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Alfred Russel Wallace : Alfred Wallace : A. R. Wallace :
Russel Wallace : Alfred Russell Wallace (sic)

Interest-bearing Funds Injurious and Unjust
(S584: 1900)

Editor Charles H. Smith's Note: A specially-written essay (partly constructed from sections of earlier ones) appearing in Volume Two of Wallace's collection Studies Scientific and Social in 1900. Original pagination indicated within double brackets. To link directly to this page connect with: http://people.wku.edu/charles.smith/wallace/S584.htm

[[p. 254]] CHAPTER XV

     "The millionaire is, and as long as he is allowed to exist, always will be, a useful member of society; because he produces more wealth in comparison to the amount that he exhausts than any other member of society. . . . The richer a man is, the greater is the proportion of his savings to his income. Take a man with a fortune of £20,000,000, and an income of £1,000,000, of which he could not very well spend more than £100,000 a year. Now if this fortune was owned by 10,000 persons instead of one, they would have £100 a year each, of which they would probably spend £90. Therefore, their savings would amount in the aggregate to £100,000, while the multi-millionaire's savings from the same capital would be £900,000. Therefore the community which had the multi-millionaire would grow richer at the rate of £800,000 a year, at compound interest over the community that had divided his property up." --(Bradley Martin, jun., in Nineteenth Century, "Is the Lavish Expenditure of Wealth Justifiable?" p. 1029, Dec., 1898.)

     The passage quoted at the head of this chapter shows such an extraordinary misconception as to the real nature of wealth that I propose to devote a few pages to a discussion that will, I think, show the fact to be the very reverse of that maintained by Mr. Bradley Martin, jun. He confounds money with wealth; the increase of money, or its equivalent--claims on the earnings of other people--as increase of wealth. I maintain on the contrary that the result of numbers of rich men saving a large portion of their incomes every year, instead of making a community or a nation richer makes it poorer--makes it a smaller producer of real wealth--causes the bulk of its people to work harder and fare worse. Those who will read the following pages carefully, will, I think, admit [[p. 255]] that my conclusion is correct, and that it is by moving in the very opposite direction, so as to bring about the diminution rather than the increase of great individual money-wealth that the real wealth and well-being of the whole community is to be attained.

Interest-bearing Funds a Danger to the Community.

     The evil effects of wealth-accumulation, as now understood, are by no means limited to those cases where it is accumulated in abnormally large amounts by individuals, but are not less real or less important when more widely distributed and devoted, as it so often is, to supporting a considerable section of the population in idleness and luxury during their whole lives. For this class of persons are not only, so far as they are idle, an incubus on the community, but, so far as they are luxurious, they become a far greater source of evil in withdrawing large bodies of labourers from the production of useful wealth and keeping them employed in useless or even injurious work. The thousands and tens of thousands whose lives are spent in the manufacture and sale of luxuries, ornaments, nick-knacks, and worthless toys, as well as the majority of those permanently occupied as domestic servants to the wealthy, or in connexion with horse-racing, yachting, and other amusements of the upper classes, represent not only so much lost productive power but are themselves a heavy burthen, since they are all supported by the productive labour of others.

     In an ideal social state no one would live idly and luxuriously on wealth produced by another. No one would be able to obtain surplus wealth, and no children would be brought up to a life of idleness, but would be taught that they are debtors to society for all that they receive and must therefore perform their fair share of useful work.

     In order to make true social progress we must always keep some such ideal in view; and this brings me to what I consider to be at the very root of the question--the evil of all institutions which permit or favour the paying of (nominally) perpetual interest, income, or profits, on any invested capital.

[[p. 256]] Real and Fictitious Wealth.

     Nothing is more certain than that wealth--real wealth--is continually used up and destroyed, and as continually reproduced by fresh labour. All articles of food, of clothing, of furniture, and even tools, machines, dwellings, books, works of art, and ornaments, are either wholly or partly used up day by day or year by year, and as continually reproduced; and it is those which are most continually consumed and reproduced which are, pre-eminently, beneficial wealth. If, then, a man acquires a large surplus of this real wealth beyond what he can consume himself, it must be either profitably consumed by others or be wasted by natural decay. In either case it soon ceases to exist. But our fiscal and legislative arrangements enable a man to change this perishable wealth into securities which bring him a permanent income--an income supposed to be perpetual, but at all events lasting long after the wealth of which it is the symbol, and which is supposed to produce it, has totally disappeared. Incomes thus derived constitute a tax or tribute on the community, for which it receives nothing in return, and may truly be termed fictitious wealth.

