The Sun.
London, England, 1858-03-15 00:00:00

.111 A-R CHI 15, 1512521.

TVILL THE LOW RATE OF IIfTEREST
LAST?

TO THE EDITOR OF TUE ECONOMIST.
Sir,—ln discussing this question in your im-
pression of the 30th January, there is an absence of
that perspicuity for which your articles are gene-
rally so distinguished, anti. which justly entitles
you to be looked up to by the commercial commu-
nity as a guide on the subject of money. Provin-
cial editors in general, with some rare exceptions,
are dumbfounded on the subject ; and it becomes,
therefore, the more desirable and necessary that
light should be thrown upon it from the metro-
polis, the centre of the monetary world. I may
be mistaken, but the article conveys to my mind
the. impression that the writer uses the terms
money and capital, and also interest and dis-
count, as synonymous. If wrong in this inference
I shall be glad to be set right ; and if the following
definition of those terms be unsound, to be cor-
rected. I understand

Capital—to be services and commodities used in
production.
Money—to be the measure of value, the medium
of exchange, and the universal equivalent ; but,
more practically, the means of obtaining capita),
and the only means of paying for capital previously
obtained on credit to be virtually a security for ot-
taining its equivalent value in capital.
As an illustration of the difference between
money and capital, if two persons enter into part-
nership in the cloth trade, engaging to provide each
2,0001. capital, and the one brings in that value iu
wool, he brings in so much bona fide capital, and
should the other bring in the same nominal value
in bills and bank-notes, he would bring in money
—the means of obtaining capital ; but should the
bills and bank-notes turn out to be bad he would
neither have brought in capital nor the means of
obtaining it. Commerce is the exchange of capital
for capital through the medium of money, and the
contract being for the medium—money alone can
satisfy the contract and discharge the debt. In
selling, one kind of capital is disposed of for a
security (money) for obtaining its equivalent value
in any kind of capital. I understand interest to be
the consideration given for the loan of money.
If the money be borrowed for the purpose of
procuring capital, then the consideration given
is a remuneration for the me of the capital
(raw materials, labour, merchandise, &z.) which
it obtains. If borrowed for the purpose of
discharging a debt, for paying for capital previously
obtained and used, contracted to ba paid for in
money, then the consideration given is for the use
of money itself, and in this respect interest and
discount are similar.

I understand discount to be solely the remu-
neration for the use of money itself, for con-
verting credit money into ready money. A good
bill gives the same command over capital as bank
notes, minus the charge for discount ; and bills
are discounted for the purpose of obtaining money
of a mere convenient denomination for wages and
small cash payments, or to meet larger engage-
ments falling due ; and also for the advantage to
be gained when ready money can be had by dis-
counting at a lower rate than 5 per cent.—the
usual allowance made for cash.

