Defense of Usury

I was referred to Bentham's work as a reference on the topic of lending and interest: "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.

The idea of usury is seldom considered today. While there are still laws on the books that set a maximum rate of interest, they are very liberal in what they allow, and vary from state to state, such that a financial services firm can simply move its nominal headquarters to the state that allows them to charge as much as they please.

And there is quite some consumer grumbling about it, but most individuals are informed enough to dismiss it: those that grumble the loudest are those who are charged the most, and they are charged the most due to either a bad history of managing their personal finances or lack of proof of a positive history - which, to any objective third party, seems justified in most circumstances.

Given the current financial crisis, caused by political pressure (or facilitation) on financial institutions to extend loans to unqualified borrowers at extremely low rates, public sentiment is, if anything, in favor of charging higher interest rates or denying credit altogether to those who are unable to repay. But the winds of politics are ever-changing and, perhaps a few years or decades after the present crisis, sentiment will again turn to demanding ready credit at low rates to anyone who has a pulse, and the cycle will repeat as it has throughout history.

But returning to Bentham, his defense of usury covers a broad swath of topics related to both consumer and commercial lending: allowing parties to negotiate terms to their own liking, the compounding of interest, the inability of high interest rates to discourage reckless behavior, and the like.

All of this could, perhaps, be shaped into a work that is more structured and systematic than a series of letters - but even such as it is, it provides a good survey of topics related to credit, and provides a reasonable explanation of the necessity of interest.