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$420. But no, say our paternal lawgivers, you must not make such a contract. Why not? Because, in the first place, it is contrary to the divine law, and therefore a moral sin ; and, in the next place, we wish to restrain projectors and speculators.
Contrary to the divine law ! Then we ask you, gentlemen, why do you not carry out the principle to its fullest extent, and prohibit usurious interest in all business transactions? Why have you placed a legal sanction upon whatever rate of interest may be agreed on between the parties, in bottomry, and respondentia, and policies of insurance, and annuities upon lives? Where is the difference, in point of moral sin, between taking high interest upon a promissory note, and upon a respondentia bond? Something, you say, must be allowed for the hazard. But does that make any difference in regard to the morality of the transaction ? if it does, we assert the difference to be in favour of the note, for the other savours strongly of gambling.
To pass a law prohibiting the taking of usury, upon the ground that it is a contravention of the Mosaical precept, and yet to make the distinction in the cases to which we have just referred, upon the principle of allowing indemnity for hazard, appears to us to be the ultima Thule of legislative absurdity and inconsistency.
Well, but independently of the moral consideration, it is said, that a check must be placed upon the visionary schemes of projectors. Who are these projectors ? upon what men, or class of men, is intended to fall the stigma of this odious appellation ? We answer, upon those who devote their attention to the cultivation of the useful arts; upon those who require money to aid them in their plans of invention; upon those who would project new, or make improvements upon old, devices of human contrivance. In short, 'this legislative restriction effectually operates upon all that human ingenuity projects for the benefit of mankind.
The application of the steam engine to the propulsion of boats, was the work of a projector, and money was found necessary to carry the work into effect. When Robert Fulton accomplished that splendid object, he gave an impulse to his name, which will transmit the remembrance of it down to the last generation of the world. The discovery of the western hemisphere was the work of a projector, and the author of that discovery has written his great name upon the records of immortality. The genius of men like these is frowned down by the narrow policy of ephemeral legislators. Now how is it that this class of men would be affected by an operative law, limiting the rate of interest ? Suppose the act of March, 1723, were really effectual in preventing usury (which, not to speak irreverently of the laws, it happily is not,) look at the result.
The great object of the capitalist who comes into the market with his money, is to lend it at the highest interest within his reach, and upon the best security he can get. If he should place it out upon bond and mortgage, he will be content with an interest below its real market value, because he has a lien upon landed property, generally worth two or three times as much as the money loaned. A pledge of good stock certificates would be a security, nearly if not quite as firm, and the rate of interest, therefore very little higher. The calculation of interest, in both these cases, takes into view simply the inconvenience suffered by the lender in parting with his money; there being no hazard, no addition is made on that account.
But suppose the loan is made on personal security; the interest will be calculated in a compound ratio made up of the inconvenience and the hazard; so that if the current value of money be eight per cent., the interest demanded will be perhaps ten per cent., allowing two for the hazard run. We now come to those men denominated projectors. Let one of this unfortunate class present himself in the market, in search of a loan of money. If he have no remarkably good security to offer, it is probable that in nine cases out of ten he can obtain no loan, unless through motives of friendship, or the expectation, founded upon strong grounds, of deriving a collateral advantage from his project. Money lenders are loth to hazard their capital solely upon the chances of success of a scientific discovery, or an invention in the mechanic arts. But suppose the lender to be convinced of the merit and probable success of the invention, (to carry which into effect his money is wanted,) still he will not make the loan, even with the ordinary security, at the same interest that he would to a person engaged in a solid and established business, because the hazard is so much the greater. He will add a heavy per centage to the current rate of interest, in order to indemnify himself for the risk he runs. Even if the security offered were unexceptionable, this would be the case to a certain extent, on account of the dangerous and uncertain purposes to which the money is to be applied. Cases may, however, occur, in which a loan might be effected for such an object. An ingenious mechanician, we will suppose, has made an improvement in the steam engine, by which the motive power is increased, at a diminished expense, and the danger of explosion entirely removed; he must have money to bring his invention into operation, but has no security to offer for a loan; he convinces a capitalist of the certainty of his ultimate success, and that that success will secure to him the acquisition of a splendid fortune; the capitalist is willing to jeopard the loan, but the hazard is very great, and the interest must be proportioned to it,—the lender must have forty per cent. for his money. Here the law interposes and forbids the contract, and the unfortunate "projector," is defeated and driven from Change. After all his efforts to raise money have failed, as a last resort he parts with the patent right of his invention to a company he sells, for a paltry thousand, that which may realize hundreds of thousands to the purchasers. This, it may be argued on the other side, is too strong a case. If it be so, it is because the usury laws of Pennsylvania are ineffectual in preventing usurious contracts : were the act of 1723 operative to the full extent that it was intended to be by the legislature, such cases might constantly occur.
