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[SECT. III.]—: ON SUBJECTING THE COMMERCE OF MONEY TO THE REGULATION OF LAW. - Dugald Stewart, Lectures on Political Economy, vol. 2 
Lectures on Political Economy. Now first published. Vol. II. To which is Prefixed, Part Third of the Outlines of Moral Philosophy, edited by Sir William Hamilton (Edinburgh, Thomas Constable, 1856).
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ON SUBJECTING THE COMMERCE OF MONEY TO THE REGULATION OF LAW.
Having treated of the general principles which regulate the rate of interest, independently of the interposition of the statesman, I proceed now to consider the motives which have influenced the policy of different nations in subjecting the commerce of money to the regulation of law. For this purpose it will be necessary for me to take a pretty wide circuit, by referring to some speculative opinions of the ancients, which have been long exploded as unfounded prejudices, but which have had, nevertheless, a secret effect in modifying the ideas and institutions of Modern Europe. If, in discussing this preliminary point, I should be thought somewhat diffuse, I flatter myself that the nature of the subject, which is curious and interesting, independently of its connexion with the questions to which I mean to apply it, will be a sufficient apology.
In contrasting the opinions of ancient and modern times concerning the rules of practical morality, there is nothing which, at first view, appears more astonishing than the strong terms in which some of their most eminent philosophers reprobate the practice of lending money upon interest,—a practice which is now so familiarized to the minds of all civilized nations, that it would be considered as no less absurd to offer a formal proof of its innocence and equity, than to argue against them. The circumstance on which Aristotle grounds his disapprobation of this practice is of so extraordinary a nature, that although it has been often referred to by modern casuists, it would be improper to pass it over without some animadversion. “Among the various ways,” he observes, “of getting money, agriculture and the rearing of cattle are natural and honourable, because the earth itself and all animals are by nature fruitful. But to make gain from money, which is naturally barren and unfruitful, is most justly accounted dishonourable, and is held in detestation;—inasmuch as it is a perversion of money from its natural use, the purchasing what we want.” The argument is so extremely absurd, that it could never have led this acute and profound philosopher to the conclusion it is employed to support, but may be justly numbered among the instances in which speculative men have exerted their ingenuity to defend, by sophistical reasonings, the established prejudices of the times in which they lived, and in which the supposed evidence of the inference has served, in their estimation, to compensate for the weakness of the premises. It is, however, worthy of observation, that Aristotle’s argument (such as it is) was manifestly suggested by the etymology of the word Τόκος, (which, in the Greek language, signifies interest,) from the verb Τίκτω, pario,—an etymology which seems to imply that the principal generates the interest.1 The same idea, too, occurs in the scene between Antonio and Shylock, in Shakespeare’s Merchant of Venice.
It is perhaps treating this very puerile conceit with more respect than is due to it, to quote, by way of reply, the following consideration, which, one would suppose, (as an ingenious writer of our own time remarks,) might naturally enough have occurred to a man of Aristotle’s penetration; more particularly when we consider “the great number of pieces of money that had passed through his hands; more, perhaps, than were passed through the hands of philosopher before or since!” “That though a daric would not beget another daric any more than it would a ram or a ewe, yet for a daric which a man borrowed, he might get a ram and a couple of ewes, and that the ewes, if the ram were left with them a certain time, would probably not be barren. That, then, at the end of the year, he would find himself master of his three sheep, together with two, if not three lambs; and that if he sold his sheep again to pay back his daric, and gave one of his lambs for the use of it in the meantime, he would be two lambs, or at least, one lamb richer than if he made no such bargain.”
The passage of Aristotle to which the foregoing remarks relate, occurs in the tenth chapter of the First Book of his Politics, and is sufficient of itself to enable us to form a judgment of the propriety of a censure which a late writer has bestowed on Mr. Smith and Mr. Hume, as well as on the sect of French writers known by the name of Economists, as if they had borrowed from Aristotle, without the smallest acknowledgment, the fundamental principles of their theories of Political Economy.* When we consider how much the interest of money enters as an element into all commercial speculations in modern times, is it possible to imagine there should be anything more than the most general and accidental coincidence between the reasonings of such writers as Hume and Smith, and those of an author, whose experience of the nature and effects of commerce was so limited as to impress his mind with a conviction, that to receive a premium for the use of money was inconsistent with the rules of morality?
The same sentiments with respect to usury, (fœnus,) (under which title was comprehended every premium, great or small, which was received by way of interest,) occurs in the Roman writers. “Concerning the arts,” says Cicero, in his First Book of De Officiis, “and the means of acquiring wealth, which are to be accounted liberal, and which mean, the following are the sentiments usually entertained. Those means of gain are in least credit which incur the hatred of mankind,—as those of tax-gatherers and usurers.”† The same author (in the Second Book of the same work) mentions an anecdote of old Cato, who being asked what he thought of lending money upon interest, answered, “What do you think of the crime of murder?”‡ The comparison certainly appears to us extravagant and absurd in the extreme; and yet (as I formerly had occasion to observe) the very same language was held in the English House of Commons about two centuries ago.
The regulations of the Jewish Lawgiver on this subject are more peculiarly interesting to us, as they have had a more immediate influence upon the opinions that have prevailed in Modern Europe.
“Thou shalt not lend,” it is said, “upon usury to thy brother: usury of money, usury of victuals, usury of anything that is lent.—Unto a stranger thou mayst lend upon usury, but unto thy brother thou shalt not lend upon usury, that the Lord thy God may bless thee in all that thou settest thy hand to in the land whither thou goest to possess it.”*
From this prohibition in the Mosaic Law, the primitive Christians were led to conclude, that the practice of usury was in all cases inconsistent with their profession, inasmuch as the Christian dispensation having abolished the distinction betwixt Jew and Gentile, the same liberality which Moses had enjoined towards their own nation, became necessarily incumbent on them towards all mankind; and accordingly, there is no crime against which the Fathers in their homilies declaim with more vehemence. “On this point,” Mr. Gibbon remarks,† “they are quite unanimous;” and refers in support of his assertion to Barbeyrac’s Morale des Pères, and a learned work by Gerard Noodt, De Fœnere et Usuris. The same abhorrence of usury of every kind appears in the Canon Law, insomuch that the penalty of that law is excommunication; nor is the usurer allowed burial until he has made restitution of what he had gained in the exercise of this iniquitous profession, or security was given that restitution should be made after his death.
A circumstance which probably contributed not a little to strengthen this prejudice, was the hatred which the Christians in former ages entertained against the Jews and all their opinions and practices. To lend money on interest was to engage in a trade rendered infamous in the general estimation by the character of those who most frequently carried it on; and (as an ingenious and lively writer remarks) “it was an easier method, and a method pretty much in vogue in these scrupulous times, to let the Jews get the money anyhow they could, and then squeeze it out of them as it was wanted.”*
The authority of Aristotle, which was for a long time almost despotic over the Christian world, co-operated powerfully with the causes now mentioned, in checking the natural progress of human reason upon a subject, about which it appears to us somewhat surprising that there could ever exist a diversity of opinion.
The influence of these ideas has extended to times of a much more recent date. About the middle of last century they were entertained by the most eminent divines of the Church of England, who frequently preached against every species of usury, even that which was permitted by law; contending, that although law sanctioned a certain rate of interest to prevent greater evils, and in compliance with the general corruption of men, (in the same manner as the law of Moses authorized Polygamy,) yet the rules of morality did not justify this practice in any case whatever. And the same doctrine was maintained by some lawyers in a debate in the British House of Commons, a considerable time after the commencement of the present century.
These prejudices seem now to be completely exploded in every part of Europe, insomuch that it appears to be almost as absurd to offer a serious argument against them, as it would be to defend them. A learned author, however, and of the Catholic Church, who published last year (1797) a Treatise upon the Law of Usury and Annuities, (Mr. Plowden of the Middle Temple,) would seem to be of a different opinion, having employed no less than fifty-nine pages of his work in considering the Law of Usury in a spiritual view, in order to establish the following general conclusion: That “it is not sinful but lawful for a British subject to receive legal interest for the money he may lend, whether he receive it in annual dividends from the public, or in interest from private individuals who may have borrowed it upon mortgage, bond, or otherwise.”1 M. Necker, too, in the notes annexed to his Eloge on Colbert, (published about eighteen years ago,) thought it necessary for him to offer an apology for the freedom with which he ventured to discuss some political questions concerning interest, by reminding his readers, that he reasons upon this subject, merely as a statesman and not as a divine. “Ce que je dis de l’Intérêt est sous un point de vue politique, et n’a point de rapport avec les respectables maximes de la religion sur ce point.”
The facts and observations which have hitherto been stated, relate chiefly to the History of the prejudice against usury. I hope, however, they will be found to be not altogether unconnected with the reasonings which are to follow, as they shew that it has not been confined to men educated under particular religious systems, and that therefore its origin must be sought for in those political and moral circumstances which extended in common to the different ages and nations among whom it has prevailed.
Among these circumstances, there is one which obviously presents itself to our notice, as discriminating remarkably the states of society in the ancient and modern worlds; I mean the difference in point of extent between the ancient and modern commerce.
