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Usury

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Usury

Usury (icon is the practice of charging excessive, unreasonably high, and often illegal interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 rates on loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s.

Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change
Bureau de Change
A bureau de change or currency exchange is a business whose customers exchange one currency for another. Although originally French, the term bureau de change is widely used throughout Europe, and European travellers can usually easily identify these facilities when in other European countries...

). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba
Riba
Riba means one of the senses of "usury" . Riba is forbidden in Islamic economic jurisprudence fiqh and considered as a major sin...

is the corresponding Arabic
Arabic language
Arabic is a name applied to the descendants of the Classical Arabic language of the 6th century AD, used most prominently in the Quran, the Islamic Holy Book...

 term and ribbit
Loans and interest in Judaism
The combination of loans and interest, in Judaism, is a complicated and detailed subject. The biblical Hebrew terms for interest are neshekh , literally meaning a bite, and marbit/tarbit , which specifically refers to the gain by the creditor; neshekh referred to interest that was charged by...

is the Hebrew
Hebrew language
Hebrew is a Semitic language of the Afroasiatic language family. Culturally, is it considered by Jews and other religious groups as the language of the Jewish people, though other Jewish languages had originated among diaspora Jews, and the Hebrew language is also used by non-Jewish groups, such...

 word.

The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money: particularly the 1545 act "An Acte Agaynst Usurie" (37 H.viii 9) of King Henry VIII of England (see book references).

Historical meaning


Banking during Roman times
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....

 was different from modern banking. During the Principate
Principate
The Principate is the first period of the Roman Empire, extending from the beginning of the reign of Caesar Augustus to the Crisis of the Third Century, after which it was replaced with the Dominate. The Principate is characterized by a concerted effort on the part of the Emperors to preserve the...

, most banking activities were conducted by private individuals, not by such large banking firms as exist today; almost all moneylender
Moneylender
A moneylender is a person or group who offers small personal loans at high rates of interest.-See also:* Microfinance - provision of financial services to low-income individuals....

s in the Empire were private individuals because anybody that had any additional capital and wished to lend it out could easily do so.

The rate of interest on loans varied in the range of 4–12 percent; but when the interest rate was higher, it typically was not 15–16 percent but either 24 percent or 48 percent. The apparent absence of intermediary rates suggests that the Romans may have had difficulty calculating the interest due on anything other than mathematically convenient rates. They quoted them on a monthly basis, as in the loan described here, and the most common rates were multiples of twelve. Monthly rates tended to range from simple fractions to 3–4 percent, perhaps because lenders used Roman numerals
Roman numerals
The numeral system of ancient Rome, or Roman numerals, uses combinations of letters from the Latin alphabet to signify values. The numbers 1 to 10 can be expressed in Roman numerals as:...

.

Moneylending during this period was largely a matter of private loans advanced to persons short of cash, whether persistently in debt or temporarily until the next harvest. Mostly, it was undertaken by exceedingly rich men who were prepared to take on a high risk if the profit looked good; interest rates were fixed privately and were almost entirely unrestricted by law. Investment was always regarded as a matter of seeking personal profit, often on a large scale. Banking was of the small, back-street variety, run by the urban lower-middle class of petty shop-keepers. By the 3rd century, acute currency problems in the Empire drove them into decline. The rich who were in a position to take advantage of the situation became the money-lenders when the ever-increasing tax demands in the last declining days of the Empire crippled and eventually destroyed the peasant class by reducing tenant-farmers to serfdom
Serfdom
Serfdom is the status of peasants under feudalism, specifically relating to Manorialism. It was a condition of bondage or modified slavery which developed primarily during the High Middle Ages in Europe and lasted to the mid-19th century...

. It was evident that usury meant exploitation
Exploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...

 of the poor.

The First Council of Nicaea
First Council of Nicaea
The First Council of Nicaea was a council of Christian bishops convened in Nicaea in Bithynia by the Roman Emperor Constantine I in AD 325...

, in 325, forbade clergy
Clergy
Clergy is the generic term used to describe the formal religious leadership within a given religion. A clergyman, churchman or cleric is a member of the clergy, especially one who is a priest, preacher, pastor, or other religious professional....

 from engaging in usury (canon 17). At the time, usury was interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 of any kind, and the canon merely forbade the clergy to lend money on interest above 1 percent per month (12.7% APR
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...

