In Defense of Usury

While at the University of Oklahoma I was subjected to a course on the History of England taught by a professor of Womens Studies. The course, and the professor, was economically illiterate which was unfortunate since the course covered the period of time, and was most concerned with, the Industrial Revolution through the 1960′s. I spent the entire course supplementing my reading with books on economic history and thought to counterbalance the crude Marxism and mercantilist thought. I was required to read the Hunt’s, the Webb’s, and most irritatingly in the end E.P. Thompsons “The Making of the English Working Class.” A book so mind bogglingly wrongheaded as to defy any description, regardless of its real contribution in compiling primary sources on the lives of working people.

So I retaliated with papers on the repeal of the English Corn Laws and other such reactionary concerns. It was in one of these forays into the History of Science collection that I came upon the letters of Jeremy Bentham which included a series of letters to a friend, which was also addressed to Adam Smith, which he titled, Defence of Usury. Bentham took Smith to task for endorsing the restrictions on interest rates in existence at the time. I have no memory of whether Mr. Smith was persuaded, but he should have been. My professor gave me a very high grade for the paper, but her distaste was palpable.

What makes me bring up this topic today? Well Michael recently dscussed Kiva, a micro-credit program very similar to that set up by Muhammad Yunus and his Grameen Bank which won this years Nobel Peace Prize. One feature of micro-credit programs are their high interest rates. From their website we learn why:

I’ve heard that MFIs charge a high rate of interest for the loans. Is that so?

Like other financial institutions, microfinance institutions (MFIs) charge interest for the loans they make to their clients. The interest covers the high cost of making very small loans and personally servicing each client every week. It also covers the cost of managing the “center meetings”; the peer support group process; and providing information on social services, personal development, health and other critical information that helps clients improve their lives and the future of their families. Their rates are also affected by the rates MFIs themselves pay for borrowing the funds that they in turn lend to their clients. MFI interest rates can range from 15 to 35 percent, depending on the conditions in each MFI’s service area. Without microfinance programs, the only alternative for very poor people is often borrowing from local “money lenders,” who regularly charge between 120 and 300 percent.

That makes sense to me, though a simple point can be made. If these people could profitably be lent to at lower rates then somebody would. If these people could easily get the credit they desire or need at lower rates they undoubtedly would. In fact, the dedication of the people running these things is the only explanation I can find for even the highest rates being sustainable.

Okay, but that program is recognized as a success. “What is your concern,” you might reasonbably ask? Reading a blogroll favorite of mind, Division of Labour, I find that our own government need read Bentham, or at minimum recognize the costs and rationale for small scale loans. Especially loans with a short time frame. In response to pleadings from columnists and other illiterates Senators Jim Talent and Bill Nelson, in a typical display of bipartisan idiocy, have authored a bill designed to cap the rates at which pay day loans can be made to our military at 36%. The response,

Advance America, the “largest provider of payday cash advance services with approximately 2,700 centers in 36 states” has announced it will stop providing payday loans to military personnel.

Lawrence White shows why the law makes it impossible:

Note that the “interest rate” capped by the Act includes all service or transaction fees. If the transaction fee to borrow $100 for a week is $10 (which is cheaper than bouncing a check or missing a credit card payment), that is computed as $520 per year, or as a “520%” addition to the “annual interest rate”.

Even a one dollar charge in this instance would be a 52% rate. Under these restrictions how could Advance America not decide there were better ways to allocate their capital? Sadly there is a lot of sentiment to extend the bill to cover all such services. Lawrence suggests:

the payday loan industry might want to consider hiring Muhammad Yunus as a consultant and spokesman.

My guess is it will not matter. “Hardline authoritarianism” comes in many guises that do not attach themselves to this administration and with affects which are very widespread. I suggest we train our eyes more broadly than on the abuses which catch the fancy of the New York Times.

[tags] Jeremy Bentham, Jim Talent, Bill Nelson, Division of Labour, Lawrence White, payday loans, Muhammad Yunus, Nobel Peace Prize , Usury [/tags]