Frédéric Bastiat was an early 19th century French economist/statesman whose common sense essays tried to battle the rise of socialist ideology after the French revolution, where provisional governments were rivaling each other for power. Of central concern was who should control the money. How is wealth created? How should it be divided amongst the people? What services should government provide? Same questions we are asking now. This essay addresses the popular fallacy of the day that Capital should be available to all gratuitiously, without necessity of paying back loans, and looking upon any form of interest as Usury. Bastiat argued that capital is created by savings, and savings are what makes borrowing possible so the common man can get ahead and prosper, and lending is only worth the risk if the lender profits by it, via interest. He demonstrated the law of supply and demand, that, in essence, interest decreases as availability of capital increases. His basic premises is that without a leisure class (people who have money to spare over earning daily bread), there would be nothing to borrow, so that neither the common man nor society can prosper. Translated from the French by Horace White of Chicago. I have divided this essay up into segments for ease of comprehension.
By : Frédéric Bastiat (1801 - 1850)
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My object in this treatise is to examine into the real nature of the Interest of Capital, for the purpose of proving that it is lawful, and explaining why it should be perpetual. This may appear singular, and yet, I confess, I am more afraid of being too plain than too obscure. I am afraid I may weary the reader by a series of mere truisms. But it is no easy matter to avoid this danger, when the facts, with which we have to deal, are known to every one by personal, familiar, and daily experience.
But, then, you will say, "What is the use of this treatise? Why explain what everybody knows?"
But, although this problem appears at first sight so very simple, there is more in it than you might suppose. I shall endeavor to prove this by an example. Mondor lends an instrument of labor to-day, which will be entirely destroyed in a week, yet the capital will not produce the less interest to Mondor or his heirs, through all eternity. Reader, can you honestly say that you understand the reason of this?
It would be a waste of time to seek any satisfactory explanation from the writings of economists. They have not thrown much light upon the reasons of the existence of interest. For this they are not to be blamed; for at the time they wrote, its lawfulness was not called in question. Now, however, times are altered; the case is different. Men, who consider themselves to be in advance of their age, have organized an active crusade against capital and interest; it is the productiveness of capital which they are attacking; not certain abuses in the administration of it, but the principle itself.
A journal has been established to serve as a vehicle for this crusade. It is conducted by M. Proudhon, and has, it is said, an immense circulation. The first number of this periodical contains the electoral manifesto of the people. Here we read, "The productiveness of capital, which is condemned by Christianity under the name of usury, is the true cause of misery, the true principle of destitution, the eternal obstacle to the establishment of the Republic."
Another journal, La Ruche Populaire, after having said some excellent things on labor, adds, "But, above all, labor ought to be free; that is, it ought to be organized in such a manner, that money lenders and patrons, or masters, should not be paid for this liberty of labor, this right of labor, which is raised to so high a price by the trafficers of men." The only thought that I notice here, is that expressed by the words in italics, which imply a denial of the right to interest. The remainder of the article explains it.
It is thus that the democratic Socialist, Thoré, expresses himself:
"The revolution will always have to be recommenced, so long as we occupy ourselves with consequences only, without having the logic or the courage to attack the principle itself. This principle is capital, false property, interest, and usury, which by the old regime, is made to weigh upon labor.
"Ever since the aristocrats invented the incredible fiction, that capital possesses the power of reproducing itself, the workers have been at the mercy of the idle.
"At the end of a year, will you find an additional crown in a bag of one hundred shillings? At the end of fourteen years, will your shillings have doubled in your bag?
"Will a work of industry or of skill produce another, at the end of fourteen years?
"Let us begin, then, by demolishing this fatal fiction."
I have quoted the above, merely for the sake of establishing the fact, that many persons consider the productiveness of capital a false, a fatal, and an iniquitous principle. But quotations are superfluous; it is well known that the people attribute their sufferings to what they call the trafficing in man by man. In fact, the phrase tyranny of capital has become proverbial.
I believe there is not a man in the world, who is aware of the whole importance of this question:
"Is the interest of capital natural, just, and lawful, and as useful to the payer as to the receiver?"
You answer, no; I answer, yes. Then we differ entirely; but it is of the utmost importance to discover which of us is in the right; otherwise we shall incur the danger of making a false solution of the question, a matter of opinion. If the error is on my side, however, the evil would not be so great. It must be inferred that I know nothing about the true interests of the masses, or the march of human progress; and that all my arguments are but as so many grains of sand, by which the car of the revolution will certainly not be arrested.
But if, on the contrary, MM. Proudhon and Thoré are deceiving themselves, it follows, that they are leading the people astray—that they are showing them the evil where it does not exist; and thus giving a false direction to their ideas, to their antipathies, to their dislikes, and to their attacks. It follows, that the misguided people are rushing into a horrible and absurd struggle, in which victory would be more fatal than defeat, since, according to this supposition, the result would be the realization of universal evils, the destruction of every means of emancipation, the consummation of its own misery.
This is just what M. Proudhon has acknowledged, with perfect good faith. "The foundation stone," he told me, "of my system is the gratuitousness of credit. If I am mistaken in this, Socialism is a vain dream." I add, it is a dream, in which the people are tearing themselves to pieces. Will it, therefore, be a cause for surprise, if, when they awake, they find themselves mangled and bleeding? Such a danger as this is enough to justify me fully, if, in the course of the discussion, I allow myself to be led into some trivialities and some prolixity.
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