Chapter V: Money (4)

If this honorable Senator and his like-minded colleagues were tolerably familiar with the financial history of their country, and perhaps they were, they would have known that this precise scheme had had a practical trial in Rhode Island, just before the adoption of the national Constitution. The Legislature authorized the issue of $500,000 in scrip-money based upon the value of the real estate of the farmers of the Colony. The law required a mortgage for twice the amount of scrip-money based upon it, and it was therefore supposed the money would be as good as gold or better. But somehow or other the merchants of the towns could not see the matter in that light. The depreciation of the scrip-money began at once, and the prices of wares ran up in a way that should have set business in active motion, according to all the views of the "scarcity" school. It was therefore enacted by the Legislature, that anybody who refused to accept the scrip at its face value should be fined $500 and lose the right of suffrage! They made it a legal tender! But business refused to boom. The merchants shut up their stores, the farmers could not market their crops, and idleness and rioting set in all over the State. Then the farmers organized a boycott against the towns, and food became scarce. Meanwhile the mortgage legal tenders would not pass at the best for over 16 cents to the dollar! There was more of "enforcing" legislation, and appeal to the courts, but nothing could boost the mortgage-money. The chief result of the experiment was, that Rhode Island gained in this way the title of "Rogues' Island."

No matter how good the cause, how patriotic the People, an inconvertible paper money is sure to run down at the heel. In June, 1775, one week after Bunker Hill, the Continental Congress voted to emit $2,000,000 in "Bills of Credit" issued on the faith of the "Continent." Eleven separate Colonies, New Hampshire and Georgia issuing none, began about the same time their revolutionary issues of the same sort, amounting in all during 1775-83 to $209,524,776. The vice of such irredeemable scrip is, there is no economical limitation of the Supply. The middle of 1777, when Burgoyne was prosperously advancing from Canada towards New York, saw a general fall of the notes both Continental and Colonial, and of course and in consequence a universal rise of the prices of other products. At the close of that year, the average depreciation from silver was not far from 3 to 1; at the close of 1778, it was not far from 6 to 1; at the end of 1779, it was about 28 to 1; the Continental press then rested, after $200,000,000 nominally had been put out, but actually about $40,000,000 more than that, a usual if not universal accompaniment of such issues. When the stuff dropped out altogether in the spring of 1781, the country found no more lack of silver for Money than Massachusetts had found in 1749, when and after she redeemed her outstanding bills of credit at 11 for 1 in sterling silver, £138,649 of which, the share falling to her from the capture of Louisburg, was shipped to the Colony in coin, and she became for the next 25 years the "Silver Colony." Assuming that only $200,000,000 Continental had been issued, Thomas Jefferson carefully estimated that the Nation realized from them $36,367,720 in specie value, or 18% of the nominal value.

14. Whether the Money of any Nation be coin or paper or both, when once it is in the hands of the People, Government has properly nothing to say _about the rate of interest at which one person loans this money to another_. Usury Laws so-called, prohibiting the lender from taking more than a prescribed rate % for the use of money loaned, under penalties sometimes of the entire interest and sometimes of the entire debt have disfigured the statute-books of all Nations and of all the States of this Union. Such laws cannot justify themselves for a moment in the light of sound principles of Political Economy. Their origin may be explained by a reference to two false views, now happily exploded.

(a) The laws of Moses forbade to the Israelites the taking from one another any _interest_ on money loaned, but at the same time it allowed them to take such interest freely of strangers; the permission in the one case going to show that there is nothing in the taking of interest that is unjust or sinful, and the prohibition in the other being readily explainable from the general purpose of the municipal regulations of Moses, which was to found an agricultural and not a trading commonwealth, in which every family was to possess land that could not be permanently alienated or sold, in which it was a great object to maintain the personal independence and equality of these families, in which the law for the recovery of debts was very summary and effective, lessening the risk of losing the principal, and which was to be and was sedulously separated in its usages from the surrounding nations. It has been well understood for a long time that the municipal code of Moses was local and peculiar, not necessarily applicable at all to the circumstances of other States, and in no sense binding on the conscience of legislators; and yet there doubtless sprang from the prohibition referred to a prejudice against interest, and this prejudice was perhaps deepened in the Middle Ages and onwards by the conduct of the Jews themselves, who, in addition to their sin of persistently growing rich in spite of the endless disabilities laid on them by the people of Europe, always demanded, in accordance with the permission of their great lawgiver, a good rate _per centum_ of interest from those strangers to whom they became money-lenders. The Jews were everywhere hated, and consequently the usury which they practised was hated also. The fundamental absurdity of forbidding in trading communities the taking of interest on sums loaned to a borrower which he was at liberty to use for his own profit, deterred the nations from going to the length of prohibition, unless it might be in the case of the hated Jews. There is a clause of Magna Charta, interesting as showing how early the children of Abraham became the money-lenders of Europe, to the effect that, during the minority of any baron, while his lands are in wardship, no debt which he owes to the Jews shall bear any interest.

