Of Interest
by David Hume
    Nothing is esteemed a more certain sign of the flourishing
condition of any nation than the lowness of interest: And with reason;
though I believe the cause is somewhat different from what is commonly
apprehended. Lowness of interest is generally ascribed to plenty of
money. But money, however plentiful, has no other effect, if fixed,
than to raise the price of labour. Silver is more common than gold;
and therefore you receive a greater quantity of it for the same
commodities. But do you pay less interest for it? Interest in BATAVIA
and JAMAICA is at 10 per cent. in PORTUGAL at 6; though these places,
as we may learn from the prices of every thing, abound more in gold
and silver than either LONDON or AMSTERDAM.
    Were all the gold in ENGLAND annihilated at once, and one and
twenty shillings substituted in the place of every guinea, would money
be more plentiful or interest lower? No surely: We should only use
silver instead of gold. Were gold rendered as common as silver, and
silver as common as copper; would money be more plentiful or interest
lower? We may assuredly give the same answer. Our shillings would then
be yellow, and our halfpence white; and we should have no guineas. No
other difference would ever be observed; no alteration on commerce,
manufactures, navigation, or interest; unless we imagine, that the
colour of the metal is of any consequence.
    Now, what is so visible in these greater variations of scarcity or
abundance in the precious metals, must hold in all inferior changes.
If the multiplying of gold and silver fifteen times makes no
difference, much less can the doubling or tripling them. All
augmentation has no other effect than to heighten the price of labour
and commodities; and even this variation is little more than that of a
name. In the progress towards these changes, the augmentation may have
some influence, by exciting industry; but after the prices are
settled, suitably to the new abundance of gold and silver, it has no
manner of influence.
    An effect always holds proportion with its cause. Prices have
risen near four times since the discovery of the INDIES; and it is
probable gold and silver have multiplied much more: But interest has
not fallen much above half. The rate of interest, therefore, is not
derived from the quantity of the precious metals.
    Money having chiefly a fictitious value, the greater or less
plenty of it is of no consequence, if we consider a nation within
itself; and the quantity of specie, when once fixed, though ever so
large, has no other effect, than to oblige every one to tell out a
greater number of those shining bits of metal, for clothes, furniture
or equipage, without encreasing any one convenience of life. If a man
borrow money to build a house, he then carries home a greater load;
because the stone, timber, lead, glass, &c. with the labour of the
masons and carpenters, are represented by a greater quantity of gold
and silver. But as these metals are considered chiefly as
representations, there can no alteration arise, from their bulk or
quantity, their weight or colour, either upon their real value or
their interest. The same interest, in all cases, bears the same
proportion to the sum. And if you lent me so much labour and so many
commodities; by receiving five per cent. you always receive
proportional labour and commodities, however represented, whether by












yellow or white coin, whether by a pound or an ounce. It is in vain,
therefore, to look for the cause of the fall or rise of interest in
the greater or less quantity of gold and silver, which is fixed in any
nation.
    High interest arises from three circumstances: A great demand for
borrowing; little riches to supply that demand; and great profits
arising from commerce: And these circumstances are a clear proof of
the small advance of commerce and industry, not of the scarcity of
gold and silver. Low interest, on the other hand, proceeds from the
three opposite circumstances: A small demand for borrowing; great
riches to supply that demand; and small profits arising from commerce:
And these circumstances are all connected together, and proceed from
the encrease of industry and commerce, not of gold and silver. We
shall endeavour to prove these points; and shall begin with the causes
and the effects of a great or small demand for borrowing.
    When a people have emerged ever so little from a savage state, and
their numbers have encreased beyond the original multitude, there must
immediately arise an inequality of property; and while some possess
large tracts of land, others are confined within narrow limits, and
some are entirely without any landed property. Those who possess more
land than they can labour, employ those who possess none, and agree to
receive a determinate part of the product. Thus the landed interest is
immediately established; nor is there any settled government, however
rude, in which affairs are not on this footing. Of these proprietors
of land, some must presently discover themselves to be of different
tempers from others; and while one would willingly store up the
produce of his land for futurity, another desires to consume at
present what should suffice for many years. But as the spending of a
settled revenue is a way of life entirely without occupation; men have
so much need of somewhat to fix and engage them, that pleasures, such
as they are, will be the pursuit of the greater part of the
landholders, and the prodigals among them will always be more numerous
than the misers. In a state, therefore, where there is nothing but a
landed interest, as there is little frugality, the borrowers must be
very numerous, and the rate of interest must hold proportion to it.
