Defense of Usury
Payne and Foss: 1787
(EN: I was referred to Bentham's work as a reference on the topic of interest, but is not itself a comprehensive treatise on the subject. "Defense of Usury" is a series of letters, written presumably to a person [or persons] opposed to the notion of charging interest, at least beyond some arbitrary level, on borrowed monies. As such, it doesn't explore the topic fully or systematically, but there is quite a bit of food for thought.)
While much has been said in recent years in defense of liberty, the author does not recall seeing anything that specifically defends the freedom on an individual to enter into an agreement with another party, stating one's own terms and demanding terms in exchange, and ultimately entering into an agreement by mutual consent. And in the lack of such a clear statement, money-bargains have suffered much injustice by the intrusion of law into private matters.
Plainly stated, any "man of ripe years and of sound mind" ought to be hindered from entering into a bargain to obtain money, nor when entering into a bargain to furnish money for the use of another. Free men must be able to enter into any agreement of their own consent.
And yet, there is much legal interference into the private arrangements of a financial nature, primarily the prohibition against charging interest (usury).
The author's consideration of the subject is that any interference in the private affairs of men is a restrain upon liberty and its broad application is damaging to the self-interest of individuals. While the rule may be intended to improve the welfare of society, each citizen of a free nation knows his own best interests and should not be prevented from pursuing the course of action that best benefits his own welfare, especially if doing so causes no harm to any other.
Those who propose and support such legislation generally have their reasons for doing so, and the author will consider the arguments in favor of interference in private affairs, or at least those he finds to be most sensible: prevention of usury, prevention of prodigality, etc.
2: Prevention of Usury
The author begins with a consideration of usury: the very notion of usury is categorically hated by those who seem unable to explain what it means. They have commanded from the pulpit to revile it, have heard the woeful tales prodigal debtors of the suffering they feel it has inflicted upon them, and are convinced that, whatever it may be, usury is evil.
And yet, usury is not an action that is easily defined, as it is a matter of excess. Its definition, under the law, is of demanding greater interest than the law itself permits, or greater than it is "usual" form men to give and take. As such, there is about it a quality of vagueness - it lacks the level for precision needed for the specific borrower and lender to know what is an acceptable rate of interest, and where it crosses the line into usury.
A law that punishes usury necessarily claims to the state the ability to fix the rate of interest for all private agreements, and to do so in an arbitrary manner. One might as well fix the price for any good in all the markets in a great kingdom - without knowing the cost of the good, or its quality, or the levels of supply and demand in a specific place and time.
As each of these factors must be considered, there can be no such thing as "usury." There is no single value that can be considered to be fair, without taking into account the specific details of the bargain. Indeed, the parties to a loan are far more familiar with the specific details, and better qualified to assess and agree upon a fair price - and by entering into a voluntary bargain, consent that the price is indeed fair. And any form of law that upholds the liberty of its subjects would not seek to interfere in their doing so - to do otherwise is to deprive them of their liberty.
Considering the history of credit, the rate of interest dictated by law has varied greatly, from country to country in the same age, in a single country in different ages.
- In Rome, under Justinian (c 500 AD), it was 12%
- In England, Under Henry VII (c 1500 AD), it was 10%
- In present England (C 1785), it is merely 5%
- In India at the same time, it is 12% (by custom rather than law)
- In Constantinople, it is as high as 30%
Given the wide differences in these rates, can one say that any specific rate is intrinsically more proper than another? The author cannot imagine an argument or assertion feigning logic that would not be completely absurd.
It has been clearly witnessed that the past attempts of legislators to fix the price of commodities in the marketplace has been "absurd and mischievous" and has at times done great harm. To set a maximum price that is unappealing to suppliers results merely in the deprivation of the good in question, which does more to exacerbate than satisfy the level of need of the good in question.
Setting the price of goods, or the rate of interest, is effectively a method of influencing the price of one good in terms of another: to exchange silver for wheat is to say "this much silver is worth that much wheat" - to establish a maximum price is to claim that a given quantity of wheat will not be more dear than a given quantity of silver, regardless of the plentitude or scarcity of either. Where the market disagrees with the valuation of law, they do not accept the legal price, but sellers instead refuse to trade.