(b) Governments formerly deemed themselves competent to determine and fix the _general_ purchasing-power of their own money. Even the Constitution of the United States uses this language: "to coin money, _regulate the value thereof, and of foreign coins_." There was formerly, and there is still to some extent, a curious and harmful confusion in the public mind in respect to this term, "the value of money." In the only proper sense of the term the _value of money_ means its power of purchasing services in general, and the value of money is _high_ when a given sum of it will purchase much of general services, and _low_ in the contrary case; and a high or low value of money in this true sense depends on a very distinct set of causes from those which determine the high or low rate of interest on money loaned; nevertheless, so long as governments supposed that they could regulate the former, it is very natural that they should also suppose that they could regulate the latter; and although all intelligent governments have given over the idea of being able to regulate the general value of the money they furnish to the people, many of them still adhere to the notion, equally false with the other, that they _are_ able to regulate the loanable value, or the rate of interest, at least to prevent any more than their prescribed maximum rate from being taken. A few simple considerations will sufficiently condemn all usury laws.

(1) It is at once needless and invidious to deny by law to money-lenders, who offer just as honorable and useful services to society as any other class of men, the privilege of selling _their_ service for what it will bring in the market, while other men in every department of business are allowed to exchange their services on the best terms they can make without interference or control. Let us see precisely the nature of the transaction when one man loans money to another. It is a clear case of value. The lender does a service to the borrower, and for this service justly demands a compensation. The service is this: The lender might himself use the money to gratify his own desires. It is his money; he may use it, as he pleases, for his own gratification. Or he may himself employ it productively, and, at the end of the period, receive back his principal with the customary rate of profit. If he surrenders this advantage to the borrower, if he passes over to him the right to use this money, say, for a year, he practises what we call in Political Economy _abstinence_. For this abstinence he has a right to claim a reward, precisely as the man has a right to claim a reward who foregoes working for himself in order to work for another. This reward of abstinence is _interest_. The money-lender foregoes an advantage. He performs a service for the borrower; and, therefore, the right to interest stands on just as unassailable ground as the right to wages. Moreover, the loanable value of money varies under Supply and Demand just like other values; there are always those who want to borrow, and always those who want to lend; both parties must be assumed to know their own minds, and to be equally competent to make their own bargains; it is a case of mutual exchange for a mutual benefit, like all other trade; and the current rate of interest is determined at any one time by the actual free exchanges between borrowers and lenders. Now for any government to try to compel a lender by law to take only 6% when his money is worth 8, is a direct violation of the rights of property. It is a forcible and pernicious interference with the freedom of contracts. It is based on the false premise that the loanable value of money is uniform, and that government is competent to determine what it is. No value is uniform. And no government is competent to determine even the maximum price of money loaned, any more than the maximum price of commodities.

(2) Usury laws are almost uniformly _disregarded_, both by the governments which make them and by the people for whom they are made. Indeed, such laws cannot be enforced in a commercial community. Common sense is outraged by a law which requires a man to part with his property at less than the actual value; and when common sense is against a law, it stands a slim chance of observance. If the legal rate be six, and the actual worth be eight, who lends at six? Not the banks. They require deposits of their customers, the use of whose money shall make up to them the difference between the legal and the actual rate. The modes of evasion are various, but they are adequate and universal. Besides, governments themselves have shown a noteworthy inconsistency in this matter, which incidentally proves the unsoundness of their whole action. While announcing pains and penalties to those who take more than a given rate, they are careful never to bind themselves down to any given rate. Governments are always more or less borrowers, and if usury laws are necessary in order to help borrowers in a pinch, there ought to be a clause in the organic law of every country, forbidding the government to pay and its lenders to take any more than a certain rate per cent. There is no such clause in any organic law. Governments wisely follow the natural market, and borrow low when they can, and pay high when they must. In the last months of Mr. Buchanan's administration, the United States paid 12% on a public loan, and could get but little at that. Sauce for the goose is sauce for the gander, and if usury laws are good for the citizens, some solid reason ought to be rendered why they are not good for the government. The truth is, they are not good for either, since natural laws are perfectly competent to regulate the rate of interest, and do regulate it substantially in spite of a factitious, impertinent, and mischief-making interference.

