The History of Usury

In the economic model previously outlined, the role of the banks, both central and private, are a key component that ‘fuel’ the economy in terms of ‘loans borrowed’ and ‘interest paid’. However, while today, the idea of loans and interest are generally accepted as a necessary requirement of any economic system, this was not always the case, when equated to the term ‘usury’. Historically, usury was considered to be the practice of lending money with an associated interest rate or possibly more accurately, an excessive interest rate. However, history suggests that usury has been practiced in various parts of the world for at least 4000 years, while being the subject of  much criticism on moral, ethical, religious and legal grounds.  The arguments raised against usury have related to work ethics, social justice, economic instability, ecological destruction and inter-generational equity.  While some of these arguments might now be perceived as historical, many still contend that there are many negative effects on society when considered in terms of the present-day interest-based global economy. While there are many threads associated with the history of usury, the following discussion will mainly follow the path through the rise and fall of the Holy Roman Empire and  the European Renaissance into the modern era. However, from a religious perspective, the objection to usury is anchored in the book of Deuteronomy, which the fifth book of the Jewish Torah, but which also provides moral guidance to Christians and Muslims.

Deuteronomy 23:19 Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of anything that is lent upon interest.

Deuteronomy 23:20 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.

Of course, it might be suggested that there is quite a lot of scope for interpretation within the definition of ‘thy brother’ and ‘a foreigner’, which then might suggest that all lending with interest is not absolutely forbidden. In the early days of the Roman empire, loans were made with high interest rates to people in the provinces in order that they might pay their taxes, which were used to support its many military campaigns. As such, this might also be seen as another selective criteria being applied to the morality of usury. Initially, as the Christian church began to expand under the protection of the Roman empire, it appears to have had nothing to add on the subject of usury beyond that implied within Deuteronomy. However, in 325 BCE, the Christian council  of Nicaea introduced a ban on usury, although it only applied to its own clergy. Later, in 806 BCE, Charlemagne, now the emperor of the Holy Roman Empire, introduced another ban on usury that was extended to the population at large, although there is little historical evidence suggesting that usury was in common practice beyond the city of Byzantium, which already had a state-regulated system of commerce and banking. However, as the Roman empire began to fail, medieval Europe started to fall into what has become known as the Dark Ages, such that most financial matters were conducted within a barter system based on the exchange of goods and services rather monetary coinage. It was not until the 11th century that the general state of the ‘European economy began to improve in any significant way.

By the beginning in the 12th century, the Church was not only upholding its opposition to usury but also promising harsh consequences for those found guilty of its practice. In 1179, the Catholic Church had decreed that usurers would be denied full burial rites, which reflected  the strict view of theologians, such as Thomas Aquinas, who equated usury to theft and likened its seriousness to perjury, adultery, and murder.  Later, the Church would declare that any form of usury should be considered as heresy and that anyone who practiced usury should be punished as a heretic. Therefore, given the powerful position of the Church at this time, any exchange of money in the form of a loan would have required careful consideration of the Church’s ban on usury, especially if you were directly subject to Church law. However, with hindsight, we might see the ‘loop-hole’ provided in Deuteronomy in terms of the definition ‘thy brother’ and ‘ a foreigner’. In this context, the first recognised group to practice usury were the Jews, who were deemed not to be subject to church law, while they themselves also saw no violation of their own law regarding usury, which only restricted Jews from lending to their ‘brother’ Jews. As a consequence, the Jews would come to initially dominate the money lending trade in medieval Europe, mainly because they were not allowed to practice within many of the accepted trades of the Christian world. However, over time, an increasing number of Christians entered into financial trading, which indirectly leveraged interest on many investment loans. However, at this time, financial interests were still considered to be subordinate to the real purpose of life, i.e. securing eternal salvation on the ‘day of reckoning’. As such, conduct in any financial dealings was seen to be part of one’s personal conduct in life and therefore subject to the rules of morality; especially those in defined by the Church. We might characterise the general attitude in the following guideline: 

"Payment may properly be demanded by a craftsman, who makes goods or by a merchant who transports goods over a long distance to a place that is in need of them, because both vocations serve a common good. The sin of avarices may hang on them, but indeed it lies unpardonably heavy upon the speculator, those who profit from weakness, who exploit situations for no one's good but their own. "

So while material wealth was not necessarily a sin, it was believed that wealth should be a means to an end, not an end in itself, and therefore a man should have no more wealth than he required. In many ways, this position was also captured in the words of Seneca, written some 1000 years earlier and quoted at the outset of this discussion of economics:

“What difference does it make how much is laid away in a man’s safe or in his barns, how many head of stock he grazes or how much capital he puts out at interest, if he is always after what is another’s and only counts what he has yet to get, never what he has already. You ask what is the proper limit to a person’s wealth? First, having what is essential, and second, having what is enough.”

However, by the start of 14th century, a subtle shift in attitude towards usury started to take hold in terms of the role of interest in financial trading, where mathematics could be used to calculate whether a given activity would be profitable or not. For, in more ways than one, such ideas started to remove the ‘morality’ out of the ‘equation’. While the church still condemned the idea of usury, they were no longer able to stop the spread of the idea of 'interest' as a legitimate compensation for loss, especially as it grew in popularity among bankers and merchants. For, in this context, the payment of interest was described as simply protecting the lender should any financial loss be incurred, while money was still outstanding. Later, even the Church would soften it this position in regard to ‘interest’ as follows:

Interest is not profit - it is the avoidance of loss.