He also cannot imagine why a legislator should be at all interested in influencing the rate of interest one way or the other. He can't fathom how it would be in the public interest to do so. (EN: He overlooks, or perhaps figures it's wisest not to mention, that control over interest rates can be useful to a politician in gaining support - a promise to raise or lower rates to the benefit of specific parties is likely a good way to gain political support for those segments whose interests are served.)
3: Prevention of Prodigality
The concern about prodigality is not necessarily related to the availability of credit at all, and rests in the belief that an individual who has not earned something has not earned the rights to enjoy it, and may indulge himself excessively on borrowed money, and suffer for the need to repay it later.
Laws to prevent people from "doing mischief" to one another may be necessary - but to prevent "grown persons" from doing mischief upon themselves is not necessary: the consequences of our own foolishness are a more effective education than the ministrations of others who mean to place us in their maternal care.
It is noted that men are not by nature prodigals, and to restrict the behavior of a responsible party to prevent the misdeed of another is unconscionable. Also, even those who are inclined to be irresponsible with money generally do so because they have an excess of it in their present possession - it is highly unusual for a person to borrow money with the sole intention of wasting it.
Even if a man were inclined to do so, he must find a person who will lend money to him - knowing his habits and inclinations, it is unlikely any moneylender would, even at an extraordinary rate of interest, provide funds to a borrower who has not the capability to repay. Those who are in the business of lending money are fond of being repaid promptly and easily - the debtor whom they will have to pursues and even resource to see assistance of law to collect from is not the nature of customer they prefer to serve.
However, restriction of the rate of interest that can be charged does more to encourage prodigality than to discourage it: a lender is compelled to loan at a rate lower than the means of a borrower merit, providing him with cheap money that he may invest it in risky ventures, and not compensate his lender for the risk.
That is, where lenders are permitted to set the amount of interest they feel is fair, they will charge higher interest of those who pose a risk of failure to pay - and if all lenders have the same opinion of a man, he will be unable to bargain for a lower rate. The borrower's only recourse to receive a fair rate on a loan is to be habitually discreet and responsible.
There is the notion that a scheming creditor would loan to a man with the intention not of being repaid, but by seizing whatever goods the borrower may offer in collateral. But even in the absence of such men, an individual who is steadfastly inclined to be prodigal will lose his possessions all the same - if he cannot find a person to loan against their collateral, he will sell the same possessions to gain the funds he needs. Ultimately, if a man is bent on doing himself harm, the law is powerless to prevent him from finding some means of doing so.
There is also, perhaps, the consideration that the lender is protected from the prodigal debtor by such laws - but in this regard there is likewise no need. Those who lend do not do so naively, but with great caution and inquiry. Historically, the money-lender has been approached by two kinds of men - those whose friends have no money to lend, or those who friends do not trust them to repay - and as such have great expertise in sorting out those who wish to borrow from strangers.
Another set of people from whom prodigals get what they want, and tend to succeed in getting it, is the merchants. Everyone knows it's much easier to get goods on credit than to get money, and most merchants will gladly give over possession of goods to a customer for a promise of later payment. The prodigal does not loan money for the sake of having the money, but to purchase goods for his own indulgence - if he can get the goods themselves, which he generally can, it's just as effective in accomplishing his goals, and he will find himself just as indebted to a merchant as he would to any money lender, and the laws that govern usury are not involved in such arrangements.
As far as protection against prodigality is concerned, the laws forbidding usury in money-lending are as feckless as patching but one hole in a sieve. Moreover, if the aim of the law is to discourage prodigal behavior, limiting the rate of interest on borrowed money runs contrary to that purpose: to enable the prodigal to get money cheaply encourages his behavior and does greater harm to himself and his creditors.
If the intention of law is to put a stop to prodigality, its means should not involve punishing the lenders, who are themselves deceived by the prodigal - but instead, to react to the prodigal himself, to hold him to fulfilling promises of repayment, and making others aware that he is not to be trusted with credit.
4: Protection of Indigence
Aside of prodigals, Bentham names three other classes of person whose security may be the intent of restrictive laws on credit: the indigent, the rashly enterprising, and the simple - though they are by no means mutually exclusive: a person may be indigent, simple, and overly ambitious all at once, and one situation may contribute to the next. That is, an unintelligent man may engage in a rash enterprise and make himself indigent.
The intention of such legislation must be to prevent others from taking advantage of a person who is in a situation where their need of money is acute - but the net effect of such laws is to prevent others from providing money to those whose need of it is in fact acute.
