Norman Jones, Utah State University
The question of when and if money can be lent at interest for a guaranteed return is one of the oldest moral and economic problems in Western Civilization. The Greeks argued about usury, Hebrews denounced it, Roman law controlled it, and Christians began pondering it in the late Roman Empire. Medieval canon lawyers adapted Greek and Roman ideas about usury to Christian theology, creating a body of Church law designed to control the sin of usury. By the early modern period the concept began to be secularized, but the issue of what usury is and when it occurs is still causing disputes in modern legal and theological systems.
The Greek philosophers wrestled with the question of whether money can be lent at interest. Most notably, Aristotle concluded that it could not. Aristotle defined money as a good that was consumed by use. Unlike houses and fields, which are not destroyed by use, money must be spent to be used. Therefore, as we cannot rent food, so we cannot rent money. Moreover, money does not reproduce. A house or a flock can produce new value by use, so it is not unreasonable to ask for a return on their use. Money, being barren, should not, therefore, be expected to produce excess value. Thus, interest is unnatural.
Roman lawyers were more subtle in their treatment of the problem. They recognized the right to lend and borrow for a specified return, the mutuum. A strict contract in which money, oil, or other fungible good could be lent on the expectation of an equal return in kind and quality of the substance loaned. Interest was not recognized in this obligation unless it was agreed upon by the parties ahead of time. Foenus was an illegal contract for interest without risk, with one exception. The foenus nauticum allowed lenders to contract for certain return on money lent for large projects, such as voyages. It was the Latin foenus that was used interchangeably with usuram in Latin biblical translations. Nonetheless, Roman law did, in the Lex Unicaria of 88 B.C., recognize an interest rate of up to 12%. Made the maximum rate in 50 B.C. by a decree of the Senate, the centesima usura stood until Justinian lowered the rates in 533 A.D., creating a sliding scale with 12% only applying to the foenus nauticum, 8% to business loans, 6% to those not in business, and 4% to distinguished persons and farmers.
The Christians of the late Empire were not so flexible. There is a steady condemnation of lending at interest running through the patristic literature. St. Jerome declared usury to be the same as murder, echoing Cato and Seneca, since it consumed the life of the borrower. Christians, however, seemed required by God to condemn it. Exodus 22:25 forbad oppressing one’s neighbor with usury. Deuteronomy 23:20-21 said you could not charge your brother usury. Ezekiel 18:7-8; 13 makes it clear that the righteous do not lend at usury; and that usurers “shall not live.” Leviticus 25:35-36 says if your brother is poor do not charge him usury. The final Old Testament word on the issue came from the Psalmist, who charged the godly to aid their neighbors, not lending to them at interest. The strongest rejection of loans at interest came from Christ in Luke 6:35, where He says “Lend, hoping for nothing in return.”
Given God’s hostility to usury, it is hardly surprising that Christian theologians from the fourth century on defined lending for gain as a sin. Aquinas and his fellow scholastics amplified authors like St. Jerome on the subject, and Gratian built it into the code of Canon Law. Aquinas must have been gratified to find that Aristotle shared his hostility toward usury. By the late Middle Ages there was a consensus that lending at interest for guaranteed return was illegal and damnable. However, they also agreed that if the lender shared in the risk of the venture, the loan was legal. Consequently, laws against usury seldom interfered with merchant capitalism. Businessmen could always get loans if their contracts made them partners in risk. Extrinsic titles of the canon law, for instance, made it legal to charge for damnum emergens and lucrum cessans, losses sustained because someone else was using one’s money. The difference between the amount lent and the profit it might have made was paid as interesse. However, one had to prove the loss to charge interesse. It was also possible to write contracts which specified poena conventionalis, a penalty for late payment that did not demand proof of loss. Merchant bankers like the Medici did not charge interest per se, but they often received gifts from grateful clients.
