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 5,000 BC if not earlier. Banking was practiced in temples in Ancient Greece, Rome, Egypt, and Babylon. Sometimes interest rates were set by the state. Although small-time moneylenders might act as loan sharks despite usury bans, usury was outlawed and treated as a sin by most cultures in history. These included 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, which 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.
History tells us two things. First, that charging interest is as old as minted currency and trade itself. Second, that making money by lending it had long been viewed harshly.
While this may seem good at first, especially when we conjure up images of shifty loan sharks and greedy bankers, there are some serious problems to outlawing all interest charging.
The Implication of Banning Usury
The effect of banning usury and charging interest is that it makes most types of banking (especially commercial banking) impossible. 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 the money to grow a crop, but won’t harvest to sell for a season? Why lend 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. 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 loans that compound at such high rates in short amounts of time as that make paying off the principal nearly impossible. The ethical difference between charging high interest and any charging interest has not always been made.
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 prostitution is a solution for eliminating 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 grain and farming business of the Italian merchants and farmers. Those business, as noted above, benefited 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.” Discounting was the process of charging a fee that technically 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 had been attracted to the trading culture Italian Maritime Republics after having been expelled from Spain and England. They had found the loophole in their Old Testament. It says, that while a Jew can’t charge another Jew interest, he 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).
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 became 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 following points:
- Interest charging allows for banking; liberalism allows for interest charging; the principles that the West were founded on depend on 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 are seldom 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 sorts of things that whip people into a panic and lead to persecutions in history. They rarely working out well for any party involved and, ironically, this is 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 gray 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.
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.
“A 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.
The difference between loansharking, usury, and interest: Loansharking implies the charging of unreasonably high interest rates. Interest is the act of charging interest. Usury can be interpreted as charging interest but can be seen specifically (in religious texts) as charging unfair interest such as a loan shark would. 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), and even the fees charged in banking today, are notably more in-line with reasonable interest than loansharking.
- History of Usury Prohibition A Short Review of the Historical Critique of Usury
- Johnson, Paul: A History of the Jews (New York: HarperCollins Publishers, 1987) ISBN 0-06-091533-1, pp. 172–73.