Posted by: Democratic Thinker | June 29, 2010

Absurdity of Laws Against Usury—Noah Webster

American Thought

 
 
Noah Webster, shortly after the end of the Revolutionary War, agrues in his American Magazine against those who oppose usury.

They will vew laws against usury in the same light that we do the inquisition in Spain, the execution of gypsies and witches in the last century, …

The INJUSTICE, ABSURDITY, and BAD POLICY of LAWS against USURY.

HARTFORD, 1789.

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USURY, in the primitiv sense of the word, signifies any compensation given for the use of money; but in modern legal acceptation, it iz the taking an exorbitant sum for the use of money; or a sum beyond what iz permitted by law. The municipal laws of different states and kingdoms hav fixed different rates of interest; so that what iz usury in one country or state, iz legal interest in another. The propriety of such laws iz here called in question.

1. It iz presumed that such laws are unjust. Money iz a species of commercial property, in which a man haz az complete ownership, az in any other chattel interest. He haz therefore the same natural right to exercise every act of ownership upon money, az upon any other personal estate; and it iz contended, he ought to hav the same civil and political right. He ought to hav the same right to trade with money az with goods; to sell, to loan and exchange it to any advantage whatever, provided there iz no fraud in the business, and the minds of the parties meet in the contracts. The legislature haz no right to interfere with private contracts, and say that a man shall make no more than a certain profit per cent on the sale of hiz goods, or limit the rent of hiz house to the annual sum of forty pounds. This petition iz admitted for self evident, az it respects every thing but money; and it must extend to money also, unless it can be proved that the privilege of using money in trade or otherwise without restraint, and making what profit a man iz able by fair contract, with gold and silver, az well az with houses and lands, will produce some great public inconvenience, which will warrant the state in laying the use of such gold and silver under certain restrictions.*

* In a conversation I had at Dr. Franklin’s on this subject, the doctor admitted the principle, and remarked, that a man who haz 1000l. in cash, can loan it for six per cent. profit only; but he may bild a house with it, and if the demand for houses iz sufficient, he may rent hiz house for fifteen per cent. on the value. This iz a fair state of the argument, and I challenge my antagonists to giv a good reezon for the distinction which the laws make in the two cases; or why a man should hav an unrestrained right to take any sum he can get for the use of hiz house, and yet hiz right to make profit by the loan of money, be abridged by law.

The only reezon commonly given for limiting the interest of money by law, iz, that monied men will otherwise take advantage of the distresses of the poor and needy, to extort from them exorbitant interest. Admit the proposition in its utmost latitude, and it furnishes no argument in favor of the restraint, because the restraint iz no remedy for the evil. On the other hand, it generally increases the evil; for when the law forbids a man to take more than six per cent, for the use of hiz; money, it, at the same time, leevs him the right of withholding hiz money from hiz distressed nabor, and actually lays before him the strongest motivs for withholding it. The law tuches the pride of a man, by restraining what he deems an unalienable right, and this consideration, added to a certainty of employing hiz money to greater advantage, impels the man to turn a deef eer to hiz nabors calamities, when he would be otherwise disposed to afford relief. The law therefore, so far from furnishing a remedy, actually doubles the evil.

