The Two Faces of Borrowing — The Wealth of Nations

Smith looks at money lent at interest. The lender treats the sum as capital he expects back with an annual payment for its use. The borrower may use it productively by hiring workers who reproduce the value with profit. Or he may spend it right away like a prodigal who pays idlers with funds meant for industry.

People who live on interest form the monied interest, separate from landlords and active traders. The same gold can back several loans in a row, so lendable stock can exceed the coin that carries it. As surplus capital grows, lenders compete and interest falls. Abundant capital also squeezes profit and can raise wages. Smith rejects the idea that more silver alone lowered European interest rates. Falling profit on expanding stock did.

Legal interest caps set too low exclude safe borrowers and invite shady lending. Caps set too high steer credit toward rash spenders. Country gentlemen who borrow on mortgage often replace capital already spent with shopkeepers, not just idle vanity. Land prices move with interest because an investor compares buying rent-bearing land with lending at market rates. Credit multiplies wealth only when it funds work that replaces the loan, not consumption that never returns.