In Defense of Usury

by Don Boudreaux on May 6, 2008

in Prices, Regulation

Especially in light of the renewed efforts to regulate the terms that credit-card issuers are allowed to offer to borrowers, Jeremy Bentham‘s short little classic Defence of Usury is well worth reading.  Below is a germane passage.  Writing of a potential borrower whose circumstances put him in desperate need of money, Bentham says

A man is in one of these situations, suppose, in which it would be for his advantage to borrow. But his circumstances are such, that it would not be worth any body’s while to lend him, at the highest rate which it is proposed the law should allow; in short, he cannot get it at that rate. If he thought he could get it at that rate, most surely he would not give a higher: he may be trusted for that: for by the supposition he has nothing defective in his understanding. But the fact is, he cannot get it at that lower rate. At a higher rate, however, he could get it: and at that rate, though higher, it would be worth his while to get it: so he judges, who has nothing to hinder him from judging right; who has every motive and every means for forming a right judgment; who has every motive and every means for informing himself of the circumstances, upon which rectitude of judgment, in the case in question, depends. The legislator, who knows nothing, nor can know any thing, of any one of all these circumstances, who knows nothing at all about the matter, comes and says to him—"It signifies nothing; you shall not have the money: for it would be doing you a mischief to let you borrow it upon such terms."—And this out of prudence and loving-kindness!—There may be worse cruelty: but can there be greater folly?

The folly of those who persist, as is supposed, without reason, in not taking advice, has been much expatiated upon. But the folly of those who persist, without reason, in forcing their advice upon others, has been but little dwelt upon, though it is, perhaps, the more frequent, and the more flagrant of the two. It is not often that one man is a better judge for another, than that other is for himself, even in cases where the adviser will take the trouble to make himself master of as many of the materials for judging, as are within the reach of the person to be advised. But the legislator is not, can not be, in the possession of any one of these materials.—What private, can be equal to such public folly?

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{ 42 comments }

Rob Dawg May 6, 2008 at 12:48 pm

I take it you object to seatbelts, curbs and guardrails for the same reasons?

Gerard Dericks May 6, 2008 at 12:53 pm

I completely agree. Paying with cash is an enormous nuisance because it means going to the bank often or carrying around your weight in dinero, things that are both enormous inconveniences.

I am a student, and as I only have part-time work to pay off my bills I found it very difficult, no, impossible to find a credit card that would accept me…at a 10% interest rate that is. My credit card charges me 35%, and do I moan and howl that the banks are cutting out a pound of flesh like good ol' Shylock for their pains? Of course not! I celebrate! Someone has accepted me and I am extremely grateful to have the conveniences of plastic that I would otherwise go without.

Of course, I will never pay a dime in interest expense, because I make sure I never carry a balance. And even if I did on occasion slip up I would still walk away from this deal with a huge net surplus.

So please, do not call my saviours usurers, and do not FORCE me to take a credit card with an interest rate of 10%, as all this really does is to take my card from me.

kebko May 6, 2008 at 1:14 pm

I agree in principle. But, in practice, there is the issue of a very lopsided market between the credit card companies & the borrowers. I use cards that have potentially corrosive covenants because it simply is not feasible to hire a lawyer & read through the entire credit agreement every time the issuer sends out an amendment. In those cases, the problem with usury isn't about access to credit, it's about having terms that change so that if the borrower ends up with a large amount of debt that they are having difficulty managing, the terms change so that their financial demise is inevitable, and the credit card issuer is just grabbing as much as they can from a failed situation. I just don't see anything positive from that. It may increase their operating margins, but I'm willing to pay an extra 1/4% in interest on my baic rate if it means the credit card company isn't allowed to act like an impatient vulture when I have the occasional cash flow problem.

But, I agree that if I feel like I should enter into a loan agreement with understandable terms and a very high rate, it should be my right.

Jason May 6, 2008 at 2:49 pm

If a card user cannot understand the terms of the agreement, s/he should not open an account with the credit card company. If they agree to terms they haven't read, they should be willing to accept the consequences.

Government remedies won't hurt credit card companies so much as they will hurt those with new credit histories and responsible card users that take time to understand the terms and pay their bills on time.