     To show that this is so, and at the same time to exhibit clearly not only the evil but the inherent absurdity of these arrangements, let us consider a few indisputable facts. Every year much surplus wealth is accumulated by individuals and is invested as reproductive capital. This invested capital goes on producing an income which, it is supposed, is and ought to be permanent; and as more and more surplus wealth is continually produced and invested, it is evident that the permanent incomes thus derived will continually increase, and thus in each successive generation a larger and larger number of persons will be enabled to live in idleness on incomes derived from this invested capital. But this is a state of things that evidently carries with it its own destruction, since a time must come when the number of idle persons living on "independent incomes," and the aggregate of those [[p. 257]] incomes, will be so great, that the working portion of the population will be ground down to penury in the attempt to pay them, and this will more quickly come about from the tendency of a large idle and luxurious class to withdraw labour from beneficial work to the production of useless luxuries. The end will inevitably be the worst kind of revolution, brought about by the determination of the labouring poor no longer to support the burthen of an ever-increasing class of idle rich.

How to Abolish Fictitious Wealth.

     The only cure for this state of things (to which we are steadily drifting) is for our Legislature to acknowledge the principle and act on it, that all capital expenditure must be repaid (if at all) by means of terminable rentals or annuities (including interest and repayment of capital), in a limited term, such term never much to exceed the average duration of one generation--say 30 to 40 years; while all permanent works of general utility, such as railways, harbours, docks, canals, gas and water-works &c., shall, when the capital is thus repaid, revert to the State, to the Municipalities, or to other freely elected local authorities, and be thenceforth administered for the public benefit. By this measure alone a considerable portion of the permanent investments, which now enable wealth-producers to provide for the support of the next generation in idleness, would be abolished; but there would remain the largest and the least defensible of all--the national debts of civilized nations. It is now generally admitted to be wrong for one generation, or even for one government, to borrow money for its own purposes (generally for the most wasteful and injurious of all purposes--war) and leave the debt as a burthen on its successors.

How to Extinguish National and other Debt.

     Confining ourselves to our own National Debt, I maintain that it is an unmixed evil, as well as a cruel injustice to the present generation of workers; and I further [[p. 258]] maintain, that the least injurious mode of abolishing it would be to declare, that after a fixed date the Government will not allow transfers of Stock (except in cases of inheritance) but will pay the dividends to the holders at that date for their lives and for the lives of any direct heirs living at the time they make their will or die, after which all payments will cease, and the community will at length be released from the oppressive and unjust burthen of taxation it has so long borne.

     Of course this proposal will be met by the cry of confiscation, repudiation, and other ugly terms; but let us look at it a little closer before we decide as to its justice and inadmissibility. It will hardly be denied that the Legislature may, on grounds of public policy, and after ample notice to allow of any desired sales and transfers, limit the payment of the interest or principal of its debt to the then representatives of its original creditors. Having gone so far we have to inquire further what injury will be done to the holders of stock, if this income is limited to their lives and that of their living heirs. It is admitted that the unborn can have no claims to a special provision, while the fundholder can have no affection for, or interest in hypothetical beings who may never exist. It is evident, therefore, that the supposed injury is purely imaginary, and could not be estimated at the value of the smallest coin of the realm; whereas, the payment of the debt in full, supposed to be the only honest course, would appreciably injure the fundholders themselves, as well as the whole nation.

