The Rate of Interest and the Problem of Usury
One important aspect of Turgot’s work relates to the rate of interest. In some sections of the Reflexions (Turgot 1913-23, II: 577-86) and particularly in the 1770 Memoire sur les prets d’argent (Turgot 1913-23, III: 154 202) his line of thought is double.
On the one hand, taking up traditional arguments for and against usury, he shows the “frivolity” of the latter and the possibly correct, but not truly decisive, aspect of the former. On the other hand, he supplies his own reasons, the most important of which displaces the controversy. The question of usury, he stresses, is traditionally badly posed. Once the terms are correctly defined, it becomes a simple problem of economic theory and more specifically an application of the theory of value (ibid.: 174-80).One of the traditional arguments in favour of the prohibition of usury was that - founded in Roman law - of the fungible and consumable character of some objects, money included: destroyed by the use which is made of them, they cannot be lent at interest because their transfer to the borrower necessarily involves a transfer of property. This argument, Turgot stresses, supposes that the transaction is about the physical object - for example, a quantity of coins, or a given weight of a precious metal - and it cannot but lead to the above-mentioned conclusion. However, the transaction relates instead to a quantity of value and implies the utilities of the contracting parties: “where have our quibblers seen that the only thing to be considered in the loan is the weight of the metal borrowed and returned, and not its value and its utility for the lender and the borrower?” (Turgot 1913-23, III: 177). The interest rate is just a price like any other and its determination falls in the field of the theory of value. Two principles are essential here: (1) an exchange can only be implemented if the utility of the quantity of the commodity received is higher, for each agent, than the utility of the quantity of the commodity given up in exchange; (2) time preference: the depreciation, in terms of “esteem value”, of a good available in the future compared to the same good available now (ibid.).
At the time of the transaction the lender compares the utility of the sum of money he owns with a promise of reimbursement in the future. If no interest is stipulated, and as the lender estimates the promise to reimburse tomorrow to be worth less than the identical sum today, an agreement in these conditions is impossible because it would involve a loss of utility for the lender. In order that the transaction takes place, it is therefore necessary that the promise of reimbursement in the future be for a higher amount than the sum which is lent, so that the “esteem value” the lender attributes to it be higher than the value he attributes to the sum in question. If the elements of risk and disutility are reintroduced, then this difference - the interest - measures (1) time preference, (2) the risks incurred and (3) the disutility experienced because of the momentary unavailability of the amount of money. This analysis is obviously novel and path-breaking: the link with the theory of value, in particular, is fundamental.
Turgot’s studies at the Sorbonne could have been of some help here, because a similar development had been made, more than a century and a half before, by the Flemish Jesuit Leonard de Leys (Lessius): his “carentia pecuniae” already referred to a kind of time preference. However in Lessius’ writings this element was just an empirical fact observed in the market (van Houdt 1998). Turgot instead linked it to his subjective theory of value. It is also to be noted that the reasoning in terms of time preference seems to have been widespread among confessors and casuists during the seventeenth century because Pope Innocent XI, in 1679, had to condemn the proposition that a present sum of money being “more precious” than the same sum available in the future, “the lender may demand from the debtor something more in addition to the loan, and on that title can be excused from usury” (quoted in Delumeau 1990: 118).
Two last points must be mentioned to conclude.
The first regards the interest rate; it is definitely not a monetary variable. While a type of monetary quantitativism prevails - probably a legacy of Cantillon and Hume - the interest rate is subject to the logic of the loanable funds market and, being a price like any other, must be determined freely between agents. The second point concerns money as a measure of value and a medium of exchange. As noted above, values cannot be expressed as such. In particular the “valeur appreciative” of a commodity is essentially relative. It is thus expressed, in an isolated transaction, by the quantity of the good against which it is exchanged; or in general by each of the quantities of every other commodity against which it can be exchanged. Turgot deduces from this the money form properly speaking: thanks to its intrinsic qualities, related to the requirements of the functions of measure of values and medium of exchange, one commodity detaches itself from the rest, and all the other commodities, by convention, express their value in terms of this good, which therefore becomes the unique form of expression of value, “gage universel” (Turgot 1913-23, II: 554). This analysis is to a great extent taken up and developed by Morellet in his “Digression” on money which he included in his 1769 Prospectus d’un nouveau diction- naire de commerce, and from there probably handed over to Condillac in his 1776 Le commerce et le gouvernement consideres relativement l,un a l,autre. Above all, Karl Marx later adopted and developed it in his analysis of the “forms of value” in book I of Capital.Gilbert Faccarello
See also:
Daniel Bernoulli (I); Pierre Le Pesant de Boisguilbert (I); British classical political economy (II); Marie-Jean-Antoine-Nicolas Caritat de Condorcet (I); French Enlightenment (II); Francois Quesnay and Physiocracy (I).