Chapter XLIX: Section CXCII

INTEREST-POLICY.--GOVERNMENT INTERFERENCE.--FIXED RATES.

Instead of the medieval prohibition of interest, most modern states have established fixed rates of interest, the exceeding or evasion of which, by contract or otherwise, is declared null and void, and is usually punishable as usury.[192-1] If the fixing of the rate is intended to depress the rate of interest customary in the country,[192-2] [192-3] it uniformly fails of its object. If control were great enough, vigilant and rigid enough, which is scarcely imaginable, to prevent all violations of the law, it is certain that less capital would be loaned than had been, for the reason that every owner of capital would be largely interested in employing his capital in production of his own. More capital, too, would go into foreign parts, and there would be less saved by those not engaged in any enterprise of their own. All of this would happen to the undoubted prejudice of the nation's entire economy.[192-4] [192-5]

If, on the other hand, the control by the government be not great enough, the law would, in most cases, be evaded; especially as each party, creditor as well as debtor, would find it to his advantage to evade it. The latter, who otherwise would not be able to borrow at all, is, as a rule, more in need of obtaining the loan, than the creditor is to invest his capital. How easily, therefore, might he be induced to bind himself by oath or by word of honor![192-6] He would, moreover, be compelled to pay the creditor not only the natural interest and the ordinary insurance premium, but also for the special risk he runs when he violates the law threatening him with a severe penalty.[192-7] Hence the last result is either a material enhancement of the difficulty of obtaining loans or an enhancement of the rate of interest.[192-8]

[Footnote 192-1: This is, historically, the second meaning
of the word usury, while in the middle ages, for instance in
England, under Elizabeth (_D. Hume_), the taking of any
interest whatever was called usury. Science should employ
this word only in the sense used in § 113.]

[Footnote 192-2: In Switzerland, at the end of the 17th
century, not only were those punished who took more interest
than the law prescribed, but those who took less. (Compare
Rechtsquellen von Basel, Stadt und Land, 1865, Bd. II.)]

[Footnote 192-3: Fixed rates of interest of this kind are to
be accounted for in part by a still continuing aversion of
the legislator for interest in general; in part, by the
opinion which prevails that precisely the most useful and
most productive classes might be elevated by an artificial
lowness of the rate of interest. (But most especially the
government itself, which borrows more than it lends.) When
Louis XIV. about 1665, lowered the rate of interest to 5 per
cent., he claimed in the preamble to his decree that it
would have the effect of promoting the welfare of landowners
and business men, and of preventing idleness. Similarly
_Sully_, Economies royales, L, XII. And so _J. Child_,
Discourse of Trade, 69 ff., says that every lowering of the
rate of interest, by law, produced a completely
corresponding increase of the national wealth. He says,
since the first reduction (?) of interest in 1545, the
national wealth increased six fold; since the last, in 1651,
the number of coaches increased a hundred fold;
chamber-maids wore now better clothes than ladies formerly;
on 'Change there were more persons with a fortune of £10,000
than before with £1,000. Similarly _Culpeper_: compare
_Roscher_, Z. Geschichte der eng. Volkswirthsch., 57 ff.
Later, the French generally thought that a lowering of the
rate of interest would prove injurious to the _noblesse de
la robe_; hence even in 1634, parliament was opposed to it.
(_Forbonnais_, Recherches et Considérations, I, 48, 226.)
_Darjes_ says that information of all loans of capital
should be made to the police authorities, and that the
authorities might compel payment and the loaning of the
principal over again to parties in need of capital. (Erste
Gründe, 426 seq.) Something analogous practically provided
for by the Würtemberg _Landesordnungen_ of the 16th century.
(Compare also _von Schröder_, F. Schatz- und Rentkammer,
XXV, 3.)]

[Footnote 192-4: Precisely a high rate of interest is a
powerful incentive to saving, and to the importation of
capital.]

[Footnote 192-5: _Usurae palliatae_, interest taken out of
the capital, or stem-interest, called also money-usury in
contradistinction to patent interest-usury. To this category
belong the written acknowledgments of indebtedness to a
larger amount than that actually received; acknowledging it
in a higher kind of money than that in which the loan was
made; the compulsory taking by the debtor of commodities at
a disproportionately high price, in the place of money, or
at a disproportionately low one, by the creditor. See the
enumeration of such things in the police regulations of the
empire, 1530, art. 26, and 1548, art. 17. Thus, in Paris,
jewels are "sold" to students hard-pressed for money, which
immediately find their way to the _monts de piété_, and have
to be paid for some time after to the usurious "seller," at
a most exorbitant price. The person who loans $100 at 6 per
cent., and retains the interest for the next following year
from the date of the loan, takes in reality nearly 6.4 per
cent. Fraudulent accessory expenses of all kinds, _faux
frais_, expenses of registration, for prolongation, and
extinguishment, etc. Here belong, also, the provisions
introduced into contracts to make redemption more difficult,
the fixing of terms of payment in such a manner that the
debtor is almost forced to let them slip by--called "usury
in the conditions" in Austria. Remarkable instances from the
16th century in _Vasco_, Usura libera, § 57 ff. Recently,
_Braun_ und _Wirth_, Die Zinswuchergesetze, 1856, 190 ff. In
view of the manifold business transactions behind which the
interest-usurer may take refuge, the complete prevention of
the latter would break the legs of commerce (loc. cit., 145
ff.).]

[Footnote 192-6: If the state, by annulling such promises,
should incite the people to violate them, it would be a
frightful step towards the demoralization of the nation:
"thus rewarding men for obtaining the property of others by
false promises, and then, not only refusing payment, but
invoking legal penalties on those who have helped them in
their need." (_J. S. Mill_, Principles, V, ch. 10, 2.)
Besides, the Austrian usury law of 1803 punishes the
borrower also as a spendthrift, and imprisons him for six
months (§ 18), or else it designates where he shall make his
domicile (_Ortsverweisung_). Modern loaning on drafts and
bills of exchange, the acceptance of which is forged with
the knowledge of the creditor, corresponds to what
_Plutarch_, Quaest., Gr., 53, relates of the Cretans, who
had, especially in later times, the worst possible
reputation for avarice and dishonesty. (_Polyb._, VI, 46.
_Paul_ to Titus, I, 12.)]

[Footnote 192-7: He must insure him against the usury laws.
(_Adam Smith._) According to _Krug_, Staatsökonomie, the
usury laws should be called so because they promote usury,
not because they prevent it. Compare to some extent,
_Montesquieu_, Esprit des Lois, XXII, 18 ff.]

[Footnote 192-8: When Catherine II. reduced the rate of
interest in Livonia, in 1785, from 6 to 5 per cent., it soon
became impossible, even on the best security, to borrow at
less than 7 per cent. (_Storch_, Handbuch, II, 26.) And so,
when in New York, in 1717, the rate of interest was reduced
to 6 per cent., it became necessary, the following year, to
raise it again to 8 per cent. The merchants, themselves,
petitioned that it might be so raised, because they found it
impossible to get any loans whatever. (_Ebeling_, Geschichte
und Erdbeschreib. von Nord Amerika, III, 152.) In Chili, the
legal rate of interest is 6 per cent., the actual rate,
however, never under 12 per cent., and frequently 18 to 24
per cent. In Peru, on the other hand, the repeal of the
usury laws rapidly reduced the rate of interest from 50 to
24 per cent., and finally to 12. (_Pöppig_, I, 118.)]