The Ethics of Usury And Its Impact on the Modern Banking System

Gheorghe Sava · 16 aprilie 2012

Introduction

The last century has witnessed recurrent financial and economic crises culminating in the Great Depression of the 1930s and the on-going bust which has started in 2007. These economic cycles featured a recognizable pattern – a boom triggered by an artificial creation of money followed by a deep crisis in which the distorted structure of production and demand patterns were adjusted to market needs. For many economists, the modern monetary and financial system, based on fiat currencies and fractional-reserve banking is the main culprit for these severe economic cycles and the many individual and collective dramas resulting in them. The present article aims at clarifying the treatment of usury[1] in Christian theology and free-market economics[2], and argues that anti-usury canon and civil laws contributed to the development of an unsound monetary and financial system, primarily by facilitating the emergence of the fractional-reserve banking.

The free charging of interest was prohibited both by canon and civil law for most of the precedent 2000 years and was only allowed during the last two-three centuries. The Christian Church has been strongly opposed to this practice, starting with its decisions at the first Councils, continuing with the denunciation of usury by the Holy Fathers of the fourth and fifth century and the first scholastics in the twelve and thirteen centuries[3]. This position was consistent with the Christian endeavour towards spiritual salvation, but the attempt to impose it upon society via a legal or customary framework left a negative imprint on the subsequent development of the banking sector. The Orthodox Church has only maintained in its canon law the prohibition – decided during the first councils – of clergy to engage in usury, but refrained from extending it to ordinary people. On the contrary, the Catholic Church, which permanently strove to combine the religious power with political supremacy, went a step further and forbade usury to all Christians. In practice, this prohibition was not widely observed and charging of interest on lending remained a common characteristic of economic life. However, because interest charging had to be dissimulated in order to overcome the canon and civil legal hurdles, the prohibition had the undesired effect of damaging lending practices.

By contrast, for the science of economics which is primarily concerned with the efficient production of wealth in the society, the interest rate and interest income are key concepts for economic development. Interest fosters saving and capital accumulation which in turn leads to higher labour productivity, wages and standards of living. For the ethics of the free-market economics (Woods Jr., 2005) interest is a natural phenomenon deriving from the concept of time preference, i.e. the basic principle of human action according to which a man prefers the enjoyment of a good now rather than the enjoyment of the same good later. Accordingly, the practice of charging interest compensates primarily the natural discomfort of postponing consumption. This is a right deriving from owning private property and therefore should not trouble too much our conscience.

In the remaining of the article we explore the positions of Christian theology and free-market economics with regard to usury and material wealth in general. Although the two disciplines have different objectives, in practice these can be reconciled, i.e. the free market seems to be the most suited system in order to advance towards salvation. At the same time, the interference of the Catholic Church with the social order by prohibiting usury did not have the desired effect of improving the morals in society. On the contrary, it created strong incentives to conceal the true nature of certain banking operations which later developed into a financial sector that is both fraudulent and detrimental to prosperity.

Historical background

Hinduism, Buddhism, Judaism, Christianity and Islam have been the most vocal critics of usury, to which a large number of philosophers and politicians in ancient Greece and Rome can be added. The criticism of usury appears quite strong in Judaism in the Old Testament, where charging interest is prohibited and scorned. The Prophet Ezekiel includes usury in a list of “abominable things”, together with rape, adultery, murder, robbery and idolatry (Ezekiel 18:8,13). In the Exodus (22:25) and Leviticus (25:35-37) texts, the prohibition of usury applies primarily to the poor and the destitute. But later on, in the Deuteronomy (23:19-20), the prohibition to lend at interest is extended towards all Jews, whereas it is specifically allowed towards foreigners. This will come to play an important historical and economic role in the Middle-Age Europe, when the Jews engaged heavily in occupations such as tax and rent collecting and money lending. Jews became active in one business where Christian laws actually discriminated in their favour in contrast with most other professions where their participation was banned by local rulers and the guilds (Johnson, 1987). Despite the prohibition on taking interest, there is evidence that this rule was not widely observed in biblical times. In time, as economic conditions changed, a standard form of legalization of interest was established – known as “hetter iskah” – meaning the permission to form a partnership. It has become so accepted that nowadays, all interest transactions are accepted by simply adding to the contract concerned the words “al-pi hetter iskah” (Visser and McIntosh, 2009).

Christianity pronounced itself against usury quite early after being accepted as religion by the Roman Emperor Constantine. The First Councils of Arles in 314 (Canon 44) and Nicaea in 325 (Canon 17) forbade clergy from engaging in usury. Moreover, the Council of Carthage in 345 (Canon 12) and the Council of Aix in 789 (Canon 36) have declared reprehensible making money by lending at interest even for laymen (Veermersch, 1912). The Orthodox Church has only taken over the apostolic canons in which the clergy was forbidden to engage in usury, but officially has been less critical of this practice and did not extend its condemnation to ordinary persons. However, in the West, the canonical laws of the Catholic Church absolutely forbade the practice and usury became punishable by ex-communication. As the dominating power in the society, the Catholic Church decreed that persons who accepted interest on loans could receive neither the sacraments nor Christian burial, thus pushing charging of interest into a concealed practice. Starting with the 16th century, the pro-usury countermovement began to gain in importance along with the growing economic activity, finding loopholes in the law and contradictions in the religious arguments. The rise of Protestantism and its pro-capitalism influence was also associated with this change. As a result of these influences, in the early seventeenth century, usury changed from being an offence against public morality that a Christian government was expected to suppress to a matter of private conscience (Visser and McIntosh, 2009).