Bentham elaborates a bit on the nature of "folly" - the foolishness of a person who fails to take good advice is visited upon himself, but those who insist on forcing their own foolish advice upon others do greater damage on a much larger scale. If you let each person follow his own wisdom, fewer will suffer, and the suffering of those who do will be a lesson to themselves and an example to others.
5: Protection of Stupidity
Legislators seek to provide laws to protect individuals who are simple, but what can be clearly observed is that the historical attempts of politicians to protect the stupid have resulted in decisions that no individual, short of an absolute idiot, could have conceived, and that measures undertaken to prevent the simple man from harming himself more often prevents the man who is not simple from exercising the liberty to act in perfectly sensible ways according to his own best interest.
Whatever a man's weakness, he stands much more exposed to it in buying goods than in borrowing money, and the simple are more readily and frequently swindled by the merchant than the money-lender. And yet, there is little attempt to regulate trade for the purpose of protecting simpletons.
There is in consequence little difference between buying a good and borrowing the money to purchase it. Credit, however, is easier to grasp: the buying of goods is everyday business, and regulating prices would be an endless task that few legislators would think themselves capable of - but obtaining credit is something that is done more seldom done, making it easier to regulate. But what is easy or possible is not always the correct course.
Neither is there any common standard for stupidity. A man who has paid too much for a good, or sold his own wares for too little, might in arrears claim to have been simple in light of his mistake, but there is no court in England that would seek to rectify the situation: a bad bargain is its own lesson. Moreover, a bad decision regarding credit is much more easily rectified: if a man enters into a bad bargain and pays too high a rate of credit, he can very easily borrow of another lender to repay his high-interest loan and have the balance die at a lower and more air rate. And if he cannot find another to extend credit at a lower rate, there cannot be more certain proof that the first was fair.
6: Mischiefs of Anti-Usury Legislation
Having considered the reasons given for laws forbidding usury, it is clear that they do not and can not accomplish their intended purposes - and meanwhile, they do mischief in several ways.
Primarily, the forbiddance against chagrining interest above a certain rate results in the refusal to loan money to those who need it, but who should fairly be charged a higher rate. This is a hardship on those who would profit by being extended credit, for their intended goals are unachievable for lack of it, and it deprives others of the profit of loaning it to them. As it is often the case that those who can make most productive use of borrowed money are willing to pay greater interest for its use, access to capital is restricted to those who benefit the least by having it.
A second mischief is that those who are in desperate need of credit, and are unable to obtain it, often do themselves greater harm by other means. If they cannot loan, they must sell anything of value they may possess, often at extremely disadvantageous terms. Everyone knows that when a seller is in a desperate position, one need not offer him a fair bargain, and it is not uncommon for merchandise in a forced sale to go for a third of its value. In terms of land, there have been instances where estates to have been liquidated for a quarter of the price at which they were purchased, not even considering the value of improvements made to the land. Would it not cause less suffering for him to loan at 12% or 20% as opposed to liquidating his worldly goods at a fraction of their value? The author does some basic calculations, considering the loss of value as if it were interest, to demonstrate that credit at a seemingly exorbitant rate would constitute less of a loss.
It is also an effect of bad law that it is ruinous to the law-abiding: the moneylender who is unable to find sufficient lenders who can be trusted at a fixed rate of interest may not be able to meet the expenses of his own business, whereas the lender who disregards the law is able to loan to any who need, and to effectively siphon off the profits of his law-abiding competitors. (EN: Bentham, does not mention also that those who loan at illegally high rates cannot count on the judicial system to help them collect from delinquent borrowers, and thus have recourse to less civil means of collecting what they are owed.)
There is also the problem of the vagueness of the law, in failing to provide exact guidance to those who would comply with it: unless a precise rate of interest is exactly given, the lender is at the wiles of any interpretation of what is "fair" or "customary" in terms of interest, making the business of money-lending particularly treacherous even to those who would enter into it. He personally is aware of "several" incidents in which the reputation and fortune of an individual was damaged because their rate at which they loaned was declared to have been excessive.
