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Usury
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Usury (comes from the Medieval Latin usuria, "interest" or "excessive interest", from the Latin usura "interest") originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest.
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Encyclopedia
Usury (comes from the Medieval Latin usuria, "interest" or "excessive interest", from the Latin usura "interest") originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest. As such, the term is largely derived from Abrahamic religious principles; Riba is the corresponding Islamic term. The primary focus in this article is on the Christian tradition.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money: particularly the Act 'In restraint of usury' of Henry VIII in England in 1545 (see book references).
Historical meaning
The First Council of Nicaea in 325, forbade clergy from engaging in usury. (canon 17) At the time "usury" meant simply interest of any kind, and the canon merely forbade the clergy to lend money on interest above one per cent per month. Later ecumenical councils applied this regulation to the laity.
Lateran III decreed that persons who accepted interest on loans could receive neither the sacraments nor Christian burial. Pope Clement V made the belief in the right to usury heresy in 1311, and abolished all secular legislation which allowed it. Pope Sixtus V condemned the practice of charging interest as "detestable to God and man, damned by the sacred canons and contrary to Christian charity."
Theological historian John Noonan argues that "the doctrine [of usury] was enunciated by popes, expressed by three ecumenical councils, proclaimed by bishops, and taught unanimously by theologians."
Certain negative historical renditions of usury carry with them social connotations of perceived "unjust" or "discriminatory" lending practices. The historian Paul Johnson, comments:
Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest. Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ... Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Jews took a different view of the matter.
The Hebrew Bible regulates interest taking, but interpretations vary widely. One understanding is that Israelites were forbidden to charge interest on loans made to other Israelites, but allowed to charge interest on transactions with non-Israelites. However, the Hebrew Bible itself gives numerous examples where this provision is evaded.
The primitive Hebrew economy was not an established, refined mercantile nation as many around it already were. Hence, it took a considerable historic time and economic evolution to construct appropriate mercantile laws and principles.
Thus, Johnson contends that the Hebrew Bible treats lending as philanthropy in a poor community whose aim was collective survival, but which is not obliged to be charitable towards outsiders.
A great deal of Jewish legal scholarship in the Dark and the Middle Ages was devoted to making business dealings fair, honest and efficient.
Usury (in the original sense of any interest) was at times denounced by a number of religious leaders and philosophers in the ancient world, including Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Aquinas, Muhammad, Moses, Philo and Gautama Buddha.
For example, Cato in his De Re Rustica said:
"And what do you think of usury?" - "What do you think of murder?"
But one must always consider that usury, in historical context, has always been inextricably linked to economic abuses, mostly of the masses and of the poor; but sometimes of the financier and royalty, as bankrupt royalty has led to many a demise, thus frowning upon lending at interest or for a euphemistic "just profit". The main moral argument is that usury creates excessive profit and gain without "labor" which is deemed "work" in the Biblical context. Profits from usury are argued not to arise from any substantial labor or work but from mere avarice, greed, trickery and manipulation. In addition, usury is said to create a divide between people due to obsession with monetary gain. Most importantly, usury is the derivation of profit from biological time, which is linked to life, considered sacred, God-given and divine, leading to excessive worrying about money instead of God, thus subjugating a God-given sanctity of life to man-made artificial notions of material wealth.
Usury was also prohibited in ancient China. Modern illegal triads take on the role as usurers, a practice called "loan sharking".
Interest of any kind is forbidden in Islam. As such, specialized codes of banking have developed to cater to investors wishing to obey Qur'anic law. (See Islamic banking)
As the Jews were ostracized from most professions by local rulers, the church and the guilds, they were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending. This was said to show that Jews were insolent, greedy usurers. Natural tensions between creditors and debtors were added to social, political, religious, and economic strains.
... financial oppression of Jews tended to occur in areas where they were most disliked, and if Jews reacted by concentrating on moneylending to non-Jews, the unpopularity - and so, of course, the pressure - would increase. Thus the Jews became an element in a vicious circle. The Christians, on the basis of the Biblical rulings, condemned interest-taking absolutely, and from 1179 those who practised it were excommunicated. Catholic autocrats frequently imposed the harshest financial burdens on the Jews. The Jews reacted by engaging in the one business where Christian laws actually discriminated in their favour, and became identified with the hated trade of moneylending.
Peasants were forced to pay their taxes to Jews who were economically coerced into becoming the "front men" for the lords. The Jews would then be identified as the people taking their earnings. Meanwhile the peasants would remain loyal to the lords.
Non-Jewish debtors may have been quick to lay charges of usury against Jewish moneylenders, even those who charged moderate rates of interest. Thus, historically, attacks on usury led to antisemitism. According to Walter Laqueur,
"The issue at stake was not really whether the Jews had entered it out of greed (as antisemites claimed) or because most other professions were barred to them... In countries where other professions were open to them, such as Muslim Spain and the Ottoman empire, one finds more Jewish blacksmiths than Jewish money lenders. The high tide of Jewish usury was before the fifteenth century; as cities grew in power and affluence, the Jews were squeezed out from money lending with the development of banking."
