A FALSE BASAL PRINCIPLE.
That usury or interest must be held under the restraints of law is
recognized in nearly all countries. It is treated as a necessary evil
that cannot be abolished, and therefore must be controlled. Bacon
said, "It is permitted on account of the hardness of men's hearts."
The laws differ in the various states. The rate of interest authorized
by a particular state is not invariably fixed, but is changed as the
condition of the people seems to demand.
That which determines the rate, of any particular people, at any
particular time, is the productive ability of the borrower. The rate
now in England is about three per cent. The conditions being such that
the productive power of the borrower is very limited. In the United
States, where the natural resources are not all occupied, and the
avenues for successful effort more numerous, the average is seven per
cent. In the western states of the United States the rates are higher
than in the eastern, for the material resources lie so open and
undeveloped that the productive power of the borrower is far greater
than in the older eastern states.
The basal for the rate of interest is the benefit or the advantage of
the loan to the borrower. What can the borrower do or make with this
capital? How great a benefit can he gain by it? The rate is based on
the earnings of the borrower.
The transfer from R. R. station to R. R. station across this city is
twenty-five cents. That I may make my train and meet my appointment,
that prompt and rapid transfer is of greater value to me, but that
does not give the hackman the right to an increased charge.
The fare to the distant city is ten dollars, but to me, with important
business waiting and suffering, it is worth an hundred. The conductor
does not ask me what my profits are to be from this trip. He collects
the same fare of all for the same service, whatever their interests
may be in the passage.
The letter which is freighted with a proposition that affects my
future life is two cents. Because of great value to me the postal
service is no more than a letter of idle gossip.
Railroad freight rates are at times arbitrarily fixed on the basis of
the benefit to the patron. The rates of freight from a coal mine are
sometimes made by a railroad on the basis of the profits of operating
the mine. The rates to a quartz mine in the mountains are often so
regulated. A contractor, dependent on a transportation company, must
often share his profits. Such rates are regarded as unjust and
oppressive and efforts are made to correct the evil by law.
A is crossing the city and can without inconvenience carry a note to a
party for B. That accommodation without sacrifice or inconvenience on
the part of A is no basis for a charge upon B, though the delivery of
the message was of value to B, but if A discovers that in delivering
that note he can make it a matter of business gain to himself, that
would not justify B in claiming a part of the profits A secured for
himself. While A served his own business he also favored B. It would
be unreasonable and unjust for B to forget the favor and make a charge
against A, because in the delivery of the note A managed to gain a
profit.
Two farmers are without barns. It will require the labor of a number
of years to secure the requisite amount of lumber and other material
to enable them to erect their barns. One of the farmers undertakes to
shelter and protect from decay the lumber of both, until the requisite
amount can be secured. This is a real favor to the other and is
accepted readily. He even offers to pay him for the care and
liability. But he discovers afterward that his neighbor, by wise,
careful and skillful piling, has made from this lumber a shelter for
his stock and grain. That he has so managed as to gain for himself a
benefit. Then, with the false principle of usury he makes a charge for
the keeping of the very thing for which he was willing to pay a
price.
A gentleman not wanting his coach for a time, but wishing it to be
kept in perfect repair, and his team fed and exercised, to be kept
sleek and strong, leaves it in his coachman's care. The coachman
agrees to keep from decay, and to replace should one die, and at the
end of the term, return the coach in perfect condition, no mar or
wear, and the team sleek and strong from good care, feed and daily
exercise. But the coachman discovers that in the daily exercise of the
team he can carry a party of business men to and from their offices,
and secure for himself a gain. He, at the end of the term, returns the
carriage and equipage complete as he received it. The owner has had
his property perfectly cared for during the term he could not use it.
But the owner learning of the benefit to the keeper, which would not
have been possible without his equipage, demands a portion of the
benefit which cost him nothing, nor in the least diminished his
property.
A gentleman has a warm, rich and beautiful robe, but is about to
travel a number of years among the countries of Cuba, Porto Rico, and
the Philippines, where he will not need it, and afterward visit
Siberia, where he will need and use it. Another undertakes to relieve
him of all care of it during these years and deliver it to the
Siberian home ready for his use. He protects it from the moths in
summer, and guards it against all touch or taint, and delivers it in
the perfect condition in which it was received. In justice he
deserves a reward from the owner, and if he received no benefit, would
receive it, but it is found that he needed it for his comfort by the
way, and that without it he should have perished. Then the owner
demands a reward for the benefit the carrier received. The owner did
no service. He received a positive benefit, but the porter, who
carried the burden all the way, must pay interest or rental because he
was kept from perishing by it.
The surprise or discovery feature is introduced into the above
illustrations to emphasize the false basis upon which the rates of
interest rest. In the actual practice of usury the lender may have
full information as to the use of the loan and its advantages to the
borrower. If we eliminate this feature the basis still remains
untenable. By no tortion of ethics can I demand that he, who does me a
favor, shall pay me for the privilege.
A man has one thousand dollars of money he is not using. He gives it
to another to keep or place in a drawer in his vault. To care for this
and be responsible for it, a commission is allowed, for it is no
benefit to the keeper. Even an amount is asked for the drawer in the
vault, without responsibility. To care for this a term of years is
deserving of a reward. But now keeping the property equally safe, and
returning every dollar when the owner calls for it, is not
satisfactory to the usurer. If this money has in any way proved a
benefit to the keeper, through his wisdom and energy and skill, he
demands an increase. What is this loan worth to you? is the question
of the usurer to the borrower.
The basis of legal interest rates is the amount of benefit the
borrower gains by the loan. If his opportunities in a state are
favorable, and he may by diligence make a large gain, the rates are
high. If in another state his opportunities are so limited that,
strive as he may, he can make little gain, the legal rates will be
low.
The basis is so absurd that many have urged the repeal of all laws
regulating the rates of interest. "Why should the laws presume to
level the rates for a whole state? The possibilities and opportunities
of gain are infinitely varied. Every borrower knows his own conditions
and the amount of advantage the loan is to him and he should be
permitted to pay for money whatever he is willing to pay."
One writer thus expresses it, "No man of ripe years and of sound mind,
acting freely, and with his eyes open, ought to be hindered, with a
view to his advantage, from making such bargains in the way of
obtaining money, as he thinks fit; nor anybody hindered from supplying
him upon any terms he thinks proper to accede to."
Jeremy Bentham is often quoted to prove the absurdity of all laws
regulating the rates of interest, and yet all his elaborate arguments
are based on this false principle.
If usury is wrong only when the borrower can make no profit, and is
right whenever the borrower can make a gain by it, and the rate of
interest is to be measured by that gain, then all laws are illogical
that limit the rate, and may be classed among those restraining
trade.