Even in regard to subjects, which, by their importance would, if any, justify a regulation of their price, such as for instance land, I question whether there ever was an instance where, without some such ground as, on the one side fraud, or suppression of facts necessary to form a judgment of the value, or at least ignorance of such facts, on the other, a bargain was rescinded, merely because a man had sold Protection of Simplicity. 43 sold too cheap, or bought too dear. Were I to take a fancy to give a hundred years purchase instead of thirty, for a piece of land, rather than not have it, I don't think there is any court in England, or indeed any where else, that would interpose to hinder me, much less to punish the seller with the loss of three times the purchase money, as in the case of usury. Yet when I had got my piece of land, and paid my money, repentance, were the law ever so well disposed to assist me, might be unavailing: for the seller might have spent the money, or gone off with it. But, in the case of borrowing money, it is the borrower always, who, according to the indefinite, or short term for which money is lent, is on the safe side: any imprudence he may have committed with regard to the rate of 44 LETT. V. Reasons for Restraint.
of interest, may be corrected at anytime: if I find I have given too high an interest to one man, I have no more to do than to borrow of another at a lower rate, and pay off the first: if I cannot find any body to lend me at a lower, there cannot be a more certain proof that the first was not in reality too high. But of this hereafter*.
Mischiefs of anti-usurious Laws. 45 LETTER VI.
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 46 LETT. VI. Mischiefs of the 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 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, 48 LETT. VI. Mischiefs of the borrowing, upon terms which it 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 expenses 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.
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 immovables. 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 D the 50 LETT. VI. Mischiefs of the 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 1001. a year, clear of taxes, was devised to a man, charged, suppose, with 15001. 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 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 lias 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 30001. and which the devisor had given to the devisee for that value, D 2 being 52 LETT. VI. Mischief s vf the being put up to sale, fetched but 20 years purchase, 20001. At the end of that period it would have fetched its original value, 30001. 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. 20001. what he would have, after paying the 15001. is 5001.; which, with the interest of that sum, at 5 per cent, for seven years, viz. 175L makes, at the end of that seven years, 6751. In the other case, paying 6 per cent, on the 15001. that is 90L a year, and receiving all that time the rent of the land, viz. 1001. he would have had, at the seven years end, the amount of the remaining ten pound during that period, that is 701. in addition to his 10001.— 675. substractanti-usurious Laws. 53 ed from 10701. leaves 3951. This 3951. then, is what he loses out of 10701. 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 hereof the accidental case, of its being sq constructed as to be liable to evasion. But, even in this case, the mischievous influence of the law still pursues them; aggravating 54 LETT. VI. Mischiefs of the vating 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, petition, 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 }aw is so worded as to be liable to be evaded, iu this case it is partly inefficacious and 46 LETT. VI. Mischief s of the 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 worstpenned 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 D 3 classed 58 LETT* VI. Mischiefs of the 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 *c second time: they are aware, as you " yourself observe, of this inconve- " nience, 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 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*.
* See Introduction to the Principles of Morals and Legislation, 4to. 1789. Cb. 14. On the proportion between punishments and offences.
60 LETT. VI. Mischiefs of the 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, anti-usurious Laws. HI 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.
f $ LETT. VII. Efficacy of LETTER VII.
Efficacy of anti-usurious Laws.
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 cannot 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*, " can reduce " the common rate of interest below « the <r the lowest ordinary market rate, at " the time when that law was made. " Notwithstanding the edict of 1?66, *' by which the French king at- " tempted to reduce the rate of inte- " rest from five to four per cent., mo- " ney 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 64 LETT. VII. Efficacy of 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 £C 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 06 LETT. VII. Efficacy of 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 or- " dinary 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 68 LETT. VI I. Efficacy of ments 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: 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 kgal 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."
la England, as far as I can trust my 76 LETT.VII. Efficacy of 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 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, 72 LETT. VII. Efficacy, &c.
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.
LETT. VIII. Virtual Usury allowed. 73 LETTER VIII.
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 inquire, how far the law, on this head, is consistent with itself, and with any principles upon which it can have built.
1. 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, E he ft LETT. VIII. Virtual he has shewn how money may be, and has been, taken up, at so high a rate, as 13 or 14 per cent. 5 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 one half 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 Usury allowed. 75 what should make it bad for everybody else.
2. At this distance from all the fountains 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 ought 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 re-E 2 strictive 76 LETT. VIII. Virtual strictive laws. The only restraint is, that it requires the assistance of a third person, a friend of the borrower's, as for instance: J5, the real borrower, •wants 1001. and finds U, a usurer, who is willing to lend it to him, at 10 per cent. B. has 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, and F. accepts, a bill of 1001. 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 endorsed to U. accordingly. The 501. that 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 Usury allowed. 77 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 t8 LETT. VIII. Virtual 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 pawn- Iroking. In this case there is the less pretence Usury allowed. 79