Written by Ali Mammadov
“God created three types of men: peasants and other laborers to assure the subsistence of the others, knights to defend them, and clerics to govern them. But the devil created a fourth group, the usurers.”
The excerpt above is from one of the sermons of Jacques de Vitry, who was a French theologian of the 13th century. His statement summarizes the attitude of the majority towards usurers and moneylenders during the Middle Ages. However, not everyone disliked usurers because of their religious beliefs. Some philosophers such as Aristotle believed interest should not be charged just because it was immoral. There were many supporters of this idea throughout history. Earning money by using money did not sound very ethical to the supporters of it. Nonetheless, interest was charged by moneylenders even when Aristotle lived.
Even Sumerians did that. The first compound interest was recorded in 2400 BC, and it was around 20% (Harford, T., 2017). The interest was charged by the city of Lagash who had lent a large amount of barley to a different city called Umma. It is known that Sumerians solved mathematical problems on interest. Interest was beneficial for temples too since they could earn money by lending. This would give temples more power in cities since they could control the financial system. Although Sumerians did not regard the idea of borrowing and lending as unethical, there were some Sumerian proverbs warning humans against borrowing easily (Muroi, K., 2015).
Additionally, interest rates in the ancient world were set by authorities, despite there were some variations on different loans. The first recorded interest rate regulation was also in Mesopotamia; it was done by Hammurabi, the King of Babylon. There were about 150 laws about financial and economic issues in the Code of Hammurabi, and interest was one of them. He determined different fixed rates for commodities (Hudson, M., 2000). Creditors who made loans at higher rates had to be punished.
Interestingly, average interest rates became lower in other states which existed later. While the normal commercial rate in Mesopotamia was around 20%, it varied from 12% to 18% in ancient Greece (Hudson, M., 2000).
Temples played an important role in Greece as well. In fact, the Greek military donated 10% of seized items to temples. This would give them more political power to the temples. It is claimed that this practice may have caused inequality in the distribution of wealth and power in ancient Greece. This may be an explanation for why many Greek thinkers did not find the idea of interest very ethical. Plato, one of the greatest thinkers of ancient Greece, viewed money as a mere means of exchange, meaning it was not right to earn money by using it.
In his last and the longest work, Nómoi (The Laws), Plato condemns charging interest and says, “no one shall lend money upon interest” (Plato and Jowett, B., 1986). Clearly, the idea of interest was not compatible with his idea of ideal state. He believed interest causes inequality, jealousness, selfishness, and immorality among society. Furthermore, one of the reasons he did not find charging interest meaningful was his firm belief in the idea of intrinsic value. Plato believed every item had an intrinsic value that could not change.
Therefore, twenty dollars would always worth twenty dollars, and it would not be right to gain additional earning on that. Obviously, his student, Aristotle, had similar views. He also believed in the idea of intrinsic value, and in Ethika Nicomacheia (Nicomachean Ethics), he describes money as means of exchange and a measure of exchange value (Bregianni, C., 2017). According to Aristotle, money existed only in laws; it did not exist in nature. Therefore, he considered financial transactions reprehensible, though he thought money was essential for societies. Charging interest was especially disgraceful since the only thing involved was money.
In other words, nobody would get benefits of money, means of exchange, by using it; the transaction would not get them anything other than money. This process was identified as ‘money creating money,’ and Aristotle condemned it in Politiká (Politics) and claimed it was unproductive and unnatural. His supporters would later describe the process of ‘money creating money’ as similar to trying to get an egg from an infertile chicken. However, not everyone was against charging interest in ancient Greece. Some influential people, including the famous politician Demosthenes, supported the idea of giving loans with interest.
Similar reasons were mentioned by famous Roman thinkers, such as Lucius Seneca, Marcus Cicero, and Marcus Cato. Cato even compared usurers to murderers (Haney, L., 1920). It can be argued that they were influenced by Aristotle. His influence can also be seen in religious arguments against interest. It is also important to note that the ‘normal’ interest rate in ancient Rome was even lower than the rate in ancient Greece. It was around 8.33% in Rome.
As mentioned above it was 20%- 25% and 12-18% in Mesopotamia and ancient Greece, respectively. It is important to note that the rates were not always stable. There are records of even higher rates in Mesopotamia, especially during the decline of Babylon. However, it can be said that the rates mentioned here were the average costs of borrowing. The fact that interest rates decreased over time in these states may mean that overall risk levels have declined as civilizations became more developed. Proponents of this theory believe that as economies became more stable, risk levels went down, and interest rates decreased.
However, those who do not agree with the theory claim that the decline may have been caused by differences in calculation methods in Mesopotamia, Greece, and Rome. (Hudson, M., 2019). Interestingly, temples played important roles in Rome too. They did not pay interest on loans, but they charged interest. The Temple of Saturn and the Juno Moneta temple were among the most important actors of the financial system in Rome. The argentarii (the Roman moneychangers) were allowed to use deposited money for other transactions, such as loaning to another person, if interest was to be paid (Labate, V., 2016). Even though some restrictions were put on interest by several politicians, these facts show us that interest was actively charged in Rome.