). Later ecumenical council
Ecumenical council
An ecumenical council is a conference of ecclesiastical dignitaries and theological experts convened to discuss and settle matters of Church doctrine and practice....

s applied this regulation to the laity
Laity
In religious organizations, the laity comprises all people who are not in the clergy. A person who is a member of a religious order who is not ordained legitimate clergy is considered as a member of the laity, even though they are members of a religious order .In the past in Christian cultures, the...

.

Lateran III
Third Council of the Lateran
The Third Council of the Lateran met in March 1179 as the eleventh ecumenical council. Pope Alexander III presided and 302 bishops attended.By agreement reached at the Peace of Venice in 1177 the bitter conflict between Alexander III and Emperor Frederick I was brought to an end...

 decreed that persons who accepted interest on loans could receive neither the sacrament
Sacrament
A sacrament is a sacred rite recognized as of particular importance and significance. There are various views on the existence and meaning of such rites.-General definitions and terms:...

s nor Christian burial. Pope Clement V
Pope Clement V
Pope Clement V, born Raymond Bertrand de Got was Pope from 1305 to his death...

 made the belief in the right to usury a heresy
Heresy
Heresy is a controversial or novel change to a system of beliefs, especially a religion, that conflicts with established dogma. It is distinct from apostasy, which is the formal denunciation of one's religion, principles or cause, and blasphemy, which is irreverence toward religion...

 in 1311, and abolished all secular legislation which allowed it. Pope Sixtus V
Pope Sixtus V
Pope Sixtus V , born Felice Peretti di Montalto, was Pope from 1585 to 1590.-Early life:The chronicler Andrija Zmajević states that Felice's family originated from modern-day Montenegro...

 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:
The Hebrew Bible
Hebrew Bible
The Hebrew Bible is a term used by biblical scholars outside of Judaism to refer to the Tanakh , a canonical collection of Jewish texts, and the common textual antecedent of the several canonical editions of the Christian Old Testament...

 regulates interest taking. Interest can be charged to strangers but not between Jews.
Israelites were forbidden to charge interest on loans made to other Israelites, but allowed to charge interest on transactions with non-Israelites, as the latter were often amongst the Israelites for the purpose of business anyway, but in general, it was seen as advantageous to avoid getting into debt at all to avoid being bound to someone else. Debt was to be avoided and not used to finance consumption, but only when in need. However, the laws against usury were among the many which the prophets condemn the people for breaking.

Johnson contends that the Torah treats lending as philanthropy
Philanthropy
Philanthropy etymologically means "the love of humanity"—love in the sense of caring for, nourishing, developing, or enhancing; humanity in the sense of "what it is to be human," or "human potential." In modern practical terms, it is "private initiatives for public good, focusing on quality of...

 in a poor community whose aim was collective survival, but which is not obliged to be charitable towards outsiders.
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
Plato
Plato , was a Classical Greek philosopher, mathematician, student of Socrates, writer of philosophical dialogues, and founder of the Academy in Athens, the first institution of higher learning in the Western world. Along with his mentor, Socrates, and his student, Aristotle, Plato helped to lay the...

, Aristotle
Aristotle
Aristotle was a Greek philosopher and polymath, a student of Plato and teacher of Alexander the Great. His writings cover many subjects, including physics, metaphysics, poetry, theater, music, logic, rhetoric, linguistics, politics, government, ethics, biology, and zoology...

, Cato
Cato the Elder
Marcus Porcius Cato was a Roman statesman, commonly referred to as Censorius , Sapiens , Priscus , or Major, Cato the Elder, or Cato the Censor, to distinguish him from his great-grandson, Cato the Younger.He came of an ancient Plebeian family who all were noted for some...

, Cicero
Cicero
Marcus Tullius Cicero , was a Roman philosopher, statesman, lawyer, political theorist, and Roman constitutionalist. He came from a wealthy municipal family of the equestrian order, and is widely considered one of Rome's greatest orators and prose stylists.He introduced the Romans to the chief...

, Seneca
Seneca the Younger
Lucius Annaeus Seneca was a Roman Stoic philosopher, statesman, dramatist, and in one work humorist, of the Silver Age of Latin literature. He was tutor and later advisor to emperor Nero...