To proov this assertion more cleerly, let me call the attention of my reeders to facts within their knowlege. Every man knows that there are persons in every state, who, thro imprudence, idleness or misfortune, become involved, and unable to pay their dets when du. Theze persons seldom make provision for discharging their dets, till they are pressed by their creditors. When they are urged by just demands or legal process, they are under a necessity of raising money immediately: But money iz scarce; it iz in a few men’s hands, who will not pay the full valu of lands or personal estate. The poor detor iz then obliged to sell hiz farm or hiz cattle, or both, at private sale or at auction, for any price they will fetch, which iz commonly but a small part of the valu. Now, if the detor could hav borrowed a sum of money, at ten, fifteen, or even twenty per cent, he might hav been a gainer by the loan; for by being prohibited by law from borrowing money, at a high interest, he haz been obliged to sacrifice twenty, perhaps fifty or a hundred per cent. Laws against usury do not help such men; on the contrary they oppress them. Could such men get money even at twenty per cent, they would often be benefited by the loan; they might save their estates and avoid misery and ruin. A prohibition of high interest only compels the distressed to seek releef by sacrificing property in a way not guarded against by law. Nay, I beg leev to assert that such laws are the very meens of producing, supporting and enriching a host of oppressors in every state in America. There are a few men, in every state, who are what iz called beforehand; theze men will not loan money at legal interest, for this very good reezon, they can do better with it, az they say; and no man can blame another for making the most profitable use of hiz money. Theze men therefore keep their money, till their distressed nabor iz forced by det to sell hiz farm; then iz the time to lay out their money; they get the farm at their own price, which iz generally less than half its valu. In most states, lands are sold at auction, where they are sacrificed; and the poor owner haz all the charges of a legal suit to pay, az wel az the det; and the land sold for a small part of its valu. This iz the common practice, authorized by law; so that laws against usury only create an evil in one way, by endevoring to prevent it in another.

The evil and hardships of this law, of selling real estate on execution, hav been so great, az to giv rise to a different mode of satisfying executions in Connecticut. In this state, a man’s person and estate are both liable for det; but if the personal estate iz inefficient, the creditor haz hiz election, ether to confine the dettor in prison, or take hiz lands. But the law, which iz so far in favor of the creditor, here steps in to prevent a sacrifice of the real property at public sale; and ordains that the creditor shall take it at a value, which shall be apprized by three indifferent freeholders. This law does injustice to the creditor; for it interferes with the contract, and obliges him to take that for pay which he did not engage to receev. But it favors the dettor, in a state where money iz scarce and cannot be eezily raized on an emergency. So far one law, by doing injustice to creditors, corrects some of the ill effects of the law against high interest in Connecticut; but the remedy iz partial, for men in distress for money, generally sell their estates at private sale, for one half their valu; and a few monied men and rich farmers are constantly taking advantage of their nabors calamities, to enrich themselves. Such men make more than fifty per cent, per ann. on their money by theze speculations, and no law can wholly prevent them. Now laws against usury create this very evil: They drive money from a country; they create a necessity for it; and then a few welthy men enrich themselves, not by loaning at fifteen or twenty per cent, but by purchasing lands at half price, which are sold to keep men from jail, who, if they could hav got money for a few months, at twenty per cent, might hav sold their estates to advantage, or otherwise paid their dets. In general then we may obzerv, when a man iz reduced to the necessity of asking money at twenty per cent, hiz situation iz such that it iz better to giv that interest, than to risk a sale of property on a sudden to raize the money. Laws against usury do not save such men; it iz idle to suppose it; on the contrary, they multiply instances of oppression, az all America can witness.

But the argument, if good, proovs too much. If legislators hav a right to fix the profit on money at interest, to prevent exorbitant demands from injuring the necessitous, wil not the same reezon warrant a restriction on the profits of every commodity in market? If my rulers hav a right to say, my annual profit on money loaned, shal be but six per cent, hav they not a right to say the advance on my wheet shal be but six per cent.? Where iz the difference? A poor man may indeed be distressed by a demand of high interest, and so he may by the high price of flour; and I beg leev to say, that distresses from the last cause are infinitely the most numerous, and the most deserving of legeslativ remedies. It wil perhaps be said that the price of bred, in all cities, iz fixed by law—tru; but if the price of wheet iz not likewise fixed, there are times of scarcity when the law must vary the price, or the baker must be ruined, and the poor be destitute of bred. In an extensiv fertile country, like America, such cases may not happen frequently; but the actual existence of the fact proovs that such laws rather follow the state of the market, than regulate it; And indeed it iz a question, whether in this country, the citizens of our large towns would not be supplied with bred at a cheeper rate, without any regulations at all.

