Beggar Thy Neighbor

A History of Usury and Debt

Charles R. Geisst

• Publisher: University of Pennsylvania Press
• Year: 2013
• Print ISBN:
  9780812224269
  9780812244625
• eBook ISBN:
  9780812207507
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The practice of charging interest on loans has been controversial since it was first mentioned in early recorded history. Lending is a powerful economic tool, vital to the development of society but it can also lead to disaster if left unregulated. Prohibitions against excessive interest, or usury, have been found in almost all societies since antiquity. Whether loans were made in kind or in cash, creditors often were accused of beggar-thy-neighbor exploitation when their lending terms put borrowers at risk of ruin. While the concept of usury reflects transcendent notions of fairness, its definition has varied over time and place: Roman law distinguished between simple and compound interest, the medieval church banned interest altogether, and even Adam Smith favored a ceiling on interest. But in spite of these limits, the advantages and temptations of lending prompted financial innovations from margin investing and adjustable-rate mortgages to credit cards and microlending.In Beggar Thy Neighbor, financial historian Charles R. Geisst tracks the changing perceptions of usury and debt from the time of Cicero to the most recent financial crises. This comprehensive economic history looks at humanity's attempts to curb the abuse of debt while reaping the benefits of credit. Beggar Thy Neighbor examines the major debt revolutions of the past, demonstrating that extensive leverage and debt were behind most financial market crashes from the Renaissance to the present day. Geisst argues that usury prohibitions, as part of the natural law tradition in Western and Islamic societies, continue to play a key role in banking regulation despite modern advances in finance. From the Roman Empire to the recent Dodd-Frank financial reforms, usury ceilings still occupy a central place in notions of free markets and economic justice.

Chapter 1

Saints and Sinners

God, nature, reason, all scripture, all law, all authors, all doctors, yea all councils are against usury. Philosophers, Greeks, Latins, Lawyers, Divines, Catholics, Heretics, all tongues, all nations, have thought usury as bad as a thief.

—Roger Fenton, 1612

Collecting interest traditionally was considered the world’s second oldest profession until the Industrial Revolution. It was lumped together with other socially unacceptable practices as inimical to the common good and a perversion of the idea that man should help his fellow man. Along with prostitution, arson, and murder, it was considered an execrable crime under religious law, although it was more gingerly tolerated in the secular world. In the Middle Ages, usurers were often relegated to the seedier sections of towns, segregated much as prostitutes were in red light districts. Theory and practice concerning interest often diverged widely, but generally the more religious the society, the stronger the prohibition against it.

Originally, usury and interest were considered the same practice and were not differentiated in a systematic way. Biblical references were to usury alone, meaning interest, but later distinctions were made between interest and excessive interest. As will be seen, however, usury has always been considered excessive interest, whatever the basic rate of interest may have been. Until the Enlightenment, the two terms were interchangeable, with usury being the operative—and pejorative—term. As the use of Latin declined in Western Europe, the term “interest” evolved in the vernacular but was never able to shake its medieval connotation. For almost a thousand years it was understood to be something not conducive to economic well-being.

Interest became known by its Latin name, “usury,” or usura, meaning to charge a high or exorbitant rate of interest. In the Middle Ages, the term became usuria, from which the modern spelling derives. This negative connotation of the practice of usury is the one that has survived the ages because charging interest at a reasonable rate has always been considered standard business practice despite church prohibitions against it in the medieval world. But as in all commercial practice, the question of how much interest was considered fair versus usurious was never settled in a satisfactory sense because of the fragmented nature of ancient societies, characterized by different religious traditions. The absence of a uniform marketplace for credit also meant that interest rates varied widely, and wildly, from place to place.

