Defence of Usury

Mischiefs of the anti-usurious Laws.

LETTER VI.

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.