The Morality of Moneylending: A Short History

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Bacon recognized that a higher rate of interest is economically justified by the nature of certain loans. The economic debate had shifted from whether usury should be legal to whether and at what level government should set the interest rate a debate that, of course, continues to this day, with the Fed setting certain interest rates. As one scholar put it: In spite of this progress, artists continued to compare usurers to idle drones, spiders, and bloodsuckers, and playwrights personified the moneygrubbing usurers in characters such as Sir Giles Overreach, Messrs.

Mammon, Lucre, Hoard, Gripe, and Bloodhound. Probably the greatest work of art vilifying the usurer was written during this period— The Merchant of Venice by Shakespeare — , which immortalized the character of the evil Jewish usurer, Shylock.

In The Merchant of Venice , Bassanio, a poor nobleman, needs cash in order to court the heiress, Portia. Bassanio goes to a Jewish moneylender, Shylock, for a loan, bringing his wealthy friend, Antonio, to stand as surety for it.

The conflict between Shylock and Antonio incorporates all the elements of the arguments against usury. Antonio, the Christian, lends money and demands no interest. As Shylock describes him:. He is portrayed as the lowly, angry, vengeful, and greedy Jew. It is clear that Shakespeare understood the issues involved in usury. Antonio, provoking Shylock, says:. As late as , medieval moral and economic theories were alive and well, even if they were increasingly out of step with the economic practice of the time.

During the Enlightenment, the European economy continued to grow, culminating with the Industrial Revolution. This growth involved increased activity in every sector of the economy. Banking houses were established to provide credit to a wide array of economic endeavors. The Barring Brothers and the House of Rothschild were just the largest of the many banks that would ultimately help fuel the Industrial Revolution, funding railroads, factories, ports, and industry in general.

Economic understanding of the important productive role of usury continued to improve over the next four hundred years. Yet, the moral evaluation of usury would change very little. The morality of altruism—the notion that self-sacrifice is moral and that self-interest is evil—was embraced and defended by many Enlightenment intellectuals and continued to hamper the acceptability of usury. After all, usury is a naked example of the pursuit of profit—which is patently self-interested.

Further, it still seemed to the thinkers of the time that usury could be a zero-sum transaction—that a rich lender might profit at the expense of a poor borrower. Even a better conception of usury—let alone the misconception of it being a zero-sum transaction—is anathema to altruism, which demands the opposite of personal profit: In the midth century, northern Europe was home to a new generation of scholars who recognized that usury served an essential economic purpose, and that it should be allowed freely.

Three men made significant contributions in this regard. Other Dutch scholars agreed with him, and, partially as a result of this, Holland became especially tolerant of usury, making it legal at times. He argued that a creditor has the right to dispose of his money in any way he wishes and at whatever rate the market will bear, because it is his property.

Turgot was also the first economist to fully understand that the passing of time changes the value of money. He saw the difference between the present value and the future value of money—concepts that are at the heart of any modern financial analysis. Time, he argued, belongs to the individual who uses it and therefore time could be sold.

During the same period, the British philosopher Jeremy Bentham — wrote a treatise entitled A Defense of Usury.

Since innovative trades inherently involved high risk, they could only be funded at high interest rates. Limits on permissible interest rates, he argued, would kill innovation—the engine of growth. Correcting another medieval error, Bentham also showed that restrictive usury laws actually harmed the borrowers.

Such restrictions cause the credit markets to shrink while demand for credit remains the same or goes up; thus, potential borrowers have to seek loans in an illegal market where they would have to pay a premium for the additional risk of illegal trading. My neighbours, being at liberty, have happened to concur among themselves in dealing at a certain rate of interest. I, who have money to lend, and Titus, who wants to borrow it of me, would be glad, the one of us to accept, the other to give, an interest somewhat higher than theirs: Why is the liberty they exercise to be made a pretence for depriving me and Titus of ours.