In those nations of antiquity with whose history we are best acquainted, and to whom the foregoing observations relate, there does not seem to have been anything that bore a resemblance to the commerce of modern Europe. The Tyrians, indeed, the Sidonians, and the Carthaginians were commercial nations; but what were their notions concerning money-loans we are left to conjecture, having no records to guide our researches. The sentiments which prevailed at Athens and Rome on the subject of trade are well known. Plato asserts in his book De Legibus, that it had been better for the Athenians to have continued to send annually the sons of seven of their principal citizens to be devoured by the Minotaur, than to have changed their ancient manners, and to have become a maritime power; and Aristotle, although he frequently discovers a predilection for opinions contrary to those of his master, does not venture to contradict him in this particular. The prejudices of the Romans against the lucrative arts and professions were still more inveterate. Among such nations, accordingly, money-loans would be much less regarded in their relation to commercial speculations, than as subservient to the wants of the necessitous; and the epithet barren, which Aristotle applies to money, shows plainly that it was in this point of view he considered them. Discreditable, however, as the trade of a money-lender was at Rome, a certain rate of interest was permitted by law, and a variety of regulations with respect to it established, which M. Dupuy has illustrated with much learning in the Appendix to his Memoir on the Roman Money. An interesting abstract of this Essay may be found in Paucton’s Métrologie. Usury is called by Mr. Gibbon “the inveterate grievance of Rome.” “After being discouraged,” he observes, “by the Twelve Tables, and abolished by the clamours of the people, it was revived by their wants and idleness, tolerated by the discretion of the Prætors, and finally determined by the Code of Justinian. Persons of illustrious rank were confined to the moderate profit of four per cent.; six was pronounced to be the ordinary and legal standard of interest; eight was allowed for the convenience of manufacturers and merchants; and twelve was granted to nautical insurance; but except in this perilous adventure, the practice of exorbitant interest was severely restrained.”1
A very remarkable, and indeed singular instance of legislative refinement on the subject of money loans, in times of the most remote antiquity, is mentioned by Sir William Jones in his Third Discourse, published in the Asiatic Researches. “In the first of the Sacred Law Tracts,” he observes, “which the Hindoos suppose to have been revealed by Menu some millions of years ago,”—and which Sir William himself refers to a date long prior to the Christian era,—“there is a curious passage on the legal interest of money, and the limited rate of it in different cases, with an exception in regard to adventures at sea;—an exception,” says Sir William Jones, “which the sense of mankind approves, and which commerce absolutely requires; though it was not before the reign of Charles I. that our English jurisprudence fully admitted it in respect of maritime contracts.” In this, however, as in many other instances of the information we have lately received from that quarter of the globe, we can only indulge our wonder, without possessing sufficient data to serve as a groundwork for satisfactory speculation.
The low state of commerce in Greece and Rome, and the contempt in which it was held by those who governed public opinion, sufficiently account for the prejudice against loans for interest, so strongly expressed by their philosophers and statesmen; and this authority sanctioned by some passages in the Mosaic Law, naturally produced a still greater detestation for the practice in modern Europe, at a time when its commerce was confined to a few cities in Italy, or to the Hanse Towns, and when the only persons who exercised this trade, were held in universal odium on account of their religious principles. Indeed, abstracting entirely from these accessory circumstances, loans for interest can scarcely be looked on in a favourable light, except in connexion with an active and enterprising commerce; and it is only during the last three centuries that this has become an object of universal and of ardent pursuit, giving a commencement to those mighty changes which it seems destined to accomplish in the condition of the human race. The commerce of money among different nations, so wonderfully facilitated by bills of exchange, is a branch of trade altogether of modern origin.
In a state where there is little or no commerce, the great motive for borrowing is necessity; and the only motives for lending must be humanity or avarice. In the former case, as the lender only advances a sum of money which would otherwise have remained useless in his chest, the same disposition which induced him to succour the distressed will, in general, prevent him from accepting a premium for an act of beneficence. In the case of lenders of a different description, who are anxious to turn to their own account the necessities of their fellow-creatures, it is reasonable to presume that their dealings will be governed by the same spirit which, in a commercial country, characterizes pawnbrokers, and others who make a traffic of the miseries of the poor. The value of a loan to an individual who is in want of bread, cannot be ascertained by calculation, as it may be when money is borrowed for the purposes of trade. The relief of the present moment seems cheaply purchased at any price, of which the payment is to be delayed to a distant day; and it is not judging too harshly of human nature to suppose, that the demands of the lender, whose temper leads him to make a profession of this species of gaining, will rise in proportion to the distress of the borrower, and to the risk he runs of losing the principal. In a country, therefore, where there is no commerce, every money-lender who accepts of interest will be regarded in the same odious light in which pawnbrokers are considered among us; and the man “who putteth out his coin to usury,” will be naturally classed (as he is in the words of Scripture) with “him who taketh a reward against the guiltless.”*
A very striking illustration of the effects which are naturally produced on the character by that sort of speculation, which has for its object the necessities of the poor, occurs in the history of the charitable corporation which was established about the year 1730, with the professed view of lending money to the poor upon pledges, so as to prevent their oppression by pawnbrokers. Many characters, respectable from rank, fortune, and reputation, belonged to this corporation; but, in a short time, they were so corrupted by the trade they carried on, and the public cry was so loud against the iniquity of their transactions, that the House of Commons found it necessary to make a parliamentary inquiry into their conduct, the consequence of which was, that the corporation was broken, and three of the managers who were members of the House were expelled.
These remarks, while they account for the origin of the opinions concerning the practice of taking interest for money among those nations of antiquity whose commercial transactions were few and insignificant, will be sufficient, at the same time, to establish its reasonableness and equity in countries where money is most commonly borrowed for the purposes of commercial profit, and where, of consequence, the use of it has a fixed and determinate value, depending, like that of any commodity in general request, on the circumstances of the market at the time. In such countries both parties are benefited by the transaction, and even the state is a gainer in the end. The borrowers of money are frequently among the most opulent of the community, who wish to enlarge their capitals and extend their trade, and who, by doing so, are enabled to give farther encouragement to industry, and to supply labour and bread to the indigent.
It is not a little remarkable that John Calvin appears to have been one of the first who extricated himself entirely from the ancient prejudices on this subject. “Pecunia non parit pecuniam. Quid mare quid domus, ex cujus locatione pensionem percipio? an ex tectis et parietibus argentum proprie nascitur? Sed et terra producit, et mari advehitur quod pecuniam deinde producat, et habitationis commoditas cum certa pecunia parari commutarive solet. Quod si igitur plus ex negotiatione lucri percipi possit, quam ex fundi cujusvis proventu: an feretur qui fundum sterilem fortasse colono locaverit ex quo mercedem vel proventum recipiat sibi, qui ex pecunia fructum aliquem perceperit, non feretur? et qui pecunia fundum acquirit, annon pecunia illa generat alteram annuam pecuniam? Unde vero mercatoris lucrum? Ex ipsius, inquies, diligentia atque industria. Quis dubitat pecuniam vacuam inutilem omnino esse? neque qui a me mutuam rogat, vacuam apud se habere a me acceptam cogitat. Non ergo ex pecunia illa lucrum accedit, sed ex proventu. Illæ igitur rationes subtiles quidem sunt, et speciem quandam habent, sed ubi propius expenduntur, reipsa concidunt. Nunc igitur concludo, judicandum de usuris esse, non ex particulari aliquo Scripturæ loco, sed tantum ex aequitatis regula.”* To those who are acquainted with the prevailing sentiments of Calvin’s time, this passage cannot fail to be an object of curiosity.
Notwithstanding, however, this diversity of circumstances in the condition of ancient and modern nations, and the important changes it has operated on their opinions, it has by no means produced universally the effects which might have been expected. A certain rate of interest is indeed allowed by law, and no person doubts of its being perfectly fair and honourable to receive it; but everything above this legal rate is reprobated under the name of usury, as a crime of a very heinous nature, and, till the time of Queen Anne, was punished with confiscation of the usurer’s whole moveables, the punishment being mitigated, since that period, to the forfeiture of thrice the sum usuriously lent. In order, too, to repress the crime still more effectually, our law allows of methods for the probation of it, which are contrary to the general maxims of common law. If there is a written bond in the hands of the usurer, he may be forced to exhibit his own bond in order to convict himself, contrary to the common maxim, nemo tenetur edere instrumenta contra se. And where the crime cannot be proved otherwise, it may by the usurer’s oath, contrary to the maxim which is received in other cases, nemo tenetur jurare in suam turpitudinem.
There can be little doubt that these laws originated at first in prejudices which took rise in a very different state of society, but they have been powerfully supported by some considerations which have been generally supposed to demonstrate their political and commercial expediency. A few writers only have ventured to call this in question, and to express their doubts, whether the rate of interest should not be left, like the terms of other contracts, to be adjusted by the discretion of the parties. Among these, Mr. Bentham, of Lincoln’s Inn, has particularly distinguished himself, in a very ingenious Treatise, entitled, A Defence of Usury, [1787,] in which he attempts to prove, “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 anybody hindered from supplying him upon any terms he thinks proper to accede to.”* The late Dr. Reid, too, in an Essay, read a good many years ago before a literary society in Glasgow, maintained nearly the same proposition, and argued in support of it upon principles very similar to those employed by Mr. Bentham. Nor has the opinion been confined to our own country; for it is maintained by several very eminent French writers, by M. Turgot, for example, and the whole sect of the Economists; and it has been actually brought to the test of experience in different commercial states, particularly in Holland and at Hamburgh.
The following passage from Turgot deserves to be quoted, as it states with equal clearness and conciseness the point on which the question turns:—
“It is an error to believe that the interest of money in trade ought to be fixed by the laws of princes. It has a current price, like that of all other merchandise. This price varies a little, according to the greater or less security which the lender has; but, on equal security, he ought to raise and lower his price in proportion to the abundance of the demand; and the law no more ought to fix the interest of money than it ought to regulate the price of any other commodities which have a currency in trade.”
I quote this passage from Turgot’s Reflections, &c.;† but he has treated the subject at much greater length in a separate Essay, entitled, Mémoire sur le prêt à Intérêt et sur le Commerce des Fers.
At a much earlier period I find the same doctrine advanced by the celebrated Mr. Law, in a memorial presented by him (before his elevation to the ministry) to the Regent Duke of Orleans. This paper is entitled, Mémoire sur l’Usage des Monnoyes, et sur le Profit ou la perte qu’il peut y avoir pour un Prince et pour un Etat, dans l’Altération du Titre des bas Monnoyes, et dans l’Augmentation ou la Diminution de leurprix par rapport aux Etats voisins.1 “L’Intérêt de la monnoye ne doit pas être réglé par le Prince. Je suppose qu’elle vaut présentement à gênes quatre pour cent, qu’on attend des vaisseaux d’Espagne avec des grosses sommes, si ces vaisseaux arrivent heureusement, l’intérêt baissera à trois. S’ils n’arrivoient pas, ne dois-je pas en profiter, et faire valoir mon argent cinq pour cent?
“Le monnoye est comme une marchandise. J’ai un magazin de draps d’Augleterre, qui valent six livres la palme. Si le Prince régloit le prix de nos draps à six livres, il me feroit tort; car s’il arrive une quantité de draps, je ne trouverai plus à vendre les miens à six livres, je serai obligé de m’en défaire à moins, et le Prince ne me bonifiera pas le perte.