     For, let us suppose it to be determined that the National Debt shall be paid off within, say, thirty years, and that increased taxation to the necessary amount is thereupon raised annually. The immediate effect would be to raise the price of consols, which would soon rise very much above par owing to their affording the only safe and easily realizable temporary investments for great capitalists, financiers, &c., so that all persons whose stock was paid off would have to buy in again at a loss in order to secure a safe income, which would be then permanently diminished. If we add to this loss the heavy burthen of taxation, of [[p. 259]] which they would have to bear their share, the fund-holders (who we suppose had rejected the scheme of terminable annuities), would find out their mistake, and begin to ask themselves why they should suffer in order that certain unborn individuals might live in idleness at the expense of the nation. The supposed honest plan of going on paying interest for ever, is really dishonest, because it perpetuates a heavy burthen on the whole community, not for any real benefit to any existing portion of the community, but for the injurious and immoral purpose of providing that even in unborn generations certain selected individuals shall be able to live idle lives at the expense of their fellows. The alleged confiscation, on the other hand, is really the honest course, because, while providing that no living individual shall suffer either in purse or vicariously by the suffering of those dear to them, it provides for the abolition of an unjust burthen which we have inherited from evil times, but which will become still more unjust and harder to bear the longer it exists.

How to Deal with the Land.

     Having thus, we will suppose, got rid of all such permanent means of investment as railway-stocks, gas shares and the public funds, there would remain only the land of the country. But this, as I show in the four succeeding chapters of this volume, is the most injurious to the community of all forms of permanent investment of capital, since it secures to the capitalist not only the general power due to wealth, but enables him to absorb in the form of increased rents a large portion of the nation's surplus wealth-production, and gives him also direct power over the health, the happiness, and the lives of his fellow citizens, who must live upon the land on his terms so long as he is allowed to possess it and deal with it as he pleases. For these reasons alone, all possession of land except in limited quantities for personal occupation, should be prevented, and then the last remaining means by which a permanent and ever increasing income can be [[p. 260]] obtained from accumulated wealth which is, in its very nature, transitory and perishable, would have been taken away, and the result would, I maintain, be wholly beneficial to the community.

Some Objections Answered.

     Among the objections that will be made to this proposed reform it will no doubt be said that on the system of short terminable payments to cover interest and repayment of principle, capitalists would not lend money and consequently no good national or local work would be effected. But the fact is that they could be much better effected without borrowing money, whenever the proposed works were such as would be remunerative, while all other necessary works could be done in the same way, but of course would have to be paid for by some kind of public or private contributions. The following experiment shows how easily this may be done.

     In the island of Guernsey some years ago a market-place was much wanted, and the Government of the island having determined to build it, issued notes, inscribed "Guernsey Market Notes," for £l each, and numbered from one to four thousand, £4,000 being the estimated cost of the market. With these notes the Government paid the contractor, the contractor paid his men, and the men bought all the necessaries they required, as the notes were a legal tender in the island. They were used to pay rent, to pay taxes, and for all other purposes. When the market was finished, it immediately produced a revenue, and this revenue was applied to redeem the notes; and in ten years all were redeemed, and henceforth to the present time the market returns a considerable revenue to the Government of the island, which goes to reduce taxation; and all this was done without borrowing any money or paying any interest.

     Now here is a principle, applied on a small scale by a small self-governing community, which is capable of a very extensive application. All remunerative public works could be executed by some such method; while if it is urged that some works, like sanitary improvements, [[p. 261]] are not directly remunerative, it may be replied that this is usually because the benefit of such works is allowed to be absorbed by individuals instead of accruing to the community. This is because individuals possess the land in our towns and cities, and every sanitary improvement effected at the public expense increases the value of this land. In fact, no public improvement of any kind can be made in a city without increasing the value of the land, so that there is a double motive in urging on costly, and, perhaps, unnecessary improvements--jobs are effected by financiers and contractors, while the owners of land know that, however much the ratepayers may suffer, they are sure to be benefited. Here is surely another indication that the land of every municipality, or other local community, which grows in value owing to the increase and the expenditure of the whole population, should belong to the community and not to private individuals.

     The subject, however, which we were more particularly considering was the doing away with those funds and investments by which money is made to produce a perpetual income. Now, when, as in Guernsey, there was no permanent debt created and no interest paid, there was no "stock" to speculate in and no income derivable from it. Here, then, we have a double advantage over the usual mode of creating interest-bearing debts, which indicates that we have discovered an important principle which is applicable to almost every case of public improvement. Let us take the case of railways, for example. These are usually constructed under legislative acts, empowering a company to take the necessary land to build the line and to work it for the profit of the shareholders. This plan has led to the greatest possible amount of mischief. Lines have been made where not wanted; speculation to an enormous extent has been encouraged; huge monopolies have been created; shareholders by thousands have been ruined; while the thing least considered has been the general interest. During the last great American railway mania it has been estimated by Mr. Atkinson that railway-construction went on four times as fast as the increase of produce to be [[p. 262]] carried by the railways, thousands of miles of railways being made long before they would be wanted, involving loss in a great variety of ways, and being, in fact, one of the causes of recurring depression of trade.

