Defence of Usury
By Jeremy Bentham
Jeremy Bentham’s clever application of applied economics,
Defence of Usury, Shewing the Impolity of the Present Legal Restraints on the Terms of Pecuniary Bargains in a Series of Letters to a Friend. To Which is Added a Letter to Adam Smith, Esq; LL.D. on the Discouragements opposed by the above Restraints to the Progress of Inventive Industry was first written while Bentham was visiting Russia in 1787. (“Impolity” was changed to “Impolicy” in a later edition.)The book was an immediate success, and a total of four editions were published in Bentham’s lifetime (1748-1832).In this work, Bentham accomplishes two things. First, in an orderly manner replete with concrete examples he covers every possible objection to the regulation of
usury (charging of interest rates that are apparently above the market rate), from religious restrictions that tainted the connotation of the word, to the economics of risk premiums. Second, throughout the work he champions those who are marginalized by society. He tears apart anti-Jewish bigotry. He argues strongly for the rights of the poor and even the feeble-minded to make their own choices in life. His emphasis on the ability of individuals to be the best judges of their own particular circumstances, and their right to use their own best methods for the pursuit of happiness, became the basis of modern utility theory.Bentham’s ability to entertain his readers is well-illustrated in his classic horse-trading satire in
Letter IX. Here, he uses the words of Sir William Blackstone (renowned jurist, whose works later became the basis of legal education throughout England and the United States) to highlight Blackstone’s own inconsistencies. Bentham’s sentence structures often seem ornate and overly-complex today. Yet, these very ornaments enabled him to spoof and poke at the foolish ideas of legislators and judges while maintaining decorum, delivering what we would today call “zingers”.The editions differ little, and the 4th edition (1818) is reproduced here with only minor typographical corrections.Bentham wrote, but decided against publishing, a tentative Preface to the second edition and a tentative “Postscript”, covering tangential material he’d been led to think about. He also penned a subsequent letter to Adam Smith (beyond the hypothetical letter in the book proper), of which there is a surviving draft, hoping for Smith’s concurrence with his intellectual critiques. (The critiques addressed the effects of a government attempting to
lower interest rates below the market rate, and the influence of “projectors”. [In today’s language, “inventors”.]) Smith (1723-1790), who died shortly after receiving Bentham’s plea, acknowledged the letter by sending a dedicated copy of his book, but never conceded the points to Bentham. The interested reader can find these items of Bentham’s transcribed and published in
Jeremy Bentham’s Economic Writings, by W. Stark (London: The Royal Economic Society, 1952, vol. 1, pp.191-207). Mr. Stark observes the extensiveness and disarray of Bentham’s many surviving boxes of handwritten notes, and includes in his introduction a thorough discussion of these additional, previously unknown, materials.Note, to give historical and scientific perspective to the difficulty of assessing inventions, research, and lending for those purposes, that at the time of the publication of Smith’s 1776 and Bentham’s 1787 work, and Bentham’s brief actual correspondence with Smith (1790), there would have been enormous difficulty for a lending/investing “venture capitalist” to distinguish between credible scientific inventions and such skeptically-held but still ambiguous fields even such as alchemy! Alfred Jenner’s smallpox vaccine was released only a decade later (in 1796, after inspiring Jenner’s attention after an English epidemic in 1788). Eli Whitney’s (1765-1825) cotton gin was patented only in 1794, and his drawings on it not even begun till 1792. Foucault’s pendulum was set up in Paris only in 1852. Mendeleev’s periodic table was not published until 1869. Marie Curie (1867-1934) was hired by the Sorbonne only in 1906, after having won her first Nobel Prize in 1903. But, wild, though collapsed, speculations about the potential financial gains from discoveries (the
Mississippi Land Scheme and the
South Sea Bubble of the 1720s), were rife in the mid-1700s. On a successful scientific front, though, the planet Uranus was discovered by William Herschel in 1781, re-exciting an interest in astrophysics that had been rejuvenated by Newton (1643-1727). Thus, Bentham—and Smith—wrote at a time when the discovery of the physical world and its financial potential was fraught with attention and hope, but yet not concrete enough to sort out with conviction.Lauren F. Landsburg
Editor, Library of Economics and Liberty
First Pub. Date
London: Payne and Foss
4th edition. First edition used spelling of 'Impolity' in subtitle.
The text of this edition is in the public domain. Picture of Jeremy Bentham courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- LETTER I. Introduction.
- LETTER II. Reasons for Restraint. Prevention of Usury.
- LETTER III. Reasons for Restraint. Prevention of Prodigality.
- LETTER IV. Reasons for Restraint. Protection of Indigence.
- LETTER V. Reasons for Restraint. Protection of Simplicity.
- LETTER VI. Mischiefs of the anti-usurious laws.
