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Report No. 63

2.12. Practical necessity of allowing interest to be charged.-

In practical application, therefore, the doctrine of usury had to be narrowed down to the prevention of exploitation by the money-lender. This is illustrated by an early English Act, which fixed the maximum rate of interest at 10 per cent per annum in certain cases, such as failure to pay by the specified time, as distinct from payment for the mere use of money. Subsequent legislation in England reduced the rate, and the matter evoked a lot of controversy amongst economists. Ultimately, John Locke1 showed that any attempt to fix the maximum rate of interest was illusory. He pointed out that the demand for money regulates its price. He showed that a legal rate below the market rate would severely hamper trade, because people would then prefer to hoard that capital, rather than risk lending it.

The controversy2 between Bentham and Adam Smith on the subject of usury laws is also well-known. Adam Smith apparently accepted the usury laws, while Bentham demonstrated, from Adam Smith's own promises of natural freedom, that there could be no logical reason for the support of laws which so obviously restricted a man's freedom of action in the employment of his own capital. According to the Code Napoleon, interest is either legal or contractual. The legal interest is fixed by law; the contractual interest may exceed the legal interest, whenever the law has not prohibited such excess.

1. John Locke Considerations of the Lowering of Interest, (Works, 1801 Edn.).

2. Bentham, in Defence of Usury.

Interest Act, 1839 Back

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