“Si ces draps n’arrivent pas, comme je cours le risque de la perte, ne dois-je pas jouir du bénéfice que le prix naturel de mes draps me donne alors?
Pour réduire l’intérêt, il faut rendre le monnoye moins valable, en augmentant la quantité, ou en diminuant la demande. Il y a deux cent ans que l’intérêt était à dix pour cent, présentement il est à cinq, et en quelques endroits à trois pour cent; mais ce n’est pas la loi qui l’a détruit, c’est l’augmentation de la quantité de monnoye depuis la découverte des Indes.”
In a note upon this passage by the author of the French work in which Law’s Memoir is published, the following remark is made:—
“Les principes exposés jusqu’ici par M. Law sont d’une évidence à laquelle il est impossible de se refuser de bonne foi avec un esprit juste. Mais ici il commence à s’éloigner du vrai, pour avoir vu les choses trop en générale, sans faire attention aux circonstances particulières; et son système étoit une conséquence de ce qu’il avance ici sur l’intérêt de l’argent. Si la circulation étoit fort rapprochée de son ordre naturel, il est probable que les princes n auroient pas besoin de régler les taux de l’intérêt. Mais comme dans les Royaumes où la circulation paroit le mieux établie, il ne laisse pas de subsister un nombre infini de causes d’obstruction, les propriétaires de l’argent composent toujours le plus petit nombre, ainsi ils exercent un véritable monopole.”
In support of this remark, a reference is made to a Dissertation on Interest, printed in the same volume, page 477, et seq.
In this Dissertation, after stating some reasons against a legal rate of interest, the author adds:—“Il s’ensuit que le prix de l’argent ne devroit être fixé plus que celui des autres denrées, dont l’abondance ou le rareté règlent le prix: mais la dureté et l’avidité des créanciers, les troubles que leurs rigueurs ont excités en divers états, la facilité plus évidente de convertir l’argent en monopole à la faveur même des gros intérêts que toute autre denrée; enfin depuis les conseils de la charité Chrétienne ont engagé les Législateurs à intervenir dans une convention qui devoit être libre de sa nature.”
The same author speaks afterwards of the opinion which reprobates the interference of legislative authority in this particular, as having been first broached in France by Mr. Law. “Une opinion apportée en France pour la première fois par M. Law; c’est que l’état ne doit jamais donner de réglemens, sur le taux de l’intérêts.”
“Cette opinion,” he continues, “vrai en soi, a cessé de l’être dans la pratique par diverses circonstances, et peut-être le seroitelle encore, si jamais les Législateurs ne fussent intervenus dans ces sortes de réglemens.1 Mais une fois qu’ils se sont chargés de ce soin, il sembleroit à craindre que jamais la bénéfice d’une diminution ne fût générale dans un état. L’expérience prouve du moins que l’ancien taux fournit toujours aux futures des moyens de difficultés et d’embarras qui tiennent l’intérêt au dessus de son cours naturel. L’emploi de l’argent dans les effets publics se fait aujourd’hui sur le pied de quatre à quatre et demi pour cent, et le prêt marchand continue d’être à six,” &c. &c. The reasoning which follows is so inconclusive, that it is not worth while to transcribe it.
On the other hand, the prevailing ideas among our commercial politicians in this island are (if I am not mistaken) in favour of our existing laws; and they are supported by an authority justly entitled to the highest respect on all questions of Political Economy, that of Mr. Adam Smith.* Indeed, I do not recollect that any writer of note (excepting the two already mentioned) have ventured to dispute the expediency of this part of our code; although a pretty strong presumption obviously presents itself against it, from the example of the Dutch and Hamburghers, and the total silence of our political writers on the subject during the ten years that have elapsed since the publication of Mr. Bentham’s Essay. A very competent judge, Sir Francis Baring, in his late Pamphlet, On the Bank of England, [1797,] has not scrupled to say that Mr. Bentham’s Essay still remains unanswered, for the best of all possible reasons, that it is perfectly unanswerable.
Another very obvious consideration, which may well excite our curiosity in examining the expediency of our existing laws on this subject, is suggested by the variations in the rate of interest (whether established by law or by custom) among different nations, and in the same nation at different periods. Among the Romans, till the time of Justinian, we find it as high as twelve per cent. In England, so late as the time of Henry VIII., we find it at ten per cent. Even at present in Ireland, it is at six per cent.; and in the West Indies at eight per cent.; and in Hindostan, where there is no rate limited by law, the lowest customary rate is ten or twelve. At Constantinople, in certain cases, thirty per cent. is said to be 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 evinces this propriety in each instance?—what but the mutual convenience of the parties, as manifested by their consent? It is convenience, then, that has produced whatever there has been of custom in the matter; what can there then 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 case 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 for your neighbour to give above five for it.” The absurdity of the reason surely does not stand in need of any comment.
Much has not been done as yet by legislators in order to fix the price of other commodities; and in what little has been done the wisdom of their regulations is very far from being generally acknowledged. Putting money out at interest, is exchanging present money for future; but why a policy, which, as applied to exchanges in general, would be commonly deemed absurd and mischievous, should be deemed necessary in the instance of this particular kind of exchange, is a proposition about which it is surely reasonable to hesitate, till it has been carefully considered. For him who takes as much as he can get for the use of a house, or of any other article of value, there is no particular appellation, nor any term of reproach: nobody is ashamed of doing so, nor is it usual so much as to profess to do otherwise. 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, or loaded with any other opprobrious name, any more than if he had bought a house with it, and made a proportionable profit by the house, it is not easy to imagine; upon that general view of the question, at least, which first presents itself to our notice.
I proceed, therefore, now to a closer examination of the subject; for which purpose I shall consider, First, the various arguments that have been alleged in favour of that limitation of interest which is fixed by our laws;—after which I shall [Secondly] point out some of the inconveniences which these laws seem likely to produce. In both discussions I shall avail myself, without scruple, of the ideas of Mr. Bentham, wherever they appear to me to be useful for establishing the conclusions I have in view.
Before, however, I enter on the general question, I think it necessary to remark, that those who dispute the expediency of anti-usurious laws, argue against these laws only so far as they are supposed to abridge the liberty of the contracting parties; for in cases where there is no contract, it seems to be manifest that the rate of interest should be fixed by law. Such cases may happen from many different causes. When a sum of money, for instance, becomes due, the right to it is litigated by the debtor. The litigation continues for years, the money in the meantime remaining in the hands of the debtor. At last he is found not only to have disputed the debt on insufficient grounds, but not even to have had what the law calls a probabilis causa litigandi. Here it is just that he not only pay the principal but the interest on it, while the money, in consequence of his unfounded claim, was withheld from the creditor; and in such a case it is necessary that the rate of interest should be determined by law. Again, suppose a man is abroad when a sum falls due to him, and that he has no attorney who has power to receive it, the debtor keeps it in his hand and uses it for years; here there is no contract to fix what the rate of interest shall be, and therefore it is proper that law should supply the defect. The case of tutors who have the administration of the money of minors is very similar.
In these cases, and others of like nature, where there was not any bargain between the parties what the rate of interest should be, it seems proper and necessary that it should be determined by law. And for this purpose two different plans might be proposed: First, by a constant rate fixed at once by the Legislature, to take place in all cases, without regard to the casual variations of the market rate; a plan which is adopted in our own country, where five per cent. has been fixed ever since the reign of Queen Anne, as the rate which may be legally demanded if no express stipulation has been made to the contrary. Or, Secondly, the rate of interest payable in cases where there is no contract, might be fixed annually by a jury, as near to the market rate for the time as can be done; in like manner as the price of grain in Scotland is fixed annually by a jury in what is called the fiars.
Taking for granted, therefore, as a point about which there cannot be any dispute, that there ought to be a fixed rate of interest for the adjustment of all differences that may arise among parties who have not previously settled the terms of their money-contracts, let us consider the reasons that may be alleged for a legal rate by which the terms of every such contract are to be restrained within certain limits.
Of these reasons one of the most plausible is founded on the expediency of maintaining, as far as possible, habits of economy in the great body of a people, and of checking the thoughtlessness and extravagance of those who are in danger of ruining their fortunes by prodigality. Were it not for this class of men, Sir James Steuart is of opinion that there would be no occasion for a statute to regulate the rate of interest. “The profits of trade,” he observes, “would strike an average among the industrious classes, and that average would fall or rise, in proportion to the flourishing or decay of commerce.”1 A case, therefore, which appeared to this ingenious and profound writer to be so strong as of itself to justify the policy of Anti-usurious Laws, will require to be considered with particular attention.2
In examining the grounds on which this opinion rests, I shall wave entirely the general question, whether it ought to be one of the objects of law to impose restraints on the prodigality of spendthrifts. It is sufficient for our purpose to remark, that in so far as this is the aim of the Anti-usurious Laws, they are altogether inadequate to the end proposed.
In proof of this, let us attend to the situation in which persons of this description are placed: First, on the supposition that the prodigal has some security to offer for the money he borrows; and, Secondly, on the supposition that he has none.
In the first case, it seems to be abundantly manifest, that so long as the prodigal has any thing to pledge or to dispose of, whether in possession or even in reversion, no Anti-usurious Laws can be efficacious in checking his extravagance. While he has ready money of his own, or effects which he can turn into ready money without loss, he will never think of borrowing money to spend; and when at last these resources fail him, so long as he has security to give, equal to that upon which money is to be had at the highest ordinary rate, he has no occasion, nor is at all likely to borrow money at an extraordinary interest. It is true that from persons of this disposition regular payment of interest is not to be expected; but supposing the money-lender to be satisfied with the security, he will seldom hesitate about the loan, in consequence of any apprehensions founded on the character of the borrower. On the contrary, Mr. Bentham observes, that where the security is good, there will be always found a sufficient number of money-lenders, with whom a disposition to prodigality will operate as a recommendation. In confirmation of this he mentions the advantage to be made in case of mortgage, by foreclosing or forcing a sale; an advantage which, he says, is not uncommonly looked for in transactions of this nature, “as is well known to all who have had occasion to observe the course of business in the Court of Chancery.”*
It remains for me only to mention, under this head, the case of those who, although they have no real or good security to offer, have some contingency in prospect, which they may wish to avail themselves of, in supporting their credit. In such instances there will be found, no doubt, money-lenders, who (if there were no laws to the contrary) would be willing to run the risk for an extraordinary profit: And it may be imagined that the penalties on usury may be useful in preventing the prodigal from advancing farther in his ruinous career. But is this really the case? So much the reverse that our Anti-usurious Laws only aggravate the evil they are meant to remedy. The following dilemma may be fairly stated on the subject:—Either these laws are effectual in restraining usury, or they are not. If they are perfectly effectual in restraining usury, they drive the prodigal to despair, and force him to sell his contingency. If they are not effectual, they are in so far nugatory; and what is worse by the penalties which await the usurer in the event of a discovery, they enhance the demand which he makes on the borrower.
