The Theory of Interest

Laurie J. Quinby

[Reprinted from Land and Freedom, January-February 1938]

Should not the followers of Henry George be sufficiently grounded in the fundamentals of economics to tide them over any problems with which they meet? It appears to me that the careful student would be impressed with the thoroughness with which our author delved into the natural laws that underlie all social and economic problems. It is not that we should accept all of his conclusions, unless to our own understanding those conclusions are the logical results of the premises he lays down. To my mind and the best of my information, no one has yet arisen to show any error in the premises. Being grounded upon them the student should develop his own conclusions. If he is logical in his reasoning, his conclusions must be correct.

In the discussion of the justification of interest, always there arises in my mind certain queries. For instance: There is not an intelligent person, whether conservative, liberal, communist, socialist, or what not, who will deny that, from the standpoint of justice, whatever any one produces through his own effort is sacredly his private possession. With it he may do what he will, so long as in so doing he does not injure another person. Yet, when it comes to the matter of interest, we find among all these groups except only among the consistent followers of Henry George some who question the justice of interest. Now what is interest?

In plain English, interest consists of a certain payment to some person by another for the use of something whether that be a commodity, a tool or a sum of money. Now, if legally we abolish interest, or in any manner regulate the amount of it as payment for the use of capital, do we not by that act confiscate or deprive its owner of what is sacredly his own? Can any one propose a just manner by which society may compel any one to grant the loan of anything which he may have to any one else without recompense?

Then, too, by the simple natural law, operating all about us all the time, we observe that the wages of labor despite even the efforts of unions will rise as interest rises and fall as interest falls. Stating the same thing conversely, interest will rise as wages rise and fall as wages fall. Why should this be considered a natural law? The answer is simple. First, all will agree that prices of anything are determined by the natural law of supply and demand. Second, it is seen in the fact that labor cannot profitably be employed without the use of capital, nor can capital be employed except by the employment of labor.

I am not overlooking the fact that, given access to natural resources, labor can employ itself without the service of another's capital. Though this be true, the laborer would even then be obliged to produce some form of capital by which to produce wealth. That is, he must first make some kind of tool with which to work. That would be his capital. The effort he expended in making the tool would be the "interest" which he is paying for the use of that capital. For the tool itself is not wealth which he may consume by eating or wearing it. It is capital only to be used in the production of wealth.

Now, if one uses the capital belonging to another, it matters not what form of capital it may be, he is doing so in the hope of gaining some advantage. That advantage may consist of almost anything. In any event, he enjoys the privilege of escaping the toil of or in saving the time in waiting until his own labor may produce that capital. He is gaining some immediate relief or profit. (Whether he gains or loses in his effort, or whether the lender risks his capital, is entirely another question, having nothing to do with the fundamental economics of the transaction.) However it may be considered, the arrangement on both sides was intended for gain. Justice, then, demands that if one producer gains by the use of the "stored-up labor" capital of another, he should share with that other some portion of that gain. That is what is meant by the term "interest." Therefore, interest is nothing more nor less than wages for labor previously employed. Whether the lender should also share a loss, if such there be, is a matter to be specified in the contract voluntarily agreed to by the lender. This is sometimes done.

I am not forgetting the fact that those who have any form of capital to .lend, often corrupt legislatures to make laws in their favor, just as at times unions, securing undue advantage, seek to enforce a higher wage than a given business may afford. Both of them are seeking personal privileges which, in the end, must meet with defeat, because the natural laws of economics are as absolute as any others. Soon or late man will discover that it is as impossible to vacate or set aside a natural economic law as it must ever be to nullify the law of gravity.