In England, the departing Crusaders were joined by crowds of debtors in the massacres of Jews at London and York in 1189-1190. In 1275, Edward I of England passed the Statute of Jewry which made usury illegal and linked it to blasphemy, in order to seize the assets of the violators. Scores of English Jews were arrested, 300 were hanged and their property went to the Crown. In 1290, all Jews were expelled from England, and allowed to take only what they could carry; the rest of their property became the Crown's. The usury was cited as the official reason for the Edict of Expulsion. However, not all Jews were expelled: it was easy to convert to Christianity and thereby avoid expulsion. Many other crowned heads of Europe expelled the Jews, although again conversion to Christianity meant that you were no longer considered a Jew. This conversion was called "Marranos".
The growth of the Lombard bankers and pawnbrokers, who moved from city to city along the pilgrim routes, was important for the development of trade and commerce. Laqueur continues:
"Following centuries of church condemnations of Jewish usury, the Jews were expelled from many countries and regions, their communities were impoverished, and very few individuals had the necessary capital to engage in money lending. Money lending continued, of course, and the Lombards took 250 percent interest (this, however, did not cause a wave of anti-Lombardism)."
In the 16th century, short-term interest rates dropped dramatically (from around 20-30% p.a. to around 9-10% p.a.). This was caused by refined commercial techniques, increased capital availability, the Reformation, and other reasons. The lower rates weakened religious scruples about lending at interest, although the debate did not cease altogether.
In 1745, the Catholic teaching on usury was expressed by Pope Benedict XIV in his encyclical Vix Pervenit, which strictly forbids charging interest on loans, although he adds that "entirely just and legitimate reasons arise to demand something over and above the amount due on the contract" through separate, parallel contracts. There are no such prohibitions in the modern world.
Religious context
Torah
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest. ( )
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. ()
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. ()
New Testament
The New Testament parable of the ten gold pieces refers to the concept of "usury" or "interest": a nobleman says to his servants:
"Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?" -
"Finally the master said to him "Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest?'" -
"Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury" -
On the other hand Luke 6:35 says "But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great". Many interpret this as condemning usury, while others see it as a call to personal altruism and not a general prohibition on usury, which they see as a wise business practice that is not referenced in this verse.
Qur'an
The following quotations are from the Qur'an:
Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities.God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-'Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
Scholastic Theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury was seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that "to live by usury is exceedingly unnatural". Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) - an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism absolutely condemns it, whether to the alien in [their] midst" or "[their] brother (fellow Jews)". St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as "montes pietatis".
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral. The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest "to compensate him for profit foregone in investing the money himself." This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
Other contexts
Usury in literature
In The Divine Comedy Dante places the usurers in the inner ring of the seventh circle of hell, below even suicides. (Showing how cultural attitudes have changed since the 14th century, the usurers' ring was shared only by the blasphemers and sodomites.)
In the 16th century it was necessary for Shylock to convert to Christianity and forsake usury before he could be redeemed in the climax of The Merchant of Venice. Thomas Lodge's didactic tirade against London moneylenders, An Alarum against Usurers containing tried experiences against worldly abuses tried to incite the educated class against the harm usurers seemed to induce in their victims.
By the 18th century usury was more often treated as a metaphor than a crime in itself, so that Jeremy Bentham's Defense of Usury was not as shocking as it would have appeared two centuries earlier.
In the early 20th century Ezra Pound's anti-usury poetry was not primarily based on the moral injustice of interest but on the fact that excess capital was no longer devoted to artistic patronage, as it could now be used for capitalist business investment. ().
Usury and the law
"When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not." (Blackstone's Commentaries on the Laws of England, p. 1336).
In the United States, usury laws are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, although it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.
Congress has opted to put a federal criminal limit on interest rates by the RICO definitions of "unlawful debt" which make it a federal felony to lend money at an interest rate more than two times the local state usury rate and then try to collect that "unlawful debt".
It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, although that term is also applied to non-coercive usurious lending, or even to the practice of making consumer loans without a license in jurisdictions that require licenses.
Usury and royalties
Royalties are contractual obligations of the Issuer of the royalty, made for the benefit of the holder of the royalty. Royalties require the payment of an agreed percentage of revenue of the Issuer, for an agreed period of time. In the event a royalty is purchased from an Issuer, the future revenue upon which the royalty is based is unknown at the time of the original transaction. Therefore, the cumulative amount of the future royalty payments is also an unknown. Royalty payments are not interest and royalties expire without value at their maturity. To be usurious payments made and received for the use of funds must be considered interest for loaned funds which require repayment at the maturity of the loan.