For a long time, civil law was in agreement with canon law, reflecting the important position enjoyed by the Church in the Christian society. Charlemagne outlawed interest throughout his empire and in England charging any interest was punishable by taking the usurer’s land and chattels. It was in the sixteenth century that Germany allowed interest at 5%. On the contrary, in France interest on loans was forbidden until the times of the Revolution and the issuance of the Decree of 2 and 3 October 1789. During the reign of Queen Elizabeth interest rates in England are limited under 10%, a law that will last until 1854. Early eighteenth century American colonies adopt usury laws, setting the interest rate cap at 8%. In the beginning of the nineteenth century a move towards deregulation causes eleven states to eliminate usury laws, while others raised the usury cap to 10% or 12%[4].

Although anti-usury laws may have succeeded in reducing the practice of interest-paying loans, they certainly did not eliminate it from the regular economic life. De Soto (2009) explains how charging interest continued, although the canonical ban on usury complicated medieval financial practices and spread confusion into the juridical doctrine of sound banking, by blurring the distinction between demand and term deposits[5]. Until the 13th century, the bulk of the financial intermediation continued, but was in the hands of Jews and other non-Christians, whose religions allowed them to charge interest. Thereafter, the use of several artifices devised to conceal actual interest-paying loans gained in importance. One of them, the so-called “depositum confessatum” disguised actual interest-paying loans as demand deposits. It represented an express declaration of bankers and their clients that they had taken part in a deposit contract, when they had actually concluded a true loan contract. When the banker “admitted” that he could not return the deposit, he was forced to pay a “penalty” in the form of interest to compensate for the presumed “delay”. As we shall explain later, this circumvention of the law played an important role in the subsequent emergence of fractional-reserve banking and the fiat paper money.

The Christian theological arguments against usury
The New Testament

An unquestionable direct backing for the Christian ban of usury is rather difficult to find in the New Testament. Many interpret Luke 6:35 which says “But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great” as condemning usury. However, a deeper analysis would reveal that the exhortation is part of a wider call to personal altruism by doing good and praying for one’s oppressors, making charity, not judging or condemning others, but forgiving and loving one’s enemies.

As regards material possessions, the sermon (which is the famous Sermon on the Mountain) goes as far as stating that “If someone takes your cloak, do not stop him from taking your tunic. Give to everyone who asks you, and if anyone takes what belongs to you, do not demand it back.” The entire sermon appears to be the depiction of an ideal behaviour according to Christian values, a state of ascetic and spiritual conduct for which every Christian should strive, but which obviously cannot be attained by mere legislative action. If this sermon represented the main reason for putting a legal ban on usury, then the question is why prohibition was not extended from usury to all property rights (see the example of the tunic) in order to address the other more altruistic teachings of the sermon.

The answer to this inconsistency has probably to do with the fact that the legal enforcement of Christian values may not have been the purpose of the sermon. This sermon has been interpreted in general as being primarily about salvation rather than about ethics. Jesus Christ turns conventional religious and secular thinking upside-down, when He claims that poverty, hunger, sorrow and rejection are a blessing. Simultaneously, he demands a dramatic change in the life of Christians, as Salvation waits only those who treat others the way they would like to be treated and not expect anything in return. This supreme human transformation represents a step forward from the old principle of not doing to someone else what you would not want them to do to you, universally accepted by religious thinking before the coming of Jesus Christ. This is the new road to salvation and the command “love your enemies, do good and lend, but expect nothing in return” would summarize this ideal form of Christian behaviour which obviously cannot be attained by a mere legislative act when the human nature has not undergone a profound transformation.

Another place where the concept of “interest” or “usury” appears in the New Testament is the parable of the ten gold pieces or talents (Luke 19:12-27). A nobleman leaves for a foreign country and leaves ten gold pieces, each with one of his servants in order to administer them in his absence. Upon the master’s return, they explain how they multiplied the talents of gold received, except for one who has buried his piece for fear of not losing it and who gets rebuked for his behaviour. Although the parable mentions interest as profit for the money placed in a bank, showing that it was an accepted practice in those days, the true meaning of the parable points to a deeper interpretation. The parable is apparently the origin of the use of the word “talent” as skill or ability and the common interpretation of the story is that we are under a moral obligation to use our abilities rather than bury them. Again, the hidden meaning is more about salvation than ethics, as the parable infers that it is not enough to refrain from doing evil things, but one has to always do good deeds.

The Holy Fathers of the Church

As already mentioned, the Holy Fathers of the Church were adamant critics of usury. In his second Sermon to Psalm XIV, St. Basil the Great considers that this practice is detrimental both to the lender and the debtor, as it produces a spiritual loss. St. Basil the Great primarily refers to the situation where the debtor is poor, so the usurer becomes guilty of callousness of heart when confronted with the misery of another human being. Instead of showing mercy and charity, as preached in the Holy Bible, the usurer uses the opportunity to derive profit out of a poor person’s misfortune by pushing him into even higher indebtedness and a possible loss of freedom.[6] At the same time, according to St. Basil the Great the debtor is guilty of trying to live beyond his means, in many instances borrowing money in order to continue living a life of luxury and sinful pleasures, even at the cost of becoming a slave. He also displays poor judgment and spiritual weakness when falling into the temptation of borrowing even though he knows that he cannot repay. Eventually, he shows himself addicted to material values, if he prefers them to his peace of mind and ultimately his physical freedom. St. John Chrysostom takes a similar position in many of his sermons and in particular in his 5th Sermon to St. Mathew. He says that nothing is more shameful and inhuman than profiteering from usury, because the lender makes business with other person’s hardship and worsens the debtor’s situation instead of alleviating it. The usurer greedily accepts a small interest on earth instead of a higher and more beneficial “interest” in heaven.

