A defence of usury; showing the impolicy of the present legal restraints on the terms of pecuniary bargains ...

LETTER IV. Reasons for Restraints — Protection of Indigence, . . 18

LETTER Y.

Reasons for Restraints — Protection of Simplicity, . . .20

LETTER YI.

Mischiefs of the Anti-usurious Laws, .... 22

LETTER VII.

Inefficacy of Anti-usurious Laws, . . . . .28

LETTER YIII.

Virtual Usury allowed, ..... 32

LETTER IX.

Blackstone Considered, . . . . . .36

IV

CONTENTS.

LETTER X. PAGE

Grounds of the Prejudices against Usury, . . 40

LETTER XI.

Compound Interest, . . . - . .45

LETTER XII.

* Maintenance and Champerty, .... 48

LETTER XIII.

To Dr. Smith, on Projects in Arts, . . . .52

* Terms used here strictly in a legal sense.

Maintenance . — An officious intermeddling in a cause depending between others, by assisting either party with money or means to prosecute or defend it. ( Webster.)

Champerty . — An agreement by a stranger, having otherwise no interest, with the plaintiff or defendant in a suit, to supply money, services, information, or evidence, by which to aid in maintaining and carrying on a suit, in consideration that he shall receive a part of the matter in suit, as commission or otherwise, if the party with whom the agreement is made prevails ; the purchasing a suit or right of suing ; maintenance, with the addition of an agreement to divide the thing in suit. ( Webster.)

Preface

(TO EDITION OF 1842.)

On financial policy, there seems a value in posthumous testimony, which has not always been appreciated. Men will listen patiently £o theories, both new and wonderful, promulged by almost any one, on every matter but that of their own secular pursuit. The way of borrowing and lending and making money is a thing to be decided on “to-day ” before the bank closes ; and no consideration which leads beyond that celebrated period is safe to think about, much less to act on. New rules of diet or new forms of worship may be tolerated and even adopted; but a plan of “doing business ” different from our own or our father’s is an innovation too monstrous to be received from any one “still in the flesh.” But when the innovator has passed to his grave, and most of his immediate generation are laid in theirs, the power of prejudice abates. Both these preliminaries have been accomplished in reference to this little volume, and it now comes to us from its author and its first readers, purged alike of the' sophistry which they imagined and of the local sarcasm he may have infused.

Since the appearance of our first edition, it has been objected that Bentham’s views of borrowing and lending were peculiar to the use of real money, and that our currency, being made up of the issues of “ the Banks,” and therefore possessing only relative or nominal value, must have its price fixed by formal statute. This distinction can hardly have been made in seriousness, but lest it be so intended, we reply that this question of interest lies entirely between the immediate borrower and lender, and if the equivalent furnished by the latter serves the purpose of the former to the full, a remuneration proportioned to that service is due, whether the loan consisted of coin or cockle shells.

VI

PREFACE.

We are not of those who'boast insensibility to the present difficulties of general business, but in all humility we differ with many of large experience as to the means of relief. We do not believe that the remedy / lies in any new positive laws; individual exertion lies stifled beneath the weight of useless or partial legislation, as unfriendly to healthy business as the embrace of the anaconda: it is for permission to unwind this murderous coil that we plead, and the fold most within our reach is the Usury Law.

We propose a return to safe practice by a recurrence to sound principles. The rule of fair equivalents never misleads. For value received or service done no law , at least, should hinder a full return. About the fireside or within the capitol nothing is true policy which makes bad faith necessary; yet the statutes against money bargains can be enforced only through treachery : they offer a direct inducement to return evil for good ; and never yet spared a dollar to needy worth, or dried a single tear of misery. H. O.

Philadelphia , February, 1842.

A DEFENCE OF USURY.

LETTEK I.

Introduction

Among the various species or modifications of liberty, of which, on different occasions, we have heard so much in England, I do not recollect ever seeing anything yet offered in behalf of the liberty of making one's own terms in money bargains. From so general and universal a neglect, it is an old notion of mine, as you well know, that this meek and unassuming species of liberty has been suffering much injustice.

A fancy has taken me just now, to trouble you with my reasons : which, if you think them capable of answering any good purpose, you may forward to the press ; or, in the other case, what will give you less trouble, to the fire.

