"Usury", as I shall employ the term, refers simply to the lending of money at interest such that the amount received by the lender exceeds the amount lent and the return is guaranteed by the borrower. I thus depart from both modern Western usage - whereby "usury" refers to the charging of "excessively high" rates of interest - and ancient usage - whereby "usury" included, also, the concept of "lending" money with either the amount or fact of repayment depending on the borrower's circumstances (this latter concept is much more akin to the taking of an equity stake in a project than lending as it is understood by moderns). My usage is pretty much precisely the way that modern Muslims understand the term.
Usury - lending money at interest - has been a controversial and circumscribed practice throughout most of recorded history. Indeed, as recently as 1981 most US states had explicit anti-usury laws restricting the rates of interest that could be charged on loans and even today many (including large) Continental states have such laws. The Breakthrough Britain report of Iain Duncan Smith's Centre for Social Justice considered whether anti-usury laws such as interest caps should be introduced in the UK. With the prominent role of debt in the Great Recession, not least the debt of governments but in particular the debt of households, many commentators - particularly in the US but also in Continental Europe - have come to wonder whether the liberalisation of anti-usury laws went too far and whether it was really a concidence that the removal of such laws was followed so quickly by a debt-fuelled binge and hangover. Meanwhile non-usury-based Islamic finance expands apace, and related products such as shared equity mortgages are growing in popularity even amongst non-Muslims.
I shall explain a little of the history of debate about usury, illustrating that the broad thrust of history has been that of practical secular and philosophical objections to usury being gradually displaced by the (in this instance) more liberal moral outlook of Christian moralists (especially those deriving their moral instruction from the Bible) and this, in its turn, driving and facilitating advances in financing technology that made the previous secular prohibitions on usury more and more nuanced and difficult to sustain, eventually overwhelming even the limited restrictions Christians wanted to keep. An interesting question is whether a lesson of the 21st century is that the original secular prohibitions were correct; or whether the preferred Christian restrictions should not have been abandonned - at least in terms of social custom if not in terms of law; or whether complete libertarianism in this area is either inevitable or perhaps even desirable.
Traditional Secular and Philosophical Objections to Usury
Opposition to usury in Europe had its main historical roots in secular philosophical objection and practical experience. That is to say, it was secular and philosophical-based moralists who contended that lending money at interest was always and everywhere wrong. In contrast, moralists who appealed more strictly to Biblical teaching to derive their moral guidance tended to conclude that there was no universal objection to lending money at interest, and that the practices that were not morally proper (and beyond those, the practices that should actually be illegal) were much more limited than the secular and philosophical-based moralists assumed.
(Many considerations of usury proceed from various Biblical passages concerning lending at interest. However, it was understood from fairly early in Christian history that these passages concerned members of the people of Israel lending to each other, and that the point was that fellow Israelites should be treated as family members rather than simply the other end of a transaction. (This was why there was no prohibition on lending at interest to non-Israelites.) There was an idea in the early Church, and still in some circles today, that fellow Christians should, likewise, be treated as family members, and so the prohibitions on lending at interest to family members would apply. There are certain issues here, but they are not centrally relevant to our discussion below, turning as they do on the familial nature of the Christian church rather than any intrinsic immorality of lending at interest. Hence we shall leave this point for now.)
The most well-known of the many secular philosophical objections to usury is that of Aristotle. Aristotle's objection is best understood by noting a little of the history of lending. Prior to the development of metallic money, lending tended to take something like the following form (at least in myth, which will suffice for our purposes). If I lent you the use of my bull to fertilize your heifers, I would expect you to return my bull plus some of the progeny (or perhaps some output of the progeny - such as milk or meat). If I let you plant your field with some of my seeds, I would expect to get back the seeds I supplied you plus some portion of the harvest. The return over-and-above the initial lending is intrinsically connected to the growth of the product - that is to say, I get more back than I lend precisely because the result of my lending is extra seeds, extra cows, or whatever.
But with the advent of money, matters became problematic. For what happened then was that at the time seeds were bought by those who needed to borrow, such seeds were rare and the price was high. But when the harvest came, seeds were plentiful and the price was low. This meant that even fairly modest rates of money interest could be equivalent to large multiples in terms of agricultural output. It required only occasional bad luck with the harvests for significant proportions of those that had borrowed to be driven into default, resulting in their property being seized and they themselves (sometimes with their whole families) being taken into slavery in lieu of the debt.
A notorious period of such episodes occurred in pre-classical Greece, and addressing it was one of the acts for which the great Athenian statesman Solon was later famous (as his seisachtheia, or "shaking off of burdens"). (I note that modern scholars doubt whether Athens actually had coinage at the time of Solon, so the version of the tale I tell should be taken as that understood by Aristotle and those later interpreting Aristotle, rather than an accurate rendering of the history of Solon's time.)
