Adam Smith was born in 1723. This year he turns 300.

To celebrate, National Review Capital Matters offers the Adam Smith 300 series. An essay on Smith will appear monthly throughout 2023, written by various students of Smith’s thought. Smith’s birthday is June 16, so the essays will appear on the 16th day of each month. Daniel Klein and Erik Matson of George Mason University are helping curate the series for Capital Matters along with Dominic Pino. To read previous months’ essays, click here.

NRPLUS MEMBER ARTICLE T he sin of usury is not one we hear much about these days, but in Christian history it has been much more prominent than today’s hot-button issues such as abortion or homosexuality. For those unfamiliar with usury, it is worth turning to Exodus 22:25: “If you lend money to one of my people among you who is needy, do not be like a money-lender; charge him no interest.” Or the similar prohibition in Leviticus 25:35–37, or Deuteronomy 23:19–20: “Do not charge your brother interest, whether on money or food or anything else that may earn interest.”

Even Jesus had something to say about the issue as recorded in Luke 6:34–35: “If you lend to those from whom you hope to receive, what credit is that to you? Even sinners lend to sinners in order that they may receive. But love your enemies, and do good and lend, despairing of nobody.”

For Dante, usurers inhabited the worst parts of hell. Of course, predatory lending after illness or a crop failure in a predominately agricultural society is different from a contemporary bank facilitating the flow of excess savings to those with productive investment opportunities.

Amidst the celebrations of Adam Smith’s 300th birthday, an examination of Smith’s attitude on interest regulation offers insight into his approach to public policy, especially for those, including the present writer, who have argued that understanding the Calvinist and Newtonian natural-theological backgrounds to his thought are important. Interest-rate restrictions are one of many exceptions to his generally free-market approach. Other exceptions include limited Church privileges, the Navigation Acts (which restricted trade to British ships), and limited arguments for tariffs on foreign trade. When considering these exceptions, we need to remember that 18th-century Britain was a very different environment from contemporary America and that Smith had a keen awareness of which reforms were politically feasible.

In Adam Smith’s Britain, the long-standing usury laws had been relaxed. Though the taking of interest on a loan was legal, interest rates were capped at 5 percent. Like most of his contemporaries, Smith in the Wealth of Nations acknowledged “the evil of usury” but was skeptical about the power of legislation to cure the greedy usurious heart of fallen humanity. For Smith, the regulation of interest rates became a practical issue for legislators, to be determined on the balance of arguments about the effects of alternative policies.

Smith, to the irritation of the utilitarian philosopher Jeremy Bentham, offered a pragmatic defense of the law that capped interest rates at 5 percent. His argument in the Wealth of Nations was that in a capital-scarce society on the threshold of industrial revolution, it was crucial that available capital be allocated to the most productive uses. We also see Smith’s concern with capital scarcity in his famous “invisible hand” passage, where he speculated that the providential hand of God might operate to keep Scottish capital at home, even though there were potentially higher returns available from riskier investments overseas. The passage about interest-rate regulation in the Wealth of Nations reads:

The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent., the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred as borrowers, to prodigals and projectors.

Smith’s prodigals are the sons of the landed gentry who would borrow and squander the funds on consumption. Projectors are those who borrow for fanciful schemes, rather than sober investors who will devote the funds to productive uses.

If interest rates are capped, lenders will not be lured by the higher returns which might otherwise be offered by prodigals and projectors, and they will place their capital with safer, more productive investors. Here we see Smith’s sensitivity to lenders’ temptation to put aside reason and greedily embrace the prodigals and projectors, a sensitivity that was likely nourished by his moderate Calvinist religious background.

We could take issue with Smith’s argument. As well as cutting the projectors out of the capital market, an interest-rate cap also cuts out perfectly sober investors with investment projects whose returns are less certain but have high upside potential. The innovations in agriculture and industry that were rapidly appearing in Smith’s time would present many such projects.

But there is something to be said for Smith’s pragmatic approach to economic reform, rather than the ideological approach of Jeremy Bentham, who criticized Smith in his Defence of Usury, written in 1787. Bentham could not believe that Adam Smith — the great champion of free markets — would defend the regulation of interest rates and waste his time considering the appropriate level of regulated interest rates.

Bentham even wrote a follow-up open letter to Smith attacking his arguments and appended this letter to subsequent editions of the Defence of Usury. To be fair to Bentham, he did engage Smith’s theoretical and empirical arguments, in particular pointing out that not all those offering lenders a return above the regulated rate could be dismissed as projectors. There are reports that Smith read and acknowledged the force of some of Bentham’s 1787 practical arguments about the definition of projectors, but Smith never responded to Bentham’s letter or altered the passage in the final edition of the Wealth of Nations. (Of course, the window for response was small since Smith died in 1790.)

This brings us to the question of the relative influence of Smith’s pragmatic approach against more ideological approaches. Smith gave no space to religious idealogues who refused to see the differences between the sorts of lending that were condemned in the biblical passages quoted above and the lending that was under debate in the Britain of his day. Nor did he follow Bentham’s wholesale condemnation of regulation.

For the record, my own view is that while lending can be predatory, offending against Christian morality and justice, as well as undermining efficient operation of financial markets, I doubt that capping interest rates is the appropriate response in our contemporary context.

As Jacob Viner, the Chicago and Princeton economist and one of the wisest interpreters of Adam Smith, wrote at the end of his classic article on the Wealth of Nations, it is a book distinguished by “its eclecticism, its good temper, its common sense, and its willingness to grant those who saw things differently from itself were only partly wrong.”

With the hindsight of centuries, perhaps the dispute can best be adjudicated by answering this question: In the end was it Smith or Bentham who had the greater influence on freeing up markets for the sake of general prosperity?