, Aquinas, Muhammad
Muhammad
Muhammad |ligature]] at U+FDF4 ;Arabic pronunciation varies regionally; the first vowel ranges from ~~; the second and the last vowel: ~~~. There are dialects which have no stress. In Egypt, it is pronounced not in religious contexts...

, Moses
Moses
Moses was, according to the Hebrew Bible and Qur'an, a religious leader, lawgiver and prophet, to whom the authorship of the Torah is traditionally attributed...

, Philo
Philo
Philo , known also as Philo of Alexandria , Philo Judaeus, Philo Judaeus of Alexandria, Yedidia, "Philon", and Philo the Jew, was a Hellenistic Jewish Biblical philosopher born in Alexandria....

and Gautama Buddha
Gautama Buddha
Siddhārtha Gautama was a spiritual teacher from the Indian subcontinent, on whose teachings Buddhism was founded. In most Buddhist traditions, he is regarded as the Supreme Buddha Siddhārtha Gautama (Sanskrit: सिद्धार्थ गौतम; Pali: Siddhattha Gotama) was a spiritual teacher from the Indian...

.

For example, Cato
Cato the Elder
Marcus Porcius Cato was a Roman statesman, commonly referred to as Censorius , Sapiens , Priscus , or Major, Cato the Elder, or Cato the Censor, to distinguish him from his great-grandson, Cato the Younger.He came of an ancient Plebeian family who all were noted for some...

 in his De Re Rustica said:
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.

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
Sharia
Sharia law, is the moral code and religious law of Islam. Sharia is derived from two primary sources of Islamic law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Fiqh jurisprudence interprets and extends the application of sharia to...

. (See Islamic banking
Islamic banking
Islamic banking is banking or banking activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money...

)


As the Jews were ostracized from most professions by local rulers, the church and the guild
Guild
A guild is an association of craftsmen in a particular trade. The earliest types of guild were formed as confraternities of workers. They were organized in a manner something between a trade union, a cartel, and a secret society...

s, they were pushed into marginal occupations considered socially inferior, such as tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 and rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...

 collecting and moneylending. Natural tensions between creditors and debtors were added to social, political, religious, and economic strains.
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.

In England, the departing Crusaders
Crusaders
The Crusaders are a New Zealand professional rugby union team based in Christchurch that competes in the Super Rugby competition. They are the most successful team in Super Rugby history with seven titles...

 were joined by crowds of debtors in the massacres of Jews at London and York in 1189–1190. In 1275, Edward I of England
Edward I of England
Edward I , also known as Edward Longshanks and the Hammer of the Scots, was King of England from 1272 to 1307. The first son of Henry III, Edward was involved early in the political intrigues of his father's reign, which included an outright rebellion by the English barons...

 passed the Statute of Jewry which made usury illegal and linked it to blasphemy
Blasphemy
Blasphemy is irreverence towards religious or holy persons or things. Some countries have laws to punish blasphemy, while others have laws to give recourse to those who are offended by 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
The Crown
The Crown is a corporation sole that in the Commonwealth realms and any provincial or state sub-divisions thereof represents the legal embodiment of governance, whether executive, legislative, or judicial...

. 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
Edict of Expulsion
In 1290, King Edward I issued an edict expelling all Jews from England. Lasting for the rest of the Middle Ages, it would be over 350 years until it was formally overturned in 1656...

. 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 (see the articles on marranos or crypto-Judaism
Crypto-Judaism
Crypto-Judaism is the secret adherence to Judaism while publicly professing to be of another faith; practitioners are referred to as "crypto-Jews"...

).

The growth of the Lombard bankers
Lombard banking
Lombard banking refers to the historical use of the term 'Lombard' for a pawn shop in the Middle Ages, a type of banking that originated with the prosperous northern Italian region of Lombardy. The term was sometimes used in a derogatory sense and some were accused of usury.-History:A Christian...

 and pawnbroker
Pawnbroker
A pawnbroker is an individual or business that offers secured loans to people, with items of personal property used as collateral...

s, who moved from city to city was along the pilgrim
Pilgrim
A pilgrim is a traveler who is on a journey to a holy place. Typically, this is a physical journeying to some place of special significance to the adherent of a particular religious belief system...

 routes.


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
Protestant Reformation
The Protestant Reformation was a 16th-century split within Western Christianity initiated by Martin Luther, John Calvin and other early Protestants. The efforts of the self-described "reformers", who objected to the doctrines, rituals and ecclesiastical structure of the Roman Catholic Church, led...

