The Wealth of Nations 17 – Book 2 Chapter 4 Of Stock Lent At Interest

The Wealth of Nations 17

Book 2 Chapter 4

Of Stock Lent At Interest

The Core of The Problem With The United States Financial Crisis

“The Stock which is lent at interest is always considered as a capital by the lender.  He expects that in due time it is to be restored to him and that, in the mean time, the borrower is to pay him a certain annual rent for the use of it.  The borrower may use it either as a capital, or as a stock reserved for immediate consumption.”

The core of the problem with the United States financial crisis is simply this, borrowing for the purpose of consumption rather than investment.

The Prodigal Nation – The United States Corporation

Smith goes on the write, “If he uses it as a stock for immediate consumption, he acts the part of a prodigal, and dissipates, in the maintenance of the idle, what was destined for the support of the industrious.”

Once the capital is spent on consumption it is gone forever, never to be reclaimed.  If on the other hand it is invested in some industry, a return is had and the original capital can be repaid and a profit is had.

Our nation, the Corporation of The United States, is a prodigal nation.  And like the New Testament story of the Prodigal Son, we are eating and drinking, destined only to live the life of a swine herder.

Consumption Based Economics Leads To Ruin

“The man who borrows in order to spend will soon be ruined, and he who lends to him will generally have occasion to repent of his folly.  To borrow or to lend for such a purpose, therefore, is in all cases, where gross usury is out of the question, contrary to the interest of both parties…”

There is a path back from the brink of spending vs. investment and it is clearly marked.  Each man must needs endeavor to serve if he is able.  Unfortunately our system currently rewards slothful behavior and encourages discouragement rather than thrift and innovation.

Interest Rates

Smith points out that as a nation builds wealth, lending at higher rates becomes increasingly difficult because of the abundance of available capital to lend.

As such, only the prodigals are willing to pay the higher rates of interest for their consumption while the borrower investor stays away.  He writes, “…the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest.  Sober people, who will give for the use of the money no more than a part of what they are likely to make by the use of it, would not venture into the competition.”

So, the truth is known.  Those who can make best use of the money stay away from the higher interest and as we see now, unstable market conditions and use their time more productively.

The best policy is to let the market determine the interest rates, not the ivory tower philosophers.

I encourage you to use capital wisely and invest in your future while avoiding unnecessary consumption.

God Bless You and God Bless America!