My title is The Enforcibility of Interest under a Title Transfer Theory of Contract.
To many libertarians, the idea that there might be limits to the legitimate enforcement of interest on loans will seem unattractive, a medieval relic of the prejudice against usury.
But such limits may be implicit in what I take to be the most promising libertarian theory of contracts,
Contracts, the Title Transfer Theory, defended in various ways by Murray Rothbard, Williamson
Evers and Randy Barnett, though I certainly don't mean to suggest that those authors
would agree with the implications I draw here.
This account actually seems to pose a challenge to any enforceability of interest in loan
contracts.
For how can the lender legitimately recover from the borrower as interest, a good that
But the lender never transferred to the borrower in the first place.
Indeed, given the double inequality of value, how can we even say that principal plused
interest at a later time is so much as the equivalent of what was transferred at the
earlier time?
I shall defend a solution to this problem while noting the solution's limitations.
That is to say, I shall in part concede and in part resist the anti-interest implications
of the title transfer theory of contract.
The central insight of the title transfer theory is that the enforceability of contracts is
not a basic moral principle, and so must be grounded in something else enforceable, as,
for example, promises and expectations are not. That foundation is property rights. And,
assuming the self is inalienable, the enforceability of contracts, even service contracts, must
be grounded in the enforceability of rights to external property. The bridge between property
Property and Contract is the idea of conditional transfer.
Suppose you transfer to me title to some bit of external property on condition that I deliver
some good or perform some service.
Then if I don't do it, the condition for transfer isn't met and the title reverts to you.
I am now in the same position as anyone else in wrongful possession of someone else's property.
What are my enforceable obligations when I am in wrongful possession of someone else's
property?
First, I have to give the property back, or the nearest equivalent if I've lost or destroyed it.
And second, I have to pay damages. Why damages? Because I need to restore not just the present property, but the past property for the period when it was away from your control.
And since, barring access to a time machine, I can't literally restore the past property, damages are the nearest equivalent.
And here, by the way, I don't think it matters whether my being in wrongful possession is culpable or not.
If I mistakenly walk off with your umbrella, my innocence doesn't entitle me to keep it.
Being forced to restore property and pay damages is not a punishment for wicked conduct.
In the case of damages, how is the nearest equivalent to be determined,
either for the temporary or for the irretrievable loss of some property?
This is a notoriously tricky question.
question. Going by prevailing market value may be unfair if what was lost had special
sentimental value, or if the owner had been relying to his detriment on the unexpectedly
absent item. On the other hand, placing too much emphasis on sentimental value runs the
risk of placing the restitutor at the mercy of the owner's testimony as to subjective
valuations difficult to verify, and placing too much emphasis on reliance ignores the
are the difficulty of determining what counterfactual opportunities really were foregone as the result of the item's absence.
These are issues at least as much for wise particular judgment as for abstract theory,
and so may belong in part to the province of the arbitrator rather than to that of the philosopher.
In a competitive judicial system, arbitrators with a reputation for wisdom and fairness will have a chance to out-compete their rivals.
So then, if you transfer property to me on condition that I do something that I then don't do, the ownership reverts to you and I thus have an enforceable obligation to return the property, or when that's impossible, the nearest equivalent, as well as to pay damages for the period of deprivation.
What I do not have, according to this theory, is an enforceable obligation to do the thing I originally agreed to do.
Since the self is inalienable, I cannot transfer title to my future services.
What if what I agreed to do was hand over a good rather than perform a service?
Here it depends whether what I was agreeing to was A, to transfer title in the future,
or B, to transfer title now to some good to be delivered in the future.
Rothbard seldom quotes Hobbes favorably, but he does so on this point.
So here's a quote from Hobbes.
Words alone, if they be of the time to come and contain a bare promise,
are an insufficient sign of a free gift and therefore not obligatory.
For if they be of the time to come, as tomorrow I will give,
they are a sign I have not yet given, and consequently that my right is not transferred,
but remaineth till I transfer it by some other act.