Canon law and secular law held usury to be malum in se, an evil in itself that must be outlawed because God condemned it. Nonetheless, there were many legal ruses that allowed invisible illegal interest to be charged. A contract for a false sale, in which an inflated price was paid for a good, might be constructed. Or the appearance of risk might be incorporated in a contract by conditioning the payment on some eventuality such as the length of someone’s life. Only the poor, lacking personal credit, were forced to pledge collateral to get money.
Poor Men’s Banks
The oppression of the poor by usurers offended many good Christians. As an anti-Semitic counter measure against the Jews who were outside the canon law’s prohibitions, the papal governor of Perugia, Hermolaus Barbarus, invented the mons pietatis, “poor men’s bank” in 1461. Publicly-run pawn shops approved by Paul II in 1467, these nonprofit banks lent to the deserving poor at very low rates of interest and, by the late fifteenth century, they began to accept deposits. By the sixteenth century these banks were spread by the Franciscans all over Europe, though not in England, where Parliament refused to legalize them.
Changing Interpretations in the Fifteenth Century
As the demand for capital grew theologians became increasingly aware that lending at interest was not always theft. In the fifteenth century, Paris’s Jean Gerson and Tubingen’s Conrad Summenhardt, Gabriel Biel and John Eck argued that usury occurred only when the lender intended to oppress the borrower. Eck, supported by the Fugger banking family, became famous for his book Tractates contractu quinque de centum (1515), defending five percent as a harmless and therefore legal rate of interest as long as the loan was for a bona fide business opportunity. For these nominalists the proper measure of usury was the intent of the borrower and lender. If they were in charity with one another the loan was licit.
Eck’s position horrified more conservative people, who continued to see usury as an antisocial crime. Not surprisingly, Eck’s great enemy, Luther, refused to accept the idea that intention was a proper test for usury. Luther refused even to accept the extrinsic titles, insisting that anyone who charged interest was a thief and murderer and should not be buried in consecrated ground. He allowed only one exception to his anathema. If money was lent at interest to support orphans, widows, students and ministers it was good. Melanchthon was less conservative than Luther, admitting the extrinsic titles.
Bourgeois reformers like Martin Bucer and John Calvin were much more sympathetic to Eck’s argument. John Calvin’s letter on usury of 1545 made it clear that when Christ said “lend hoping for nothing in return,” He meant that we should help the poor freely. Following the rule of equity, we should judge people by their circumstances, not by legal definitions. Humanist that he was, Calvin knew there were two Hebrew words translated as “usury.” One, neshek,meant “to bite”; the other, tarbit, meant “to take legitimate increase.” Based on these distinctions, Calvin argued that only “biting” loans were forbidden. Thus, one could lend at interest to business people who would make a profit using the money. To the working poor one could lend without interest, but expect the loan to be repaid. To the impoverished one should give without expecting repayment.
The arguments in Calvin’s letter on usury are amplified in Charles du Moulin’sTractatus commerciorum et usurarum, redituumque pecunia constitutorum et monetarum, written in 1542 and published in Paris in 1546. Du Moulin (“Molinaeus”) developed a utility theory of value for money, rejecting Aquinas’ belief that money could not be rented because it was consumed.
This attack on the Thomist understanding of money was taken up by Spanish commentators. Domingo de Soto, concerned about social justice, suggested that Luke 6:35 was not a precept, since it has no relation to the justice of lending at interest. Luis de Molina, writing in the late sixteenth century, agreed. He suggested that there was no biblical text which actually prohibited lending money at interest.
Increasing Tolerance toward the Legal of Charging Interest
By the second half of the sixteenth century Catholics and Protestant alike were increasingly tolerant of the idea that the legality of loans at interest was determined by the intentions of the parties involved. Theologians were often reluctant to admit much latitude for usury, but secular law and commercial practice embraced the idea that loans at interest, made with good intentions, were legitimate. By then most places permitted some form of lending at interest, often relying on Roman Law reified in Civil Law to justify it. In the Dutch Republic and England the issue was relegated to conscience. The state ceased to meddle in usury unless it was antisocial, leaving individuals to decide for themselves whether their actions were sinful. At about the same time the image of the usurer in literature changed from a sinister, grasping sinner to a socially inept fool.