In a word, the proposition I have been accustomed to lay down to myself, on this subject, is the following one, viz. that no man of ripe years and of sound mind , acting freely and with his eyes open , ought to be hindered , with a view to his advantage, from making such bargain in the way of obtaining money as he thinks fit ; nor (what is a necessary consequence) anybody hindered from supplying him upon any terms he thinks proper to accede to.

This proposition, were it to be received, would level, you see, at one stroke, all the barriers which law, either statute or common, have, in their united wisdom, set up, either against the crying sin

A DEFENCE OF USURY.

of Usury, or against the hard-named and little -heard- of practice of Champerty; to which we must also add a portion of the multifarious and as little-heard -of offence of Maintenance.

On this occasion, were it any individual antagonist I had to deal with, my part would be a smooth and easy one. “ You who fetter contracts, you who lay restraints on the liberty of man, it is for you (I should say) to assign a reason for your doing so.” That contracts in general ought to be observed, is a rule the propriety of which no man was ever yet found wrong-headed enough to deny ; if this case is one of the exceptions (for some, doubtless, there are) which the safety and welfare of every society require should be taken out of that general rule, in this case, as in all those others, it lies upon him who alleges the necessity of the exception to produce a reason for it.

This, I say, would be a short and very easy method with an individual ; but as the world has no mouth of its own to plead by, no certain attorney by which it can “ come and defend this force and injury,” I must even find arguments for it at a venture, and ransack my own imagination for such phantoms as I can find to fight with.

In favor of the restraints opposed to the species of liberty I contend for, I can imagine but five arguments.

1. Prevention of usury.

2. Prevention of prodigality.

8. Protection of indigence against extortion.

4. Repression of the temerity of projectors.

5. Protection of simplicity against imposition.

Of all these in their order.

LETTER II.

REASONS FOR RESTRAINTS — PREVENTION OF USURY.

I will begin with the prevention of usury : because, in the sound of the word usury lies, I take it, the main strength of the argument : or, to speak strictly, of what is of more importance than all argument, of the hold which the opinion I am combating has obtained on the imaginations and passions of marlkind.

“ Usury is a bad thing, and as such ought to be prevented : usurers are a bad sort of men, a very bad sort of men, and as such ought to be punished and suppressed.” These are among the string of propositions which every man finds handed down to him from his progenitors: which most men are disposed to accede to without examination, and indeed not unnaturally nor even unreasonably disposed; for it is impossible the bulk of mankind should find leisure, had they the ability, to . examine into the grounds of a hundredth part of the rules and maxims which they find themselves obliged to act upon. Very good apology, this, for John Trot: but a little more ■ inquisitiveness maybe required of legislators.

You, my friend, by whom the true force of words is so well understood, have, I am sure, gone before me in perceiving, that to say usury is a thing to be prevented, is neither more nor less than begging the matter in question. I know of but two definitions that can possibly be given of usury ; one is, the taking of a greater interest than the law allows ; this may be styled the political or legal definition. The other is, the taking of a greater interest than it is usual for men to give and take ; this may be styled the moral one ; and this, where the law has not interfered, is, plainly enough, the only one. It is plain that, in order for usury to be prohibited by law, a positive description must have been found for it by law, fixing, or rather superseding, the moral one. To say, then, that usury is a thing that ought to be prevented, is saying neither more nor less than that the utmost rate of interest which shall be taken ought to be fixed, and that fixation enforced by

A DEFENCE OF USUEY.

penalties, or such other means, if any, as may answer the purpose of preventing the breach of it. A law punishing usury supposes, therefore, a law fixing the allowed legal rate of interest ; and the propriety of the penal law must depend upon the propriety of the simply prohibitive, or, if you please, declaratory one.

One thing, then, is plain : that, antecedently to custom growing from convention, there can be no such thing as usury ; for, what rate of interest is there that can naturally be more proper than another ? What natural fixed price can there be for the use of money more than for the use of any other thing? Were it not, then, for custom, usury, considered in a moral view, would not so much as admit of a definition : so far from having existence, it would not so much as be conceivable : nor, therefore, could the law, in the definition it took upon itself to give of such offence, have so much as a guide to steer by. Custom, therefore, is the sole basis which either the moralist, in his rules and precepts, or the legislator, in his injunctions, can have to build upon. But what basis can be more weak or unwarrantable, as a ground for coercive measures, than custom resulting from free choice ? My neighbors, being at liberty, have happened to concur among them- ' selves in dealing at a certain rate of interest; I, who have money to lend, and Titius, who wants to borrow it of me, would be glad, the one of us to accept, the other to give, an interest somewhat higher than theirs ; why is the liberty they exercise to be made a pretence for depriving me and Titius of ours ?