With respect to the second class of prodigals, those who have no security to offer, either of a certain or of a contingent nature, a very few words may suffice. If they are able to raise any money, it can only be lent on the score of friendship or of humanity; in either of which cases an extraordinary rate of interest is out of the question. From those who make a trade of money-lending, they have nothing to expect either at the ordinary or at an extraordinary rate:—And the very circumstance of offering the latter, would amount to a confession of that desperate state of credit and of character, which has exhausted all the common resources of attachment and generosity.
The way in which prodigals run into debt, after they spend their substance, is in general, 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. This is the race which prodigals, who have spent their all, run at present, under the actual system of restraining laws; and this, and no other, would be the race they would run, if these laws had no existence.
In order to complete this argument with respect to the inefficacy of Anti-usurious Laws as a restraint on prodigality, the following consideration is very forcibly stated by Mr. Bentham. “In spite,” says he, “of all laws against usurers, there is another set of people from whom prodigals get what they want, and always will get it so long as they have any credit remaining, and should they find it necessary, at an expense more than equal to any excess of interest they might 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 of trade upon the whole capital employed in a man’s concerns, even after the expense of warehouse rent, journeyman’s wages, and other such general charges are taken into the account, is at least equal to double interest, or ten per cent. Ordinary profit upon any particular parcel of goods must, therefore, be a great deal more: Suppose—for the sake of illustration—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 get the money to buy them with, though he were content to give for it twice, or even thrice, the ordinary rate of interest.
From these considerations it appears how very idle it is preventing a man from making six or seven, or eight per cent. interest, when, if he chooses to run a proportionable risk, 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 upon usury to be repealed? This, then, is another way, in which, instead of serving, it injures him, by driving him from a market which might have proved less disadvantageous, to a more disadvantageous one: and consequently, the effect of the Anti-usurious Laws with regard to prodigality, if they have any effect, is to increase the evil complained of.
Besides prodigals, there are three other classes of persons for whose security these restrictive laws may be supposed to have been designed. The first is the indigent; the second, the interprising and adventurous, (or, in one word, projectors;) the third, those whose simplicity renders them incompetent to the management of their own concerns.
As for the first class, the inexpediency of the Anti-usurious Laws (in so far as they are interested) follows as an obvious consequence from the unlimited variety of situations, in respect of the degree of exigency in which the indigent may be placed. No principle can well be conceived more indisputable than this, that the consideration a man pays for borrowed money ought, in prudence, to vary with the advantage he expects to derive from the use of it, or the need he may have of the money at the time; and therefore, as the advantage or the necessity admits of an undetermined number of degrees, so may the terms of the loan, considered merely in a prudential point of view. If, for example, one man can make eleven per cent. by the use of money, where another can make but ten, six per cent. may be as prudentially given by the former, as five per cent. by the latter. In like manner, on the other hand, if an apprehended loss would amount to eleven per cent., six per cent. would be as reasonable and prudential a consideration to stipulate, as five per cent. would be in the case of a borrower who had a loss amounting to ten per cent., from which to save himself by the same means. And in any case, though in proportion to the amount of the loss, the rate of interest were ever so great, as that the clear saving should not amount to more than one per cent., or any fraction per cent.; yet so long as it amounted to anything, he would be just so much the better for borrowing, even on such comparatively disadvantageous terms. If, instead of gain, we put any other kind of benefit or advantage—if, instead of loss, we put any other kind of mischief or inconvenience, of equal value, the result will be the same.
The conclusion to which these observations lead is plainly this,—that as no legislator can judge so well as each individual for himself, whether money is worth to him anything, and how much beyond the ordinary interest, the interference of law in regulating the terms of money contracts, is not only officious and useless, but is actually prejudicial to those whom it is meant to serve.
With respect to the second class of men, whose rashness the Anti-usurious Laws may have a tendency to restrain, (I mean projectors,) the operation of these laws will require a more ample consideration; because, in this instance, they have found an advocate in no less an author than Mr. Smith, whose general principles concerning the freedom of trade and of industry, one should naturally have expected, would have inclined him to the opposite opinion. Here, however, Mr. Smith has met with a very acute and able antagonist in Mr. Bentham, who has subjoined to his Defence of Usury, a Letter addressed to Mr. Smith, containing a variety of remarks on the pernicious effects of our present laws, in consequence of the discouragements which they oppose to the progress of inventive industry. These remarks seem to me to present unanswerable objections to this part of Mr. Smith’s system.
The passage in the Wealth of Nations in which the opinion in question is stated, is as follows,—
“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 the 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 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.”*
That there is somthing not altogether sound in the principles implied in this passage, might, I think, be naturally suspected, from the following consideration, that the law, and therefore the censure passed on projectors by the approbation given to that law, admits of no discrimination in favour of the reasonable and meritorious individuals who may frequently be comprehended under that invidious denomination. The censure falls upon all such persons as, in the pursuit of wealth, or even of any other object, endeavours, by the assistance of wealth, to strike into any channel of invention. It falls upon all such persons as, in the cultivation of any of the useful arts, direct their endeavours to any of those departments in which their utility shines most conspicuous and indubitable; upon all such persons as, in the line of any of their pursuits, aim at anything that can be called improvement; whether it consist in the production of any new article adapted to man’s use, or in the meliorating the quality, or diminishing the expense, of any of those which are already known to us. It falls, in short, upon every application of the human powers in which ingenuity stands in need of wealth for its assistant. Mr. Smith himself plainly uses the word project in the most extensive acceptation of that term. “The establishment of any new manufacture,” he remarks in another part of his work, “of any new branch of commerce, or of any new practice in agriculture, is a speculation from which the projector promises extraordinary profits. These profits,” he adds, “are sometimes very great, and sometimes, more frequently perhaps, they are quite otherwise; but in general they bear no regular proportion to those of other old trades in the neighbourhood. If the project succeeds, they are commonly at first very high. When the trade or practice becomes thoroughly established and well-known, the competition reduces them to the level of other trades.”*
The question, therefore, comes plainly to this, not whether it would be useful to the public to discourage rash and useless projects, but whether it would be useful to discourage the projecting spirit in general. Indeed, it is only in this last way that our present laws can have any effect, by lessening the total number of projectors, without lessening the proportion of bad to good.
That the projector cannot hope for money at the highest rate of interest which is legal at the time, because that may always be had with more safety from old established trades, is very justly remarked by Mr. Smith. But what is the consequence? That our Anti-usurious Laws operate as a check on all who are ambitious to follow the steps of those who have distinguished themselves as the benefactors of the human race. For whatever prejudice may be entertained against projects and projectors, it is nevertheless an indisputable truth, (to use the words of Mr. Bentham,) that “whatever is now the routine of trade, was at its commencement project, whatever is now establishment, was at one time innovation.”*
The approbation bestowed by Mr. Smith on these laws in their particular application to projectors, is the more surprising, that it seems to be in direct opposition to some of his fundamental maxims. “With regard to misconduct,” he observes, “the number of prudent and successful undertakings is everywhere much greater than that of injudicious and unsuccessful ones. After all our complaints of the frequency of bankruptcies, the unhappy men who fall into this misfortune make but a very small part of the whole number engaged in trade, and all other sorts of business, not much more, perhaps, than one in a thousand.”†
In another passage, speaking of the effects of prodigality to retard the accumulation of National Wealth, Mr. Smith represents them as far too inconsiderable to call for the interposition of Government, and even censures, with some degree of asperity, the folly and presumption of statesmen in attempting to remedy the evil. “It is the highest presumption and impertinence in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”*
If this consideration, so forcibly stated by Mr. Smith, furnish a good argument against the interposition of law in restraining the prodigality of individuals, it concludes with tenfold force against its interference in the case of projectors; for this obvious reason, that prodigality is much more certainly ruinous, and much more common, than projecting; to which we may add, that in controlling prodigality, the law controls passion by reason; in controlling projects, it controls knowledge by ignorance.
On this last topic, nothing better can be offered than the following passage from Mr. Smith:—“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge better than any statesman or lawyer can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no counsel or senate whatsoever, and which would be nowhere so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
“To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must in almost all cases be either a useless or a hurtful regulation.”†
Nothing certainly can be more just and satisfactory than these remarks; and we may add to them, that to limit the legal interest to a rate at which the carriers on of the oldest and best established and least hazardous trades are always glad to borrow, is to give the monopoly of the money market to the trades, against the projectors of new imagined trades; not one of which but must appear more hazardous than the old, were it only from the circumstance of its novelty.
It has been already observed, that the censure on projects involves all past improvements; and as in this extensive application of it, no person can pretend to vindicate it, who does not prefer the savage to the civilized state of society, it may be reasonably presumed that the greater part of those from whom it has proceeded, have made some tacit exception in favour of those projects which have been already brought to the test of experience. And yet, admitting the principles on which the maxim is founded to be just, they unquestionably apply with far greater force to the past than to the future; inasmuch as every unsuccessful project furnishes additional lights to those who are afterwards to follow the same career of experiment and invention.
The career of art, the great road which receives the footsteps of projectors, is beautifully and happily compared by Mr. Bentham* to a vast plain bestrewed with gulfs, such as Curtius was swallowed up in. Each requires a human victim to fall into it ere it can close; but when it once closes, it closes to open no more, and so much of the path is safe to those who follow. If the want of perfect information of former miscarriages, renders the reality of human life less happy than this picture, still the similitude must be acknowledged, and we see at once the only plain and effectual method for bringing that similitude still nearer and nearer to perfection; I mean the framing the history of the projects of time past, and the making provision for recording, and collecting, and publishing, as they are brought forth, the race of those with which the womb of futurity is still pregnant.