2. But the absurdity and bad policy of laws against usury, are so obvious, that it iz surprizing scarcely an attempt haz been made to abolish them in any country. Such laws are absurd and impolitic, because they acually and always produce and multiply the distresses they are designed to remedy. It iz impossible it should be otherwise: The very laws of nature and commerce require that such restraints should necessarily counteract their own design. It iz necessary that commodities should be sometimes plenty and sometimes scarce; and it iz equally necessary that money, the representativ of all commodities, should be liable to the same fluctuations. In the commercial world, money and commodities wil always flow to that country, where they are most wanted and wil command the most profit. The consequence iz that a high price soon produces a low price, and vice versa.

Let us apply the principle to the present question. When money can bear its own profit, its profit or the interest arising on loans, wil be in proportion to the profit made in commercial transactions. If a man can make twelv per cent. on hiz stock, in any kind of trade or speculation, he wil not convert that slock into cash, and loan it at Six per cent. While therefore commerce or speculation wil afford a man greater profits, than the law affords him on hiz loans of cash, he wil hav no money to lend. The consequence iz, while the law fixes the rate of interest lower than the annual profits of other business, a country wil be destitute of money.

This iz precisely the case in America. Our remittances to Europe and the East Indies require considerable sums in specie to be exported; and the merchant wil not import specie, except to facilitate the purchase of hiz cargoes in America. He will not import it for the purpose of loaning, because hiz stock in trade affords a better profit. The few landholders who hav a little cash abuv their annual expenditures, wil not loan, it; for they can make twelv, fifteen, eighteen per cent. on their money by the purchase of certificates, and more on the purchase of lands. There are therefore no motivs, no inducements, for the welthy citizens to loan money, and consequently when a man iz distressed to make a payment, he iz compelled to sacrifice property to perhaps five times the valu of the det; because the law will not permit hiz nabor to take twelv or fifteen per cent. per ann, for the loan of money, a few months; when he haz the money, and would gladly releev hiz frend, if he could receev an adequate compensation.

Thus laws against usury drive cash from a country. They really and continually create a scarcity of an article, and then restrain men from raizing the price, in proportion to that scarcity. They create distresses of the poor, and at the same time, create an impossibility of releef. Were money left, like all kinds of commodities, to command its own price in market; whenever its price should rize abuv the usual cleer profit of other business, men would import specie, or turn their stock into cash, and loan it on good security; for no man would submit to the drudgery of business, if he could make money az safe by lying stil, with hiz money at interest. Had money been permitted to bear its own price according to the demand for it in America since the war, it would hav been kept in the country, or introduced til the rate of interest had fallen, even below the legal standard. Limit the profit on any article of life, and set the price so low that peeple can make more by deeling in other articles, and the articles so fixed wil become scarce and deer. Were the legislatures of the several states to say that our traders should make but one per cent, on salt, they would not bring cargoes of it to the country. It would be az scarce az money iz now. Let the price of wheet be fixed at half a dollar a bushel, and in two years we should not hav a bushel in market. It iz the same case with money. The low profits on the use of money, expel it from the country and none can be obtained at the legal price. Let the interest rize to any sum which can be obtained, and in two years, it would be az eezy to borrow money at a low interest, az it iz now difficult to command it at any price. The laws of nature wil continue to opperate, in spite of the feeble opposition of human power.

Another consideration demands our notice. The laws against usury increase the distresses of the needy, by enhancing the risk, and consequently the insurance on loans.* It iz fruitless to attempt to prevent loans of money. When men are pressed for money, they can always find persons to supply them, upon some terms. But az a loan of money at a higher rate of interest than iz allowed by law, exposes the lender to a loss of the money, and a fine or forfiture besides hiz demand for the use of hiz money wil rize in proportion to that risk. This haz always been one of the most pernicious effects of such laws. So that the law, not only creates a scarcity in the first instance, but actually raizes the demand of interest much abuv the natural demand required by that scarcity. In short, insted of releeving the detter, it multiplies hiz distresses four fold.

* See Blackstone on this subject, Com. Vol. II. 455, where the author’s reezoning holds good, whether against fixing the value of horse hire or money lent. All exorbitant demands are unjust in foro conscentiæ; but what right haz a legeslature to fix the price of money loaned, and not of house-rent?

