few days, serve as the instrument of three different 
loans, and of three different purchases
each of which is, in value, equal to the whole 
amount of those pieces. What the three monied 
men, A, B, and C, assigned to the three 
borrowers, W, X, and Y, is the power of 
making those purchases. In this power consist 
both the value and the use of the loans
The stock lent by the three monied men is 
equal to the value of the goods which can be 
purchased with it, and is three times greater 
than that of the money with which the purchases 
are made. Those loans, however, may 
be all perfectly well secured, the goods purchased 
by the different debtors being so employed 
as, in due time, to bring back, with a 
profit, an equal value either of coin or of paper. 
And as the same pieces of money can 
thus serve as the instrument of different loans 
to three, or, for the same reason, to thirty 
times their value, so they may likewise successively 
serve as the instrument of repayment
A capital lent at interest may, in this manner, 
be considered as an assignment, from the 
lender to the borrower, of a certain considerable 
portion of the annual produce, upon condition 
that the borrower in return shall, during 
the continuation of the loan, annually assign 
to the lender a small portion, called the 
interest; and, at the end of it, a portion equally 
considerable with that which had originally 
been assigned to him, called the repayment
Though money, either coin or paper, serves 
generally as the deed of assignment, both to 
the smaller and to the more considerable portion
it is itself altogether different from what 
is assigned by it. 
In proportion as that share of the annual 
produce which, as soon as it comes either from 
the ground, or from the hands of the productive 
labourers, is destined for replacing a capital
increases in any country, what is called 
the monied interest naturally increases with 
it. The increase of those particular capitals 
from which the owners wish to derive a revenue
without being at the trouble of employing 
them themselves, naturally accompanies 
the general increase of capitals; or, in other 
words, as stock increases, the quantity of stock 
to be lent at interest grows gradually greater 
and greater
As the quantity of stock to be lent at interest 
increases, the interest, or the price which 
must be paid for the use of that stock, necessarily 
diminishes, not only from those general 
causes which make the market price of things 
commonly diminish as their quantity increases
but from other causes which are peculiar to 
this particular case. As capitals increase in 
any country, the profits which can be made 
by employing them necessarily diminish. It 
becomes gradually more and more difficult to 
find within the country a profitable method of 
employing any new capital. There arises, in 
consequence, a competition between different 
capitals, the owner of one endeavouring to 
get possession of that employment which is 
occupied by another; but, upon most occasions
he can hope to justle that other out of 
this employment by no other means but by 
dealing upon more reasonable terms. He must 
not only sell what he deals in somewhat cheaper
but, in order to get it to sell, he must 
sometimes, too, buy it dearer. The demand for 
productive labour, by the increase of the funds 
which are destined for maintaining it, grows 
every day greater and greater. Labourers easily 
find employment; but the owners of capitals 
find it difficult to get labourers to employ. 
Their competition raises the wages of 
labour, and sinks the profits of stock. But 
when the profits which can be made by the 
use of a capital are in this manner diminished
as it were, at both ends, the price which 
can be paid for the use of it, that is, the rate 
of interest, must necessarily be diminished 
with them. 
Mr Locke, Mr Lawe, and Mr Montesquieu, 
as well as many other writers, seem to have 
imagined that the increase of the quantity of 
gold and silver, in consequence of the discovery 
of the Spanish West Indies, was the real 
cause of the lowering of the rate of interest 
through the greater part of Europe. Those 
metals, they say, having become of less value 
themselves, the use of any particular portion 
of them necessarily became of less value too, 
and, consequently, the price which could be 
paid for it. This notion, which at first sight 
seems so plausible, has been so fully exposed 
by Mr Hume, that it is, perhaps, unnecessary 
to say any thing more about it. The following 
very short and plain argument, however, 
may serve to explain more distinctly the fallacy 
which seems to have misled those gentlemen. 
Before the discovery of the Spanish West 
Indies, ten per cent. seems to have been the 
common rate of interest through the greater 
part of Europe. It has since that time, in 
different countries, sunk to six, five, four, and 
three per cent. Let us suppose, that in every 
particular country the value of silver has sunk 
precisely in the same proportion as the rate of 
interest; and that in those countries, for example, 
where interest has been reduced from 
ten to five per cent. the same quantity of silver 
can now purchase just half the quantity of 
goods which it could have purchased before. 
This supposition will not, I believe, be found 
anywhere agreeable to the truth; but it is the 
most favourable to the opinion which we are 
going to examine; and, even upon this supposition
it is utterly impossible that the lowering 
of the value of silver could have the 
smallest tendency to lower the rate of interest
If £100 are in those countries now of no 
more value than £50 were then, £10 must 
now be of no more value than £5 were then.