Defence of Usury. persons who may There seems, indeed, to be only one class of prodigals to whose case usury laws can have any application, those, namely, who have spent all their ready money, engaged all their securities, and have no longer any good pledges to offer upon which to raise a loan; for, it is very evident that, as long as a spendthrift has the means, he will gratify his passion, or his love of ostentation; that as long as he has good security to give he will get money at legal interest, and that it is only when he is driven to have recourse to contingencies and distant reversions that a high premium becomes necessary to bribe the usurer. In this last case, indeed, he will be likely to tread upon the forbidden ground of the law, but it would be in vain to attempt to thwart his purpose; for, as he is determined to have money, he will instantly sell his interests in these supposed contingencies, and thus find the shortest road to ruin, in spite of laws and judges. But the matter may, after all, be brought within very narrow bounds by stating as above, that the prodigal who has any thing certain, either in possession or in prospect, will find means to get it spent without violating the laws against usury; and if he has nothing certain, he will get very few usurers to deal with him. Besides, it will be admitted on all hands that it is not worth while to It is not at all necessary to the well-being legislate in such cases. tranquillity of society to make laws for fools, and more particularly when the violation of such laws, which in this instance is easily practicable, will only render their foolishness more certainly fatal. But, even supposing the law, as it respects the borrowing of money, to be completely efficient and successful, it would only shut up one very narrow outlet; leaving open the large sluices of extravagance which carry off wealth in the shape of tradesmen's bills, overcharged in every article, and with interest upon interest, for, as Mr. Bentham justly remarks, “So long as a man is looked upon as one who will pay, he can much more easily get the goods. he wants than money to buy them with, though he were content to give for it twice or even thrice the ordinary rate of interest." To put a stop to prodigality there seems to be no other effectual expedient than that resorted to by the ancient Romans, and still employed in extreme cases, both here and in France, which is, to put the incurable waster under an interdict. His relatives may do that for him; the law can do nothing, either curative or positively preventive. or If we advert on the other hand to the case of the indigent and the simple, we shall find that the legal restriction on usury is equally inefficient as a protection against exorbitant demands, on the part of the lender, whilst it operates decidedly to their disadvantage in obtaining relief, and that too, in proportion to the amount of their necessities. By the indigent, we here mean such persons as, from accidental circumstances, are reduced to temporary straits, and to whom the advance of a sum of money would be worth considerably more than the legal interest. It happens, however, from the very conditions of their case as now described, that they may not be able to hold out a competent security for the loan which has thus become so necessary to them; and as the man who might be willing to lend, even on this imperfect security, were he allowed to receive an adequate premium for his risk, is positively prohibited from entering into terms with them, they are consequently, and by the direct operation of the law in question, shut out from all chance of relief. We shall suppose that the pressure of circumstances renders it indispensable for a tradesman to raise, in a given time, a certain sum of money, which, if he cannot borrow it, he must realize by forcing a sale of his goods. But the market we may imagine is unfavourable, and he is certain to lose, by the sale, twenty per cent. on the average price of his commodity; he would therefore willingly give seven per cent. for money, in order to wait a more favourable state of things, and to avoid so great a sacrifice. There are, we shall suppose, more than one individual who would lend him money, at six or seven per cent., but who, as they can get five per cent. on the very best security, will not let him have it for less. The sale must therefore be made, and the embarrassed tradesman is accordingly compelled, by what our author denominates the loving-kindness of the law, to purchase his accommodation at three times the price at which he could have it by means of a loan; and all this evil arises from the absurd officiousness of rulers, who are determined to think and care for the subject, without having either opportunity or talents for becoming acquainted with his business or his particular situation. Thus, in the case before us, the person who needs the accommodation is, of all others, the best qualified to form a correct judgment as to what he can afford to give for it, and what it would be even advantageous to give; yet, the legislator, as Mr. Bentham remarks, in a similar supposition, who knows nothing, nor can know any thing of any one of all these circumstances, who, in short, knows nothing at all about the matter, comes and says to him, 'it signifies nothing, you shall not have the money, for it would be doing you a mischief to let you have it upon such terms.' The apprehension of the lawgiver is that a man, in embarrassed circumstances, will give more for money than he can well afford, that he will ruin himself by the very means he employs to avert that catastrophe; but the balance of chances may, in all such affairs, be left to the discernment of the persons concerned, and particularly of the lender, who before he advances any part of his funds, will make it his business to ascertain the likelihood and the means of being repaid; and as these depend, in a great measure, upon the success of his debtor, the caution of the one will abundantly counteract the precipitancy of the other. With regard again to simplicity of character, which here means being a simpleton, why should the law of the land extend its guardianship only to pecuniary transactions. A man may buy an estate at a thousand years' purchase; he may give as the rent of a house an annual payment equal to the price of it; he may rent a farm at a sum greater than the worth of the fee-simple, and no law nor judge upon earth will interfere to save him from the effects of his folly. But the moment he is known to rent a hundred pounds at more than 57. per annum, the vigilance of the statute flies instantly to his aid, calls him a great simpleton, and punishes the owner of the property for assisting him. It requires, however, only to be mentioned, as Mr. Bentham has justly remarked, that 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. A single per cent, beyond the ordinary rate of interest of money is a stride more conspicuous, and startling than many per cent. upon the price of any kind of goods. But if we consider the restrictive system generally, and without any relation to the particular cases of prodigal simpletons, we shall find that the greatest evil attending it arises from the insuperable obstacles which it throws in the way of many persons in the higher ranks of life, and possessed of considerable property, to whom, from a variety of circumstances, a loan may be of the utmost consequence, and who may not