still; if 4 per cent. a larger amount still; and so on. And the Law of Demand for capital is :

The Demand for capital increases with every increase in the numbers of the population, the natural resources of the country, the efficiency of the arts of production, the scope that these arts afford for the employment of Auxiliary capital, and the durability of Fixed capital. The rate of interest at which capital can find employment in a country with any given industrial population in any given state of the arts of production, depends on the amount of the capital offered for loan. It rises with a diminution and falls with an increase of this amount. Conversely, the amount of capital for which occupation can be found, increases with a fall and diminishes with a rise in the rate of interest at which capital is offered on loan. The current rate of interest measures the Final Utility of capital to each borrower; that is the advantage to him of the use of that capital which he is only just induced to employ. § 5. The rate of interest is in equilibrium when it is just that at which the whole supply of capital can find employment.

The annual addition to the capital of a country is seldom any considerable part of the whole, so that if we consider only short periods of time we may, without any great error, regard the supply as fixed during that time. On this supposition, the Law of the rate of interest becomes similar to that of the value of a commodity, the amount of which cannot be increased : Demand is the sole regulator of value. The rate of interest is then simply determined as just that which will call forth a demand for the existing capital.

§ 6. But when we are considering long periods of time we cannot neglect the influence which the rate of interest exercises on the increase of capital: and the problem becomes difficult. To simplify it, let us begin by making the opposite assumption to that which we made when we supposed the supply of capital to be fixed independently of the rate of interest. Let us now suppose that the rate of interest,-the price that can be obtained for the use of capital-exercises an overwhelming influence on the accumulation of capital.

Let us imagine for instance that people would save rapidly if they could obtain 5 per cent. per annum interest for their capital; but that if they could not obtain as high a rate as this, many of them would cease to save and begin to consume their capital. In this case the Normal rate of interest for secure investments would be fixed at 5 per cent. For so long as the rate of interest was more than 5 per cent., capital would accumulate

rapidly. The growth of capital would make the division of the produce more favourable to industry and less favourable to capital; earnings would rise and interest would fall. If it fell below 5 per cent., the accumulation of capital would be checked, and many would consume their capital. The demand of industry for the aid of capital would thus be increased, the division of the produce would become more favourable to capital; earnings would fall, and the rate of interest would rise again to 5 per cent., and so on. Thus a rate of interest of 5 per cent. per annum would be the Centre or Normal value toward which the remuneration of abstinence continually gravitated, and any deviation from which would be but a temporary irregularity, which the moment it exists, sets forces in motion tending to correct it.

On this assumption the Normal rate of interest would be fixed at 5 per cent. independently of all changes in the field for the employment of capital; such as the opening up of rich new countries, or inventions that gave room for vast extensions of Fixed capital. Of course such a change might raise the rate of interest temporarily; but since this rise would, on our present hypothesis, call rapidly into existence a vast increase of capital, interest would not remain for any considerable time higher than 5 per cent. On this supposition the Normal rate of interest would be rigidly fixed in the same way as is the Normal value of a commodity, the Expenses of production of which are independent of the amount produced1.

§ 7. But in fact the influence which the rate of interest exerts on the accumulation of capital is much weaker than we have supposed it to be in this imaginary case. The motives which men have for saving are various, and their characters differ widely; some will be improvident however high be the rate of interest; and however low it be, others will save for their families and for their own old age. On the whole

a fall in the rate of interest in a country is likely to check the growth of capital in some ways, and to promote it in others, but the latter effects are on a smaller scale than the former, so that a fall in the rate of interest will diminish the rate of accumulation of capital to some extent, though often only to a small extent".

The Law of Supply of capital is then that :—

The natural resources, and the numbers of the industrial population of a country, and the state of the arts of production in it, constitute the field of employment for capital, and determine the rate of interest at which any given amount of capital can be employed in

1 See Book II. ch. v. § 3.

2 Book I. ch. vi. § 4.

it. The rate is in equilibrium when it is just that at which the whole supply of capital can find employment. The supply depends upon the slow operation of many causes, one of which is the rate of interest. Combining this with the Law of Demand we get the Law of the Normal Rate of Interest, which is :

When the economic conditions of a country have been nearly uniform for a long period of time, the supply of capital is such, that the rate of interest which can be obtained for it is that which has been required to cause this supply to be forthcoming; and the rate thus determined is the Normal rate.