It is indeed comfortable to reflect, that this state of continually improving security is the natural state not only of the road to opulence, but of every other track of human life. In the war which industry and ingenuity maintain with fortune, past ages of ignorance and barbarism form the forlorn hope which has been detached in advance, and made a sacrifice of for the sake of the future. The golden age, it is but too true, is not the lot of the generation in which we live; but if it is to be found in any part of the track marked out for human existence, it will be found, (we may venture to hope,) not in any part which is past, but in some part which is yet to come.
So much for the argument for Anti-usurious Laws founded on their supposed tendency to repress the hurtful rashness of projectors. It yet remains, before concluding this part of the subject, to say a few words on their supposed utility in protecting [the third class,] the simple and inexperienced from the arts of the fraudulent.
I have already taken notice of the great variety of circumstances on which the reasonableness of the terms of a money-contract depends, circumstances which vary with the condition of the parties between whom the contract is formed. Is it not then a most extraordinary expedient, in order to prevent the advantage which the designing may take of the weak, to confine all those, without exception, who may have occasion to engage in transactions of this nature, to one fixed rate of interest, which they are prohibited to go beyond, under the severest penalties? Is not such a regulation likely to do more mischief on the whole, than the accidental frauds which may now and then be practised on such individuals as are possessed of that degree of understanding which allows them the general management of their own affairs.
But farther, if the law thinks proper to fix the maximum of interest in pecuniary bargains, why does it not also fix a minimum with as severe a penalty upon the man who borrows at a lower rate? The borrower and lender are equally entitled to favour from the legislator, as both are to be presumed equally capable to understand their own interest. The one has the same interest in lending that the other has in borrowing; and there is nothing that should give the one an advantage over the other in making the bargain. It seems evident that the legislator goes upon the idea of those times when the borrowers were the poor and necessitous, who being liable to great oppression from the rich usurer, were entitled to favour and protection; but the lenders now are as poor and necessitous as the borrowers. In a commercial country they are indeed more so; because they comprehend the widow, the orphan, the aged, and infirm, who often live upon the interest of a small stock. In this case, then, the law guards the rich against the oppression of the poor, when it intends only to guard the poor against the oppression of the rich. Suppose a man worth £3000, lends to a weak man of equal fortune £1000, and by imposing on his ignorance or weakness, makes him agree to pay for it six per cent., that is, defrauds his weak neighbour of £10;—the law determines that, for this fraud, he shall not only make restitution, but, moreover, shall forfeit £3000, that is, all that he has; and the forfeiture would have been the same if the fraud had only amounted to tenpence. Suppose, now, the borrower to be the sharper, and that he persuades a simpleton to lend the £1000 at four per cent. when he might have five. His crime appears to be perfectly equal to the crime we first supposed in the lender; nor is it possible for the nicest casuist to discern a grain of guilt in the one that is not in the other. Yet in the one case the law pronounces absolute ruin against the fraudulent lender, while in the other it allows the fraudulent borrower to pass altogether unpunished.
But waving these considerations, and supposing, for a moment, not only that the protection of the simple in the borrowing of money is a fair and proper object of law, but that it is in the power of the legislator in this instance completely to accomplish the proposed end, what advantage is gained so long as there are so many similar occasions, as there ever must be, where the simplicity of the individual is equally likely to make him a sufferer, and on which the legislator cannot interpose with effect, nor has ever so much as thought of interposing?
Buying goods with money, or upon credit, is the business of every day; borrowing money is the business only of some particular exigency, which in comparison can occur but seldom. Regulating the price of goods in general would be an endless task, and no legislator has ever been weak enough to think of attempting it; and supposing he were to regulate the prices, what would that signify for the protection of simplicity, unless he were to regulate also the quantum of what each man should buy?
But in what degree soever a man’s weakness may expose him to imposition, he stands much more exposed to it in the way of buying goods than in the way of borrowing money. To be informed, beforehand, of the ordinary prices of all the sorts of things a man may have occasion to buy, may be a task of considerable variety and extent. To be informed of the ordinary rate of interest, is to be informed of one single fact, too interesting not to have attracted attention, and too simple to have escaped the memory.
Even in regard to subjects whose importance might be supposed to justify a regulation of their price by the legislator, (such, as for instance, land,) it may be doubted whether there ever was an instance where, without some such ground as, on the one side, fraud, or suppression of facts necessary to form a judgment of the value, or at least ignorance of such facts on the other, a bargain was rescinded, merely because a man had sold too cheap, or bought too dear. Were I to take a fancy to give a hundred years’ purchase instead of thirty for a piece of land, rather than not have it, where is the court that would interpose to hinder me, much less to punish the seller with the loss of three times the purchase-money, as in the case of usury? Yet, when I had got my piece of land and paid my money, repentance, were the law even so well disposed to assist me, might be unavailing; for the seller might have spent the money, or gone off with it. But in the case of borrowing money, it is the borrower always who, according to the indefinite, or short term for which money is lent, is on the safe side; any imprudence he may have committed with regard to the rate of interest may be corrected at any time. If I find I have given too high an interest to one man, I have no more to do than to borrow of another at a lower rate and pay off the first; if I cannot find another to lend me at a lower, there cannot be a more certain proof that the first was not in reality too high.
Some measures of police, indeed, might perhaps be useful in such an overgrown city as London, for checking the exorbitant impositions which are there practised in the loan of petty sums to that humble class of traders who expose their wares in the streets for sale. Mr. Colquhoun, at least, by whom this singular species of banking was first brought under the public notice, says, that it is highly injurious to the morals of those who are concerned in it; and, although something might be advanced on the other side of the question, I shall not venture to say that he is entirely wrong. The object of this trade, which is chiefly carried on by females, is to accommodate those women who sell fish and other goods on the streets, with such small sums as may be necessary for their daily demand. The usual diurnal stock is said to be five shillings, for the use of which for twelve hours they pay sixpence when the money is returned in the evening, the lender thus receiving £7, 10s. a year for every five shillings. “In contemplating,” says Mr. Colquhoun, “this very curious species of banking, (trifling as it seems to be,) it is impossible not to be forcibly struck with the immense profits that arise from it. It is only necessary for one of these female sharpers to possess a capital of seventy shillings, or £3, 10s., with fourteen steady and regular customers, in order to realize an income of one hundred guineas a-year.”* If any regulations of police should be thought necessary for correcting such practices, which originate entirely in the ignorance and bad habits of the populace in a large and luxurious city, no inference can be drawn from them to invalidate the reasonings stated by Mr. Bentham; nor would it be even fair to conclude that such transactions are universally accompanied with all the mischiefs which Mr. Colquhoun affirms arise from this practice, as carried on at present. The truth is, that Mr. Colquhoun does not seem to be sufficiently aware of the circumstances which justify the equity of a lender in exacting a higher proportional premium for the loan of a small sum than for the loan of a large one, nor of the circumstances which, in the case of a small trade, justify the prudence of a borrower in consenting to such conditions. One of these circumstances is, that the risk is greater, as in small loans the profit is not sufficient to defray the expense of examining with sufficient minuteness into the circumstances of the borrower; a second, and far stronger is, that the borrower of a small sum can afford to give a higher interest than the borrower of a large one. The value of loans to a small amount is often so great that it can scarcely be said to bear any proportion whatever to that of large sums. As an example, we may observe the case of a labouring man having an opportunity of getting employment, but in want of five shillings to purchase the necessary tools, while his master rigidly adhering to the custom of the trade, refuses to furnish them himself. In such a case, which I understand occurs very frequently in England, the labourer, if he could get five shillings, would be able to repay it in a few days with large interest. It would be difficult to find a case where a thousand pounds could be laid out so as to produce such advantages.
I proceeded, at our last meeting, to make some observations on the motives which have influenced the policy of different nations in subjecting the commerce of money to the regulation of law. The general principles which regulate the rate of interest, independently of the interposition of statesmen, I touched on slightly in a former Lecture, without aiming at so full an illustration of the subject as it might have been proper for me to attempt, if it had not already been placed in so clear a light by the united abilities of Mr. Hume and of Mr. Smith.
Among the writers who have disputed the expediency of legal restraints on the rate of interest, I mentioned M. Turgot, Mr. Bentham, and the whole of that class of politicians known in France by the title of Economists, [supra, p. 157.] To these I added the name of the celebrated Mr. Law, who, from a Memoir presented, before his elevation to the ministry, to the Regent Duke of Orleans, appears to have held the same opinion. The arguments he employs in support of it are expressed with that clearness and conciseness which in general distinguish his writings. The Memoir to which I refer is to be found in the sixth [second?—see above, p. 158] volume of a French work, entitled, Researches and Considerations on the Finances of France, from the year 1695 to the year 1721, p. 181; edition of Liege 1758. In the same volume, this doctrine concerning the freedom of money-loans is, as I have above stated, ascribed by the editor to Mr. Law as its author, or at least, as its first broacher in France. “Une opinion apportée en France pour la première fois par M. Law, c’est que l’état ne doit jamais donner de Réglemens sur le taux de l’intérêt,” page 64.
In what I have already said on this subject, I have chiefly followed Mr. Bentham, who has traced the consequence of the general principle more minutely than any of his predecessors. I propose to prosecute the same argument this evening, requesting it may always be remembered, that in considering questions of this nature, which have divided the sentiments of those who have considered them with much more attention than it has been in my power to bestow on them, I would be always understood to express myself with diffidence; and that the general aim of these speculations is not to inculcate particular conclusions, but to promote a spirit of free discussion.
That the arguments commonly alleged in favour of Antiusurious Laws are not sufficient to establish their expediency or equity, may, I flatter myself, be safely inferred from the remarks formerly stated. I shall confine myself, therefore, in what follows, to a view of the mischievous effects which they seem likely to produce.
The first I shall mention is that of precluding so many people altogether from the possibility of obtaining the money they stand in need of, to answer their respective exigencies, and what is worse, that precise description of people whose necessity is the greatest. In this point of view, then, the sole tendency of the law is to aggravate the distress of the unfortunate.
