usury

Of Usury, from Brant's Stultifera Navis (the Ship of Fools); woodcut attributed to Albrecht Dürer

Usury (/'juʒ(ə)ɹi/, from the Medieval Latin usuria, "interest" or "excessive interest", from Latin usura "interest") was defined originally as charging a fee for the use of money. This usually meant interest on loans, although charging a fee for changing money (as at a bureau de change) is included in the original meaning. After moderate-interest loans were made more easily available usury became an accepted part of the business world in the early modern age. Today, the word has come to refer to the charging of unreasonable or relatively high rates of interest.

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

Main articles: History of banking and History of pawnbroking

The historical rendition of usury as a vile enterprise stems not only from a spiritual view that charging exorbitant interest is a flagrant manifestation of unchecked greed, but carries with it social connotations of perceived "unjust" or "discriminatory" moneylending practices. This is well explained by the historian Paul Johnson, who believes:

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.^[1] 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.^[2]

The Torah and later sections of the Hebrew Bible criticize interest-taking, but interpretations of the Biblical prohibition vary. One common understanding is that Israelites are forbidden to charge interest upon 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 was evaded.^[3]

Johnson holds that the Hebrew Bible treats the 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. One of the great problems was usury, or rather lending money at interest. This was a problem the Jews had created for themselves, and for the two great religions which spring from Hebrewism. ^[4]

Usury (in the original sense of any interest) was denounced by a number of spiritual leaders and philosophers of ancient times, 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?"

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 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. But the Christians also 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 so became identified with the hated trade of moneylending.^[5]

Peasants who were forced to pay their taxes to Jews could personify them as the people taking their earnings while remaining loyal to the lords on whose behalf the Jews worked. Non-Jewish debtors may have been quick to lay charges of usury against Jewish moneylenders charging even nominal interest or fees. Thus, historically attacks on usury have often been linked 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."^[6]

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 hanged and their property went to the Crown. In 1290, all Jews were expelled from England, 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.

The growth of the Lombard banking 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)."^[6]

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 debates did not abate 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.

Usury within religious texts

Hebrew Bible

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. (Exodus, 22:24 ^[7])

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 LORD 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)

Now there cried a certain woman of the wives of the sons of the prophets unto Elisha, saying: 'Thy servant my husband is dead; and thou knowest that thy servant did fear the LORD; and the creditor is come to take unto him my two children to be bondmen.' (Kings 4:1)

Woe is me, my mother, that thou hast borne me a man of strife and a man of contention to the whole earth! I have not lent, neither have men lent to me; yet every one of them doth curse me. (Jeremiah 15:10)

he that hath not given forth upon interest, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true justice between man and man, hath walked in My statutes, and hath kept Mine ordinances, to deal truly; he is just, he shall surely live, saith the Lord GOD. [...] [And he that] hath given forth upon interest, and hath taken increase; shall he then live? he shall not live--he hath done all these abominations; he shall surely be put to death, his blood shall be upon him. [...] [And he] that hath withdrawn his hand from the poor, that hath not received interest nor increase, hath executed Mine ordinances, hath walked in My statutes; he shall not die for the iniquity of his father, he shall surely live. (Ezekiel 18:8-9, 13, 17)

In thee have they taken gifts to shed blood; thou hast taken interest and increase, and thou hast greedily gained of thy neighbours by oppression, and hast forgotten Me, saith the Lord GOD. (Ezekiel 22:12)

Then I consulted with myself, and contended with the nobles and the rulers, and said unto them: 'Ye lend upon pledge, every one to his brother.' And I held a great assembly against them. [...] And I likewise, my brethren and my servants, have lent them money and corn. I pray you, let us leave off this exaction. (Nehemiah 5:7, 10)

He that putteth not out his money on interest, nor taketh a bribe against the innocent. He that doeth these things shall never be moved. (Psalm 15:5)

The rich ruleth over the poor, and the borrower is servant to the lender. (Proverbs 22:7)

He that augmenteth his substance by interest and increase, gathereth it for him that is gracious to the poor. (Proverbs 28:8)

The neutrality of this section is disputed. Please see the discussion on the talk page.

New Testament

There are two parables in the New Testament that deal with "usury". Neither verse contradicts the clear Biblical condemnation of usury:

Geneva Study Bible

Wherefore then gavest not thou my money into the {e} bank, that at my coming I might have required mine own with usury? -Luke 19:23

(e) To the bankers and money changers. Usury or loaning money at interest is strictly forbidden by the Bible, Ex 22:25-27 De 23:19,20. Even a rate as low as one per cent interest was disallowed, Ne 5:11. This servant had already told two lies. First he said the master was an austere or harsh man. This is a lie for the Lord is merciful and gracious. Next he called his master a thief because he reaped where he did not sow. Finally the master said to him that why did you not add insult to injury and loan the money out at interest so you could call your master a usurer too! If the servant had done this, his master would have been responsible for his servant's actions and guilty of usury. (Ed.) Jesus affirms just banking and just interest:

Matthew Henry's Concise Commentary

19:11-27 This parable is like that of the talents, Mt 25. Those that are called to Christ, he furnishes with gifts needful for their business; and from those to whom he gives power, he expects service. The manifestation of the Spirit is given to every man to profit withal, 1Co 12:7. And as every one has received the gift, so let him minister the same, 1Pe 4:10. The account required, resembles that in the parable of the talents; and the punishment of the avowed enemies of Christ, as well as of false professors, is shown. The principal difference is, that the pound given to each seems to point out the gift of the gospel, which is the same to all who hear it; but the talents, distributed more or less, seem to mean that God gives different capacities and advantages to men, by which this one gift of the gospel may be differently improved.

