Interest and Principal: A Loan is a Service

By Pierre-Joseph Proudhon (1849)

Entry 980


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Untitled Anarchism Interest and Principal: A Loan is a Service

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(1809 - 1865)

Father of Anarcho-Mutualism

: ...he turned his talents instead to the printer's trade, a profession which gave birth to many anarchists, but the first to call himself an anarchist was Proudhon. By mid-century, Proudhon was the leading left intellectual in France or for that matter, all of Europe, far surpassing Marx's notoriety or Bakunin's. Proudhon... (From: Dana Ward Bio.)
• "What is your flag? Association! And your motto? Equality before fortune! Where are you taking us? To Brotherhood!" (From: "Toast to the Revolution," by Pierre-Joseph Proudh....)
• "The revolution, in that epoch, without abandoning its first given, took another name, which was already celebrated. It called itself philosophy." (From: "Toast to the Revolution," by Pierre-Joseph Proudh....)
• "Revolutions are the successive manifestation of justice in human history. — It is for this reason that all revolutions have their origins in a previous revolution." (From: "Toast to the Revolution," by Pierre-Joseph Proudh....)

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Interest and Principal: A Loan is a Service

 Photo by Marc Garnaut, CC BY-NC License

Photo by Marc Garnaut,
CC BY-NC License

These letters, addressed to Frederic Bastiat, an economist, originally appeared in a debate published in The Voice of the People, in 1849.

Interest and Principal

A Loan is a Service

On the one hand, it is very true, as you have unquestionably established, that a loan is a service. And as every service has a value, and, in consequence, is entitled by its nature to a reward, it follows that a loan ought to have its price, or, to use the technical phrase, ought to bear interest.

But it is also true, and this truth is consistent with the preceding one, that he who tends, under the ordinary conditions of the professional lender, does not deprive himself, as you phrase it, of the capital which be lends. He lends it, on the contrary, precisely because the loan is not a deprivation to him; he lends it because he has no use for it himself, being sufficiently provided with capital without it; be lends it, finally, because he neither intends nor is able to make it valuable to him personally,--because, if he should keep it in his own hands, this capital, sterile by nature, would remain sterile, whereas, by its loan and the resulting interest, it yields a profit which enables the capitalist to live without working. Now, to live without working is, in political as well as moral economy, a contradictory proposition, an impossible thing.

The proprietor who possesses two estates, one at Tours, and the other at Orleans, and who is obliged to fix his residence on the one which he uses, and consequently to abandon his residence on the other, can this proprietor claim that he deprives himself of anything, because he is not, like God, ubiquitous in action and presence? As well say that we who live in Paris are deprived of a residence in New York! Confess, then, that the privation of the capitalist is akin to that of the master who has lost his slave, to that of the prince expelled by his subjects, to that of the robber who, wishing to break into a house, finds the dogs on the watch and the inmates at the windows.

Now, in the presence of this affirmation and this negation diametrically opposed to each other, both supported by arguments of equal validity, but which, though not harmonizing, cannot destroy each other, what course shall we take?

You persist in your affirmation, and say: "You do not wish to pay me interest? Very well! I do not wish to lend you my capital. Try working without capital." On the other hand, we persist in our negation, and say: "We will not pay you interest, because interest, in social economy, is a premium on idleness, the primary cause of misery and the inequality of wealth." Neither of us is willing to yield, we come to a stand-still.

This, then, is the point at which Socialism takes up the question. On the one hand, the commutative justice of interest; on the other, the organic impossibility, the immorality of interest; and, to tell you the truth at once, Socialism aims to convert neither party--the Church, which denies interest, nor the political economy, which supports it--especially as it is convinced that both are right. Let us see, now; how it analyzes the problem, and what it proposes, in its turn, that is superior to the arguments of the old moneylenders, too vitally interested to be worthy of belief, and to the ineffectual denunciations uttered by the Fathers of the Church.

Since the theory of usury has finally prevailed in Christian as well as in Pagan countries; since the hypothesis, or fiction, of the productivity of capital has become a practical fact among nations--let us accept this economic fiction as we have accepted for thirty-three years the constitutional fiction, and let us see what it results in when carried to its ultimate. Intead of simply rejecting the idea, as the Church has done --a futile policy--let us make from it a historical and philosophical deduction; and, since the word is more in fashion than ever, let us trace the evolution.

