WEBVTT NOTE 17. The Moneylender 1 00:00:00.000 --> 00:00:04.000 Chapter 17 The Moneylender 2 00:00:04.000 --> 00:00:16.000 Ever since biblical times when the moneylenders were driven from the temple, they have been scorned, criticized, vilified, persecuted, prosecuted and caricatured. 3 00:00:16.000 --> 00:00:26.000 Shakespeare in The Merchant of Venice characterized the moneylender as a Jew scurrying around trying to exact his pound of flesh. 4 00:00:26.000 --> 00:00:31.440 In the movie The Pawn Broker, the moneylender was an object of loathing. 5 00:00:31.440 --> 00:00:36.400 The moneylender, however, together with his first cousins, the usurer, the pawnbroker 6 00:00:36.400 --> 00:00:40.400 and the loan shark, have been badly misjudged. 7 00:00:40.400 --> 00:00:48.680 Although they perform a necessary and important service, they are nevertheless extremely unpopular. 8 00:00:48.680 --> 00:00:55.020 Lending and borrowing take place because people differ as to their rate of time preference, 9 00:00:55.020 --> 00:01:00.040 The rate at which they are willing to trade money they presently possess for money they 10 00:01:00.040 --> 00:01:02.920 will receive in the future. 11 00:01:02.920 --> 00:01:09.360 Mr. A may be anxious to have money right now and not care too much about what money he 12 00:01:09.360 --> 00:01:11.400 may have in the future. 13 00:01:11.400 --> 00:01:18.740 He is willing to give up $200 next year in order to have $100 now. 14 00:01:18.740 --> 00:01:23.040 Mr. A has a very high rate of time preference. 15 00:01:23.040 --> 00:01:28.480 At the other end of the spectrum are the people with very low rates of time preference. 16 00:01:28.480 --> 00:01:33.520 To them, future money is almost as important as present money. 17 00:01:33.520 --> 00:01:40.920 Mr. B, with a low rate of time preference, is willing to give up only $102 next year 18 00:01:40.920 --> 00:01:44.800 in order to receive $100 now. 19 00:01:44.800 --> 00:01:51.400 Unlike Mr. A, who cares much more about present money than future money, Mr. B would not give 20 00:01:51.400 --> 00:01:55.920 Give up a large amount of future money for cash in hand. 21 00:01:55.920 --> 00:02:01.940 It should be noted that a negative time preference does not exist, that is, a preference for 22 00:02:01.940 --> 00:02:05.940 money in the future over money in the present. 23 00:02:05.940 --> 00:02:11.600 This would be equivalent to saying that there would be a preference toward giving up $100 24 00:02:11.600 --> 00:02:16.240 in the present in order to get $95 in the future. 25 00:02:16.240 --> 00:02:22.720 This is irrational unless there are conditions other than time preference which operate. 26 00:02:22.720 --> 00:02:29.200 For example, one might want to purchase protection for money that is unsafe now but will be safe 27 00:02:29.200 --> 00:02:31.960 a year hence, etc. 28 00:02:31.960 --> 00:02:38.740 Or one may want to savor his dessert and postpone consumption until after dinner. 29 00:02:38.740 --> 00:02:44.580 Dessert before dinner would then be considered a different good than dessert after dinner. 30 00:02:44.580 --> 00:02:51.220 No matter how similar the two goods were in physical terms, there is thus no preference 31 00:02:51.220 --> 00:02:57.180 shown for a good in the future over the same good in the present. 32 00:02:57.180 --> 00:03:02.420 Although it is not necessary, it is usual for a person with a high time preference, 33 00:03:02.420 --> 00:03:09.460 Mr. A, to become a net borrower of money, and for a person with a low time preference, 34 00:03:09.460 --> 00:03:12.680 Mr. B, to become a lender. 35 00:03:12.680 --> 00:03:19.340 It would be natural, for example, for Mr. A to borrow from Mr. B. Mr. A is willing to 36 00:03:19.340 --> 00:03:27.860 give up $200 a year from now in order to get $100 now, and Mr. B would be willing to loan 37 00:03:27.860 --> 00:03:35.300 $100 now if he can get at least $102 after one year has elapsed. 38 00:03:35.300 --> 00:03:43.300 If they agree that $150 is to be repaid a year hence for a present loan of $100, they 39 00:03:43.300 --> 00:03:45.300 both gain. 40 00:03:45.300 --> 00:03:50.860 Mr. A will gain the difference between the $200 he would have been willing to pay for 41 00:03:50.860 --> 00:03:58.100 $100 now, and the $150 that he will actually be called upon to pay. 42 00:03:58.100 --> 00:04:01.620 That is, he will gain $50. 43 00:04:01.620 --> 00:04:07.460 Sector B will gain the difference between the $150 that he will actually get a year 44 00:04:07.460 --> 00:04:14.140 hence and the $102 that he would have been willing to accept in a year for giving up 45 00:04:14.140 --> 00:04:19.220 the $100 now, a gain of $48. 46 00:04:19.220 --> 00:04:26.020 In fact, because money lending is a trade like any other trade, both parties must gain 47 00:04:26.020 --> 00:04:29.020 or they would refuse to participate. 48 00:04:29.020 --> 00:04:36.460 A moneylender may be defined as someone who loans out his own money or the money of others. 