I accept variable rates, two-cycle billing and high over-the-limit fees in exchange for benefits and features. This is a great trade-off for me and I don't see why I should lose the ability to make this deal (for my own good, of course) because others are unable or unwilling to read contracts to which they agree.

SheetWise May 6, 2008 at 3:33 pm

A payday loan will cost you an average of 6% a week — or 312% annually. Consider that for a $1,000 loan the borrower holds for two weeks, there will be $120 in interest charges alone.

Is it rational to borrow money at 312%? Maybe. It really depends on what your alternatives are. Payday lenders are required by law to disclose the annual percentage rates of their loans. Many other creditors can hide their charges in fees that they're not required to disclose — and which can far exceed payday loan rates.

Consider a landlord who charges you a $75 fee for rent of $750 that's a week late. That "fee" translates to an APR of 520%.

If an electric account is shut off, our local electric company (SRP) charges a fixed reconnect fee of $85, plus additional deposits. If you have a $340 electric bill, that's a 25% charge for what's likely to be less than a week — or an APR of 1,300%. Obviously, if the bill is less, the rate is higher.

Another way of borrowing money is with what bankers call bounced-check protection, or “courtesy overdraft”. With bounced-check protection an NSF check will be covered, but the account holder will have to pay a fixed fee, generally in the range of $25 to $40 per check, and must make the check good — usually within a week (or additional fees apply). A $100 overdraft with a $25 fee would translate into a rate of 25% per week, or an APR of 1,300%. If the fee is $40 the APR is 2,080%.

Sometimes high interest loans make sense — like when all of your other options are worse. In these situations, having a credit card balance available that charges a 35% APR makes the lender seem outright generous.

FreedomLover May 6, 2008 at 3:48 pm

Credit card companies only make late charges on me when I forget to make my payment on time. Otherwise, on the whole it's a huge net loss on people like me.

True_Liberal May 6, 2008 at 4:45 pm

Rob Dawg: Curbs and guardrails protect innocent third parties from wayward vehicles.

Seatbelts protect only the wearer, and seatbelt laws can be logically extended to prohibit motorcycling, scuba diving, skydiving, bungee jumping… pehaps even football. Usury laws fall in this category, don't they? It's blatant nanny-statism.

jorod May 6, 2008 at 5:23 pm

Things have changed since Bentahm's time. The credit card companies expect to lose money and send out cards to all kinds of unqualified people knowing that most people will pay. Credit cards are a game that is rigged by the house. Easy credit means easy bankruptcy for some who struggle to pay their debts.

Jason May 6, 2008 at 6:11 pm

"The credit card companies expect to lose money" "it's a huge net loss" I don't believe this is true. Credit card companies charge merchants fees every time the card is used. A card user that always pays in full and on time is still profitable for a card company.

Is the merchant the loser then? A credit card can be cheaper to process than cash. Anyone that has worked a register or in a cash counting room knows how burdensome cash can be (making change, accounting, theft prevention). Where this doesn't make economic sense, merchants probably won't accept credit cards.

By the "magic" of innovation, credit cards make all parties net gainers.

Those that are foolish with their spending have no problem racking up debt and only complain about the injustice of the system after they finish shopping. If one believes adults cannot handle their own basic finances, the problem is much deeper than credit card interest rates.

SheetWise May 6, 2008 at 6:15 pm

Credit card companies only make late charges on me when I forget to make my payment on time. Otherwise, on the whole it's a huge net loss on people like me.

It's not really a net loss — credit issuers are paid a fee by the merchants when you use your card. Even if you never pay a late fee or interest, they make money. There's reason the music stops when you don't pay by VISA.

PMB May 6, 2008 at 6:15 pm

Yaron Brook of the Ayn Rand Institute had a well-written defense of usury in The Objective Standard:

http://www.theobjectivestandard.com/issues/2007-fall/morality-of-moneylending.asp

sethstorm May 6, 2008 at 8:42 pm


So please, do not call my saviours usurers, and do not FORCE me to take a credit card with an interest rate of 10%, as all this really does is to take my card from me.

I do, as it calls them for what they truthfully are. That means that they are usurers. Easy credit got us into this mess, usury isn't going to get us out. That does not (always) mean your card is going to go away. Pardon if I popped your bubble, but that's how it is.

It is time to account for usury, and all its forms.