Reflection on such events had led to a fairly widespread opinion by the time of Aristotle, and probably even more widespread later, that the lending of money led to the destitution of the poor and the ever-increasing concentration of assets in the hands of the already-wealthy. (Indeed, Cato and Seneca likened usury to murder, since a usurer, like a murder, took a portion of a man's life. The general thought underpinning Cato and Seneca's argument - that even a contract entered into freely might impose to great a misery on one party (e.g. we would not accept a contract in which default would result in the borrower selling himself as a slave to the lender) - is probably the key driver of modern usury laws in Europe and the US.)
Aristotle is thus, to some extent, explaining what is wrong with something already widely-regarded as wrong in practice - as it were, his is the answer to the question "We all know what is wrong with it in practice, but what is the problem in theory?" His answer comes in two parts. First, he understands money as a good that is used up in its consumption, like food but unlike houses or fields. Thus, just as one cannot rent food, one cannot rent money. Second, he claims that there is a conceptual error involved in usury: the assumption that metallic money can grow. By nature, money is sterile and usury is thus unnatural.
Aristotle's mediaeval Scholastic followers added to these thoughts. In their view, money's proper role was as a measure of and an intermediary to facilitate transactions involving real goods and services. But usury, they thought, implied a transaction in which money itself was a terminus to the deal rather than an intermediary, and in which the measure was "diluted". This perverted and thereby damaged money's proper role.
This way of expressing the matter may seem naive to the modern mind. After all, if the money is used to buy, say, some seed, then the investment may be fruitful and converted back into more money than was there originally. So why hasn't the money been fruitful? The Christian might find the parable of the Talents coming to mind, in which the two worthy servants make their money grow - doubling the amounts. Even Christ's critcism of the worthless servant is (at least on the face of it) that he did not place his one talent on deposit and gain interest.
And yet, it seems to me that Aristotle was on to something, even if he took his position too far. For remember the practical problem mentioned. When we think of converting money into seeds, we are imagining that the price of the seeds will be much the same when we buy the few as when we sell the many. But this is not necessarily so. Even if the "real" project, the planting of sees, is fruitful in producing more seeds out than are put in, there is no guarantee that that will mean that the "money" project - the amount of gold pieces at the end compared with the number at the beginning - is fruitful. Successful planting might still mean a financial loss and bankruptcy. And one way to express this is to say that the money itself is barren. In modern terms we might prefer to say that the farmer has been exposed to exchange rate risk (pricing risk) as well as project risk.
Intrinsic and Extrinsic Entitlement to Interest
Despite the authority of Aristotle, Catholic Scholastic philosophers developed a concept of legitimate "interest" on money. First, and more straightforwardly, there was the concept of lending to business in which the lender shared in the risk of the enterprise. We would not regard this as really being the charging of "interest" as such, today. It is much closer to the taking of an equity stake in the project funded by the lending, and is closely related to the Islamic finance concept of mudarabah.
But even the charging of interest without sharing in equity risk was not altogether outlawed. The arguments above were felt to be sufficient to demonstrate that there was nothing intrinsic about the act of lending money that justified charging interest. If interest were to be justified, there had to some extrinsic factors that justified it. Three common such factors were:
- provable alternative profit opportunities foregone that did not involve lending at interest
- operating costs incurred in the business of providing the loan
- penalty interest, at a pre-agreed rate, to be incurred in the event of delay in making repayment, to compensate for specific provable costs the lender would then incur
Two less common were
- when the government decides to set a temporary low rate of interest on loans to encourage more lending for a time, for some specific purpose to the common good
- when the lending is of a sort where the risk of default and consequent loss to the lender is significant and can be evidenced, interest could be charged that would compensate for such losses
Protestant thought
At around the time of the Reformation, Catholic thought, as represented by Eck, for instance, was seeking to liberalise further, permitting much higher rates of interest under much less restricted terms than in the past, provided that the borrower were relatively well-off. (In tractates contractu quinque de centum, Gerson, Biel, Summenhardt and Eck argued that it was legitimate to make loans at up to 5% interest.) Although Eck's mortal enemy Luther initially sought to reverse this liberalising trend and outlaw usury altogether (rejecting even the extrinsic factors), Melanchthon broadly agreed with Eck in this and indeed amplified upon Eck’s position, arguing that usury is permissible provided that no harm is done or intended by the usurer.
Melanchthon's great admirer Calvin went even further, setting out, instead of the traditional limited set of circumstances under which usury was permitted, a restricted set of seven circumstances under which usury was sinful. This reversed the traditional position - instead of usury being forbidden except in the few cases when it was allowed, usury was now to be allowed except in the limited set of cases when it was forbidden.
