CHAPTER XI.

OF THE RATE OF INTEREST.

THE natural fluctuations in the rate of interest charged for the use of capital or its representative, money, are determined by the same causes which influence the price of any other commodity; namely, demand and supply. If there arises an unusual demand for any commodities, in the interior of a country, or from foreign lands, the extra production cannot take place without the aid of more money, and the price of that commodity by which the others are produced rises in proportion to the demand for its assistance. the price of money rises, so will the price of the article produced advance in proportion until the demand for it subsides, when the price of the article and the rate of interest charged for the money to produce it return to their natural points.

A high rate of interest may prove the commerce of a country to be in a most flourishing and healthy condition, and it may also prove the

country to be on the verge of bankruptcy. In the autumn of 1865 we have seen the rate of interest standing very high in England, and going higher in 1866, but this was attributed to an increase in the trade generally of the country; large quantities of merchandise were shipped to America on the conclusion of the war, and this would of itself be sufficient to raise somewhat the price of capital or money.

There are many persons who maintain that bankers as a body desire to keep the rate of interest as high as possible; this view is held by the writer of an article in Blackwood's Magazine' for March 1866, on The Reform of the Bank of England,' and I do not hesitate to state that such is quite erroneous. On the first consideration of such a question, it will appear to the uninitiated in banking practice that a high rate of interest will be always for the benefit of bankers; but there are undercurrents at work here. In the first place, a banker always considers himself best off when his clients are well to do, and can obtain all they want to enable them to carry on their various trades prosperously, and if possible extend them. Now, when the rate of interest is high a merchant curtails his operations unless the profits promise a

corresponding augmentation, and even under such circumstances, the increased profit cannot long keep pace with the rise in the rate, as the pressure must be felt somewhere sooner or later; as a high rate of interest must be hurtful to those who are borrowers, and a large part of a banker's profits are derived from discounting bills and making advances to those who bank with him, it will stand to reason that no more money than will be sufficient to keep the accounts open will remain to the credit of the banker's clients so long as the rate continues unusually high. As the rate of interest rises, the deposits are withdrawn from the banks by all persons who understand how better to employ them, and it is unnecessary to remark that the number of persons who do remove their money for better investment is certainly increasing. It will thus be seen that, irrespective of the possible inconvenience which may be occasioned to the banker by having his deposits withdrawn, he may lose considerably more by the absence of the profit upon the withdrawn deposits than he gets by a higher rate of interest upon a probably diminished number of discounters. Then again, in obedience to a fixed law, as the price of the article increases, so do the bad debts increase.