Online research in philosophy

Usury, charging a higher interest rate than thought by some to be “fair,” has had and still has, a bad press. Historically, it was heavily punished. It was then, and all too often is now, thought to be exploitative. Yet, as even the most economically unsophisticated must realize, both sides of these transactions must necessarily gain at least in the ex ante sense, otherwise one or the other would refuse to enter into the deal in the first place. The present paper is an attempt to justify the practice of charging interest on loans, at any rate agreeable to both borrowers and lenders.

With almost daily news stories about the crisis in our credit markets, it seems inevitable that a new political and academic debate about credit regulation is commencing. With Americans paying billions of dollars in finance charges every year and some loosing their homes, it is time to ask fundamental questions about the liberality of credit supply and terms. Rather than readjusting usury limits or tinkering with disclosure requirements, it is time to reassess America's philosophy of lending. Although the current socio-economic belief that more credit is better has held dominance for several centuries, history offers an alternative theory. Surprisingly, a serious analysis of this scholastic theory of usury has been virtually absent from academic debates about credit for the past several decades. This article argues that the confusion and ineffectiveness of usury laws could be corrected by a return to the principles of the scholastic theory of usury. This article identifies contemporary academic, political and public dissatisfaction with the current state of credit regulation. It surveys some of the recent data demonstrating the rising levels and costs of consumer debt. Next, the historical approaches to usury that predated the scholastic theory are introduced to set the context for a presentation of the scholastic theory itself. The article outlines the scholastic theory of usury as a synthesis of biblical principles, natural law reasoning and Roman law concepts. The scholastic theory is shown to have developed while remaining true to its core principles from the fourth to the sixteenth century. The new economic environment of the sixteenth century caused some usury theorists to develop a troubling subjective theory of usury which eventually displaced the original principles. After examining this history, the article articulates core principles of the scholastic theory which are then applied to modern commercial and consumer lending transactions. The article concludes that modern credit regulation would greatly benefit from a return to the scholastic principles of usury regulation.

Social attitudes toward usury (here defined using the archaic meaning as the taking of interest on loans) have changed dramatically over the centuries. From antiquity until the Protestant Reformation, usury was regarded as an inherently evil activity. Today, with few exceptions, usury is met with moral indifference. Modern objections to usury are limited to protest against "excessive" interest rates rather than interest per se. With this change in focus, the very meaning of the term "usury" has also changed. Many early pronouncements against the taking of interest emphasized the plight of the poor, but ironically, the poor actually pay the highest rates of interest in the modern American economy. Despite the universality of usury, some socio-economic subcultures still manage to avoid the taking or giving of interest. Orthodox branches of both Judaism and Islam have maintained bans on usury throughout the centuries and up to the present time. This is especially interesting in the case of Judaism, given the popular cultural image of the Jew as usurer. Jewish free loan systems may actually offer a model for modern loan programs that can be designed to aid poor borrowers, who are frequently shut out of mainstream financial services.

There is a close connection between Dante’’s portrayal of usury in the Inferno and wider scholastic argumentation on the subject. Reading Dante’’s account in light of the scholastic critique of usury reveals a conceptual depth and clarity to the former which has, in the absence of such a reading, remained unfortunately opaque. Dante’’s treatment is informed by three of the four main scholastic arguments against usury, which are cen- tered around the themes of the nature and purpose of money, the relation between labor and a just recompense, and the medieval vision of society as an harmonious whole. Each of these themes are weaved by Dante into his poem in a range of diverse ways, yet the final (social) element is arguably a unifying factor. In this regard, his account of usury can be read in continuity with other critiques of ‘‘bad commerce’’ which are in evidence throughout the Inferno.

Usury is a concept often associated more with religiously based financial ethics, whether Christian or Islamic, than with the secular world of contemporary finance. The problem is compounded by a tendency to interpret riba, prohibited within Islam, as both usury and interest, without adequately distinguishing these concepts. This paper argues that in Christian tradition usury has always evoked the notion of money demanded in excess of what is owed on a loan, disrupting a relationship of equality between people, whereas interest was seen as referring to just compensation to the lender. Although it is often claimed that hostility towards ‘usury’ has been in retreat in the West since the protestant Reformation, we would argue that the crucial break came not with Calvin, but with Jeremy Bentham, whose critique of the arguments of Adam Smith, upholding the reasonableness of the laws against usury, led to the abolition of the usury laws in England in 1854. There has to be a role for law, whether Islamic or secular, in regulating financial relationships. We argue that by retrieving the necessary distinction between demanding usury as illegitimate predatory lending and interest as legitimate compensation, we can discover common ground behind the driving principles of financial ethics within both Islamic and Christian tradition that may still be of relevance today. By re-examining past ethical discussions of the distinction between usury and just compensation, we argue that the world’s religious traditions can make significant contributions to contemporary debate.