Besides, such laws, like all national restrictions on trade, tend to make men dishoneft, in particular things, and thus weeken the powers of the moral faculty. There are ten thousand ways of evading such laws, and slight evasions gradually produce a habit of violating law, and harden the mind against the feer of its penalties. Indeed, such laws tend to undermine that confidence which iz the basis of social intercourse. Laws which encourage informations, should be enacted with caution. Such are laws against usury. A man haz often the strongest temptation to be a treecherous rascal, by inducing hiz frend to loan him money, on illegal interest, and then betraying him. This species of villany waz lately carried so far in Massachusetts, az to induce the legislature to repeel a clauze of their law against usury. And a man of morality must shudder, while he reeds the legal prosecutions and adjudications in England upon their statutes of usury.

The absurdity of attempting to fix the valu of money iz another objection to it of no small consequence. The valu of it depends wholly on the quantity in circulation and the demand. In this respect it resembles all other articles of trade; and who ever thought of fixing the price of goods by law?* It iz almost impossible for a legislature to ascertain exactly the valu of money at any one time; and utterly impossible to say that the valu when ascertained, shall continu the same for six months. Nay, two states adjoining eech other may estimate the use of money very differently, at the same period. In New York the legal interest iz seven per cent, in New England but six. A man may therefore do that legally in one state, which in the others would expoze him to a severe penalty.

* The legislatures of several states during the late war were rash enough to make the attempt; and the success of the scheme waz just equal to the wisdom that planned it.

In ancient Rome, the interest waz twelv per cent. The emperor Justinian reduced it to four, but allowed higher interest to be taken of merchants, on account of the risk. In Holland, when Grotius wrote, the common interest waz eight per cent.; but twelv to merchants. In England, the statute 37th, Henry VIII, confined interest to ten per cent. By the 21ft James I, it waz reduced to eight; by the 12th Charles II, to six; and by 12th Ann, to five, the present legal interest in that country.*

* Blackstone Vol.11. 462.

Postlethwaite remarks very justly that theze laws hav not ascertained the real valu or interest of money; for when the legal interest haz been six per cent, the real interest haz sometimes been four; and when the legal interest haz been five, the real interest haz fometimes been seven. Indeed the interest of money depends on such a combination of circumstances, az the scarcity of money, the demand in market, and the hazard, that an attempt to find and fix a permanent rate, iz one of the most visionary schemes that a public body can undertake. To proov the impossibility of such a scheme, I would only mention the continual practice of violating laws against usury; which would not be the case, if the real valu of money had been ascertained and fixed.* If legislatures had found the tru valu of the use of money, there would hav been fewer violations of their laws: If they hav, in any case, fixed a rate of interest lower than the real valu, they hav violated the rights of their subjects. This iz a serious consideration; and perhaps in no instance are the laws of England and America more strongly marked with the traces of ancient prejudice and barbarity, than in the prohibition which prevents a man from using hiz money az he pleezes, while he may demand any sum, whatever for the use of hiz other property.

* What are marine insurances, bottomry, loans at respondentia and annuities for life, but exceptions to the general law against usury? The necessity of higher interest than common iz pleeded for theze exceptions. Very good; but they proov the absurdity of attempting to fix that, which the laws of nature and commerce require should be fluctuating. Such laws are partial and iniquitous.

The only power, I conceev, a legislature haz to determin what interest shall arize on the use of money, or property, iz where the parties hav not determined it by agreement. Thus when a man haz taken up goods upon credit, or where, by any other legal meens, a man becomes possessed of anothers money or estate, without a specific stipulation for interest, the law very properly steps in and ascertains the sum which the detter shall pay for the use of that money. But to make a law that a man shall not take but six per cent. for the use of money, when the borrower iz willing to giv more, and the lender cannot part with hiz money at that rate of interest, iz a daring violation of private rights, an injury often to both parties, and productiv of innumerable embarrassments to commerce.

