17. The Moneylender

0:00Chapter 17 The Moneylender Ever since biblical times when the moneylenders were driven from the temple, they have been scorned, criticized, vilified, persecuted, prosecuted and caricatured. Shakespeare in The Merchant of Venice characterized the moneylender as a Jew scurrying around trying to exact his pound of flesh. In the movie The Pawn Broker, the moneylender was an object of loathing. The moneylender, however, together with his first cousins, the usurer, the pawnbroker and the loan shark, have been badly misjudged. Although they perform a necessary and important service, they are nevertheless extremely unpopular.

0:48Lending and borrowing take place because people differ as to their rate of time preference, The rate at which they are willing to trade money they presently possess for money they will receive in the future. Mr. A may be anxious to have money right now and not care too much about what money he may have in the future. He is willing to give up $200 next year in order to have $100 now. Mr. A has a very high rate of time preference. At the other end of the spectrum are the people with very low rates of time preference. To them, future money is almost as important as present money. Mr. B, with a low rate of time preference, is willing to give up only $102 next year in order to receive $100 now.

1:44Unlike Mr. A, who cares much more about present money than future money, Mr. B would not give Give up a large amount of future money for cash in hand. It should be noted that a negative time preference does not exist, that is, a preference for money in the future over money in the present. This would be equivalent to saying that there would be a preference toward giving up $100 in the present in order to get $95 in the future. This is irrational unless there are conditions other than time preference which operate. For example, one might want to purchase protection for money that is unsafe now but will be safe a year hence, etc.

2:31Or one may want to savor his dessert and postpone consumption until after dinner. Dessert before dinner would then be considered a different good than dessert after dinner. No matter how similar the two goods were in physical terms, there is thus no preference shown for a good in the future over the same good in the present. Although it is not necessary, it is usual for a person with a high time preference, Mr. A, to become a net borrower of money, and for a person with a low time preference, Mr. B, to become a lender. It would be natural, for example, for Mr. A to borrow from Mr. B. Mr. A is willing to give up $200 a year from now in order to get $100 now, and Mr. B would be willing to loan $100 now if he can get at least $102 after one year has elapsed.

3:35If they agree that $150 is to be repaid a year hence for a present loan of $100, they both gain. Mr. A will gain the difference between the $200 he would have been willing to pay for $100 now, and the $150 that he will actually be called upon to pay. That is, he will gain $50. Sector B will gain the difference between the $150 that he will actually get a year hence and the $102 that he would have been willing to accept in a year for giving up the $100 now, a gain of $48. In fact, because money lending is a trade like any other trade, both parties must gain or they would refuse to participate.

4:29A moneylender may be defined as someone who loans out his own money or the money of others. In the latter case, his function is that of intermediary between the lender and borrower. In either case, the moneylender is as honest as any other businessman. He does not force anyone to do business with him, nor is he himself compelled. There are, of course, dishonest moneylenders, just as there are dishonest people in all 1. Money lending is infamous because it is frequently accompanied by violence. Borrowers or victims unable to pay their debts are often found murdered, usually by the loan shark.

5:25Those who borrow money from moneylenders usually have contracts with them to which they have fully agreed. One is hardly a victim of a moneylender if one has agreed to repay a loan and then reneges on the contractual promise. On the contrary, the moneylender is the victim of the borrower. If the loan, but not the repayment, is consummated, the situation is equivalent to theft. There is little difference between the thief who breaks into the money lenders office and steals money and the person who borrows it contractually and then refuses to pay it back. In both cases the result is the same. Someone has taken possession of money which is not theirs.

6:12Killing a debtor is an unjust overreaction, just as the murder of a thief would be. The primary reason money lenders take the law into their own hands, however, and do not hesitate to use forceful means, even murder, is that money lending is controlled by the underworld. But this control came about virtually at the public's request. When courts refuse to compel debtors to pay their rightful debts, and they prohibit the lending of money at high rates of interest, the underworld steps in. Whenever the government outlaws a commodity for which there are consumers, be it whiskey, drugs, gambling, prostitution or high interest loans, the underworld enters the industry that law-abiding entrepreneurs fear to service.