Moreover, this idea must correspond to some reality; it must indicate some necessity of the mercantile spirit; else nations never would have sacrificed to it their dearest and most sacred beliefs.

See, then, how Socialism, entirely convinced of the inadequacy of the economic theory as well as of the ecclesiastical doctrine, treats in its turn the question of usury.

First, it observes that the principle of the productivity of capital is no respecter of persons, grants no privileges; it applies to every capitalist, regardless of rank or dignity. That which is legitimate for Peter is legitimate for Paul; both have the same right to usury as well as to labor. When, then,--l go, back to the example which you have used,--when you lend me, at interest, the plane which you have made for smoothing your planks, if, in my turn, I lend you the saw which I have made for cutting up my lumber, I also shall be entitled to interest.

The right of capital is alike for all; all, in the proportion that they lend and borrow, ought to receive and pay interest. Such is the first consequence of your theory, which would not be a theory, were not the right which it establishes universal and reciprocal; this is self-evident.

Let us suppose, then, that of all the capital that I use, whether in the form of machinery or of raw material, half is lent to me by you; suppose also that of all the capital used by you half is lent to you by me; it is clear that the interests which we must pay will offset each other; and, if equal amounts of capital are advanced, the interests canceling each other, the balance will be zero.

In society, it is true things do not go on precisely in this way. The loans that the producers reciprocally make to each other are not always equal in amount, therefore the interests that they have to pay are also unequal; hence the inequality of conditions and fortunes.

But the question is to ascertain whether this equilibrium in the loaning of capital, labor, and skill, and, consequently, equality of income for all citizens, perfectly admissible in theory, is capable of realization in practice; whether this realization is in accordance with the tendencies of society; whether, finally and unquestionably, it is not the inevitable result of the theory of usury itself.

Now, this is what Socialism affirms, now that it has arrived at an understanding of itself, the Socialism which no longer distinguishes itself from economic science, studied at once in the light of its accumulated experience and in the power of its deductions. In fact, what does the history of civilization, the history of political economy, tell us concerning this great question of interest?

It tells us that the mutual loaning of capital, material, or immaterial, tends more and more towards equilibrium, owing to the various causes enumerated below, which the most conservative economists cannot dispute:--

First--The division of labor, or the separation of industries, which, infinitely multiplying both tools and raw material, multiplies in the same proportion the loans of capital.

Second--The accumulation of capital, an accumulation which results from diversity of industries, producing between capitalists a competition similar to that between merchants, and, consequently, effecting gradually a lowering of the rent of capital, a reduction of the rate of interest.

Third--The continually increasing power of circulation which capital acquires through the use of specie and bills of exchange.

Fourth--Finally, public security.

Such are the general causes which, for centuries have developed among producers a reciprocity of loans tending more and more to equilibrium and consequently to a more and more even balance of interests, to a continual diminution of the price of capital.

These facts cannot be denied; you yourself admit them; only you mistake their principle and purport, by giving capital the credit for the progress made in the domain of industry and wealth, whereas this progress is caused not by capital, but by the circulation of capital.

The facts being thus analyzed and classified Socialism asks whether, in order to bring about this equilibrium of credit and income, it is not possible to act directly, not on capital, remember, but on circulation; whether it is not possible so to organize this circulation as to inaugurate, at one blow, between capitalists and producers (two classes now hostile, but theoretically identical) equivalence of loans, or, in other words, equality of fortunes.

To this question Socialism again replies: Yes, it is possible, and in several ways.

Suppose, in the first place, to confine ourselves to the present conditions of credit, the operations of which are carried on mainly through the intervention of specie--suppose that all the producers in the republic, numbering more than ten millions, tax themselves, each one, to the amount of only one percent of their capital. This tax of one percent upon the total amount of the capital of the country, both real and personal, would amount to more than a thousand million of francs.

Suppose that by means of this tax a bank be founded, in competition with the Bank (miscalled) of France, discounting and giving credit on mortgages at the rate of one-half of one percent.

