[192-3] Fixed rates of interest of this kind are to be accounted for in part by a still continuing aversion of the legislator for interest in general; in part, by the opinion which prevails that precisely the most useful and most productive classes might be elevated by an artificial lowness of the rate of interest. (But most especially the government itself, which borrows more than it lends.) When Louis XIV. about 1665, lowered the rate of interest to 5 per cent., he claimed in the preamble to his decree that it would have the effect of promoting the welfare of landowners and business men, and of preventing idleness. Similarly Sully, Economies royales, L, XII. And so J. Child, Discourse of Trade, 69 ff., says that every lowering of the rate of interest, by law, produced a completely corresponding increase of the national wealth. He says, since the first reduction (?) of interest in 1545, the national wealth increased six fold; since the last, in 1651, the number of coaches increased a hundred fold; chamber-maids wore now better clothes than ladies formerly; on 'Change there were more persons with a fortune of £10,000 than before with £1,000. Similarly Culpeper: compare Roscher, Z. Geschichte der eng. Volkswirthsch., 57 ff. Later, the French generally thought that a lowering of the rate of interest would prove injurious to the noblesse de la robe; hence even in 1634, parliament was opposed to it. (Forbonnais, Recherches et Considérations, I, 48, 226.) Darjes says that information of all loans of capital should be made to the police authorities, and that the authorities might compel payment and the loaning of the principal over again to parties in need of capital. (Erste Gründe, 426 seq.) Something analogous[TN 25] practically provided for by the Würtemberg Landesordnungen of the 16th century. (Compare also von Schröder, F. Schatz- und Rentkammer, XXV, 3.)
[192-4] Precisely a high rate of interest is a powerful incentive to saving, and to the importation of capital.
[192-5] Usurae palliatae, interest taken out of the capital, or stem-interest, called also money-usury in contradistinction to patent interest-usury. To this category belong the written acknowledgments of indebtedness to a larger amount than that actually received; acknowledging it in a higher kind of money than that in which the loan was made; the compulsory taking by the debtor of commodities at a disproportionately high price, in the place of money, or at a disproportionately low one, by the creditor. See the enumeration of such things in the police regulations of the empire, 1530, art. 26, and 1548, art. 17. Thus, in Paris, jewels are "sold" to students hard-pressed for money, which immediately find their way to the monts de piété, and have to be paid for some time after to the usurious "seller," at a most exorbitant price. The person who loans $100 at 6 per cent., and retains the interest for the next following year from the date of the loan, takes in reality nearly 6.4 per cent. Fraudulent accessory expenses of all kinds, faux frais, expenses of registration, for prolongation, and extinguishment, etc. Here belong, also, the provisions introduced into contracts to make redemption more difficult, the fixing of terms of payment in such a manner that the debtor is almost forced to let them slip by—called "usury in the conditions" in Austria. Remarkable instances from the 16th century in Vasco, Usura libera, § 57 ff. Recently, Braun und Wirth, Die Zinswuchergesetze, 1856, 190 ff. In view of the manifold business transactions behind which the interest-usurer may take refuge, the complete prevention of the latter would break the legs of commerce (loc. cit., 145 ff.).
[192-6] If the state, by annulling such promises, should incite the people to violate them, it would be a frightful step towards the demoralization of the nation: "thus rewarding men for obtaining the property of others by false promises, and then, not only refusing payment, but invoking legal penalties on those who have helped them in their need." (J. S. Mill, Principles, V, ch. 10, 2.) Besides, the Austrian usury law of 1803 punishes the borrower also as a spendthrift, and imprisons him for six months (§ 18), or else it designates where he shall make his domicile (Ortsverweisung). Modern loaning on drafts and bills of exchange, the acceptance of which is forged with the knowledge of the creditor, corresponds to what Plutarch, Quaest., Gr., 53, relates of the Cretans, who had, especially in later times, the worst possible reputation for avarice and dishonesty. (Polyb., VI, 46. Paul to Titus, I, 12.)