I accept variable rates, two-cycle billing and high over-the-limit fees in exchange for benefits and features.
Thankfully there are enough people to offset you. They see those for what they are, ripoffs.

Payday lenders are required by law to disclose the annual percentage rates of their loans.
Some states like Ohio are taking that further by doing something about those rates. After what they've done to that state, they won't be missed.

John Cartledge May 6, 2008 at 9:18 pm

When I got my first credit card many years ago, it was all just a straightforward matter of borrowing and lending and interest rates. In that context, I agree whole-heartedly with the original post.

Nowadays,this has gotten much more complex. Card issuers dream up ways to trap you unknowingly into a penalty or fee. One small example: notice there is never a postmark on the envelope your credit card statement arrives in. More than once I've caught them either mailing the statement late or crediting my payment late or both to generate a late fee (of course, they blame the post office.)

What's the solution? God knows I don't want more government intervention, but simply requiring a postmark on their outgoing mail would end this particular shenanigan.

As for the rest, it would be very nice to have simple, straightforward terms and no trickery – but no one in the credit market seems to do business that way anymore, and I don't know how we get there from here. You shouldn't need an accounting degree to figure out the terms on your credit card

Ken May 6, 2008 at 9:52 pm

The comments seem to have side tracked beyond the issue at hand. The point of the post is that some people are very risky to lend to. If these people have high default rates, then for lenders to make money, they need to charge high interest rates.

When someone is a high risk and needs money, usury laws PREVENT him from getting this needed money because lenders will not lend money to this person at such a low interest rate. Other people have decided they know what's best for everyone else regardless of individual circumstance and passed laws to show how much they care about these high risk people, making credit inaccessible to them.

Gil May 6, 2008 at 10:34 pm

Haha! Perhaps the gripe against usury was that if a person couldn't pay off a debt they became a debt slave or went to a debtors prison (the free-market alternatives). Then again maybe it's for the best that the daft and slow-witted are taken out of mainstream society and put to work serving the smarties.

FreedomLover May 6, 2008 at 11:25 pm

Gil:

Exactly, the dumb exist to serve their better masters. That's the way it is.

Bob Smith May 7, 2008 at 2:18 am

Card issuers dream up ways to trap you unknowingly into a penalty or fee. One small example: notice there is never a postmark on the envelope your credit card statement arrives in. More than once I've caught them either mailing the statement late or crediting my payment late or both to generate a late fee (of course, they blame the post office.)

You don't pay online? It's the way to go these days. Some of my cards even have automatic payments set up so I don't have to do anything at all. Works every time.

FreedomLover May 7, 2008 at 3:48 am

Bob Smith:

The key is to not fall victim to online identity theft. It's a growing problem.

vidyohs May 7, 2008 at 6:29 am

All you people who use credit cards are costing me money. Stop it, please.

If a merchant loses money on a deal on a regular basis, he will hike his prices to make it back on other things, that is where I am being screwed by you guys.

Was in my corner gas stattion the other day to get a few money orders (I don't do plastic in any way shape or form, nor do I bank) I offered to let the man behind me to buy his bottle of Arizona tea because he was the only other customer in the store at the time. He stepped up and offered his plastic for the purchase and the young man was forced to run it because the guy had already opened the tea and was drinking it. The clerk told the guy that the credit card company charged him 75 cents everytime to run a card, and the store had a $5 limit in order to use a credit card. The store lost money on the transaction, and they will make it up on me in my future purchases.

It is a myth that carrying cash is a pain, I have been doing it, expect for one brief period in the mid 1980s, all my life. That brief point I mentioned was the convincer to me that I did not need to play the credit card game.

I get offers constantly, I throw them in the trash. Easy to do. If people in shops think I am old fashioned because I deal in cash, screw 'em, their opinion is worth less than a flea fart.

Now for those who do use plastic and think they are getting trapped in the gotcha game because you do run a balance, keep all the offers for those "zero" percent for one year cards, and move all your balance to one of those. Stay aware of where you are in the year and about two months before the interest is due to kick in, move your balance to a new "zero" percent for a year card and keep right on playing, if you use your card wisely and keep moving your balance, make your payments on time, you'll never have to pay interest.

Yes, you can do that. My sister-in-law does it constantly and has for more years than I like to remember.