It should be noted that most ancient sources, such as religious scriptures, do not distinguish between usury and interest; the terms gained slightly different meanings later. Therefore, it should be clear that when condemning usury or interest, they condemn both of them. For example, when the Old Testament condemns neshekh or tarbit, or when Koran condemns riba, they do not restrict usury (excessive interest) only. Indeed, the word neshekh means ‘to bite.’ It is not surprising why the Jewish tradition likens interest to snake bite. Some commentators believe it is because the first bite of a snake does not cause too much discomfort in the beginning, but later it kills.
They argue that interest also does not cause a lot of suffering in the beginning, but it may make the borrower regret later (Thomas, A., 2006). Although Judaism allows Jews to charge interest when making loans to strangers, it does not allow interest among Jews. However, since Jews were allowed to take interest from non-Jews, it gave them a bigger market share after the Church prohibited Christians from charging interest.
Although the New Testament did not explicitly condemn charging interest, several verses, such as ‘lend, hoping for nothing again’ (Luke 6:35), implied interest should not be taken. The fact that Christianity condemned self-interested actions influenced Christian leaders’ and scholars’ ideas on usury. Religious leaders, including St. Basil the Great, St. Grégoire de Nazianze, St. Grégoire de Nysse, and St. Augustine of Hippo, argued that charging interest was against the core principles of the Church.
In 325 a.d, clerics were banned from charging interest by the Council of Nicaea. Later, the same rule was applied to ordinary people. The discrepancies between Jewish and Christian usury laws led to conflicts between the groups (Brook, Y., 2007). Seeing Jews benefitting from charging interest, Christians started questioning the usury laws. Why would God allow one group to take interest from others but prohibit another group from doing that? Therefore, St. Jerome came up with an idea that Christians could charge interest to their enemies. Since people at that time viewed charging interest as a zero-sum game, they thought by taking interest from an enemy would make the enemy suffer.
As a result, Christians started to lend money with interest during the Crusades. In fact, there were some ways of evading the usury laws, and some people benefitted from them. One of them was to make loans in one currency and take it back in a different currency. They could earn the difference between currency values, which was not illegal. It should be noted that Islam also prohibited charging interest for very similar reasons, and its restrictions were even more severe. Most authorities claim that the Holy Book clearly prohibits charging interest.
However, some commentators argue that Koran restricts excessive interest only. Even some scholars claim that riba (interest) is only discouraged rather than prohibited. This type of interpretation has existed in almost all religions. In Christianity, John Calvin made such arguments. He argued that the Church should allow charging mild amounts of interest. Calvin actually made a radical change. He distinguished between interest and usury and criticized the Scholastics who justified their opposition towards charging interest by using Biblical verses and logic. However, Calvin thought setting up a business for the purpose of charging interest was still immoral.
He stated that the motive behind charging or taking interest is important. If one takes a loan with interest to help others or to get additional capital for his/her business, it is moral; the lender is not committing a sin here. But if the purpose of charging is merely to earn profits, it is immoral, according to Calvin. In other words, he thought the Bible only prohibited neshekh, the ‘biting interest’, while tarbit was allowed (Buch, J., 2005). Additionally, he stated that no one should charge interest to a poor man or someone who is in an urgent need (Brook, Y., 2007).
Such views started to make people and the Church gradually accept the idea of charging interest. Thinkers such as Francis Bacon realized the benefits of taking loans with interest, although the majority of people had viewed borrowers as losers of the zero-sum game. Eventually, the debate was not about whether interest should be charged or not anymore; it was about at what level it should be charged. However, even at that time, some people viewed moneylenders as evil. For example, in Shakespeare’s The Merchant of Venice, the Jewish usurer Shylock is characterized as evil and someone who hates Antonio, a Christian, for lending money without interest and bringing the interest rate down in Venice (Shakespeare, W., 16th century).
The Industrial Revolution, which happened during the Enlightenment period, clearly made changes to the attitude of people towards economic affairs, including interest. Since secularism has already become prevalent in Europe, theological arguments against interest did not convince everyone. Economists such as Turgot stated that interest was just a rent paid for using someone’s money. He is also considered to be the first economist to realize that value of money changes as time passes.
According to Turgot, no one would borrow if the value of money stayed the same. Also, one of the most important things about Turgot is that he did not believe time belonged to God, which many people did in the past (Böhm-Bawerk, 1884). Some religious leaders had stated that by giving loans with interest, lenders sold nothing but time; it was a sin because time belonged to God. Turgot criticized this idea and said that time belongs to individuals. Turgot’s works made the French government get rid of its usury restricting laws. During the same period, charging interest was defended by Jeremy Bentham in his book called A Defense of Usury.
