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the latter usury. Grotius says: "if the compensation allowed by law does not exceed the proportion of the hazard run or the want felt by the loan, its allowance is neither repugnant to the natural nor the revealed law, but if it exceeds those bounds, it is then oppressive usury.”
Rate of Interest. The question of the exorbitance of interest for money lent depends upon two circumstances: the inconvenience of parting with it for the present, and the hazard of losing it entirely. The rate of general interest must depend upon the general inconvenience to the lenders. This results entirely from the quantity of specie or current money in the kingdom. In every nation a certain quantity of money is necessary, all above which may be spared or lent without much inconvenience to the lenders, and the greater this national superfluity is, the more numerous will be the lenders, and the lower ought the rate of the national interest to be.
Hazard of a Loss. The hazard of an entire loss has its weight in the regulation of interest, hence the better the security, the lower will the interest be, the rate being generally in a compound ratio, formed out of the inconvenience and the hazard. Thus if the quantity of specie in a nation be such that the inconvenience of lending for a year is computed to amount to three per cent; a man having money to loan, would probably loan on good personal security at five per cent, allowing two for the hazard run; he would loan on mortgage at four per cent, the hazard being less, and to the state, on the maintenance of which all his property depends, at three per cent, there being no hazard whatever.
Extra Interest Allowed. Sometimes the hazard will be greater than the legal rate of interest will compensate. This gives rise to the practice of: (1) Bottomry, or respondentia. (2) Policies of insurance. (3) Annuities on lives.
(1) Bottomry. This originally arose from permitting the master of a ship, in a foreign country, to hypothecate the ship, in order to raise money to refit, and is in the nature of a mortgage of the vessel, in which the master pledges the keel or bottom of the ship, partem pro toto, as a security for the repayment. If the ship be lost, the lender loses all his money, but if it returns in safety, then he shall receive back his principal, and also the premium or interest agreed upon, however much it may exceed the legal rate. This is allowed to be a valid contract in all trading nations for the benefit of commerce, and by reason of the extraordinary hazard incurred. In this case the ship and tackle, if brought home, are answerable, as well as the borrower, for the
At Respondentia. But if the loan is not in the vessel, but upon the cargo and merchandise, which must necessarily be exchanged during the voyage, then only the borrower personally is bound to answer the contract, who is then said to take up money at respondentia. These terms are also applied to contracts for the repayment of money borrowed, not on the ship and goods only, but on the mere hazard of the voyage itself, as when a man lends a merchant money to be employed in a beneficial trade, with condition to be repaid with extraordinary interest, in case the voyage be safely performed. By statute of George II, restrictions were made as to bottomry or at respondentia on vessels bound to or from the East Indies.
(2) Polices of Insurance. A policy of insurance is a contract between A and B, that upon A paying a premium equivalent to the hazard run, B will indemnify or insure A against a particular event. This is founded on the principle of hazard, but not that of inconvenience, for the insurer is never out of possession of his money, till the loss actually happens. Thus too, in a loan, if the chance of repayment depends upon the borrower's life, it is usual, beside the ordinary rate of interest, for the borrower to have his life insured till the time of repayment, for which he is charged an additional premium, suited to his age and constitution. In this manner, any extraordinary or particular hazard may be provided against, which the established rate of interest will not reach.
Insurable Interest. To prevent these insurances from being turned into a species of gaming, it is enacted by statute of George III, that no insurance shall be made on lives, or on any other event, wherein the party insured has no interest; that in all policies, the name of such interested party shall be inserted, and nothing more shall be recovered thereon, than the amount of the interest of the insured.
Marine Insurances. This does not however extend to marine insurances, which were provided for by a prior law of their own. Such contracts, which entirely depend on good faith and integrity, are vacated by the least shadow of fraud or undue concealment, and on the other hand, being greatly for the benefit and extension of trade by distributing the gain or loss among a number of persons, they are greatly encouraged by the common law and statutes.
Wagering Marine Policies. A practice formerly existed of insuring large sums, without having any property on the vessel, called insurances, interest or no interest, and also of insuring the same goods several times over, both of which were a species of gaming, termed wagering policies. A statute of George II declared such policies void, except upon privateers, and upon ships or merchandise from the Spanish and Portuguese dominions, for obvious reasons, and further enacted, that no re-assurance shall be lawful, except that the former insurer be insolvent, a bankrupt or dead; and lastly, that in the East India trade, the lender of money on bottomry or at respondentia shall alone be insured for the money lent, and the borrower, in case of a loss, shall recover no more upon any insurance, than the surplus of his property above the value of his bottomry or respondentia bond.
