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Chapter 4 The Great Experiment The initiators of the modern credit system take as their point of departure not an anathema against interest-bearing capital in general, but on the contrary, its explicit recognition. —Karl Marx, 1867 As society grew larger and entered the industrial age, the demand for loans and property increased. Usury prohibitions were under pressure in Britain and the United States because they were seen by many as standing in the way of progress. As experience in the eighteenth century proved, credit banking made loans easier to obtain. But the moral stigma surrounding usury and indebtedness lingered. Consumption loans still provided fodder for those who wanted to keep the usury prohibitions. Business loans provided the argument for greater laxity. The last remaining question was if the prohibitions would still hold sway if usury ceilings were abolished. After almost four millennia of prohibitions and condemnations, the abolishment of usury ceilings was an experiment that became an inexorable force in the face of rapid social and economic developments. Before Waterloo , the Napoleonic Codes had been introduced in France. One of them purposely ignored the French usury laws, giving a clear signal that strictures on lending at interest were to be relaxed. That experiment was watched with great interest by the English. This put them in the uncomfortable position of looking to the French for indications of what might happen in their own country if interest rate levels were free to find their “natural” level. What became a great experiment on both sides of the Atlantic was a much trickier issue than it seemed. If the British and Americans rescinded their usury laws, both societies would face uncertainty on a large scale. What would happen to interest rates for consumption and business loans? 138 Chapter 4 The answer was clearer for the latter since business loans operated outside the usury laws to a great extent, as they had for years, but the effect on personal consumption loans was murky. Perhaps they would also find a natural level and not be punitive on borrowers. It was universally agreed among the majority of lawmakers that change was coming. The only question was exactly when. Compound interest was discussed more in the nineteenth century than in the past, due to the lingering influence of Richard Price. The practice was challenged frequently in court in the United States and Britain for most of the century. Generally, the courts on both sides of the Atlantic ruled that the practice was acceptable as long as borrowers were aware of it, but it could never be applied by lenders willy-nilly. Anatocismus was recognized for what it had always been, another method to avoid the usury laws and compensate lenders at the expense of borrowers. Even after the usury laws had been repealed in Britain and some American states, the issue continued because borrowers recognized that the math of compound interest could do more harm than simple usury itself. Market developments also put pressure on lawmakers. Since the advent of stockjobbing in the late seventeenth century, speculation had created even thornier problems for the usury laws since many speculators borrowed to finance their securities positions. Since the founding of the Bank of England , England had grown accustomed to trading in intangible assets. The appetite for speculation was dampened but not extinguished by the South Sea Bubble. Stockjobbing increased and with it a growing number of speculators who, like lenders before them, learned that speculating could certainly be better than working for a living. In America, that sort of speculation involved land to a larger extent than it did in Britain. The Americans also acquired a taste for securities trading and suffered two panics in their rudimentary markets before 1800. Like the English, they watched many of their well-known public figures get ensnared in speculative deals and come to a bad end, suffering loss of reputation as well as fortune . This complicated an already thorny situation even further, as did the new trend of trading securities rather than tangible goods. Was the idea of excessive interest dying or did it still apply to the complexities of modern life in the early nineteenth century? Those hoping for its demise would find a little of each as the decades wore on. During the eighteenth century, the concept of leverage made its appearance on the financial stage. Once stockjobbers, adventurers, and serious businessmen recognized its potential to create profits, the die was cast. The .145] Project MUSE (2024-04-25...

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