Part 02, Chapter 15

[Liberty, August 18, 1888.]

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To the Editor of Liberty(67 ¶ 1)

During the past six months I have read your paper searchingly, and greatly admire it in many respects, but as yet do not grasp your theory of interest. Can you give space for a few words to show from your standpoint the fallacy in the following ideas?(67 ¶ 2)

Interest I understand to be a payment, not for money, but for capital which the money represents; that is, for the use of the accumulated wealth of the race. As that is limited, while human wants are infinite, it would appear that there will always be a demand for more than exists. The simplest way of solving the difficulty would, therefore, be to put the social capital up and let open competition settle its price. Added accumulation means greater competition to let it, so that its price will be lowered year by year. But can that price ever become nothing so long as men have additional wants that capital can assist to fill? Yet Mr. Westrup advocates a rate of interest based on the cost of issuing the money,—that is, allowing nothing for the capital. Is stored labor so plenty as to be cheaper than blackberries?(67 ¶ 3)

For illustration, A has $1,000 worth of land, buildings, etc., in a farm, but sees that he can use $1,500 worth profitably. So he places a mortgage of $500 on the place and invests it in more property. Now to say that he should have that additional property merely for the cost of issuing the paper which represents it during the transfer would be like saying that, when he bought his house, he should have it merely for cost of the transfer papers,—the deeds, etc.,—paying nothing for the house itself.(67 ¶ 4)

In a line my query is: Where do your definitions of interest and discount on money diverge?(67 ¶ 5)

Yours truly,

J. Herbert Foster.

Meriden, Connecticut.

Discount is the sum deducted in advance from property temporarily transferred, by the owner thereof, as a condition of the transfer, regardless of the ground upon which such condition is demanded.(67 ¶ 6)

Interest is payment for the use of property, and, if paid in advance, is that portion of the discount exacted by the owner of the property temporarily transferred which he claims as payment for the benefit conferred upon the other party, as distinguished from that portion which he claims as payment for the burden borne by himself.(67 ¶ 7)

The opponents of interest desire, by reducing the rate of discount to cost, or price of burden borne, to thereby eliminate from discount all payment merely for benefit conferred.(67 ¶ 8)

But they are entirely innocent of any desire to abolish payment for burden borne, as it certainly would be abolished in the case supposed by Mr. Foster, were A to obtain his extra $500 worth of property simply by paying the cost of making out the transfer papers. A certainly could not thus obtain it under the system of credit proposed by the opponents of interest. His obligation is not discharged when he has paid over to the man of whom he buys the property the $500 which he has borrowed on mortgage. He still has to discharge the mortgage by paying to the lender of the money, at the expiration of the loan, in actual wealth or valid documentary claim upon wealth, the $500 which he borrowed. That is the time when he really pays for the property in which he invested. Now, the question is whether he shall pay simply the $500, which is supposed to represent the full value of the property at the time he made the investment, or whether he shall also pay a bonus for the use of the property up to the time when he finally pays for it. The opponents of interest say that he should not pay this bonus, because his use of the property has imposed no burden upon the lender of the money, and under free competition there is no price where there is no burden. They declare, not that he should not pay the $500, but that the only bonus he should pay is to be measured by the cost of making out the mortgage and other documents, including all the expenses incidental thereto.(67 ¶ 9)

The only reason why he now has to pay a bonus proportional to the benefit he derives from the use of the property is found in the fact that the lender of the money, or the original issuer of the money, from whom the lender procured it more or less directly, has secured a monopoly of money manufacture and can therefore proportion the price of his product to the necessities of his customers, instead of being forced by competition to limit it to the average cost of manufacture. In short, what the opponents of interest object to is, not payment for property purchased, but a tax upon the transfer papers; and the very best of all arguments against interest, or payment for the use of property, is the fact that, at the present advanced stage in the operation of economic forces, it cannot exist to any great extent without taking the form of a tax upon the transfer papers.(67 ¶ 10)

Shall the transfer papers be taxed? That is the question which Liberty asks, and Mr. Foster has already answered in the negative by saying that open competition should be left to settle the price of capital. But when this open competition is secured, it will be found that, though there may be no limit to the desire for wealth, there is a limit at any given time to the capacity of the race to utilize capital, and that the amount of capital created will always tend to exceed this capacity. Then capital will seek employment and be glad to lend itself to labor for nothing, asking only to be kept intact, and reimbursed for the cost of the transfer papers. Such is the process by which interest, or payment for the use of property, not only will be lowered, but will entirely disappear.(67 ¶ 11)