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Subject Area: Law
Topic: The American Revolution and Constitution

§ 106.: Usury and interest laws.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1 [1900]

Edition used:

A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 1.

Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.

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§ 106.

Usury and interest laws.—

It has long been the custom in England and in this country to regulate the rate of interest.

The regulation of interest may be of two kinds. So far as the legislature undertakes to determine what rate of interest can be recovered on contracts for the payment of money, in the absence of the express stipulation of the parties, it is a reasonable police regulation, the object of which is to aid the parties in effecting settlements, when they have not previously agreed upon any rate of interest. If the parties are not satisfied with the statutory rate, they can agree upon any other rate. But it is different when the legislature undertakes to prescribe what rate of interest the parties to a contract may agree upon. The rate of interest, like the price of merchandise, is determined ordinarily by the relation of supply and demand. Free trade in money is as much a right as free trade in merchandise. If the owner of the property in general has a natural right to ask whatever price he can get for his goods, the owner of money may exact whatever rate of interest the borrower may be willing to give. For interest is nothing more than the price asked for the use of money. No public reason can be urged for imposing this restriction upon the money lender, and the utter futility of such laws, in attempting to control the rate of interest, is, or should be, a convincing proof of their unreasonableness. It has been suggested that originally these laws were based upon the fact that the lending of money was a special privilege. “The practice of regulating by legislation the interest receivable for the use of money, when considered with reference to its origin, is only the assertion of a right of the government to control the extent to which a privilege granted by it may be exercised and enjoyed. By the ancient common law it was unlawful to take any money for the use of money; all who did so were called usurers, a term of great reproach, and were exposed to the censure of the church, and if, after the death of a person, it was discovered that he had been a usurer while living, his chattels were forfeited to the king, and his land escheated to the lord of the fee. No action could be maintained on any promise to pay for the use of money, because of the unlawfulness of the contract. Whilst the common law thus condemned all usury, Parliament interfered, and made it lawful to take a limited amount of interest. It was not upon the theory that the legislature could arbitrarily fix the compensation which one could receive for the use of property, which, by the general law, was the subject of hire for compensation, that Parliament acted, but in order to confer a privilege which the common law denied. The reasons which led to this legislation originally have long since ceased to exist; and if the legislation is still persisted in, it is because a long acquiescence in the exercise of a power, especially when it was rightfully assumed in the first instance, is generally received as sufficient evidence of its continued lawfulness.”1

But, of course, this reason furnishes no justification for the present existence of such laws. In the light of modern public opinion, the lending of money on interest is in no sense a privilege, and no law can make it so. The biblical injunction against the taking of interest, and the fact that the original money lenders of Europe were Jews; in other words, respect for the teachings of the Bible on the subject, and hate for the despised Jew, probably combined to bring the usury laws into being. In the Middle Ages, the Jew had no rights at all. Every recognition of his natural rights was a privilege. Suffice it to say, that on no satisfactory grounds can usury laws be justified. But their enactment has so long been recognized as a constitutional exercise of legislative authority, and the fact that they become dead letters as soon as enacted, render it very unlikely that the courts will pronounce them unconstitutional, however questionable legal writers and authorities may consider them. Mr. Cooley says that the usury laws are “difficult to defend on principle; but the power to regulate the rate of interest has been employed from the earliest days, and has been too long acquiesced in to be questioned now.”1 I differ with the learned judge in his opinion that long acquiescence in such laws precludes an inquiry into their constitutionality; but will readily accede that the easy evasion of them makes it unimportant whether they are questioned or not, except that it may be considered as highly injurious to enact any law which is not or cannot be enforced, in that the successful defiance or evasion of a particular law tends to lessen one’s reverence for law in general.

It has been held recently that a statute authorizing building and loan associations to charge what would under the general usury laws be usurious rates of interest, is not unconstitutional as class legislation.2

[1]Field, J., in Munn v. Illinois, 94 U. S. 136; 10 Bac. Abr. 264.

[1]Cooley’s Principles of Const. Law, p. 235.

[2]Iowa Savings & Loan Assn. v. Heidt, 107 Iowa, 297; Zenith Building and Loan v. Heimabach (Minn. ’99), 79 N. W. 609. But see Gordon v. Winchester Building & Loan Assn., 75 Ky. 110.