The difference depends not on the quantity of money, but on the habits
and manners which prevail. By this alone the demand for borrowing is
encreased or diminished. Were money so plentiful as to make an egg be
sold for sixpence; so long as there are only landed gentry and
peasants in the state, the borrowers must be numerous, and interest
high. The rent for the same farm would be heavier and more bulky: But
the same idleness of the landlord, with the higher price of
commodities, would dissipate it in the same time, and produce the same
necessity and demand for borrowing.
    Nor is the case different with regard to the second circumstance
which we proposed to consider, namely, the great or little riches to
supply the demand. This effect also depends on the habits and way of
living of the people, not on the quantity of gold and silver. In order
to have, in any state, a great number of lenders, it is not sufficient
nor requisite, that there be great abundance of the precious metals.
It is only requisite, that the property or command of that quantity,
which is in the state, whether great or small, should be collected in
particular hands, so as to form considerable sums, or compose a great
monied interest. This begets a number of lenders, and sinks the rate












of usury; and this I shall venture to affirm, depends not on the
quantity of specie, but on particular manners and customs, which make
the specie gather into separate sums or masses of considerable value.
    For suppose, that, by miracle, every man in GREAT BRITAIN should
have five pounds slipt into his pocket in one night; this would much
more than double the whole money that is at present in the kingdom;
yet there would not next day, nor for some time, be any more lenders,
nor any variation in the interest. And were there nothing but
landlords and peasants in the state, this money, however abundant,
could never gather into sums; and would only serve to encrease the
prices of every thing, without any farther consequence. The prodigal
landlord dissipates it, as fast as he receives it; and the beggarly
peasant has no means, nor view, nor ambition of obtaining above a bare
livelihood. The overplus of borrowers above that of lenders continuing
still the same, there will follow no reduction of interest. That
depends upon another principle; and must proceed from an encrease of
industry and frugality, of arts and commerce.
    Every thing useful to the life of man arises from the ground; but
few things arise in that condition which is requisite to render them
useful. There must, therefore, beside the peasants and the proprietors
of land, be another rank of men, who receiving from the former the
rude materials, work them into their proper form, and retain part for
their own use and subsistence. In the infancy of society, these
contracts between the artisans and the peasants, and between one
species of artisans and another are commonly entered into immediately
by the persons themselves, who, being neighbours, are easily
acquainted with each other's necessities, and can lend their mutual
assistance to supply them. But when men's industry encreases, and
their views enlarge, it is found, that the most remote parts of the
state can assist each other as well as the more contiguous, and that
this intercourse of good offices may be carried on to the greatest
extent and intricacy. Hence the origin of merchants, one of the most
useful races of men, who serve as agents between those parts of the
state, that are wholly unacquainted, and are ignorant of each other's
necessities. Here are in a city fifty workmen in silk and linen, and a
thousand customers; and these two ranks of men, so necessary to each
other, can never rightly meet, till one man erects a shop, to which
all the workmen and all the customers repair. In this province, grass
rises in abundance: The inhabitants abound in cheese, and butter, and
cattle; but want bread and corn, which, in a neighbouring province,
are in too great abundance for the use of the inhabitants. One man
discovers this. He brings corn from the one province and returns with
cattle; and supplying the wants of both, he is, so far, a common
benefactor. As the people encrease in numbers and industry, the
difficulty of their intercourse encreases: The business of the agency
or merchandize becomes more intricate; and divides, subdivides,
compounds, and mixes to a greater variety. In all these transactions,
it is necessary, and reasonable, that a considerable part of the
commodities and labour should belong to the merchant, to whom, in a
great measure, they are owing. And these commodities he will sometimes
preserve in kind, or more commonly convert into money, which is their
common representation. If gold and silver have encreased in the state
together with the industry, it will require a great quantity of these
metals to represent a great quantity of commodities and labour. If












industry alone has encreased, the prices of every thing must sink, and
a small quantity of specie will serve as a representation.
    There is no craving or demand of the human mind more constant and
insatiable than that for exercise and employment; and this desire
seems the foundation of most of our passions and pursuits. Deprive a
man of all business and serious occupation, he runs restless from one
amusement to another; and the weight and oppression, which he feels
from idleness, is so great, that he forgets the ruin which must follow
him from his immoderate expences. Give him a more harmless way of
employing his mind or body, he is satisfied, and feels no longer that
insatiable thirst after pleasure. But if the employment you give him
be lucrative, especially if the profit be attached to every particular
exertion of industry, he has gain so often in his eye, that he
acquires, by degrees, a passion for it, and knows no such pleasure as
that of seeing the daily encrease of his fortune. And this is the
reason why trade encreases frugality, and why, among merchants, there
is the same overplus of misers above prodigals, as, among the
possessors of land, there is the contrary.
