Chapter L: Section CXCIII

INTEREST-POLICY.--EFFORTS TO AVOID THE EVIL EFFECTS OF A FIXED RATE.

It has been thought possible to avoid the evil effects of a fixed legal rate of interest, by regulating it in such a way as to make it coincident with the rate customary in the country.[193-1] But there are numberless transactions in which an insurance premium, or premium for risk or certain expenses of administration[193-2] on the part of the loaner is inseparable from the true interest. Here, even the law which entered most into detail could never properly provide for the infinite gradations or shades of risk and trouble; and the rate in a great many transactions would, therefore, be placed below the natural height. Turgot long since observed that the value of a promise of future payment is different not only for different persons, but at different times. Thus, for instance, it is really less after there have been numerous cases of bankruptcy than at other times.[193-3] If, now, it was desired to fix the maximum rate of interest in such a way that it should equal the rate customary in the country, where the security is good, the best real property security for instance, the consequence would be, that those persons who had no such guaranty to offer (leaving the loaning "among brothers" out of the question) would either be unable to borrow money at all, or, by evading the law, only at an artificially higher rate. Hence the legislator causes injury where he wished to favor. This has been observed in England in almost all past commercial crises.[193-4] The man who makes it his business to loan his capital, on short time and in small sums, undertakes a trade which the examination, and the surveillance of a large number of small debtors, and the necessity of reinvesting the many small sums paid him, render exceedingly troublesome and disagreeable. Moreover, in loaning on short terms of payment, there is always danger that his money may lie idle for some length of time. These are reasons sufficient, why, in such cases, when the whole compensation is denominated interest, a rate of interest greater than usual in the country is equitable and even necessary. (§ 179.)[193-5]

It has been frequently suggested that spendthrifts and adventurers should be hindered using, or to speak more correctly, abusing the nation's wealth by laws prohibiting the rate of interest at which they might be expected to obtain credit; and this in the interest alike of the creditors they might possibly find and in their own.[193-6] But almost every inventor of genius, from Columbus to Stephenson, has been obliged to be considered "an adventurer" for a time by "solid men." The law limits him thus, and more especially during the critical period of outlay which precedes the undoubted triumph of his idea, to his own means or the gifts of others.[193-7] And how inadequate, as rule, are both. The rich are as seldom discoverers, as discoverers are skillful supplicants. And, as regards spendthrifts, they may ruin themselves in so many thousands of ways, especially by buying or selling, and unhindered by the state, that it is scarcely apparent why the one way of borrowing should be legally closed to them.[193-8] How is it, if the law itself drives them into the hands of a worse class of creditors, and compels them to pay yet a higher rate of interest? Are they not simply more rapidly ruined? States, themselves, have scarcely ever given any heed to their own usury laws in borrowing or loaning.[193-9]

[Footnote 193-1: In Austria, in 1803, in loaning on pledge,
4 per cent.; in other loans and in the trade of merchants
with one another, 6 per cent. In France, since 1807, with
merchants, 6 per cent.; with others, 5. _Salmasins_, De Mono
Usur., c. 1, advises that the maximum should be fixed as
high as that usual in the most unfavorable cases. The
reduction from such rate, where possible, would regulate
itself.]

[Footnote 193-2: _Petty_, Quantulumcunque concerning money,
1682.]

[Footnote 193-3: Sur le Prêt d'Argent, § 36.]

[Footnote 193-4: How many merchants would have avoided
bankruptcy here if they had been allowed to borrow at 8 per
cent.! The established rate of 5 per cent. was certainly too
low, considering the great demand for capital and the want
of confidence at the moment, to permit capital to be loaned
at that rate. Many saw themselves compelled to sell their
merchandise or evidences of state indebtedness at a loss of
30 per cent., in order to meet their obligations. But the
person who, to anticipate the receipts due in 6 months, for
instance, consents to suffer a loss of 30 per cent., pays,
in a certain sense, interest at the rate of 60 per cent. a
year. Compare _Tooke_, Considerations on the State of the
Currency, 60, and History of Prices, II, 163, on the Crisis
of 1825-26. Since the Bank, least of all, could exceed the
legal rate of interest, numberless applications were made to
it in times of war in order to obtain the difference between
the legal rate and the rate usual in the country.
(_Thornton_, Paper Credit of Great Britain, ch. 10.)
Prussia, November 27, 1857, suspended the usury laws for 3
months, on account of the commercial crisis, except the
provisions relating to pawn-broker and minors.]

[Footnote 193-5: _Turgot_ tells of Parisian "usurers" who
made weekly advances to the market women of la Halle, and
received for 3 livres, 2 sous interest; that is 173 per
cent. a year. The premium for insurance may have been very
high here. When such loaners were brought before the courts,
and they were sentenced to the galleys, the usual punishment
for usury, their debtors came and testified their gratitude
by begging for mercy to them! (Mémoire sur le Prêt d'Argent,
§ 14, 31.) Compare _Cantillon_, Nature du Commerce, 276.]

[Footnote 193-6: Thus, _Adam Smith_, Wealth of Nations, II,
ch. 4. Similarly, _Roesler_ Grundsätze, 495 ff. Compare,
_per contra_, _Jer. Bentham_, Defense of Usury: showing 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 on the Discouragement imposed by the
above Restraints to the Progress of inventive Industry,
1787; 3 ed., 1816.]

[Footnote 193-7: The first steamboat in the United States
was, for a long time, called the "Fulton-folly!"]

[Footnote 193-8: It is just as hard to see why only
money-capital should have a fixed rate of interest, and not
buildings, etc. likewise.]

[Footnote 193-9: In Holland, the legal rate of interest was
lowered, in 1640, to 5 per cent., and in 1655 to 4; but not
since. (_Sir J. Child_, Discourse of Trade, 151.) Besides,
_Locke_, Considerations on the Lowering of Interest, Works,
III, 34, assures us that, in his time, a man in England
could make contracts for unlimited interest.]