How Bernanke’s Medieval ‘Usury Laws’ Are Destroying the Economy

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Usury laws are laws that impose price ceilings on interest rates. They are government-imposed maximum prices. They were popular with the Medieval Catholic church until the church wised up several hundred years ago. They still exist in virtually every American state, however. The mainstream economic critique of them is that, like all price ceilings, they create shortages. That is, marginal borrowers with less-than-great credit histories will not be given credit. Some will be driven to loan sharks who charge much higher interest rates. The amount of borrowing demanded will exceed the supply of lendable funds at the price-controlled, below-market rate of interest.

The Greenspan/Bernanke policy of using monetary policy to push interest rates to zero (or less in real terms) is effectively a form of price control or usury law policy. Murray Rothbard accepted the standard economic analysis of price controls on interest, but went further:

“Usury laws are [a] form of price control tinkering with the market. These laws place legal maxima on interest rates, outlawing any lending transactions at a higher rate. The amount and proportion of saving and the market rate of interest are basically determined by the time-preference rates of individuals. An effective usury law acts like other maxima — to induce a shortage of the service. For time preferences — and therefore the ‘natural’ interest rate remain the same. The fact that this interest rate is now illegal means that the marginal savers — those whose time preferences were highest — now stop saving, and the quantity of saving and investing in the economy declines. This results in lower productivity and lower standards of living in the future. Some people stop saving; others even dissave and consume their capital” (emphasis added).

1:22 pm on October 29, 2012