49 00:04:36.460 --> 00:04:42.700 In the latter case, his function is that of intermediary between the lender and borrower. 50 00:04:42.700 --> 00:04:47.380 In either case, the moneylender is as honest as any other businessman. 51 00:04:47.380 --> 00:04:53.400 He does not force anyone to do business with him, nor is he himself compelled. 52 00:04:53.400 --> 00:04:58.340 There are, of course, dishonest moneylenders, just as there are dishonest people in all 53 00:04:58.340 --> 00:05:17.940 1. Money lending is infamous because it is frequently accompanied by violence. Borrowers 54 00:05:17.940 --> 00:05:25.500 or victims unable to pay their debts are often found murdered, usually by the loan shark. 55 00:05:25.500 --> 00:05:30.700 Those who borrow money from moneylenders usually have contracts with them to which they have 56 00:05:30.700 --> 00:05:32.860 fully agreed. 57 00:05:32.860 --> 00:05:38.900 One is hardly a victim of a moneylender if one has agreed to repay a loan and then reneges 58 00:05:38.900 --> 00:05:41.540 on the contractual promise. 59 00:05:41.540 --> 00:05:46.140 On the contrary, the moneylender is the victim of the borrower. 60 00:05:46.140 --> 00:05:53.180 If the loan, but not the repayment, is consummated, the situation is equivalent to theft. 61 00:05:53.180 --> 00:05:57.660 There is little difference between the thief who breaks into the money lenders office and 62 00:05:57.660 --> 00:06:04.940 steals money and the person who borrows it contractually and then refuses to pay it back. 63 00:06:04.940 --> 00:06:08.060 In both cases the result is the same. 64 00:06:08.060 --> 00:06:12.900 Someone has taken possession of money which is not theirs. 65 00:06:12.900 --> 00:06:18.780 Killing a debtor is an unjust overreaction, just as the murder of a thief would be. 66 00:06:18.780 --> 00:06:23.860 The primary reason money lenders take the law into their own hands, however, and do 67 00:06:23.860 --> 00:06:30.820 not hesitate to use forceful means, even murder, is that money lending is controlled by the 68 00:06:30.820 --> 00:06:32.300 underworld. 69 00:06:32.300 --> 00:06:37.580 But this control came about virtually at the public's request. 70 00:06:37.580 --> 00:06:43.100 When courts refuse to compel debtors to pay their rightful debts, and they prohibit the 71 00:06:43.100 --> 00:06:48.460 lending of money at high rates of interest, the underworld steps in. 72 00:06:48.460 --> 00:06:54.620 Whenever the government outlaws a commodity for which there are consumers, be it whiskey, 73 00:06:54.620 --> 00:07:01.140 drugs, gambling, prostitution or high interest loans, the underworld enters the industry 74 00:07:01.140 --> 00:07:05.560 that law-abiding entrepreneurs fear to service. 75 00:07:05.560 --> 00:07:12.580 There is nothing in whiskey, drugs, gambling, prostitution or money lending that is intrinsically 76 00:07:12.580 --> 00:07:13.820 criminal. 77 00:07:13.820 --> 00:07:20.140 It is solely because of a legal prohibition that gangland methods become associated with 78 00:07:20.140 --> 00:07:22.180 these fields. 79 00:07:22.180 --> 00:07:23.780 2. 80 00:07:23.780 --> 00:07:27.500 Money is sterile and produces nothing by itself. 81 00:07:27.500 --> 00:07:32.740 Therefore, any interest charge for its use is exploitative. 82 00:07:32.740 --> 00:07:38.020 Money lenders who charge abnormal interest rates are among the most exploitative people 83 00:07:38.020 --> 00:07:39.680 in the economy. 84 00:07:39.680 --> 00:07:44.640 They Richly Deserve the Approprium They Receive 85 00:07:44.640 --> 00:07:50.120 Apart from the ability of money to buy goods and services, having money earlier rather 86 00:07:50.120 --> 00:07:55.820 than later provides an escape from the pain of waiting for fulfillment. 87 00:07:55.820 --> 00:08:01.160 It fosters a productive investment, which at the end of the loan period, even after 88 00:08:01.160 --> 00:08:07.720 paying the interest charge, yields more goods and services than at the beginning. 89 00:08:07.720 --> 00:08:13.780 As for the exorbitantly high rates of interest, it should be understood that in a free market, 90 00:08:13.780 --> 00:08:19.320 the rate of interest tends to be determined by the time preferences of all the economic 91 00:08:19.320 --> 00:08:20.560 actors. 92 00:08:20.560 --> 00:08:26.080 If the rate of interest is inordinately high, forces will tend to develop which will push 93 00:08:26.080 --> 00:08:27.820 it down. 94 00:08:27.820 --> 00:08:32.800 If for example, the rate of interest is higher than the time preference rate of the people 95 00:08:32.800 --> 00:08:56.800 If the interest rate shows no tendency to decrease, this indicates not that it is too high, but that only a high rate of interest can equilibrate the demand for loans and satisfy the time preference rate of the economic actors. 96 00:08:56.800 --> 00:09:02.800 The critic of high interest rates has in mind a fair rate of interest. 