Mixed with the straightforward definitions of interest and usury were ideas of fairness or justice, which gave moneylending strong political connotations as well. Ordinary interest was as common as it is today, although when economies began using money as a medium of exchange the debate quickly began over what was normal and what was excessive. Calculating it was difficult under barter economies because interest was usually paid in kind. If a merchant lent a farmer a sack of seed, what was considered normal interest? How much had to be paid back and in what commodity? Was the crop harvested from the seed more or less valuable than the seed? These questions were solved on the local level. In general, interest charges on non-monetary items were not considered usury in the strict sense of the word. But when money became more widely used, ethics entered the discussion. Usury was any amount paid on money loans above the principal amount originally lent. Since moneylending was considered the product of idleness, high rates were frowned upon. Again, the same problem persisted. What was considered high?

In its simplest form, interest charged on a loan for consumption purposes was considered unjust, presumably because the person borrowing the money did not have the means to live without borrowing. Any usury in this case was considered exploitative. This notion is the oldest and can be found in the Old Testament. Most ancient and medieval commentators and writers used Deuteronomy as their main source for condemnations of usury. It stated, “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury” (23:19). Continuing, it stated, “Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury, that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it” (23:20). “Brother” was not meant to be a general term, however; it was much more specific. A brother was a member of one’s own tribe. In other words, Jews could lend to gentiles and collect usury but could not do the same to fellow Jews. This has been referred to as the “Deuteronomic double standard.”¹

Other biblical references stated the same principle. Leviticus 25:36 said, “Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.” But the passage in Deuteronomy became the standard that would be cited for generations as the biblical prohibition of usury of any kind. The standard was indeed a double standard only because there was evidence that Jews did in fact lend to other Jews. Josephus claimed that a lender should be satisfied with the gratitude of a needy borrower rather than expect usury in return for a loan. Early loan contracts demonstrate that, admonitions aside, lending at usury occurred despite the warnings of the prophets. Interest was set at 12 percent among the Hebrews. A similar rate structure was found in many ancient cultures. When Nehemiah was the provincial governor of Judea between 444 and 432 B.C., he declared the 12 percent rate to be used to settle disputes, a practice that would endure for over two thousand years.²

A similar admonition can be found in Psalms. “He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved” (25:5). These statements, especially the one concerning lending to members of one’s own tribe, were perhaps the earliest foundation of a cottage industry that would be known throughout the ancient and medieval worlds. In order to conform to Deuteronomy, Jews could only lend to gentiles and a tradition began that survived for centuries. They became associated with lending and suffered both the fruits and the consequences of their activity. As they later discovered, rulers in Europe often required their services desperately but often cited church law forbidding usury when it was time to repay. Citing religion was a powerful reason for not repaying a loan since secular law traditionally did not condemn usury.

A distinction between usury and interest was made very early. Generally, loans were made to someone in distress, a member of one’s own clan in need. If interest was charged at all, it had to be minimal, simply in order to cover the costs of the lending in today’s language. What the minimum rate of interest should have been was almost never stated, however. Usury entered when the lender was thought to be trying to take advantage of the borrower’s situation, forcing him to ruin or some other compromising position. Thus, usury was equated with conduct unbecoming a member of one’s own tribe or clan and was roundly condemned. The punishments could vary but ostracism and banishment were common. In the ancient and medieval worlds, they were applied to lenders and borrowers alike. Punishments for borrowers reneging on debts were also harsh, if they could be proved to have done harm to the lenders. Lenders carried the onus of having to prove that injury had been incurred and that they were not practicing excessive interest.

A major problem in discussing interest and usury, especially in the period before the Roman Empire, was determining exactly how interest was calculated. Reading present practice backward suggests that the concept and calculations of interest rates have not been constant and have indeed changed over time. Some of the extant material strongly suggests that interest was calculated on a monthly, and simple, basis. The annual rate, or the total interest bill, was simply the amount charged per month times the number of months the loan was extended. Loans (mutuum in Latin) that appeared to have high rates attached to them were medium-term loans for periods longer than a year. The exact repayment terms were not standard due to the absence of an organized banking system in the ancient world and varied from lender to lender. In contemporary language, the sources for loans were private, meaning that funds came from wealthy individuals and merchants.