Nor has blind custom, thus made the sole and arbitrary guide, anything of steadiness or uniformity in its decisions ; it has varied from age to age in the same country ; it varies from country to country in the same age ; and the legal rate has varied along with it ; and, indeed, with regard to times past, it is from the legal rate, more readily than from any other source, that we collect the customary. Among the Romans, till the time of Justinian, we find it a3 high as twelve per cent. ; in England, so late as the time of Henry viii, we find it at ten per cent.; succeeding statutes reduced it to eight, then to six, and lastly to five, where it stands at present (1787). Even at present in Ireland it is at six per cent.; and in the West Indies at eight per cent.; and in Hindos-

A DEFENCE OF USURY.

tan, where there is no rate limited by law, the lowest customary rate is ten or twelve. At Constantinople, in certain cases, as I have been well informed, thirty per cent, is a common rate. Now, of all these widely different rates, what one is there that is intrinsically more proper than another ? What is it that evidences this propriety in each instance? What but the mutual convenience of the parties, as manifested by their consent ? It is, then, convenience that has produced whatever there has been of custom in the matter ; then what can there be in custom, to make it a better guide than the convenience which gave it birth ? And what is there in convenience, that should make it a worse guide in one ca^e than in another ? It would be convenient to me to give six per cent, for money : I wish to do so. “ No (says the law), you shan’t.” Why so ? “ Because it is not convenient to your neighbor to give above five for it.” Can anything be more absurd than such a reason ?

Much has not been done, as yet, I think, by legislators, in the way of fixing the price of other commodities ; and, in what little has been done, I believe the probity of the intention has, in general, been rather more unquestionable than the rectitude of the principle or the felicity of the result. Putting money out at interest is exchanging present money for future; but mankind are as yet to learn why a policy, which, as applied to exchanges in general, would be generally deemed absurd and mischievous, should be deemed necessary in the instance of this particular kind of exchange. For him who takes as much as he can get for the use of any other sort of thing, a house, for instance, there is no particular appellation, nor any mark of disrepute; nobody is ashamed of doing so, nor is it usual so much as to profess to do otherwise ; and why a man who takes as much as he can get (be it six, or seven, or eight, or ten per cent.) for the use of a sum of money, should be called usurer, should be loaded with an opprobrious name, any more than if he had bought a house with it, and made a proportionable profit by the house, is more than I can see.

Another thing I would also wish to learn, is, why the legislator should be more anxious to limit the rate of interest one way than the other ? why he should set his face against the owners of that

A DEFENCE OF USURY.

species of property more than any other ? why he should make it his business to prevent their getting more than a certain price for the use of it, rather than to prevent their getting less f why, in short, he should not take means for making it penal to offer less, for example, than five per cent., as well as to accept more? Let any one that can, find an answer to these questions ; it is more than I can do: I except always the distant and imperceptible advantage of sinking the price of goods of all kinds, and in that remote way multiplying the future enjoyment of individuals ; but this was a consideration by far top distant and refined to have been the original ground for confining the limitation to this side.

LET TEE III..

REASONS- FOR RESTRAINTS- — PREVENTION OF PRODIGALITY.

Having done with sounds, I come gladly to propositions, which, as far as they are true in point of fact, may deserve the name of reasons. And first, as to the efficacy of such restrictive laws with regard to the prevention of prodigality.

That prodigality is a bad thing, and that the prevention, of it is a proper object for the legislator to propose to himself, so long as he confines himself to what I look upon as proper measures, I have no objection, to allow, at least for the purpose of argument ; though, were this the principal question, I should look upon it as incumbent on me to place in a fair light the reasons there may be for doubting, how far, with regard to a person arrived at the age of discretion, third persons may be competent judges as to which of two pains may be of greater force and value to him, the present pain of restraining his present desires, or the future contingent pain he may be exposed to suffer from the want to which the expense of gratifying these desires may hereafter have reduced him. To prevent our doing mischief to one another, it is but too necessary

A DEFENCE OF USURY.

to put bridles into all our mouths ; it is necessary to the tranquillity and very being of society : but that the tacking of leadingstrings upon the backs of grown persons, in order to prevent their doing themselves mischief, is not necessary, either to the being or tranquillity of society, however conducive to its well-being, I think cannot be disputed. Such paternal, or if you please, maternal care, may be a good work, but it certainly is but a work of supererogation.