97 00:09:02.800 --> 00:09:07.800 But a fair rate of interest, or a just price, does not exist. 98 00:09:07.800 --> 00:09:14.800 This is an atavistic concept, a throwback to medieval times when monks debated the question, 99 00:09:14.800 --> 00:09:19.800 along with the question of how many angels can fit on the head of a pin. 100 00:09:19.800 --> 00:09:23.800 If there is any meaning to the fair rate of interest doctrine, 101 00:09:23.800 --> 00:09:33.800 3. Money lenders prey upon the poor by charging higher rates of interest than they charge other borrowers. 102 00:09:33.800 --> 00:09:43.800 It is a common myth that the rich compose virtually the whole money lending class and the poor virtually all the borrowing class. 103 00:09:43.800 --> 00:09:50.600 It is a common myth that the rich compose virtually the whole money lending class and 104 00:09:50.600 --> 00:09:54.600 the poor virtually all the borrowing class. 105 00:09:54.600 --> 00:09:57.380 This however is not true. 106 00:09:57.380 --> 00:10:02.920 What determines whether a person becomes a net borrower or lender is his rate of time 107 00:10:02.920 --> 00:10:06.120 preference, not his income. 108 00:10:06.120 --> 00:10:13.400 Rich corporations that sell bonds are borrowers, for the sale of bonds represents money borrowed. 109 00:10:13.400 --> 00:10:23.400 Most wealthy people who own real estate or other properties which are heavily mortgaged are almost certainly net borrowers, not net lenders. 110 00:10:23.400 --> 00:10:30.400 On the other hand, every poor widow or pensioner with a small bank account is a moneylender. 111 00:10:30.400 --> 00:10:37.400 It is true that moneylenders charge the poor higher rates of interest than they charge other people. 112 00:10:37.400 --> 00:10:41.400 But when stated in this way, it can be misleading. 113 00:10:41.400 --> 00:10:53.400 For money lenders charge higher rates of interest to individuals who are greater risks, those who are less likely to repay the loan, regardless of wealth. 114 00:10:53.400 --> 00:11:05.400 One way to decrease the risk of default, and therefore the rate of interest charged, is to put up collateral, or real property, that would be forfeited if the loan is not repaid. 115 00:11:05.400 --> 00:11:15.400 Since rich people are more capable of putting up collateral for loans than poor people, their loans are granted at lower rates of interest. 116 00:11:15.400 --> 00:11:24.400 The reason, however, is not because they are rich, but because the lender is less likely to undergo losses in case of default. 117 00:11:24.400 --> 00:11:29.400 There is nothing untoward or unique about this situation. 118 00:11:29.400 --> 00:11:37.400 Poor people pay a higher rate for fire insurance since their houses have less fireproofing than rich people's houses. 119 00:11:37.400 --> 00:11:41.400 They are charged more for medical care since they are less healthy. 120 00:11:41.400 --> 00:11:50.400 Food costs are higher for poor people because there is more crime in their neighborhoods and crime raises the cost of conducting a business. 121 00:11:50.400 --> 00:11:57.400 This is, to be sure, regrettable, but it is not the result of malice against the poor. 122 00:11:57.400 --> 00:12:04.400 The moneylender, like the health insurance company and the grocer, seeks to protect his investment. 123 00:12:04.400 --> 00:12:14.400 Imagine the results of a law which prohibits usury, which can be defined as charging a rate of interest higher than the lawmaker approves of. 124 00:12:14.400 --> 00:12:22.400 Since the poor and not the rich pay the higher interest rate, the law would have its first effects on them. 125 00:12:22.400 --> 00:12:29.400 The effect would be to hurt the poor, and, if anything, enhance the rich. 126 00:12:29.400 --> 00:12:36.400 The law seems to be designed to protect the poor from having to pay high interest rates, 127 00:12:36.400 --> 00:12:42.400 but in reality it would really make it impossible for them to borrow money at all. 128 00:12:42.400 --> 00:12:49.400 If the money lender must choose between loaning money to the poor at rates he regards as too low 129 00:12:49.400 --> 00:12:55.800 and not loaning them any money at all, it is not difficult to see what choice he will make. 130 00:12:55.800 --> 00:13:03.300 What will the money lender do with the money he would have loaned to the poor but for the prohibitory law? 131 00:13:03.300 --> 00:13:10.000 He will make loans exclusively to the rich, incurring little risk of non-repayment. 132 00:13:10.000 --> 00:13:14.700 This will have the effect of lowering the interest rates for the rich, 133 00:13:14.700 --> 00:13:20.700 Because the greater the supply of a good in any given market, the lower the price. 134 00:13:20.700 --> 00:13:28.700 The question of whether or not it is fair to prohibit exorbitant rates of interest is not now under discussion. 135 00:13:28.700 --> 00:13:36.700 Only the effects of such a law. And these effects are, quite clearly, calamitous for the poor.