lends money without interest against a pledge and stipulates for repayment by instalments.

In practice, no doubt, small inexperienced savers, to avoid trouble and anxiety, will hand over their savings to life-insurance companies which will build the houses, ships, factories, etc. With the sums set aside for depreciation on these objects, the insurance companies will then pay each saver a life-annuity; healthy men 5,% of the deposit; old people or invalids 10% or 20%. Under these circumstances there will be no expectations from wealthy uncles. The coffin-lid will be nailed down with the last nail of the property. The saver will begin to consume his property when he ceases working, and at his death it will be consumed completely. Under such circumstances, however, no one is forced to provide for his posterity. It is provision enough to liberate their work from the burden of interest. An individual liberated from the burden of interest no longer needs an inheritance, just as the widow's son at Nain no longer needed crutches. Everyone earns his own goods and chattels, and finances, with his surplus, the aforesaid insurance-companies. Thus the annual depreciation upon houses, ships, etc. paid to the old will be constantly replaced, through new construction, by the savings of the young. The expenditure of the old will be met by the savings of the young.

A worker at present pays interest upon about $12,500 in houses (* Germany with about 10 million workers (that is, those who live from the proceeds of their work) pays interest upon a capital of about 500 billion marks (including the land). A single worker therefore pays interest upon about 50,000 marks or $12,500.), means of production, national debt, railways, ships, shops, hospitals, crematoria, etc. That is, he has to pay $500 annually either directly, as deduction from wages, or indirectly in the prices of commodities, as interest upon capital and rent upon land. Without interest upon capital, the proceeds of his labour would be doubled. If such a worker, with $1,000 wages, at present saves $100 annually, it would be a long time before he could live on his capital, especially as his saving, in the present order of things, causes periodic crises which again and again force him to have recourse to his savings, or possibly even result in their total loss, through the failure of his bank in the crisis his saving had provoked. But if, through the elimination of interest, the worker's income is doubled, he can, in the case we have supposed save annually $1,100 instead of $100. Even though his savings are not "automatically" increased by interest, the difference, at the end of the years of saving, between the amount he will have saved, without interest, and the amount he could have saved, with interest, will be so great that he will rejoice at the disappearance of interest. For the difference will not be simply in the ratio 100 (plus interest) to 1,100; it will be much greater, since the worker will not be compelled, in times of unemployment, to have recourse to his savings.

One more objection which has been raised against the possibility of equalising demand and supply in the capital market we have still to refute. It is objected that, since production can be cheapened by more or better machinery, every employer will make use of the fall in the rate of interest to enlarge and improve his factory. From this the deduction is made that the fall of interest and, still more, the complete absence of interest, would create in the capital market a demand from employers too great for supply ever to cover, with the result that interest could never fall to zero.

Otto Conrad (* Jahrbuch für Nationalökonomie und Statistik, Jena, 1908.) says for example: "Interest can never completely disappear. For suppose a piece of machinery, say a lift, is to replace five workmen with a total annual wage of 4,000 kronen. With interest at 5,%, the cost of the lift must not exceed 80,000 kronen. Now suppose that the rate of interest falls, say to 0.01 %. The lift could then be profitably installed even if it costs 40 million kronen. If interest sinks to zero or near zero, the utilisation of capital would increase to a degree that cannot even be imagined. The most complicated and expensive machines could be installed to save the smallest piece of manual labour. Interest could be kept at zero only by the existence of infinite capital undertakings. No special proof is needed that this condition is not fulfilled to-day, and that it can never be fulfilled."

To this argument against the possibility of loans without interest we reply as follows: Among the expenses of a capital undertaking must be reckoned, in addition to interest, the cost of upkeep, which is always, especially in industrial undertakings, extremely high. A lift which cost 40 millions would certainly cost, for upkeep and depreciation alone, 4-5 millions. The lift would thus have to replace, not, as Conrad imagined, five workmen but 4,000 workmen with wages at 800 kronen - even if not a penny of interest were required. With 5% for upkeep and 5% for depreciation, the lift to replace five workmen with wages at 800 kronen, must not cost more than 40,000 (instead of 40 million) kronen in interest-free money. If the cost of construction exceeds this amount, the cost of upkeep is not covered, the lift is not built, and there is no extra demand upon the loan-market.