In Roman law, the code known as the Twelve Tables (Duodicem Tabularum) was the most noteworthy attempt to codify usury for both patricians and plebeians. Patricians were the usual lenders to plebeians, who often objected vehemently to the rates charged. Roman history was replete with attempts to ban or control lending rates. Drawn by a council known as the Decemviri in 450 B.C., the law stated, “No person shall practice usury at a rate of more than one twelfths.”³ This meant that the legal rate of interest was set at 8.33 percent per annum, conforming to the Roman calendar of twelve months established by King Numa in 695 B.C. It has also been understood as a rate of 1 percent per month, as Montesquieu later interpreted it in the eighteenth century. But that may be overstating the case slightly since most loans were meant to be for one month on average. The rate of one-twelfth was derived from agriculture. It represented one ounce in a pound of crop, with payment due on the first of each month. Interest was stated on an annual basis, with no compounding.⁴ If it was compounded, it was called anatocismus anniversarius (annual compounding). A subsequent change raised the lending rate to 12 percent (usurae centesimae) in the later years of the republic and first years of the empire and it remained the same for about a century before being revised several times, finally being reaffirmed by Constantine in the fourth century A.D. But while the rate of interest was relatively low, the penalties for not repaying a loan remained harsh. The code continued: “When debt has been acknowledged, or judgment about the matter had been pronounced in court, thirty days must be the legitimate time of grace. After that, then arrest of debtor may be made by laying on hands. Bring him into court. If he does not satisfy the judgment, or no one in court offers himself as surety on his behalf, the creditor may take the defaulter with him. He may bind him either in stocks or in chains; he may bind him with weight not less than fifteen pounds or with more if he shall so desire.”⁵ Other interpretations of the law suggested that creditors could have insolvent debtors tied and then carved into pieces to satisfy the lenders. Other accounts had creditors selling debtors’ children into slavery.

Although lending rates were set and remedies provided for violations, the laws were not universally followed by any means. Cicero, while provincial governor of Cilicia, related that Marcus Junius Brutus did a tidy moneylending business in Cyprus, lending at 48 percent rather than the 12 percent official rate, using an intermediary to hide his identity from the Roman Senate. Roman law forbade lending money in the provinces at high rates, but the law was harder to enforce than it was at home. Even at home, disputes over usury were not settled amicably. The historian Appian recalled a case in Rome in 89 B.C. where a dispute between debtors and their creditors was taken to a praetor (magistrate). The debtors claimed that an old law, preceding the Twelve Tables, forbid taking usury of any sort and they refused to pay their creditors. Unable to reach an amicable agreement, the praetor allowed the parties to pursue the case in court. The lenders became exasperated at the thought that they could lose due to an older law and killed the praetor in the Roman Forum. The Senate offered a reward for the identity of the killers, to no avail.⁶

Simple interest presented social and moral problems, but compound interest was roundly condemned. Usura was simple interest, but usurae usurarum (usury on usury) was compound interest. In Roman law it was also known as anatocismus, a term Cicero introduced into Latin from the Greek (meaning “interest again”) around 51 B.C., and it found its way into legal usage and judicial practice before being officially banned several centuries later under Justinian. But simply being interest on interest was not enough to get it banned; the consequences were unpalatable. Anatocismus created additional interest that was added to the principal of a loan. Therefore, the addition of the extra interest put the borrower more deeply in debt than had been the case before compounding.⁷

Anatocismus was the general word used for compound interest. Its deleterious effect was known as alterum tantum, or “twice as much.” Interest was considered excessive when the rate applied doubled the principal amount to be repaid at the end of the loan term. This was the most precise term used to denote a rate beyond which practical everyday usury should not venture, despite the official 12 percent rate. If a borrower was charged at the official 12 percent rate and he paid no interest monthly as usually stipulated, the loan amount would double in six years. If 48 percent was charged, the amount would double in one and a half years under the same conditions. Adding unpaid interest to principal was not unique to the Romans; it was also found in ancient Hindu society. The general assumption is that alterum tantum and anatocismus were both generally disregarded by the time of Ulpian in the third century and only Justinian’s Code made them legally operative again.⁸