The last consideration in terms of mischief is that bad law has a corruptive influence on the public morality. If one law be obviously unfair and ill-conceived, the aspersion is cast on the whole body of the law. If one law is so vague as to be inconsistently interpreted and unevenly enforced, the aspersion is cast on the justice of law itself. And if the honest man is treated as a criminal by a bad law, what use is there in any man attempting to be honest? In the case of usury, the unsoundness of the law is plain to any who wish to enter into a voluntary agreement, which both parties see as being acceptable and beneficial - that they are prevented from doing so by law calls into question the suitability of the legal system.
7: Efficacy of Anti-usury Laws
One last point in terms of usury laws: "No law can reduce the common rate of interest below the lowest ordinary market rate at the time that law was made." Taking the example of the Edict of 1766, in which the Kind of France set the rate of interest to four percent, money continued to be loaned at five - the law was either evaded or utterly ignored.
Nothing can be so pointless as a law that attempts to fix the price of any good, including capital, in a free market. One cannot by declaration of law make a scarce good more plentiful - though by fixing a price below that at which it should be sold due to its scarcity, such laws can make goods all the more scarce if men be influenced by them at all.
This also points to the utter silliness of having such a law at all: if law specifies a level of interest that is unacceptable to the market and men are easily capable of evading or ignoring it, it is entirely pointless. If the law is administered and amended with caution, such that it specifies a level of interest the market will accept, it is equally pointless - men would extend credit at that rate even if there was no law at all.
(EN: I recall reading in another source a more sinister interpretation of the situation in France - that the law was passed with the full knowledge that it would be broken, but it gave the State the ability to enforce it arbitrarily. As such, a moneylender who paid tribute to the local politicians would be safe from prosecution even though he ignored the law, whereas another who failed to grease the wheels could be hauled off to jail at any time. The situation was so profitable to corrupt politicians and officials, and the corruption was so overt and unabashed, that it is posited that this could not have been unintentional.)
This is also seen in England at the author's time: the rate of interest fixed by law is five percent. Many people lend money, but nobody at that rate: the best ordinary rate is about 8% with rates as high as 10% being common. Occasionally, one may hear of a rate of six of seven percent, offered to individuals of extraordinarily good repute, on solid security, and in favor with a lender.
8: Virtual Usury
Even when the usury statutes are overtly respected, there are various devices which may be used, between a borrower and a lender, to arrange a loan that enables the creditor to collect and agreed-upon sum of interest, above what the statutory limits may be. These generally involve payments from borrower to creditor that are not classified as interest, but are functionally the same.
Drawing fees are a common way to increase the interest rate of a loan: a commission charged to the borrower, whether paid in advance or added to the principal of the loan, can effectively raise the rate to as high as 13% or 14%. An execution fee may be charged by redrawing the loan contract each month - such that the borrower who needs funds for a year renews his debt each month and pays the additional fee. There is also no evidence in the contract of how much money actually changed hands, such that the amount of principal for which the loan is written may be less than the amount o money received by the borrower.
Bentham also describes a fairly elaborate scheme by which multiple parties create a web of loans to disguise what is effectively one borrower loaning to one lender - the details of which are quire arabesque and entirely incidental to the purpose: a creditor charges a rate of interest higher than the statues will allow, but amenable to a borrower, and the two of them conspire to conceal their interaction through a labyrinth of paperwork that, at face value, is entirely in compliance. Even if the arrangement were discovered, it would be difficult to prove, and could easily be dismissed as an inconsistency or oversight rather than a willful violation of the law.
The pawnbroker provides another option for a lender and borrower who wish to arrange a loan, as pawn broking is not considered a form of lending (though it functions as such): because a physical item is involved, the pawnbroker buys an item at one price and sells it back to the owner at a higher one, and it is thus regarded by the law as a sale of goods rather than a form of credit. If the purpose of the law were to defend the lowest poor against exploitation, certainly the practice of pawn broking would have received greater attention, as it is the bank and moneylender to the lowest levels of society.
The author also mentions "bottomry and respondentia," which were contracts of maritime trade that involved loans and insurance of a ship and its cargo. Because trade was seen as critical to the national interest, these contracts were exempted from the restrictions of usury and could be involved in the web of financial transactions between a borrower and a creditor. As an aside, the author finds it ironic that legislators who felt restricting the rate of interest was vital for the sake of protecting the economy could, at the same time, declare that the empire's most critical industry would be better off without such "protection."