An explicitly utilitarian attempt at a moral defense of usury was launched in in the anonymously published Letters on Usury and Interest. The ultimate reason, the author argued, is one of utility:. Here, then, is a sure and infallible rule to judge of the lawfulness of a practice. Is it useful to the State? Is it beneficial to the individuals that compose it? Either of these is sufficient to obtain a tolerance; but both together vest it with a character of justice and equity.

In fact, if we look into the laws of different nations concerning usury, we shall find that they are all formed on the principle of public utility. In those states where usury was found hurtful to society, it was prohibited. In those where it was neither hurtful nor very beneficial, it was tolerated. In those where it was useful, it was authorized.

In ours, it is absolutely necessary. I say in this nation; which, as long as it continues to be a commercial one, must be chiefly supported by interest; for interest is the soul of credit and credit is the soul of commerce. Although the utilitarian argument in defense of usury contains some economic truth, it is morally bankrupt.

Utilitarian moral reasoning for the propriety of usury depends on the perceived benefits of the practice to the collective or the nation. But what happens, for example, when usury in the form of sub-prime mortgage loans creates distress for a significant number of people and financial turmoil in some markets?

How can it be justified? The utilitarian argument collapses in the face of any such economic problem, leaving moneylenders exposed to the wrath of the public and to the whips and chains of politicians seeking a scapegoat for the crisis. Although Salmasius, Turgot, and Bentham made significant progress in understanding the economic and political value of usury, not all their fellow intellectuals followed suit.

The father of economics, Adam Smith — , wrote: Yet, Smith also believed that the government must control the rate of interest. He believed that unfettered markets would create excessively high interest rates, which would hurt the economy—which, in turn, would harm society. Although Smith was a great innovator in economics, philosophically, he was a follower. He accepted the common philosophical ideas of his time, including altruism, of which utilitarianism is a form.

Like Bentham, he justified capitalism only through its social benefits. If his projections of what would come to pass in a fully free market amounted to a less-than-optimal solution for society, then he advocated government intervention. Government intervention is the logical outcome of any utilitarian defense of usury. Following Bentham and Smith, all significant 19th-century economists—such as David Ricardo, Jean Baptiste Say, and John Stuart Mill—considered the economic importance of usury to be obvious and argued that interest rates should be determined by freely contracting individuals.

But the moral-practical dichotomy inherent in their altruistic, utilitarian, social justification for usury remained in play, and the practice continued to be morally condemned and thus heavily regulated if not outlawed. Despite their flaws, the thinkers of the Enlightenment had created sufficient economic understanding to fuel the Industrial Revolution throughout the 19th century.

Economically and politically, facts and reason had triumphed over faith; a sense of individualism had taken hold; the practicality of the profit motive had become clear; and, relative to eras past, the West was thriving. Morally and philosophically, however, big trouble was brewing. As capitalism neared a glorious maturity, a new, more consistent brand of altruism, created by Kant, Hegel, and their followers, was sweeping Europe.

At the political-economic level, this movement manifested itself in the ideas of Karl Marx — Marx, exploiting the errors of the Classical economists, professed the medieval notion that all production is a result of manual labor; but he also elaborated, claiming that laborers do not retain the wealth they create.

According to Marx, moneylending and other financial activities are not productive, but exploitative; moneylenders exert no effort, do no productive work, and yet reap the rewards of production through usury.

What is the profane basis of Judaism? What is the worldly cult of the Jew? What is his worldly god? Money is the jealous god of Israel, beside which no other god may exist. Money abases all the gods of mankind and changes them into commodities. Marx believed that the Jews were evil—not because of their religion, as others were clamoring at the time—but because they pursued their own selfish interests and sought to make money.

And Marxists were not alone in their contempt for these qualities. Artists who, like Marx, resented capitalists in general and moneylenders in particular, dominated Western culture in the 19th century.

And in The Brothers Karamazov , Dostoyevsky writes:. It was known too that the young person had. It was not that she lent money on interest, but it was known, for instance, that she had for some time past, in partnership with old Karamazov, actually invested in the purchase of bad debts for a trifle, a tenth of their nominal value, and afterwards had made out of them ten times their value.

