Usury

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 became an accepted part of the business world in the early modern age, the word has come to refer to the charging of unreasonable or relatively high rates of interest.

Historical meaning

Usury (in the original sense of any interest) is scripturally and doctrinally forbidden in many religions. Usury was denounced by countless spiritual leaders and philosophers of ancient times, including Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Aquinas, Muhammad, and Moses.

Cato in his De Re Rustica said:

"And what do you think of usury?"
"What do you think of murder?"

The teachings against usury in the Islamic traditions are not only historically significant in their own right, but also have the widest influence on modern finance. Usury, indeed, 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.

In 1745, the Catholic teaching on usury was expressed by Pope Benedict XIV in his VIX Pervenit, which strictly forbids the practice as such, although he adds that "entirely just and legitimate reasons arise to demand something over and above the amount due on the contract" - such reasons could include the risk of loss, the time value of money in the modern economy, etc.

In traditional Jewish law it is forbidden to charge interest upon loans made to other Jews. However, Jews are not forbidden to charge interest on transactions with non-Jews, or Gentiles. Given this double standard, Gentile debtors may have been quick to lay charges of usury against Jewish money-lenders charging even nominal interest or fees. Thus, historically attacks on usury have often been linked to anti-semitic rhetoric, as, for example, in The Merchant of Venice and Ezra Pound's poetry.

Indeed, 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" money-lending practices.

Injunctions against usury within religious texts

Biblical

The following quotations are from the Bible (New Living Translation):

Exodus 22:25 If you lend money to a fellow Hebrew in need, do not be like a money lender, charging interest.

Leviticus 25:35-37 If any of your Israelite relatives fall into poverty and cannot support themselves, support them as you would a resident foreigner and allow them to live with you. Do not demand an advance or charge interest on the money you lend them. Instead, show your fear of God by letting them live with you as your relatives.

Remember, do not charge your relatives interest on anything you lend them, whether money or food.

Deuteronomy 23:19 Do not charge interest on the loans you make to a fellow Israelite, whether it is money, food, or anything else that may be loaned with interest.

Deuteronomy 23:20 You may charge interest to foreigners, but not to Israelites, so the LORD your God may bless you in everything you do in the land you are about to enter and occupy.

Nehemiah 5:7 After thinking about the situation, I spoke out against these nobles and officials. I told them, "You are oppressing your own relatives by charging them interest when they borrow money!" Then I called a public meeting to deal with the problem.

Nehemiah 5:10 I myself, as well as my brothers and my workers, have been lending the people money and grain, but now let us stop this business of loans.

Psalm 15:5 Those who do not charge interest on the money they lend, and who refuse to accept bribes to testify against the innocent. Such people will stand firm forever.

Proverbs 28:8 A person who makes money by charging interest will lose it. It will end up in the hands of someone who is kind to the poor.

Jeremiah 15:10 Then I said, "What sadness is mine, my mother. Oh, that I had died at birth! I am hated everywhere I go. I am neither a lender who has threatened to foreclose nor a borrower who refuses to pay--yet they all curse me."

Ezekiel 18:8 And suppose he grants loans without interest, stays away from injustice, is honest and fair when judging others,

Ezekiel 18:13 ...and lends money at interest. Should such a sinful person live? No! He must die and must take full blame.

Ezekiel 18:17 ...helps the poor, does not lend money at interest, and obeys all my regulations and laws. Such a person will not die because of his father's sins; he will surely live.

Ezekiel 22:12 There are hired murderers, loan racketeers, and extortioners everywhere! They never even think of me and my commands, says the Sovereign LORD.

Qur'anic

The following quotations are from the Qur'an:

Al-Baqarah 2:275 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 2:276-280 God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. 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-'Imran 3:130 O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed.

Al-Nisa 4:161 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.

Ar-Rum 30:39 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.

Usury in scholastic theology

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 as if one were to charge for a piece of cake and then make a further charge for eating it. 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 any man can sell.

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 "Mons Pietatis".

Later, the Protestant John Calvin (father of a Protestant Reformation movement known as Calvinism) defended interest charges. A connection was advanced in influential works by Richard H. Tawney and by Max Weber that this set the stage for the development of capitalism. In fact, technology and joint-stock companies were at least as influential and trade and commerce were not retarded in countries that maintained laws against usury. However, the growth in derivative financial "products" was certainly increased by the allowance of interest charges.

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"- Source 18 USCA 1961 B(6)(B). See Racketeer Influenced and Corrupt Organizations Act

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 rates in the US

States have statutes which set out how much interest can be charged before it becomes unlawful (Usury).

If a lender charges above the lawful interest rate, a court will not allow him to sue you to recover the debt, because his interest rate was illegal anyway.

And in some states (as New York) such loans are avoided, meaning made void from the beginning or ab initio. Ref NY Gen Oblig 5-501 et seq. and NY 1503.

Reference: Interest rate usury limits for US 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. On the other hand, to the extent that borrowers are driven to such debts out of necessity, opponents of usury may dispute just how voluntary the contract is. ^{[citation needed]}

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, commercial transactions must be made on spot. Usury violates this principle, since usury essentially means buying money on credit.

Division of risk

Many view investing money and expecting it to be returned regardless of the success of the venture being financed by the loans still appears to be a scheme for making money simply by having money and not by taking any risk or by doing any work, adding any value or by any effort or sacrifice at all. ^{[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 an ugly side 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 which result in a transfer of money from poor to rich. 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. Thus usury tends to force economic activity into the hands of the few which is often seen as a negative aspect of modern capitalism. ^{[citation needed]}