, and other reasons. The lower rates weakened religious scruples about lending at interest, although the debate did not cease altogether.

The papal prohibition
Vix Pervenit
Vix Pervenit: On Usury and Other Dishonest Profit was an encyclical, promulgated by Pope Benedict XIV on November 1, 1745, which condemned the practice of charging interest on loans as usury. Because the encyclical was addressed to the Bishops of Italy, it is generally not considered ex cathedra...

 on usury meant that it was a sin to charge interest on a money loan. As set forth by Thomas Aquinas
Thomas Aquinas
Thomas Aquinas, O.P. , also Thomas of Aquin or Aquino, was an Italian Dominican priest of the Catholic Church, and an immensely influential philosopher and theologian in the tradition of scholasticism, known as Doctor Angelicus, Doctor Communis, or Doctor Universalis...

, the natural essence of money was as a measure of value or intermediary in exchange. The increase of money through usury violated this essence and according to the same Thomistic
Thomism
Thomism is the philosophical school that arose as a legacy of the work and thought of St. Thomas Aquinas, philosopher, theologian, and Doctor of the Church. In philosophy, his commentaries on Aristotle are his most lasting contribution...

 analysis, a just transaction was one characterized by an equality of exchange, one where each side received exactly his due. Interest on a loan, in excess of the principal, would violate the balance of an exchange between debtor and creditor and was therefore unjust.

Some have suggested that the development of double entry bookkeeping would provide a powerful argument in favor of the legitimacy and integrity of usury but this is an obvious non-sequitur. Business has always been accepted as a right and proper activity by all cultures, including those that reject usury.

The Old Testament


From the King James Version

[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.

[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.

[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.

[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:

[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.

[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.

Torah



The following quotations are from the Hebrew Bible
Hebrew Bible
The Hebrew Bible is a term used by biblical scholars outside of Judaism to refer to the Tanakh , a canonical collection of Jewish texts, and the common textual antecedent of the several canonical editions of the Christian Old Testament...

, 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. (Exodus, 22:25)


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. (Leviticus, 25:35-37)


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. (Deuteronomy, 23:20-21)

New Testament




The New Testament
New Testament
The New Testament is the second major division of the Christian biblical canon, the first such division being the much longer Old Testament....

 contains references to usury:

Qur'an


The following quotations are English translations from the Qur'an
Qur'an
The Quran , also transliterated Qur'an, Koran, Alcoran, Qur’ān, Coran, Kuran, and al-Qur’ān, is the central religious text of Islam, which Muslims consider the verbatim word of God . It is regarded widely as the finest piece of literature in the Arabic language...

:

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 had been seen as a lack of charity.

St. Thomas Aquinas
Thomas Aquinas
Thomas Aquinas, O.P. , also Thomas of Aquin or Aquino, was an Italian Dominican priest of the Catholic Church, and an immensely influential philosopher and theologian in the tradition of scholasticism, known as Doctor Angelicus, Doctor Communis, or Doctor Universalis...

, 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
Thought of Thomas Aquinas
This article contains selected thoughts of Thomas Aquinas on various topics.-Social justice:Aquinas defines distributive justice as follows:...

).

Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one's time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor.
Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client).
If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.

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 condemns usury towards Jews, but allows it towards non-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
Fifth Council of the Lateran
The Fifth Council of the Lateran was the last Ecumenical council of the Catholic Church before reformation.When elected pope in 1503, Pope Julius II , promised under oath that he would soon convoke a general council. However, as time passed the promise was not fulfilled...

, 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
Henry of Segusio
Henry of Segusio, usually called Hostiensis, 1 was an Italian canonist of the thirteenth century, born at Susa , in the ancient Diocese of Turin. He died at Lyon.-Life:...

 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
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...

. 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).

Usury in literature


In The Divine Comedy
The Divine Comedy
The Divine Comedy is an epic poem written by Dante Alighieri between 1308 and his death in 1321. It is widely considered the preeminent work of Italian literature, and is seen as one of the greatest works of world literature...

