A theoretical-empirical investigation of usury laws

Abstract

The concept of usury is found in Western man's earliest writings on ethical principles, e.g. the Bible and the works of Aristotle, and has been embodied in statutes forbidding (or limiting the rate of) interest. In the United States, usury laws that regulate the rate of interest are s till found in the majority of states. Although economists, with some notable exceptions viz. Keynes and A. Smith, have generally opposed the concept of usury, i.e. regulating the rate of interest through statutes, interest rates on certain debt investments, primarily the residential mortgage, are constrained by law. Investigating the origin of the concept of usury, this work analyzes the views of early proponents of usury regulation, e.g. the medieval church and the Scholastics (post-Aquinas), and how the concept changed from the prohibition of interest to the limiting of the rate of interest. The views of prominent economists are presented and analyzed along with recent publications dealing with the problem of interest rate control (statutory). Since market interest rates reached historical highs during the period 1971-1974, an occurrence that can be traced to Federal Reserve policies preceding and during this period, these years provided empirical data which facilitated the study of usury regulation A portfolio model of a utility maximizing financial intermediary holding mortgages (i.e. supplying funds for mortgage loans) and other financial assets was derived. From the predictions of the model empirical tests to ascertain the effect of usury laws on building permits, residential construction expenditures and credit rationing (a consequence of binding usury ceilings) were conducted. All gave confirmation to the hypothesis that usury statutes have a significant effect on these magnitudes.