The Holy Fathers overwhelmingly refer to the practice of lending with interest to those who are already in financial distress and are therefore unlikely to repay. Their position with regard to the case of charging interest for a business loan to a well-off person is less clear. Nevertheless St. Basil the Great does not seem to think differently about the rich borrowers in the same sermon: “Are you rich? Do not borrow. Are you poor? Do not borrow. If you are rich, you don’t need to borrow, and if you have nothing you will not be able to repay your debt. Do not trade your life for your subsequent worries, so that you may not regret the days when you were not obliged to pay interest”. As shown below, this has probably to do with the general ascetic and charitable ideal of the Holy Fathers which shaped their attitude about wealth.

The Orthodox Church and material wealth in general

Finally, the position of the Orthodox Church vis-à-vis usury can be best inferred from its position towards the accumulation of material wealth in general (Mantzaridis, 2004). On one hand, the Church views favourably material goods, which are God’s gift to be used and enjoyed by his creatures. On the other hand, the accumulation of riches and material wealth is subject to a critical treatment, mainly because of the following:

First, the possession of material wealth entails great dangers for the spiritual evolution. Protected by their wealth, the rich people may become self-sufficient and ignore the need for a spiritual life. “Prisoners” of their fortunes, they can become greedy, slaves of the material world, tormented by the fear of death which would mean losing their earthly possessions. During his human mission, Jesus Christ has criticized most the love for riches, not so much for ethical and social justice reasons, but because it considered it the most formidable obstacle towards salvation[7]. The rich risk addiction with this “temporary”, but comfortable world, at the cost of complete oblivion of God’s Kingdom – “For where your treasure is, there your heart will be also” (St. Matthew 6:21).

Second, for judging the behaviour of the rich people it is of paramount importance to see the way in which worldly possessions are used. We have seen earlier the powerful calls for charity, i.e. not using selfishly one’s wealth, but sharing it with the others[8]. More than that, Christians are expected to lead a frugal life and live modestly[9] and they should know that they are not the real owners of their riches, but only administrators of God’s given wealth, from which the whole creation needs to benefit. All property belongs to God, just as life belongs to Him, and He gives property, just as He gives life. St. Sergej Meciov holds that Christians should live as if they were not part of this world in order to find peace of mind. As regards material wealth, this philosophy could be translated in the teachings of St. Maxim the Confessor, who focuses on the inner disposition of the owners of the riches – some people possess things without being addicted to them, so that they do not get upset when they lose them, while others get sad over material loss like the rich man in Bible.

In conclusion, all the arguments presented so far support the theological rejection of greediness and excessive accumulation of material wealth. In this context, usury is regarded as another means of getting rich at the expense of the poor. Although there is no direct prohibition of usury in the New Testament, as it was the case with the Old one, charging interest – and in particular an excessive rate from poor people – is not compatible with the Christian teachings regarding salvation. It is true that the case of charging interest for business purposes rather than survival needs is hardly considered, but even in this case the need to stay free from excessive enrichment and addiction to earthly possessions remains the guiding light. At the same time, the call for an outright legal prohibition of usury does not appear to be strong enough. In particular, as singling out usury from all the other teachings advocating non-attachment to material wealth does not seem justified.

Interest and the ethics of the free market
The Austrian School of Economics

In contrast to religion, the science of economics analyses the process of wealth creation in a society. Although the question of ethics permeates less and less into mainstream economics, its importance for the harmonious social cooperation in a society that strives to advance its standard of living cannot be ignored. Our analysis will be primarily based on the findings of the Austrian School of economic thinking. Although it is not part of the mainstream paradigm anymore, the Austrian School appears in our view as the most coherent and self-sustained branch of economics, given its distinct methodological approach called “praxeology”. This method contends that a valid economic theory can only be logically derived from the basic principles of human action. This is in stark contrast with the mainstream thinking such as the neoclassical, Keynesian, new Keynesian or Chicago schools which rely heavily on an empirical approach based on mathematical and statistical methods. Indeed, such approach seems appropriate for natural sciences where factors can be isolated in laboratory conditions, but not for social sciences as the actions of human beings are too complex for this treatment. Unlike the majority of mainstream strands which take a utilitarian approach[10], whereas the individual largely “vanishes” in various aggregated indicators and interests, in the case of Austrian economics ethical questions related to human behaviour, private property rights or the critique against the coercive intervention by government in the market process come at the forefront.

As already mentioned, the ethics of the free-market economics[11] do not condemn interest charging. On the contrary, the interest income is considered a necessary incentive to promote saving and investment in an economy. For the Austrians, $100 today and $100 in the future represent actually two different goods, given that men prefer a determined quantity of a good today to the same quantity in the future. This is the concept of time preference, which is a category inherent in every human action according to Mises (1949)[12] and originates naturally from our finite lifetimes. Only an increased amount of the good in the future, i.e. the amount lent plus the interest, would persuade the lender – who doesn’t want to make an act of charity – to forego consumption in the present and lend his savings. Prohibiting the charging of interest would leave the lender worse off, as his time preference has been obstructed, with negative consequences for the savings behaviour and capital accumulation in the economy. Not only the outright prohibition of interest would be detrimental to one party of the transaction, but also the capping of the interest rate would bear negative consequences for reasons explained below.

The improvement in material wealth and civilisation enjoyed by mankind at present is the direct result of the gradual increase in labour productivity. This would not have been possible without a steady accumulation of capital allocated to satisfy the most urgent needs of consumers according to market signals. Various theories emphasize different factors that facilitated the industrial revolution that spurred the European economic miracle initiated in the middle Ages, but the catalyst of these contributing factors appears to have been the development of a legal system protecting private property and economic freedom. Moreover, the development of a financial environment that encouraged saving and investment also played an important role.

