Usury Today

May 21, 2010

Building off of my post yesterday, I now make a stab at answering the questions "Does the ban carry over into the New Covenant?" and "What does it mean for us today?"

Well, according to fairly standard accounts of applying the Old Testament law, it would carry over in its general equity.  It may be be straightforwardly part of the moral law, but it seems not.  It would seem to be a deduction, an application, from the moral law, for the nation of Israel.  This would mean that, to apply it, we have to deduce what moral principles it is seeking to apply, what things it is trying to safeguard for the communities of Israel, and then see to what extent those principles and concerns apply to other settings beyond ancient Israel.  Insofar as they do apply, then the prohibition on usury should continue to govern our societies, but we do not need to see it as a priori binding across the board.  (One thing that should be clear, though, is that insofar as it now applies, it would apply without distinction between co-religionists and foreigners, since in Christ all men become our neighbors.) 

Notice here that I am not taking the medieval scholastic approach, which sought to demonstrate why usury was an inherently unjust action from the standpoint of the natural law.  Why?  Well, two main reasons.  First, that whole line of argument is rather difficult for most people (including myself) to grasp, and relies on quite a few assumptions (e.g., about the nature of money) that many people are no longer inclined to grant, and which, in any case, seem to be largely of a philosophical nature that is hard to either prove or disprove Biblically.  Therefore, the scholastic position against usury has limited persuasive value, and I do not feel myself sufficiently qualified to decide whether or not I accept the argument, much less, to try to recommend it to others.  Second, that whole approach has proven to be very susceptible of casuistry.  That is to say, it gradually got watered down through various exceptions and qualifications and drawing what feel like arbitrary lines in the sand, so that it became nearly useless as a standard for modern economic ethics, and lost sight, it seems to me, of some of the concerns that lay at the root of the prohibition.  If this is overly harsh, correct me...I really only know about a tenth as much about this as I'd like to.  

So how might it apply to more "capitalist" economic settings?  What I outlined before was a fairly broad account of the harmful effects of usurious credit on communities and economies, but of course it has to be said that these effects would be much more serious in a small agrarian society like Israel.  That's because the chief resource of Israel's economy--land--was in limited supply, and the supply could not be increased.  The value of commercial credit, of course, is that it helps drive the expansion of production--finding more raw materials, tools to extract them faster, tools to process them faster, new ways of manufacturing and distributing them, etc.  Where the supply of raw materials is plenteous and flexible, credit can help boost production for everyone in the market--a rising tide lifts all boats--but, where the supply of raw materials is limited and relatively inflexible, credit just means an intensification of competition for a piece of the pie, and tends to have the effect of increasing inequality--making some members of the market masters of the resources, and others servants.  I think this effect will tend to happen in any economy, but the effect is considerably heightened in an agrarian setting. Therefore, one might well suggest that, in other economic settings, the second rationale for the ban that I've suggested--the tendency of credit to produce inequality--wouldn't be as much of a factor.  Likewise, the first rationale--the tendency of borrower to get enslaved to lender--might not be as much of a factor.  As I mentioned, in an agrarian setting, the farmer is largely at the mercy of fortune as regards his ability to produce a good crop and pay back the loan; it would be very easy for him, through no fault of his own, to default, because of weather, locusts, etc.  However, for people in more stable industries, interest-bearing loans really might help them expand their business without grave risk, unless they brought the risk on themselves by behaving foolishly.  So, one could argue that, on these two fronts at least, a much more positive case can be made for usury in our economies than could be made in ancient Israel (of course, one might then object that perhaps we ought to have a much more agrarian economy, more like Israel's, and I would be friendly to such an objection).  

Nevertheless, neither of these concerns about usury has been wholly done away with.  In any economy or any industry, usury can have the effect of imposing servitude upon the borrower, a servitude that it may prove difficult to escape, and will often have the effect of increasing inequality by encouraging the growth of the stronger producer at the expense of the weak.  Moreover, the third objection still stands: usurious credit reduces the need for cooperation and interdependence.  For these reasons, I think that we would do well to adopt the scholastic (and the Islamic) principle that commercial credit ought to be extended in the form of co-investment, in which the risk and profits are shared, rather than in the form of a loan, in which the creditor has a claim on the borrower and all his assets.  To be sure, if we do this, economic growth may not be as rapid, because the entrepreneur will have a harder time getting the capital to grow his business quickly, however, the growth that we have will be more stable, and more equally shared; certainly the last couple years should be enough proof that mere speed of growth is not the best thing for an economy.  

So, on the basis of the OT usury bans, I do not think that we can conclude that any charging of interest is wrong, or even that it may not have a limited role to play in some economic situations, but we can conclude that it is dangerous tool, and it is very dangerous to a society if that society becomes dominated by debt and interest, as our societies undoubtedly have been for a couple centuries, and so we should aggressively seek to foster alternative modes of finance and investment.  This sort of conclusion also means, of course, that a Christian does not need to immediately disengage himself from any usurious uses to which his money may be being put (indeed, it would be almost impossible for most of us to do so today), but it does mean he should seek to have an ethically critical, rather than a casual attitude toward the way he handles his own finances, and to the ways he might pursue a profession in finance (I say this as a part-time investment advisor, an ethically scary position if there ever was one), and that as Christian communities, we should look for alternative financial practices.

