The Institution of Interest - Usury

From Life, Money and Illusion 2nd Edition, p144 - p151

As a young teen, I remember opening my first bank account and having the interest payments I was to receive explained to me. Every month I would be paid a certain amount for leaving my money in the account. If I left the interest payments in the account, I would also be paid interest on them. I did some calculations and saw how my money would double, and double again and again, over time. I was keen to keep my money in the bank, until a few years later when I started thinking of things I wanted to buy.

I didn’t realize that my bit of money was part of the reserves the bank used to create money to loan to others. Still, the interest I received was serving one of its purposes. It caught my interest and got my money to where it could be used by others, rather than my keeping it in a sock, or spending it right away.
Loaning money played a key role in transforming civilization from a multitude of locally based subsistence economies to today’s system of industrial production serving global markets. Having money available for loans is a key part of our present economic system. It takes money to make things happen. A loan can make it possible for a person with a good idea to develop that idea to the point that he or she has goods or services for sale. If all goes well, the loan can be repaid and the person will end up with his or her own tools and the experience to stay in business. Interest payments are the rental fee entrepreneurs pay until they can own their own businesses.

Those who earn more than they spend have capital, that is, money available for investment. The more capital invested in productive economic activity, the more goods and services will be available and the more work there will be for people to earn money for what they need and want. With goods, services and opportunities resulting from capital investment, increasing capital has, for many, become a primary focus of attention. To expand capital is the goal of capitalism.

Investing to make shoes or to provide a cleaning service is different from investing to make money. Aristotle identified the difference in the 4th century BC. He identified oekonomia, from which our word “economics” comes, as the art of household management. It refers to activities conducted to accomplish ends like producing food, shelter, tools or entertainment. Chrematistike, on the other hand, refers to economic activity that is carried on for the purpose of economic gain independent of whatever practical results might come of it. Aristotle approved of oekonomia but not chrematistike.

While money can be loaned at interest for either of these goals, the goal of economic gain is abstract. Indeed, the money itself becomes abstract; after a certain point it is seldom seen as anything more than numbers printed in an account book, or viewed online. Through the narrow focus on monetary costs and gain, investors can become insensitive to the troubles and grief that their money-making might cause. It is because of the troubles often caused when money is loaned for no purpose besides getting more money in return that charging interest on loans has been condemned as usury (considered for centuries to be one of the deadly sins.)

It is the dire consequences that can befall those who cannot make their interest payments that gave usury its bad reputation. The problem, however, expands massively when practically the entire money supply with which societies do business is created through debt with associated interest demands. We will see below how paying interest, not just on our houses, cars and credit card balances, but on money itself, makes the rat race vicious.

Charging interest on loans is not necessarily usury, however. As mentioned earlier, when seed or livestock are loaned and returned with a share of the growing season’s natural increase, it is not usury. How much different is that from loaning money and asking in return for some of the increase, along with repayment of the principal? There is no difference, as long as the money does in fact expand with use. If the venture, for which the money was loaned, goes broke, the expectation of the lender makes the difference. Lenders who insist on repayment in full, complete with interest charges, are guilty of usury. Lenders who accept a share of the misfortune, as they would have accepted a share of the good fortune, are acting in partnership and within traditional moral bounds.

The tension between the good that interest-paying loans can enable and the harm they can cause has been ongoing for millennia. The opportunities that access to investment capital provides are undeniable. Equally certain is the advantage that lenders have over borrowers. The greater the borrower’s need, the greater the advantage of the lender. The temptation to exploit such advantage is older than recorded history. Enough farms were taken over by lenders and enough debtors sold into slavery by the time the Old Testament was written for that text to prescribe a Jubilee every 50 years. During the Jubilee year, all debts were to be forgiven and lands returned to their original owners. The purpose was to regularly rebalance society by counteracting the tendency of wealth to multiply, even as the disadvantaged became desperate.

The early prohibition of usury was aimed at protecting small farmers and craftspeople. The details about how much a loan will end up costing are not necessarily understood when farmers and craftspeople mortgage their farms and businesses to buy seed, materials or food for their families. What is found in the fine print of a truly usurious loan is that, if the loan is not paid back as agreed, the farm or business named as collateral would become the possession of the lender. By the time their house, farm or business is claimed by the lender for missing payments, it is too late. Charging interest on such loans was discouraged. The large-scale borrowing by kings, popes and nobles was seldom called into question.

