In 1803, USA president Thomas Jefferson wrote to the governor of Indiana territory (Indiana was not at that time a state). Jefferson was keen to expand the territory of the USA by the acquisition of Indian lands. He advised:
… we shall push our trading houses and be glad to see the good and influential individuals among them run in debt. Because we observe that when these debts get beyond what individuals can pay, they’re willing to lop them off by the cession of lands.
The Natives of Indiana might not have been prepared to sell their land, however,all unknowing of the long-term consequences, they entered into unrepayable debt which ultimately led to the same result. It need hardly be said, this had a devastating impact on their heritage, patrimony and way of life. A more modern example of the same process might be the privatisation plans of the governments of the UK, Greece, Spain, Portugal, Ireland, Cyprus and Italy which are all regarded as debt induced, to one extent or another. Clearly, debt can have severe, unforeseen, negative consequences.
In the UK today, millions of the economically vulnerable are mired in debt problems of their own and must borrow further just to put food on the table. The UK, like other European nations has also embarked on extensive austerity measures which appear likely to have a further impact on the vulnerable.
This leaves them not only having to mortgage tomorrow to pay for today, but often to mortgage the rest of next week as well, through their resorting to so-called pay-day loans. Such loans often come at an eye-watering APR of circa 4,214%.
The model of instrumental rationality, which Economists generally assume applies to individuals and nations, states that economic agents will only take out such loans if they are better off by doing so. In this model, it is not the role of the state to infringe on individuals’ liberties by preventing their having what they want. However, the state is prepared to intervene in markets where people are in danger of making ill-informed decisions or where externalities exist – for example, the cases of alcohol pricing, cigarette advertising and limitations on the supply of narcotic substances. A justification of intervention might be that pay-day loans involves similar risks.
In any event, whether the state intervenes in the market or not, we might at the least consider whether it would be wise to eliminate the advertising of such debt. If we are rational, we need no adverts to entice us – if we are not rational, then all the more case for refraining from advertising such a potentially devastating deal.
An alternative to the need for pay-day loans would of course be more remunerative pay-days for the economically vulnerable. However, that may well be another story.