Book: Defence of Usury

Overview
Jeremy Bentham’s Defence of Usury (1787) is a set of letters arguing that consensual lending at freely negotiated interest rates should be lawful. Confronting long‑standing religious, moral, and statutory condemnations of “usury,” Bentham reframes interest as the price of money over time, to be governed by the same principles as any other voluntary exchange. He writes as a reformer of commercial law, but also as a moral philosopher: the touchstone is utility, the balance of happiness and harm produced by legal rules.

Core Thesis
Bentham’s central maxim is crisp: “No man of ripe years and sound mind, acting freely, should be hindered from making such bargain, in the way of obtaining money, as he thinks fit; nor… any other man from supplying him.” Interest, he argues, compensates lenders for risk, delay, and inconvenience; its level should vary with circumstances. A fixed legal maximum is arbitrary because risk differs across borrowers and projects. To forbid contracts that both parties prefer, absent fraud or coercion, is to diminish overall welfare.

Critique of Usury Laws
Anti-usury statutes exclude precisely those who need credit most: the poor, the inexperienced, and the innovator. When ceilings are set below the market rate for risky ventures, lenders retreat to the safest borrowers, while the rest are pushed into clandestine markets at even worse terms or denied capital altogether. The laws thus invert their aim, purporting to shield the vulnerable, they strip them of options.

Bentham dwells on the evasions usury laws breed. Complex instruments, penalties, annuities on lives, maritime loans like bottomry, smuggle risk premia back into contracts. The law ends up rewarding opacity and professional chicanery while punishing straightforward bargains. By the same token, the prohibition of compound interest is irrational: when a debtor fails to pay on time, additional interest is simply the ordinary measure of damages for nonperformance.

Replies to Objections
Against paternalism, Bentham rejects the maxim that “necessitous men are not free.” Necessity does not extinguish agency; it sharpens the borrower’s incentive to weigh costs. If the state forbids him to give a high price for urgently needed money, it substitutes its own fallible judgment for his and leaves him worse off. Family protection cannot justify blanket bans; targeted safeguards for minors, wards, or the insane suffice.

He answers the complaint that high interest enriches the idle at the expense of the industrious by noting that lenders commonly acquire wealth through prior industry and savings, and that interest channels idle funds to productive hands. The claim that “money is sterile” mistakes form for function: lent capital becomes tools, stock, wages, it is socially fecund.

In a courteous but firm letter to Adam Smith, Bentham disputes Smith’s tolerance of a modest legal ceiling to screen out “prodigals and projectors.” Market discipline already performs that screening; moreover, “projectors” are often entrepreneurs whose uncertain ventures yield public benefits. To ration them out by statute is to tax invention.

Policy Implications and Effects
Bentham urges repeal of caps on interest and permission for compound interest, with ordinary protections against fraud and exploitation preserved. Free bargaining lowers the cost of credit by widening supply and improving matching; it also promotes circulation of capital toward its most valued uses. Where risk is high, higher rates are not a social vice but a price signal.

Significance
Defence of Usury became a touchstone for liberal political economy and legal reform. By uniting a utilitarian ethic with a clear analysis of credit markets, Bentham helped erode the moral stigma of interest and prepared the ground for nineteenth‑century repeal of usury laws in Britain and beyond. The larger lesson endures: paternal limits on voluntary exchange often harm those they intend to protect.