§ 8. The greater part of the capital in England has been accumulated since the country entered on the economic phase in which it is now; and the Normal rate here is about four per cent. a year on good security. In the case of England the influence which foreign markets exert on the rate of interest is of primary importance. If the rate were to rise much above four per cent., a great deal of capital that is now sent abroad for investment would be retained at home. More capital would be employed here; the demand of capital for the aid of industry would rise; and this would make wages rise at the expense of interest. On the other hand, if the rate were to fall much below four per cent., the amount of capital seeking investment here would diminish; there would be less competition on the part of capital for the aid of industry; the division of the produce of capital and industry would be more favourable to capital; and the rate of interest would rise.

The Normal rate of interest in England does not seem likely to deviate much from four per cent. for some time to come; but it may be slowly altered by changes in the field of employment, while the market rate of interest is oscillating rapidly up and down on either side of the Normal rate as a centre.

§ 9. Before the invention of the steam-engine it seemed likely that the Normal rate of interest in Western Europe would soon become lower than it is now. The changes that have come over the face of modern industry have given room for the profitable employment of a vast amount of Auxiliary capital of which £700,000,000 have been invested in English railways. Successive inventions together with the development of foreign commerce have enabled capital to increase much faster than population, without causing any fall in the rate of interest. And history records several other periods during which the wealth and capital of a nation increased very rapidly, while at the same time the opening out of new fields for the employment of capital was causing a rise in the rate of interest.

In new countries the return which nature gives to man's

work is often so rich that, though the wages of labour are high, ten per cent. or more can be got for the use of capital. But capital rushes in from older countries; and before a district has been occupied for many generations, the richest natural sources of wealth become private property for which a high rent is demanded. And then the produce which remains to be divided between capital and labour, the Earnings-and-interest Fund, obeys the Law of Diminishing Return and does not increase as fast as the capital increases: so that it no longer affords a very much higher rate of interest than that which can be had in older countries. A rate of eight per cent. on sound investments has spread like a wave steadily over the greater part of the North American Continent; and this is being followed by waves of seven and of six and even five per cent. interest that have already started on their way westward and southward from the Northern Atlantic States.

§ 10. It is difficult to forecast the distant future of the rate of interest. Hitherto the progress of civilization has increased the willingness to save at a low rate. In old countries, in which men are accustomed to work patiently for small gains and to value highly the possession of a secure income, a low rate of interest seems to have little effect in checking the accumulation of capital. In England for instance, in spite of the low rate of interest, the capital of the country is increasing at the average rate of about £200,000,000 annually, that is by a little more than a thirtieth of its total amount. If this rate of increase were sustained for four hundred years, the capital owned by Englishmen would be multiplied a million fold, and in eight hundred years a billion fold. But however high the hopes we may have of the future progress of the arts of production, we cannot suppose that there will ever be a field for the profitable employment of as much capital as this. Sooner or later the rapid growth of capital must increase the competition of capital for the aid of labour, and diminish the competition of labour for the aid of capital; so that capital's share of the total net produce will cease to be proportionately as large as before. And, at the same time, the total net produce that can be obtained by a given amount of capital and labour will diminish according to the Law of Diminishing Return. So that ultimately the Normal rate of interest will fall.

There is no reason to think that it will fall rapidly down to a minimum and then remain stationary. Rather should we expect that, with some slight oscillations, the Normal rate of interest will keep on falling, but that the rate of its fall will become continually slower and slower. It is thus likely never to attain but always to be approaching its mininum. But we have no means of guessing what that minimum will be.

CHAPTER XI.

WAGES.

1. WE have seen how the produce of land, capital and industry, exclusive of rent and taxes, is divided into Interest and Earnings; into the share which remunerates abstinence, and the share which remunerates work whether bodily or mental. Let us now look at the way in which this latter part is Normally subdivided among unskilled labour and the different kinds of skilled labour and of business power.

We are not now concerned with the advantages which custom or social opportunities or trade organizations give to the various ranks of industry in bargaining for their several shares of the Earnings-and-interest Fund; but when we come to discuss the theory of Market wages in the next Book, we shall see how such advantages may cause the wages of a trade to diverge for a considerable time from their Normal level.

Let us first inquire what constitutes the Normal demand for the work of each trade. This demand depends partly upon the desire of consumers to obtain the things which that trade produces or helps to produce, and partly upon the extent to which its aid is wanted by other industrial classes and the owners of capital who take part in making these things. Thus the demand for the work of a trade may be said to depend on the competition for its aid in production. The meaning of this term may be made more clear by an illustration.

The recent advance in England's wealth has caused a great demand for building; and those who produce other things have had to give more of them than before for the purchase or hire of a house. There has been an increased competition for the aid of the building trades, which has raised their wages and enabled them to obtain a larger share of the wealth of the country than before. Now suppose that during such a rise in the price of houses, there is a sudden check to the supply of (say) house carpenters. The rest of the building trades will then find it difficult to obtain the aid of carpenters to supply roofs, floors,