7:05There is nothing in whiskey, drugs, gambling, prostitution or money lending that is intrinsically criminal. It is solely because of a legal prohibition that gangland methods become associated with these fields. 2. Money is sterile and produces nothing by itself. Therefore, any interest charge for its use is exploitative. Money lenders who charge abnormal interest rates are among the most exploitative people in the economy. They Richly Deserve the Approprium They Receive Apart from the ability of money to buy goods and services, having money earlier rather than later provides an escape from the pain of waiting for fulfillment.

7:55It fosters a productive investment, which at the end of the loan period, even after paying the interest charge, yields more goods and services than at the beginning. As for the exorbitantly high rates of interest, it should be understood that in a free market, the rate of interest tends to be determined by the time preferences of all the economic actors. If the rate of interest is inordinately high, forces will tend to develop which will push it down. If for example, the rate of interest is higher than the time preference rate of the people If the interest rate shows no tendency to decrease, this indicates not that it is too high, but that only a high rate of interest can equilibrate the demand for loans and satisfy the time preference rate of the economic actors.

8:56The critic of high interest rates has in mind a fair rate of interest. But a fair rate of interest, or a just price, does not exist. This is an atavistic concept, a throwback to medieval times when monks debated the question, along with the question of how many angels can fit on the head of a pin. If there is any meaning to the fair rate of interest doctrine, 3. Money lenders prey upon the poor by charging higher rates of interest than they charge other borrowers. It is a common myth that the rich compose virtually the whole money lending class and the poor virtually all the borrowing class.

9:43It is a common myth that the rich compose virtually the whole money lending class and the poor virtually all the borrowing class. This however is not true. What determines whether a person becomes a net borrower or lender is his rate of time preference, not his income. Rich corporations that sell bonds are borrowers, for the sale of bonds represents money borrowed. Most wealthy people who own real estate or other properties which are heavily mortgaged are almost certainly net borrowers, not net lenders. On the other hand, every poor widow or pensioner with a small bank account is a moneylender.

10:30It is true that moneylenders charge the poor higher rates of interest than they charge other people. But when stated in this way, it can be misleading. For money lenders charge higher rates of interest to individuals who are greater risks, those who are less likely to repay the loan, regardless of wealth. One way to decrease the risk of default, and therefore the rate of interest charged, is to put up collateral, or real property, that would be forfeited if the loan is not repaid. Since rich people are more capable of putting up collateral for loans than poor people, their loans are granted at lower rates of interest.

11:15The reason, however, is not because they are rich, but because the lender is less likely to undergo losses in case of default. There is nothing untoward or unique about this situation. Poor people pay a higher rate for fire insurance since their houses have less fireproofing than rich people's houses. They are charged more for medical care since they are less healthy. Food costs are higher for poor people because there is more crime in their neighborhoods and crime raises the cost of conducting a business. This is, to be sure, regrettable, but it is not the result of malice against the poor. The moneylender, like the health insurance company and the grocer, seeks to protect his investment.

12:04Imagine the results of a law which prohibits usury, which can be defined as charging a rate of interest higher than the lawmaker approves of. Since the poor and not the rich pay the higher interest rate, the law would have its first effects on them. The effect would be to hurt the poor, and, if anything, enhance the rich. The law seems to be designed to protect the poor from having to pay high interest rates, but in reality it would really make it impossible for them to borrow money at all. If the money lender must choose between loaning money to the poor at rates he regards as too low and not loaning them any money at all, it is not difficult to see what choice he will make.

12:55What will the money lender do with the money he would have loaned to the poor but for the prohibitory law? He will make loans exclusively to the rich, incurring little risk of non-repayment. This will have the effect of lowering the interest rates for the rich, Because the greater the supply of a good in any given market, the lower the price. The question of whether or not it is fair to prohibit exorbitant rates of interest is not now under discussion. Only the effects of such a law. And these effects are, quite clearly, calamitous for the poor.