It is evident, in the first place, that the rate of discount on commercial paper, the rate of loans on mortgages, the dividend of invested capital, etc., being one-half of one percent, the cash capital in the hand of all usurers and moneylenders would be immediately struck with absolute sterility; interest would be zero, and credit gratuitous.

If commercial credit and that based on mortgages--in other words, if money capital, the capital whose exclusive function is to circulate--was gratuitous, house capital would soon become so; in reality, houses no longer would be capital; they would be merchandise, quoted in the market like brandy and cheese, and rented or sold--terms which would then be synonymous--at cost.

If houses, like money, were gratuitous--that is to say, if use was paid for as an exchange, and not as a loan--land would not be slow in becoming gratuitous also; that is, farmrent, instead of being rent paid to a non-cultivating proprietor, would be the compensation for the difference between the products of superior and inferior soils; or, better, there no longer would exist, in reality, either tenants or proprietors; there would be only husbandmen and wine-growers, just as there are joiners and machinists.

Do you wish another proof of the possibility of making all capital gratuitous by the development of economic institutions?

Suppose that instead of our system of taxes, so complex, so burdensome, so annoying, which we have inherited from the feudal nobility, a single tax should be established, not on production, circulation, consumption, habitation, etc., but in accordance with the demands of justice and the dictates of economic science, on the net capital falling to each individual. The capitalist, losing by taxation as much as or more than he gains by rent and interest, would be obliged either to use his property himself or to sell it; economic equilibrium again would be established by this simple and moreover inevitable intervention of the treasury department.

Such is, substantially, Socialism's theory of capital and interest.

Not only do we affirm, in accordance with this theory (which, by the way, we hold in common with the economists) and on the strength of our belief in industrial development, that such is the tendency and the import of lending at interest; we even prove, by the destructive results of economy as it is, and by a demonstration of the causes of poverty, that this tendency is necessary, and the annihilation of usury inevitable.

In fact, rent, reward of capital, interest on money, in one word, usury, constituting, as has been said, an integral part of the price of products, and this usury not being the same for all, it follows that the price of products, composed as it is of wages and interest, cannot be paid by those who have only their wages, and no interest to pay it with; so that, by the existence of usury, labor is condemned to idleness and capital to bankruptcy.

This argument, one of that class which mathematicians call the reductio ad absurdum, showing the organic impossibility of lending at interest, has been repeated a hundred times by Socialism.

Why do not the economists notice it? Do you really wish to refute the ideas of Socialism on the question of interest? Listen, then, to the questions which you must answer:--

1. Is it true that, though the loaning of capital, when viewed objectively, is a service which has its value, and which consequently should be paid for, this loaning, when viewed subjectively, does not involve an actual sacrifice on the part of the capitalist; and consequently that it does not establish the right to set a price on it?

2. Is it true that usury, to be unobjectionable, must be equal; that the tendency of society is towards this equalization; so that usury will be entirely legitimate only when it has become equal for all,--that is, nonexistent?

3. Is it true that a national bank, giving credit and discount gratis, is a possible institution?

4. Is it true that the effects of the gratuity of credit and discount, as well as that of taxation when simplified and restored to its true form, would be the abolition of rent of real estate, as well as of interest on money?

5. Is it true that the old system is a contradiction and a mathematical impossibility?

6. Is it true that political economy, after having, for several thousand years, opposed the view of usury held by theology, philosophy, and legislation, comes, by the application of its own principles, to the same conclusion?

7. Is it true, finally, that usury has been, as a providential institution, simply an instrument of equality and progress, just as, in the political sphere, absolute monarchy was an instrument of liberty and progress, and as, in the judicial sphere, the boiling-water test, the duel, and the rack were, in their turn, instruments of conviction and progress?

These are the points that our opponents are bound to examine before charging us with scientific and intellectual weakness; these, Monsieur Bastiat, are the points on which your future arguments must turn, if you wish them to produce a definite result. The question is stated clearly and categorically: permit us to believe that, after having examined it, you will perceive that there is something in the Socialism of the nineteenth century that is beyond the reach of your antiquated political economy.

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