Defense of Usury

Defense of Usury by Jeremy Bentham, a groundbreaking book on practical Economics via amazon.com. Published in 1787, is still controversial today.

Usury, for those who do not know, is the charging on interest on loans. Today it is a common feature of our daily lives. Anyone who has a credit card or has taken out a mortgage knows what usury is. What people don't know was that this practice was banned in Europe for centuries, and is still controversial today.

Bias against interest on loans originates, like all of our knowledge, from the Ancient Greeks. Aristotle believed that it was immoral to charge interest on loans other than for security reasons. He thought that making money off interest was unproductive; money was made not by producing things like farming did but by raising the price on something that was already made. So loaning a bottle of wine and charging interest only enriched the lender and made the borrower poorer. The Catholic church continued the prohibition of usury through the Middle Ages using theological statements about the immorality of the accumulation of wealth for one self.

Bentham's book argued usury was moral because it reflected the preferences of both lender and borrower. Because the borrower agreed to pay, he must believe that this loan plus interest is better then no loan at all. If it truly is predatory, he wouldn't agree to it. Usury also incentivizes people to save money and invest by increasing the return one would receive by lending money to a bank. Remember, people only save if they expect to earn more in the future. Higher interest rates mean more capital for wealth creation.

Bentham's logic is being contested after the financial crisis and the passage of the 2010 Dodd-Frank financial reform act. Supporters of the bill believe that unrestricted interest rates (Bentham's position) take advantage of borrowers lack of knowledge, so government must pass laws to correct this asymmetrical information. It is true that consumers lack information, but how can government made up of regulators with imperfect knowledge make better decisions? Its a paradox for either side of the argument. 

The book is free on Epub for those who don't use Kindle (iphone, ipad, nook people click here)