As Europe emerged from the Middle Ages and business dealings began to replace the system of obligations that characterized feudalism, loaning money became a more common practice. This prompted the Church of Rome to reassert the rules against usury at its Third Lateran Council in 1175. A century later, in 1274, the assertion was reinforced at the Council of Lyons. Under threat of excommunication, landlords were forbidden to rent to usurers, and where they had already been provided accommodation, they were to be evicted within three months. Usurers were refused Christian burial, and their wills were declared invalid. At the Council of Vienne in 1312, the prohibitions were extended to include the excommunication of rulers and magistrates who maintained laws supporting usury, and any such laws were to be revoked within three months. Any person arguing that usury is not a sin was to be turned over to the inquisitors and punished as a heretic.

These were harsh laws, but so too was getting caught in the debt trap. When a person is in need, borrowing money can be their only hope. To lose one’s land or business because of the substantial sums that interest-bearing loans come to demand could mean destitution, or even death, for debtors and their families. The moneylender, on the other hand, could make substantial gains by seizing the borrower’s assets. In the eyes of the Church, moving wealth from people in need to people with more than they needed was unfair and immoral.

Taking unfair advantage of others — usury — referred to more than charging interest on loans. In a 13th century manual on the topic, written by St. Raymond, usury included raising the price of something because one has a monopoly on supply, hard bargaining to lower a price, charging excessive rent, subletting at a higher rate than a renter was paying, cutting wages, lack of lenience with a debtor behind on payments, requiring too much collateral on a loan and excessive profits by middlemen. All were denounced as sinful.

Charging interest on loans of money is the practice most often identified as usurious, yet it is not making a profit from loaning money that is the essence of the sin. Payment for loss incurred or gain foregone by the lender was considered legitimate.

Compensation for late repayment was okay. Annuity investment, where the amount of return is based on the actual performance of the investment, and investment in trade journeys where profitable returns are expected but not certain, were acceptable. What was considered unlawful was to loan money at an interest rate identified in advance to be paid, come what may, with no risk to the lender.

During a 16th century parliamentary debate in Britain, usury was described as “any bargain, in which one party obviously gained more advantage than the other, and used his power to the full.” Ironically this definition of usury comes from a debate that ended with the removal of British laws that forbade charging interest.

Compound Interest

The accumulation of interest charges can come as a surprise to borrowers. A mortgage of $100,000 at 10 percent interest for 30 years will cost the borrower $300,000 by the time it is paid off. This assumes that no payments are missed and that the homebuyer does not end up paying interest on the interest. If payments on such a loan were deferred so that the interest was added to the principal and interest charged each month on the new total, the borrower would be paying “compound interest.” The same $100,000 loan at 10 percent compound interest, if no payments had been made at the end of 30 years would cost a little less than $2 million, equivalent on average to paying back the entire principal every 18 months.

Most lenders would foreclose if a borrower were not paying the interest charges; therefore, the massive gains of compounded interest would not come from a single borrower. Nevertheless, the interest income would likely be lent out through other loans, thereby gaining interest on the interest. The cumulative result for the lender would be the massive returns of compounded interest.

With loans to poor countries, the same pattern takes an enormous toll. Because these countries have an entire population to tax to pay off loans, lenders are more willing to loan additional moneys to cover the interest when payments get behind. Subsequent loans are often delivered with the requirement that publicly owned properties be sold to private interests. State-run businesses, transport and communications systems, water works, health care and other such public institutions are removed from public control. While a price may be paid for the public enterprise, it is often less than full value, and the ongoing benefits are lost just the same. Unlike a private borrower whose debt is cancelled when their farm or house is confiscated, the poor countries gain only a temporary respite from the demands of their loans.

Difficulties arising from money loaned at interest led philosophers and statesmen to brand the practice as anti-social. By contrast, in the early 1990s, when concern for government deficits was being stirred up, the priorities expressed in editorials were almost the opposite. Governments were reported to be spending too much and had to cut back social services, job creation, education, health care, old age pensions, the arts, amateur sport and even the military. These calls for reduced spending were echoed throughout the media, but never, in the intense process of molding public opinion, was there any suggestion that we might reduce the deficit by cutting back on interest payments. This suggests that, of all the things we do as a society, paying interest charges is the most sacred. This is an impressive rise to prominence for a practice that was once condemned as a deadly sin.