Now, as to the theme of the blog, I agree totally with our host, government has no business in intruding into private negotiations and agreements.

David P. Graf May 7, 2008 at 8:54 am

Vidyohs,

If a destitute person was willing to sell themselves into slavery in return for food and housing, would you see a problem with that?

vidyohs May 7, 2008 at 9:19 am

If I could get them as cheap as that, my answer is probably no. But there is a caveat, if the destitution is due to expression of his socialist enculturation and he won't produce quality work then I'd probably pass on 'em.

My only problem is that if I did buy a cheap slave some do-gooder asshole would come along and ruin my little empire by interfereing with our free market transaction.

Martin Brock May 7, 2008 at 10:04 am

Gil:

Perhaps the gripe against usury was that if a person couldn't pay off a debt they became a debt slave or went to a debtors prison (the free-market alternatives).

Huh? Who is paying for this debtor's prison? The creditors who aren't being paid? Why would they compound their losses so? If a freeman can't pay off a debt, why would I expect him to pay it off more readily as a slave?

The free market alternative to debt slavery and debtor's prison is bankruptcy. In a free credit market, creditors accept this risk. Your "free market alternatives" are part and parcel of the statist belief that we can squeeze blood from a stone if only we squeeze hard enough.

The smarties are the ones who don't lend to people who can't repay them. The daft and slow-witted are the ones who cry for the state to bail them out of their failed investments with counterproductively punitive "solutions" like debt slavery, debtor's prison, Federal Deposit Insurance and Treasury Inflation Protected Securities.

Martin Brock May 7, 2008 at 10:05 am

Gil May 7, 2008 at 11:00 am

L'il ol' me M.B.? Actually I was taking the notion of a debtor's prison from a free-to-download PDF file of a book called The Market for Libertry. It's the book that anarcho-Libertarians refer to when they reckon the free market can replace everything including all aspects of law&order. Luring women into a world of prostitution via debt repayment is the main way debt bondage is used nowadays I hear. Who knows? Maybe vidyohs know some men who'd have Asian women (perhaps from the Phillipines, Thailand, Cambodia, etc.) hawking the fork in no time to repay the blokes for making it over to the West if they could get away with it.

shawn May 7, 2008 at 11:25 am

35% < [sideways 8]

jorod May 7, 2008 at 11:55 am

What makes credit cards really attractive is inflation. People don't have to carry a wheel barrow full of money around and they don't feel the money slipping through their hands. Just swipe it!!
I'd like to to start an ATM company. Charge people $3 per transaction to get their own money out of their own accounts. What a racket.

shawn May 7, 2008 at 12:02 pm

do you know much about the ATM business, jorod? No? Hmm, I'm shocked. How much does the rent for your ATM cost you? How much do various banks charge you to transact with them? How much does it cost you for insurance to cover those little ATM machines? How much do you pay on interest for the cash in the machines? How much does gas cost for you to go around, check, repair, and refill those machines?

You're right, though, $3 is unconscionable.

Hammer May 7, 2008 at 1:43 pm

This reminds me of a gripe one of my former employers had about banks. He hated them because "They only will lend you money when you don't need it." A fair point, and one not very much in favor of government controls of lending.

The trouble is, the nanny staters always look at things as though folks just woke up one morning and realize "Holy cow! We are up to our eyes in debt!" The fact is these people start 100% debt free, and start taking it on on purpose. If they get in trouble it is the result of their decisions. By the logic of the nanny state, just because some people can't be responsible, everyone should pay, so no one can drive a car since someone might crash, okay?

John Smith May 7, 2008 at 1:54 pm

Gil wrote:
“Luring women into a world of prostitution via debt repayment is the main way debt bondage is used nowadays I hear.”

That makes no sense at all. Prostitution only exists in a capitalist society?

Or are you saying – “Luring women” meaning they have a choice – unlike other government regimes where people are forced to be prostitutes?

By prostitution, you mean the exchange of sex for money, compared to dating or an overnight of sex but no money is exchanged.

Freely choosing to be paid to have sex is bad – Freely choosing not to charge to have sex is good (liberating)?