We are told that such laws are necessary to guard men from the oppression of the rich. What an error! Waz a monied man ever compelled to assist a distressed nabor, by the forfitures incurred by such laws? Iz not hiz money hiz own? Wil he lend it all, if it should not be for hiz benefit? Besides, cannot a man in necessity alienate hiz property for one fourth of its valu? Are not such bona fide contracts made every day to raize money to answer a temporary purpose? Nay, hav not the laws of all commercial states authorized sales by auction, where any man may part with hiz property for a fourth of its valu? Iz there any remedy in law against such a sacrifice of a man’s estate? Wherein then consists the security of laws against usury? In the name of common sense and common equity, let legislators be confident. If men are improvident, lazy and careless, a loss of property wil be their punishment, and no mezures of government wil prevent it.

To what then shall we ascribe the severe laws against high interest, which hav been and stil are existing in most commercial countries? I presume the cause may be easily assigned. The Jewish prohibition, not to take interest, except of strangers, first gave rise to douts in the minds of our pious christian forefathers, with respect to the legality of any interest at all. This produced, in the dark ages, severe ecclesiastical laws against taking any thing for the use of money; and theze laws originated a general prejudice against it, thro the Christian world.

In the twelfth and thirteenth centuries, commerce began to revive; but az there waz but little money, and trade waz lucrativ, because in few hands, money bore a very high interest. In some parts of Europe, the interest waz forty per cent. Even with this interest, certain Italian traders could make an annual profit, and therefore it waz for their benefit to giv it. It however rendered them very unpopular.*

* Robertions Charles V. Vol. I. 280.

The Jews, for their infidelity, had been considered by the Christians az outcasts on earth. Severe laws were enabled against them in almost every country; depriving them of the rights of citizens, and forbidding them to hold real estates. Proscribed and insulted, the poor Jews were compelled to turn their hand against every man in their own defence. They commenced strolling traders and bankers, and by theze meens commanded a large share of the money in every kingdom.

With this command of cash, the Jews very justly compensated themselves for the injuries they suffered from the tyrannical laws which existed against them. They loaned money at the highest rate of interest they could obtain. Hence the general karacter of the Jews, and the prejudice against them that survives to this enlightened period.

It iz very probable, that before the discovery of the American mines, money waz so scarce in Europe, that a few brokers in eech kingdom might engross such a share, az to hav it in their power to oppress peeple. This waz evidently the case in England, about the reign of Edward I, and the parliament thought proper to interfere and restrain the evil. Laws againft usury were doutless necessary and useful at that time. But since the world haz been filled with gold and silver from South America, and nations hav opened an intercourse with eech other, there never can be a want of specie, where a country can supply produce enough to exchange for it. It haz become a mere fluid in the commercial world; and in order to obtain a supply, in a country abounding with produce and manufactures, the legislature haz nothing to do, but let it bear its own price; let it command its own valu, ether at interest, or in exchange for commodities.

Laws against usury therefore I confider az originating ether in the necessity of the times, which long ago ceesed, or in a bigotted prejudice against the Jews, which waz az barbarous formerly, az it iz now infamous. Laws retraining the interest of money I now consider, in the same light, az I do laws against freedom of conscience. And were it not for the force of habit, I should az soon expect to see a modern legislature ordering a pious sectary to the slake for hiz principles, az to see them gravely passing a law, to limit the profit on the use of hiz money. And unless the legislatures of this enlightened age should repeel such laws, and place money on a footing with other property, they will be considered az accessory to a direct violation of the deerest rights of men, and will be answerable for more frauds, perjuries, treechery apd expensiv litigations, than proceed from any other single cause in society. I am so firmly persuaded of the truth of theze principles, that I venture to predict, the opinions of men will be changed in less than half a century, and posterity will wonder that their forefathers could think of maintaining a position so absurd and contradictory, az that men hav no right to make more than six per cent, on the loan of money, while they hav an indefeezable right to make unlimited profit on their money in any other manner. They will vew laws against usury in the same light that we do the inquisition in Spain, the execution of gypsies and witches in the last century, or thoze laws of England which make 100l. annual income necessary to qualify a man for killing a partridge, while they allow forty shillings only to qualify him for electing a knight of the shire.

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