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The Confederate Lawyer
December 25, 2009

Usury, Loan Sharking, and High Interest Rates
by Charles G. Mills

GLEN COVE, NY — Usury is an offense against justice. It consists in receiving or demanding interest unjustly on a personal loan. Its worst form is “loan sharking,” the lending of money at interest rates like 600 percent, with a threat of violence to enforce payment.

There are at least two criteria for usury. First, the loan must be personal. Moral theologians have recognized for centuries that interest is a legitimate way to share in the anticipated profits from a business loan. Accordingly, a number of civil laws against usury do not apply to loans made to corporations.

Second, the interest must be unjust. In an economy in which only gold and silver were money, the justice of interest was easier to determine. A lender of a gold coin weighing one ounce was repaid with a gold coin weighing one ounce. Today’s currencies are usually subject to constant inflation, and such a simple concept would be unjust. Interest may at least cover anticipated interest and the costs of making the loan. Banking involves lending borrowed money, and it is certainly unjust for the intermediate borrower and lender to be stuck with the interest and not pass it on to the final borrower. It is also arguably just to make a sufficient profit from lending to attract the necessary investors to supply the money lent.

It is not the role of government to eliminate all usury. Government is incapable of doing this without eliminating just loans and destroying the free market in money. Governments have never attempted to eliminate all usury. In medieval Europe, usury was forbidden to Christians but not to non-Christians. In modern society, the best we can do is to outlaw interest rates extremely higher than market rates that they were not fairly bargained for. Sometimes laws against usury use a two-tiered approach. If the interest exceeds a certain rate, the courts will not help the lender collect it in full; if it exceeds another much higher rate, it is a crime.

Today, a large part of the assets of our national banks are consumer loans with an interest rate of 29.9 percent. These include credit cards and home equity loans with additional charges on top of the interest. This rate of interest is a crime in some of the states where the borrowers live and take out the loans. Congress has, however, allowed national banks to lend at the legal rate of interest in the state from which the banks mail the bills, rather than the legal rate where the borrowers live and the loans were made and are collected.

The justification offered for such an interest rate is that these kinds of loans are highly risky and the good borrowers have to pay for the ones that default. It is certainly true that a lot of credit card loans are discharged in bankruptcy, even after recent changes in the law to make it harder for consumers to file bankruptcy petitions. This, however, does not justify a usurious rate of interest. It is unjust to charge borrowers for the worthlessness of other borrowers.

This epidemic of usury is not caused by the free market but by bad national policy. For generations, one of the key things for which bank examiners have looked was the presence of risky loans. Today, examiners are more likely to look for a failure to lend to racial minorities. The standard for banking that once existed was the soundness of its loan portfolio. Now the banks, and especially the national banks, are encouraging people with negative net worth due to constant spending of money that the people do not have. Usury is the only way this can avoid being a losing proposition.

We need to stop issuing dozens of credit cards to one person. We need to stop lending money on obviously fraudulent mortgage applications. We need to allow the local courts to enforce their state usury laws in credit card and mortgage foreclosure cases. If we do, interest rates will decline to something less unjust.

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The Confederate Lawyer column is copyright © 2009 by Charles G. Mills and the Fitzgerald Griffin Foundation, www.fgfBooks.com. All rights reserved.

Charles G. Mills is the Judge Advocate or general counsel for the New York State American Legion. He has forty years of experience in many trial and appellate courts and has published several articles about the law.

See his biographical sketch and additional columns here.

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