A Perspective on the Law of Interest, Clarified

E. O. Bailey

[Reprinted from Land and Freedom, May-June 1938]

In the letter-discussions of the subject of interest, let us hope that the result will be a clarification of the Law of Interest, if there is such a law, to the end that the Science of Economics will be rounded out and made definitely stronger in principle.

We start off with two factors, viz., land and man. Man applies labor to the land and gets food. This is the natural reward of his labor and is called wages. If he acquires by this labor, a surplus, it is called wealth. Out of this simple process we get the principle. "That all wealth is produced by labor applied to land."

This principle should preclude any such thesis that this wealth, which came into being as the wages of labor, could of itself produce other wealth which would not be the wages of labor. L. D. Beckwith says that a calf is half interest and that growth is also largely interest. If this is true (with other claims that when wealth becomes capital it naturally and ethically produces other wealth in the form of interest), then we will have to place interest along with man in the two of factors which form the basis of economic science. This will give us land, man and interest. This assumption also alters the first principle to read: "All wealth is produced by labor and capital," applied to land.

So, too, we must revise our concept of rent. Rent does not arise from natural differences in the productivity of land. It does not arise at all until society is organized. Some form of social organization must precede the appearance of rent. After this is done, rent becomes the measure of the advantage a location gives to exchange. This location may be given added advantages in the form of public service, but it is this advantage in exchange that determines rent. Exchange is the determining factor in any form of society. Civilization itself is determined by the freedom and ease of exchange and degree of exchange facility.

Again, land itself does not generate rent. It is location. The amount of rent is then automatically determined by the facility with which exchange can be carried on. That exchange is then determined by the degree of social organization. This puts society in the role of sole claimant to rent.

That any other value, or product, arises from the use of capital than wages and replacement, seems improbable. If we remove privilege and allow labor its full reward, we would be unable to locate any return to capital as a producing factor.

Patent rights and other forms of privilege distort our vision, and the ever present element of land monopoly gives us so false a premise that we easily get off the course of logical thought. The entire advantage in the use of capital, if used under free conditions, would go to the consumer of the product, and not to the owner of the capital.