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be indemnified for that risk, and therefore an addition of twenty per cent. must be made, to cover those chances.
Now observe the manner in which the act of 1723 operates: a capitalist is willing, for the sake of an extraordinary profit, to run an extraordinary risk; he would therefore lend his money in the case just referred to, at fifty per cent., if it were not for the act of assembly,--that act, however, rendering the transaction null and void, if pleaded in bar, and the lender having nothing to rely on but the honour of the borrower, increases his demand of interest to seventy per cent. Thus it will be seen that the usury law forces twenty per cent. more out of the borrower's pocket, than would be the case if the law were not in existence. It will not be urged on the other side, that the twenty per cent. so added will prevent the prodigal from borrowing; the character and necessities of such an individual, furnish sufficient proof that he will have the money upon any terms; we shall not waste argument, therefore, to establish a self-evident fact. In regard to the raising of money upon post obit bonds, at a heavy interest, we will only observe, that according to our view it differs very little in point of morality from the present mode of wagering, usually denominated "Life Insurance."
It must be seen by every one who will reflect a moment on the subject, that a man who is in want of a loan will give any amount of interest which the exigency of his case demands, and his circumstances will justify; now, it is altogether indisputable, that no particular rate of interest can be fixed upon, which will be equally adapted to the necessities of all. If a man can realize a profit of twenty per cent. upon all the money he can employ in his business, he can well afford to pay the capitalist an interest of ten per cent., or more, for the use of his funds; but the legislature, ignorant as they are of the circumstances which govern merchants and others in their money transactions, absolutely forbid the borrowing upon such terms. This amounts in effect to a prohibition of borrowing at all—it paralyses commercial enterprise, and shuts out every man from trading but he who has capital of his own; for who, as we have said, that can make twenty per cent. from his money, will lend it to another at six? It is said that the laws against usury protect indigence from imposition. How do they protect indigence from imposition? It is perfectly clear that the same rule, which we just now applied to the prodigal, will equally apply to this class. If an indigent person (that is, a person destitute of all means) asks for a loan, how is he to get it? No one will lend money to him, even at one thousand per cent., unless he have some prospective resources, which hold out the possibility of repayment at some future day. And here we will take leave
VOL. XXI.—NO. 41.
to observe, that the fixing of a rate at which the other necessaries of life shall be sold, would be a better protection to indigence, than the placing of a regular rate of interest upon money. The reason for this is obvious. A person finds it necessary to purchase goods upon credit. He may do this without much difficulty (for merchandise is far more easily obtained on credit than money); if he is desirous of finding out the market value of the articles he is in want of, he is obliged to seek in all directions for such information; and even then, his object may be but imperfectly accomplished. The merchant may then charge him an exorbitant price; the bargain is concluded, and the debtor is bound by the contract-there is no escaping from it--he must pay the money. But the current rate of interest is easily discovered; we have nothing to do but go upon 'Change, to ascertain a fact which is there notorious to every one. A man is, then, not so liable to imposition in taking a loan of money, as in buying a bill of goods. But suppose he has been thus imposed upon, and has agreed to pay a money lender a higher interest than he would be obliged to pay elsewhere. The escape is perfectly easy. He can go to another capitalist; borrow the sum he wants at its market price, and pay off the first loan.
Thus it will be seen, that it is very easy to be relieved, without any breach of contract, when one is charged an exorbitant interest for money; while in the purchase of goods at an unreasonable price, the bargain once closed, relief is impossible. The regulation of the prices of goods, however, is an impracticable thing; and if practicable, and attempted by the legislature, would be scouted at by the people, as preposterous and absurd. The regulation of interest for money, in such a way as to adapt any particular rate, or limited number of rates, to the exigencies and circumstances of all, we do contend, is just as impracticable; and being so impracticable, the act of March 1723 is opposed by every principle of common sense and common reason.
We now proceed to consider, more particularly, the direct operation of that law upon this community; and the benefits that would result from its entire abolition.
It is well known, that in Pennsylvania there are many conscientious capitalists, who are restrained from coming into the market with their money by two causes: 1st., they will not lend at six per cent., so long as they can obtain a higher legal interest elsewhere; and 2d., they will not violate the law by taking usurious interest. These persons, not being themselves engaged in commercial pursuits, must bestow their capital somewhere. In the adjoining states of New York and New Jersey, the legal rate of interest is seven per cent.-one per cent. higher than in Pennsylvania; the consequence is, that the greater part of the money in the hands of such men is sent
into New York and New Jersey, and invested on the best landed security at that rate. We have personal knowledge of this being actually done; and, in the report of the committee of the Philadelphia Chamber of Commerce, it is stated to be a thing of frequent occurrence. It is certainly the result naturally to be expected.
Now, suppose the legal interest in Pennsylvania were enhanced to seven per cent., thereby equalizing it with the legal rate of New York and New Jersey, it is perfectly clear that the drain from this state would be removed, and this species of capital invested within our own limits; if the legal rate in Pennsylvania were increased to eight per cent., the current would then take a turn, and the money in the hands of conscientious capitalists, in all those states where the legal rate is less than eight per cent., would flow in upon us. Carry the matter still farther, and abolish all restrictions upon the rate of interest; and it is obvious, that the money in all those states where usury laws are in existence, would direct its course towards Pennsylvania, until we should be flooded with funds from all quarters, seeking a profitable investment. This current would continue to flow, until the supply of money exceeded the demand for it, at certain rates of interest.
