Usury Laws
Discussion
Common arguments for and against Usury Laws
Alternative Banking Working Group - OWS:
"There have been numerous arguments made over the years against the practice of lending money for a profit (that is, charging interest in excess of the principal of a loan), along with the specific instances in which the interest rate exceeds the level that is considered socially acceptable or reasonable. Some of the arguments are based on morality, particularly the arguments with religious roots, while others are based on economic, sociological, environmental and anthropological concepts. Opponents of usury laws generally argue that they are socially disruptive despite “good intentions,” because when the usury rate is lower than the market rate for a particular loan, it discourages legitimate lenders from making that loan, which negatively affects potential borrowers, especially less creditworthy borrowers.
Some of these arguments (many of which interrelate) are:
-Income via interest extracted from another is unjustified when it’s not the product of one’s labor; profits from one’s own labor are distinguished from profits acquired simply by owning something, like land, that requires the borrower to add labor before it is fruitful (traditional objection in many faiths, societies, and also in Marxist doctrine);
-Money becomes an end in itself, rather than a socially-contracted abstract mechanism to facilitate the relationship of supply and demand, which diminishes the importance, and full reward, of ordinary labor;
-Strict usury laws prevent middlemen who control credit from exploiting small borrowers, particularly the needy and destitute who require personal consumption loans. A counterargument is that such borrowing for necessities is inevitable, and usury laws make things worse because “loan shark” demand rises when other lenders can’t make loans at market interest rates – plus, the usury laws increase the loan shark interest rates further by adding the risk of legal prosecution to their cost of doing business. In this view, it is better and more economically efficient to allow people the freedom to contract, and address usury issues by educating borrowers about money, especially since usury laws can also be creatively evaded by all sorts of mechanisms, like sale-and-leaseback agreements.
-Usurious rates cause poor people to pay more for their money than wealthy people – this redistributes resources from the poor (seeking to buy basic necessities with money that has a huge marginal utility to them) to the rich (seeking to buy luxury goods with money that has relatively diminished value), and becomes part of the apparatus by which a wealthy class develops a plutonomy. (Several studies cited in the Visser/McIntosh paper, including the National Consumer Council’s 1995 study, discuss this mechanism; it also happens on the level of debtor nations who are impoverished by interest payments.) Through the mechanism of compounding interest, money becomes self-perpetuating power in itself, a “quasi-monopoly,” instead of a mediating agent. Arguably, this is unconstitutional, given that money is a government service to which everyone should have equal access.
-Usurious rates interfere with goods being put to the best social use – instead, apportionment is based on purchasing power; a counterargument would be that high interest rates actually ensure money will be put to its best use, because they discourage the wasting of money; usury laws arbitrarily exclude high-risk borrowers from the equation, even if their use of the money would be socially beneficial
-Usury is one of the attacks on the poor that punishes people for economic downturns or their individual failure to earn a lot of money (regardless of the social utility their activities have), making society unstable by leaving some people without resources, and amplifying the social exclusion of the relative poor[7];
-Social cohesion is damaged when people prey on each other rather than aid each other’s progress; in general, the pursuit of commercial interests and personal wealth is a distraction from serving the community/state;
-In an economy that relies on consumption, it’s destructive and immoral to promote high-interest, credit-based spending as the way to give lower-income people purchasing power; also encourages bank profit expectations that foster speculative behavior, risk of bailouts. Usurious interest rates are a part of credit expansion that has replaced wage increases for the labor force, in order to perpetuate consumption.
-Purchasing power decreases due to high interest rates – prices go up, no one benefits – compare to interest rates in flourishing business environment;
-Our money is issued as debt, so interest payments are constant – usury is part of that system; it’s wrong for commercial banks to hold monopoly on money/credit creation process, at zero cost to them
-Usury discounts future value in favor of present value, which is disastrous – and the higher the discount rate (based partly on interest rate), the more pronounced the effect. The depletion and exhaustion of resources is encouraged by the idea that it’s better to have x amount of currency now, rather than later; “economic rationality” can actually lead to the extinction of a species, and the prioritizing of short-term investments over long term investments, in which benefits come much later than costs. Financial economy does not reflect ecological economy (which does not function based on compound interest). Rather than observing principles of intergenerational equity (e.g., future generations have a right to the land and the environment as well as present ones), it exploits the future for the interests of the present.
-Usury acts as an agent of economic instability by making interest-based economies subject to “boom and bust” cycles;
-J.M. Keynes – argued that a ceiling on interest rates would increase investment, because most economic problems come from people preferring to save rather than to invest money – low interest rates would let borrowers borrow more in order to invest, while lenders would invest more in capital because of lower lending rates. He argued that this would give borrowers more cash, which would be used for consumption. A counterargument is that arbitrarily low interest rates discourage savings, placing upward pressure on those same rates; this requires either the creation of money or credit at an accelerating pace, which contributes to inflation, or non-price rationing, which reduces efficiency. Bowsher (see FN 6) reports that when interest rate ceilings were imposed in certain states, banks shifted their money to states with more permissive usury laws, allowing businesses in those states to be more competitive; passing statutes that make the usury laws inapplicable to corporations (as some states have done) winds up giving them a competitive advantage over other types of firms, or individuals.
-Silvio Gesell – condemned interest because it caused sales prices to be more related to the “price” of money on the market than to the actual needs of people, or the quality of the products. He argued that money should be treated as a public service that was subject to a use fee; this was tested via the “stamp scrip movement,” which some say was destroyed when its success began to threaten banking monopolies.[8] Successors to Gesell (e.g., Margrit Kennedy) argue that interest functions as a cancer in our social structure, and that inflation-free money should be adopted, with a circulation fee acting like a negative-interest-rate mechanism. The key obstacle to an “anti-hoarding” scrip approach seems to be the difficulty of getting alternative schemes started, and getting people to use them when it is a lot easier to use other kinds of money (as discussed in the Federal Reserve article cited in FN 8).
-Adam Smith – he argued that usury laws were justified, because high interest rates would leave borrowing to “prodigals and projectors” who wouldn’t be as likely to be able to pay back the loan, as opposed to more responsible people, who would not be willing to borrow at such high interest. A counterargument to this position is Jeremy Bentham’s position that innovative investing is responsible for economic progress, which carries high risk, so it requires high rates of interest to fund it. Established businesses and wealthy individuals can borrow at lower interest rates, a disparity with an anticompetitive effect that spreads from credit markets to goods and services markets.
(In fact, the Old Testament proposed a “Jubilee” process every fifty years, where all debts would be forgiven, recognizing the need for a corrective mechanism to the effect of compounding interest!)" (http://www.nycga.net/groups/alternative-banking/docs/usury-laws-research-v-2-work-in-progress)