The Wealth of Nations
Book 2, Chapter 4
Stock Lent at Interest
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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.
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