Money loaned and borrowed in cities
5. The loan and hire of wealth in medieval cities came to be expressed as a money loan. The loan of money and of other wealth expressed in terms of money, began in the cities. The use of money and the expression of the value of things in terms of money was common there throughout the Middle Ages. Moreover, as the movable forms of wealth multiplied, the agreement to return borrowed wealth in kind became impossible in cities; the loan in terms of money became the only practicable thing. A merchant embarking on a trading expedition must have such a number and variety of goods, that he finds it both very difficult to rent them and wasteful in time to enumerate them and return them in like kind. It therefore became usual to make a loan either of the things expressed in terms of money, or of money with which to buy the things, thereby reducing to a single, simple, easily interpreted contract, the indebtedness which the borrowing of a thousand different things occasioned.
The medieval opposition to loans at interest
Such a contract differed not in economic purpose, but only in form and terms of obligation, from the renting of wealth. The church writers, however, got much confused in regard to the nature of money loans. They did not see that it was things which the merchant wished to borrow. They did not see that the money loan was simply a more convenient mode of transferring the use of wealth from one person to another. The moralists and lawmakers of that day said: Money is unfruitful, therefore taking interest for it is robbery. We cannot follow here the controversy as to the justice of interest on money which involved other ideas than those mentioned, but even to the present time traces of the old fallacy may be seen more or less plainly in the economic theory as well of conservative writers as of the socialistic opponents of interest. The principal sum expressed in the loan contract was called the capital sum, from caput, head, and the amount paid for its use was first called usury, money for the use. How the word interest came to take its place, and the word usury came to mean excessive interest is one of the most interesting chapters in economic history. The term capital then came to be connected with city wealth, with movable forms of wealth, with things supposed to be peculiarly "the product of labor"; and interest was assumed to be connected only with this capital. The term rent on the other hand was connected especially with the use of land. The connection was a historical accident, but it has had an important influence on economic theory.
Rivalry of the commercial and landholding classes in Europe
6. The owners of city wealth and of country landed estates often were opposed as well in social and political as in economic affairs. The practical economic questions of the Middle Ages and the practical political questions largely turned on these two groups of interests. The men of wealth in the cities, the merchants and manufacturers, often were found opposed to the landed aristocracy. This social division between the commercial and agricultural classes doubtless helped to strengthen the prejudgment as to the nature of the two kinds of wealth. Indeed, in view of the situation, it may have been in a measure justifiable and expedient to contrast the thought of city wealth, which has come to be called capital, with that of landed wealth. But even if it were, it is now misleading and erroneous to continue the use of such concepts in a new country and in our modern conditions.
Land continues to be rented while city wealth is borrowed in money form
Indeed, for centuries the sharper features of the contrast have been steadily softened. The money economy of the city gradually spread to the rural districts, but never entirely displaced barter, which lingers everywhere. Important steps toward a money economy were the commuting of forced or customary labor of the serfs into a money payment to the lord, and at the same time the substitution of money payments for payments in kind (use of lands, specified goods, etc.) to the peasants. Thus arose a free peasant class receiving wages. But land continued to be rented and landed estates to be hereditary throughout Europe. As they did not pass from hand to hand as a commercial or marketable form of wealth, their value was rarely, if ever, expressed in terms of money and as a ratio to the rent they bore. The result was the fixing of the erroneous idea that agricultural wealth is essentially different in the character of its service and yield from wealth used in manufactures. One phase of the error was the idea held by the physiocratic writers and by Adam Smith that in agriculture "nature labors along with man," while in manufacture "nature does nothing, man does all." This view was corrected by later critics (Buchanan, Ricardo, and others), but the main portion of the fallacy persisted in the supposed contrast between the characters of the services performed by natural resources and by artificially produced wealth.
§ II. THE CONCEPT OF CAPITAL IN MODERN BUSINESS
Extension of the use of the money loan and of the capital concept
1. The development of the use of money and credit has led to the expression of the value of all indirect agents, without distinction, in terms of money. This is a capitalistic age. The development of a class of money-lenders has led to a transfer of all sorts of wealth from owners to users by means of money. As in medieval Europe city wealth was bought and sold, and measured and expressed, so in twentieth century America are the farm, the waterfall, and the mine. Every purchase with money owned or borrowed is to-day called an investment of capital. To invest means to clothe, and an investment of capital is clothing money in any kind of wealth, whether it be a ship, a factory, or a farm.
Interest on money is the contractual form in which more and more the use of wealth is paid for. The borrower does not ask the wealthy man to buy for him a factory and to rent it to him. It is not impossible for the transaction to take that form; but in practice it is inconvenient. The capital concept, the expression of wealth in the form of money, spreads over almost the whole face of the economic world. In promissory notes, mortgages, capital stock, bonds, and many other forms, are expressed the obligations of borrowers bound to pay regularly a sum called interest for the use of the multifarious wealth they have chosen to employ.
Definition of capital
2. Capital to-day may be defined as economic wealth expressed in terms of the general unit of value. In economic discussion new conditions must be recognized and an attempt made to adapt definitions to the language and needs of practical life. By this definition, capital, at any given moment of time, includes all economic goods in existence, when they are thought of in terms of their value. But things have different durations, some are parts of the capital of the world only for an instant, others for a week, a month, or years. Most capital is composed of things durable in a large degree.
It has been seen above that there is no reason for keeping things unless they will increase in value, that is, unless a rental is logically attributable to them. Everything kept for a day, a month, a year, is kept because thus it will continually give off uses or by accumulating them it will become more useful. Hence, when interest is defined as the payment for the use of capital, it is connected with all wealth that is expressed in the capital form. In practical business and in theoretical discussion this is the idea of capital that alone can be consistently followed. Capital is the value equivalent of a sum of money "invested," "clothed" in forms of wealth purchased and exchanged. Wealth has become fluid in modern times; it was crystallized in medieval times. Under the new conditions, wealth, expressed in the mobile form of capital, flows into the most distant corners of the industrial world.
Distinction between money and capital
3. Capital must not be identified with money although it is expressed in terms of money. While money and capital are not identical, neither are they opposite or mutually contradictory. Money is but one species of the genus capital. It is a particularly durable form when industry as a whole is considered, a particularly fleeting form in the individual's possession, and a particularly important, though not necessarily the most important, form in its social significance. The things composing capital are concrete things, scarce forms of wealth, some of which are yielding gratification at the present moment, or are destined to do so at some future moment; others of which are not themselves giving direct gratification, but are indirect agents for the gratifying of wants. To this latter group belongs money.
The