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)

Usury in 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 Part I).

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. Judaism condemns it save when practised against 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 5th Lateran Council (Session 10, 4 May 1515) 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.^[8] 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." (Rothbard 1995, p. 46) 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).

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. ([1]).

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".^[9]

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 rates in the United States

Each U.S. state has its own statute which sets out how much interest can be charged before it becomes 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, meaning made void from the beginning or ab initio. Ref NY Gen Oblig 5-501 et seq. and NY 1503.

However, there are separate rules applied to most banks. In 1980, due to inflation, national banks (banks that generally include N.A. in their name), federally chartered savings banks, installment plan sellers and chartered loan companies were exempted from state usury limits by the federal government through a special law. This effectively overrode all state and local usury laws.

Reference: Interest rate usury limits for U.S. states: Usury rate limits.

Ethical arguments for and against usury

Freedom of trade

The primary ethical argument in defense of usury has been the argument of liberty against the "restraint of trade" since the borrower has voluntarily entered into the usury contract.^{[citation needed]} Opponents note, however, that borrowers may be driven to such debts out of necessity, or economic duress.^{[citation needed]} 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 attachement to one another, there is no incentive for the lender to lend, and the borrower to enjoy the (presumed) benefits of a loan 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. ^{[citation needed]}

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. The final "ethical result" of the interest rates justifies charging them.

Islam

In contrast, the Medieval Schoolmen, Islamic scholars and others raise several arguments against usury. Islamic contract law prohibits trading on credit; monetary or other exchange values (i.e. gold, silver, etc.) transactions must be made on the spot. Usury violates this principle, since usury essentially means buying money on credit.

Islamic scholars argue that usury also implies that the party in debt guarantees to pay the required amounts on refixed dates. Such guarantees, however, are impossible to make, as every business and venture runs the risk of failing.

In a business where money is lent, the debtor only provides the capital yet is guaranteed a fixed amount of profit. The debtee, however, puts in time and effort, but is made to bear the risk of loss. Muslim scholars argue that such practice is unjust.^[10]

As an alternative to usury, Islam strongly encourages charity and direct investment, where the debtor shares whatever profit or loss the business may incur.

Risk Sharing

Many view investing money and expecting it to be returned regardless of the success of the venture being financed as a scheme for making money simply by having money (as opposed to doing so by taking a risk, engaging in some work or effort, adding value, or by sacrificing in some manner.) ^{[citation needed]} However, in practice, such "risk-free" loans still carry the risk of default and contracts typically specify what to do in this possibility. Since the borrower bears more of the risk and thus receives the value of any returns above the interest rate, this acceptance of additional risk typically occurs when the borrower expects higher returns than the lender. ^{[citation needed]}

Inequality

Moreover, the growth in derivative financial products has certainly increased by the widespread and free allowance of interest charges but this has enabled wealthy financial institutions to create a debt imbalance in their favour at the expense of borrower countries (which includes the United States of America, that currently has a debt in the trillions of US Dollars). The provision of credit at rates that are much higher for the poor is, like other instances where the poor's costs are higher, sometimes seen as a negative attribute of capitalism. ^{[citation needed]}

Moreover, if interest rates are higher than returns on productive investments, investment may be directed away from production loans into consumption loans.^{[citation needed]} Moreover, productive investment time-frames can become unrealistically shortened and a business can be expected to produce returns in short order^{[citation needed]} and, when it does not, the lenders simply foreclose and take over the business even though this action may be shortsighted. This may be a disincentive to investment, except perhaps, for those businesses which are so large that they have no need for external credit and can readily meet loans from collateral offered.

References

• Rothbard, Murray N. (1995), written at Auburn, Alabama, An Austrian Perspective on the History of Economic Thought (2 Vol. Set), Ludwig von Mises Institute, ISBN 0-945466-48-X, <http://www.mises.org/store/Austrian-Perspective-on-the-History-of-Economic-Thought-2-volume-set-P273C1.aspx>.

See also

• contractum trinius
• Debt-based monetary system
• Islamic banking
• Money changing
• Payday loans
• Predatory lending
• Settlement (finance)
• Vix Pervenit
• Title loan

Further reading

Web:

• Usury is Riba in Islam, this is an exclusive site on the subject of Riba (ar-Riba, usury, interest), answering the logic and reasoning for the prohibition of usury
• USURY, A Scriptural, Ethical and Economic View, by Calvin Elliott, 1902. (a searchable facsimile at the University of Georgia Libraries; DjVu & layered PDF format)
• Catholic Encyclopedia article on Usury, 1912
• Question 78. The sin of usury (St Thomas Aquinas' Summa Theologiæ)
• Luther's Sermon on Trading and Usury
• Concordia Cyclopedia: Usury
• What Love Is This? A Renunciation of the Economics of Calvinism
• Dr. Ian Hodge on Usury
• S.C. Mooney's Response to Dr. Gary North's critique of Usury:Destroyer of Nations
• Norman Jones's article on usury from EH.NET's Encyclopedia
• Islamic definition of Usury
• Usury laws by state.
• History of Religious Injunctions Against Usury
• Origin of Modern Banking and Usury in Britain
• Buddha on Right Livelihood and Usury
• Usury (Jewish Encyclopedia, 1906 ed.)
• Usury (Beyond the Pale exposition, friends-partners.org)
• Defence of Usury by Jeremy Bentham. 1787
• Of Usury by Francis Bacon

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.

Donate to Wikimedia