CHEAP CAPITAL AND LOW INTEREST.
IF a wise philanthropist, who desired to benefit the working class, were granted a wish in the field. of practical economics, what form should it take ? We have little doubt that the wise philanthropist of our thought would answer, " Cheap capital," or, what is the same thing, " A low rate of interest." The reasons why a low rate of interest would. help the working man, and would do away with unemployment wherever unemployment is due to economic and not to moral causes, are so obvious as hardly to require statement. As we have said so often in these pages, the answer of the labourers in the vineyard to the question : " Why stand ye here all the day idle ? " is the true answer, or, as the phrase is, the " bed-rock " answer,—" Because no man hath hired us." What the working man who has little or on accumulated capital desires above all things is that there should. be plenty of hirers to compete for his services. What he has got to sell, his commercial asset, is the strength and skill of his own right arm. To get the greatest value for this strength and skill he wants a free market and a good market, plenty of willing purchasers, or, as we call them when the purchases extend over a short period, hirers. But no man can hire another without the possession of capital. A man can make a thing for himself without accumulated capital. Again, without accumulated. capital you can force a slave, or any person whose body is at your disposal, to make the thing for you. If, however, you are to hire, you must have accumulated capital with which to pay the person hired. " No capital, no hiring," is a funda- mental law of economics. When, then, we say that what is wanted in the working man's interest is plenty of hirers, we are, in effect, saying that what is wanted in the working man's interest is plenty of capital,—in other words, cheap capital. When capital is plentiful and cheap, instead of three men looking for two jobs, we get three jobs looking for two men, and competing for those two men till one of the hirers has to drop out of the informal, but none the less real, auction. Goldsmith when he talked about the land where wealth accumulates and men decay was economically talking nonsense, even though there may be found on an altogether different plane of thought a certain apparent moral justification for his line. Economically the land where wealth accumulates is the land where men flourish.
If our readers will excuse us a little longer in our excursion into the elements of economics, we will look closer and in more detail at the way in which cheap capital—money at a low rate of interest—helps the worker. Let us suppose an energetic man of business considering the question whether he shall start a factory, or put up a row of working men's dwellings, or equip a fruit farm, or lay out a market garden in the French style with thousands of cloches and glass frames. " Shall I be able to make a profit ? " is his first question. The answer to this question depends, of course, upon a great variety of things ; but though all these things contribute to the answer, he will in almost all cases find that the final considera- tion is : " On what terms can I get the £5,000 capital [or whatever it may be] which is necessary for my purpose ? " And here let us remember that the hire of capital—the interest to be paid for the money—is just as much the supreme factor in the question whether the man is going to use his own capital or borrow it from somebody else. If he takes his own money, he will take it out of some investment already producing profit. If ho is already getting a high rate of interest for that money, he will be disinclined to make any change. If, on the other hand, the rate of interest is low, and he is getting a com- paratively small sum, he will have a strong incentive towards prosecuting his new venture. To say this is economically the same thing as to say that he will be able to borrow the money at a low rate of interest. If, then, the current rate of interest is low, far more new factories and farms and new enterprises of all kinds will be started than if we have the conditions of high interest and dear money. But no new enterprise can be started which does not involve the employment of extra labour, and therefore increase competition in the labour market,—an approxima- tion towards the workman's paradise of three jobs looking for two men.
No doubt the competition of capital for labour such as we have just described tends in the end to defeat itself. Cheap money competing in the labour market increases the price of labour till the dearer labour bill tends to balance the cheap money. By this means a gradually tightening check on the employment of capital is caused. In other words, there is a certain destruction of capital, with the result that capital becomes scarcer, and therefore demands a higher rate of interest. The wheel begins to turn the other way. To prevent this process of economic reaction going too far, certain compensating forces soon come into play. The workmen who have been getting better wages owing to the competition of capital when capital was at a low price do not spend all their wages. They will be sure, even in improvident England, to accumulate a certain amount of savings. These savings at once seek to be hired, or which is the same thing, seek to hire labour. As these accumulations come into the capital and labour market the wheel tends to turn back.
Here, then, we see at work the beautiful and elaborate system of checks and balances which governs the economic world and prevents either a glut of capital, and thereby a too great destruction of capital, or else a glut of labour.
As we watch the working of these wheels and compensating- balances in the interests of the -worker, the statement with which we started is again and again confirmed. What is wanted by the poor man is the accumulation of capital. Here is his instant need, his dearest desire. Cheap Capital, Cheap Capital, and again Cheap Capital, should be the motto of the man who wants to be hired and to get the best possible price for his strength and skill.