Dante
Dante Alighieri
Durante degli Alighieri, mononymously referred to as Dante , was an Italian poet, prose writer, literary theorist, moral philosopher, and political thinker. He is best known for the monumental epic poem La commedia, later named La divina commedia ...

 places the usurers in the inner ring of the seventh circle of hell. (Showing how cultural attitudes have changed since the 14th century, the usurers' ring was shared only by the blasphemers
Blasphemy
Blasphemy is irreverence towards religious or holy persons or things. Some countries have laws to punish blasphemy, while others have laws to give recourse to those who are offended by blasphemy...

 and sodomites
Sodomy
Sodomy is an anal or other copulation-like act, especially between male persons or between a man and animal, and one who practices sodomy is a "sodomite"...

.)

In the 16th century it was necessary for Shylock
Shylock
Shylock is a fictional character in Shakespeare's The Merchant of Venice.-In the play:In The Merchant of Venice, Shylock is a Jewish moneylender who lends money to his Christian rival, Antonio, setting the security at a pound of Antonio's flesh...

 to convert to Christianity and forsake usury before he could be redeemed in the climax of The Merchant of Venice
The Merchant of Venice
The Merchant of Venice is a tragic comedy by William Shakespeare, believed to have been written between 1596 and 1598. Though classified as a comedy in the First Folio and sharing certain aspects with Shakespeare's other romantic comedies, the play is perhaps most remembered for its dramatic...

. Thomas Lodge
Thomas Lodge
Thomas Lodge was an English dramatist and writer of the Elizabethan and Jacobean periods.-Early life and education:...

's didactic tirade against London moneylender
Moneylender
A moneylender is a person or group who offers small personal loans at high rates of interest.-See also:* Microfinance - provision of financial services to low-income individuals....

s, 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
Jeremy Bentham
Jeremy Bentham was an English jurist, philosopher, and legal and social reformer. He became a leading theorist in Anglo-American philosophy of law, and a political radical whose ideas influenced the development of welfarism...

's Defense of Usury was not as shocking as it would have appeared two centuries earlier.

In Honoré de Balzac’s
Honoré de Balzac
Honoré de Balzac was a French novelist and playwright. His magnum opus was a sequence of short stories and novels collectively entitled La Comédie humaine, which presents a panorama of French life in the years after the 1815 fall of Napoleon....

 1830 novel Gobseck
Gobseck
Gobseck is an 1830 novel by French author Honoré de Balzac and included in the Scènes de la vie privée section of his novel sequence La Comédie humaine. Gobseck first appeared in outline form in La Mode in March 1830 under the title l’Usurier , and then in August 1830 in the periodical Le Voleur...

, the title character, who is a usurer, is described as both "petty and great—a miser and a philosopher..."

In the early 20th century Ezra Pound
Ezra Pound
Ezra Weston Loomis Pound was an American expatriate poet and critic and a major figure in the early modernist movement in poetry...

's anti-usury poetry was not primarily based on the moral injustice
Natural law
Natural law, or the law of nature , is any system of law which is purportedly determined by nature, and thus universal. Classically, natural law refers to the use of reason to analyze human nature and deduce binding rules of moral behavior. Natural law is contrasted with the positive law Natural...

 of interest but on the fact that excess capital was no longer devoted to artistic patronage
Patronage
Patronage is the support, encouragement, privilege, or financial aid that an organization or individual bestows to another. In the history of art, arts patronage refers to the support that kings or popes have provided to musicians, painters, and sculptors...

, as it could now be used for capitalist
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 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
William Blackstone
Sir William Blackstone KC SL was an English jurist, judge and Tory politician of the eighteenth century. He is most noted for writing the Commentaries on the Laws of England. Born into a middle class family in London, Blackstone was educated at Charterhouse School before matriculating at Pembroke...

's Commentaries on the Laws of England
Commentaries on the Laws of England
The Commentaries on the Laws of England are an influential 18th-century treatise on the common law of England by Sir William Blackstone, originally published by the Clarendon Press at Oxford, 1765–1769...

, p. 1336).

In the United States, usury laws are state law
State law
In the United States, state law is the law of each separate U.S. state, as passed by the state legislature and adjudicated by state courts. It exists in parallel, and sometimes in conflict with, United States federal law. These disputes are often resolved by the federal courts.-See also:*List of U.S...

s that specify the maximum legal interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

 at which loans can be made. US 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
Commerce Clause
The Commerce Clause is an enumerated power listed in the United States Constitution . The clause states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Courts and commentators have tended to...

 of Article I of the Constitution.