Where little or no depreciation takes place, as for example with certain forms of permanent land-improvement, the indefinite increase of demand for interest-free loans will be prevented by the wages claimed by the workers. The problem here merges into the problem of rent upon land. Nor will any private individual undertake to blast rocks and clear forests if this work brings him no advantage. If he builds a factory or tenement-house, he has the advantage of gradually receiving back his money in the sums annually set aside for depreciation. The expectation of receiving back the money was, in fact, the motive for building the tenement. Being mortal he wishes to reap before his death what he has sowed in the sweat of his brow; he can therefore undertake only such works as resolve themselves into depreciation. If he and his works disintegrate at the same rate he has judged correctly from the individual standpoint. Works of eternal value are not for the individual, who is mortal, but for the people, which is eternal. The people, which exists eternally, counts upon eternity and blasts the rocks, although this work yields no interest and does not resolve itself into depreciation. At death's door the old State-forester draws up a plan for the reafforestation of a waste. Such works are for the State. But the State will undertake them only to the extent to which interest-free money is placed at its disposal. Such undertakings are not, therefore, an obstacle to freedom from interest, they are the consequence of it.

Those who raise this objection also forget that a simple extension of an undertaking (10 lathes instead of 5; 10 brick-moulders where 5 were at work) requires a corresponding increase in the number of workmen employed. An increased demand for money for extending a factory therefore always means a simultaneous increase of demand for workers who, by increasing their claims for wages, cancel the gain expected by the employer. An employer cannot by simply extending his factory expect any special advantage from loans free of interest, so the disappearance of interest will not stimulate him to create an unlimited demand for loans. The limits to such loans will be set by the wages claimed by the workers, who alone profit by the decrease of interest. And this is natural; for the relation between employers and workmen is fundamentally the same as the relation between those who lend money (pawnbrokers) and those who borrow money (their customers) against a pledge. (* Eugen Düing said long ago: "Employers let their factories to the workmen for a certain charge." Dühring calls this charge for letting, profit. Marx calls it surplus-value. We call it simply interest.) Here also the fall of interest is to the advantage of the borrowers.

The employer does not buy work, or working hours, or power of work for he does not sell the power of work. What he buys and sells is tie product of labour, and the price he pays is determined, not by the cost of breeding, training and feeding a worker and his offspring (the physical appearance of the workers is only too conclusive a proof that the employer cares little for all that), but simply by the price the consumer pays for the product. From this price the employer deducts interest on his factory, cost of raw material, including interest, and wages for his own work. The interest always corresponds to basic interest; the employer's wage, like all wages, follows the laws of competition; and the employer treats the raw material he intends his workmen to manufacture as every shopkeeper treats his merchandise. The employer lends the workmen machinery and raw material and deducts from the workers' produce the interest with which the raw material and machinery are burdened. The remainder, so-called wages, is in reality the price of the product delivered by the workmen.

Factories are simply, therefore, pawn-shops. Between a pawnbroker and Krupp there is no difference of quality but simply a difference of size. With wages for piece-work the nature of the contract is obvious. But all wages are fundamentally wages for piece-work, since they are determined by the piece of work the employer expects to obtain from the individual worker.

But as well as simple extension of enterprises, which increases the demand for workmen, we must consider improvements of the means of production, which result in the production of more commodities with the same number of workmen. If a farmer, for example, doubles the number of his ploughs he must also double the number of his ploughmen. But if he buys a steam-plough he may be able to plough double the number of acres with the same number of labourers.

Employers always aim at such improvements in the means of production (sharply to be distinguished from simple multiplication of the means of production). For what affects an employer is net profit (* Net profit - employers protit - proceeds of the employees labour - is what remains over for the management of the business after payment the cost of production, including interest, and is to be regarded as the profit of management It has nothing to do with interest. In corporations and trusts the patent-rights of the inventors, or the "shameless" salaries and wages claimed by exceptionally efficient or irreplaceable directors and workmen, absorb this net profit.), and this is larger when his means of production are superior to those of his competitors. Hence the competition among employers to improve the means of production; hence the demand for loans from employers who have not themselves the means necessary for scrapping obsolete machinery and building well-equipped factories, as they desire.

Nevertheless it does not follow that the demand for interest-free loans for the improvement of the means of production must at all times be unlimited; it does not follow that supply can never overtake the demand caused by the absence of interest. And the reason why this deduction cannot be made is that the money necessary for carrying out such improvements in the means of production is only of secondary importance.

