The 14th to the 17th Century: The Theory of Interest


Dropping now the normative garb of scholastic interest analysis and the moral doctrines that motivated their research, we may restate as follows the causal theories their research unearthed, on the understanding that the picture cannot be quite satisfactory because the scholastic doctors did not much more agree on the theory of interest than do we.

I. Interest, though construed on the more general model of loans of ‘con- sumptibles,’ is essentially a monetary phenomenon. There was no analytic merit in this. The scholastic doctors simply accepted a surface fact exactly as had Aristotle. They did sometimes relate interest on money to the returns of income-bearing goods, land, mining rights, and the like that may be bought for money. But this point—though used in some interest theories of the seventeenth and eighteenth centuries—was without analytical value because the price of income-bearing goods and therefore the net return from them already presupposes the existence of interest.

II. Interest is an element of the price of money. Calling it a price for the use of money does not explain anything and at best restates the problem in an unenlightening way. In itself, it is an empty phrase. Nor is the analogy of interest with interlocal premia or discounts on money more than a restatement of the problem. For these interlocal premia and discounts are explained by risks and costs of transfers whereas pure interest, as distinguished from compensation for risks and costs, is an intertemporal premium which the analogy does not help to explain. The uncritical appeal to mere lapse of time per se is valueless—circumstances are easily conceivable in which it would fail to produce a deviation from zero interest. Though negative only, these propositions are of great analytical value. They clear the ground and prove that the scholastic doctors—in this respect much superior to nine-tenths of the interest analysts of the nineteenth century— saw the real logical problem involved. In fact, these propositions define it. This is why they should be credited with having launched the theory of interest.

III. Hence deviation of interest from zero is a problem the solution of which can be found only by analysis of the particular circumstances that account for the emergence of a positive rate of interest. Such analysis reveals that the fundamental factor that raises interest above zero is the prevalence of business profit—all the other facts that may produce the same results are not necessarily inherent in the capitalist process. This proposition constitutes the main positive contribution of scholastic interest analysis. Adumbrated before, it was first clearly stated by St. Antonine, who explained that though the circulating coin might be sterile, money capital is not so because command of it is a condition for embarking upon business. Molina and his contemporaries, while rightly insisting that money was ‘in itself’ not productive and no factor of production, yet accepted a similar view: they coined the significant phrase that money was the Merchant’s Tool. Moreover, they quite understood the mechanism by which this premium, if capitalist business be sufficiently active and—relative to the rest of the environment—sufficiently important, will tend to become an all-pervading normal phenomenon. And their ideas on lucrum cessans and damnum emergens complement their analysis as regards the supply side of the money market.


1. Schumpeter, Joseph A. History of Economic Analysis. New York: Oxford UP, 1954. Print. 104-106.


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One response to “The 14th to the 17th Century: The Theory of Interest

  1. Pingback: History of Economics Analysis | Gedanken zur Geschichte

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