(3) Annuities. The practice of purchasing annuities for lives at a cerrain price or premium, instead of advancing the same sum on an ordinary loan, arises usually from the inability of the borrower to give the lender a permanent security for the return of the money borrowed at any one period of time. He therefore stipulates in effect to pay annually, during his life, some part of the money borrowed, with legal interest for such principal as is unpaid, and an additional compensation for the extraordinary hazard run of losing that principal entirely, by the contingency of the borrower's death.
Heavy Premiums. The real value of the contingency must depend on the age, constitution, situation and conduct of the borrower, and hence the price is difficult to reduce to a general rule. If by the terms of the contract, the lender's principal be put in jeopardy, no inequality of price will make it an usurious bargain, though under some circumstances of imposition, it will be relieved in equity.
Rates of Interest. Upon the two principles of inconvenience and hazard, compared together, different nations at different times have established different rates of interest. The Romans at one period allowed twelve per cent. per annum to be taken for common loans. Justinian reduced it to four per cent. but allowed higher interest to be taken of merchants, for the hazard was greater in their case. Holland at one time allowed
eight per cent on common loans, and twelve to merchants, which policy Lord Bacon strove to introduce into England, but our law established one standard for all alike.
Variations in the Rate of Interest. The rate of interest in England has varied anıl decreased for two hundred years past, according as the quantity of specie in the kingdom has increased by accessions of trade, the introduction of paper credit and other circumstances. The statutes of Henry VIII and Elizabeth allowed ten per cent. Her successor, James I, reduced it to eight, and Charles II to six, while under Anne, it was reduced to five per cent.
Interest on Foreign Contracts. If a contract, which carries interest, be made in a foreign country, our courts will direct the payment of interest according to the law of that country, in which the contract was made. The refusal to enforce such contracts would put an end to foreign trade. By statute of George III, all mortgages and other securities upon estates in Ireland or the plantations, bearing interest, not exceeding six per cent, shall be legal, though executed in Great Britain, unless the money lent shall be then known to exceed the value of the thing in pledge, in which case the borrower shall forfeit treble the sum so borrowed.
4. Debt. This is a species of contract, whereby a chose in action or right to a certain sum of money, is mutually acquired and lost. This may arise from any of the other species of contracts. As in the case of a sale, where the price is not paid in ready money, the vendee becomes indebted to the vendor for the sum agreed upon, and the vendor has a property in this price, as a chose in action, by means of this contract of debt. Any contract, whereby a determinate sum of money becomes due to any person, and is not paid, but remains in action merely, is a contract of debt. It is usually divided into debts of record, debts by special, and debts by simple contract.
Debt of Record. This is a sum of money, which appears to be due by the evidence of a court of record. Thus, when any specific sum is adjudged to be due from a defendant to a plaintiff on an action or suit at law, this is a contract established by the sentence of a court.
Recognizance. Debts upon recognizance are also a sum of money, recognized or acknowledged to be due to the crown or a subject, in the presence of a court or magistrate, with a condition, that such acknowledgment shall be void, upon the appearance of the party, his good behavior or the like.
These are ranked among the highest class of debts, viz., debts of record, being witnessed by the best kind of evidence; by matter of record.
Debts by Specialty. These are such, whereby a sum of money becomes, or is acknowledged to be due by deed, or instrument under seal. It is the creation or acknowledgement of a debt from the obligor to the obligee. Unless the obligor performs a condition annexed, as the payment of rent or money borrowed, the observance of a covenant or the like, the bond becomes forfeited, and the debt becomes due in law.
Debts by Simple Contract. These exist, where the contract, upon which the obligation arises, is neither ascertained by matter of record, nor yet by deed or special instrument, but by mere oral evidence, the most simple of any, or by notes unsealed, which are capable of a more easy proof, and therefore better than a verbal promise. A vast variety of obligations branch out from this latter class, through the numerous contracts for money which exist.
Promise to Pay Another's Debt. Statute of Frauds. By statute of Charles II, no executor or administrator shall be charged, upon any special promise to answer damages out of his own estate, and no person shall be charged upon any promise to answer for the debt or default of another, or upon any agreement in consideration of marriage, or upon any contract or sale of
any real estate, or upon any agreement that is not to be performed within one year from the making, unless the agreement or some memorandum thereof be in writing, and signed by the party himself, or by his authority.
Bills of Exchange. A bill of exchange is a security, originally invented among merchants for the more easy remittance of money from one to the other, which has been adopted in most pecuniary transactions. It is an open letter of request from one man to another, desiring him to pay a sum named therein to a third person on his account, by which means a man in the most distant part of the world may have money remitted to him from any trading country, without danger of robbery or loss.
History and Terms Used. This method was brought into