For my own part, I must confess that so long as such methods only are employed as to me appear proper ones (and such there are), I should not feel myself disinclined to see some measures taken for the restraining of prodigality : but this I cannot look upon as being of the number. My reasons I will now endeavor to lay before you.

In the first place, I take it, that it is neither natural nor usual for prodigals, as such, to betake themselves to this method — I mean, that of giving a rate of interest above the ordinary one — to supply their wants.

In the first place, no man, I hope you will allow, prodigal or not prodigal, ever thinks of borrowing money to spend, so long as he has ready money of his own, or effects which he can turn into ready money without loss. And this deduction strikes off what I suppose you will look upon as the greatest proportion of the persons subject at any given time to the imputation of prodigality.

In the next place, no man, in such a country as Great Britain, at least, has occasion, nor is it at all likely he will choose, to take up money at an extraordinary rate of interest, who has security to give equal to that upon which money is commonly to be had at the highest ordinary rate. While so many advertise, as are to be seen every day advertising, money to be lent at five per cent., what should possess a man who has anything to offer that can be called a security, to give, for example, six per cent., is more than I can conceive.

You may say, perhaps, that a man who wishes to lend his money out upon security, wishes to have his interest punctually, and that without the expense, and hazard, and trouble, and odium of going to law ; and that, on this account, it is better to have a,

A DEFENCE OF USURY.

sober man to deal with than a prodigal. So far I allow you ; but were you to add that on this account it would be necessary for a prodigal to offer more than another man. there I should disagree with you. In the first place, it is not so easy a thing, nor, I take it, a common thing, for the lender upon security to be able to judge, or even to form any attempt to judge, whether the conduct of one who offers to borrow his money is or is not of such a cast as to bring him under this description. The question, prodigal or not prodigal, depends upon two pieces of information, neither of which, in general, is- very easy to come at ; on the one hand, the amount of his means and reasonable expectations ; on the other hand, the amount of his expenditure. The goodness or badness of the security is a question of a very different nature : upon this head every man has a known and ready means of obtaining that sort of information which is the most satisfactory the nature of things affords, by going to his lawyer. It is, accordingly, I take it, on their lawyers’ opinion that lenders, in general, found their determination in these cases, and not upon any calculations they may have formed concerning the receipt and expenditure of the borrower. But even supposing a man’s disposition to prodigality to be ever so well known, I take it there are always enough to be found to whom such a disposition would be rather an inducement than an objection, so long as they were satisfied with the security- Everybody knows the advantage to be made in case of mortgage, by foreclosing or forcing a sale: and that this advantage is not uncommonly looked out for, will, I believe, hardly be doubted by any one who has had any occasion to observe the course of business in the Court of Chancery.

In short, so long as a prodigal has anything to pledge or to dispose of, whether in possession or even in reversion, whether of a certain or even of a contingent nature, I see not how he can receive the smallest benefit from any laws that are or can be made to fix the rate of interest. For, suppose the law to be efficacious as far as it goes, and that the prodigal can find none of those monsters called usurers to deal with him, does he lie quiet ? No such thing : he goes on and gets the money he wants, by selling his interest, instead of borrowing. He goes on, I say; 'for if he has

A DEFENCE OF USURY.

prudence enough to stop him anywhere, he is not that sort of man whom it can be worth while for the law to attempt stopping by such means. It is plain enough, then, I conclude, that to a prodigal thus circumstanced, the law cannot be of any service ; on the contrary it may, and in many cases must, be of disservice to him, by denying him the option of a resource which, how disadvantageous soever, could not well have proved more so, but would naturally have proved less so, than those which it leaves still open to him. But of this hereafter.

I now come to the only remaining class of prodigals, viz., those who have nothing that can be called a security to offer. These, certainly, are not more likely to get money upon an extraordinary rate of interest, than an ordinary one. Persons who either feel, or find reasons for pretending to feel, a friendship for the borrower, cannot take of him more than the ordinary rate of interest : persons who have no such motives for lending him, will not lend him at all. If they know him for what he is, that will prevent them, of course : and even though they should know nothing of him by any other circumstance, the very circumstance of his not being able to find a friend to trust him at the highest ordinary rate, will be sufficient reason to a stranger for looking upon him as a man who, in the judgment of his friends, is not likely to pay.