Now the question recurs, why these.“ projectors," as they are sneeringly called, should be singled out as the objects of legislative restraint? Is it for the protection of the community from visionary schemers? Who is it that suffers, but the projector himself, when his inventions are unfortunate or unsuccessful ? Certainly not the public; and if the public were the sufferers, they are sufficiently competent to their own protection, without the interposition of an act of assembly to shield them from imposition. The trading community has arrived at years of sufficient discretion, to enable it to walk without the aid of leading strings. We say, then, (for these and other reasons which will be apparent to the reader without enumeration by us), that this law, so far as it is intended to operate as a restraint upon native ingenuity, is unjust and impolitic to the last degree. Genius is too rare and precious an endowment to be discouraged and tied down by legislative enactment. It should rather be fostered and protected, and assisted by every species of encouragement in the power of the legislature to bestow.
We know not what other considerations influenced the passage of the act of 1723, nor do we know whether peculiar circumstances did not exist at that time, which rendered its passage advisable. Legislation, however, should be adapted to the character of the people and the condition of the times; and a law which may have been very politic a century ago, in a country like this, (which is in a state of perpetual revolution), may be exceedingly impolitic now. Not being aware, then, of all the causes which operated in producing the law of 1723, we proceed to the dissection of an argument against usury, upon which our opponents of the present day are continually harping. We allude to the supposed influence of the law in preventing prodigality.
Now we have had this assertion dinned into our ears, almost from time immemorial ; and we have never yet been able to comprehend the manner in which the law effected this object. So long as the prodigal is in possession of ready money, he certainly stands in no need of loans. But let his ready cash be exhausted, and himself driven to the necessity of borrowing, to enable him to continue the indulgence of his pleasures; there is no reason why he should be obliged to pay higher interest than another person, provided he can offer good security to the lender--a mortgage upon real estate, or a pledge of stock, or even a good endorser upon his promissory note, would secure him a loan at the market value of money. In the case of a mortgage, as Mr. Bentham takes occasion to remark, the prodigality of the mortgagor would be an inducement with many persons, as long as they were content with the security; for his want of punctuality in the payment of interest would give the mortgagee an opportunity of foreclosing and forcing a sale, which is often attended with great advantage. The ability of the prodigal, then, to raise a loan, depends upon the security he can offer. But suppose he has no security to offer; it is asked, how is he to borrow money at the ordinary rate of interest? He would be just as likely, in a case like that, to get it at an ordinary as at an extraordinary rate. The truth is, that without security, no capitalist would lend him money upon any terms. The only manner in which he can raise money at all, is to borrow it from his friends in such sums as they are willing to lose, and then he gets it without interest.
In default then of actual and substantial security, and in the absence of every other plausible inducement, he can get no loan. But he may have a fortune in prospectu,--he may
have a father, or a near relative, at whose death he may justly look for a handsome inheritance. Then comes the plan of raising money upon post-obits. He goes to a money lender and states his situation. “I want a loan,” says he, "of ten thousand dollars. I have no real or personal security to offer for it, but I have a rich father, at whose death I shall come into the possession of a hundred thousand,--lend me the sum I require, and I will
I give you a bond for ten thousand dollars with fifty per cent. interest, payable upon the happening of that event."
The lender makes his calculations : the father is advanced in years, certainly, but his health is good, and he may yet live many years : the son is young, but his health is impaired, and his constitution broken by excess : if the father should survive the son, I shall lose my money, because his portion of the estate will be diverted from its original destination; and even were it not so diverted, his heirs would not feel themselves bound by an illegal contract: noreover, the son may be disinherited, on account of his prodigality ; in which case, also, I shall be the loser : fifty per cent., however, is a great temptation, and I think I might hazard the loan: but then, there is the statute of usury in the way, and how can I be secure that it will not be pleaded, in bar of my claim, by the borrower himself? I must
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 scen 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; fur 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.