But if the words be of the time present or past, as I have given or do give to be delivered tomorrow,
then this is my tomorrow's right given away today. There is a great difference in the
signification of the words between I will that this be thine tomorrow, and I will give it
thee tomorrow. Further, the word I will in the former manner of speech signifies a promise of
an act of the will present, but in the latter it signifies a promise of an act of the will to come.
What would have to look at the wording and the circumstances of a contract to determine whether it is best interpreted as a present transfer of title or as a promise to transfer title in the future?
If it is the former, then I may legitimately be compelled to deliver the good up to you since it is now yours.
If it is the latter, then I may keep the good, paying you instead the original consideration plus damages.
There is one circumstance in which a contract must be interpreted as a promise to transfer title in the future, rather than as a present transfer of title, and that is when the contractor does not currently possess title to the good in question.
You cannot transfer what you do not have, and this is where the enforceability of interest can become problematic.
Suppose you lend me $1,000 today, on condition that I pay you back the same amount plus an additional $100 a year from now.
If I don't meet the condition, the ownership of the $1,000 reverts to you and I must pay it back.
If I've spent it all, I still owe it to you, just as if I stole off with your umbrella, whether intentionally or by mistake,
I owe you back the umbrella or the value equivalent, even if I've since destroyed or lost it.
You may not be able to collect the thousand from me right now, but once I am able to pay, you may forcibly collect, though there may be issues of proportionality as to how much of my total possessions you may seize at one time.
But what about the additional $100 of interest? Can you collect that as well? It depends.
I don't think I can be interpreted as having transferred title to $100 to you.
First, I may not have title to an extra $100 at the time of contract, and what I do not have, I cannot transfer.
and Transfer. If I title to it without having possession of it, as for example, if someone
else had stolen it, I could transfer title whereupon you'd be entitled to recover from
the wrongful possessor. Second, even if I do have title to an extra $100, I don't think
I could be interpreted as having transferred title over it to you, conditionally or otherwise,
because barring contractual stipulation to the contrary, as in the case of bonds or collateral
Does that mean that interest payments are unenforceable in the case of unsecured loans?
No, because in addition to returning the principal, I also owe you damages.
And while we've seen that the determination of damages can be tricky,
it's surely easier when both parties have committed themselves on paper to what they take the nearest equivalent to be.
Thus, if contractors stipulate that $1,000 now is being exchanged against $1,100 a year from now, it is not unreasonable to set the damages at $100.
So the interest agreed on is a rough or provisional guide to damages, but it cannot, I think, be decisive.
Suppose that in desperation you agree to pay me $10,000 a year from now in exchange for $100 now, but when the time comes you are unable to do so.
To keep things simple, let's also stipulate that I don't rely to my detriment on the promised $10,000.
So you owe me $100 plus damages. But is it really plausible to place the value of the damages at $9,900?
After all, keeping in mind the Austrian principle of the double inequality of value,
the valuation of interest in the contract was not, strictly speaking, the $100 at time 1 and $10,000 at time 2 were of equal value.
If that had been the case, neither contractor would have bothered to make the exchange.
All it shows is that you valued $100 at time one more than $10,000 at time two,
and that I valued $100 at time one less than $10,000 at time two.
That indicates only that paying me $10,000 at time two would be sufficient to make me whole,
not that it would be necessary. And it is my valuations, not yours, that count,
Since the point of restitution is to make me whole, rather than, as it were, to make you unholy.
As I've described the case, it is unlikely that making me whole requires paying me the entire contracted amount.
Though figuring out what it actually does require will again be, at least in part, the province of arbitratorial judgment, rather than philosophical argument.
And this suggests that in a just libertarian society, there will indeed be limits to the enforceability of quote, usury, end quote.
This does not mean, however, that highly usurious contracts will never be in the interest of contractors.
For there are ways of securing compliance with agreements other than by force, such as by reputational effects, credit reports, and the like.
Such effects may well give lenders sufficient expectation of repayment to make it in their interest to enter into such contracts,
in its predictions of the effects of freed markets on poverty, it is likely that borrowers will stand in need of highly usurious loan contracts far less often than they do at present.