It seems to me that a government system where people voluntarily agree and everyone should be free to do what one wishes, as long as one doesn't infringe on somebody else's equal freedom is far better than a government that restricts and limits freedom of choices. (choices being those that do not infringe on somebody else's equal freedom)

Chris May 7, 2008 at 2:41 pm

I have no problem with allowing credit cards to set fees as high as they want or to impose absurd terms. We've done away with debtors prison and involuntary servitude. I see no reason that the government should prevent a bank from trying to sell a piece of dung in the market.

However, there are some reforms to be made. The three things I would change are as follows:

(1) The actual terms should be clear. If the marketing material is written to a 9th-grade level, then the terms and conditions should be as well.

(2) Once the terms are set on a card, the bank should be prohibited from changing them. Banks have gotten into a habit of luring people in with one set of terms, let ting them rack up enough debt that switching is not really possible, and then changing the terms. They should have to stick with the deal they made originally.

(3) If arbitration is specified in the contract, then the consumer should be able to pick the arbitrator. Since the banks are repeat and very significant players in arbitration, the arbitrators have an incentive to find their way.

vidyohs May 7, 2008 at 3:28 pm

Chris,

Did you not read what I posted above about moving credit card debt from zero interest card to zero interest card annually thereby doing and "end run" around the aspect of paying interest on credit card debt as long as you make the minimum monthly payment, the credit card companies are not able to get you through any backdoor.

"(2) Once the terms are set on a card, the bank should be prohibited from changing them. Banks have gotten into a habit of luring people in with one set of terms, let ting them rack up enough debt that switching is not really possible, and then changing the terms. They should have to stick with the deal they made originally.
Posted by: Chris | May 7, 2008 2:41:59 PM"

That technique is not fantasy, many people such as my sister-in-law do it and never pay a penny in interest.

mpkomara May 7, 2008 at 4:21 pm

Thank you for the link to Bentham's paper on usury. What a great read! Give the prodigals Payday Loan stores.

Chris May 7, 2008 at 4:32 pm

vidyohs –

I'm aware of the practice of moving balances around from card to card. It's not always possible, though.

I know somebody who went back to school, was without income for a few years, and racked up about $14,000 in life's essentials (gas, food, clothing) on a credit card over that time. I'm not aware that credit card companies will generally you to open up a new credit card with a $14,000 line and transfer that much from another card.

vidyohs May 7, 2008 at 5:05 pm

Chris,

Well I am a self confessed nonexpert, so I can't debate this with total conviction.

I only know several people that do it every year who do run some pretty high credit charges and they say that even though they do it year after year and they cycle through the same banks issuing the same credit cards every certain number of years, none have ever done anything but pee down their legs in egarness to take the debt on their new zero interest card.

I have always been puzzled as to why, but learning that each time the card is used they get to charge the merchant 75 cents or so for the practice gave the me the understanding I needed. For some card holders that would amount to an annual sizable sum. (Of course I get to help pay for that fee because the merchant is going to raise his prices to cover it.)

I guess my final word would be, try it. All that can come of it is a no.

vidyohs May 7, 2008 at 5:13 pm

Gilduck,

"Maybe vidyohs know some men who'd have Asian women (perhaps from the Phillipines, Thailand, Cambodia, etc.) hawking the fork in no time to repay the blokes for making it over to the West if they could get away with it.
Posted by: Gil | May 7, 2008 11:00:09 AM"

As usual your ability to say anything coherently is pathetic, but if I get the sense of it right; hell man, I've seen some cuties from Thailand and Vietnam that I'd buy in a heartbeat if I could afford the price. That is buy, not rent for the night, just to be clear.

I think a select harem is every man's birthright.

Per Kurowski May 7, 2008 at 10:03 pm

No one would complain for a second if a banker charged a person the interest rate he needs to account for the exact credit risk of that person and make a profit. But that is not what happens in the real world.

A person gets grouped by the lenders in such a way that he either gets his risk covered by others or he has to pay for all others that do not pay. In all the groups of debtors, there might be just one person who gets the exact right rate and the rest is composed by those who do not pay and should never have been given the loans in the first place and those that by paying with relative ease should have been charged lower interest.

Therefore we should not perhaps view the issue as usury but more like sloppy groupings and that in order to save many good debtors from being exploited by having to make a non-transparent solidarity payment, there could be a social case for limiting how much bunching and bad credit assessments plus ratings should be allowed.