    Commerce encreases industry, by conveying it readily from one
member of the state to another, and allowing none of it to perish or
become useless. It encreases frugality, by giving occupation to men,
and employing them in the arts of gain, which soon engage their
affection, and remove all relish for pleasure and expence. It is an
infallible consequence of all industrious professions, to beget
frugality, and make the love of gain prevail over the love of
pleasure. Among lawyers and physicians who have any practice, there
are many more who live within their income, than who exceed it, or
even live up to it. But lawyers and physicians beget no industry; and
it is even at the expence of others they acquire their riches; so that
they are sure to diminish the possessions of some of their fellow-
citizens, as fast as they encrease their own. Merchants, on the
contrary, beget industry, by serving as canals to convey it through
every corner of the state: And at the same time, by their frugality,
they acquire great power over that industry, and collect a large
property in the labour and commodities, which they are the chief
instruments in producing. There is no other profession, therefore,
except merchandize, which can make the monied interest considerable,
or, in other words, can encrease industry, and, by also encreasing
frugality, give a great command of that industry to particular members
of the society. Without commerce, the state must consist chiefly of
landed gentry, whose prodigality and expence make a continual demand
for borrowing; and of peasants, who have no sums to supply that
demand. The money never gathers into large stocks or sums, which can
be lent at interest. It is dispersed into numberless hands, who either
squander it in idle show and magnificence, or employ it in the
purchase of the common necessaries of life. Commerce alone assembles
it into considerable sums; and this effect it has merely from the
industry which it begets, and the frugality which it inspires,
independent of that particular quantity of precious metal which may
circulate in the state.
    Thus an encrease of commerce, by a necessary consequence, raises a
great number of lenders, and by that means produces lowness of
interest. We must now consider how far this encrease of commerce
diminishes the profits arising from that profession, and gives rise to
the third circumstance requisite to produce lowness of interest.











    It may be proper to observe on this head, that low interest and
low profits of merchandize are two events, that mutually forward each
other, and are both originally derived from that extensive commerce,
which produces opulent merchants, and renders the monied interest
considerable. Where merchants possess great stocks, whether
represented by few or many pieces of metal, it must frequently happen,
that, when they either become tired of business, or leave heirs
unwilling or unfit to engage in commerce, a great proportion of these
riches naturally seeks an annual and secure revenue. The plenty
diminishes the price, and makes the lenders accept of a low interest.
This consideration obliges many to keep their stock employed in trade,
and rather be content with low profits than dispose of their money at
an under-value. On the other hand, when commerce has become extensive,
and employs large stocks, there must arise rivalships among the
merchants, which diminish the profits of trade, at the same time that
they encrease the trade itself. The low profits of merchandize induce
the merchants to accept more willingly of a low interest, when they
leave off business, and begin to indulge themselves in ease and
indolence. It is needless, therefore, to enquire which of these
circumstances, to wit, low interest or low profits, is the cause, and
which the effect? They both arise from an extensive commerce, and
mutually forward each other. No man will accept of low profits, where
he can have high interest; and no man will accept of low interest,
where he can have high profits. An extensive commerce, by producing
large stocks, diminishes both interest and profits; and is always
assisted, in its diminution of the one, by the proportional sinking of
the other. I may add, that, as low profits arise from the encrease of
commerce and industry, they serve in their turn to its farther
encrease, by rendering the commodities cheaper, encouraging the
consumption, and heightening the industry. And thus, if we consider
the whole connexion of causes and effects, interest is the barometer
of the state, and its lowness is a sign almost infallible of the
flourishing condition of a people. It proves the encrease of industry,
and its prompt circulation through the whole state, little inferior to
a demonstration. And though, perhaps, it may not be impossible but a
sudden and a great check to commerce may have a momentary effect of
the same kind, by throwing so many stocks out of trade; it must be
attended with such misery and want of employment in the poor, that,
besides its short duration, it will not be possible to mistake the one
case for the other.
    Those who have asserted, that the plenty of money was the cause of
low interest, seem to have taken a collateral effect for a cause;
since the same industry, which sinks the interest, commonly acquires
great abundance of the precious metals. A variety of fine
manufactures, with vigilant enterprising merchants, will soon draw
money to a state, if it be any where to be found in the world. The
same cause, by multiplying the conveniencies of life, and encreasing
industry, collects great riches into the hands of persons, who are not
proprietors of land, and produces, by that means, a lowness of
interest. But though both these effects, plenty of money and low
interest, naturally arise from commerce and industry, they are
altogether independent of each other. For suppose a nation removed
into the Pacific ocean, without any foreign commerce, or any knowledge
of navigation: Suppose, that this nation possesses always the same












stock of coin, but is continually encreasing in its numbers and
industry: It is evident, that the price of every commodity must
gradually diminish in that kingdom; since it is the proportion between
money and any species of goods, which fixes their mutual value; and,
upon the present supposition, the conveniencies of life become every
day more abundant, without any alteration in the current specie. A
less quantity of money, therefore, among this people, will make a rich
man, during the times of industry, than would suffice to that purpose,
in ignorant and slothful ages. Less money will build a house, portion
a daughter, buy an estate, support a manufactory, or maintain a family
and equipage. These are the uses for which men borrow money; and
therefore, the greater or less quantity of it in a state has no
influence on the interest. But it is evident, that the greater or less
stock of labour and commodities must have a great influence; since we
really and in effect borrow these, when we take money upon interest.