be able to furnish that precise degree of security which every man is entitled to expect who lends his money at legal interest. As a return of five per cent. can be had from the public funds, and upon the best heritable security from private individuals, it is not reasonable to suppose that a moneyholder will lend at the same rate where there is the smallest possible risk either of losing his capital, or of having the interest irregu larly settled. In the employment of all other kinds of property there are various degrees of hazard, and the usury demanded by the owner always bears some proportion to his estimate of that hazard; but in money transactions, the law recognizes only one degree of risk, and authorizes only one rate of premium, on which account, those who cannot exhibit unexceptionable security will in vain apply for accommodation. It would be easy to imagine a thousand cases wherein this exclusion would operate as a peculiar hardship. We take one from the letters now before us, which seems at once perfectly natural, and free from all exaggeration. After stating that before the war, meaning the American war, for these letters were originally published in 1787, land used to sell at thirty years' purchase, and that owing to the distress occasioned by hostilities, it had fallen to eighteen or even fifteen years' purchase, he supposes that an estate worth, before the depreciation, 100%. per annum clear of taxes, was devised to a man, charged, say with 1500/. and interest till the money should be paid. Five per cent. interest, the utmost that could be accepted from the owner, did not answer the incumbrancer's purpose: he chose to have the money. But six per cent. perhaps, would have answered his purpose, if not, most certainly it would have answered the purpose of somebody else, for multitudes there all along were, whose purposes were answered by five per cent. The war lasted, I think, seven years; the depreciation of the value of land did not take place immediately; but as, on the other hand, neither did it recover its former price upon the peace, we may put seven years for the time during which it would be more advantageous to pay this extraordinary rate of interest than sell the land, and during which accordingly, this extraordinary rate of interest would have to run. One per cent. for seven years, is not quite of equal worth to seven per cent. the first year; say however, that it is. The estate which before the war was worth thirty years' purchase, that is 3000/., and which the devisor had given to the devisee for that value, being put up to sale fetched but twenty years' purchase, 2000. At the end of that period it would have fetched its original value, 3000l. Compare then the situation of the devisee at the seven years' end, under the law, with what it would have been without the law. In the former case, the land selling for twenty years' purchase, that is 2000/. what he would have after paying the 1500/. is 500%; which, with the interest of the latter sum, at five per cent. for seven years, viz. 175l. makes at the end of that seven years 6751. In the other case, paying six per cent. on the 1500l., that is 901. a year, and receiving all that time the rent of the land, viz. 100/. he would have had at the seven years' end the amount of the remaining 10. during that period, that is 70/. in addition to his 1000/1.-6751. subtracted from 1070/. leaves 3951. This 395. then, is what he loses out of 1070%., almost thirty-seven per cent. of his capital, by the loving-kindness of the law. Make the calculations, and you will find that by preventing him from borrowing the money at six per cent. interest, it makes him nearly as much sufferer as if he had borrowed it at ten.' In truth, innumerable instances must occur in which great and positive losses are sustained from the operation of the law against usury. It will be readily admitted that nothing could be a greater hardship than to preclude people from borrowing at all; and it must follow that in proportion as obstacles are created to pecuniary accommodation, an approach is made to that great and unnecessary hardship; for, as in certain cases, money must be had upon any terms short of positive ruin, the needy person is subjected to great inconvenience and to an immense expense to procure a loan in defiance of the law, which he is in fact compelled to violate. He resorts to a money-dealer, who not only exacts a premium proportioned to the deficiency of the security which the borrower presents, that is, to the hazard of losing his capital; but also an additional sum as a compensation for the risk he runs of being detected in an illegal transaction, and of being punished accordingly. Thus the law operates against a man in the ratio of his necessities; the more urgent his wants, the greater are the obstacles which are thrown in his way. The person who lends to him must be indemnified, not only for whatsoever risks he incurs independently of the law, but also for the very risk occasioned by the law: he must be insured, as Adam Smith observed long ago, against the law which he violates. This cause would operate, as has been forcibly illustrated by our author, even if there were 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 or otherwise, 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 necessarily happen in every other, that those who remain have the less to withhold them from advancing their terms, and each one accordingly will find it easier to push his advantage up to any given degree of exorbitancy than he would if there were a greater number of persons of the same description to resort to. If we apply these remarks to the cases of the prodigal and simpleton already considered, we shall see good reason for concluding that the most effectual expedient, whereby to prevent imposition, is to allow every one to receive for his money what rent soever he can obtain for it, whether in the name of interest alone, or of interest and insurance combined. Respectable people will not then shrink from a trade, upon which an odium has been cast merely by an artificial distinction in the application of a word, and by a statute founded upon an avowed exception to all enlightened policy. The foolishness of any law or, at least, its inexpediency in certain circumstances of society, is always clearly manifested by the increased connivance which its incessant violation renders necessary, and by the inconsistencies to which it ultimately leads in legal decisions themselves. Thus, it is very well known, that, notwithstanding the severe penalty imposed by the statute we are now speaking of, usury to a great extent is practised and tolerated every day. The method of accommodation, by redeemable annuity so commonly resorted to, is nothing else than a very expensive branch of usurious dealing, exposing a necessitous person not only to a very heavy interest, as must happen in the case of all clandestine transactions, but also to the additional expense of insuring his life. Drawing and redrawing of bills, too, is a mode of raising money known to most merchants, by which, as Dr. Smith has remarked, the interest on any given sum will amount in the course of a year to 13 or 14 per cent. The desperate resource of selling accepted bills is likewise, sometimes, rendered available to evade the law, and to ward off distress. B. a borrower, says Mr. Bentham, wants 100%, and finds U. a usurer who is willing to lend it to him at ten pounds |