It was 245 years ago yesterday...
…That Adam Smith told us how the band doth play. While we’re not on favour of the determination of a legal interest rate at which borrowing may take place or not - for reasons given elsewhere in the chapter - the rest of this advice seems apposite:
The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.
From today’s newspaper:
The answer is that without Greensill’s backing, Gupta’s sprawling industrial empire probably wouldn’t exist. Tapping enthusiastically into Greensill’s short-term supply chain financing model, his Liberty Steel outfit has taken over 12 UK plants, including in Rotherham, Newport, Hartlepool, and the Scottish Highlands.
It has also bought distressed steel businesses in Australia and Romania, amassing a £4bn debt pile along the way, £3bn of which is owed to Greensill alone, according to The Sunday Times. In the space of just a few years, Gupta went from obscure trading house to one of the biggest industrial outfits in Europe.
To condense Adam Smith’s advice down, it has never been difficult to find new ways to lend money, nor new people to lend money to. There has always been the occasional difficulty with finding people worth lending to.