     If, on the other hand, no such power had been given to companies, but, when public opinion in any State or country demanded a particular line of railway it had been constructed by means of Railway Bonds created for the purpose, bearing no interest and serving as legal currency within the State till they were all redeemed and paid off out of the profits of the line, then no speculation would have been possible. It would have been no one's interest to build unnecessary and unprofitable lines, because so soon as this was done the bonds of the particular line would have little chance of being redeemed; and as they would be a legal tender, they would soon be all paid in as taxes, and the Government--that is, all the taxpayers--would have to bear the loss. This would check further railway-making for a time, and thus prevent useless expenditure in the interest of speculators and contractors.

     On the other hand, every railway that returned any profits at all would steadily redeem its bonds, and then the whole of the future profits would go to reduce taxation or to make railway travelling free. It would thus be the interest of every one that no railways should be made that were likely to be worked at a loss, because that would lead to a depreciation of the bonds, and thus be a loss to the whole community. But it would be equally every one's interest that all really useful and necessary lines should be made, because, besides the direct benefit, the bonds would be quickly redeemed and the profits of the line would enable the general taxation to be reduced. Water-works, gas-works, public parks, new streets, and all similar improvements could be executed on a similar principle, the only safeguard required being that no large improvement should be undertaken in any town or district till the preceding one had been completed and had begun to redeem its bonds out of its genuine profits or proceeds.

     [[p. 263]] It has now, I think, been made clear how all public works and public improvements may be effected by public credit, properly so called, instead of by public debt, involving far less risk of loss, no permanent charge on the community, but leading, on the contrary, to a continuous reduction of taxation, and cutting away the very foundations of the system by which the financier and speculator are now enabled to plunder the working people.

Concluding Observations.

     Returning to our main subject, some may think that by thus checking great accumulations of capital by individuals the country would be impoverished; but the fact would be exactly the reverse, since the accumulation of real capital would be greatly facilitated. For that large class which now makes its wealth by financial operations and speculations--a mere form of gambling--would find its occupation gone, and would be forced to turn its attention to genuine industrial pursuits. Instead of money being used, as it so largely is now, as a mere instrument to make more money by pure speculation, it would have to be invested in true reproductive wealth--machines, tools, buildings, roads, bridges, ships, &c., and thus the whole country would be enriched and benefited.

     When the changes here indicated had been effected, capital could be profitably invested only in some form of agriculture, manufacture, or commerce; and, while the wealth of the community would thus be indefinitely increased, the accumulation of excessive wealth by individuals would become almost impossible, since, there is a limit to the number of industrial concerns that can be profitably managed by one man. As the race of hereditary idlers would no longer exist, the total production of wealth would be much increased from this cause, while the free use of land in small quantities by a large proportion of the population would render labourers less dependent on capitalists than now, and thus lead to a more equable distribution of wealth than now prevails.

     My object in this brief chapter has been to call [[p. 264]] attention to a principle of great importance which appears to have been overlooked by political economists and ignored by legislators, namely,--that the system which enables a permanent and sometimes an increasing revenue to be derived from nominal wealth long after the real wealth it is supposed to represent has ceased to exist, is wrong in itself; and that, like all wrongs, it inevitably leads to suffering. One of the evil results of this system is that it affords the main, if not the only, support to millionnaires and to hereditary plutocrats.

     I have further endeavoured to show that we may remove all the sources whence vast revenues can be derived by individuals without any productive exertion on their part, not only without injury but with the most beneficial results to the community. Lastly, I believe, that it is in some such view as to the economic error and moral wrong of deriving permanent incomes from perishable wealth, that we shall find the true solution of the problem of the antagonism between capitalists and labourers now everywhere agitating the civilized world.

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