Now of course if you believe that a system that for instance orders all who have been diagnosed a special genetic propensity for cancer by a dubious or perfect system to go out and build up a special group of coinsurance against cancer, then I guess I understand you feel good about these credit groupings.

You see the financial sector does not make money on perfect assessed risks but on the imperfectness of those assessments. Is this wrong? Not necessarily since this is how things are… but to ramble about some higher moral goals does also seem a little bit silly.

And by the way Hammer though you are right with your comment on the nanny state let us not forget that this applies also to those financial institutions working under the assumption they will be bailed out.

Gil May 7, 2008 at 11:01 pm

Well there's a point – in a Libertarian society people who lend at whatever rate they want but what happens when the person can't repay? Some form of debt bondage has been the traditional way especially in times of little to no government. After all, why should the lender waive a debt because it's uncomfortable to the borrower? Did the borrower sign his rights away when he took the loan and can only get his rights back when the debt is cleared.

Once again you confirm my suspicions there can't be anything called 'slavery' J.S. After all, 'self-ownership' should mean the right to sell one's self in 'something that some would call slavery' but if they freely chose the initial transaction then it isn't slavery is it? If a 'slave owner' takes advantage of a pitiful alley human who's down-and-out and offered them a life of hard work in exchange for basic amenities and the person agreed since they have some sort of aversion against starving then it really amounted to a free-market transaction in labour hire. After all, other Libertarians have pointed out there's no such as a 'just price' or a 'just wage' therefore there's no such 'unjust prices' nor 'unjust wages'. Slavery is merely the in the eye of the dogooder beholder just as wussy people who eat meat don't want to visit a slaughterhouse.

Gil May 8, 2008 at 2:07 am

By the way, I have actually wondered in the early era of 'free sex' why prostitutes didn't try and find such women and beat them up or something for undercutting them. Who knows maybe the appearance of HIV/AIDS helped out brothels where prostitutes get regularly checked and use protection?

vidyohs May 8, 2008 at 6:26 am

Gilduck,

This whole piece was such a rambling cobbled together piece of tripe that I could spend hours just ripping the foolishness, but I'll just focus on this piece of muirpidity.

"After all, other Libertarians have pointed out there's no such as a 'just price' or a 'just wage' therefore there's no such 'unjust prices' nor 'unjust wages'.
Posted by: Gil | May 7, 2008 11:01:05 PM"

As usual you write with such a lack of skill that I am just going on the what I think the gist of your statement is.

Where in the hell did you ever get the idea that libertarians have said there is no such thing as a just price or a just wage? Only a total muirpid could come up with that distortion or misrepresentation.

Every libertarian on this blog who knows his stuff has said repeatedly that a "just" price is the price that is agreed upon by the buyer and the seller, and a "just" wage is what is agreed upon by the contracting parties.

It is you idiot socialist that come up with the phrases of "unjust" this and that to try and interfere with the free markets.

How old are you Gil? You demonstrate the lack of understanding that seems to come from early adolescence.

Gil May 8, 2008 at 10:55 am

Sigh! X(

Did you just confirm what I said? If wages and prices are what people come to then neither could be called 'unjust'? The reason Libertarians dislke the term 'just wage' as it's a term from lefties who think there are 'unjust wages'. To the free marketeer it's simply called 'wages' and other people can debate till the cow come home as to whether the wages were 'just' or 'unjust'

Well here are a few Libertarian articles dealing with the linkage of the word 'just' with the word 'wage':

http://www.lewrockwell.com/westley/westley20.html

http://www.lewrockwell.com/woods/woods53.html

http://www.lewrockwell.com/dieteman/dieteman112.html

P.S. Can I be adolescent again minus the not-so-good parts like zits, school and stuff, like, you know? X)

vidyohs May 8, 2008 at 10:00 pm

No Gilduck,

It is not what you said. it is sad when even yourself doesn't know what you've said.

Which is why I keep reminding you that your problem with expressing oherent thoughts seems to be because you have no coherent thoughts to express.

What goes on in your brain is likely not what comes out of your fingers or mouth. It seems that way.

vidyohs May 8, 2008 at 10:00 pm

FYI, "oherent" is even more disorganized than coherent. LOL

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