(3) If Usury laws were _not_ disregarded, they would be even worse in their effects than they are now. We must suppose that their aim is to aid borrowers, and make it easier for them to contract loans. But are borrowers, as a class, any more deserving of the fostering care of government than are lenders? Even if it could make its interference effective, as it cannot, is there any reason why government, leaving these borrowers to make all other bargains, sales, and transfers according to their best skill and judgment, should rush to their rescue only when they propose to borrow money? If they are competent to do their other business for themselves, government pays their capacity a poor compliment in undertaking to help them in the single matter of making loans; and the borrowers in turn have reason to pray to be delivered from their friends, since they, of all others, would be the men especially injured if all the lenders obeyed the usury laws. Suppose that a borrower is in great need of a loan, and that for some reason his credit is now a little weak. Many men would be willing to loan him at 9%, which affords a margin for the extra risk, but at 6, which we will suppose the maximum allowed by the law, he cannot borrow a dollar, because his credit is not quite equal to the best. If, therefore, the lenders obey the law, he, and such as he, must fail. And because it is unlawful to take over 6% he will be obliged to pay those who are willing to violate the law 10 or 12, to compensate them for the risk and odium of such violation, while, under freedom, he could borrow at 8. Moreover, if the loanable value of money at the time be actually 9, while the law only allows 6, many men will attempt to use their own capital productively, who would otherwise loan it, in order to realize the high rate; and this action of theirs still further restricts the loan-market and makes it more difficult to borrow. If, then, the purpose of government be to aid borrowers, no means could be more unskilfully chosen for that end than to pass usury laws, since such laws, so far as they are obeyed, have necessarily the opposite tendency; and even when violated redound to the disadvantage of borrowers, so long as the laws themselves are popularly regarded as of any legal or moral force.

In 1716, the Bank of England, as a great loaning institution, was exempted from the operation of all usury laws: why the bank only, and not other people as well, the Act of Parliament does not state. In 1867, the State of Massachusetts repealed all its usury laws, though 6% is to be understood in the absence of special agreement, and the result has been entirely satisfactory to all classes of the people. Rhode Island had done this previously, and Connecticut did it subsequently, and both have experienced equal satisfaction in the result. Other States will soon follow in their lead; and this relic of ignorance and prejudice will pass away. Adam Smith left the Wealth of Nations disfigured by the concession that governments might properly enough pass usury laws; but it is gratifying to be able to add that he was convinced of his error in that by Bentham's book on Usury, and fully acknowledged his conviction in the spirit of a genuine lover of truth. We conclude, then, that usury laws are needless, since interest, like all other prices, will perfectly adjust itself. They are disregarded, since lenders will loan or withhold their money according to their own keen sense of interest. They are pernicious, since they infringe the rights of property, and tend to prevent weak borrowers from having a fair chance in the market.

The present writing is at midsummer, 1890; and, in order to complete the entire discussion so far as this country is concerned, it is needful to add, that, between 1878 (when specie payments were resumed) and 1890, the circulating medium of all kinds is proven by official statistics of the highest authority to have increased from $805,793,807 to $1,405,018,000, or more than 57 _per centum_. This circulating medium consists of six formal kinds; namely, gold, silver, greenbanks, bank-bills, gold-certificates, and silver-certificates. Each of these differs in important respects from each of the rest, but all come alike under our fundamental classification of Moneys, as either an intermediate merchandise or promises to render it. This increase is way beyond any increase in the population of the country, and way beyond any apparent or proven increase in the national business; while at the same time the banking facilities of the country, which always spare the use of Money by substituting cheques therefor in the wholesale business and in a large share of the retail business also, have been increasing in equal measure. The number of national banks, especially in the West and South, has been multiplying. The use of cheques has been enlarging in every commercial community in the land. Yet up to the present time all of this vast volume of Money has been kept at par with gold, and consequently at the highest state of efficiency for commercial purposes.

What about the immediate future? Science is not prophecy except in a quite subordinate sense. Congress is loudly threatening at this very moment to more than double the enforced monthly coinage of silver dollars at the public expense for the sole benefit of a comparatively few miners of silver. If this threat be executed upon a long-suffering people of tax-payers, who will have no one to blame but themselves if they tolerate the outrage, Science is willing to venture the prediction, that the monetary standard here will drop from gold to silver within a twelvemonth or two; that general prices will rise much beyond the appreciation of money implied in that drop, though they will be illusory and gainless; that prudent debtors will hold high carnival for a time at the expense of their creditors; that the country will become as empty of gold as a contribution-box is of other money between Sundays; that foreign trade (soon to be explained), already in a sickening decline, under restrictions and prohibitions, will hasten to a practical demise; and that the United States, at once the laughing-stock and the victim to the superior intelligence of other nations, will come through alternate fever and chills to a position of common sense and ultimate recovery.