Show someone how to bind a broom and he can bind a hundred. But offer him money, free of interest, on condition that he improves his means of production and produces more or better brooms with the same amount of labour, and he will have no answer to give you. Improvements of the means of production are the fruit of intellectual effort which cannot be bought like potatoes at so much per hundredweight. Improvements of the means of production cannot be turned out to order-no matter how "cheap" the money available. Anybody could at any time earn millions by thinking out new patents - but for the fact that he lacks the necessary intelligence.

It may be that after 10 or 100 years the means of production will be so improved that every workman will perform twice, five times or 10 times his present work. Employers will hasten to adopt such improvements. But contemporary employers are forced to use whatever machinery is offered them by the contemporary, backward, technical arts.

Apart from this, however, let us assume that a costly machine is discovered with which everyone can double his present production. This would cause an unprecedented demand for loan-money to purchase the new machine. Everyone would install it and scrap the old machines. Even if interest upon loan-money had disappeared, this enormous new demand would cause its reappearance. Under these circumstances (the conversion of all existing machinery into scrap-iron) interest might even reach an unprecedented height. But this condition of affairs could not last long. Commodities would become 50% cheaper (not cheap in the sense of a fall of prices, but cheap because everyone could double the quantity of his produce and use this double quantity for exchange) and this would allow the population to make extraordinary savings. And the supply of these savings would soon overtake the extraordinary demand for loan-money.

One can therefore conclude that the demand for loan-money for the improvement of the means of production must itself produce a supply of loan-money much more than sufficient to cover this demand.

Thus from whatever side we consider the problem of covering the demand for loan-money so completely that interest would disappear; whether we approach the problem from the side of demand or the side of supply, we find that there are no natural obstacles to such covering. Except for the traditional form of money, the road is free for loan-money without interest, as well as for houses and means of production without interest. The elimination of interest is the natural result of the natural order of things when undisturbed by artificial interference. Everything in the nature of men as in the nature of economic life urges the continual increase of so-called real capital - an increase which continues even after the complete disappearance of interest. The sole disturber of the peace in this natural order we have shown to be the traditional medium of exchange. The unique and characteristic advantages of this medium of exchange permit the arbitrary postponement of demand, without direct loss to its possessor; whereas supply, on account of the physical characteristics of the wares, punishes delay with losses of all kinds. In defence of their economic welfare both the individual and the community have been and are at enmity with interest; and they would long ago have eliminated interest if their power had not been trammelled by money.

We have now studied this new theory of interest from so many sides that we can finally put and answer a question which should logically have been asked at the beginning of our inquiry, but which we have purposely postponed till now, since knowledge and insight which can only be assumed to exist at the end of our inquiry are necessary for its complete understanding.

We said that money is capital because it can interrupt the exchange of commodities. From this the deduction can be made that if, by the proposed change of form, we deprive money of the power of interrupting exchange, money as a pure medium of exchange is no longer capital, that is, money can no longer exact basic interest.

Against this deduction no objection can be raised; it is correct.

But if it is further deduced that, since money can exact no interest from commodities, we may count upon interest-free loans from the day that Free-Money is introduced - this deduction is not correct.

As medium of exchange, in direct relation to commodities, that is in commerce. Free-Money will not be capital, just as commodities are not capital when exchanged for one another. With Free-Money, commodities will be exchanged free of interest. But when Free-Money is introduced it will meet with the market conditions created by its predecessor, gold, for the purpose of exacting interest upon loans; and as long as these conditions continue to exist, that is, as long as demand and supply permit the exaction of interest in the loan-market (in all its branches), interest will have to be paid also upon loans contracted in Free-Money. Free-Money will find before it world-wide poverty, the result of which is interest. This poverty must disappear, and it will not disappear in the course of a few days. Work is here the remedy. Until this poverty is removed, the instruments of production and commodities will continue to yield interest in all forms of loan-transactions (not, however, in exchange-transactions). But Free-Money does not make interest the condition of its services, it will allow our economic system, as the result of work uninterrupted by crises, to put on fat; and it is this fat which is to eliminate, and doubtless will and must eliminate, interest. Interest feeds upon the sweat and blood of the people, but it has no liking for fat or, in other words, economic prosperity. For interest, fat is poison.

