Front Page Titles (by Subject) LETTER XI.: Compound Interest. - Defence of Usury
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LETTER XI.: Compound Interest. - 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).
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A word or two I must trouble you with, concerning compound interest; for compound interest is discountenanced by the law. I suppose, as a sort of usury. That, without an express stipulation, the law never gives it, I well remember: whether, in case. of an express stipulation, the law allows it to be taken, I am not absolutely certain. I should suppose it might: remembering covenants in mortgages that interest should become principal. At any rate, I think the law cannot well punish it under the name of usury.
If the discountenance shewn to this arrangement be grounded on the horror of the sin of usury, the impropriety of such discountenance follows of course, from the arguments which shew the un-"sinfulness of that sin."
Other argument against it, I believe, was never attempted, unless it were the giving to such an arrangement the epithet of a hard one: in doing which, something more like a reason is given, than one gets in ordinary from the common law.
If that consistency were to be found in the common law, which has never yet been found in man's conduct, and which perhaps is hardly in man's nature, compound interest never could have been denied.
The views which suggested this denial, were, I dare to say, very good: the effects of it are, I am certain, very pernicious.
If the borrower pays the interest at the day, if he performs his engagement, that very engagement to which the aw pretends to oblige him to conform, the lender, who receives that interest, makes compound interest of course, by lending it out again, unless he chooses rather to expend it: he expects to receive it at the day, or what meant the engagement? 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: a pain of disappointment takes place in the case of the one, while no such pain takes place in the case of the other. The cause of him whose contention is to catch a gain, is thus preferred to that of him whose contention is to avoid a loss: contrary to the reasonable and useful maxim of that branch of the common law which has acquired the name of equity. The gain, which the law in its tenderness thus bestows on the defaulter, is an encouragement, a reward, which it holds out for breach of faith, for iniquity, for indolence, for negligence.
The loss, which it thus throws upon the forbearing lender, is a punishment which it inflicts on him for his forbearance: the power which it gives him of avoiding that loss, by prosecuting the borrower upon the instant of failure, is thus converted into a reward which it holds out to him for his hard-heartedness and rigour. Man is not quite so good as it were to be wished he were; but he would be bad indeed, were he bad on all the occasions where the law, as far as depends on her, has made it his interest so to be.
It may be impossible, say you, it often is impossible, for the borrower to pay the interest at the day: and you say truly. What is the 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.—He has it in his power to ruin him, and he has it not in his power to obtain such compensation. The judge, were it possible for a arrested debtor to find his way into a judge's chamber instead of a spunging-house, might award a proper respite, suited to the circumstances of the parties. It is not possible: but a respite is purchased, proper or not proper, perhaps at ten times, perhaps at a hundred times the expence of compound interest, by putting in bail, and fighting the creditor through all the windings of mischievous and unnecessary delay. Of the satisfaction due either for the original failure, or for the subsequent vexation by which it has been aggravated, no part is ever received by the injured creditor: but the instruments of the law receive, perhaps at his expence, perhaps at the debtor's, perhaps ten times, perhaps a hundred times the amount of that satisfaction. Such is the result of this tenderness of the law.
It is in consequence of such tenderness that on so many occasions a man, though ever so able, would find himself a loser by paying his just debts: those very debts of which. the law has recognized the justice. The man who obeys the dictates of common honesty, the man who does what the law pretends to bid him, is wanting to himself. Hence your regular and securely profitable writs of error in the house of lords: hence your random and vindictive costs of one hundred pounds, and two hundred pounds, now and then given in that house. It is natural, and it is something, to find, in a company of lords, a zeal for justice: it is not natural, to find, in such a company, a disposition to bend down to the toil of calculation.