The two terms demonstrate that the Romans developed an early range of lending rates, similar to those that would be used centuries later. Twelve percent was the official rate below which no one would lend while the upper end of the band was capped by alterum tantum, literally the rate that would double the principal amount. While the upper limit was high, it nevertheless attempted to define a usurious rate that clearly would prove disastrous for the borrower. It also demonstrated that the official rate was routinely violated. If understood in this manner, it also gives some insight into the origin of the well-known mathematical rule called the Rule of 72, which clearly shows how many years it will take to double an amount. All a borrower or lender needed to do was to divide 72 by the interest rate charged. The answer was the number of years necessary to double the amount of money involved.

If that amount occurred within a brief time, from one to two years, it would clearly be in violation of the spirit of lending. But even under anatocismus it was not considered improper for the lender to take the additional interest received from a borrower and lend it to another; the prohibition extended only to adding it to the original borrower’s principal. Using compound interest meant that a borrower could owe more interest than principal on a loan through compounding if the rate was high enough and the repayment period long and this was why anatocismus was frowned upon and eventually banned. The ban did not, however, do away with the practice. Compound interest, especially semi-annual compound interest, clearly existed and was first mathematically implied in the work of Fibonacci in the early thirteenth century, but the actual calculations were not clear.

Regardless of how interest was calculated, the fact that it was always used in business transactions runs somewhat counter to the general religious prohibitions. But a clear distinction had to be made between interest charged on money loans and other forms of payment in kind. Money interest was usually considered the most odious. It was the result of idleness on the part of the lender and desperation on the part of the borrower. A moneylender lent a sum to a borrower and demanded to be paid in money or in kind, quite often the latter. Regardless, usury was considered a wasteful practice according to most ancient and medieval writers. No value was created and nothing useful accomplished except to enrich the lender. The notion was characteristic of a hand-to-mouth economy where farmers and city-dwellers existed on a day-to-day basis with little savings or accumulated working capital. The idea remained static while commerce developed over the centuries, slowly demanding larger and larger amounts of capital to be invested in business enterprises.

Other than biblical and Roman sources, Aristotle was considered the philosophic authority on interest, especially among ancient and medieval churchmen. Plato mentioned usury rarely, stating that, “No money is … to be lent on interest. The law will not protect a man in recovering either interest or principal.”⁹ But there is a sizable time gap because Aristotle’s writings were lost in Europe after the fall of Rome and only were reintroduced by Arab scholars in the eleventh century. After the reintroduction, Aristotelian thought became widely used by the Scholastic philosophers in the thirteenth century, the most notable being Thomas Aquinas, who, along with other medieval writers and canonists, considered Aristotle to be “the Philosopher.” Aristotle explored usury in a different vein. Rather than expressing his dislike of the practice in tribal or commandment form as the Old Testament sources did, he approached it philosophically. Usury was considered a practice that was inequitable to the borrower because it had the ability to beggar him. Usury was the most unnatural form of acquisition: “the art of the petty usurer is hated most, and with most reason; it makes a profit from currency itself, instead of making it from the process which currency was meant to serve.”¹⁰ To Aristotle, money was barren and intended only to be a medium of exchange, not something that could be deployed to earn its own rate of return. If it were used to facilitate exchange of goods and services, its use was valid. If it were lent to earn usury, it was unjust and barren and the lender was nothing more than a thief. When a loan was made, no usury was to be expected. This is not to say that money was not lent at interest in ancient Athens but only suggests that the opinion makers of the day, whose influence would ext...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Introduction
• Chapter 1 Saints and Sinners
• Chapter 2 Embracing Shylock
• Chapter 3 Protestants, War, and Capitalism
• Chapter 4 The Great Experiment
• Chapter 5 The New Debt Revolution
• Chapter 6 Something Old, Something New
• Chapter 7 Islam, Interest, and Microlending
• Chapter 8 The Consumer Debt Revolution
• Appendix Early Interest Rate Tables and Calculations
• Notes
• Bibliography
• Index
• Acknowledgments