Within this crafting of words, the usury laws was essentially side-stepped and soon most  lenders began to demand interest payments against the ‘possibility of loss’ and, as such, it was not classed as ‘usury’ because the ‘interest’ was not a fee for the use of money. Later, when it became evident that money lenders were simply using the definition of ‘interest’ as a means to side-step the charge of ‘usury’, the Church did not act and the door was left open to further financial ‘developments’. By the 17th century, trade in Europe was mainly conducted in gold and silver coins, and while durable, these coins were difficult to transport in bulk and run the risk of being stolen. As a consequence, many traders started to deposited their coins with local goldsmiths, simply because they own the strongest safes. In return, the goldsmiths started to issue paper receipts, which in-turn were used as a form of ‘paper money’ and traded in preference to gold coins.  However, it did not take long for this class of ‘goldsmith’ to noticed that only about 10-20% of their receipts were ever redeemed at any given time. As a consequence, they started to ‘lend’  against the gold reserves they held on behalf of others, but several times over the actual value held, as they only required the 10-20% figure to meet the normal demand for gold to be redeemed.

Note: Today, we might quickly realise that the goldsmith was effectively creating ‘paper money’  that exceeded the actual gold reserve  by a factor of 5. If we assume an interest rate of 20%, it would have produced a 100% profit every year on gold reserves that did not exist and which the goldsmith was not legally allowed to lend.

So while the goldsmiths had to be careful to cover any immediate demands for gold to be returned, they were becoming increasingly wealthy without actually producing anything of value themselves. However, although only the principal sum was lent and entered the money supply, more money was paid back, i.e. principal plus interest, such that it would eventually exceed the original wealth in the local community, i.e. it triggered an inflationary spiral. As consequence, more and more people were forced to take out loans of this ‘new paper money’ to cover any shortfall being caused by the wealth being siphoned into the vaults of the goldsmiths-turned-bankers.

But does this historical perspective have any relevance today?

Today, we might better recognise the development of goldsmith model within our own banking system, where private banks have been able to create ‘paper money’ up to ten times their actual reserves, which then left themselves, and the wider economy, exposed to a ‘run on the bank’ should a high portion of depositor ask for their money back in a time of financial crisis, as per 2008. In recent times, the measure of the US money supply has increased from $3.7 trillion, in 1988, to $10.3 trillion, in 2002 and, by 2007, this measure of money was growing at the rate of 11.8% per year. So the obvious question we might want to ask is:

Where did all this new money come from?

Apparently, the US government had not increased its supply money and no gold was added to the US money supply, since the US had abandoned the gold standard in 1933. As such, this new money was effectively ‘created’ by private banks as ‘bank credit’  and linked to the loans issued. However, as the town-people in the goldsmith-banker model found out to their cost, the problem with inflating the money supply in this way is that it inflates prices, i.e. the cost of everything goes up. For more money entering the any economy has the effect of driving up prices, such that $1 buys less, which essentially robs people by reducing the value of their money. Strangely, this form of inflation is often blamed on the government, for it is frequently assumed that governments simply print more fiat money in order to maintain public services without having to resort to the politically unpopular decision to raise tax rates. However, in the US, the government is only responsible for issuing coins, not larger valued paper money. Even so, in countries where the central bank is nationalised institution, so that paper money may be issued by the government, it is known that they only sources a small percentage of the money supply. For example, in the UK, where its central bank was nationalised after World War II, private banks continue to create 97% of the money supply as loans. However, price inflation is only one problems associated with this system of private bank money creation. Again, as the town-people of the goldsmith-banker model found out to their cost, the private banks only create the principal sum, not the interest required to pay back their loans. Given that virtually all the money supply (97%) is created by the private banks themselves, new money must continually be borrowed into existence in order to pay the interest owed to the bankers. So, in the case of the US economy, $1 lent at 5% interest becomes $2 in 14 years, which means the money supply has to double every 14 years, just to cover the interest owed on the money existing at the beginning of this 14 year cycle. In the US, the Federal Reserve's own figures confirm that the money supply has doubled every 14 years since 1959.

Note: Based on these actual figures, it means that private banks effectively siphon off as much money in interest as there was in the entire economy 14 years earlier.

Of course, what is possibly more astounding is that this profit has been extracted, as interests on loans, based on paper money they created out of thin air. This business model, or scam to many, now affects the entire global economy and has become the underlying cause of poverty, economic slavery and under-funded governments, which the majority appear not to understand and therefore powerless to change.

Are there any other long-term issues that need to be considered?

In a wider context, this series of discussions related to the global economy considers whether there are any other limits to economic growth based on the seemingly obvious fact that we all lived on a planet with finite resources. Ultimately, it would seem that the ‘goldsmith-banker’ model can only drive the inflationary spiral into the future and seed the apparently endless demand for economic growth, without which the model will collapse. If so, it may be further evidence that the limit to growth model to be discussed is unavoidable. However, before addressing such issues, we possibly need to consider the role of ‘banks, money and loans in a little more detail.