Restoring Balance

As mentioned earlier, the custom of the Jubilee year comes to us from ancient times as a way to rebalance society. The biblical reference is more widely known than the following example from Greek history. In his book Voltaire’s Bastards: The Dictatorship of Reason in the West, John Ralston Saul tells how Western civilization can trace its origins back to 6th century BC. At the time, Athens was in the wrapping-up stage of the money begets money process. The hereditary rich and ruling class had been exploiting their advantage to the fullest. When their debtors could not pay, they took possession of farms and, in some cases, sold the dispossessed into slavery to recover their money. With the loss of property came loss of citizenship, further concentrating power within the ruling class. Athens was not well. Apprehension and discontent soured the civic mood, and revolution seemed possible. A citizen named Solon was called to public office. He had held a year-long post as ruler 20 years earlier and was Athens’ leading poet.

Solon’s first acts were to eliminate debts, return confiscated lands and free the enslaved citizens. The End Game was replaced with a clean slate, and the Greece we read about in our history texts flourished, producing great art, architecture, democracy and the ongoing legacy upon which Western civilization is based. Henry IV of France, with the help of his chief minister, Sully, did the same thing in the early 1600s.

The idea of cancelling loans is met with gasps of horror, not unlike the cries of heresy that greeted challenges to the divine right of kings in days past. We have to ask ourselves why this would be. Why is there such commitment to maintaining payments on mathematically intensified debts that are causing immense hardship and could, perhaps, push civilization into chaos? In the US, the excesses of debt- based money creation were neutralized by stock market crashes in 1837, 1857, 1892–93, 1907 and 1929. In each of these instances, enormous amounts of debt evaporated. The difference was that, in Athens and France, the process was orderly. In the US, before providing the foundations for new beginnings, the crashes produced chaos and hardship in great measure. Of the 1892–93 panic, John Ralston Saul writes: “Four thousand banks and fourteen thousand commercial enterprises collapsed.”

In ancient Greece and 17th century France, the thrill of gain was likely very much as it is today. People who were winning likely wanted to keep winning. It is unlikely that these qualities of being human have changed. Then as now, the winners would have overlooked evidence showing that their great success was causing harm. How did the end game of the past become obvious enough to enable an orderly transformation, and yet, today the possibility is vigorously ignored? Saul attributes it, in part, to “the attachment of moral value, with a vaguely religious origin, to the repayment of debts.”

Besides the psychological tendencies to ignore the unfortunate consequences of success and the deep level at which capitalist values have been accepted as personal and societal principles, there are technical factors that inhibit our ability to recognize the need for a rebalancing of accounts. Electronic banking and control of the media enable the winners of today’s Global Monopoly Game to keep the game going in ways that were not possible before. When wealth was embodied in land, or in gold and silver coins, it was much more obvious when the game was drawing to a close. All the tokens could be seen to be in one camp. In today’s cyberworld, accounts are kept in electronic files that fly from place to place at the speed of light. In the past, if one were sold into slavery, the change of status would have been obvious. In today’s debt game, it is not as clear when one’s lot has changed. How many alive today will work most of their lives, paying the proceeds of their labor into the accounts of moneylenders? Such debt “slavery” can be self-inflicted when people borrow for themselves, or it can be the result of entire countries being obliged to reorganize their economies to earn foreign exchange for paying off international debts. The chains of debt slavery can be velveteen, but the product of people’s labors is claimed by others nonetheless.

Another advantage enjoyed by today’s big winners is that we are a world informed by mass media. Radio and television stations, newspapers and movie studios are expensive enterprises. Those who can afford to own mass media have technological access to people’s thoughts and beliefs in a way that never existed before. Most of North America’s mass media is controlled by a handful of wealthy interests. It is no surprise that their editorial policies and comments promote strategies that accommodate their continued winning.

As we move into the final stage of the present Global Monopoly Game, strategic plans are being implemented to open up the entire world to the process. This will enable the winners to go another round or two, before they own everything available. Wherever there is financial wealth to be made, there is the opportunity to help meet the next increment of exponential growth. Unexploited natural resources, inexpensive labor and the economies of developing countries or the education, health care, water and waste systems of the developed world all tie up money that could be tapped to maintain the present round of the money game. When those resources have been gathered, what will the next step be?

The institution of loaning money at interest offers great opportunities. We have built a complex industrial civilization on the opportunities. Now we face some dangers. More follows on the problems emerging from basing our system of mutual provision on the abstract expansion of wealth. First, however, more detail about the institutions of money and growth will expand the context of the economic problem.