- LETTER VII. Efficacy of anti-usurious laws.
- LETTER VIII. Virtual Usury allowed.
- LETTER IX. Blackstone considered.
- LETTER X. Grounds of the Prejudices against Usury.
- LETTER XI. Compound Interest.
- LETTER XII. Maintenance and Champerty.
- LETTER XIII. To Dr. Smith, on Projects in Arts
Mischiefs of the anti-usurious Laws.
In the preceding letters, I have examined all the modes I can think of, in which the restraints, imposed by the laws against usury, can have been fancied to be of service.
I hope it appears by this time, that there are no ways in which those laws can do any good. But there are several, in which they can not but do mischief.
The first, I shall mention, is that of precluding so many people, altogether, from the getting the money they stand in need of, to answer their respective exigencies. Think what a distress it would produce, were the liberty of borrowing denied to every body: denied to those who have such security to offer, as renders the rate of interest, they have to offer, a sufficient inducement, for a man who has money, to trust them with it. Just that same sort of distress is produced, by denying that liberty to so many people, whose security, though, if they were permitted to add something to that rate, it would be sufficient, is rendered insufficient by their being denied that liberty. Why the misfortune, of not being possessed of that arbitrarily exacted degree of security, should be made a ground for subjecting a man to a hardship, which is not imposed on those who are free from that misfortune, is more than I can see. To discriminate the former class from the latter, I can see but this one circumstance, viz. that their necessity is greater. This it is by the very supposition: for were it not, they could not be, what they are supposed to be, willing to give more to be relieved from it. In this point of view then, the sole tendency of the law is, to heap distress upon distress.
A second mischief is, that of rendering the terms so much the worse, to a multitude of those, whose circumstances exempt them from being precluded altogether from getting the money they have occasion for. In this case, the mischief, though necessarily less intense than in the other, is much more palpable and conspicuous. Those who cannot borrow may get what they want, so long as they have any thing to sell. But while, out of loving-kindness, or whatsoever other motive, the law precludes a man from
borrowing, upon terms which he deems too disadvantageous, it does not preclude him from
selling, upon any terms, howsoever disadvantageous. Every body knows that forced sales are attended with a loss: and, to this loss, what would be deemed a most extravagant interest bears in general no proportion. When a man’s moveables are taken in execution, they are, I believe, pretty well sold, if, after all expences paid, the produce amounts to two thirds of what it would cost to replace them. In this way the providence and loving-kindness of the law costs him 33 per cent. and no more, supposing, what is seldom the case, that no more of the effects are taken than what is barely necessary to make up the money due. If, in her negligence and weakness, she were to suffer him to offer 11 per cent. per annum for forbearance, it would be three years before he paid what he is charged with, in the first instance, by her wisdom.
Such being the kindness done by the law to the owner of moveables, let us see how it fares with him who has an interest in immoveables. Before the late war, 30 years purchase for land might be reckoned, I think it is pretty well agreed, a medium price. During the distress produced by the war, lands, which it was necessary should be sold, were sold at 20, 18, nay, I believe, in some instances, even so low as 15 years purchase. If I do not misrecollect, I remember instances of lands put up to public auction, for which nobody bid so high as fifteen. In many instances, villas, which had been bought before the war, or at the beginning of it, and, in the interval, had been improved rather than impaired, sold for less than half, or even the quarter, of what they had been bought for. I dare not here for my part pretend to be exact: but on this passage, were it worth their notice, Mr. Skinner, or Mr. Christie, could furnish very instructive notes. Twenty years purchase, instead of thirty, I may be allowed to take, at least for illustration. An estate then of 100
l. a year, clear of taxes, was devised to a man, charged, suppose, with 1500
l. with interest till the money should be paid. Five per cent. interest, the utmost which could be accepted from the owner, did not answer the incumbrancer’s purpose: he chose to have the money. But 6 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 immediately recover its former price upon the peace, if indeed it has even yet recovered it, 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 had 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
l. and which the devisor had given to the devisee for that value, being put up to sale, fetched but 20 years purchase, 2000
l. At the end of that period it would have fetched its original value, 3000
l. Compare, then, the situation of the devisee at the 7 years end, under the law, with what it would have been, without the law. In the former case, the land selling for 20 years purchase, i.e. 2000
l. what he would have, after paying the 1,500
l. is 500
l.; which, with the interest of that sum, at 5 per cent. for seven years, viz. 175
l. makes, at the end of that seven years, 675
l. In the other case, paying 6 per cent. on the 1,500
l. that is 90
l. a year, and receiving all that time the rent of the land, viz. 100
l. he would have had, at the seven years end, the amount of the remaining ten pound during that period, that is 70
l. in addition to his 1000.—675
l. subtracted from 1,070
l. leaves 395
l. This 395
l. then, is what he loses out of 1,070
l., almost 37 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 6 per cent. interest, it makes him nearly as much a sufferer as if he had borrowed it at ten.
