This section is from the "The Science Of Wealth" book, by Amasa Walker.
But for usury laws, the current rate of interest would be as well known as the price of stocks or corn or wool, and would, like them, be determined by the laws of trade; and men would act as intelligently and as freely as in the purchase of merchandise. Freedom is as essential in the disposal of money as in the intercourse of nations. To hamper it with laws regulating the rate at which it shall be loaned, is as absurd, and as repugnant to the laws of wealth, as to fix the price of wheat or cotton.
(b) Usury laws create an injurious distinction between different kinds of mercantile paper, and thus occasion embarrassment and loss to borrowers.
For example, the law says in Massachusetts that only six per cent interest shall be taken by the banks. But money may be worth twelve per cent; and there are ten applications for it, at that rate, to one that can be supplied. What is the result? Why, the bank will make no loans except upon such paper as it can charge for exchange. Exchange is legal, whether it is real or fictitious. A and B apply for discount at a bank in Boston. A offers notes of the most undoubted character, payable in Boston; B offers notes or drafts payable in New York, and he gets accommodated. His drafts have sixty days to run; he is charged one per cent exchange, and thus pays twelve per cent interest. A, having only notes on which no such exchange can be legally charged, must "go into the street," and employ a broker to sell the notes for him at the best rates he can.
This state of things occasions great annoyance and loss to borrowers; yet it must continue so long as usury laws exist.
(c) Usury laws are the principal cause of compulsory deposits, or deposits made to secure large discounts. These are, as we have shown, exceedingly burdensome to the business community, and most dangerous to the currency. If the rate of interest, as at the Bank of England, was left entirely to the state of the money market, these deposits, now peculiar to American banking, would disappear. If every man could borrow money at what it was worth, there would be no motive to bribe moneyed institutions indirectly.
3d, Interest will be influenced largely by the safety or hazard of capital. This will depend,—
(a) Upon the moral character of the people, whether essentially honest or dishonest, whether honorable or dishonorable, whether industrious, frugal, and temperate, or otherwise.
(b) Upon the general thrift of the community; for however well disposed to pay, if decay and decline are general, the hazards of capital must be greatly increased. It must share in the general losses of business.
(c) Upon the justice and efficiency of the laws by which the rights of property are secured, and the obligation of contracts enforced. This, as can readily be seen, is one of the most important considerations in regard to the safety of loans; and, of course, the rate of compensation in the shape of interest.
4th, Again, the uniformity of the rate of interest, and its general average, will depend mainly upon the soundness of the currency. If it consists wholly of value, — that is, if the credit element constitutes no part of the circulating medium or standard of value, — the rate of interest will be as uniform and as low as the laws of trade admit. The rate can never be absolutely fixed at one point; yet, where no credit is used as currency, the credits of the country will be so based upon values that the vacillations will be very moderate. They were very slight in Europe until within the • last thirty years.
We have already shown, when speaking of a mixed currency,* how frequent and excessive are the fluctuations in the rate of interest in the United States. In no other civilized country have they been so great, for the sufficient reason that no other country has a mixed currency so deficient in the element of value.
* See Diagram No. 9, p. 197.
We have shown, at the place referred to, that these variations have been from three and one-half to thirty-six per cent. Now, no commodity, in time of peace, has varied to an equal extent. The reason is, that commodities are not wanted to pay notes; but, to meet pecuniary engagements, money is, and must be had.
Under a currency in which credit is the principal element, the fluctuations in interest are in proportion to the extent of that element; because, as we have shown, a mixed currency, whenever there is any panic or distress for money, withdraws from circulation with a rapidity proportionate to its weakness, or want of value. Hence the frightful revulsions we have witnessed. And we may doubtless expect that these will increase in force and frequency in the future, since the mixed-currency system, once almost exclusively confined to England, France, and the United States, is being extended throughout the commercial world. The risks of credit will therefore be greater, and the average rate of interest will, so far as risk is concerned, be enhanced.
But, in regard to a legal rate of interest, it may be asked, whether a limit should not be established by law, in all cases where the parties have not themselves agreed upon one. Certainly, it would seem desirable and proper, that, in the absence of all agreement or contract, the law should say that a given rate should be awarded. This would not be regulating the rate of interest, but establishing justice between the different parties in those cases where, from any cause, no fixed rate of interest had been agreed upon. This legal rate would properly be the general average rate obtained for the use of money.