[192-7] He must insure him against the usury laws. (Adam Smith.) According to Krug, Staatsökonomie, the usury laws should be called so because they promote usury, not because they prevent it. Compare to some extent, Montesquieu, Esprit des Lois, XXII, 18 ff.
[192-8] When Catherine II. reduced the rate of interest in Livonia, in 1785, from 6 to 5 per cent., it soon became impossible, even on the best security, to borrow at less than 7 per cent. (Storch, Handbuch, II, 26.) And so, when in New York, in 1717, the rate of interest was reduced to 6 per cent., it became necessary, the following year, to raise it again to 8 per cent. The merchants, themselves, petitioned that it might be so raised, because they found it impossible to get any loans whatever. (Ebeling, Geschichte und Erdbeschreib. von Nord Amerika, III, 152.) In Chili, the legal rate of interest is 6 per cent., the actual rate, however, never under 12 per cent., and frequently 18 to 24 per cent. In Peru, on the other hand, the repeal of the usury laws rapidly reduced the rate of interest from 50 to 24 per cent., and finally to 12. (Pöppig, I, 118.)
INTEREST-POLICY.—EFFORTS TO AVOID THE EVIL EFFECTS OF A FIXED RATE.
It has been thought possible to avoid the evil effects of a fixed legal rate of interest, by regulating it in such a way as to make it coincident with the rate customary in the country.[193-1] But there are numberless transactions in which an insurance premium, or premium for risk or certain expenses of administration[193-2] on the part of the loaner is inseparable from the true interest. Here, even the law which entered most into detail could never properly provide for the infinite gradations or shades of risk and trouble; and the rate in a great many transactions would, therefore, be placed below the natural height. Turgot long since observed that the value of a promise of future payment is different not only for different persons, but at different times. Thus, for instance, it is really less after there have been numerous cases of bankruptcy than at other times.[193-3] If, now, it was desired to fix the maximum rate of interest in such a way that it should equal the rate customary in the country, where the security is good, the best real property security for instance, the consequence would be, that those persons who had no such guaranty to offer (leaving the loaning "among brothers" out of the question) would either be unable to borrow money at all, or, by evading the law, only at an artificially higher rate. Hence the legislator causes injury where he wished to favor. This has been observed in England in almost all past commercial crises.[193-4] The man who makes it his business to loan his capital, on short time and in small sums, undertakes a trade which the examination, and the surveillance of a large number of small debtors, and the necessity of reinvesting the many small sums paid him, render exceedingly[TN 26] troublesome and disagreeable. Moreover, in loaning on short terms of payment, there is always danger that his money may lie idle for some length of time. These are reasons sufficient, why, in such cases, when the whole compensation is denominated interest, a rate of interest greater than usual in the country is equitable and even necessary. (§ 179.)[193-5]
It has been frequently suggested that spendthrifts and adventurers should be hindered using, or to speak more correctly, abusing the nation's wealth by laws prohibiting the rate of interest at which they might be expected to obtain credit; and this in the interest alike of the creditors they might possibly find and in their own.[193-6] But almost every inventor of genius, from Columbus to Stephenson, has been obliged to be considered "an adventurer" for a time by "solid men." The law limits him thus, and more especially during the critical period of outlay which precedes the undoubted triumph of his idea, to his own means or the gifts of others. [193-7] And how inadequate, as rule, are both. The rich are as seldom discoverers, as discoverers are skillful supplicants. And, as regards spendthrifts, they may ruin themselves in so many thousands of ways, especially by buying or selling, and unhindered by the state, that it is scarcely apparent why the one way of borrowing should be legally closed to them.[193-8] How is it, if the law itself drives them into the hands of a worse class of creditors, and compels them to pay yet a higher rate of interest? Are they not simply more rapidly ruined? States, themselves, have scarcely ever given any heed to their own usury laws in borrowing or loaning.[193-9]