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History of Political Economy 35.1 (2003) 21-48

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In Medio Stat Virtus:
An Alternative View of Usury in Adam Smith's Thinking

Maria Pia Paganelli

Some specific positions of Adam Smith have been, and still are, sources of problems and debates. Generally, the controversies concern apparent contradictions in the Smithian theory. An example of these puzzling contradictions in Smith is his position on usury laws:

In countries where interest is permitted, the law, in order to prevent the extortion of usury, generally fixes the highest rate which can be taken without incurring a penalty. This rate ought always to be somewhat above the lowest market price, or the price which is commonly paid for the use of money by those who can give the most undoubted security. (WN, II.iv.14)

How could a believer in the beauty and power of the market favor usury laws?

Modern literature tries to answer this question in at least three fashions: a “nonsense” interpretation, a “Keynes-like” interpretation, and a “Stiglitz and Weiss–like” interpretation. I will argue that these interpretations of Smith on usury laws are unsatisfactory because they neglect [End Page 21] Smith's contextual knowledge.1 I will show how the key to understanding the consistency of Smith's position on usury can be found in the difference between his contextual knowledge and ours.2

Unlike most modern economists, Smith is a moral philosopher. Smith has a well-developed classical and, I would argue, consistent view of the world. In general, for the classical Greeks and Romans, extremes are dangerous because they are too far away to be seen and known. A middle position is therefore preferred to an “extreme” position. Moreover, differently from modern economics, which assumes that information is unbiased and behavior is error-free,3 Smith's economics observes and analyzes systematic biased information that leads to systematic errors. By acknowledging systematic bias and preferring a middle position, it is possible to make sense of Smith's position on usury.

Evidence that understanding Smith's defense of usury laws requires the tools of moral philosophy and systematic biases can be found in the extensive use of these two instruments in The Wealth of Nations and The Theory of Moral Sentiments, as well as in the interaction between Smith and his most famous intellectual adversary on usury—Jeremy Bentham.

To show how usury laws make sense in Smith's world, but not in Smith's world seen through some modern lenses, I will consider the possibility of reaching Smith both “from the past” and “from the future.” Reaching Smith's position on usury laws from the past is my present attempt. Trying to reach Smith from the future is what current literature on Smith and usury laws has unsuccessfully tried.

Reaching Smith's Position on Usury with the Instruments Available in His Day

Before being the father of economics, Adam Smith was a professor of moral philosophy. I will therefore look into the “toolbox” of moral philosophy to find interpretative instruments. [End Page 22]

Smith lived during the transition from the ancien régime to modernity. The principles (economic and otherwise) to which Smith subscribed coincide with some principles that are still recognized today, but Smith's understanding of economics was informed by his knowledge of Greek and Roman literature (see Paganelli 2000 and Griswold 1999). So, while Smith rejects a theological justification of usury laws, which was proposed by many before him,4 he also does not embrace a more amoral rationality, which some of his contemporaries of less classical education more likely held.5 As I will show below, Smith's justification of usury laws was nonreligious (in contrast with most of his predecessors) but rested on a moral base (in contrast with most of his contemporaries and successors).

The Classical Medietas

In the eighteenth century, moral philosophy was still heavily based on the works of the ancient Greeks and Romans. Smith gives us evidence in all his works of his deep knowledge of the classics.

The Greeks...


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