US Congress has opted to put a federal criminal limit on interest rates by the Racketeer Influenced and Corrupt Organizations Act
Racketeer Influenced and Corrupt Organizations Act
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act or simply RICO, is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization...

 (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 shark
Loan shark
A loan shark is a person or body that offers unsecured loans at illegally high interest rates to individuals, often enforcing repayment by blackmail or threats of violence....

ing, 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.

Yet all loan contracts (notes) provide that if the principal and the interest are not paid, the lender has the right to go to law and obtain a judgment against the debtor, which may, if the debtor does not pay the judgment, be taken by the sheriff, that is, by force. So in reality all ordinary loan contracts threaten violence against the debtor to ensure that the loan and interest are paid, and to collect by seizure if not paid.

Usury and royalties


Royalties
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...

 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. The value in gains by the use of the royalty should equal its payment value, excess cost or interest beyond its tangible value is illicit interest or usury.

Usury and slavery in present day


While the practice of direct slavery is widely banned across the world, in some places debt-slavery is still practiced. A debtor who is found unable to repay a loan can be placed in a state of debt-slavery, a situation where-by their life and labors are directed by the lender until the debt is considered repaid. Usury is often a major part of extending this slavery, not uncommonly assisting in extending the debt-slavery onto the children of the debtor, thus making slaves of multiple generations and promoting child labor
Child labor
Child labour refers to the employment of children at regular and sustained labour. This practice is considered exploitative by many international organizations and is illegal in many countries...

. Another form of or name for this practice is debt bondage
Debt bondage
Debt bondage is when a person pledges him or herself against a loan. In debt bondage, the services required to repay the debt may be undefined, and the services' duration may be undefined...

.

Usury statutes in the United States


Each U.S.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...

 has its own statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...

 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
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...

) such loans are voided ab initio
Ab initio
ab initio is a Latin term used in English, meaning from the beginning.ab initio may also refer to:* Ab Initio , a leading ETL Tool Software Company in the field of Data Warehousing.* ab initio quantum chemistry methods...



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.
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. , is a unanimous 1978 U.S. Supreme Court decision holding that state anti-usury laws regulating interest rates cannot be enforced against nationally-chartered banks based in other states...

case that the National Banking Act
National Banking Act
The National Banking Acts of 1863 and 1864 were two United States federal laws that established a system of national charters for banks, and created the United States National Banking System. They encouraged development of a national currency backed by bank holdings of U.S...

 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, because of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, Congress passed the Depository Institutions Deregulation and Monetary Control Act
Depository Institutions Deregulation and Monetary Control Act
The Depository Institutions Deregulation and Monetary Control Act, a United States federal financial statute law passed in 1980, gave the Federal Reserve greater control over non-member banks.* It forced all banks to abide by the Fed's rules....

 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
Truth in Lending Act
The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...

 does not regulate rates, except in the cases of some mortgages, but it does require uniform or standardized disclosure of costs and charges.

In the 1996 Smiley v. Citibank
Smiley v. Citibank
Smiley v. Citibank, , is a 1996 U.S. Supreme Court decision upholding a regulation of the Comptroller of Currency which included credit card late fees and other penalties within the definition of interest and thus prevented individual states from limiting them when charged by nationally-chartered...

case, the Supreme Court further limited states' power to regulate credit card fees, extending the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees, and, therefore, that states could not regulate fees.

Some members of Congress have tried to create a federal usury statute that would limit the maximum allowable interest rate, but the measures have not progressed. In July, 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama. The act provides for a Consumer Financial Protection Agency to regulate some credit practices, but does not have an interest rate limit.

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
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...

 is that charging interest is essential to guiding the investment process, based on the claim that profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

 are required to direct investments to their most productive use (solving the economic calculation problem
Economic calculation problem
The economic calculation problem is a criticism of central economic planning. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy...

). According to this argument, interest-driven investment is essential to economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

, and therefore to the very existence of industrial civilization. This practical argument for the utility of usury treats all "unearned" returns to capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

 as interest; traditionally, guaranteed interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 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
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...

 investments with stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

 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
The Merchant of Venice
The Merchant of Venice is a tragic comedy by William Shakespeare, believed to have been written between 1596 and 1598. Though classified as a comedy in the First Folio and sharing certain aspects with Shakespeare's other romantic comedies, the play is perhaps most remembered for its dramatic...