17th-Century Debate Turns to Acceptable Interest Rates
As social good became the proper test of a loan’s propriety, there emerged two distinct debates about usury. By the first third of the seventeenth-century the issue of usury as a sin had been relegated to the conscience of the lender. The state was increasingly concerned only with whether or not the rate of interest was damagingly high. As the Act against Usury passed by the English Parliament in 1624 demonstrates, the rate of interest was important to the national economic well-being, lowering the maximum rate of 10%, established in 1571, to 8%. An amendment to the Act announced that this toleration of usury did not repeal the “law of God in conscience.”
This era saw the emergence of a casuistic debate about usury and an economic debate about credit. Robert Filmer, the English political theorist, wrote a book proclaiming that matters of conscience need not be subjected to state control. His contemporaries in the first generation of economists, Gerard de Malyne and Thomas Mun saw usury as a practical business problem. Malyne thought lending at interest was perfectly admissible if it was commercial credit; oppression of the poor by pawnbrokers was the evil usury condemned by God. Mun argued that there was no connection between usury and patterns of trade, and Edward Misselden saw interest rates as a matter of the money supply, not an oppression of the poor.
Most seventeenth-century Europeans knew usury was condemned by God, but many, while not admitting that usury should be legal, were espousing more radical views. Claudius Salmatius wrote a series of books with titles like De Usuris (1638) and De Modo Usurarum (1639) rejecting the Aristotelian definition of money as a good that was consumed. He insisted it could be rented. In this he was following Du Moulin’s argument from the sixteenth century. By the early eighteenth century Salmatius’ rejection of the traditional idea of usury was widely accepted. John Locke tried a slightly different argument, though to the same end. Lending at interest for productive purposes, he said, was no different from a landlord sharing the profits of a field with his tenant.
1700s: Worries about Usury Diminish, Lending at Interest Becomes Normal
By the eighteenth century the moral issue of usury was no longer of interest to most Protestant thinkers. In practice lending at interest with collateral had become normal, as had deposit banking. It was regulated by states, and this regulation was seen as benefiting business and protecting the poor. Adam Smith thought that since money can by made by money, so its use ought to be paid for. Nonetheless, he defended usury laws as the necessary in order to encourage productive investment and discourage consumptive spending. A cap on interest rates makes money cheaper for productive borrowers, while forcing up the cost of money to those borrowing simply to consume, since they would be getting their money outside the regulated money market. The expense of money borrowed for consumption actually keep many people from borrowing at all.
Debates among Catholics in the 1700s
Among Catholics the practice looked much the same, but in 1744 Scipio Maffei set off a debate with his three-volume defense of lending at interest, in which he suggested usury at moderate rates was not illicit, even if it was not charitable. This assertion was condemned by a papal encyclical, Vix Pervenit,in 1745. The encyclical reasserted the scholastic condemnation of usury, reinvigorating the tension between moral attitudes toward lending at interest and commercial necessity for doing it.
In the early nineteenth century the Roman Congregations issued a series of rulings that took the pressure off. Faithful Catholics engaged in lending were not committing sin as long as they lent at a moderate rate. The moral condemnation of usury as an oppression of the poor did not disappear, however. It was adopted by socialists, whose antagonism toward capitalists convinced them that a market in money was evil. To them, usury was the “new slavery.”
Bentham’s Laissez-Faire Position
However, some economists were arguing that state regulation of credit was a distinctly bad thing. Jeremy Bentham wrote, in 1787, his Defence of Usury, in which he proclaimed a laissez-faire position, and introduced his concept of utility, urging “that no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit: nor, (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to.” Bentham’s argument, written against proposed legislation in the Irish Parliament, won out in the English Parliament, which abolished the law against usury.