The direct and indirect consequences of anti-usury laws

As regards the emergence of a sound financial system to intermediate savings in the economy, anti-usury laws condemning the charging of interest have most likely hampered and delayed this process and implicitly discouraged saving and capital accumulation. They did not only diminish the quantity of savings in the economy by artificially depressing their remuneration, but also influenced the way in which savings were channelled into productive investment. Both intuition and historical evidence point to the fact that anti-usury laws contributed to the emergence of the fractional-reserve banking system which in turn was conducive to the set up of central banks and the introduction of fiat money. As we show below, the modern monetary-financial system is not only unethical by violating private property rights, but also economically inefficient (Hulsmann, 2008; Woods Jr., 2005).

Money represents a medium of exchange which removed the inconvenience of barter, thus facilitating trade and the division of labour[13]. In time, gold proved itself as the most suitable commodity to fulfil this function. Banks emerged for two main purposes. First, as money warehouses, they kept safely the gold savings in so called “demand deposits” and issued in exchange titles to the gold deposits, i.e. banknotes. Banknotes were as good as gold, and as time went by, they started circulating as money, due to their more convenient handling. Second, banks ensured financial intermediation by lending out the saving or “time deposits”, i.e. either gold or titles to the gold entrusted to them not for safe-keeping, but for investment purposes. In the first case, depositors pay the bank a fee for the warehousing service, while in the second case the bank pays an interest to depositors for providing the savings that will be on-lent to borrowers; Hence, the emergence of the “depositum confessatum” technique, in order to hide the true economic and juridical function of interest bearing deposits.

Fractional-reserve banking appeared when bankers noticed that under normal business conditions, not all depositors were likely to redeem their gold demand deposits simultaneously. Thus, demand deposits started to be treated as time deposits and their proceeds lent out at interest despite the obligation of ensuring immediate availability of the gold deposited for safe-keeping. Consequently when banks started to issue banknotes, they engaged in issuing banknotes as money in excess of the gold deposited for safe-keeping, realizing that it gave them the opportunity to earn bigger, but actually illicit profits. The deposited gold covered now only a fraction of the bank’s liabilities and they were subject to bank-runs becoming inherently insolvent the moment all its depositors required the redemption of their gold, regardless of how sound its asset management was.

Under a free and competitive banking system, the practice of inflating demand deposits would be limited by the fact that the banks issuing excess banknotes are likely to see their gold reserves dwindle in the process of banknote clearing with sound banks. But, if competition is hampered and banks collude in inflating their gold deposits at a relatively similar pace, this check and balance is largely removed[14]. It remains only one risk that this generalized fraudulent practice would entail a bank run on gold in the entire banking system. Such risk was equally removed with the creation of central banks, which enjoy a monopoly on the issue of banknotes and are empowered to act as lender of last resort in order to provide liquidity to troubled banks. As it was physically impossible for central banks to come up with all the gold necessary to cover bank runs, in particular after the inflating process of banknotes gained speed once it became a state-monopoly, the link between banknotes and gold was eventually severed[15]. Today, the banking system operates by multiplying the fiat money issued by central banks, which can create money “out of thin air” by simply writing a check on itself and spending it.

In which way have canonical and civil laws prohibiting usury contributed to the transformation of free banking into fractional-reserve banking?

First, by prohibiting or discouraging the involvement of Christians into the financial intermediation activity, competition in the banking business was greatly reduced. This opened the new banking industry to the followers of other religions, in particular Jews, which were banned from other occupations by the Christian rulers anyway. This quasi-monopoly facilitated the collusion of bankers operating on fractional-reserve, eliminating the first check on this fraudulent practice.

Second, the use of several techniques to circumvent anti-usury laws, such as the “depositum confessatum”, removed the distinction between deposits and loans on the balance-sheet of banks, facilitated the operation of banks on fractional-reserves and generalised a behaviour considered fraudulent before. In the words of de Soto (2009), “bankers who had used the depositum confessatum to disguise loans and deposits and to justify the illegal payment of interest, eventually realized that the doctrine which held that deposits always concealed loans could also be extremely profitable to them, because they could employ it to defend even the misappropriation of money which had actually been placed into demand deposits and had not been loaned”. This blurred a clear juridical doctrine of the demand deposit contract developed by the Romans. The ensuing confusion was used to legally justify what had been considered a fraudulent banking activity before. Like in Greece and Rome, the most important banks in the late Middle Age initially operated with a 100 percent cash reserve for demand deposits, but gradually violated the traditional legal principles found in the Corpus Juris Civilis – Justinian's Legislative Code (de Soto, 2009). Unfortunately, the rulers did not intervene to protect private property rights and punish fractional-reserve banking. On the contrary, they condoned this practice by being among the main beneficiaries of the loans made from demand deposits and even by setting up public banks in order to profit from this illegal activity as well.

Third, by capping the interest rates allowed to be charged, usury legislation depressed not only the quantity of savings in the economy, but also the turnover and profitability of the banking activity. Fewer savings to intermediate and a ceiling on the interest rates may have represented another incentive for bankers to boost their profits by engaging in an illegal activity.

Overall, the collusion between bankers operating on fractional-reserve banking to which the complicity of the rulers was added later resulted in the modern “alliance” between public authorities and the banking sector. On one hand, the banking sector is inherently vulnerable, prone to bank-runs and needs the support of the central bank as a lender of last resort. On the other hand, governments are the main beneficiaries of the inflation resulting from the banks’ credit multiplication.

