November 11, 2011

The Eminently Real Free Market (XLVII): Sketchy Stories (35): The “Usury” Suspects

Sketchy story number 11:
The international credit system: usury unchained by government. (32)
The suggestion is that “usury”—that quaint term for interest charged on a loan—should be chained by an institution known better for the chains it can forge than for its judicious apportioning of risk.
Mr. Ferrara’s reference notes have inspired many posts here, and this one is no exception. In a reference note for the previous story, Mr. Ferrara had thanked University of Oklahoma College of Law Professor Brian McCall for helping him understand the daily workings of the Fed,[1] which insight served TCATL’s rhetorical purposes in ways we cannot discern. Now he cites Professor McCall’s defense of “the lost theory of usury” which, in our opinion, should remain lost.[2] Once again, Mr. Ferrara’s stories function as dress rehearsals for the extended treatment he will give certain topics in later chapters. Our comments will serve a corresponding purpose.
Professor McCall’s 66-page study—which manages to discuss the morality of charging interest apart from that of the cartelization of banks and fractional reserve banking[3]—deserves to be the focus of one or perhaps several posts;  unfortunately it cannot be this one. We merely note that Mr. Ferrara's repeats his usual complaint that there is no free market in credit to the degree that the State is involved, with which Austro-libertarians concur. (But, of course, he cannot refrain from confusingly putting “free” in scare quotes.) There is, he rightly notes,
rather government-supported credit tyranny that has sparked a small but growing consumer revolt in the form of PayPal and other services that are being formed in the hope of circumventing banks and credit card companies. (33)
Now, unless PayPal offers barter services we haven’t yet heard about, it is still functioning as a broker for the exchange of goods and services for Federal Reserve Notes.
Anyway, this week got away from us, and so we postpone our preliminary attempt to do justice to interest until next week.
To Be Continued 
[1] Mr. Ferrara expresses indebtedness to him “for this understanding of how the Fed operates at the level of everyday banking by ordinary customers.” (331 n. 61) That is, he learned that “[a]ll the commercial banks in the Federal Reserve System have accounts with the Fed that are balanced electronically on the Fed’s computers at the end of each business day.” We suspect that he is also indebted to Professor McCall for his defense of the Scholastic hybrid of Scripture, Aristotelian “equality of exchange” nonsense, the economically meaningless distinction between consumer and business loans, nescience about time preference, and the pragmatic significance of Islamic conceptual end-runs around that praxeological reality.
[2] Brian M. McCall. “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” Cardozo Law Review 30.2 (2008): 549-615. A foretaste of where we'll be going with this:
Calvin's main contribution to the usury question was in having the courage to dump the prohibition altogether.
Murray Rothbard, “The Economics of Calvin and Calvinism.”
A usury law, like any price control, is analogous to placing a limit on a thermometer’s scale. A cap on a thermometer does not reduce the fever of the sick person; it simply keeps people from assessing the true conditions. A usury law creates an illusion of a lower rate of discount than market transactors voluntarily agree upon.
There is no surer way to identify a crackpot theory of economics than to examine what the economist’s theory of interest is. If he denies the legitimacy of interest in morally legitimate profit-seeking transactions, he is not an economist; he is a monetary crank. If he denies interest as a theoretically inescapable tool of economic analysis, he is a true crackpot, as nutty as a man who promotes the idea of the possibility of a perpetual motion machine. But he is far more dangerous: legislators do not listen to “scientists” who would propose making illegal all machines except perpetual motion machines. Legislators have on occasion passed usury laws that are based on the idea that interest is illegitimate.
North, Ibid., 509 n. 16.
Note well: Dr. North, an economic historian, aims his epithet “crank” and “crackpot” at economists who, respectively, either morally condemn interest or deny its indispensability to their analysis of human action. (It is hard to do both coherently.) He and Professor McCall differ on the application of the description “morally legitimate profit-seeking transactions.” Dr. North would apply it to consumer loans, while Professor McCall, who is not an economist, but a professor of law, would withhold it from them.  
[3] Professor McCall does mention fractional reserve banking (FRB) as a factor complicating “the law’s” evaluation of the nominal amount of money lent and the nominal amount repaid (Ibid., 609-610). If the latter is greater than the former, the difference may reflect, not necessarily interest, but merely the decrease in purchasing power consequent to the increase in the supply of Federal Reserve Notes, which that same “law” currently commands citizens to honor as “legal tender for all debts, public and private.” The lender may only be estimating how much compensation he is entitled to because of that decrease. Professor McCall does not condemn FRB, however, even though, apart from it or from the even more causally basic credit-expanding cartel of banks known as the Federal Reserve System, it is hard to imagine the origination of the moral hazards that illustrate his moral complaint.