At general level, Calvin distinguished between two classes of interest: those involving legitimate increase and those that were "biting". It was legitimate to lend at interest to the wealthy or to businesses that would use the money to make a profit. To those that were poorer but still had some means to repay through work (in particular, the working poor) one could lend without interest, but expect the loan to be repaid. And one should give to the destitute without even expecting repayment.
Calvin rejects Aristotle's key arguments, and their Scholastic amplification. "It is said: "Money does not beget money." What does the sea beget? What does a house from the letting of which I receive a rent? Is money born from the roof and walls? But on the other hand, both the earth produces and something is brought from the sea, which afterwards produces money, and the convenience of a house can be bought and sold for money." For Calvin, money is not a static unit of exchange, but a dynamic tool for the creation of wealth. Indeed, Calvin regards (as I do here) the core tradition of opposition to usury as being derived from Greek philosophical thought, as opposed to Biblical injunction.
Later developments
Calvin regretted that it was his rejection of the universal opposition to usury for which his remarks on this subject were to be remembered, to the exclusion of the caveats he himself emphasized, but that was how it went - in areas under Calvinist influence, such as the UK and Switzerland, Calvin rapidly came to be regarded as condoning practically all usury.
Adam Smith, it should be noted - perhaps to the surprise of readers here - was an advocate of maximum rates of interest on the grounds that this would enable low-risk borrowers who were likely to undertake socially beneficial investments not to be deprived of funds as a result of "the greater part of the money which was to be lent [being] lent to prodigals and projectors [investors in risky, speculative ventures], who alone would be willing to give [an unregulated] high interest rate". (Indeed, Keynes may have had a similar view.)
Jeremy Bentham, on the other hand, established the modern mainstream British position - near-total libertarianism in respect of lending at interest - in his "Defence of Usury": a series of thirteen letters to his friend Crichoff. His view was that "no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making a bargain, in the way of obtaining money, as he thinks fit: nor (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to." (Thus, Bentham rejects even the case I have characterised as derived from Cato and Seneca, and related to the argument against slavery, freely entered into.)
The Catholics liberalised more gradually, still expressing strong reservations as late as Rerum Novarum in the late 19th century. Meanwhile, another plank of objection to lending at interest arose particularly in the 19th century in the form of Socialist objections to “unearned income”.
Morally-driven restrictions on interest rates have been virtually non-existent in the UK for long ages. But usury laws persisted in many US states until 1981 (collapsing after a 1979 ruling that such laws applied in the state from which credit was supplied, not to transactions with residents of the state in question if supplied from another state). And a number of EU Member States still have such laws even today.
There are particular modern forms of high-interest lending that have come under scrutiny recently. In particular, some forms of very high interest, very short-term lending may predominate under conditions when borrowers have other high debts, are already insolvent, and the final loans may regularly presage bankruptcy. Under such conditions, the high interest short-term lender is siphoning off assets that the borrower is aware are already probably lost to him, at the expense of other creditors that might use those assets to recover some of their debts.
My own view
It seems to me that the morally libertarian position on this matter is ripe for review. If a borrower really might be driven into destitution by the terms of a loan, then some of the classical Catholic or Calvinist moral injunctions would have some force. It can't be okay for me to tempt a poor person to ruin herself through fruitless consumption that she can't afford funded by loans she can't repay. I may find it convenient to be lazy in such a case, prepared to lose my own money through my lack of diligence. Or it might work best for me, financially, just to treat the borrower as a distant statistic, focusing on the average return which works out for me despite some defaults. But behind those statistics are real people and real lives - people I should not treat as entirely "other" but as at least partially my brethren (going right back to the original concern that usury is improper in respect of family members).
It is tempting to note that in Britain the borrower can default and the worst that can happen is not remotely the levels of poverty envisaged in the earlier usury prohibitions. And this is certainly a strong argument for saying that no form of usury should be illegal. But just because something is not illegal, that doesn't mean we should think it is morally acceptable.
My feeling is that mainstream Christian churches have not dwelt on the perils of usury nearly enough, or provided nearly enough moral guidance to their congregations on the issue. There may be lessons for us to learn from Islam in this. Perhaps we need some new form of “Christian finance”, which would include some lending at interest, but in which such lending does not occur when doing so would be immoral, and instead may involve more use of equity financing than would occur in secular models. The rich can probably diversify their risks such that the added risk of money borrowing (over and above the risks inherent in investment projects) are not relevant, but the same will often not be true of the poor. If we are to shield poor borrowers from the risks of price fluctuation highlighted by Aristotle, we will need to structure financing more directly in terms of the underlying output - e.g. by sometimes buying shares in projects, rather than lending money at interest.
