Progress and Poverty (George)/Chapter X

by Henry George

Chapter X Interest on capital

Capital is not a fixed quantity, but can always be increased or decreased, (1) by the greater or less application of labour to the production of capital, and (2) by the conversion of wealth into capital, or capital into wealth.

It is manifest that under conditions of freedom the maximum that can be given for the use of capital will be the increase it will bring, and the minimum or zero will be the replacement of capital; for above the one point the borrowing of capital would involve a loss, and below the other, capital could not be maintained.

The power of applying itself in advantageous forms is a power of labour, which capital as capital cannot claim nor share. A bow and arrows will enable an Indian to kill, let us say, a buffalo every day, while with sticks and stones he could hardly kill one in a week; but the weapon maker of the tribe could not claim from the hunter six out of every seven buffaloes killed as a return for the use of a bow and arrows. Nor will capital invested in a woollen factory yield to the capitalist the difference between the produce of the factory and what the same amount of labour could have obtained with the spinning-wheel and handloom.

Capital is produced by labour; it is, in fact, but labour impressed upon matter - labour stored up in matter, to be released again as needed, as the heat of the sun stored up in coal is released in the furnace. The use of capital in production is, therefore, but a mode of labour. As capital can be used only by being consumed, its use is the expenditure of labour; and, for the maintenance of capital, its production by labour must be commensurate with its consumption in aid of labour.

The normal point of interest, which lies between the necessary, maximum and the necessary minimum of the return to capital must, wherever it rests, be such that all things considered the reward of labour and the return to capital will give an equally attractive result for the exertion on the one hand or the sacrifice on the other hand that is involved. It is perhaps not possible to formulate this point as wages are habitually estimated in quantity and interest in a ratio. But there must be such a point at, or rather about which the rate of interest must tend to settle; since, unless such an equilibrium were effected, labour would not accept the use of capital, or capital would not be placed at the disposal of labour.

This natural relation between interest and wages may be stated in a form which suggests a relation of opposition; but this opposition is apparent only. In a partnership between Dick and Harry, the statement that Dick receives a certain share of the income implies that the share of Harry is less or greater as Dick's is greater or less; but where, as in this case, each gets only what he adds to the common fund, the increase of the portion of the one does not decrease what the other receives.

We are, of course, not speaking of particular wages and particular interest, but of the general rate of wages and the general rate of interest, meaning always by interest the return which capital can secure, less insurance and wages of superintendence. In a particular branch of production the line may be clearly drawn between those who furnish labour and those who furnish capital, yet even in communities where there is the sharpest distinction between the general class labourers and the general class capitalists, these two classes shade off into each other by imperceptible gradations, and in the extremes where the two classes meet in the same persons, the interaction which restores equilibrium can go on without obstruction.

Relative positions of capitalist and landowner

If we could imagine a place where the production of wealth went on without the aid of labour and solely by the reproductive force of capital and that certain capitalists were transported with their capital in appropriate forms to such a place, manifestly they would get, as the return for their capital, the whole amount of wealth it produced, only so long as none of its produce was demanded as rent. When rent arose, it would come out of the produce of capital, and as it increased, the return to the owners of capital must necessarily diminish.

If we imagine the place where capital possessed this power of producing wealth without the aid of labour to be of limited extent, say an island, we shall see that as soon as capital had increased to the limit of the island to support it, the return to capital must fall to a trifle above its minimum of mere replacement, and the landowners would receive nearly the whole produce as rent, for the only alternative capitalists would have would be to throw their capital into the sea. Or, if we imagine such an island to be in communication with the rest of the world, the return to capital would settle at the rate of return in other places. Interest there would be neither higher nor lower than anywhere else. Rent would obtain the whole of the superior advantage, and the land of such an island would have a great value.