Now, what would be the effect of all this upon the rates of interest? Clearly to reduce these rates: 1st, by making money more abundant in the market; 2d, by removing the risk which always attends a violation of the law; 3d, by obviating the necessity of negotiating usurious loans through the medium of a third person, and thereby saving brokerage commissions.
We hold these three reasons to be good and sufficient. The only means by which a rush of specie into Pennsylvania (supposing the act of 1723 were repealed), from the other states of the union, could be prevented, would be by the repeal of the usury laws of those states; these laws being all thus repealed, the states (setting aside their difference of enterprise and commercial character), would stand upon an equal footing. But this is a thing which cannot be apprehended-at least for many years, and perhaps never; for the strong prejudices against usury, which exist through the country, and particularly in those parts of it which are rather agricultural than commercial, would render the accomplishment of such an object (if at all possible) a work of much time and labour. In regard to our pecuniary relations with foreign countries, we will take occasion to observe, that the general repeal of usury laws throughout the Union would avail more than any other measure, towards counterbalancing the disadvantages under which we labour, from the great disproportion existing between our exports and imports. It would greatly contribute to this result
by encouraging the introduction of foreign capital; which, of itself, would in a great measure compensate for the vast amounts of specie annually exported from this country for the payment of foreign debts. It must be perfectly apparent to every one, that a foreign capitalist will not send his money a distance of three thousand miles, for the purpose of illegal "shaving." This is an operation often attended with considerable hazard; and very little money is employed in this way, unless under the immediate management or superintendence of the lender-the calculation of the credit of the borrower, and the risk attending the violation of law, is with difficulty confided to the agency of a third person. But take away the legal prohibition, and the objections of foreigners to sending their capital would be removed, because they could then make a profitable investment upon substantial landed security. In the case of shaving, by means of an agent, the possible infidelity of that agent in performing the duties of his trust, would be a matter for serious consideration. In the case of investment upon ground rent, or bond and mortgage, no such consideration could arise.
2. We have said that the effect of the usury laws is to enhance the rate of interest, by increasing the risk to the lender -the lender must, therefore, insure himself against the operation of that law, by a charge of additional interest; this would be the case under any circumstances; but the law is doubly operative in producing this effect, inasmuch as it drives out competition; for there are many individuals who could not be induced, by the most exorbitant interest, to hazard the violation of law. Independently of the hazard, and the moral consideration, there is even to the present day a certain degree of disrepute attendant upon the character of the usurer, which also exercises a great restraining influence.
So many capitalists being thus prevented from bringing their money into the market, it follows as a consequence that those who are not driven out, having less competition to encounter, have less to restrain them from increasing the rates of interest. We believe that a confederation among money lenders to enhance interest beyond the actual market rate, is exceedingly difficult, and perhaps not possible; but if it be possible, it is clear that it would be rendered so, by diminishing the number of operative capitalists; for the fewer their number, the more easily can they act in concert. There needs no laboured demonstration to prove this. No necessity, however, would exist for this concert of action; for by driving competition from the market, the supply of money would be so far reduced below the demand, as to enable lenders to require from borrowers a sufficiently exorbitant interest.
3. A repeal of these laws would have a tendency to abolish brokerage commissions upon illegal negotiations. It is well known that, under the existing order of things, very few negotiations, for the loan of money at illegal interest, are made without the agency of a broker. The broker, of course, receives a regular compensation for effecting the transaction, which is generally one quarter of one per cent. upon the gross amount of the loan, and this commission is always paid by the borrower. A is in want of a loan of eight thousand dollars for two months; he employs B, a broker, to procure him the money, which he accordingly does, from C, a capitalist. C's charge for interest is one and a half per cent. a month, amounting in all to $240-B's charge for commissions is one quarter per cent. upon the whole sum, amounting to $20. Thus we see, that A is obliged to pay $260 for the use of $8000 for two months. It is self evident, if the object of the parties to a contract of this nature, in employing the broker, be the evasion of the penalty attached to a breach of the usury laws, that the repeal of those laws would altogether abolish such an agency for such a purpose, and the borrower and lender would then negotiate with each other in propriis personis ; so that, in the case we have supposed, A would have only $240 to pay for his loan, instead of $260.
We know it is adversely asserted, that the repeal of the law would not remove the necessity of a broker's agency; and this is strenuously insisted upon, on the ground that brokers are continually employed in the purchase and sale of real estate, and the stocks of incorporated companies.' But the circumstances, under which the different agencies are conducted, destroy the analogy. In the first place, there is no regular place of resort, where buyers and sellers of real estate can meet for the purpose of conducting their negotiations. If a man wishes to buy a house, he never thinks of going to the Exchange to effect his object, (unless in pursuance of a sheriff's advertisement,) because it is not customary for holders thus to offer their property at private sale. A broker's office takes the place of an Exchange, and a register is there kept of much of the real estate in the market. This is the usual way in which holders advertise for sale. Purchasers, however, in addition to these, are actuated by other motives. Houses are not sold at a regu lar market rate, as money is,--their prices do not so much
1 So in the case of loans upon real security, agents are in general employed to effect them. Such transactions require much investigation, both as respects the value of the property and the validity of the title. Formal papers are also essential. Securities of this description are very different from commercial papers, and may well demand for their negotiation an intermediate person.