Salmasius: High-Water Mark of Early-Modern Interest Theory
[This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An audio version of this Mises Daily, read by Jeff Riggenbach, is available as a free download.]
The honor of putting the final boot to the usury prohibition belongs to the 17th-century classicist and Dutch Calvinist, Claude Saumaise (Latinized name, Claudius Salmasius) (1588–1653). In several works published in Leyden, beginning with De usuris liber in 1630 and continuing to 1645, Salmasius finished off this embarrassing remnant of the mountainous errors of the past. His forte was not so much in coining new theoretical arguments as in finally willing to be consistent. In short, Salmasius trenchantly pointed out that moneylending was a business like any other, and like other businesses was entitled to charge a market price. He did make the important theoretical point, however, that, as in any other part of the market, if the number of usurers multiplies, the price of money or interest will be driven down by the competition. So that if one doesn't like high interest rates, the more usurers the better!
Salmasius also had the courage to point out that there were no valid arguments against usury, either by divine or natural law. The Jews only prohibited usury against other Jews, and this was a political and tribal act rather than an expression of a moral theory about an economic transaction. As for Jesus, he taught nothing at all about civil polity or economic transactions. This leaves the only ecclesiastical law against usury that of the pope, and why should a Calvinist obey the pope? Salmasius also took some deserved whacks at the evasions permeating the various Scholastic justifications, or "extrinsic titles," justifying interest. Let's face it, Salmasius in effect asserted: what the canonists and Scholastics "took away with one hand, they restored with the other." The census is really usury; foreign exchange is really usury; lucrum cessans is really usury. Usury all, and let them all be licit. Furthermore, usury is always charged as compensation for something, in essence the lack of use of money and the risk of loss in a loan.
Salmasius also had the courage to take the hardest case, professional moneylending to the poor, and to justify that. Selling the use of money is a business like any other. If it is licit to make money with things bought with money, why not from money itself? As Noonan paraphrases Salmasius, "The seller of bread is not required to ask if he sells it to a poor man or a rich man. Why should the moneylender have to make a distinction?" And "there is no fraud or theft in charging the highest market price for other goods; why is it wrong for the usurer to charge the heaviest usuries he can collect?"
Empirically, Salmasius also analyzed the case of public usurers in Amsterdam (the great commercial and financial center of the 17th century, replacing Antwerp of the previous century), showing that the usual 16 percent charge on small loans to the poor is accounted for by the costs of the usurers borrowing their own money, of holding some money idle, of renting a large house, of absorbing some losses on loans, of paying licence fees, hiring employees, and paying an auctioneer. Deducting all these expenses, the average net interest rate of the moneylenders is only 8 percent, barely enough to keep them in business.
In concluding that usury is a business like any other, Salmasius, in his typical witty and sparkling style, declared, "I would rather be called a usurer, than be a tailor." Our examples of his style already demonstrate the aptness of the great Austrian economist Böhm-Bawerk's conclusion about Salmasius: that his works
are extremely effective pieces of writing, veritable gems of sparkling polemic. The materials for them, it must be confessed, had in great part been provided by his predecessors… But the happy manner in which Salmasius employs these materials, and the many pithy sallies with which he enriches them, places his polemic far above anything that had gone before.
As a result, Salmasius's essays had wide influence throughout the Netherlands and the rest of Europe. As Böhm-Bawerk declared, Salmasius's views on usury were the high-water mark of interest theory, to remain so for over 100 years.