The next question for the working man is, What is the best method of increasing capital ? " Obviously one way, and a most important way, is that he should himself become a manufacturer and a producer of capital by saving. Every penny of his savings, although he may not be able to trace all the processes, goes towards bettering wages,—his own among the rest. By increasing the stock of capital which is competing in the hiring market he is running up the value of his own hands. The notion which is entertained by certain Socialistically inclined Trade-Unionists that a workman who saves has to some extent gone over to the enemy, and is committing treason towards his own class, is the wildest of delusions. The real result of his saving is that he helps to keep up wages. If the working classes of this country could once acquire the habit of thrift, they would not only be personal gainers, but gainers as a class. That is the positive way of helping capital to accumulate and become cheap. A negative, but even more important, method is to be found in the attitude which the workman takes towards capital. If he yields to the paradoxical teachings of the Socialists, and comes to regard the act of exchange which takes place between labour and capital as an act of war rather than what it really is, a union of forces, he will in divers ways check the accumulation of capital. Capital is largely a matter of credit, and credit, as all the world knows, depends upon security, or perhaps we should say upon the sentiment of security. Even if there is in fact security, such security will not encourage the accumulation of capital if people are not thoroughly convinced of its existence. Ill-grounded fears may kill credit, and thus kill capital, quite as easily as fears which are well grounded. The political and social atmosphere in which capital most easily and rapidly accumulates is an atmosphere of absolute security,—one in which all men feel that there is no risk of their capital being taken away from them against their will, either in whole or in part. To put the matter very crudely, if Messrs. Smith, the bankers, know that the law will enforce a contract for the return of money lent without any sentimental considera- tions, they will be willing to lend it at a moderate rate of interest, It is a very different story, however, if they know that, in spite of a contract for repayment at a fixed date, there is a very considerable possibility of the Courts stepping in and declaring that what the law has to con- sider is not the words of the contract, but the moral, social, and economic condition of the man who borrowed the money, and that if for moral and social reasons it would be very inconvenient for Robinson, the borrower, to pay back the capital, the lenders will not be allowed to force him to pay back. In that case Messrs. Smith will have to double or treble or quadruple their rate of interest in order to protect themselves from loss. - That is. as we have said, a crude example ; hutexactly the same thing goes on when the capitalist feels that there is a risk of Parliament stepping in and imposing taxation, or making rules and regulations, which will seriously impede or hamper him in his business, and cause a reduction in the corpus of his capital. Such misgivings make him chary of investment, make him, in other words, refuse to lend unless he is bribed to do so by a high rate of interest. The fear of anti-capitalist legislation may, indeed, go so far as to make him feel that he would rather keep his money, earning nothing, in a stocking, or send it abroad, even though he cannot supervise its employment nearly so easily as at home. Anything seems better than running the risk of his capital shrinking to half or becoming immobile. If, then, the workers of the country were wise, they would take as much care to avoid frightening capital, or decreasing the security of its employment, as the capitalists themselves. To use a metaphor, they would smooth every road to the labour market, and improve every means of access, abolishing all obstacles and toll- gates, and welcoming the capitalist or potential hirer as the man they can least afford to get on without. If one is selling a, horse or a house at auction, what one tries for is bidders, and every possible effort is made to induce them to look at the property and invest in it. Strange as it may seem, this is not the attitude of the present-day labourer who is putting up his strength and skill to auction. He is far too apt to treat bidders as if they were criminals. When he sees a crowd of them going to the market, he greets them with curses and black looks, and denounces them as tyrants and bloodsuckers. Instead of " The more the merrier " being his motto, it is more likely to be : " Pray heaven we may some day be rid of these scoundrels !"
If we analyse the matter to the bottom, we come back to Bastiat's theory of abundance. What is always wanted in the interests of the community is abundance and not scarcity. Therefore it is always to the interest of the community to procure abundance. But abundance can never be reached through scarcity, no matter how ingenious the argument to prove the contrary. " Am I not being asked to reach abundance through scarcity ? " is the argumentative touchstone which the pilgrim in the wilder- ness of economies should always keep in his pocket and produce when some officious person tries to induce him to leave the main track of common-sense for an alleged short cut. Occasionally, no doubt, the material interests of a portion of the individuals who make up the community may to some extent lie in the direction of producing scarcity. If and when such a clash of interests occurs, then we may be sure, to quote Bastiat again, that the right course is to think of the interests of the whole cons- munity. Those interests must, as we have said, inevitably lie in the direction of abundance. The goal of economics is never less, but always more, to go round.