: Shylock
Shylock
Shylock is a fictional character in Shakespeare's The Merchant of Venice.-In the play:In The Merchant of Venice, Shylock is a Jewish moneylender who lends money to his Christian rival, Antonio, setting the security at a pound of Antonio's flesh...

 lends Antonio
Antonio (Merchant of Venice)
Antonio is the title character in Shakespeare’s The Merchant of Venice. He is a middle-aged bachelor and merchant by trade who has his financial interests tied up in overseas shipments when the play begins. He is kind, generous, honest and confident, and is loved and revered by all the Christians...

 money for trade speculation, demanding repayment in flesh should Antonio's project fail utterly (accepting none of the business risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...

).

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
Spread
Spread may refer to:*Statistical dispersion*Spread , an edible paste put on other foods*the score difference being wagered on in spread betting*the measure of line inclination in rational trigonometry...

 simply covers the credit risk). Economists of the Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 say that there is no such thing as a "just" interest rate separate from the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

 equilibrium determined by the time-preferences
Time preference
In economics, time preference pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment....

 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
Shylock
Shylock is a fictional character in Shakespeare's The Merchant of Venice.-In the play:In The Merchant of Venice, Shylock is a Jewish moneylender who lends money to his Christian rival, Antonio, setting the security at a pound of Antonio's flesh...

). This position is based on the idea that without force there will be a market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

—since very high interest loans will only be taken up by those intending to default. The need for enforcement stems from this adverse selection
Adverse selection
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information : the "bad" products or services are more likely to be...

 problem rather than any immorality inherent in moneylender
Moneylender
A moneylender is a person or group who offers small personal loans at high rates of interest.-See also:* Microfinance - provision of financial services to low-income individuals....

s. 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) defend interest-charging since it allows 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.

Islamic banking


In a partnership or joint venture where money is lent, the creditor only provides the capital yet is guaranteed a fixed amount of profit. The debtor, however, puts in time and effort, but is made to bear the risk of loss. Muslim scholars argue that such practice is unjust. As an alternative to usury, Islam strongly encourages charity and direct investment in which the creditor shares whatever profit or loss the business may incur (in modern terms, this amounts to an equity stake in the business).

Interest-free micro-lending


Growth of the internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

 internationally has enabled global micro-lending charities where lenders make small sums of money available on zero-interest terms. Persons lending money to on-line micro-lending charity Kiva
Kiva (organization)
Kiva Microfunds is an organization that allows people to lend money via the Internet to microfinance institutions in developing countries around the world and in the United States, which in turn lend the money to small businesses and students...

 for example do not get paid any interest, although the end users to whom the loans are made may be charged interest by Kiva's partners in the country where the loan is used.

See also

  • Abomination (Bible)
    Abomination (Bible)
    Abomination is an English term used to translate the Biblical Hebrew terms shiqquwts and sheqets, which are derived from shâqats, or the terms , tōʻēḇā or to'e'va or ta'ev...

  • Contractum trinius
    Contractum trinius
    A contractum trinius was a set of contracts devised by European bankers and merchants in the Middle Ages as a method of circumventing canon law edicts prohibiting usury...

  • Loansharking (traditional occupation of Mafiosi)
  • Money changing
  • Payday loan
    Payday loan
    A payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card...

    s
  • Predatory lending
    Predatory lending
    Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...

  • Vix Pervenit
    Vix Pervenit
    Vix Pervenit: On Usury and Other Dishonest Profit was an encyclical, promulgated by Pope Benedict XIV on November 1, 1745, which condemned the practice of charging interest on loans as usury. Because the encyclical was addressed to the Bishops of Italy, it is generally not considered ex cathedra...

  • Title loan
  • Usury Act 1660
    Usury Act 1660
    The Usury Act 1660 is an Act of the Parliament of England with the long title "An Act for restraining the taking of Excessive Usury". The purpose of the Act was to reduce the interest rate from 8% to 6%...


Further reading

  • '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
    Margrit Kennedy
    Margrit Kennedy is a German architect, professor, environmentalist, author and an advocate of complementary currencies and an interest and inflation-free economy....

    , with Declan Kennedy: Illustrations by Helmut Creutz; New and Expanded Edition, New Society Publishers, Philadelphia, PA, USA and Gabriola Island, BC, Canada, 1995.

External links