The current over-sized welfare states in the Western World would not have been possible without the surge in public debt monetized by the financial sectors and the central banks. Hulsmann (2008) delves into the negative consequences of the inflation resulting in this process which falsifies the economic calculation and redistributes wealth arbitrarily in the society. The negative spiritual consequences are also important: people became much more materialistic trying to protect their savings and prolonged the phase of their lives in which they strive for monetary income; the family declined as the welfare state[16] provided a greater number of services than before, encroaching on its traditional role; libertine lifestyles multiplied as they enjoy now the safety net of the welfare states while traditional values as thrift, hard work and responsible behaviour have been increasingly penalised.

Recurrent crises plaguing economic activity

Moreover, the recurrent economic crises engulfing the world economy are a direct consequence of the inflationary policies run by central banks and amplified by a highly leveraged banking sector. Interest rate plays a crucial role in coordinating the structure of production across time. On a free market, the interest rate described as the “social rate of time preference” by Rothbard (1962) is determined purely by the time preferences of all the people that make up the economy. An artificial tempering with the interest rate that would be formed by the individual time preferences on a free market is likely to trigger business cycles and a significant loss of economic wealth and saved capital.

The Austrian theory of the business cycle[17] explains how artificially depressed interest rates below the level reflecting time preference and real savings in the economy, signal businesses to invest more in long-term and capital-intensive projects. If entrepreneurs fail to recognize the artificially induced economic stimulus, a misallocation of the factors of production is likely to result, followed by a boom and bust process. Under normal market conditions, interest rates coordinate production across time and ensure that real savings are available for the completion of investments by lowering consumption at present. But, in this special case, the increase of investments and the lengthening of their time-structure occurs when the demand for consumer goods has not decreased, but actually strengthened in the boom, taking advantage of the low interest rates. The supply of real savings in the economy is not enough for the finalization of all projects financed by credit expansion as the stages of production closer and those more remote to consumption outbid each-other over the scarce resources. A crisis results, where mal-investments are liquidated and the structure of production is brought in line with consumer preferences again, with considerable welfare costs and social pain.

This explains also the current economic crisis, which is probably the end phase of the latest string of booms and busts that befell upon the world economy since 1990, when the Federal Reserve System[18] started to lower its interest rate. Every time interest rates were hiked in response to rising inflation in the boom, a recession followed and a new and more powerful monetary impulse was necessary to re-inflate the economy. A total of five recessionary episodes took place within the past two decades. The Fed’s interest rate was lowered in a stop-and-go manner from 8% at the end of 1990 to 0.25% at present, over which period the money supply (M2) increased by more than 2.5 times, the volume of domestic U.S. credit increased more than three times while housing prices increased at a similar stunning pace. The financial sector swallowed from 6 to 8% of GDP (it used to be about 2% of GDP immediately after the Second World War). Its primary role would be to intermediate savings in the economy and protect them from inflation, but in reality it is doing just the opposite. Unfortunately, the modern bloated financial sector is nothing but deadweight to the general welfare of the society, i.e. a large share of labour and capital being devoted to an activity which is primarily responsible for the economic inefficiency and unethical redistribution of wealth resulting from entrenched inflation and for the loss of capital in the mal-investment of the boom.

The anti-crisis measures that governments adopted both during the Great Depression and the current one were based on the economic fallacy that the crisis was caused by a lack of domestic demand. Consequently, they adopted even more expansionary fiscal and monetary policies which only succeeded in prolonging the duration and severity of the recession by postponing the necessary structural adjustments in the economy[19] (Woods, 2009). A hidden objective of this approach has been to avoid any deflation that may have caused a “systemic” risk to the financial sector, i.e. a potential financial crisis that would have forced the banking sector to reorganize itself on a sound ethical and economic basis. It is true that the transition to such a system would require painful adjustments in the short-run, but at least the resulting non-inflationary and stable monetary arrangements would be worth the short-term pain. Instead, the developed economies are caught now in the quagmire of mutually reinforcing sovereign debt, banking and real economy crises with no exit in sight, other than a massive monetization of debt by central banks and potential hyperinflation. Kicking the can down this road would mean a continuous erosion of the productive capacity of the economies and a further decline in moral standards. According to Hulsmann (2008): “There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking…They provide illicit incomes, encourage irresponsibility and dependence, stimulate the artificial centralization of political and economic decision-making, and constantly create fundamental economic disequilibria that threaten the life and welfare of millions of people.” One can infer that usury has become “institutionalised, or systemic” (Dempsey, 1943) in today’s monetary and financial arrangements, which are extracting a heavy toll on the large mass of taxpayers. This outcome is nothing but the contrary to what anti-usury legislation was originally aiming at.

Conclusion: material wealth and the path towards salvation

The previous analysis shows that the ethics of the free market and Christian theology follow different ends and implicitly have different positions also on usury. The former is primarily concerned with the harmonious and voluntary economic cooperation in society during our finite natural lives, while the latter underlines the necessary ethical conduct towards salvation. Someone who obeys the ethics of the free-market is likely to live an honest life and indirectly help others by the fruits of his work and investments which raise the general level of prosperity in the society. However, this is not the ideal of Christianity which puts forward much higher aspirations for a human being. Access to eternal life, happiness and salvation are the supreme prize that one can receive and it only comes through an internal transformation putting the individual into a bond of love with God and the rest of the creation. That is why the degree of expectations about the proper human behaviour differs so much in the theological and economics approaches.

