Front Page Titles (by Subject) LETTER VIII.: Virtual Usury allowed. - Defence of Usury
The Online Library of Liberty
A project of Liberty Fund, Inc.
LETTER VIII.: Virtual Usury allowed. - Jeremy Bentham, Defence of Usury 
Defence of Usury; shewing the Impolicy of the Present Legal Restraints on the Terms of Pecuniary Bargains; in Letters to a Friend. To which is added A Letter to Adam Smith, Esq. LL.D. on the Discouragements opposed by the above Restraints to the Progress of Inventive Industry; and to which is also added, A Protest against Law-Taxes (London: Payne and Foss, 1818).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
Virtual Usury allowed.
Having proved, as I hope, by this time, the utter impropriety of the law's limiting the rate of interest, in every case that can be conceived, it may be rather matter of curiosity, than any thing else, to enquire, how far the law, on this head, is consistent with itself, and with any principles upon which it can have built.
1. Drawing and re-drawing is a practice, which it will be sufficient here to hint at. It is perfectly well known to all merchants, and may be so to all who are not merchants, by consulting Dr. Smith. In this way, he has shewn how money may be, and has been, taken up, at so high a rate, as 13 or 14 per cent. a rate nearly three times as high as the utmost which the law professes to allow. The extra interest is in this case masked under the names of commission, and price of exchange. The commission is but small upon each loan, not more, I think, than ½ per cent.: custom having stretched so far but no farther, it might be thought dangerous, perhaps, to venture upon any higher allowance under that name. The charge, being repeated a number of times in the course of the year, makes up in frequency what it wants in weight. The transaction is by this shift rendered more troublesome, indeed, but not less practicable, to such parties as are agreed about it. But if usury is good for merchants, I don't very well see what should make it bad for every body else.
2. At this distance from all the mountains of legal knowledge, I will not pretend to say, whether the practice of selling accepted bills at an under value, would hold good against all attacks. It strikes my recollection as a pretty common one, and I think it could not be brought under any of the penal statutes against usury. The adequateness of the consideration might, for aught I know, be attacked with success, in a court of equity; or, perhaps, if there were sufficient evidence (which the agreement of the parties might easily prevent) by an action at common law, for money had and received. If the practice be really proof against all attacks, it seems to afford an effectual, and pretty commodious method of evading the restrictive laws. The only restraint is, that it requires the assistance of a third person, a friend of the borrower's; as for instance: B, the real borrower, wants 100l. and finds U, a usurer, who is willing to lend it to him, at 10 per cent. B has F, a friend, who has not the money himself to lend him, but is willing to stand security for him, to that amount. B therefore draws upon F, and F accepts, a bill of 100l. at 5 per cent. interest, payable at the end of a twelvemonth from the date. F draws a like bill upon B: each sells his bill to U for fifty pound; and it is indorsed to U accordingly. The 50l. that F receives, he delivers over without any consideration to B This transaction, if it be a valid one, and if a man can find such a friend, is evidently much less troublesome than the practice of drawing and re-drawing. And this, if it be practicable at all, may be practised by persons of any description, concerned or not in trade. Should the effect of this page be to suggest an expedient, and that a safe and commodious one, for evading the laws against usury, to some, to whom such an expedient might not otherwise have occurred, it will not lie very heavy upon my conscience. The prayers of usurers, whatever efficacy they may have in lightening the burthen, I hope I may lay some claim to. And I think you will not now wonder at my saying, that in the efficacy of such prayers I have not a whit less confidence, than in that of the prayers of any other class of men.
One apology I shall have to plead at any rate, that in pointing out these flaws, to the individual who may be disposed to creep out at them, I point them out at the same time to the legislator, in whose power it is to stop them up, if in his opinion they require it. If, notwithstanding such opinion, he should omit to do so, the blame will lie, not on my industry, but on his negligence.
These, it may be said, should they even be secure and effectual evasions, are still but evasions, and, if chargeable upon the law at all, are chargeable not as inconsistencies but as oversights. Be it so. Setting these aside, then, as expedients practised or practicable, only behind its back, I will beg leave to remind you of two others, practised from the day of its birth, under its protection and before its face.
The first I shall mention is pawnbroking. In this case there is the less pretence for more than ordinary interest, inasmuch as the security is, in this case, not only equal to, but better than, what it can be in any other: to wit, the present possession of a moveable thing, 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. If there be a case in which the allowing of such extraordinary interest is attended with more danger than another, it must be this: which is so particularly adapted to the situation of the lowest poor, that is, of those who, on the score of indigence or simplicity, or both, are most open to imposition. This trade however the law, by regulating, avowedly protects. What the rate of interest is, which it allows to be taken in this way, I can not take upon me to remember: but I am much deceived, if it amounts to less than 12 per cent. in the year, and I believe it amounts to a good deal more. Whether it were 12 per cent. or 1200, I believe would make in practice but little difference. What commission is in the business of drawing and re-drawing, warehouse-room is, in that of pawnbroking. Whatever limits then are set to the profits of this trade, are set, I take it, not by the vigilancy of the law, but, as in the case of other trades, by the competition amongst the traders. Of the other regulations contained in the acts relative to this subject, I recollect no reason to doubt the use.
The other instance is that of bottomry and respondentia: for the two transactions, being so nearly related, may be spoken of together. Bottomry is the usury of pawnbroking: respondentia is usury at large, but combined in a manner with insurance, and employed in the assistance of a trade carried on by sea. If any species of usury is to be condemned, I see not on what grounds this particular species can be screened from the condemnation. "Oh but" (says sir William Blackstone, or any body else who takes upon himself the task of finding a reason for the law) "this is a maritime country, and the trade, which it carries on by sea, is the great bulwark of its defence." It is not necessary I should here enquire, whether that branch, which, as Dr. Smith has shewn, is, in every view but the mere one of defence, less beneficial to a nation, than two others out of the four branches which comprehend all trade, has any claim to be preferred to them in this or any other way. I admit, that the liberty which this branch of trade enjoys, is no more than what it is perfectly right it should enjoy. What I want to know is, what there is in the class of men, embarked in this trade, that should render beneficial to them, a liberty, which would be ruinous to every body else. Is it that sea adventures have less hazard on them than land adventures? or that the sea teaches those, who have to deal with it, a degree of forecast and rejection which has been denied to land men?
It were easy enough to give farther and farther extension to this charge of inconsistency, by bringing under it the liberty given to insurance in all its branches, to the purchase and sale of annuities, and of post-obits, in a word to all cases where a man is permitted to take upon himself an unlimited degree of risk, receiving for so doing an unlimited compensation. Indeed I know not where the want of instances would stop me: for in what part of the magazine of events, about which human transactions are conversant, is certainty to be found? But to this head of argument, this argument ad hominem, as it may be called, the use of which is but subsidiary, and which has more of confutation in it than of persuasion or instruction, I willingly put an end.