Chapter 4: The Great Experiment
American Bankruptcy
The first stock market panic in the United States left many wealthy speculators in a terrible financial situation. William Duer, a prominent land speculator lost a lot and ended up bankrupt after overextending his borrowings. Congress was yet to pass a bankruptcy bill. Defaulters like Duer still faced jail time during this period. Under bankruptcy laws, one was set free from their debts and creditors had no claim over them. As time progressed, public opinion went against jailing small debtors and the law began to change.
Repeal of British Usury Laws
In Britain, people began to consider that to capitalize on the industrial revolution, flexibility rather than strictness needed to be applied to the system. Usury laws were not in line with market rates of interest. Usurers created artificial demand for commodities that did not exist. Adam Smith was concerned that usury war is now seen in economic terms instead of moral terms. Bills to control the situation were slow in their implementation. Ricardo did not agree with some of the government's economic policies. He discouraged protectionist policies and described comparative advantage. Ricardo who had Portuguese descent argued against usury in terms of its effect on the free market forces. He also argued that rather than taking loans, the government should have defrayed expenses during funding of operations.
In 1935, an act of parliament paving the way for operations by loan society worked towards reducing the impact of usury in society. Small banks provided mortgages and took deposits. By 1940, laws stipulating the specific amount to due on loans had been passed. Some new laws came with higher payment rates but protected borrowers from exorbitant penalties. In 1844, an act was passed preventing imprisonment of defaulters of less than twenty pounds. However, some people felt this provided a loophole for defaulters. In 1854, laws of usury got repealed. The credit would, therefore, end up being cheaper than before.
The States and the Church
Civil War Debt
Uncertain repayment schedules were common in the United States. Greater investment was taking place in the bonds markets. American bonds had set days for redemption. The war made investing in bonds popular. Although the war lasted less than two years, it required private sector financing. Once the war was over and people saw the potential in these bonds, investment in them was increased.
Repeal of Sorts
The fight against usury laws resumed after the war. Official usury ceilings in some states like Massachusetts. New York would later follow suit and usury laws faced repeal although the strong debate was involved between those who were pro-usury and those against the laws. Usury laws in the United States were considered outdated and more of a nuisance rather than necessity.
American Tontines
Tontines were disguised under a different name. They went hand in hand with the offers of insurance. They remained in the US even after being phased off in Britain. The complexity in these policies allowed them to be offered for a long time before finally being declared illegal. They gained popularity with the help of usury laws.
Marx on Usury
Marx saw usury as a means of enslaving the peasant people. He saw usury to also exist among countries with some taking advantage of others. His theory was close to that of Aristotle who saw it be theft. Usury was a means for capitalists to accumulate wealth for further domination.
Debt as a Weapon
The debt was used most creatively in the nineteenth century. Capitalism was strongly dependent on debt financing. It increased the scope of indebtedness from an individual to the masses. Control of the money market ended up in control of stock markets giving those in control a lot of power.
The Rise of the Loan Shark
Usury was still practiced after the civil war. Expenses had to be paid for with the help of loans. Creditors enforced the terms of a loan to the letter. There were not enough lending societies to meet the high demand caused by rising populations in the city. Loan sharks got into the picture to fill this void in the market and cover those who could not get funding from loan societies. Their terms, however, were terrible for debtors.
Information from Geisst Versus Information from his Sources
Most of the information that comes from sources in his work is on the theories of past philosophers. Geisst quotes Karl Marx and Aristotle on their theories about usury and what their opinion was on the matter. Historical dates like the passing of important bills and durations of wars were all obtained from secondary sources. His own information comes mostly in the form of the opinions he gives as to the impact of usury on different people at different times.
Difficult Section to Comprehend
The industrial age came with a demand for property and loans. Moral questions regarding usury remained. Compound interest became a greater topic of discussion in the nineteenth century. Compound interests' impacts were seen to be greater than those of usury. Speculators borrowed to finance their activities. Speculative deals ended up badly most of the time. Use of leverage for lending became greatly accepted in early American society. Strict penalties were set for loan defaulters. Reputation and social standing remained the major credentials for acquiring a loan. In relation to America, it is hard to understand how a society that had so much ethnic diversity would have a common moral ground. It is also difficult to understand how was it possible to distinguish usury compound interest in a society that was still to define its laws?
Question Section
What would have happened if the church maintained its strong stance on usury? Would the modern day system of banking that is currently in existence have been developed? Was usury a necessary evil for the building of modern day society? If the shortcomings of usury laws had were adequately covered in the new acts that different lawmakers were formulating, would the void that was filled by loan sharks have been filled already and thus their existence avoided? How important is war in appraising the value in bonds as it did for both Britain when they battled France and America during the civil war? Would barter trade have helped avoid usury if it were used in place of money?