At the same time, prescribing these higher Christian aspirations in legislation does not seem to be the solution for advancing people towards salvation. The case of usury shows how the external imposition of a certain moral behaviour by the Catholic Church has actually strengthened an immoral behaviour in the financial sector, weakening the foundations of the ethics of the free-market and bearing significant economic costs. This case is rather similar to the socialist experiment. The fact that the first Christian communities lived together and shared the ownership of property on a voluntary basis has most likely helped the participants free themselves from the attachment to material wealth and advance towards spiritual salvation. A completely different case occurred under forced socialization, where people that were not prepared and willing to share the results of their work were forced into this constraining social arrangement. The experience of the former socialist countries in Eastern Europe is quite bleak, pointing again both to material backwardness and a corrupt social and economic system where people were routinely forced to moral compromise in order to survive. It was not surprising that such social arrangements degenerated into widespread atheism instead of fostering an attachment to Christian values. After all, God left humans with a free-will as any relationship of love makes sense only between free and distinct participants.

Although the Christian doctrine and the ethics of the free-market are promoting different moral messages, they are not incompatible in practice. On the contrary, for a society trying to ensure both prosperity and an ethical behaviour, the free-market is the best socio-economic arrangement to arrive at this end. The harmonious functioning of the unhampered market system was first noted with surprise by the classical economists. Originally they thought that a form of authoritarian interference was required in order to coordinate production in keeping with the needs of the community. But they discovered afterwards that the actions of the individuals left free on the market were capable of supplying consumers more efficiently and abundantly. In the words of Mises (1949): “Their astonishment at the “automatic”, as it were, steering of the market system was precisely due to the fact that they realized that an “anarchic” state of production results in supplying better than the orders of a centralized omnipotent government”. It is not surprising that they saw in this predetermined harmony the “finger of God”. It follows that the unhampered market, unlike the socialist interventionist system, is well-matched with God’s divine order in two ways: (1) the free-market system functions smoothly and ensures an optimal level of wealth creation in the absence of government intervention, and (2) the absence of institutionalized coercion and exploitation on the free-market is consistent with the ethical order prescribed by God and conducive towards spiritual accomplishment.

The ethics of the free-market allow a person to choose his own path in life and order his spiritual values vis-à-vis the material ones as he sees fit. The economic science would only teach him how to make the best of his material desires with scarce means, without encroaching on his liberty to embark on a road of spirituality. It goes without saying that he would not be spared from all sorts of temptations including the pressure to conform to the materialistic behaviour and wealth of the neighbour. But, there would not be direct or indirect institutionalised redistribution of wealth in the society, which is the equivalent of admitting that theft and exploitation are tolerable if approved by law. However, due to the corrupt nature of the fallen mankind, there would always be forces trying to tilt a free-market system into a framework allowing institutionalized aggression against property rights and economic freedom. These are usually the socialist arrangements, which under the guise of worthy moral values – such as justice and prosperity for everyone – generate moral corruption, laziness and discontent both for those who receive and those who are forced to give. It is obvious that a free-market arrangement would not be sustainable without a very strong moral fabric in the society[20].

As regards the attitude towards material wealth, the Archbishop John (Shahovskoy) of San Francisco states that God’s given earthly possessions may lose their real value for human salvation if they are misused: “True human possession is to be found only in eucharistic property which comes from God and goes back to God through man. Only this spiritually-light possession which does not weigh down the spirit, which does not nail us to temporal life or attract us to sin, can be called ‘blessed’…Property is a conductor of love, Divine and human. But men often make it a conductor of hatred for God and man. It is not property that is at fault, not the fact of possession, but evil possession or evil desire for possession.” The same thing applies to usury. As free-market economists contend, the lending of savings can be beneficial for all parties involved in the transaction and the economy in general, if it encourages honest work, diligence and peaceful cooperation in society. The situation changes completely when lending is not an intermediation of real savings any more, but just inflationary money creation which is largely associated to hedonism, easy leaving and the quest for rapid and unethical enrichment.

The Orthodox Christian Saints[21] describe a dual path towards salvation. One is the ascetic path of giving up earthly life and possessions while retreating into a monastic life. The second one is the life in family and society, which automatically encompasses an economic dimension involving ownership, production of goods and services, paying and receiving interest, etc., but where the heart does not lie with the material and temporary possessions and does not ignore charitable works for those in need. In the latter case, the attitude towards wealth should emulate the “eucharistic property” mentioned before, where economic life remains an instrument to express one’s love for man and God.

References

Dempsey, Bernard. 1943. Interest and Usury. Washington D.C.: American Council of Public Affairs.

Hulsmann, Jorg Guido. 2008. The Ethics of Money Production. Auburn Ala.: Ludwig von Mises Institute. at http://guidohulsmann.com/#publications.

Johnson, Paul. 1987. A History of the Jews. New York: HarperCollins Publishers.

Mantzaridis, Georgios. 2004. Morala crestina. Bucuresti : Editura Bizantina. 2006.

Mises, Ludwig von.1949. Human Action. A Treatise on Economics. Auburn Ala.: Ludwig von Mises Institute. 1998.

Sf. Ioan Gura de Aur. Omilii la Matei. Bucuresti: Editura Institutului Biblic si de Misiune al Bisericii Ortodoxe Romane. 1994.

Rothbard, Murray N. 1962. Man, Economy and State. A Treatise on Economic Principles. Auburn Ala.: Ludwig von Mises Institute. 2001.

Sf. Serghie Meciov. Cum sa supravietuim duhovniceste. Bucuresti: Editura Cartea Ortodoxa. 2008.

Sf. Teofan Zavoratul. Sfaturi intelepte. Galati: Editura Egumenita. 2008.

Shahovskoy, John, Archbishop of San Francisco. “The Philosophy of Ownership”, St. Vladimir’s Seminary Quarterly, Vol. 1-New Series, No. 3, July 1957

de Soto, Juerta. 1998. Money, Bank Credit and Economic Cycles. Auburn Ala.: Ludwig von Mises Institute. 2009.