The way that prodigals run into debt, after they have spent their substance, is, I take it, by borrowing of their friends and acquaintance, at ordinary interest, or more commonly at no interest, small sums such as each man may be content to lose, or be ashamed to ask real security for ; and as prodigals have generally an extensive acquaintance (extensive acquaintance being at once the cause and effect of prodigality) the sum total of the money a man may thus find means to squander may be considerable, though each sum borrowed may, relatively to the circumstances of the lender, have been inconsiderable. This I believe to be the race which prodigals, who have spent their all, run at present, under the actual system of restraining laws : and this, and no other, I take it, would be the race they would run were those laws out of the way.

Another consideration there is, I think, which will complete your conviction, if it was not complete before, of the inefficacy of

A DEFENCE OF USURY.

these laws as to the putting any sort of restraint upon prodigality. This is, that there is another set of people from whom prodigals get what they want, and always will get it, so long as credit lasts, in spite of all laws against high interest ; and, should they find it necessary, at an expense more than equal to any excess of interest they might otherwise have to give — I mean the tradesmen who deal in the goods they want. Everybody knows it is much easier to get goods than money. People trust goods upon much slenderer security than they do money : it is very natural they should do so ; ordinary profit upon the whole capital employed in a man’s trade, even after the expense of warehouse rent, journeymen’s wages, and other such general charges are taken into the account and set against it, is at least equal double interest ; say ten per cent. Ordinary profit upon any particular parcel of goods must, therefore, be a great deal more, say at least triple interest ; fifteen per cent : in the way of trading, then, a man can afford to be at least three times as adventurous as he can in the way of lending, and with equal prudence. So long, then, as a man is looked upon as one who will pay, he can much easier get the goods he wants than he could the money to buy them with, though he were content to give for it twice or even thrice the ordinary rate of interest.

Supposing anybody to be willing to run the risk of supplying him, for the sake of extraordinary gain, although he did not look upon his personal security to be equal to that of another man, and, for the sake of the extraordinary profit, to run the extraordinary risk ; in the trader, in short, in every sort of trader, whom he was accustomed to deal with in his solvent days, he sees a person who may accept of any rate of profit, without the smallest danger from any laws that are or can be made against usury. How idle, then, to think of stopping a man from making six, or seven, or eight per cent, interest, when, if he chooses to run a risk proportionable, he may in this way make thirty or forty per cent., or any rate you please. And as to the prodigal, if he cannot get what he wants upon these terms, what chance is there of his getting it upon any terms, supposing the laws against usury to be away ? This, then, is another way in which, instead of serving, it injures him, by narrowing his option, and driving him from a market

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which might hxve proved less disadvantageous, to a more disadvantageous one.

As far as prodigality, then, is concerned, I must confess I cannot see the use of stopping the current of expenditure in this way, at the faucet, when there are so many unpreventable ways of letting it run out at the bung-hole.

Whether any harm is done to society, upon the whole, by letting so much money drop at once out of the pockets of the prodigal, who would have gone on wasting it, into the till of the frugal tradesman, who will lay it up, is not worth the inquiry for the present purpose; what is plain is, that, so far as the saving the prodigal from paying at an extraordinary rate for what he gets to spend is the object of the law, that object is not at all promoted by fixing the rate of interest upon money borrowed. On the contrary, if the law has any effect, it runs counter to that object, since, were he to borrow, it would only be in as far as he could borrow at a rate inferior to that at which otherwise he would be obliged to buy. Preventing his borrowing at an extra rate may have the effect of increasing his distress, but cannot have the effect of lessening it : allowing his borrowing at such a rate might have the effect of lessening his distress, but could not have the effect of increasing it.

To put a stop to prodigality, if, indeed, it be worth while, I know but of one effectual course that can be taken, in addition to the incomplete and insufficient courses at present practicable, and that is, to put the convicted prodigal under an interdict , as was practiced formerly among the Romans, and is still practiced among the French, and other nations who have taken the Roman law for the groundwork of their own. But to discuss the expediency or sketch out the details of such an institution, belongs not to the present purpose.