While, however, the law thus precludes a man from borrowing upon terms which it deems too disadvantageous, it does not preclude him from selling upon any terms, however ruinous. Everybody knows that forced sales are attended with a loss; and to this loss, what would be deemed a most extravagant interest bears in general no proportion. When a man’s moveables are taken in execution, they may be reckoned pretty well sold, if, after all expenses paid, the produce amounts to two-thirds of what it would cost to replace them. In this case, the well-meant interference of the law costs the debtor thirty-three per cent. If a man’s fortune consists in immovable property, the fluctuations in the value of land, occasioned by the varying circumstances of the country, may sometimes lay him under a necessity of disposing of his estate to a still greater disadvantage. During the distress occasioned by the American war, lands, which it was necessary should be sold, were sold at London, by public auction, at twenty, eighteen, nay, in some instances, as low as fifteen years’ purchase, whereas before the war, thirty years’ purchase for land was reckoned a medium price. Could any rate of interest, at which the seller might have raised money by loan, have injured his fortune nearly in the same proportion?
What has been hitherto said is confined to the case of those who have present value to give for the money they stand in need of. If they have no such value;—then if they succeed in purchasing assistance upon any terms, it must be in breach of the law. Even in this case, however, the mischievous influence of the law still pursues them, aggravating the very mischief it pretends to remedy. Though it be not completely efficacious in the way that the legislator proposes, it is perfectly so in the way opposite to that which he has in view. The effect of it is to raise the rate of interest higher than it would be otherwise, and that in two ways. In the first place, a man must, in common prudence, as Mr. Smith observes, make a point of being indemnified, not only for whatsoever extraordinary risk it is that he runs, independently of the law, but for the very risk occasioned by the law: he must be insured, as it were, against the law. This cause would operate were there even as many persons ready to lend upon the illegal rate as upon the legal. But this is not the case, a great number of persons are, of course, driven out of this competition by the danger of the business; and another great number by the disrepute which, under cover of these prohibitory laws, has fastened itself upon the name of usurer. So many persons, therefore, being driven out of the trade, it happens in this branch, as it must in every other, that those who remain have the less to withhold them from advancing their terms; and without confederating, each one will find it easier to push his advantage up to any given degree of exorbitancy, than he would, if his rapacity were checked by a more general competition.
Through the whole course of the foregoing argument, I have proceeded on the supposition that Anti-usurious Laws, although in particular instances open to evasion, may yet be so framed as to accomplish to a certain degree those restraints on pecuniary bargains which the legislator wishes to impose. There is, however, in Mr. Smith’s Wealth of Nations, a passage in which he asserts (by implication at least) the contrary; a passage the more extraordinary in this eminent writer, that, if it were true, it would prove those laws, of which he has expressed his approbation, to be completely nugatory. “No law,” says he, “can reduce the common rate of interest below the lowest ordinary market rate at the time when that law was made. Notwithstanding the edict of 1766, by which the French King attempted to reduce the rate of interest from five to four per cent., money continued to be lent in France at five per cent., the law being evaded in several different ways.”*
It is remarkable, that of this position, expressed in the most general and unqualified terms, (and which is certainly very far from being self-evident,) no proof whatever is produced by Mr. Smith, but one particular instance; an instance which proves nothing but the inefficacy of one particular law, which might have been owing to an accidental defect in its structure, or in the provisions made for carrying it into execution. What is more, the position does not seem to be true in the extent in which it is stated. At least, if it is true, that “no law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law was made,” the same combination of circumstances must afford obstacles equally powerful to the efficacy of the law against all higher rates; and for this purpose nothing can be effectual but a resolution on the parts of all persons any way privy not to inform. Supposing this to be the case, all rates of interest would be equally free, and the state of men’s dealings in this way just what it would be were there no law at all on the subject. That this is not the case in England, is manifest from the examples which every now and then occur, of convictions upon the statutes against usury. In other parts of Europe where Anti-usurious Laws are established, there is probably, in this respect, a difference of degree, according as the case of the legislator has been more or less employed in rendering the laws effectual. In one country, the empire of Russia, the whole system of laws on this article is said to be merely a dead letter.
“The rate fixed by law in Russia,” says Mr. Bentham, “is five per cent.; but although many persons in that country borrow money, none borrow it at the legal rate. The lowest ordinary rate upon the very best real security, is eight per cent.; nine, and even ten, upon such security are common. Six or seven may have place, now and then, between relations or other particular friends; because now and then a man may make a present of one or two per cent. to a person whom he means to favour. The contract is renewed from year to year; for a thousand roubles, the borrower in his written contract obliges himself to pay at the end of the year one thousand and fifty. Before witnesses he receives his thousand roubles; and without witnesses he immediately pays back his thirty roubles, or his forty roubles, or whatever the sum may be, that is necessary to bring the real rate of interest to the rate verbally agreed on.”*
I have already said, that in England the Anti-usurious Laws are confessedly of very considerable efficacy in restraining the terms of pecuniary bargains. Even in England, however, the law is very far from being consistent with itself, inasmuch as it sanctions virtual usury in a variety of cases; and therefore if it were guided by any general principle upon this subject, it ought either to guard against these indirect violations of its own general spirit, or leave the commerce of money entirely open.
One of the most obvious instances in which virtual usury is permitted by law, is in a practice well known among merchants by the name of drawing and re-drawing. The nature of this operation is very distinctly and fully explained by Mr. Smith in the second chapter of the Second Book of his Wealth of Nations. From the account of it which he gives, it is obvious in what way by means of it money may be obtained, and in fact has very often been obtained by merchants at an interest more than double of that permitted by law. The extra interest is in this case marked under the names of commission and price of exchange. The commission is but small on each draft, (never less, however, than one-half per cent.,) but by a frequent repetition of the operation during the course of the year, it may swell the rate of interest to eight or ten per cent., or even considerably higher. By means of this expedient, therefore, the Anti-usurious Laws may be eluded, though by a process somewhat complicated and troublesome; and it is evident where this is had recourse to, it renders the business of borrowing money much more ruinous to the merchant than any bargain he could well be supposed to have made with money-lenders, had the commerce of money been perfectly free. The monopoly of this virtual usury is secured to bankers, and the profits they derive from it must consequently be higher than if a general competition in the trade of money-lending were allowed to capitalists of every description.
Beside this expedient for raising money at an usurious rate, (which may be thought to be rather tolerated and overlooked than sanctioned by law,) there are others which have at all times been in use under its immediate countenance and authority.
The first I shall mention is, by having recourse to pawnbrokers. In this case, the law by regulating, avowedly protects usury, and actually authorizes a very high rate of interest as a compensation for the expense of warehouseroom, and that of insurance against fire and other accidents. Nor is there much reason for believing that the limits prescribed by law are here of any considerable efficacy. On the contrary, it is presumable that the profits of the trade are, like those of other trades, determined chiefly by the competition amongst the traders.
The indulgence given by our law to pawnbrokers has, no doubt, proceeded from a sense of their absolute necessity in such a state of society as ours, particularly in great and overgrown towns. In a city, for example, like London, there are vast multitudes who have no friend to aid them in distress; who live from day to day, or from week to week, without realizing any stock for a season of adversity. When such a man falls sick, the whole revenue of a poor family is stopped at once. If he would borrow, his personal security depends on his recovery, and on his being able by future industry to pay the debt by what he can save over and above the maintenance of his family. In such a situation, his only resource is evidently to sell some part of his furniture, or to pledge it with a pawnbroker; and without this resource, thousands who gradually recover their credit, would be driven at once to ruin and beggary.
The trade of a pawnbroker, it must, notwithstanding, be confessed, lays a man under great temptation to deal hardly with the poor; and it is highly expedient that severe penalties should be held out against those who exercise it oppressively and cruelly. The humanity of our own Legislature in this respect must not be passed over in silence. Within the last ten years, several very important regulations have been made, not only with a view of limiting the rates of money lent on pledges, but (what is of far greater consequence) to prevent the unfortunate from being obliged to part with their property without a fair consideration,—imposing, at the same time, severe penalties on those who avail themselves of the means which such shops are calculated to afford, to commit depredations on the property of others.1 For the attainment, however, of the ends which our legislators have had so laudably in view, there is ground to believe that much yet remains to be done. The author of the Treatise on the Police of the Metropolis,* lately published, remarks, that a class of sharpers obtain licenses to become pawnbrokers. He observes, that “any person, even the most notorious rogue or vagabond, who can raise ten pounds to pay a license, may, at present, set up the trade of a pawnbroker; and it is even said, that some have got licenses who have actually been on board the Hulks. This class of swindling pawnbrokers,” he says, “are uniformly receivers of stolen goods, and under the cover of their license do much mischief to the public, which might be prevented, in a great measure, by placing the power of granting licenses in the hands of the Magistrates of the Division, upon the footing of public-houses, and rendering it necessary for all persons to obtain a certificate of character before they can obtain such license, and also to enter into a recognizance of good behaviour.”†
The same author states the number of pawnbrokers within the bills of mortality, paying a license of £10 a year, at 213; and of pawnbrokers in the country, paying £5 a year, at 431,—in all, 644. He adds, that the property of the poorest and most distressed part of the community, to the amount of more than half a million sterling, is constantly in the hands of pawnbrokers in the metropolis alone. This, too, seems a very moderate statement. Sir Frederick Eden tells us, that he was present, three or four years ago, at the trial of a pawnbroker, at Newcastle-upon-Tyne, for receiving stolen goods, when it appeared that above 30,000 pawns went through his hands in a year.
I have already said that, in a great metropolis like London, the trade of a pawnbroker, under proper regulations, seems to be a necessary evil; and I have hinted my doubts whether it is of much use for law to interpose in fixing limits to the rate of interest. It is here, however, where our laws have relaxed from their usual severity against usurers, that the most specious apology might be made for their rigorous application,—inasmuch as the security is, in this case, not only equal to, but better than what it can be in any other, consisting in the present possession of a moveable article, of easy sale, on which the creditor has the power, and certainly does not want the inclination, to set such price as is most for his advantage. Even in such cases, however, the interposition of law in favour of the indigent, would probably only aggravate the evil it meant to cure.* (Accordingly, Dr. Reid, in an Essay on this subject, formerly referred to, [supra, p. 157,] in which he argues for the perfect freedom of pecuniary bargains in all cases where the parties are upon an equal footing, and where the borrower cannot be said to be pressed by any necessity, yet pleads for an exception in every instance in which the borrower is compelled to apply to a money-lender by indigence. “If the Law,” says he, “could distinguish between the poor and the rich,—between those who borrow from hard necessity, to prevent going to prison, or having their goods carried off by legal execution, and those who borrow to extend their trade and increase their profit;—if this were possible, I heartily agree that, with regard to the first of these cases, the law should fix the highest rate of interest that can be taken, and that the law should be enforced under the severest penalties, such as our present laws inflict on usurers.” He grants, at the same time, the difficulty of distinguishing by a law the poor from the rich, and contents himself with submitting, as the best criterion he can suggest for the purpose, that all those shall be considered as entitled to the protection of law who borrow upon a pledge. A man does not borrow in this way who can give good personal security; and he who cannot give good personal security for what he must borrow, may be considered as in necessity. “It seems reasonable, therefore,” according to Dr. Reid, “that such laws as we at present have, should take place against pawnbrokers; and it is the more reasonable, as the pawnbroker has absolute security from his debtor having a pledge in his hand.” I have already given my reasons for thinking, that even in the case of indigence, all these well-meant interpositions of law in limiting the rate of interest, only aggravate the evil which they propose to cure.)