The main object, however, in discounting is to
obtain legal tender money, absolutely necessary to
discharge money contracts coming due, and this
supports the position I have long taken, that the
rate of discount in this country depends fundamen-
tally upon the demand and supply of legal tender
money, and the supply being restricted by the Bank
Charter Act of 1844, that the unusual and unnatu-
ral high rate of 5 per cent is to be attributed to the
operation of that act.
Entertaining these views of the meaning of the
terms money and capital, interest and discount, the
object of the inquiry seems to me to involve two
questions instead of one :-
Ist. Will the low rate of interest last 7 The an-
swer to this will mainly depend on the supply and
demand of capital, and as the supply of capital,
other than services, depends chiefly on good or bad
harvests—upon large or small crops of pro-
duce ; and as the last harvest throughout the
d worl was good and crops abundant (exhibiting
the coincidence of a plethora and a low price of
capital with a dearth and high value of money,
manifesting clearly their difference) a low rate of
interest may be expected until the result of the
next harvest can be estimated.
2d. Will the low rate of discount last ? The
answer to this question will depend upon the sup-
ply and demand of money, and iu making an
estimate we must take into consideration, not
only the circumstances affecting more particularly
our own country, but also those bearing upon the
demand and supply of money throughout the
world ; and when we consider the following causes
in operation, we are disposed to answer the ques-
tion in the affirmative.
That the reduced price of services and commodi-
ties (capital) will require less money to circulate
them.
That trade being prostrated, will, so long as the
etagnation lasts, absorb less money.
That the money of the world has increased, is
increasing, and will increase ; and though self-
interest will lead to its employment in the
circulation of capital, sooner or later, in one
way or another, yet after such a panic and
prostration of trade, it will be some time
before the great wheel for circulating capital
can be iu full work again. The quantity of money
has been increased by the gold discoveries in Cali-
fornia and Australia, the greater portion of which
has been converted into coin ; and the quantity of
gold, the basis of our money, will probably con-
tinue to increase at the rate of 30,000,0001. a-year.
The quantity of money has also been increased by
the United States issuing paper money to the
amount of 4,000,0001., and by the Bank of
France being permitted to issue notes of as
low a denomination as two and four pounds.
Further, as the substitution in France of gold
for silver in the coinage (which has been the
principal means, hitherto, of absorbing the new
discoveries of gold) must be approaching its comple-
tion, particularly as less coinage will lee wanted for
a stagnant trade and reduced prices, we may ex-
pect, ere long, that our fixed prices of
31. 17s. Did. an ounce will attract the gold
here. We come, then, to the conclusion that
the low rate of discount, other circumstances
remaining the same, will continue for some years.
And should the restrictive clauses of the Act of
1844, on the issuing of convertible bank notes, of
bona fide money, be repealed, and provision be
made for such a surplus stock of gold as will
counteract the evil of its export as a commodity, the
rate of discount need never exceed 5 per cent.
under any pressure, and a panic from an
apprehension of a deficiency of legal tender
money could never occur. A close resem-
blance exists between the rate of freight and
the rate of money ; for although the market value
of all things is determined by demand and supply,
yet the analogy between these rates is more espe-
cially strong from both being equally a means for
the transfer of capital. The rate of freight depends
upon the proportion of goods seeking ships to trans-
port them, and the number of ships wanting
freights ; andthe rate of money on the quantity of
capital seeking to be exchanged, and the amount
of money wanting to be employed. Would it not
be, then, as unwise to limit the number of ships to
be built, and consequently to raise the rate of
freight, and give a monopoly to the present ship-
owners, as to restrict the supply of hood money,
raise its value, and give a monopoly to the present
money-holders ! As a constant reader of the Econo-
mist from the first, I shall value your further ex-
planation of the terms money and capital—interest
and discount, and am, sir, your obedient servant,
HAMER STANSFELD.
The Grange, Burley, near Otley, Feb. 22, 1858.
P.S. If the rate of interest, it may be asked, de-
pends mainly on the demand and supply of capi-
tal, and the rate of discount entirely on the
supply and demand of money—two very different
things—how comes it that the terms interest and
discount, and also capital and money, are so inti-
mately connected iu the public mind as to be con-
sidered respectively the same thing Is it not
that capital is generally the foundation of bills,
constituting the great bulk of the monies used in
the wholesale trade ? Almost every sale of capital
on credit gives rise to a bill of equal value,
and frequently the same transaction to
many bills, so that in ordinary times of cre-
dit the value of capital in circulation on
credit and bill-money is nearly the same. Aft r
good harvests capital is plentiful, credit is generally
good, money abundant and cheap. After bad
harvests the reverse is the case ; and sometimes, as
in the late panic, a collapse of credit takce place in
spire of good harvest, when, coincident with a
plethora and low price of capital, there exists a
dearth and a high value of money. Does not
the intimate connection existing between money
and capital, and also between interest
.and discount,
through the mystical influence of credit, lead to
the erroneous impression that these are respectively
the same things

THE ARMY AND NAVY CLUE AND VIE EMPEROR
NAPOLEON.—The 211,mi/err of Saturday says :—" We
record with pleasure a fact which shows the hot ou able
sentiments by which the officers are animated in Eng-
land who stood fide by side with our own officers in the
Crimean war. The committee of the Army and Nay!
Club in Loudon, being informed that som ho ly
sent to officerS of the French army a caricature, be
neath which were printeoi borne offensive w,,rd,e, with
a pretended message from the club, has offered a
reward Of 501. to at.y one who will make known th-_1
author of this deed thus showing how indignat t t
members of the club were at the perpetratiun of such
an unworthy insult."