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
Virtual Usury allowed.
Having proved, as I hope, by this time, the utter impropriety of the law’s limiting the rate of interest, in every case that can be conceived, it may be rather matter of curiosity, than any thing else, to enquire, how far the law, on this head, is consistent with itself, and with any principles upon which it can have built.
Drawing and re-drawing is a practice, which it will be sufficient here to hint at. It is perfectly well known to all merchants, and may be so to all who are not merchants, by consulting Dr. Smith. In this way, he has shewn how money may be, and has been, taken up, at so high a rate, as 13 or 14 per cent. a rate nearly three times as high as the utmost which the law professes to allow. The extra interest is in this case masked under the names of
commission, and price of
exchange. The commission is but small upon each loan, not more, I think, than ½ per cent.: custom having stretched so far but no farther, it might be thought dangerous, perhaps, to venture upon any higher allowance under that name. The charge, being repeated a number of times in the course of the year, makes up in frequency what it wants in weight. The transaction is by this shift rendered more troublesome, indeed, but not less practicable, to such parties as are agreed about it. But if usury is good for merchants, I don’t very well see what should make it bad for every body else.
2. At this distance from all the mountains of legal knowledge, I will not pretend to say, whether the practice of
selling accepted bills at an under value, would hold good against all attacks. It strikes my recollection as a pretty common one, and I think it could not be brought under any of the penal statutes against usury. The adequateness of the consideration might, for aught I know, be attacked with success, in a court of equity; or, perhaps, if there were sufficient evidence (which the agreement of the parties might easily prevent) by an action at common law, for money had and received. If the practice be really proof against all attacks, it seems to afford an effectual, and pretty commodious method of evading the restrictive laws. The only restraint is, that it requires the assistance of a third person, a friend of the borrower’s; as for instance:
B, the real borrower, wants 100
l. and finds
U, a usurer, who is willing to lend it to him, at 10 per cent.
F, a friend, who has not the money himself to lend him, but is willing to stand security for him, to that amount.
B therefore draws upon
F accepts, a bill of 100
l. at 5 per cent. interest, payable at the end of a twelvemonth from the date.
F draws a like bill upon
B: each sells his bill to
U for fifty pound; and it is indorsed to
U accordingly. The 50
F receives, he delivers over without any consideration to
B This transaction, if it be a valid one, and if a man can find such a friend, is evidently much less troublesome than the practice of drawing and re-drawing. And this, if it be practicable at all, may be practised by persons of any description, concerned or not in trade. Should the effect of this page be to suggest an expedient, and that a safe and commodious one, for evading the laws against usury, to some, to whom such an expedient might not otherwise have occurred, it will not lie very heavy upon my conscience. The prayers of usurers, whatever efficacy they may have in lightening the burthen, I hope I may lay some claim to. And I think you will not now wonder at my saying, that in the efficacy of such prayers I have not a whit less confidence, than in that of the prayers of any other class of men.
One apology I shall have to plead at any rate, that in pointing out these flaws, to the individual who may be disposed to creep out at them, I point them out at the same time to the legislator, in whose power it is to stop them up, if in his opinion they require it. If, notwithstanding such opinion, he should omit to do so, the blame will lie, not on my industry, but on his negligence.
These, it may be said, should they even be secure and effectual evasions, are still but evasions, and, if chargeable upon the law at all, are chargeable not as inconsistencies but as oversights. Be it so. Setting these aside, then, as expedients practised or practicable, only behind its back, I will beg leave to remind you of two others, practised from the day of its birth, under its protection and before its face.
The first I shall mention is
pawnbroking. In this case there is the less pretence for more than ordinary interest, inasmuch as the security is, in this case, not only equal to, but better than, what it can be in any other: to wit, the present possession of a moveable thing, of easy sale, on which the creditor has the power, and certainly does not want the inclination, to set such price as is most for his advantage. If there be a case in which the allowing of such extraordinary interest is attended with more danger than another, it must be this: which is so particularly adapted to the situation of the lowest poor, that is, of those who, on the score of indigence or simplicity, or both, are most open to imposition. This trade however the law, by regulating, avowedly protects. What the rate of interest is, which it allows to be taken in this way, I can not take upon me to remember: but I am much deceived, if it amounts to less than 12 per cent. in the year, and I believe it amounts to a good deal more. Whether it were 12 per cent. or 1200, I believe would make in practice but little difference. What
commission is in the business of drawing and re-drawing,
warehouse-room is, in that of pawnbroking. Whatever limits then are set to the profits of this trade, are set, I take it, not by the vigilancy of the law, but, as in the case of other trades, by the competition amongst the traders. Of the other regulations contained in the acts relative to this subject, I recollect no reason to doubt the use.
The other instance is that of
respondentia: for the two transactions, being so nearly related, may be spoken of together. Bottomry is the usury of pawnbroking: respondentia is usury at large, but combined in a manner with insurance, and employed in the assistance of a trade carried on by sea. If any species of usury is to be condemned, I see not on what grounds this particular species can be screened from the condemnation. “Oh but” (says sir William Blackstone, or any body else who takes upon himself the task of finding a reason for the law) “this is a maritime country, and the trade, which it carries on by sea, is the great bulwark of its defence.” It is not necessary I should here enquire, whether that branch, which, as Dr. Smith has shewn, is, in every view but the mere one of defence, less beneficial to a nation, than two others out of the four branches which comprehend all trade, has any claim to be preferred to them in this or any other way. I admit, that the liberty which this branch of trade enjoys, is no more than what it is perfectly right it should enjoy. What I want to know is, what there is in the class of men, embarked in this trade, that should render beneficial to them, a liberty, which would be ruinous to every body else. Is it that sea adventures have less hazard on them than land adventures? or that the sea teaches those, who have to deal with it, a degree of forecast and rejection which has been denied to land men?
It were easy enough to give farther and farther extension to this charge of inconsistency, by bringing under it the liberty given to insurance in all its branches, to the purchase and sale of annuities, and of
post-obits, in a word to all cases where a man is permitted to take upon himself an unlimited degree of risk, receiving for so doing an unlimited compensation. Indeed I know not where the want of instances would stop me: for in what part of the magazine of events, about which human transactions are conversant, is certainty to be found? But to this head of argument, this argument
ad hominem, as it may be called, the use of which is but subsidiary, and which has more of confutation in it than of persuasion or instruction, I willingly put an end.