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All of this is much more thinking out loud than it is attempting to lay out a treatise (even if it sounds a bit like the latter), so by all means engage, critique, and force me to modify my proposals until they're unrecognizable.

Making Sense of the Usury Prohibition

A friend asked me recently to share some of my thoughts on usury--the meaning of the OT prohibitions, their validity in the NT, and their applicability in the modern world.  As usual, my thoughts turned out to be rather wordy, so I decided it was worth exploring them in a two- or three-part blog series.  

So, what was the original purpose of the ban on usury in the Old Testament?

I do not buy the idea that the ban on usury was simply on charitable loans, that commercial loans of any sort were not envisioned, because they weren't relevant in that sort of economy.  On this reading, they were relevant in the economy of trading with non-Israelites, and that was why the law in Deuteronomy permitted them to charge interest to aliens.  From the reading I have done, it seems the main function of loans in the ANE economy at the time the usury laws were given was to finance farmers--either simply to buy seed to plant extra crops for the next year, or to expand their fields to increase their production; a hefty portion of the crop's yield was then usually demanded as interest.  Now, this means that such loans fell somewhere along a spectrum between commercial and charitable.  For the very small subsistence farmer, who was so poor he hadn't been able to save any of his seed from the year before, and had to take out a loan to buy seed to plant a crop for the coming year, the loan would have much of the character of a charitable loan.  For a more well-off farmer, who was looking for an opportunity to rapidly boost his production, such loans would have been basically commercial loans.  Clearly there was then a significant place in even a rather agrarian economy like ancient Israel for productive commercial lending.  So I don't buy the idea that the ban was simply not envisioning the possibility of such loans.  

Why then would God have wanted to ban usury, even in cases when it wasn't straightforwardly exploiting a brother?  Three reasons, it seems to me.  First, because even prudent commercial loans, for clearly profitable enterprises, can quickly become enslaving.  Human nature being what it is, people tend to grasp for more than is wise, overconfident in their abilities, and so a borrower will borrow a little more than he can really afford at a higher rate than he can really afford, and will soon find himself and his farm at the mercy of his creditors; this would be particularly so in an agrarian economy where so much one's production depended on factors outside one's control.  The instability and unhealthy dependency that widespread credit introduces into an economy can be readily seen in our current financial crisis.  God wanted his people to be free, and such freedom would quickly be endangered if for-profit lending was allowed a large foothold in their economy.  

Second, because credit-driven production requires aggressive expansion.  To make an interest-paying loan worthwhile, you have to use it to expand your business and boost your production at a higher rate than the rate of interest; and of course, credit enables you to expand much faster than you would otherwise be able to do.  Of course, this is why credit is viewed as so wonderful and absolutely necessary in the modern economy--we are told that it is the only way in which we could generate as much economic growth as we have seen in the past couple centuries, and this is the way we're going to overcome poverty.  But of course, the problem is that credit-driven growth does not end poverty, because it increases inequality, at least, it certainly does in an economy like ancient Israel, where, with a limited amount of land to go around, and most of the economy dependent on the land, the only way for a borrower to expand his enterprise is to dispossess other smaller producers.  And then, of course, once he has expanded his enterprise so that he is much larger than nearby producers, he can command a much lower rate of interest than smaller borrowers, and so is able to continually strengthen his position relative to them.  In short, interest-bearing credit helps to consolidate larger and larger slices of the pie in certain hands at the expense of others.  

Third, because usurious credit reduces the need for cooperation and interdependence, since its absence would have to be filled either by interest-free loans or capital investments.  Interest-free loans would be more likely to establish brotherly relationships among Israelites, instead of the master-slave relationships that usurious credit would tend to engender.  If such loans were not forthcoming, then an Israelite wanting to embark on a risky business enterprise would need to solicit cooperative investment from fellow Israelites, who would share both the risk and the profits of the venture with him, instead of having a low-risk claim on his assets should he fail, as the creditor would.  This would mean a greater likelihood that Israelite society would be characterized by relationships of cooperation and interdependence.

The chief rationales for banning usury then, it seems to me, are just the same as that for the seven-year debt cancellation and the Jubilee law: to maintain a well-distributed possession of the land and its produce, in which each family maintained its patrimony; without these policies, there would have been a tendency over time for the land ownership to become gradually consolidated in wealthier hands, while more and more Israelites would become landless serfs.  With these policies, the people of God would be more likely to be free, equal, and interdependent.

Why then were they allowed to lend to foreigners?  The answer seems simple enough, if the problem with usury was not so much that there was something inherently unjust about charging it, but rather that its regular practice would have baleful implications for the economy of God's people.  Since the economies of the foreigners already operated on usury, with the inequalities and difficulties this created, then for the Israelites to lend to them would not have any serious effects on them, and such lending would presumably have remained a relatively small part of the Israelite economy--clearly, the law was not designed for the kind of permanent Diaspora that made money-lending the core of the Jewish economy for two millenia.