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
July, 2001
First Pub. Date
1787
Publisher
London: Payne and Foss
Pub. Date
1818
Comments
4th edition. First edition used spelling of 'Impolity' in subtitle.
Copyright
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
Efficacy of anti-usurious laws.
LETTER VII.
Before I quit altogether the consideration of the case in which a law, made for the purpose of limiting the rate of interest, may be inefficacious with regard to that end, I can not forbear taking some further notice of a passage already alluded to of Dr. Smith’s: because, to my apprehension, that passage seems to throw upon the subject a degree of obscurity, which I could wish to see cleared up, in a future edition of that valuable work.
“No law” says he,
*2 “can reduce the common rate of interest below the lowest ordinary market rate, at the time when that law was made. Notwithstanding the edict of 1766, by which the French king attempted to reduce the rate of interest from five to four per cent. money continued to be lent in France at five per cent. the law being evaded in several different ways.”
As to the general position, if so it be, so much, according to me, the better: but I must confess I do not see why this should be the case. It is for the purpose of proving the truth of this general position, that the fact of the inefficacy of this attempt seems to be adduced: for no other proof is adduced but this. But, taking the fact for granted, I do not see how it can be sufficient to support the inference. The law, we are told at the same time, was evaded: but we are not told how it came to be open to evasion. It might be owing to a particular defect in the penning of that particular law: or, what comes to the same thing, in the provisions made for carrying it into execution. In either case, it affords no support to the general position: nor can that position be a just one, unless it were so in the case where every provision had been made, that could be made, for giving efficacy to the law. For the position to be true, the case must be, that the law would still be broken, even after every means of what can properly be called
evasion had been removed. True or untrue, the position is certainly not self-evident enough to be received without proof: yet nothing is adduced in proof of it, but the fact above-noticed, which we see amounts to no such thing. What is more, I should not expect to find it capable of proof. I do not see, what it is, that should render the law incapable of “reducing the common rate of interest below the lowest ordinary market rate,” but such a state of things, such a combination of circumstances, as should afford obstacles equally powerful, or nearly so, to the efficacy of the law against all higher rates. For destroying the law’s efficacy altogether, I know of nothing that could serve, but a resolution on the part of all persons any way privy not to inform: but by such a resolution any higher rate is just as effectually protected as any lower one. Suppose the resolution, strictly speaking, universal, and the law must in all instances be equally inefficacious; all rates of interest equally free; and the state of men’s dealings in this way just what it would be, were there no law at all upon the subject. But in this case, the position, in as far as it limits the inefficacy of the law to those rates which are below the “lowest ordinary market rate,” is not true. For my part, I cannot conceive how any such universal resolution could have been maintained, or could ever be maintained, without an open concert, and as open a rebellion against government; nothing of which sort appears to have taken place: and, as to any particular confederacies, they are as capable of protecting any higher rates against the prohibition, as any lower ones.
Thus much indeed must be admitted, that the low rate in question, viz. that which was the lowest ordinary market rate immediately before the making of the law, is likely to come in for the protection of the public against the law, more frequently than any other rate. That must be the case on two accounts: first, because by being of the number of the ordinary rates, it was, by the supposition, more frequent than any extraordinary ones: secondly, because the disrepute annexed to the idea of usury, a force which might have more or less efficacy in excluding, from the protection above spoken of, such extraordinary rates, cannot well be supposed to apply itself, or at least not in equal degree, to this low and ordinary rate. A lender has certainly less to stop him from taking a rate, which may be taken without disrepute, than from taking one, which a man could not take without subjecting himself to that inconvenience: nor is it likely, that men’s imaginations and sentiments should testify so sudden an obsequiousness to the law, as to stamp disrepute to-day, upon a rate of interest, to which no such accompaniment had stood annexed the day before.
Were I to be asked how I imagined the case stood in the particular instance referred to by Dr. Smith; judging from his account of it, assisted by general probabilities, I should answer thus;—The law, I should suppose, was not so penned as to be altogether proof against evasion. In many instances, of which it is impossible any account should have been taken, it was indeed conformed to: in some of those instances, people who would have lent otherwise, abstained from lending altogether; in others of those instances, people lent their money at the reduced legal rate. In other instances again, the law was broken: the lenders trusting, partly to expedients recurred to for evading it, partly to the good faith and honour of those whom they had to deal with: in this class of instances it was natural, for the two reasons above suggested, that those where the old legal rate was adhered to, should have been the most numerous. From the circumstance, not only of their number, but of their more direct repugnancy to the particular recent law in question, they would naturally be the most taken notice of. And this, I should suppose, was the foundation in point of fact for the Doctor’s general position above-mentioned, that “no law
can reduce the common rate of interest below the lowest ordinary market rate, at the time when that law was made.”
In England, as far as I can trust my judgment and imperfect general recollection of the purport of the laws relative to this matter, I should not suppose that the above position would prove true. That there is no such thing as any palpable and universally-notorious, as well as universally-practicable receipt for that purpose, is manifest from the examples which, as I have already mentioned, every now and then occur, of convictions upon these statutes. Two such receipts, indeed, I shall have occasion to touch upon presently: but they are either not obvious enough in their nature, or too troublesome or not extensive enough in their application, to have despoiled the law altogether of its terrors or of its preventive efficacy.
In the country in which I am writing, the whole system of laws on this subject is perfectly, and very happily, inefficacious. The rate fixed by law is 5 per cent.: many people lend money; and nobody at that rate: the lowest ordinary rate, upon the very best real security, is 8 per cent.; 9, and even 10, upon such security, are common. Six or seven may have place, now and then, between relations or other particular friends: because, now and then, a man may choose to make a present of one or two per cent. to a person whom he means to favour. The contract is renewed from year to year: for a thousand roubles, the borrower, in his written contract, obliges himself to pay at the end of the year one thousand and fifty. Before witnesses, he receives his thousand roubles: and, without witnesses, he immediately pays back his 30 roubles, or his 40 roubles, or whatever the sum may be, that is necessary to bring the real rate of interest to the rate verbally agreed on.
This contrivance, I take it, would not do in England: but why it would not, is a question which it would be in vain for me to pretend, at this distance from all authorities, to discuss.