Usury and the Efficiency of Market Control Mechanisms
Dale Beck Furnish
Arizona State University (ASU) - Sandra Day O'Connor College of Law
William J. Boyes
Arizona State University (ASU)
Arizona Journal of International and Comparative Law, Vol. 1, pp. 61-84, 1982
This article presents the authors’ commentary on an accompanying article entitled Usury in English Law, in which Professor R.M. Goode analyzes the English law of usury. Based on opinions garnered from the authors’ recent study of usury law in Arizona and the United States, this article raises directly several issues which Professor Goode’s article raises by implication. Specifically, both his treatment and this analysis have some implications for the ongoing debate about the efficiency of the common law. Furthermore, this article provides some insights into the form and province of usury laws in future years. The authors frame this analysis around a recent postulate made by Judge Richard Posner in the general debate on the efficiency of the common law, claiming that the common law is economically efficient in the sense that it maximizes social wealth. The empirical results of the authors’ study of lenders’ practices in Arizona and the United States, focused primarily in the 1970’s demonstrated that effective usury limits hurt lower income groups by reducing the quantity of credit available. Financial institutions, unable to charge fees sufficient to cover risk premiums, refused to lend to high-risk borrowers. Faced with the barriers of usury laws, borrowers inevitably and constantly have demanded loan money outside the legal limits. Due to frequent drifting form legal limits and repeated collisions with inescapable market forces, usury laws have evolved into an efficient and only mildly intrusive modern mode.
Today, usury has been defined as a variable concept, depending on the market sector affected. Furthermore, the authors consider both the influence of the legislative process in responding to efficiency criteria by permitting expensive credit and allowing an expansive credit market, and the United States courts’ response toward permitting a free market by refusing to apply usury limits strictly and literally. In the authors’ opinion, Professor Goode has an optimistic view of the English approach, and the analysis in Usury in English Law misconstrues the trend of usury laws in the United States and elsewhere. The authors also think that the judicial branch should exercise broad discretion in its review of loan agreements, and the prior exercise of such discretion has contributed materially to a viable control system for the money market in Arizona and the United States. This may not, however, assist the more helpless elements in the credit market and only sophisticated borrowers may take advantage of judicial discretion. Instead, the weakest consumers in the market may be helped the most by fostering disclosure and competition.
Number of Pages in PDF File: 24
Keywords: R.M. Goode, Financial ServicesAccepted Paper Series
Date posted: June 30, 2009 ; Last revised: July 12, 2009
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