It is quite certain that the disproportion between the demand and supply of real capital, which is the cause of interest, will continue to exist for some considerable time after the introduction of the money-reform, and that it will only gradually disappear. The effects, accumulated through thousands of years, of the traditional form of money, namely the scarcity of real capital, cannot disappear as the result of twenty-four hours' working of the lithographic press. The scarcity of houses, ships and factories cannot be eliminated by gaily-printed slips of paper, in spite of the belief to the contrary held by the paper-money lunatics of all times. Free-Money will permit the building of houses, factories and ships in unlimited quantities; it will permit the mass of the population to work as much as it pleases, to sweat and curse the pauperism that gold has left behind. But Free-Money will not itself provide a single stone for the missing cities. The lithographic presses upon which Free-Money is printed cannot themselves contribute a drop to the ocean of real capital necessary to drown interest. Freedom from interest can be realised only by years of dogged and uninterrupted toil. Lasting freedom must always be striven for; freedom from interest must also be striven and fought for. Bathed in sweat the people must cross the threshold of their first interest-free dwellings, their first interest-free factories; bathed in sweat they must organise the interest-free State of the future.

The day on which gold is driven from its throne. the day on which Free-Money assumes the function of exchanging commodities, will see no great change in interest. The interest upon existing real capital will remain for some time unchanged. Even the new real capital which the people can now produce with untrammelled labour will yield interest. This new real capital will however, depress interest in direct proportion to its own increase in quantity. And if beside a city like Berlin, Hamburg, Munich, a second, larger, city is built, the supply of dwellings will perhaps cover the demand and bring interest upon houses down to zero.

But if real capital is still producing interest and it is possible to buy with money commodities which can be assembled into new, interest-bearing, real capital, it is clear that anyone seeking a loan of money must pay for it interest equal to the interest yielded by real capital. That is obvious from the laws of competition.

Loans of Free-Money must therefore pay interest as long as real capital yields interest. Real capital will long remain capital because metal money allowed it to exist only in insufficient quantities, so its component parts, namely, money and raw materials, will also long remain capital.

Up to the introduction of Free-Money interest on real capital depends on basic interest; after the introduction of Free-Money basic interest will disappear, and interest on loans will be exactly determined by interest on real capital. Borrowers of money will no longer pay interest because money can exact a tribute from the wares, but because the demand for loans, for the time being, exceeds the supply.

Basic interest is not interest on a loan; the exchange of money for wares and the tribute thereby exacted have nothing in common with a loan. Basic interest is not, therefore, determined by demand and supply. In exchange for the money the producer gives his produce. This is an exchange-transaction during which basic interest is exacted because the possessor of money can prohibit, or allow, the exchange. Basic interest corresponds to the difference of efficiency between money and the substitutes for money (bills of exchange, barter and primitive production) as media of exchange. No offer of loan-money, however large, could eliminate this difference, and upon it depends basic interest.

With the interest on real capital, on the contrary, we have, not an exchange, but a loan. The landowner lends his land to a farmer, the house-owner lends his house to a tenant, the manufacturer lends his factory to the workmen, the banker lends money to his debtor - but the merchant who exacts interest from the wares lends, nothing; he makes an exchange. Farmer, tenant, workman, debtor, give back what they received; but the merchant receives for his money something totally different from money. For this reason exchange has nothing in common with lending, and for this reason, also, basic interest and interest upon real capital are determined by totally different causes. We ought really to cease designating two so fundamentally different things by the same word, interest.

Interest on real capital is determined by demand and supply; it is subject to the laws of competition and can be eliminated by a simple change in the ratio of demand to supply. With basic interest this would never be possible. Interest on real capital has up to the present been protected from such a change - the condition for the production of real capital being that it should be able to exact interest equal to basic interest.

Free-Money will deprive real capital of this protection, but the disproportion between the demand and supply of loans of every kind, loans in the form of tenement-houses, factories and machinery, as well as loans in the form of money, will continue to exist.

The material for the interest upon these money-loans will, however, no longer be drawn from commerce (Money - Wares - Surplus Money) but from production. It will consist of the increase of the product obtained, without increase of the cost of production, by the employer with the aid of a loan - and claimed by the loan-giver for himself, because the ratio of demand and supply temporarily permits him to do so.

Basic interest is exacted during exchange, not during production. It is not a share in the increased quantity of wares produced with the help of a loan, but a share in all the wares dependent upon the medium of exchange. Basic interest would still have been exacted even if all workmen had possessed their own, precisely similar, means of production: if all debts had been paid; if everyone paid for his purchases in cash; if everyone lived in his own house. if the loan-market had been closed; if loans in every form had been prohibited; if the exaction of interest had been forbidden by law and religion.