Usury statutes in the United States
Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.
If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab-initio
However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally-chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence. In 1980, due to inflation, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits . This effectively overrode all state and local usury laws. The 1968 Truth in Lending Act does not regulate rates, except in the cases of some mortgages, but it does require uniform or standardized disclosure of costs and charges.
Avoidance mechanisms
Interest-free banks
The JAK members bank represents an example of how it is possible to create a usury-free saving and loaning system, offering a feasible financial tool to all its members. Other examples of interest-free banking come from the Islamic banking used in the Muslim world.
Islamic banking
In a partnership or joint venture where money is lent, the creditor and others provide the capital. The profit is then distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. Please refer to the main article for further details.
Ethical arguments for usury
Freedom of trade
The primary ethical argument in defense of usury has been the argument of negative freedom against the "restraint of trade" since the borrower has voluntarily entered into the usury contract. Opponents note, however, that borrowers may be tricked into signing such contracts, assume there is a usury law cap on interest that does not exist, or be driven to accept such an interest rate out of necessity. At the same time however, except for related party transactions where feelings of compassion, guilt, etc, compel the lender to lend without interest, in un-related party transactions where neither the borrower nor the lender has any predetermined attachment to one another, there is no incentive for the lender to lend or for the borrower to repay the debt without usury.
Investment
A practical argument for usury in welfare economics is that charging interest is essential to guiding the investment process, based on the claim that profits are required to direct investments to their most productive use (solving the economic calculation problem). According to this argument, interest-driven investment is essential to economic growth, and therefore to the very existence of industrial civilization. This practical argument for the utility of usury treats all "unearned" returns to capital as interest; traditionally, guaranteed interest is usurious, whereas dividends from shared ventures are less so. In this tradition, the practical case against usury does not completely apply (although replacing debt market investments with stock market savings may not always be desirable). Officially, this is how capitalist Islamic states solve the calculation problem. An example of the 'moral' difference between dividend income and interest income is found in The Merchant of Venice: Shylock lends Antonio money for trade speculation, demanding repayment in flesh should Antonio's project fail utterly (accepting none of the business risk).
Excessive rates
In addition to the defense of interest as such, the practice of charging high interest rates is defended by those who point out that such rates reflect the very fact that the loans are being given to creditors with a high risk of default (in a competitive debt market the interest spread simply covers the credit risk). Economists of the Austrian school say that there is no such thing as a "just" interest rate separate from the free market equilibrium determined by the time-preferences of individual lenders and debtors. (Other free market theorists take a similar view on the merit of an unregulated debt market, but may not explain the subjective estimate of a worthwhile interest-rate bargain through time preference.)
Adverse selection and enforcement methods
Some have defended the threat or use of force (legal or illegal) against non-payers (such as required by Shylock). This position is based on the idea that without force there will be a market failure—since very high interest loans will only be taken up by those intending to default. The need for enforcement stems from this adverse selection problem rather than any immorality inherent in moneylenders. See: "The market for lemons".
Today's credit reporting system in industrialized countries obviates much of the need for the use of force. Since all potential lenders can quickly learn of one's delinquent status, non-payers may find an unwilling seller for many important goods, like apartment rentals, mortgages, renting of expensive equipment without a deposit, and in many cases, insurance or employment. In the minds of many debtors, such considerations outweigh fear of force brought against them.
Charities
Some low-interest charity loans (such as small business micro-loans) have made a defense on the fact that interest rates allow for the indefinite administration of the charity, the replacement of defaulted loans, and in some cases, the creation of additional loan pools in other regions. These people say that the final "ethical result" of the interest rates justifies the means of charging them.
See also
Further reading
Web
- , A Scriptural, Ethical and Economic View, by Calvin Elliott, 1902. (a searchable facsimile at the University of Georgia Libraries; DjVu & format)
- (St Thomas Aquinas' Summa Theologić)
- (Jewish Encyclopedia, 1906 ed.)
- (Beyond the Pale exposition, friends-partners.org)
- by Jeremy Bentham. 1787
- by Francis Bacon
- face book to repeal usury law
Books
- 'In Restraint of Usury: the Lending of Money at Interest', Sir Harry Page, The Chartered Institute of Public Finance and Accounts, London, 1985,
- The Bibliography therein - particularly:
- 'The Idea of Usury: from Tribal Brotherhood to Universal Otherhood', Benjamin Nelson, 2nd Edition, University of Chicago Press, Chicago and London, 1949, enlarged 2nd edition, 1969.
- 'Interest and Inflation Free Money: Creating an Exchange Medium That Works for Everybody and Protects the Earth', Margrit Kennedy, with Declan Kennedy: Illustrations by Helmut Creutz; New and Expanded Edition, New Society Publishers, Philadelphia, PA, USA and Gabriola Island, BC, Canada, 1995.
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