Capital as a form of labour

In truth, the primary division of wealth in distribution is dual, not tripartite. Capital is but a form of labour, and its distinction from labour is in reality but a subdivision, just as the division of labour into skilled and unskilled would be. We have reached the same point as would have been attained had we simply treated capital as a form of labour and sought the law which divides the produce between rent and wages; that is to say, between the possessors of the two factors, natural substances and powers, and human exertion - which two factors by their union produce all wealth.

Profits often mistaken for interest

Attention has already been called to the fact that land values, which constitute such an enormous part of what is commonly called capital, are not capital at all; and that rent, which is as commonly included in the receipts of capital and which takes an ever-increasing portion of the produce of an advancing community, is not the earnings of capital, and must be carefully separated from interest.

Nothing can be capital, let it always be remembered, that is not wealth - that is to say, nothing can be capital that does not consist of actual, tangible things, not the spontaneous offerings of nature, which have in themselves, and not by proxy, the power of directly or indirectly ministering to human desire.

Thus, a Government bond is not capital, nor yet is it the representative of capital. The capital that was once received for it by the Government has been consumed unproductively - blown away from the mouths of cannon, used up in warships, expended in keeping men marching and drilling, killing and destroying. The bond cannot represent capital that has been destroyed. It does not represent capital at all. It is simply a solemn declaration that the Government will, some time or other, take by taxation from the then existing stock of the people so much wealth, which it will turn over to the holder of the bond; and that, in the meanwhile, it will from time to time take in the same way enough to make up to the holder the increase which so much capital, as it some day promises to give him, would yield him were it actually in his possession. The immense sums that are thus taken from the produce of every modern country to pay interest on public debts are not the earnings or increase of capital; they are not really interest in the strict sense of the term, but are taxes levied on the produce of labour and capital, leaving so much less for wages and so much less for real interest.

But suppose the bonds have been issued for the deepening of a river bed, the construction of lighthouses, or the erection of a public market; or suppose, to embody the same idea while changing the illustration, they have been issued by a railway company. Here they do represent capital, existing and applied to productive uses, and like stock in a dividend-paying company may be considered as evidences of the ownership of capital. But they can be so considered only in so far as they actually represent capital, and not in so far as they have been issued in excess of the capital used.

There are economic writers who decompose profits into interest, insurance, and wages of superintendence. But while wages of superintendence clearly enough include the income derived from such personal qualities as skill, tact, enterprise, organizing ability, inventive power, character, etc., there is another contributing element to the profits we are speaking of, which can only arbitrarily be classed with those qualities - the element of monopoly.

When James I granted to his minion the exclusive privilege of making gold and silver thread, and under severe penalties prohibited everyone else from making such thread, the income that Buckingham enjoyed in consequence did not arise from the interest upon the capital invested in the manufacture, nor from the skill, etc., of those who really conducted the operations, but from what he got from the King - namely, the exclusive privilege - in reality the power to levy a tax for his own purposes upon all the users of such thread. From a similar source comes a large part of the profits which are commonly confounded with the earnings of capital.

Receipts from the patents granted for a limited term of years for the purpose of encouraging invention are clearly attributable to this source, as are the returns derived from monopolies created by protective tariffs under the pretence of encouraging home industry.

Profits properly due to the elements of risk are also frequently confounded with interest. Some people acquire wealth by taking chances which to the majority of people must necessarily bring loss. Such are many forms of speculation and especially that mode of gambling known as stock dealing; just as at a gaming table, whatever one gains someone else must lose.

How necessary it is to note the distinctions to which I have been calling attention is shown in current discussions, where the shield seems alternately black or white as the standpoint is shifted from one side to the other. On the one hand we are called upon to see, in the existence of deep poverty side by side with vast accumulations of wealth, the aggressions of capital on labour. On the other hand, it is pointed out that capital aids labour, and hence we are asked to conclude that there is nothing unjust or unnatural in the wide gulf between rich and poor; that wealth is but the reward of industry, intelligence and thrift; and poverty but the punishment of indolence, ignorance and imprudence.