Bentham lists a handful of other vehicles that can be used to transfer money from one party to another, all of which can be employed in tandem to enable two parties, acting within the letter of the law, to make an arrangement for the loan of money at a greater profit to the lender than usury laws permit. As such, the law is completely ineffective, and completely powerless, to prevent individuals from choosing their own terms in financial agreements, but merely makes matters more complex.
9: Blackstone Considered
The author refers to the opinions of Sir William Blackstone, a much respected judge and scholar of the British legal system, who was also decidedly against the notion of legal interference in private affairs, in case the reader is reluctant to accept the opinion of the author, alone.
To Blackstone, negotiating the terms of a loan is little different than bargaining over the price of a horse - the seller wants as much as he can get and the buyer to pay as little as he must, and what is a "fair" price is determined by the agreement between the two. If any third party intercede, it is to the benefit of one and the detriment of another, and the proper role of law is merely in holding men to the bargains they have entered into, and not in interfering in the bargaining process.
It is generally accepted that demanding and exorbitant price for anything is "contrary to conscience" but not by any means immoral - for who is to decide what is fair or exorbitant but the buyer, and what standard can be measure it by except the poignancy of his need to have it? He cannot rightly claim that his need of it is great if the price he is willing to pay is small.
Still in the horse-trading metaphor, it might be more accurate to consider the rent of a horse than the sale of it, as the loan arrangement involves the fee charged for the use of money that will eventually be returned. And in that context, we consider that the negotiation is between a seller who wants to be fairly compensated for being deprived of his horse for a time and the buyer who is willing to pay for the convenience of its use for that same time. Into this, we also consider the number of individuals who have horses they would be willing to lend, and the number of riders who are looking to rent. The more demand outstrips supply, the higher the price ought to be as buyers bid against one another, enabling the horse to be let to the buyer with the greatest need, as evidenced by his willingness to pay a higher price to have use of it.
And it is evident in the horse-trade that prices are higher in some locations and in some years than in others, for scarcity of horses to fill the demand of them. Especially when you consider show horses or racing horses, the use of which generates a profit for those who use them besides there mere conveyance from one place to another, the prices of such creatures seems exorbitant indeed - and yet, no-one sees any use or necessity in a law for fixing and reducing the price of horses. And it has been well demonstrated that those who need them, and can make the most productive use of them, will gladly pay what seems to others to be a high price, and happily so for the profit they make.
10: Prejudices against Usury
The basis of laws against usury are based on tradition, particularly upon religious beliefs, in whose tangled and contradictory terms the notion of virtue is divorced from reason: it is not good to do a thing because of the consequences that result of doing it, but because the act itself is considered to be virtuous.
In scriptures, money itself is a bad thing - not because of what some will do to obtain it, nor what others will use it to do once it has been obtained, which would be rational approaches to morality, but merely because money is an anathema and those who seek it are morally corrupt.
But more to the point of prejudice, seeking to gain interest from the loan of money was bad, simply because it was "acting like a Jew," which is a prejudice that has been common for centuries, and even being in the business of money-lending has been proscribed by Christian doctrine. Even the business of borrowing has been discouraged, as it is reckoned that a good man should live within his own means and make thrifty use of that which he has.
(EN: Bentham continues for quite a bit on the historical prejudices against borrowing, and the way that which the borrower is pitied and his creditor despised, but it's excessive: the point is well made that it is a prejudice that defies logic.)
11: Compound Interest
The notion of compound interest deserves separate concern, as it also is viewed with some concern by the law, though it is unclear to the author whether it is permissible or forbidden, and is considered a different thing than usury, though next of kin to it.
From the moneylender's perspective, his interest (gain) is compounded by loaning out the money repaid to him by his debtors - so where any debtor fails to keep to the agreement, the creditor has lost not only the amount due him, but the interest he could have earned were the payment made as agreed. As such, charging the debtor additional interest on the interest that was not paid compensates him for the loss of capital.
There is objection to paying "interest on interest" as having the effect of making the interest on a loan greater than what was agreed upon, but you must also consider that, when the payment of a loan is delayed, the expense is borne by the creditor for the borrower's failure to keep to the agreement. If the interested is not compounded, the debtor has no financial incentive for making repayment as agreed
Also, the ability of the creditor to compound interest provides small compensation for small inconvenience - if the inconvenience be small. If his debtor ails to make repayment occasionally, the additional payment for the compounding of interest is a trifle; but if he neglects his debt repeatedly, the additional cost is justly significant. But to the point, the only recourse of a creditor, where compounding is forbidden, is to declare the loan to be in breach, and to seize the collateral or other property of the debtor top satisfy the obligation immediately, which is far more inconvenient and injurious to the debtor than the payment of additional interest.
