Money and interest

The sensationist approach is groundbreaking not only on the subject of value and prices but also as regards the nature of money and interest. At first sight, however, sensationist authors just followed Boisguilbert’s statements that only the structure of relative prices matters: the quantity of money is unimportant and anyway cannot explain economic crises or prosperity.

The value form and money

Turgot’s theory of value shows that money is not the primary goal of exchanges: underlying these exchanges, there is something hidden that is much more fundamental - utility. But values and utilities cannot be expressed as such: money is their necessary expression. Turgot thus points out the difficulty that a theory of value has to face: the measure of value (1769, 88, 94-5). “It is... impossible to express value in itself” (1769, 94). Value is a relative value, and the value of a com­modity can only be expressed in terms of a quantity of another commodity against which it is exchanged.

The sole means of expressing value is therefore... to say that one thing is equal to another in value Value has... no other measure than value; and

one measures values by comparing values, in the same way as one measures a length by applying another length to it; in either means of comparison there is no fundamental unit given by nature; there is only a conventional and arbitrary unit.

(1769, 95)

In this perspective, money is necessarily a commodity, and every commodity is money.

The analysis of the nature of money as the value form is developed in detail in the Reflexions (1766, 554-62). The “appreciative value” of a commodity is first of all expressed by each of the quantities of every other commodity against which it can be exchanged. Then Turgot deduces from this the money-form properly speaking. Thanks to its intrinsic qualities, related to the requirements of the func­tions of measure of values and medium of exchange, one commodity detaches itself from the rest, and all the other commodities, by convention, express their value in terms of this good, which therefore becomes the unique expression of value. This analysis was to a great extent taken up and developed by Morellet in his “Digression” on money which he included in his 1769 Prospectus. Isnard accepted it. But another author later also benefited from Turgot’s analysis of the value and money forms: Karl Marx, whose analysis of the “forms of value” and the necessary monetary expression of value systematises Turgot’s and Morellet’s developments.

Money as capital

The value form analysis deals with the functions of money as a measure of value and medium of exchange. But money is also a store of value. Far from seeing in that feature a potential source of crisis and an interruption in the circulation of commodities, as Boisguilbert (but also the physiocrats) did, Turgot saw instead this aspect of money as positive, linked to what he called “the true idea of the circula­tion of money” (1766, 575).

[T]he cultivation of land, manufactures of all kinds and all branches of com­merce run on a mass of capitals or of accumulated moveable wealth which, having first been advanced by entrepreneurs in each of the different classes of work, must return to them each year with a constant profit It is this continual advance and return of capitals which make up what one must call the circulation of money, this useful and fertile circulation which animates all the works of society, which maintains life and movement in the political body, and for which there is good reason to make a comparison with the cir­culation of blood in the animal body.

(Turgot 1766, 575)¹9

Dugald Stewart, in his lectures on political economy, insisted on the relationship between money and capital, and quoted Turgot quite extensively (1854-60, VIII, 396-7). In the manuscript of what is now known as Theories of Surplus Value (1861­63, 29), Marx also appreciated Turgot’s statements on the circulation of money as capital,^{[98] [99] which he symbolised with the cycles M - C - M (Money - Commodity - Money) and M - C - M’ (M’ > M). This is a point he advised Friedrich Engels to note in his review of the first volume of Capital for the Fortnightly Review.[100]}

All sorts of businessmen, says Turgot, “ont cela de commun qu’ils achetent pour vendre... leurs achats sont une avance qui leur rentre"'. Buying to sell, this is in fact the transaction in which money functions as capital, and which conditions its reflux to its point of issue, in distinction to selling to buy, where it need only function as currency. The differing sequence of the acts of selling and buying imposes upon money two different circulation movements.

(Marx to Engels, 23 May 1868, in 1975-2004, vol. 43, 39)

Finally, Turgot listed some additional requirements for the circulation of money as capital. As those who save and those who invest are not necessarily the same people, he wrote, the collection of savings and their distribution poses the question of the role of financial intermediaries. Turgot touched on this theme in Memoire sur lesprets d’argent: he recognised the necessity of such intermediaries but opposed an institutional solution which would have conferred an official status, a monopoly, on this kind of transaction. As with every other form of activity, this intermediation has to remain free, and must assume any form that merchants and producers find most suited to their needs.

One possible form is of course that of a bank. Turgot paid attention to the “transport of debts”, that is, to the circulation of “paper” (bills of exchange). Paper issued by a solvent agent, and endowed with confidence, could act as a medium of exchange. This paper, by definition “convertible”, could also be issued by a bank, but on condition that certain rules designed to assure the security of the enterprise be respected: merely receiving deposits without borrowing, discounting bills as the prime activity, not exceeding the limits of its own activity - by not engaging in trade, for instance - and possessing no exclusive privilege, that is, remaining in a competitive situation. It was essential to avoid John Law’s mistakes.