Usury Laws in the United States
In the United State usury was regulated by each state as it saw fit. Clearly basing themselves on English legislation (usually the 1664 Act against Usury), colonies and states generally assumed that lending at “immoral” rates of interest is wrong and must be prevented by regulation. The laws were eased in the early nineteenth century. Many states, but not all, repealed their anti-usury legislation. Hard economic times in the post-Civil War era caused the return of anti-usury measures, but these statutes had little impact on normal commercial operations. Attempts to regulate interest rates were complicated by the competition among states with varying laws. Thus American usury laws tend to vary the admissible rate of interest according to local economic circumstances, with some much more tolerant of high rates than others. In 1999, for instance, the legal rate of simple interest prescribed by state usury laws varied from 5% (Delaware and Wisconsin) to 15% (Washington and South Dakota). However, most state laws have complex definitions of usury that allow various rates for various types of transactions, which is why credit card companies can charge so much more than the legal usury rate. Moreover, during the 1980’s, when interest rates had reached record highs, the U.S. Congress exempted national banks from state usury laws and small loan regulations, tying their rates to the prime interest rate instead.
Islam and Usury
One of the striking developments in the twentieth century is the creation of a system of Islamic banks that do not lend money usuriously. The Qur’an forbids usury, or riba, and the prohibition of lending for interest without risk to the lender is expanded upon by a number of Hadith. Muslim scholars have followed the same Aristotelean path of analysis as did Christian theologians to understand the divine hostility to usury. In particular, they stress the consumable nature of money. This stress on consumption comes naturally, since the Qur’an says “O you who believe! Eat not Ribâ (usury)” (Al Imran 3:130).
One of the Islamic responses to the West in the past fifty years has been the rapid growth of banks serving Muslims that do not contract for a predetermined amount over and above the principal. These banks must share the risk with the borrower, and they must not make money from money.
Most nations continue to regulate usury, which is now, in the West, defined as contracting to charge interest on a loan without risk to the lender at an interest rate greater than that set by the law. However, moral arguments are still being made about whether or not contracting for any interest is permissible. Because both the Bible and the Qur’an can be read as forbidding usury, there will always be moral, as well as social and economic, reasons for arguing about the permissibility of lending at interest.
Bentham, Jeremy. Defence of Usury: Shewing the Impolicy of the Present Legal
Restraints on Pecuniary Bargains In a Series of Letters to a Friend. To Which is Added a Letter to Adam Smith, Esq.; LL.D. on the Discouragements opposed by the above Restraints to the Progress of Inventive Industry, fourth edition, 1818. http://www.econlib.org/library/Bentham/bnthUs.html
Divine, Thomas F. Interest: An Historical and Analytical Study of Economics and Modern Ethics. Milwaukee: Marquette University Press, 1959.
Gordon, Barry. Economic Analysis before Adam Smith: Hesiod to Lessius. London: Macmillan, 1975.
Jones, Norman. God and the Moneylenders: Usury and the Law in Early Modern England. Oxford: Blackwell, 1989.
Kerridge, Eric. Usury, Interest and the Reformation. Aldershot, Hants. and Burlington, VT: Ashgate, 2002.
Nelson, Benjamin. The Idea of Usury: From Tribal Brotherhood to Universal Otherhood. Chicago: University of Chicago Press, 1969.
Noonan, John T. The Scholastic Analysis of Usury. Cambridge, MA: Harvard University Press, 1957.
Rockoff, Hugh. Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900. NBER Working Papers: 9742, 2003. http://www.nber.org/papers/w9742
Savelli, Rodolfo. “Diritto Romano e Teologia Riformata: du Moulin di Fronte al Problema dell’Interesse del Denaro.” Materialli per una Storia della Cultura Giuridica 23, no. 2 (1993): 291-324.
Thireau, Jean-Louis. Charles du Moulin, 1500-1566: Etude sur les sources, la methode, les idee politiques et economiques d’un juriste de la Renaissance.Geneva: Droz, 1980.