Progress and Poverty, Henry George [read novels website .TXT] 📗

the produce of labor and capital, but upon what is left after rent is taken out; or, upon the produce which they could obtain without paying rent⁠—that is, from the poorest land in use. And hence, no matter what be the increase in productive power, if the increase in rent keeps pace with it, neither wages nor interest can increase.

The moment this simple relation is recognized, a flood of light streams in upon what was before inexplicable, and seemingly discordant facts range themselves under an obvious law. The increase of rent which goes on in progressive countries is at once seen to be the key which explains why wages and interest fail to increase with increase of productive power. For the wealth produced in every community is divided into two parts by what may be called the rent line, which is fixed by the margin of cultivation, or the return which labor and capital could obtain from such natural opportunities as are free to them without the payment of rent. From the part of the produce below this line wages and interest must be paid. All that is above goes to the owners of land. Thus, where the value of land is low, there may be a small production of wealth, and yet a high rate of wages and interest, as we see in new countries. And, where the value of land is high, there may be a very large production of wealth, and yet a low rate of wages and interest, as we see in old countries. And, where productive power increases, as it is increasing in all progressive countries, wages and interest will be affected, not by the increase, but by the manner in which rent is affected. If the value of land increases proportionately, all the increased production will be swallowed up by rent, and wages and interest will remain as before. If the value of land increases in greater ratio than productive power, rent will swallow up even more than the increase; and while the produce of labor and capital will be much larger, wages and interest will fall. It is only when the value of land fails to increase as rapidly as productive power, that wages and interest can increase with the increase of productive power. All this is exemplified in actual fact.

III Of Interest and the Cause of Interest

Having made sure of the law of rent, we have obtained as its necessary corollary the law of wages, where the division is between rent and wages; and the law of wages and interest taken together, where the division is between the three factors. What proportion of the produce is taken as rent must determine what proportion is left for wages, if but land and labor are concerned; or to be divided between wages and interest, if capital joins in the production.

But without reference to this deduction, let us seek each of these laws separately and independently. If, when obtained in this way, we find that they correlate, our conclusions will have the highest certainty.

And, inasmuch as the discovery of the law of wages is the ultimate purpose of our inquiry, let us take up first the subject of interest.

I have already referred to the difference in meaning between the terms profits and interest. It may be worth while, further, to say that interest, as an abstract term in the distribution of wealth, differs in meaning from the word as commonly used, in this: That it includes all returns for the use of capital, and not merely those that pass from borrower to lender; and that it excludes compensation for risk, which forms so great a part of what is commonly called interest. Compensation for risk is evidently only an equalization of return between different employments of capital. What we want to find is, what fixes the general rate of interest proper? The different rates of compensation for risk added to this will give the current rates of commercial interest.

Now, it is evident that the greatest differences in what is ordinarily called interest are due to differences in risk; but it is also evident that between different countries and different times there are also considerable variations in the rate of interest proper. In California at one time two percent a month would not have been considered extravagant interest on security on which loans could now be effected at seven or eight percent per annum, and though some part of the difference may be due to an increased sense of general stability, the greater part is evidently due to some other general cause. In the United States generally the rate of interest has been higher than in England; and in the newer States of the Union higher than in the older States; and the tendency of interest to sink as society progresses is well marked and has long been noticed. What is the law which will bind all these variations together and exhibit their cause?

It is not worth while to dwell more than has hitherto incidentally been done upon the failure of the current political economy to determine the true law of interest. Its speculations upon this subject have not the definiteness and coherency which have enabled the accepted doctrine of wages to withstand the evidence of fact, and do not require the same elaborate review. That they run counter to the facts is evident. That interest does not depend on the productiveness of labor and capital is proved by the general fact that where labor and capital are most productive interest is lowest. That it does not depend reversely upon wages (or the cost of labor), lowering as wages rise, and increasing as wages fall, is proved by the general fact that interest is high when and where wages are high, and low when and where wages are low.

Let us begin at the beginning. The nature and functions of capital have already been sufficiently shown, but even at the risk of something