The compounding of interests, like the very accrual of interest does not harm to the debtor who pays his "just debts" and keeps to the word he has given in the credit agreement, and harms only the man who forsakes his word, and only to the degree and duration until he makes amends. To forbid the compounding of interest is to encourage dishonesty and misconduct.
Bentham prudently adds that it was not likely the lords who acted to forbid the compounding of interest intended to condone such injustice, but that they had merely neglected the "toil of calculation."
12: Maintenance and Champerty
Bentham acknowledges that he may be pushing and the boundaries of the present inquiry to address the notion of Maintenance and Champerty, which have at times been forbidden. (EN: I wasn't able to make much headway with the definitions Bentham provides, and looked into it a bit further elsewhere: M&C seem to be an offer to help pay the expenses of bringing suit against someone, mainly a debtor, for a share of the settlement.)
Bentham relates the story of a personal acquaintance who was rightly owed a substantial amount of money but who was unable to finance a lawsuit to collect it. Civil lawsuits are the sole convenience of "those who can afford to throw away one fortune for the chance of recovering another." And in the case of his acquaintance, the defendant was able to find an old statute against Champerty to prevent him from borrowing money to bring suit, asserting that anyone who provided such a loan was, in effect, seeking to benefit from the settlement.
As such, Bentham considers the statutes against M&C to be "barbarous" remnants from the "feudal" age in which justice was available only to the wealthy. In effect, the prohibition against M&C gave wealthy people a "monopoly of justice against poverty" by making it impossible for a poor person to gain the resources he needs to bring suit against one who has harmed him.
He supposes that, in their day, such laws were intended to protect the poor by prohibiting a wealthy person to profit by claiming a share of the settlement in exchange for financial support. However, even if the "champerty-usurer" claimed half the settlement, his client would still get the other half, which is better for him than having gotten nothing at all.
(EN: This may seem a bit outdated unless you consider the incidence of "class action suits" in the legal profession, where an attorney claims a thick percentage of the settlement he obtains for others because he did not charge an hourly fee for his work. This is generally defended on the grounds that the attorney is taking a risk in spending his time and resources on a case that may not win.)
Also, the nature of champerty is fundamentally similar to that of usury: it is an agreement entered into by two individuals, each knowing what he is committing to and risking, and each having the opportunity to decline unless the terms are acceptable in his judgment.
13: Letter to Dr. Smith
Bentham makes some reference to the Greek philosophers, in whom it was witnessed that each student seemed to rebel against his teacher, taking the opposite position on many issues rather than following faithfully along. It is not meant as disrespect to the teacher that the student should take a different direction, and largely to credit the teacher for causing his student to think through his ideas with greater discernment, given the opposition of viewpoints.
He acknowledges also, that previous views on the topic of usury with which he has disagreed in this series of letters are themselves founded on the best of intentions - but he must disagree that the methods suggested of accomplishing those goals are justified or even effective and have side effects that may not have been adequately considered.
He refers to a very specific passage in which Smith indicates that setting the legal rate of interest too high would encourage loaning to "prodigals and projectors" rather than those who would make the most profitable and advantageous use of the same capital - but at lower rates, money would be lent to where it would do the greatest good.
The main problem with this argument is that the rate of interest is arbitrarily forced upon all lenders and borrowers, whatever their intention for the funds in question. If a given use of the funds is sufficiently productive, the borrower can afford to pay a higher rate for the loan - and as such, a higher rate for funds results in more productive use of capital rather than less.
The aspersion of "projector" is ascribed to individuals who promote projects of dubious merit, whose operations cross the border between a legitimate plan and a scheme used to defraud investors - but the merit of a project and whether the intent of its projector is honest or dishonest cannot be ascertained by the interest offered for borrowed funds, nor generalized that any proposal that offers a significant profit opportunity is necessarily ill conceived.
