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Why Is Usury Wrong?
Lending money at interest - so that the borrower pays the lender more money than was originally lent - is forbidden in Judaism, Christianity and Islam, although details and interpretation on the subject seem to differ. Seeing as these are up there in terms of the “Big Three” religions in the Western world, it’s quite interesting how big of a deal money-lending has become. So much so, in fact, that you almost never hear anyone mention nowadays the simple point that it was considered unethical to charge interest whatsoever in centuries previous to this one. Wikipedia’s usury article outlines an argument by St. Thomas Aquinas as to why this was the case:
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. 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.
The arguments against these practices in Islamic law, Sharia, are also quite interesting. More on those in separate posts…
October 15th, 2007 at 1:50 pm
[…] Religious/ethical prohibitions against usury […]
October 15th, 2007 at 3:39 pm
Weird things happen under usury: all wealth naturally flows to the top, cos to pay off any loan more money must be generated from somewhere. So you might have a mad scramble for gold then a crash when it runs out, or crazy wealth distribution with one lord surrounded by poverty.
In paper money systems I think this is offset to a degree by the ability to issue shares which can then change in value, effectively printing money. The effect of usury is then to cause inflation.
October 15th, 2007 at 3:50 pm
well, what do you think are the moral ramifications of charging usury on fiat money? I mean its money that comes out of thin air and then has to be paid back in interest.
The idea originally for the justification of interest is that it was an “opportunity cost” because, reasonably, the money being lent could be invested elsewhere and made profitable in some other endeavor besides lending.
but with the federal reserve system the money is created with the sole purpose of being lent. It comes into existence as debt.
October 15th, 2007 at 4:26 pm
The real issue is that investment banks (and the fed works on the same principle) lend out the SAME money over and over again, collecting insurance on each of these loans. This creates the extra liquidity that is at the real root of inflation.
Only banks are allowed to do this, by special provision of the law. If you or I do it, it’s a crime, and was considered a crime for bankers in all common law up until the modern banking revolution.
This is also the same mechanism that finances modern ‘fiat’ currencies. In fact, real fiat currencies would be better, if the US govt printed our currency by fiat, we wouldn’t have to pay interest on it back to the central banks.
I’m working my way through this very interesting book which describes these mechanisms in great historical and technical detail:
http://www.mises.org/books/desoto.pdf
October 15th, 2007 at 5:00 pm
As for the credit rating system, the worse of a start you get off to, the more the game is stacked against you. You’re branded unreliable and irresponsible, and that might be true at first, but then due to higher interest and penalties you have to work several times as hard as a person with a higher rating, and not necessarily get the credit (in both senses of the word) you deserve for it.
October 15th, 2007 at 10:44 pm
Potential reasons why usury might be considered wrong, culled from above:
(1) Encourages unbalanced wealth distribution: “So you might have a mad scramble for gold then a crash when it runs out, or crazy wealth distribution with one lord surrounded by poverty.”
(2) Moral issues around value of work and stores of value: “I mean its money that comes out of thin air and then has to be paid back in interest.”
(3) This might be a stretch, but lack of intent/action harmony: “It comes into existence as debt.”
(4) Unfairness or potential absurdity of business practices: “lend out the SAME money over and over again, collecting insurance on each of these loans. ”
More thoughts:
I know there is a strong historical connection here to Alexander Hamilton, but I don’t recall the details. Can anyone fill me in: I recall this being one of the early arguments *against* having a Federal bank, and what Hamilton was originally *trying* to do… ie, it’s not a flaw, it’s a feature. You can’t fix a system which isn’t actually broken. (That is, which is working as it was intended to)
Specific links to legal acts and other information would be wonderful on this.
More direct links and layman’s summaries of information relating to and explaining this would be wonderful.
Keith, I like the subject of credit ratings! I’ll come back to that as well.
October 16th, 2007 at 8:41 am
Check out chapter 2 of the book I linked to for history of the practice and chapter 3 for historical legal analysis.
Rothbard’s ‘Mystery of Banking’ is an excellent (and more lightweight) overview:
http://www.mises.org/Books/mysteryofbanking.pdf
check out the TOC and see if it’s more what you’re looking for.
In general, mises.org is very good for finding this information, although there is a lot of opinionated regular politicking material to sort through.
When you have practices that cause inflation (i.e. fractional reserve banking), you’re robbing a tiny amount from everyone at once.
October 16th, 2007 at 10:14 am
Yeah I’ve been seeing this term: “fractional reserve banking” - is that a word which describes what you were saying about lending money out over and over again?
October 16th, 2007 at 11:00 am
banks only need to hold 10% or less in assets of the money they lend out.
like for example, if they have $ 10 they can loan out $100.
But really its more convoluted then that because they write lots of loans based on the same money. I read somthing a while ago with balance sheets, illustrating how it works.
but basically where that other $90 comes from is that its created when they loan it out. blip money.
October 16th, 2007 at 12:29 pm
Yeah, exactly, they don’t back the deposits. The banks are supposed to be FDIC insured, but the gov’t is running the exact same scam! (which is why they allow this practice which was historically prohibited in all major trade cultures, excepting periodic times of stupidity which invariably end in currency collapse.)
You take $1000 in deposits, and only keep $100 on hand to handle transient withdrawls. Then you earn interest on the $900, what you take on is a non-negligible risk of being caught short on cash. This is the prime cause of inflation (the increase in currency does not increase real-world wealth) and the main mechanism that moves money from the poor to the rich (over generations.) As with any probabilistic variable, the likelihood of ruin approaches 1 as time goes on.
The De Soto book explains mathematically the amount of extra liquidity potentially creatable, with balance sheets.
October 16th, 2007 at 3:31 pm
I was going to say something about why isn’t this knowledge more widely discussed, but I already know the answer.