Benjamin Bestgen: Usury
“Usura rusteth the chisel/It rusteth the craft and the craftsman”, wrote Ezra Pound. Benjamin Bestgen this week explains the practice of usury. See last week’s primer here.
In Shakespeare’s The Merchant of Venice we encounter two people lending money: the Christian merchant Antonio and the Jewish moneylender Shylock. Shylock complains that Antonio “[…] lends out money gratis and brings down / The rate of usance here with us in Venice.” (Act I, scene 3).
Lending money gratis means that Antonio charges no interest, which undercuts Shylock’s business. Historian Stephen Alford flags that the difference between Antonio’s and Shylock’s profession is important: as a merchant, Antonio makes his money primarily by trading in goods. In lending money occasionally to friends, he is an amateur moneylender at best. Shylock is not a trader but a professional moneylender: his sole business is lending money and profiting from the interest.
Laws motivated by religious prejudice and antisemitism prohibited Jews from engaging in a wide variety of economic activities. But finance and moneylending, considered dishonourable and unethical enterprises by Christians, were almost exclusively allocated to Jews. Jewish law (halakha) prohibited the charging of interest to other Jews but not to non-Jews (though the question of interest in Judaism is complex and debated by Rabbinic authorities). Christians, in turn, were forbidden to lend money with interest but were permitted to borrow from Jews. Shakespeare’s audience was well aware of all this.
Interest and usury
Interest is the cost of money. If I borrow £100 at 5 per cent, I must repay £105, the extra £5 being the fee I have to pay to utilise the £100. Usury is understood differently in various moral, religious and legal codes but commonly refers to the charging of “excessive interest” (whatever that means) or interest above a legally determined maximum rate. However, some regard all interest as a form of usury and argue for its abolition completely.
Scholars Wayne Visser and Alastair McIntosh found that debates around interest and usury are known worldwide for at least 4,000 years. Criticism of usury is found in Hinduism, Buddhism, Christianity, Judaism, Islam and various schools of philosophical and economic thought. Anti-usury laws are largely abolished in Britain but exist e.g. in Germany, Japan, Korea, many US states and the Middle East, usury being a particular concern in the consumer credit markets.
Problems with usury
A common historic rationale for the moral and/or legal condemnation of interest was that money is not fruitful: it is a piece of metal or paper or even just a number in a ledger, having no value in itself. Trying to profit from interest was regarded as wrong because it is not a gain from one’s work, initiative, efficiency or enterprise: no act of real value creation has occurred, interest is purely a passive play with numbers.
Christianity and Islam also thought that permitting interest on lending encourages the love of money as an end in itself. This in turn corrupts individuals, societies and perverts the economy by valuing the accumulation of money more than real, productive goods and tangible enterprises.
Nowadays the argument lost some of its ancient force: we generally acknowledge that by lending money to somebody else, the lender cannot use these funds himself and also accepts the risk of not being repaid. He should be compensated for that by receiving fair and reasonable interest.
Exploiting the poor
Another criticism states that lending with interest, especially at usurious rates, almost exclusively harms the economically insecure: the jobless or “working poor” with insufficient wages, small business owners, or gig-economy and seasonal workers who struggle to cover normal living expenses or deal with a financial emergency, such as a car breakdown, health scare or an unexpected £500 bill. Such people often have few legal choices but to borrow and are most at risk of default on any loans, eviction from their home, aggressive debt collectors, hunger, litigation and indignity.
Some say that lenders who lend to such people accept a greater default risk and should be allowed to charge higher interest to compensate for that. Critics counter that payday loan providers and credit card companies (never mind black market loan-sharks) targeting these people are predatory lenders who exploit political and economic conditions that made these borrowers economically vulnerable in the first place. Living off poor people’s interest payments is not merely profiting from the sweat of someone else’s brow; it is an act of oppression and benefitting from the distress and humiliation of one’s fellow humans. The politics permitting such circumstances should be shameful for society instead of being legitimised.
Economists as diverse as Adam Smith, John Maynard Keynes, Silvio Gesell or Margrit Kennedy all voiced concerns about interest on the grounds that it invites speculation with “the price of money” and possibly deprives society of beneficial and productive investments while lenders pursue more abstract or risky ventures promising higher interest returns.
Usury also might not only lead to a flow of wealth from the poorer parts of society to the wealthy, who monopolise the capital available for borrowing. It can also harm entire countries, with many African or South American states heavily indebted to wealthy European, Chinese and North American lenders.
The concentration of too much money in the hands of comparatively few persons is not a new problem. Merchant bankers like the Medicis, Fuggers or Rothschilds were so powerful in their day that most of Europe’s governments depended on their willingness to lend. Today, we see comparable power imbalances in society, with tech billionaires, media moguls, global banks, insurers and fund managers being increasingly able to influence politics, shaping laws and markets further to their benefit.
Visser and McIntosh note that to address the risk of power corruption through excessive financial inequalities, Islamic jurisprudence advocates, to this day, strong prohibitions of interest (riba) and upholds wealth taxes (zakat). Islamic finance is arguably at present the world’s most sophisticated finance system that is profitable, yet charges no interest.
No settled question
For lawyers, interest follows us everywhere, from personal credit cards and mortgages to judicial interest rates on unpaid penalties or transactional work in banking, finance and M&A. And while we often talk about interest as if it’s the most normal thing in the world, it is worth remembering that the charging of interest never was, and still isn’t, a globally, morally or legally accepted standard practice.
Benjamin Bestgen is a solicitor and notary public (qualified in Scotland). He also holds a Master of Arts degree in philosophy and tutored in practical philosophy and jurisprudence at the Goethe Universität Frankfurt am Main and the University of Edinburgh.