Sf. Vasile cel Mare. Omilia a II a la o parte din Psalmul XIV. at http://www.razboiulnevazut.org/articol/76/Despre-camatarie-si-imprumuturi

Vermeersch, A. 1912. “Usury”, The Catholic Encyclopedia, Volume XV, Robert Appleton Company, Online Edition © 1999 by Kevin Knight

Visser, Wayne A.M. and McIntosh, Alastair. 1998. “A Short Review of the Historical Critique of Usury”, internet version from www.AlistairMcIntosh.com

Woods Jr., Thomas E. 2005. The Church and the Market. A Catholic Defense of the Free Economy. Lexington Books.

Woods Jr., Thomas E. 2009. “The Forgotten Depression of 1920”. Mises Daily, November 27. Auburn Ala.: Ludwig von Mises Institute. at http://mises.org/daily/3788

Americans for fairness in lending. “The History of Usury” at www.affil.org.

The Catholic Encyclopedia, Online Edition © 1999 by Kevin Knight. at www.newadvent.org/cathen

Wikipedia, the free encyclopedia. “Usury”. at www.en.wikipedia.org/wiki/usury


[1] “Usury” comes from the Latin “usura” and originally meant the practice of charging financial interest in excess of the principle amount of a loan. After interest charging became accepted, usury was used primarily as equivalent to interest above the rate allowed by law. In common usage today, the word means the charging of unreasonable or relatively high rates of interest.

[2] The free-market paradigm of the Austrian school appears as the most appropriate benchmark for an inter-disciplinary assessment being based on strong ethical foundations.

[3] The late scholastics who made a first attempt at developing the monetary theory in the science of economics distinguished between usury and the charging of interest. To the extent that the lender was actually taking some risk, without a guaranteed gain, interest was in general not condemned.

[4] See also “Americans for fairness in lending – The History of Usury”, at www.affil.org.

[5] A demand deposit consisted of the obligation of the custodian to always keep available to the depositor the same quantity and quality of money received (gold), i.e. a 100 per cent cash reserve. This service was not remunerated with the payment of interest and if the banker had failed to comply with its safe-keeping obligation he was guilty of misappropriation. The bank is merely acting as a warehouse. By contrast, a term deposit contract transferred the availability of money from the depositor to the banker for a pre-defined time period in exchange for an interest payment. Thus, the time deposit contract possesses the characteristics of a true loan, i.e. the relinquishment of present goods in favour of a larger quantity of future goods.

[6] In those times, it was common practice for a debtor and his family to be sold as slaves if they became bankrupt.

[7] “And again I say unto you, it is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God” (Matthew 19:24)

[8] St. Basile the Great in his 7th Sermon “To the wealthy”: “How many debts could be paid from the price of one of your rings?”.

[9] St. Basile the Great in his 7th Sermon “To the wealthy”: “Those who judge wisely should not forget that we received our riches to make good use of them and not for our pleasure”.

[10] Meaning that the so-called “social utility” considerations may prevail over the God-given individual rights to enjoy the ownership of one’s body and the fruits of his labor.

[11] In line also with the mainstream schools of economic thinking.

[12] Mises explains in his monumental Treatise on Economics “Human Action” that “time preference manifests itself in the phenomenon of originary interest, i.e., the discount of future goods as against present goods.”

[13] Mises’ famous “regression theorem” demonstrates how money could have only come into existence as a commodity or title to a commodity, for which a market value was gradually established (Mises, 1949).

[14] Such a “collusive” behavior is greatly facilitated by the operation of an inter-bank market which can help “greedy” banks that multiply credit rapidly and see their gold holdings dwindle to borrow liquidity from the banks that are expanding their balance sheets more slowly.

[15] Under President Roosevelt, in 1933, the gold standard was abandoned in the United States and people were forced to hand over their gold.

[16] Unthinkable without fiat money inflation as people tend to oppose increases in taxation.

[17] Developed by Mises, and to which also Hayek (Nobel Prize for Economics in 1974), Rothbard, Garrison and others contributed.

[18] The central bank of the United States.

[19] Until the Great Depression, governments let recessions play out, believing that the problem was not caused by a decline in spending and domestic demand, but by the pattern of consumer demand which was not supporting the production that the capital structure has been misled into undertaking in the boom phase. Woods gives as an example the recession of 1920-21 when President Harding implemented the opposite policies of today, i.e. he slashed the budget almost into half from 1920 to 1922 and the Fed did not ease its monetary policy either, but yet the recession was cured by 1923.

[20] Which in our view can only be offered by religious teachings that subordinate human life to higher moral and spiritual values.

[21] See also Saint Theophan the Recluse on the need for a monastic life as a prerequisite for salvation: “Salvation does not depend on the physical place, but on the state of mind. One can find salvation anywhere and can perish anywhere…”


© Institutul Ludwig von Mises - România
Opiniile exprimate de autor în acest articol nu sunt numaidecât şi ale Institutului Mises - România.

Comentarii

  1. Din punct de vedere strict “economic”, camata – dobanda “excesiva”, e o ineptie! Presupune ca ar exista un nivel “normal” al dobanzii.

    Altfel, din punct de vedere “social”, s-ar putea ca tocmai camata (adica dobanda excesiva in viziunea publicului) sa fie una dintre solutiile la expansiunea creditului, cauza malinvestitiei generalizate si in acelasi sens.

    ionut · 17 aprilie 2012, 02:37 · #

  2. Imi permit sa cred ca atitudinea publicului privind camata este strict legata de definitia caracterului voluntar (liber consimtit) al tranzactiilor economice.

