There is no objective criteria for what rate of interests is “usury”

Usury originally meant the practice of charging interest on loans.  Sometime during Medieval times, the charging interest as such became politically acceptable and the term change to mean charging excessive interest rates.  However, there is no objective definition of what a “fair” interest rate is beyond the rate agreed to by the parties involved, so an attack on usury is an attack on interest rates as such.  There is no such thing as a single “just” interest rate because interest rates in a free market move towards an equilibrium determined by the time-preferences of individual debtors and lenders.

Traders have the right to trade by any terms they wish

The borrower of a loan voluntary enters into a contract. As long as the contract is voluntary, it is immoral for any third party to use coercion to prevent voluntary agreements.

Interest is essential to the investment process

Charging interest is essential to guiding the investment process, which cannot be sustained by charity even it were forthcoming due to the economic calculation problem.  Interest rates are required to direct investments to their most productive use.  Interest-driven investment is essential to economic growth, and therefore to the very existence of industrial civilization. If charging interest were outlawed, industrial societies would quickly collapse due to the inability to efficiently allocate savings.

“Loan sharking” is caused by government failure

Loan-sharking (charging high interest rates backed up by the threat of violence) reflects the fact that the loans are being given to creditors with a high risk of default. The need for violence is due to the failure of governments to see this fact, or to adequately enforce the loan contracts (such as with overly lax bankruptcy laws), rather than any immorality inherent in moneylenders.

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This was originally published on April 26, 2012.