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RATE OF INTEREST,
EDWARD BURTENSHAW SUGDEN, Esq.
THE following sheets comprise the writer's observations on the expediency of raising the legal rate of interest, which were contained in a pamphlet; the principal object of which was to enquire into the expediency of repealing the first annuity act. That has since been done. The usury laws now excite so much interest, that the writer is induced to re-publish his observations upon them with some additions: he has subjoined some remarks on the proposed prohibition of grants of redeemable annuities, and the general reduction of the rate of interest.
12th Feb. 1816.
THE notion that it was immoral to make interest of money has happily long been exploded. Paley justly smiles at a provision in a statute of James the 1st. which prohibited beyond a certain rate of interest to be taken (and consequently allowed it under that rate), "that this statute shall not be construed or expounded to allow the practice of usury in point of religion or conscience." Jeremy Bentham, in his able defence of usury, is very facetious on the passage usually quoted from Aristotle, that "all money is in its nature barren." He justly observes, that a consideration which did not happen to present itself to that great philosopher, but which, had it happened to present itself, might not have been altogether unworthy of his notice, is, that though a daric would not beget another daric, any more than it would a ram or an ewe, yet for a daric which a man borrowed he might get a ram and a couple of ewes, and that the ewes, were the ram left with them a certain time, would probably not be barren: that then at the end of the year he would find himself master of his three sheep, together with two if not three lambs: and that if he sold his sheep again to pay his daric, and gave one of his lambs for the use of it in the mean time, he would be two lambs, or, at least, one lamb, richer than if he had made no such bargain.2
The precept in the law of Moses, which had long been consi
Paley's Mor. Phil, book 3. part 1. c. 10.
2 Defence. p. 101.
dered to stand in the way of taking any interest, was at length discovered to have related to transactions between Jews alone, and not to affect the barterings of Christians! When usury, as it was then termed, was allowed, most states fixed the amount of profit which might be taken on loans. This established a distinction in terms; what the law allowed was termed interest, any rate beyond that was deemed usury. The rate varied in every state and every age according to the degree of commerce in the country and the safety of loans. In most states an arbitrary rate was fixed. Hume says, that if we consider the whole connexion of causes and effects, interest is the barometer of the state, and its lowness is a sign almost infallible of the flourishing condition of a people. It, proves the increase of industry, and its prompt circulation through the whole state, little inferior to a demonstration.' This is so universally admitted, that we need not be surprised at the anxiety manifested in most countries to keep down the rate of interest. Adam Smith, however, has said, and, I think, justly, if rightly understood, that no law 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. This proposition should never be lost sight of, and it might be extended to the case of the lowest ordinary market rate of interest, rising above the rate fixed after the law had passed. Mr. Bentham has questioned this position. It may be conceded to him, that a law may be so strictly framed as to prevent any possible evasion according to the letter. But yet if the wants of mankind rise above the law, it must, however strictly penned, give way to them. It will either be openly disregarded, or evaded, with the tacit consent of all parties. This experience shews. Montesquieu observes, that "Le loi de Mahomet confonde l'usure avec le prêt à intérêt. L'usure augmente dans les pais Mahométans à proportion de la séverité de la défence: le prêteur s'indemnise du péril de la contravention." He states to what a pitch usury reached in Rome,
Essay of Interest. 3 Defence of Usury, Letter 7.
2 Book 2. c. 10. vol. 2. p. 45. edit. 1802. + L'Esprit des Loix, c. 19.
on account of the little security which the creditor had; and he justly observes, that "Les loix extrêmes dans le bien font naître le mal extrême; il falut payer pour le prêt de l'argent, et pour le danger des peines de la loi.” Bentham himself states, that in Russia, where he wrote his Defence of usury, the rate fixed by law was five per cent. ; that many people lent money, and nobody at that rate. The mode in which greater interest was taken strongly shows, that the letter of the law was sufficient, but was disregarded by the convention of the parties.
In England, whenever the ordinary market rate exceeded the legal rate, the law has constantly been evaded. The rate of interest was first fixed in this country, in the 37 H. 8.,2 the rate was 10 per cent.3 In the 5th of Edward the 6th, it was rendered illegal to take any interest, but notwithstanding this law, the common rate of interest was at this time 14 per cent.,' from which it may be inferred, that the act of H. 8. had not been honored much in the observance.
Ten per cent. was again allowed in the 13th of Elizabeth." The impolicy of a total prohibition of interest, appears to have been deeply felt. It is recited in the act, by which the statute of Henry the 8th was revived, that the act of Edward the 6th "hath not done so much good as was hoped it should, but rather the said vice of usury, and, specially by way of sale of wares, and shifts of interest, hath much more exceedingly abounded, to the utter undoing of many gentlemen, merchants, occupiers, and others, and to the importable hurt of the commonwealth."
This act was limited to five years, but "forasmuch as it was by proof and experience found to be very necessary and profitable for the commonwealth of this realm," it was in the same reign made perpetual.?
In the 21st of James I. interest was reduced to 8 per cent. The act was to continue for seven years only, but it was made
L'Esprit des Loix, c. 21; and see c. 22,
Paley is wrong in supposing that the statute of Elizabeth was the first that tolerated the receiving of interest in England at all; vol. 1. p. 160, edit.
3 37 H. 8. c. 9. s. 3.
13 Eliz. c. 8.
+ 5 and 6 Ed. 6. c. 20.
7 89 Eliz. c. 18. s. 31, 32.
5 Hume, vol. 4, 352.
21 Jac. 1. c. 17.