Another case in which the usurious rate of interest is sanctioned by law, is that of Bottomry and Respondentia. In a contract of the former kind, the lender advances money to the owner of a ship, who pledges his property in it as security, engaging to repay the money, with a stipulated consideration for risk and advance, when the ship returns;—it being understood, on the other hand, that if the ship be lost, the lender is to lose his money. Respondentia contracts are of the same nature, differing only in this, that the security is on goods instead of the ship; which goods being necessarily sold or exchanged in the course of the voyage, and the ship not being pledged, the person of the borrower is alone responsible for the money lent; and hence he is said to take up money at respondentia. The condition of repayment is, that the goods do not perish through the dangers of the sea.1 These terms are also applied to contracts for the repayment of money borrowed, not on the ship and goods only, but on the mere hazard of the voyage itself, which kind of agreement is sometimes called fœnus nauticum, and sometimes usura maritima. But as this gave an opening for usurious and gaming contracts, especially on long voyages, it was enacted, 19th Geo. II. c. 37, that all moneys lent on bottomry or at respondentia, or vessels bound to or from the East Indies, shall be expressly lent on ships or goods; and that if the borrower has not an interest in the ship, or in the effects on board, equal to the value of the sum borrowed, he shall be responsible to the lender for so much of the principal as has not been laid out, with legal interest and all other charges, though the ship and merchandise be totally lost.”2
In contracts of bottomry and respondentia, (including under this title the fœnus nauticum,) the law authorizes a departure from the established regulations with respect to interest; acknowledging, in such instances, the reasonableness of a compensation for risk, as well as for the use of the money borrowed, and leaving the particular terms of the bargain to be adjusted by the parties, according to the market rate of interest, and the rate of insurance.1
I took notice in my last lecture [supra, p. 152, seq.] of a most extraordinary fact mentioned by Sir William Jones, that “in the first of the Sacred Law Tracts,” supposed to be revealed by Menu some millions of years ago, and which Sir William Jones himself refers to a date long prior to the Christian era, “there is a general regulation limiting the rate of interest in ordinary cases, with an express exception in regard to adventures at sea. This exception (as Sir William Jones observes) the sense of mankind approves, and commerce absolutely requires, though it was not before the reign of Charles I. that our English Jurisprudence fully admitted it in respect of maritime contracts.” The truth is, that the existence of the exception in this very ancient code, is less wonderful than that of the general rule; more particularly when we consider that the rule appears to have maintained its ground, as it also had done in modern Europe, after the unsoundness of its principle had been thus explicitly acknowledged. Such coincidences among distant ages and nations in their prejudices and inconsistencies, are still more wonderful than in institutions recommended by reason and justice; and incomparably more so, than any accidental repetitions of discoveries in the exacter sciences.
The same inconsistency may be remarked in those laws which grant an unlimited license to all the different kinds of insurance; to the purchase and sale of annuities; and, in a word, to every case where a man is permitted to take upon himself an unlimited degree of risk, receiving for so doing an unlimited compensation. Mr. Erskine, in his Institutes of the Law of Scotland,* says, “where a creditor’s right to interest is clogged with an uncertain condition, by which he runs the hazard of losing his whole debt, if the condition should never exist, he may stipulate for a higher interest than the legal, without the crime of usury; for there the interest is not given, merely in consideration of the use of the money, but of the risk also undertaken by the creditor.” And to the same purpose Mr. Christian, “It is an established rule, that no contract is within the statute of usury, although more than five per cent. is to be paid on money advanced, if the principal is actually put in hazard, and may be totally lost to the lender.”1 In all these instances the law grants a liberty perfectly just and highly expedient, but altogether inconsistent with the general principles which, in a commercial country, limit pecuniary bargains to certain fixed conditions.
The remarks which have now been made, afford a very strong confirmation of the reasonings already offered, to shew the inexpediency of a legal rate of interest. They prove that while such a restraint is perfectly efficacious in aggravating the distresses of those whom it professes to protect, it never can be so contrived as to accommodate the commercial transactions of a country to the arbitary views of the legislator. The natural course of trade is too powerful to be controlled by laws which are at variance with the interests of private parties, and with the general state of society. And all that law can in such cases effect, is to force individuals on those indirect modes of evasion, which accomplish the end in a more circuitous and expensive way for themselves, as well as more prejudicial to the interests of the public. The same remarks also shew, that the general position formerly quoted [supra, p. 180] from Mr. Smith, to wit, that “no law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law was made,” although by no means true in the unqualified form in which he has stated it, is yet a most just and important maxim, when received under proper limitations. To the same purpose also, Mr. Locke long ago remarked, that “it is in vain to go about effectually to reduce the price of interest by a law; and you may as rationally expect to set a fixed rate upon the hire of houses, or of ships, as of money. He that wants a vessel, rather than lose his market, will not stick to have it at the market rate, and find ways to do it with security to the owner, though the rate were limited by law; and he that wants money rather than lose his voyage or his trade, will pay the natural interest for it, and submit to such ways of conveyance as shall, keep the lender out of reach of the law. So that your Act at best will serve only to increase the arts of lending, but not at all lessen the charge of the borrower, who, it is likely, shall, with more trouble, and going farther about, pay also the more for his money.”1 How nugatory, therefore, are those plans which speculative politicians have so often held out for advancing national wealth and prosperity by reducing the rate of interest to a still lower standard! In the last century this was a favourite object with Sir Josiah Child, who recommended such a measure as “an effectual expedient for advancing the price of lands in the purchase, for improving the rent of farms, for employing the poor, for multiplying artificers, for increasing foreign trade, and for augmenting the stocks of merchants.” Nor does the inefficacy of this project appear to be yet universally admitted. A late respectable writer, Dr. Crumpe, after giving the sanction of his approbation to the reasonings of Child, recommends the lowering of the legal rate of interest in Ireland, as the most likely means of promoting the manufactures of that country, and consequently the employment of the people.2 An author, too, of still higher name, the Marquis Beccaria, in a Discourse on Public Economy of Commerce, published about the year 1769, in enumerating the principal means by which a government may promote trade, mentions expressly the low interest of money.1 The circumstance which has misled all these writers has evidently been, that inseparable connexion which was before fully illustrated between a flourishing commerce and a low rate of interest. As the latter of these results naturally and necessarily follows from the former, they were led to imagine, that if the effect could only be secured by the direct interposition of law, it would draw along with it, as consequences, all those happy concomitants or causes with which they had found it connected in the course of their observations.
Having mentioned Locke’s Treatise on Interest, (which was written in opposition to Child,) I cannot help observing, that although he declares in favour of a legal rate of interest,2 yet all his reasonings lead to an opposite conclusion. And, indeed, the arguments he alleges in favour of a legal rate are so trifling, and so slightly urged, that he was probably prevented, merely by a respect for established opinions, from pushing his conclusion to its full extent. The passage deserves to be quoted in his own words:—
“It is necessary that there should be a stated rate of interest, and in debts and forbearances, where contract has not settled it between the parties, the law might give a rule, and courts of judicature might know what damages to allow. This may, and therefore should, be regulated.
“That in the present current of running cash, which now takes its course almost all to London, and is engrossed by a very few hands in comparison, young men, and those in want, might not too easily be exposed to extortion and oppression, and the dexterous and combining money-jobbers not have too great and unbounded a power to prey upon the ignorance or necessity of borrowers. There would not be much danger of this if money were more equally distributed into the several quarters of England, and into a greater number of hands, according to the exigencies of trade.
“If money were to be hired as land is, or to be had, as corn or wool, from the owner himself, and known good security be given for it, it might then, probably, be had at the market (which is the true) rate, and that rate of interest would be a constant gauge of your trade and wealth. But, when a kind of monopoly, by consent, has put this general commodity into a few hands, it may need regulation, though what the stated rate of interest should be, in the constant change of affairs and flux of money, is hard to determine. Possibly, it may be allowed, as a reasonable proposal, that it should be within such bounds as should not, on the one side, quite eat up the merchant’s and tradesmen’s profit and discourage their industry; nor, on the other hand, so low, as should hinder men from risking their money in other men’s hands, and so rather choose to keep it out of trade, than venture it upon so small a profit. When it is too high, it so hinders the merchant’s gain that he will not borrow; when too low, it so hinders the monied man’s profit that he will not lend; and in both these ways it is an hindrance to trade.”
In stating these observations, I would, by no means, be understood to deny, that low interest is a cause as well as an effect of National Wealth, or that it ought to be an object with a statesman to favour as much as possible its reduction, by the general plan of his policy. I only speak of the inefficacy of particular regulations to that purpose, unless they are so accommodated to the actual circumstances of a country that the same consequences would spontaneously have taken place in the natural course of things, without the interposition of the legislator.