Neither can it be taken for granted that the ability to demand a higher rate of interest would encourage lending to those who would use capital irresponsibly. Those who lend money expect to be repaid, and are quite cautious in entering into any agreement, and are perfectly intelligent individuals and experienced in assessing the ability of debtors to repay. He needs no assistance of law to help him determine the prospects of repayment. Or if you think such men to be gullible, the law makes them no less so, and projectors are perfectly able to swindle men out of their money whatever the nominal rate of interest happens to be.
He then quotes a few other passages, in which Smith himself indicates instances in which projects generate significant amount of income for their initial investors, and in which he claims that "the number of prudent and successful undertakings is everywhere much greater than that of injudicious and unsuccessful ones," even to the point of suggesting that it is very rare, perhaps one in a thousand men bankrupt themselves in pursuit of an enterprise. And further, the tightening of credit does not weed out merely the bad projects: both good and bad are diminished as one.
There's then a bit about the prosperity of society, and the growth and betterment of the human condition through the ages from the ancient to the present, fueled by men of innovation who borrowed money to undertake projects of great importance. Such endeavors require risk: those who do conventional things and achieve conventional results do much to maintain the prosperity of people, but little to move it forward.
There is also some suggestion that whatever the cause of the problems that is causing wealth to flee Britain, government involvement in private affairs is certainly not the answer. While Smith propones control of interest rates to protect against "prodigals and projections," he has himself spoken against the "impertinence and presumption of kinds and ministers to pretend to watch over the economy of private people" and that they have not been paragons of restraint: "If their own extravagance does not ruin the state, that of their subjects never will."
There is also a rather convoluted passage which I take ultimately to mean that these prodigals and projectors are of too small a number for the state to be concerned with. As mentioned earlier, the law applies to all loans, to all credit, and to all projects - good as well as bad - so a great many are inconvenienced for the sake of protecting a very small number from their own folly.
Another quote taken from Smith emphasizes that any individual, by virtue of his first-hand involvement of any situation, can much judge the merit of the investment "much better than any statesman or lawgiver can do for him." Those laws meant to "direct private peoples in what manner they ought to employ their capitals must in almost all cases be either a useless or hurtful regulation."
In terms of projectors, who waste great deals of capital in pursuit of endeavors that bear no fruit, the productivity of their efforts cannot be so accurately judged until they have been acted on and their outcomes seen. He later likens the process of invention to a lottery, and to more sober lines of business in which you must take some action before seeing the outcome, and in hope you will get what you anticipate. There is nothing at all a man may do with perfect certainty of the outcome.
Every one of the industries that have done much to contribute to the wealth of the nation was at one time a project, suggesting some course of action that may have been, and likely was, dismissed as folly by a great many. It is only because of the risk undertaken by a few, in endeavors that others considered to be ill-conceived, that man was able to emerge from the most primitive of conditions. Further, there are many pitfalls on the path to success - many men will try their hand at the wrong thing before one gets it right, and each "miscarriage" is a lesson to be learned by others so that mistakes are not repeated. Moreover, the mistakes harm but a few, who were willfully involved in the making, whereas the eventual success benefits a great many. Historically, it was only in the ages of "ignorance and barbarism" where people were prevented from deviating from what is customary; the golden ages all required individuals to do the unusual, and to take risk, to make progress.
Bentham again quotes Smith's own words in respect to the principle of projecting: in a passage in which Smith writes of "a company of merchants [who] undertake at their own risk and expense to establish new trade with some remote and barbarous nation" and suggests that the state should grant them a monopoly on that trade to compensate them for the risk of the investment. This is in essence no different from "projectors" who undertake risky ventures to reap substantial rewards, though they ask no such protection.
It is suggested, in oblique terms, that politicians may feel beset from those who undertook great risks that failed, and who complain of the injustice of it, and perhaps this is what motivates others to press for laws that prevent people from harming themselves thus. However, there is no such complaint on those who undertook risk of equal or greater magnitude and enjoyed success. Neither is their much complaint from those who failed, but had the prudence to invest conservatively in such risky businesses, such that they could bear the cost of failure, the chances of which they knew to be significant.
Bentham then paints a ridiculous picture of the machinery of state that would be necessary to enforce laws against usury and projecting: for "boards of control" to be created whose duty is to approve certain private actions, which would foster great corruption and waste a great deal of public money for the sake of protecting men from their own folly, substituting their own vain imagination of what might result for an action, rather than letting men act as they will and allowing the outcome to be its own reward or punishment. It is clearly unnecessary to do so.