The Wealth of Nations

Book 2, Chapter 4

Stock Lent at Interest

Download Preston's Free Checklist

Download Preston's free checklist. His checklist was developed after spending countless hours studying billionaires like, Warren Buffett, Carl Icahn, and Ray Dalio. With his checklist, you can find safe picks that protect and grow your principal. Additionally, Preston reads a lot of books and writes an executive summary for each book he reads. If you download his checklist, you will be added to his monthly e-mail list where he sends his book summaries. There are never any advertisements...ever. Here's an example of one of Preston's executive summaries, based on the book written by Billionaire Charlies Koch.

Chapter 4 Summary

Stock lent at interest always represents capital for the lender. He expects it to be repaid in due course. In the meantime, the borrower pays him a certain annual fee for the use of it. The borrower can use it either as capital or for immediate consumption. If he uses it as capital, he will be investing in productive labor that will make him a profit. If he uses it for immediate consumption, he is contributing toward the idle what was destined to support the industrious.

Almost all interest-based loans are made in money—either banknotes, gold or silver; however, what the borrower really wants and what the lender provides is not the actual money but the money's worth, or the goods it can purchase. By granting a loan, a lender is in effect assigning the borrower the right to a certain portion of the annual produce of the land and labor of the country, to be used as the borrower pleases.

In some countries, interest on money lending has been prohibited by law. Rather than preventing problems, this regulation has in fact increased them since the debtor is obliged to pay not only for the use of the money but for the risk his creditor runs, by accepting compensation for that use.

In countries where interest is permitted, the law to prevent extortion generally fixes the highest rate possible without incurring a penalty. In Britain, where money is lent to the government at a 3% interest rate and to private people at 4%, the present legal rate of 5% is the accepted norm.

The ordinary market price of land depends upon the ordinary market interest rate. A person who has capital from which he wishes to derive a revenue without taking the trouble to employ it himself may decide to invest it in land or lend it out at interest.

Next Chapter

Don't get lost in the Wall Street Fee-Factory

It's taken us a few years to finally figure out the right mix of tools that get results and save money. If you click on the toolbox, you'll see an article we wrote that lays-out the brokers and research tools we personally use.

Got Questions?

The Investor's PODcast

Get a free autographed copy of the Warren Buffett Accounting Book or Warren Buffett's Three Favorite Books. Simply submit your question to The Investor's PODcast. If your question gets answered on the air, the founders of this site, Preston Pysh and Stig Brodersen, will send you a free signed copy of their book!

The Warren Buffett Forum

Ask your question at the Buffett's Books money forum and interact with other smart investors like yourself. You won't find any day traders on this forum! Here's the link to The Warren Buffett Forum.