He argued that banning society from charging interest would kill innovation. One of his most interesting arguments was that usury laws actually harmed borrowers. According to this theory, when usury is restricted, the supply of credit becomes lower, while the demand stays the same. This shortage forces potential borrowers to get loans illegally and pay premiums for the added risk (Bentham, J., 1787).
Adam Smith and David Ricardo claimed that interest was a reward for the lender which the borrower pays from the profit he made by using the borrowed money. Ricardo also thought that interest encouraged those who wanted to save. According to both Smith and Ricardo, capital is created by savings. Therefore, interest is very important to the economy. However, it is very strange and interesting that Adam Smith believed interest rates must be controlled.
This idea seemed to contradict his basic ideas about the market, and Jeremy Bentham criticized Smith for ‘betraying’ his free-market ideas (Persky J., 2007). Smith favored interest just because it would benefit society. Therefore, he insisted that government intervention must be done if interest did not cause an optimal solution (Smith, A., 1776). Economists such as Ludwig von Mises and Eugen von Böhm-Bawerk made arguments in favor of usury and defended productivity of interest.
Böhm-Bawerk had a very interesting idea that people value items they have today more than they value items they will have in the future. This is explained by several psychological and economic factors. He argues that in order to make someone give things they have today, which is more valuable, they should be promised a reward. Interest is a reward for the lender for sacrificing more valuable money (today) for less valuable money (future). Among classical economists, it was Nassau William Senior who explained interest in terms of the money supply. According to his theory, a person who is saving money does that by decreasing his consumption. There is a trade-off between consumption and saving, and one can sacrifice his consumption only if he gets a reward for saving.
Therefore, interest is a reward for savers. However, this theory was later criticized by many economists since it ignored the fact that saving did not make rich people decrease their consumption. Since the idea was proved to be insufficient, Alfred Marshall suggested an expectation-based idea. His theory was based on the same assumptions as Böhm-Bawerk’s theory – today is more valuable than tomorrow. According to Marshall, interest is given to the lender as a reward for waiting a long time to get his money back.
Although it seems that the majority tended to favor the idea of interest in the 19th and 20th centuries, there were still some groups that found it immoral. The most influential of these groups were Marxists. Karl Marx believed that the capitalist class exploits the labor class by engaging in various financial activities. He thought moneylending with interest was being done by the elite to exploit the lower-income class.
It was not productive, since capitalists did not do anything other than giving money and benefitting from that (Böhm-Bawerk, 1884). His ideas had a great influence on politics, economics, philosophy, and even literature. In Dostyovesky’s Brat’ya Karamazovy (The Brothers Karamazov), a disgusting old lady is said to be engaging in financial activities like usury. The woman is attributed bad qualities (Dostoyevsky, F., 1880).
Unfortunately, during the 20th-century media only publicized cases where borrowers had difficulties and regretted taking money with interest in order to show that usurers were actually harmful. In the United States, people could understand the role of usurers and their benefits to the economy, but they still viewed them as ‘evil.’ However, an American economist, Irving Fisher had a very interesting idea about the concept of interest. His idea was also based on Böhm-Bawerk’s assumption.
Fisher argued that there were many options when it comes to earning income. People could invest their money, liquidate their investments, lend, or borrow. They would naturally choose the option that brings the highest return. If the interest rate is enough to make a person disregard other options and lend his money, the person would do that. Another influential economist, John Maynard Keynes, rejected the ideas of the classical theory.
He believed there could be no reward for saving or waiting. The reward (interest) is given since the lender decides not to have the advantage of having his money in his pocket. In other words, it is a reward for giving up liquidity. According to Keynes, the interest rate is a price that creates a balance between the total amount of money and the amount of money that is planned to be kept as cash rather than given to someone. He claimed that when liquidity is preferred more, the interest rate goes up as a result of a shortage in the money market. Clearly, he tried to analyze interest from its liquidity aspect.
It is very interesting that Keynes actually did not like the idea of usury and profits. Although he did not agree with Marx’s ideas, he obviously shared some of his views on usury. According to Keynes, when making profits becomes less important for humans, our moral codes will be changed greatly, and we will become better people. However, he warns that there is still much time left, and until that day only avarice and usury will lead us (Keynes, J., 1963).
In conclusion, it can be said that the only major religion that still prohibits usury is Islam. This is probably because the religion clearly condemns interest, leaving almost no room for other interpretations. Today, most people do not view charging interest as immoral. Economists rarely talk about the ethical aspect of the issue. They understand that moneylending is productive, unlike what Aristotle and his followers thought. When someone borrows money, he or she generally uses it for consumption or investment.
This surely benefits the whole economy. People can clearly list both advantages and disadvantages of lending with interest. The main thing is to understand that in today’s world, individuals do not usually view actions as immoral or unethical, unless it directly harms someone. General ethic rules are based on the Utilitarian perspective, rather than religions. Therefore, as long as charging interest does not harm more people than it benefits, it probably will not be considered as evil.
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Image: Lucas Cranach the Elder, Public domain, via Wikimedia Commons