The importance of low interest to the progress of National Wealth follows, as an obvious consequence, from the remarks formerly made on the accumulation of stock. “The proprietor,” says Turgot, “who lends money, ought to be considered as a dealer in a commodity absolutely necessary for the production of riches, and which cannot be at too low a price. To charge this commerce, therefore, with duties, would be as unreasonable as to lay a duty on a dung-hill, which is to manure the land.”* The truth is, that a decrease in the market rate of interest (so far as it is in the power of laws to favour it, by their general spirit and tendency) is the only safe and effectual encouragement which a statesman can give to national industry. It will afterwards appear, that the regulations of commerce, which have been commonly employed for that purpose, (such as prohibitions, monopolies, bounties, drawbacks, &c.,) are not merely useless, but positively hurtful. They may, indeed, encourage particular branches of industry, but it is at the expense of other branches, from which they withdraw their natural share of the capital of the country. Nor do they always succeed in advancing even those trades which they favour, inasmuch as by multiplying their productions beyond their due proportion, they must, in some instances, have the effect of overstocking the market. Hence the only equitable and advantageous encouragements to industry are those which favour all its branches alike; and such, precisely, is the effect of a low rate of interest.”1 It enables individuals with the same given resources, to put larger capitals in motion, leaving them, in the employment of their capitals, entirely to the guidance of their own prudential views of profit, and extending to all equally the means of applying their industry to their favourite objects.
Among the other mischievous effects of raising supplies on the funding system, its tendency to increase the market rate of interest is one of the most important. Immense sums, which would otherwise have been employed in the various departments of useful industry, are kept disengaged for speculations in the funds; and a shock is frequently given to the trade and manufactures of the kingdom by a sudden abstraction of capital, in consequence of those high temptations to lenders which it is necessary for Government to hold out in times of difficulty.
It is, however, chiefly against the agricultural improvement of the country that public loans operate. The high profits of trade enable persons of good credit to elude the laws against usury, by expedients which custom authorizes, and which actual circumstances render absolutely necessary. The shortness of the period too, to which their temporary accommodations generally extend, while it enhances the rate of interest, leaves the money-lender at all times the ready command of his capital. The case is widely different with those who have occasion to borrow money for agricultural speculations, which afford but moderate profits, and which, from their slow returns, require loans of a more permanent nature. This is felt severely in the present times, even by those who have landed security to offer, and who, accordingly, are frequently reduced to the ruinous resource of raising money on annuities; consequences, undoubtedly, of the most alarming sort to the country in general, but which necessarily result from the high rate of interest obtainable upon government securities.
Although, therefore, it seems to be impossible for a statesman, by an arbitrary reduction of the legal rate of interest, to accelerate the national prosperity at pleasure, it is equally clear, on the other hand, that the general plan of its policy may influence, to a great degree, this essential requisite to improvement.
How much the inconveniences, which have just been mentioned as resulting from public loans, are aggravated by the Anti-usurious Laws, is sufficiently evident. The tendency of such restraints on the commerce of money being obviously to raise the rate of interest in the market. M. Turgot has made some good observations on this point, in his Essay on Money Loans, formerly referred to, [supra, p. 157.]
I shall conclude this subject with remarking, that the prejudices and laws with respect to Compound Interest are entirely of a piece with those which have been now under our consideration, originating in the same idea, that the protection of the borrower requires the interposition of the legislator, in every instance, in a greater degree than that of the lender.
It appears from an Epistle of Cicero to Atticus, that compound interest was not then, in every case, contrary to law; for he says, that usuræ centesimæ cum anatocismo anniversario might be enacted.1 But this law was abrogated by Justinian;2 and in modern Europe compound interest is almost universally reprobated as the worst species of usury and extortion. In reason and equity, however, there seems to be no foundation for this opinion; the same principles which justify simple interest, concluding decisively in favour of compound interest, when the principal is withheld after being demanded; and, accordingly, Henry de Cocceii pronounced, long ago, that usuræ usurarum, or anatocismus, is perfectly agreeable to the law of nature.
“Jure naturæ usuras usurarum semper deberi, puto, etsi promissæ non fuerint. Is enim qui mea pecunia utitur, ac pro eo usu annuas usuras promittit, nec solvit has ipsas usuras, plus suo habet; utitur jure alieno; mihi aliquid abest, unde lucrum capere possem si debitor usuras solvisset: adeoque ex natura obligationis sequitur, æstimationem ejus, quod facto debitoris mihi abest, id est, usuras usurarum, solvi debere.”3 The argument, however, is stated much more forcibly by Mr. Bentham, who has allotted a separate section of his Treatise to the discussion of this very question. The substance of his reasoning may be collected from the following abstract:—
“If the borrower pays his interest at the day, and thereby performs his engagement with punctuality, the lender has it in his power to secure compound interest, by lending it out again immediately. If he fails of receiving it, he is by so much a loser. The borrower, by paying it at the day, is no loser; if he does not pay it at the day he is by so much a gainer; and what is worse, the gain which the law in its tenderness thus bestows on him, is a reward which it holds out in many cases for breach of faith, for indolence, and for negligence. The loss, on the other hand, which it thus throws on the forbearing lender, is a punishment which it inflicts on him for his forbearance; while the power which it gives him of avoiding that loss, by prosecuting the borrower upon the instant of failure, is a reward which it holds out to him for his hard-heartedness and rigour.
“It may indeed be, in many cases, impossible for the borrower to pay the interest at the day; but what is the obvious inference? That the creditor should not have it in his power to ruin the debtor for not paying at the day, and that he should receive a compensation for the loss occasioned by such failure. The spirit of our existing laws is precisely the reverse of this. The creditor has it in his power to ruin him, and he has it not in his power to obtain such a compensation. On the contrary, if the debtor has recourse to law, and resolves to fight his creditor through all the windings of mischievous delay, he purchases a respite at ten times, perhaps at a hundred times, the expense of compound interest; while, of the money thus thrown away, no part falls to the share of the individual he has injured, but is consumed by the legal agents who conduct the litigation.”*
[1 ] Gibbon, [Decline and Fall, chap. xliv., footnote.]
[* ] [Mr. Stewart refers to Dr. Gillies. See a note in his translation of the Politics of Aristotle, p. 38, seq., first edit.]
[† ] [Cap. xlii.]
[‡ ] [Cap. xxv.]
[* ] [Deuteronomy, xxiii. 19, 20.]
[† ] [Decline and Fall, Chap. xliv., footnote.]
[* ] [Montesquieu, Esprit, &c., XXI. xvi.]
[1 ]British Critic, for April 1798.
[1 ] Vol. VIII. p. 87, [Chap. xliv.]
[* ] [See Psalm xv. 5.]
[* ] [Epistolæ. Quoted also in Dissertation, (Works, Vol. I.) p. 530.]
[* ] [Letter I. Works, Vol. III. p. 3.]
[† ] [Œuvres, Tom. V. p. 88.]
[1 ] Published in the second volume of a work entitled, Recherches et Considérations sur les Finances de France depuis l’Année 1595, jusqu’à l’Année 1721.
[1 ] Locke’s opinion on the subject seems to coincide with this very nearly. See his Works, Vol. II. p. 31. [(First) Considerations on Interest and Money.]
[* ] [Wealth of Nations, Book II. chap. iv.; Vol. II. p. 44, tenth edition.]
[1 ]Political Œconomy, [Book IV. chap. iv.; Works, Vol. III. p. 158.]
[2 ] Mr. Locke, too, rests his opinion of the expediency of these laws nearly on the same consideration, Vol. II. p. 31. [(First) Considerations on Interest and Money.]
[* ] [Defence of Usury, Letter iii.; Works, Vol. III. p. 6.]
[* ] [Book II. chap. iv.; Vol. II. pp. 44, 45, tenth edition.]
[* ] [Ibid. Book I. chap. x.; Vol. I. p. 177, tenth edition.]
[* ] [Defence of Usury, Letter xiii.; Works, Vol. III. p. 22.]
[† ] [Wealth of Nations, Book II. chap. iii.; Vol. II. p. 20, tenth edition.]
[* ] [Ibid.; Vol. II. p. 27, tenth edition.]
[† ] [Ibid. Book IV. chap. ii.; Vol. II. p. 182, tenth edition.]
[* ] [Defence of Usury, Letter xiii.; Works, Vol. III. p. 26.]
[* ] [Treatise on the Police of the Metropolis, Chap. v. p. 128, seventh edition.]
[* ] [Book II. chap. iv.; Vol. II. p. 45, tenth edition.]
[* ] [Defence of Usury, Letter vii.; Works, Vol. III. p. 12.]
[1 ] Eden, On the Poor, Vol. I. p. 399.
[* ] [Peter Colquhoun, LL.D.]
[† ] [Chap. v. p. 116, seventh edition.]
[* ] [The last sentence inserted, and the following passage within round brackets, left out in the last correction.]
[1 ] Hamilton’s Merchandise, p. 537.
[2 ]Blackstone, Vol. II. p. 458.
[1 ] With respect to the principles of the Civil Law concerning the fœnus nauticum, the annotations of Henry de Cocceii on Chapter xii. Book ii. of Grotius, De Jure Belli, &c., are worthy of a perusal. See likewise Lampredi. In general, it appears, that the code of Justinian, while it confined persons of illustrious rank to the moderate profits of four per cent., and pronounced six to be the ordinary and legal rate of interest, allowed eight for the convenience of manufacturers and merchants, and twelve (or usuræ centesimæ) in the case of loans risked on the hazardous issue of nautical adventures.
With respect to modern nations, the fact is thus stated by Lampredi:—“Consuetudine et moribus invaluit, ubivis gentium, ut jus antiquum revocaretur, et in Bodemeria,” (a word of German origin, corresponding to our term bottomry,) “ceterisque negotiis maritimis periculi pretium nullis esset limitibus circumscriptum, atque adeo usura etiam plusquam centesima in pactum deduci licite posset.”—Vol. I. p. 414.
[* ] [Book IV. Title iv. 76.]
[1 ] [Edition of Blackstone’s Commentaries,] Vol. II. p. 458.
[1 ] Vol. II. p. 6.—[First Considerations of Interest and Money.]
[2 ] P. 340.—Mem:—To consult Locke’s arguments on the other side of the question.
[1 ]Monthly Review, Vol. XLI. p. 176.
[2 ] Vol. II. p. 31.—[First Considerations of Interest and Money.]
[* ] [Réflexions sur la Formation et la Distribution des Richesses, § xcv. Œuvres, Vol. V. p. 123.]
[1 ] Gale’s Second Essay on Public Credit.
[1 ] Lib. V. Epist. ult.
[2 ] See Grotius, Lampredi, and H. Cocceii.
[3 ] [H. Cocceii ad] Grotium, De Jure Belli, &c., Lib. II. cap. xii. 22. [Edit. Lausannæ, 1751, Tom. II. p. 721.]
[* ] [Defence of Usury, Letter xi.; Works, Vol. III. p. 18.]