It is true, when commerce is extended all over the globe, the most
industrious nations always abound most with the precious metals: So
that low interest and plenty of money are in fact almost inseparable.
But still it is of consequence to know the principle whence any
phenomenon arises, and to distinguish between a cause and a
concomitant effect. Besides that the speculation is curious, it may
frequently be of use in the conduct of public affairs. At least, it
must be owned, that nothing can be of more use than to improve, by
practice, the method of reasoning on these subjects, which of all
others are the most important; though they are commonly treated in the
loosest and most careless manner.
    Another reason of this popular mistake with regard to the cause of
low interest, seems to be the instance of some nations; where, after a
sudden acquisition of money or of the precious metals, by means of
foreign conquest, the interest has fallen, not only among them, but in
all the neighbouring states, as soon as that money was dispersed, and
had insinuated itself into every corner. Thus, interest in SPAIN fell
near a half immediately after the discovery of the WEST INDIES, as we
are informed by GARCILASSO DE LA VEGA: And it has been ever since
gradually sinking in every kingdom of EUROPE. Interest in ROME, after
the conquest of EGYPT, fell from 6 to 4 per cent. as we learn from
DION.
    The causes of the sinking of interest, upon such an event, seem
different in the conquering country and in the neighbouring states;
but in neither of them can we justly ascribe that effect merely to the
encrease of gold and silver.
    In the conquering country, it is natural to imagine, that this new
acquisition of money will fall into a few hands, and be gathered into
large sums, which seek a secure revenue, either by the purchase of
land or by interest; and consequently the same effect follows, for a
little time, as if there had been a great accession of industry and
commerce. The encrease of lenders above the borrowers sinks the
interest; and so much the faster, if those, who have acquired those
large sums, find no industry or commerce in the state, and no method
of employing their money but by lending it at interest. But after this
new mass of gold and silver has been digested, and has circulated
through the whole state, affairs will soon return to their former
situation; while the landlords and new money-holders, living idly,
squander above their income; and the former daily contract debt, and












the latter encroach on their stock till its final extinction. The
whole money may still be in the state, and make itself felt by the
encrease of prices: But not being now collected into any large masses
or stocks, the disproportion between the borrowers and lenders is the
same as formerly, and consequently the high interest returns.
    Accordingly we find, in ROME, that, so early as TIBERIUS'S time,
interest had again mounted to 6 per cent. though no accident had
happened to drain the empire of money. In TRAJAN'S time, money lent on
mortgages in ITALY, bore 6 per cent. on common securities in BITHYNIA,
12. And if interest in SPAIN has not risen to its old pitch; this can
be ascribed to nothing but the continuance of the same cause that sunk
it, to wit, the large fortunes continually made in the INDIES, which
come over to SPAIN from time to time, and supply the demand of the
borrowers. By this accidental and extraneous cause, more money is to
be lent in SPAIN, that is, more money is collected into large sums
than would otherwise be found in a state, where there are so little
commerce and industry.
    As to the reduction of interest, which has followed in ENGLAND,
FRANCE, and other kingdoms of EUROPE, that have no mines, it has been
gradual; and has not proceeded from the encrease of money, considered
merely in itself; but from that of industry, which is the natural
effect of the former encrease, in that interval, before it raises the
price of labour and provisions. For to return to the foregoing
supposition; if the industry of ENGLAND had risen as much from other
causes, (and that rise might easily have happened, though the stock of
money had remained the same) must not all the same consequences have
followed, which we observe at present? The same people would, in that
case, be found in the kingdom, the same commodities, the same
industry, manufactures, and commerce; and consequently the same
merchants, with the same stocks, that is, with the same command over
labour and commodities, only represented by a smaller number of white
or yellow pieces; which being a circumstance of no moment, would only
affect the waggoner, porter, and trunk-maker. Luxury, therefore,
manufactures, arts, industry, frugality, flourishing equally as at
present, it is evident, that interest must also have been as low;
since that is the necessary result of all these circumstances; so far
as they determine the profits of commerce, and the proportion between
the borrowers and lenders in any state.
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