The demand for loans, especially in the form of means of production, is caused by the fact that more or better wares can be turned out with these means of production than without them. If the worker creating this demand finds an insufficient supply, he must surrender to the loan-giver part of the surplus he hoped to realise with the desired means of production - for no other reason than that the ratio between demand and supply so decrees. And this ratio will continue to exist for some time after the introduction of the Free-Money reform.

As long as the means of production are capital, the produce of labour will also, even after the introduction of Free-Money, be capital - not however as a ware, not in the market, not where men bargain about the price. For there the claims for interest upon the wares would cancel one another. But outside the circulation of wares, where the question is, not a price, but the conditions of loan, not for purchasers, but for borrowers; the produce of labour can remain capital and indeed must remain capital as long as the means of production are capital. The opposite is true of our traditional form of money which exacts its interest, not from borrowers, but from the circulation of wares. It has plunged its snout into the very blood-circulation of the people. Free-Money will deprive the medium of exchange of its present leech-like characteristics. Free-Money is for this reason not intrinsically capital. It cannot under all circumstances extort interest. It shares the fate of the means of production, which can exact interest only as long as demand does not overtake supply. If interest on real capital falls to zero, interest-free loan-money will also have become a fact. With the Free-Money reform basic interest disappears from the moment Free-Money meets the wares. Free-Money as a medium of exchange is on the same level as the wares. It is as if we had inserted potatoes as medium of exchange between iron and wheat. Does anyone imagine that potatoes could exact interest from wheat or iron ? But the disappearance of basic interest after the introduction of Free-Money is no reason for the immediate disappearance of interest upon loan-money. Free-Money will only clear the road for interest-free loans; more it cannot do.

In this distinction between basic interest and interest on loans, everything we have hitherto said about interest is focussed to a point. Basic interest has up to the present escaped observation because it was concealed behind its offspring, ordinary interest upon loan-money. When a merchant borrows money and adds the interest he pays, with his other general expenses, to the price of his wares, this was, up to the present, assumed to be interest upon a loan. The merchant was supposed to advance the money to the wares, to lend them something; and the producer was supposed to pay the interest upon this loan. Such was the explanation. And those who let this fallacy pass were not necessarily superficial thinkers. For appearances are here indeed deceptive. Only the closest observation could discover that the interest paid by the merchant for loan-money is not the beginning but the end of the whole transaction. The merchant uses money to exact basic interest from the wares, and as the money does not belong to him, he delivers the basic interest to his capitalist. He acts here simply as cashier for the capitalist. If the money had been his own he could have exacted basic interest just as easily and put it in his pocket. In this case where is the loan ? With a loan, service and return service are separated in time. The interest upon a loan is wholly governed by the time that elapses between the service and return service. But when money is being exchanged for wares, when basic interest is being exacted, service and return service are at precisely the same point of time. A loan-transaction leaves a debtor and creditor, an exchange-transaction leaves no trace. A person goes into a shop, buys something, pays and goes away. The transaction is then completed. Each party gives and receives in the present the whole amount agreed upon. Where is, in this case, the loan ? Loans often mean poverty, distress or burdensome debt; and they always mean incapacity to pay at once for the thing desired. A person who buys bread on credit because he cannot pay ready money receives a loan and pays interest in the form of an increased price. But when a farmer brings a cart-load of fat pigs to market to exchange them for money, there is no poverty, no distress and no burden of debt. A loan-giver gives from his superfluity; a loan-taker takes because of his want. But in exchange each party has simultaneously superfluity and want; want of what he asks for, superfluity of what he offers.

Basic interest, therefore, is in no way related to interest upon loans. Basic interest is, as we have said, a tribute, a tax, an extortion; it is many things, but it is not a return service for a loan. Basic interest is a unique phenomenon which must be considered by itself; it is a fundamental economic conception. A merchant is willing to pay interest upon a loan of money because he knows that he, can recover the interest from the wares. If basic interest disappears, if money loses the power of exacting basic interest, merchants will no longer be able to offer interest for loans to buy wares.

Here again a comparison with barter will be useful. In barter wares are exchanged for one another without interest. But if at the time of barter someone desires wares, not in exchange for his wares, but as a loan, the ratio between the demand and supply of loans determines absolutely whether, or how much, interest can be exacted. If a house can be let for a rent greater than the amount of depreciation, it is obvious that anyone who rents a house in its component parts (in the form of a loan of wood, lime, iron, etc.) will have to pay interest.

(*The frequent repetitions in this chapter were necessary in order to avoid the danger of confusing basic interest upon money with interest upon loans.)