What I have said hitherto is confined to the case of those who have present value to give, for the money they stand in need of. If they have no such value, then, if they succeed in purchasing assistance upon any terms, it must be in breach of the law; their lenders exposing themselves to its vengeance: for I speak not here of the accidental case, of its being so constructed as to be liable to evasion. But, even in this case, the mischievous influence of the law still pursues them; aggravating the very mischief it pretends to remedy. Though it be inefficacious in the way in which the legislator wishes to see it efficacious, it is efficacious in the way opposite to that in which he would wish to see it so. The effect of it is, to raise the rate of interest, higher than it would be otherwise, and that in two ways. In the first place, a man must, in common prudence, as Dr. Smith observes, make a point of being indemnified, not only for whatsoever extraordinary risk it is that he runs, independently of the law, but for the very risk occasioned by the law: he must be
insured, as it were, against the law. This cause would operate, were there even 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 in every other, that those who remain have the less to with-hold them from advancing their terms; and without confederating, (for it must be allowed that confederacy in such a case is plainly impossible) each one 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 stamp to resort to.
As to the case, where the law is so worded as to be liable to be evaded, in this case it is partly inefficacious and nugatory, and partly mischievous. It is nugatory, as to all such, whose confidence of its being so is perfect: it is mischievous, as before, in regard to all such who fail of possessing that perfect confidence. If the borrower can find nobody at all who has confidence enough to take advantage of the flaw, he stands precluded from all assistance, as before: and, though he should, yet the lender’s terms must necessarily run the higher, in proportion to what his confidence wants of being perfect. It is not likely that it should be perfect: it is still less likely that he should acknowledge it so to be: it is not likely, at least as matters stand in England, that the worst-penned law made for this purpose should be altogether destitute of effect: and while it has any, that effect, we see, must be in one way or other mischievous.
I have already hinted at the disrepute, the ignominy, the reproach, which prejudice, the cause and the effect of these restrictive laws, has heaped upon that perfectly innocent and even meritorious class of men, who, not more for their own advantage than to the relief of the distresses of their neighbour, may have ventured to break through these restraints. It is certainly not a matter of indifference, that a class of persons, who, in every point of view in which their conduct can be placed, whether in relation to their own interest, or in relation to that of the persons whom they have to deal with, as well on the score of prudence, as on that of beneficence, (and of what use is even benevolence, but in as far as it is productive of beneficence?) deserve praise rather than censure, should be classed with the abandoned and profligate, and loaded with a degree of infamy, which is due to those only whose conduct is in its tendency the most opposite to their own.
“This suffering,” it may be said, “having already been taken account of, is not to be brought to account a second time: they are aware, as you yourself observe, of this inconvenience, and have taken care to get such amends for it, as they themselves look upon as sufficient.” True: but is it sure that the compensation, such as it is, will always, in the event, have proved a sufficient one? Is there no room here for miscalculation? May there not be unexpected, unlooked-for incidents, sufficient to turn into bitterness the utmost satisfaction which the difference of pecuniary emolument could afford? For who can see to the end of that inexhaustible train of consequences that are liable to ensue from the loss of reputation? Who can fathom the abyss of infamy? At any rate, this article of mischief, if not an addition in its quantity to the others above-noticed, is at least distinct from them in its nature, and as such ought not to be overlooked.
Nor is the event of the execution of the law by any means an unexampled one: several such, at different times, have fallen within my notice. Then comes absolute perdition: loss of character, and forfeiture, not of three times the extra-interest, which formed the profit of the offence, but of three times the principal, which gave occasion to it.
The last article I have to mention in the account of mischief, is, the corruptive influence, exercised by these laws, on the morals of the people; by the pains they take, and cannot but take, to give birth to treachery and ingratitude. To purchase a possibility of being enforced, the law neither has found, nor, what is very material, must it ever hope to find, in this case, any other expedient, than that of hiring a man to break his engagement, and to crush the hand that has been reached out to help him. In the case of informers in general, there has been no troth plighted, nor benefit received. In the case of real criminals invited by rewards to inform against accomplices, it is by such
breach of faith that society is held together, as in other cases by the
observance of it. In the case of real crimes, in proportion as their mischievousness is apparent, what can not but be manifest even to the criminal, is, that it is by the adherence to his engagement that he would do an injury to society, and, that by the breach of such engagement, instead of doing mischief he is doing good: in the case of usury this is what no man can know, and what one can scarcely think it possible for any man, who, in the character of the borrower, has been concerned in such a transaction, to imagine. He knew that, even in his own judgment, the engagement was a beneficial one to himself, or he would not have entered into it: and nobody else but the lender is affected by it.