Popular sentiment concerning usury was reverting to a dark-ages type of hatred. Like the Church of the Middle Ages, people found themselves simultaneously condemning the practice and engaging in it. The concept of moneylending was again split into two allegedly different concepts: This artificial division enabled the wealthier, more powerful, more influential people to freely engage in moneylending with the one hand, while continuing to condemn the practice with the other.

Loans made to lower-risk, higher-income borrowers would be treated as morally acceptable, while those made to higher-risk, lower-income borrowers would remain morally contemptible. From the 19th century onward, in the United States and in most other countries, usury laws would restrict the rates of interest that could be charged on loans, and there would be an ongoing battle between businessmen and legislators over what those rates should be. These laws, too, are still with us. As Bentham predicted, such laws harm not only lenders but also borrowers, who are driven into the shadows where they procure shady and often illegal loans in order to acquire the capital they need for their endeavors.

And given the extra risk posed by potential legal complications for the lenders, these loans are sold at substantially higher interest rates than they would be if moneylending were fully legal and unregulated.

In the United States, demand for high-risk loans has always existed, and entrepreneurs have always arisen to service the demand for funds. They have been scorned, condemned to Hell, assaulted, jailed, and generally treated like the usurers of the Middle Ages—but they have relentlessly supplied the capital that has enabled Americans to achieve unprecedented levels of productiveness and prosperity. The earliest known advertisement for a small-loan service in an American newspaper appeared in the Chicago Tribune in November By , the industry was prospering.

Loans collateralized by furniture, diamonds, warehouse receipts, houses, and pianos were available called chattel loans. The first salary loan office offering loans made in advance of a paycheck was opened by John Mulholland in Kansas City in Within fifteen years he had offices all across the country.

Some loans were made at very high rates, occasionally over percent a month. The reason rates were so high is because of the number of defaults. With high rates in play, the losses on loans in default could ordinarily be absorbed as a cost of doing business. Because of the social stigmatization and legal isolation of the creditors, legal recourse against a defaulting borrower was generally unavailable to a usurer.

Yet these back-alley loans provided a valuable service—one for which there was great demand—and they enabled many people to start their own businesses or improve their lives in other ways. Of course, whereas most of these borrowers paid off their loans and succeeded in their endeavors, many of them got into financial trouble—and the latter cases, not the former, were widely publicized.

The moneylenders were blamed, and restrictions were multiplied and tightened. In spite of all the restrictions, laws, and persecutions, the market found ways to continue. The effective compound annual interest rate on such a loan was in excess of 18 percent. And penalties would be assessed for any delinquent payments. And, as in the Middle Ages, such lending became common as the demand for capital was widespread. Consequently, these banks multiplied and thrived—for a while.

Credit card lenders charge high interest rates to high-risk customers, and penalties for delinquency. And borrowers use these loans for consumption as well as to start or fund small businesses. To this day, credit card interest rates are restricted by usury laws, and legislation attempting to further restrict these rates is periodically introduced. In , in New York, a moneylender who issued loans to people who could not get them at conventional banks appeared before a court on the charge of usury.

In the decision, the judge wrote:. You are one of the most contemptible usurers in your unspeakable business. The poor people must be protected from such sharks as you, and we must trust that your conviction and sentence will be a notice to you and all your kind that the courts have found a way to put a stop to usury.

Men of your type are a curse to the community, and the money they gain is blood money. This ruling is indicative of the general attitude toward usurers at the time. The moral-practical dichotomy was alive and kicking, and the moneylenders were taking the blows. The most influential economist of the 20th century was John Maynard Keynes — , whose ideas not only shaped the theoretical field of modern economics but also played a major role in shaping government policies in the United States and around the world.

He also agreed with Adam Smith that government must control interest rates; otherwise investment and thus society would suffer. And he revived the old Reformation idea that usury is a necessary evil:. When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues.

The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not.

Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight. Although Keynes and other economists and intellectuals of the day recognized the need of usury, they universally condemned the practice and its practitioners as foul and unfair. Thus, regardless of widespread recognition of the fact that usury is a boon to the economy, when the Great Depression occurred in the United States, the moneylenders on Wall Street were blamed.

As Franklin Delano Roosevelt put it:. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. After , banks were restricted in all aspects of their activity: In , the greatest bank in American history, J. Morgan, was broken up by the government into several companies.

The massive regulations and coercive restructurings of the s illustrate the continuing contempt for the practice of taking interest on loans and the continuing distrust of those—now mainly bankers—who engage in this activity. We paid a dear price for those regulations with the savings and loan crisis of the s and s, which cost American taxpayers hundreds of billions of dollars. From ancient Greece and Rome, to the Dark and Middle Ages, to the Renaissance and Reformation, to the 19th and 20th centuries, moneylending has been morally condemned and legally restrained.

Today, at the dawn of the 21st century, moneylending remains a pariah. One of the latest victims of this moral antagonism is the business of providing payday loans. These loans carry annualized interest rates as high as percent, because they are typically very short term i.

Bank regulators have severely restricted the ability of community banks to offer payday loans or even to work with payday loan offices, more than 13 states have banned them altogether, and Congress is currently looking at ways to ban all payday loans. So the effect of the ban has been to increase consumer credit costs and inconvenience for Georgia consumers. What is truly astonishing is that after centuries of moneylenders providing capital and opportunities to billions of willing people on mutually agreed upon terms, the image of these persistent businessmen has not advanced beyond that of Shylock.

These lenders provided mortgages designed to enable low-income borrowers to buy homes. Because the default rate among these borrowers is relatively high, the loans are recognized as high-risk transactions and are sold at correspondingly high rates of interest. The tremendous growth in this industry is a direct consequence of government policy.

Since the s, the U. To this end, the government created the Federal Home Loan Banks which are exempt from state and local income taxes to provide incentives for smaller banks to make mortgage loans to low-income Americans.

Congress passed the Community Reinvestment Act, which requires banks to invest in their local communities, including by providing mortgage loans to people in low-income brackets. The government created Fannie Mae and Freddie Mac, both of which have a mandate to issue and guarantee mortgage loans to low-income borrowers. In recent years, all these government schemes and more e.

The consequence of this folly has been a significant increase in delinquent loans and foreclosures, which has led to wider financial problems at banks and at other institutions that purchased the mortgages in the secondary markets. Any objective evaluation of the facts would place the blame for this disaster on the government policies that caused it.

But no—just as in the past, the lenders are being blamed and scapegoated. Although some of these lenders clearly did take irrational risks on many of these loans, that should be their own problem, and they should have to suffer the consequences of their irrational actions—whether significant financial loss or bankruptcy. The government most certainly should not bail them out. However, without the perception of reduced risk provided by government meddling in the economy, far fewer lenders would have been so frivolous.

Further, the number of people benefiting from sub-prime mortgage loans, which make it possible for many people to purchase a home for the first time, is in the millions—and the vast majority of these borrowers are not delinquent or in default; rather, they are paying off their loans and enjoying their homes, a fact never mentioned by the media. It should also be noted that, whereas the mortgage companies are blamed for all the defaulting loans, no blame is placed on the irresponsible borrowers who took upon themselves debt that they knew—or should have known—they could not handle.

After four hundred years of markets proving the incredible benefits generated by moneylending, intellectuals, journalists, and politicians still rail against lenders and their institutions.

Moneylenders are still blamed for recessions; they are still accused of being greedy and of taking advantage of the poor; they are still portrayed on TV and in movies as slick, murderous villains; and they are still distrusted by almost everyone. We offer safe, discounted car transport across Australia through our growing depot network or to your door. Request your quote, complete a few details, make payment and your booking is complete. Car Transportation Australia Our depot to depot network is the cheapest, quickest and most convenient way to transport your car, 4Wd or van around Australia.

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