As a corollary to all that, the rate of interest is not for Turgot a monetary vari­able. He insists that the usual phrase “price of money” is ambiguous and mislead­ing. It has in fact two very different meanings, depending on whether money is bought and sold (in modern terms, its purchasing power) or is something which is loaned: the economic logic at work in these cases is not the same. In the first case, the quantity theory is relevant. In the second case, what is referred to is the price in a particular market, the market for loanable funds (see, for example, 1766, 581-8).

The rate of interest

Turgot’s assertion that interest is a price like any other ran counter to a very long and heavy legal and scholastic tradition, the arguments of which had to be refuted. Interest is only an economic variable, and what is relevant here is not theology but the theory of value. Turgot’s ideas are outlined in some sections of the Reflexions (1766, 577-86) and developed more extensively in the 1770 Memoire sur lesprets d’argent (Turgot 1770a), which is devoted to this subject. On the one hand, sum­ming up the traditional arguments for and against usury, he shows the “frivolity” of the latter and the possibly correct but not truly decisive aspects of the former. On the other hand, he develops his own reasons, the most important of which displaces the controversy.

One major traditional argument in favour of the prohibition of usury - founded in Roman law - was that of the fungible and consumable character of some objects, money included: destroyed by the use which is made of them, they cannot be lent at interest because their transfer to the borrower necessarily involves a transfer of property rights. This argument, Turgot stresses, supposes that the transaction is about the physical object - for example, a quantity of coins, or a given weight of a precious metal or corn. However, the transaction is about a quantity of value and involves the respective utilities of the contracting parties: “where have our reasoners seen that the only thing to be considered in the loan is the weight of the metal borrowed and returned, and not its value and its utility for the lender and the borrower?” (Turgot 1770a, 177). The interest rate is a price and its determination pertains to the theory of value. Two principles are essential here: (1) the general principle of exchanges, seen earlier: an exchange can only be implemented if the utility of the quantity of the commodity received is higher, for each agent, than the utility of the quantity of the commodity given up in exchange and (2) a second principle introduced by Turgot in this context: time preference, that is to say, the depreciation, in terms of “esteem value”, of a good available in the future com­pared to the same good available now (1770a, 177).

At the time of the transaction, the lender compares the utility of the sum of money he owns with the borrower’s promise of reimbursement in the future. As the lender estimates the promise to reimburse tomorrow to be worth less than the identical sum today, an agreement in these conditions is impossible if no interest is stipulated, because it would involve a loss of utility for the lender. In order for the transaction to take place, it is therefore necessary for the promise of reimburse­ment in the future to be for a higher amount than the sum which is lent, so that the “esteem value” the lender attributes to it is higher than the value he attributes to the sum in question. If the elements of risk and disutility are reintroduced, then this difference - the interest - measures (1) the time preference, (2) the risks incurred and (3) the disutility experienced because of the momentary unavailability of the amount of money. This analysis is obviously novel and groundbreaking: the link with the theory of value is fundamental.^[102]

Turgot, in his emphasis on time preference, could have drawn inspiration from two theoretical sources: Mariotte and Locke. The first, in his 1678 Essay de logique, had already noted that, because the future is uncertain, “if two goods [pleasures] are equal, one being present and the other to come, one must prefer the present” (1678, 48, § XCVIII). The second, in An Essay on Human Understanding (Book II, Chapter 21), examines what he calls wrong judgements “when we compare present pleasure or pain with future”:

This is the way we usually impose on ourselves, in respect of bare pleasure and pain or the true degrees of happiness or misery: the future loses its just proportion, and what is present obtains the preference as the greater.

(Locke 1690, I, 227)

Turgot’s studies at the Sorbonne could also have been of some help because a similar development had been made, at the turn of the seventeenth century, by the Flemish Jesuit Leonard de Leys (Lessius in Latin): Lessius’s “carentia pecuniae” already referred to a kind of time preference. However, in Lessius’s writings, this element was just an empirical fact observed in the market (van Houdt 1998).^[103] Turgot instead linked it to his subjective theory of value. It is also to be noted that reasoning in terms of time preference seems to have been widespread among confessors and casuists during the seventeenth century because, in 1679, Pope Innocent XI had to condemn the proposition that since a present sum of money is “more precious” than the same sum available in the future, “the lender may demand from the debtor something more in addition to the loan, and on that title can be excused from usury” (quoted in Delumeau 1990, 118).

All these aspects of Turgot’s analyses naturally drew the attention of liberal economists. The idea that the determination of the interest rate must be totally free later contrasted with Smith’s analysis in the Wealth of Nations, and the comparison with Jeremy Bentham’s Defence of Usury (1787) imposed itself: their views were judged to be essentially the same. Bentham’s pamphlet was translated into French twice in 1790,^[104] and a third time in 1828 by the Saint-Simonian Saint-Amand Bazard. In his edition, Bazard added Turgot’s Memoire sur lesprets d’argent as an appendix to Bentham’s text (in Bentham 1828, 201-93):^[105]

This work by Turgot is only known by the small number of people who deal with political economy: we put it again here under the eyes of the public, because, in our opinion, together with Bentham’s treatise, it contains all that was said in the clearest and conclusive way on usury until now.

(Bazard in Bentham 1828, 7)

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