leaders treated the subject more thoroughly, but from

a moral viewpoint. The exploitation of the proverty-stricken
by rich and powerful creditors appeared sinful to the
Christians of that period, whose religion stressed meekness
and charity as among the greatest virtues and played down
the value of earthly goods. Secular legislation responded
to the Church's influence and in general, interest and usury
3/
were regarded as synonymous.

The increase in economic activity and expansion

of personal freedom that came with the Renaissance forced modifications in the prevailing views concerning

interest rates.

Recognizing that man was imperfect, Luther

and other 15th century reformers began to concede that
creditors could not be prevented from charging interest.
Calvin, in the 16th century, rejected the scriptural
basis for interest prohibition on grounds of conflicting
interpretations and changed circumstances, but still
advocated some control. Turgot, an eighteenth century
French economist, noted that money is the equivalent
of land, and hence the owner will not be inclined to loan

3/ Eugene von Bohm-Bawerk, Capital and Interest
Volume 1, 4th Edition, 1921, translated by
George Huncke and Hans Sennholz (South Holland,
Illinois: Libertatian Press, 1959), pp. 13-24.

50

- 4

his money unless he can expect a return as great as he

would obtain through the purchase of land.4/

Legal restrictions on payment of interest

were generally relaxed in the 18th century, but the
belief continued that people who needed to borrow
funds should be protected against overly high charges.
Consequently, most nations maintained legal maximum
usury rates at "reasonable" levels. Usury laws in
the United States were inherited, in large part, from
the British in colonial days. But, while these laws
generally remain in force in the U.S., in Great Britain
they, along with other restrictions on commerce and trade,
came under intense pressure in the 19th century and

were finally repealed in 1854. 57

One factor complicating attempts to maintain interest rate ceilings arose from the fact that risks and administrative expenses in making very small loans were so great that legitimate dealers could not handle such advances with rate ceilings. This situation fostered illegitimate loan "sharks" with exorbitant interest charges. As a result, it was eventually recognized that higher rates

4/ Ibid, pp. 25-60.

5/ Homer, p. 187.

51

should be permitted on small loans than on large loans,

and the small loan laws emerged.

Arguments for Usury Laws

As noted, ethical and religious arguments

Another

have been relied on to a great extent to justify either
the prohibition or limitation of interest payments.
factor which has been instrumental in sustaining
support for usury laws has been public opinion which
generally viewed the small borrower as an underdog at
the mercy of large well-financed institutions from which
he borrows. As a consequence of this public attitude,
legislators have been reluctant to raise interest rate

ceilings.

Several economic arguments also have been

used to justify usury laws, and these considerations
tend to bolster the moral and political reluctance to
raise rate ceilings. The first of these economic

arguments asserts that whereas most lenders are
knowledgeable about conditions in the particular credit
market in which they operate, it is readily observable
that a sizable number of borrowers are unsophisticated
and naive. It is contended that these borrowers
are concerned only with obtaining credit and do not even
know what rate of interest they are paying. Further that

-6

relatively few make a serious effort to study conditions

or to shop around for better terms or better timing.

Finally it is argued that contracts made with such

unknowing borrowers at rates above those existing in

the market for similar types of loans represent a distortion of competitive forces and provide a windfall to lenders.

A similar argument for the regulation

of interest rates is related to the comparative market power of borrowers and lenders. Since lenders are usually fewer in number and larger in resources than borrowers, it is contended that they can exert market power in order to command artificially high rates. Hence, usury laws are necessary to restore competitive balance between the two groups.

Another economic argument for interest

rate regulation is concerned with the economy in general. It has been contended that low interest rates are desirable to encourage more investment and consumption and promote faster economic growth. Functions of Interest Rates

Interest rates play a strategic role in

the economy.

Interest rates are prices, and, as is

true of all prices, they serve a rationing function.
Rates are the prices that allocate available funds, and
hence command over resources, among competing uses.
Normally, the term "interest rate" is used in reference to
return on marketable securities or a loan of funds. However,

53

return and affect decisions regarding amount to

be saved. To wealth holders and managers of funds, interest rates or yields are a common denominator for evaluating alternative forms of holding wealth and alternative avenues for placing funds.

At any time, some individuals or businesses

find that with their incomes, tastes, and investment prospects it is not desirable to pay the going rate for funds. They are "priced out of the market,"

just as there are those who find that at current

prices it is not expedient to hire a servant, eat steak, or purchase a luxury automobile.

Any movement in

interest rates (as with other prices) will cause a

reevaluation of projects which require borrowed funds.

54