    Nu dezvolt ideea, sunt convins ca si in privinta acestei definitii exista opinii divergente.

    iosiP · 17 aprilie 2012, 17:14 · #

  3. Imprumutul e o actiune voluntara: oriunde si oricand! Nu, atitudinea publicului este legata de marimea dobanzii perceputa ca “incorecta” si de actiunile deseori agresive (direct sau indirect) asociate de public acestei ocupatii.Care, daca ar fi pusa intr-un cadru legitim ( ma rog, “legal” in viziunea etatista) ar duce, in mare, masura, la disparitia infractorilor-camatari. Cu alte cuvinte, un Nutu Camataru, ar avea o viata (de camatar) foarte grea.

    ionut · 19 aprilie 2012, 10:29 · #

  4. Am uitat inca un aspect foarte important: camatarii nu folosesc rezervele fractionare!

    ionut · 19 aprilie 2012, 10:43 · #

  5. ionut, m-am referit mai mult la definitia termenului voluntar in conditiile in care, de exemplu, esti ratacit in desert si platesti in mod “voluntar”, desigur, 1000 EUR pe un litru de apa.

    Sau ca sa nu ma indepartez de subiect, m-am gandit la situatia unui parinte al carui copil are urgenta nevoie de o operatie si care are de ales intre a-si vedea copilul murind si a se imprumuta cu dobanda de 200%.

    Inteleg ce spui: daca imprumuturile cu dobanda ar fi legalizate ar interveni legile pietei (concurenta) si s-ar stabili un echilibru in care camatarii nu si-ar avea locul… sau poate ca da, in masura in care si operatorii privati ar avea tendinta de a-si minimiza riscurile iar parintele din exemplul anterior nu ar putea imprumuta de la ei, asa cum nu poate imprumuta acum de la banci.

    iosiP · 19 aprilie 2012, 15:38 · #

  6. I must disagree with some of the points held in the text. I think we could hardly blame the Catholic Church for a pressumed “competence shortage” and the assumed consequences of that. In the same way, we can’t assume that bankers, and lenders in general, are just intermediaries of the money flow (like if savings equals lendings), they actually create money out-of-thin-air, so, it can’t work like a free-market because it doesn’t face the scarcity of, for instance, the market of a determined good; even if it could work like a free market at the beginning, would it continue that way in the long-run?. Given that, maybe we should limit the term “usury” to what it really means: it doesn’t refer to the gains of capital in a corporative (or cooperative) association (including lending in order to generate a productive activity), it doesn’t refer to the opportunity cost gained by a lender (that would be the interest rate in a free market that, as I suggest, can’t be conceived in this case); so, I must conclude it can be reduced to just gaining of interest from the lending for direct consumption or for speculation at financial markets (creating derivatives, for instance). Said so, I think the conclusion varies a little, but I could be wrong: speculation and money creation could be the philosopher’s stone that generates wealth…out-of-thin-air!!!

    Diego · 5 octombrie 2012, 02:35 · #

  7. Diego, you are right! I agree.

    Filip · 5 octombrie 2012, 12:29 · #

  8. Precis enuntul acesta: „ the interest income is considered a necessary incentive to promote saving and investment in an economy. For the Austrians, $100 today and $100 in the future represent actually two different goods, given that men prefer a determined quantity of a good today to the same quantity in the future. ”

    este una dintre aberatiile catre care duce legitimarea camatariei (perceperii de dobanda la imprumuturi)

    Este o premisa pur si simplu falsa, neaplicabila niciunde in natura. Oare 1 kg de mere astazi este egal cu 1 kg de mere peste un an? Fireste ca da! Ce se intampla daca ai un kg de mere azi si decizi sa te abtii un an de la a-l manca? Il pui in debara si, peste un an, ce sa vezi? Ai tot acelasi kg de mere (in cel mai bun caz -:))

    Sau 1 litru de benzina astazi este egal cu 1 litru de benzina peste un an ? etc. Fireste ca da! Indiferent ca, in wishful thinking-ul nostru, ne-am dori sa fim recompensati pentru ca ne abtinem 1 an sa mancam mere sau sa consumam benzina! Insa pur si simplu logica naturala nu ne indreptateste sa speram la o astfel de recompensa!

    Si atunci banii, care sunt o simpla unitate de masura a valorii kilogramului de mere si a litrului de benzina, de ce sa aiba un regim deosebit? Ce logica ne-ar indreptati sa pretindem o recompensa pentru simplul fapt de a amana consumul lor, daca la insesi bunurile si serviciile pentru evaluarea carora s-au inventat banii, regula nu se aplica?

    Dar consecintele negative ale acestei idei sunt mult mai mari:

    „Because compound interest results in an appreciation in invested monetary capital, it is presumed rational for people to prefer having a specified amount of currency now than the same amount some time in the future. This simple and rarely questioned logic has several disastrous implications…discounting affects the rate at which we use up natural resources – the higher the discount rate (derived partly from the interest rate), the faster the resources are likely to be depleted.”
    www.alastairmcintosh…

    Si, tot de dragul preciziei, Biserica nu a condamnat camataria doar din perspectiva mantuirii omului, ci in principal din perspectiva crearii unei societati drepte, deci din ratiuni etice: „This is the proper interpretation of usury when gain is sought to be acquired from the use of a thing, not in itself fruitful (such as a flock or a field) without labour, expense or risk on the part of the lender.”

    Iar doctrina islamica spune, in aceeasi logica: „“The difference is that profits are the result of initiative, enterprise and efficiency. They result after a definite value-creating process. Not so with interest”; also “interest is fixed, profit fluctuates. In the case of interest you know your return and can be sure of it. In the case of profit you have to work to ensure it”

    www.alastairmcintosh…

    Andrei Boambes · 13 ianuarie 2017, 20:28 · #

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