Usury Laws and the History of Banking
The History of Usury Bans
Although early forms of banking (like depository banking and currency exchange) had been practiced since as early as 5,000’s BC if not earlier, and although banking was practiced in temples in Ancient Greece, Rome, Egypt and Babylon where sometimes interest rates were set by the state, and although small-time moneylenders would act as loan sharks despite usury bans, usury was generally outlawed and/or treated as a sin by most cultures in history including Indian cultures, those that practiced Buddhism, Judaism, Christianity, and Islam, and at points by the Chinese, Greeks, and Romans.
Early Vedic texts of Ancient India ban usury (2,000-1,400 BC), Plato, Aristotle, the two Catos, Cicero, Seneca and Plutarch criticize it, Solon removed all debts and credits when Athens had become “enslaved to debt”, and Rome (who had some of the first notable non-Temple banks and early forms of interest) even outlawed it at a point. Not only that, but Islam still essentially outlaws usury today.
This tells us two things: 1. That forms of interest charging are as old as minted currency and trade themselves and 2. that making money off moneylending had long been viewed harshly.
While this may seem good at first, especially when we conjure up images of shifty loansharks and greedy bankers, there are some serious problems to outlawing all interest charging.
The Implication of Banning Usury
The implication of banning usury (but especially the charging of any interest) is that it makes most types of banking (especially commercial banking) impossible, as it removes the incentive to lend money. Charity and other virtues aside, why would a private lender lend money to a grain farmer (who needs to spend to grow a crop, but won’t harvest to sell for a season) or to a grain merchant (who buys lots of grain upfront after the harvest) for the year or season if not for a cut of the grain, a fee, or some benefit? Why take a risk for no reward?
Sure, we can, like Dante (who places blasphemers and those who charge usury in Ring 3 of the Seventh Circle of Hell), John Locke (father of liberalism), or Adam Smith (the father of modern economics) point out that only labor and raw materials can create value. And we can rightly point out that loan-shark like abusive interest rates are unethical and immoral. Those are valid points, and not many would disagree with those basics, but a full ban on charging interest is a harder position to justify.
Reasonable Interest Rates Vs. Usury
Today I would define usury as very high loanshark like rates designed to extort the borrower (like those that compound at high rates in short amounts of time as to make paying off the principal near impossible), not just as any charging of interest, but this hasn’t always been the case.
Meanwhile, reasonable interest rates are rates designed to incentivize the moneylender and the borrower to take on a relationship of debt and credit that is beneficial to both parties and helps grow the economy (Capitalism).
Reasonable interest rates are an integral part of modern economics and the free-market, and it’s a little prejudice to insinuate that banking isn’t labor or that a loan has no value worth charging a fee over. Meanwhile, extortion in any area of life is always a bad thing, but banning interest isn’t any more a solution in banking than banning intercourse is a solution for sexually transmitted disease.
Still, logic aside, in practice in and around the 1,100’s Europeans were dealing with strict anti-usury laws and church doctrine that fully banned interest of all types. At the time usury was defined strictly as, “anything beyond the principle [the original amount] is usury” and that wasn’t going to propel trading-Republics into the future.
Quidquid sorti accedit, usura est (“Whatever exceeds the principal is usury”) – God’s word (as interpreted in Europe at the time)
The Problem of the Italian Grain Industry and the Re-Birth of Discounting
The hard-line, but common, stance against usury was hampering the the grain and farming business of the Italian merchants and farmers (whose business, as noted above, benefits greatly from all types of banking including currency exchange, deposit, loans, futures trading, insurance, etc).
The Roman Empire had eventually allowed loans with carefully restricted interest rates, but the Christian church in medieval Europe had since banned the charging of interest at any rate. This left the merchant grain banks with a problem.
The Merchants and Bankers of Venice
Luckily (from a modern perspective at least), although the Jewish faith also treated usury as a sin, a loophole was found that allowed a fee to be charged for interest via a process called “discounting” (charging a fee that sort-of-technically-a-little-bit skirts the direct charging of interest, at least compounding interest; Muslims still do this today to allow for banking in their culture despite their current usury ban).
The Jews, who had been attracted to the trading culture Italian Maritime Republics (after having been expelled from Spain and England), had found the loophole in their Old Testament. It says, that while a Jew can’t charge a Jew interest, they can charge interest to a foreigner.
“Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of anything 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 into, in the land whither thou goest in to possess it” (Deuteronomy 23:20-21).
Long story short, the Jews took the banking practices developed in England, Spain, and the Silk Road and went on to Italy to play the role of bankers for the grain merchants while the Italian Grain merchants themselves played the role of borrowers. This relationship can be seen as the origin of the modern banking system, insurance, stocks, and most other modern financial products.
Learn more about the History of Banking.
Moneylending, Usury, and the West
Although the final notes below deserve their own page, if not their own book or full essay, the takeaway from this should be the the following points:
- Interest charging allows for banking, liberalism allows for interest charging, and the principles that the West were founded on specifically relate to the ability to charge interest. World peace and world war both require a system of debt and credit. This is one of many reasons we can point to banks and bankers as being neutral entities in most cases (they aren’t the cause of war, but they do handle deposits and loans for both sides).
- There are two types of interest: 1. reasonable and vital rates like the Federal Reserve uses to ensure the American economy, the type that makes the world go round’. 2. the loanshark kind that we can catch glimmers of in credit card debt charged to our poorest, the housing crisis, student loans, and other more risky gambles. Risky gambles look good on paper, but upsets like hyperinflation in Germany (see Economic effects of the Treaty of Versailles) and inflation in Spain are just the sort of things that whip people into a panic and lead to persecutions in history (rarely working out well for any party involved; and ironically often not directly the fault of the banks or those being persecuted).
- How societies utilize banking and regulate interest rates will be a big part of whether we sink or swim as a global people. History shows us that we have often over-corrected (banning all interest charging and thus hurting state growth and the free-market), blamed “the Jews”, Capitalists, or Liberals (not just the moneylenders, but an entire race or ideology as a people), and called it a day. But this is a mistake, not just an ethical and moral mistake, but a practical one. Banking is a naturally arising system, it is very short sighted to blame an entire people for remembering how it works when others cast it aside in darker ages (even when not all the fruits it bears are good). But of course, it is also short sighted to forget about how those high-rates cooked up in the grey areas of the practice have come back to bite everyone in the behind time and time again. The sooner we realize the importance of interest, while respecting the roots of the sin of usury, the better.
“An high interest decays trade. The advantage from interest is greater than the profit from trade, which makes the rich merchants give over, and put out their stock to interest, and the lesser merchants break.” – John Locke, father of liberalism and sometimes economist, presents this quote when arguing that interest is vital, although “high-interest” (usury) is bad. See Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money.
Money & Debt: Crash Course World History 202.
The History of Lending and Charging Interest: Usury In Ancient China and Today.
The Religion of Usury Pt.1 – Adam Smith.
Banking Explained – Money and Credit.
The difference between loansharking, usury, and interest: Although the terms are somewhat semantic, loansharking implies the charging of unreasonably high interest rates, interest is just the act of charging interest, and usury can be interpreted as charging interest, but can be seen specifically (in religious texts) as charging unfair interest like a loan shark would. Thus, although each culture is different, the roots of the anti-usury laws are more about outlawing the charging of high interest by small-time moneylenders than outlawing any interest or related fees in banking. The fees charged with discounting (the early form of interest that arises out of the loophole described above), and even the fees charged in banking today, are notably more in-line with reasonable interest than loansharking.