A History of Usury and Debt

Beggar Thy Neighbor A History of Usury and Debt By Charles R. Geisst When he finally returned to Rome, he did found in almost all societies since antiq- so a wealthy man. uity. Charging interest on loans is the Seven years before the assassination The problem caused Cicero to coin a oldest financial practice. It has also been of Julius Caesar, an acrimonious dispute name for the practice which became a decried almost from the beginning as broke out between Marcus Tullius Cicero, cornerstone of Roman law. The story was predatory, with the lender seeking to take at the time the provincial governor of told innumerable times over the next 1,800 advantage of the borrower. Whether loans Cilicia, and Marcus Junius Brutus, a young years. The Roman historians dutifully were made in cash or in kind, unscrupu- provincial Roman administrator. The elder recorded it, and Adam Smith alluded to lous lenders were said to be practicing a statesman chided the younger man for it in the Wealth of Nations. According to beggar-thy-neighbor policy by ensuring using his administrative post in Cyprus to Roman law, simple interest was permit- that the borrowers were disadvantaged to earn ill-gotten gains at the expense of the ted, but compound interest was anathema. the point of losing their collateral, or in local people. Cicero received reports that Compounding had been used in many extreme cases even losing their freedom Brutus had been lending money in Cyprus ancient civilizations, but the Romans even- or families. Charging simple interest was at four times the maximum rate stipulated tually made it illegal. By doing so, they also barely condoned, but charging compound by Roman law. To make matters even established a tradition that would create interest was unscrupulous, immoral and worse, he did it anonymously through an much confusion in the centuries to follow. rapacious. It was also practiced with near agent who did not mind using strong-arm They did not make all interest illegal, only impunity. tactics to collect the debts. When Cicero compound or “accumulating interest.” The problem was clear in the ancient brought the matter to his attention, Brutus Prohibitions against excessive inter- world but became obscured over time. ignored him and continued to lend money. est, or more properly usury, have been Over the centuries, usury prohibitions 20 FINANCIAL HISTORY | Spring 2013 | www.MoAF.org © Bettmann/CORBIS © Bettmann/CORBIS Left: Bust of Marcus Tullius Cicero (106 – 43 BC), provincial governor of Cilicia, who accused Brutus of using his administrative post in Cyprus to earn ill- gotten gains at the expense of the local people through usury. Right: Statue bust of Marcus Junius Brutus (85 – 42 BC), who loaned money in Cyprus at four times the maximum rate stipulated by Roman law. became part of civil law, and that unwrit- world, but they remain at least partially Today, usury is considered excessive ten law of nations generally referred to as illegal in many jurisdictions. Many Ameri- interest, but that definition is relatively the natural law. But it was still practiced can states still retain laws against criminal new in historical terms. Originally, usura widely and openly by the accursed money- interest, or loan-sharking. At the same time, was interest and its actual rate differed lenders who quickly became part of legend it frequently is ignored in the same places from place to place. The debate over it and literature. This uneasy combination with impunity and only becomes the center was intense. Excessive interest in many of theory and practice is partially respon- of attention in poor economic climates or in ancient societies was interest on interest, sible for the uneven patterns of economic times of capital shortage or high inflation. or usurae usararum, which added to the development found in Europe from the Perhaps that is why it has remained part of principal of an unpaid loan. In the ancient decline of Rome to the Reformation. In the universal canon of proscribed practices. world and Middle Ages especially, this the early Middle Ages especially, all inter- Usury prohibitions firmly are part of the was anathema. The tribal tradition of the est was considered usury by the church. natural law tradition, in that natural law Hebrews prohibiting Jews from lending to Compound interest became “Jewish inter- specifies what cannot be done. Since the fall each other at interest was cited by medi- est,” suggesting that it had dark, magical, of Rome, there have been more centuries eval churchmen as the major Old Testa- non-Christian qualities that could be used characterized by what is known as capital ment source for proscribing all interest, for expropriation by the lender, consid- shortage than there have been of periods of not just simple interest. The great irony ered a societal outsider. sustained growth and general prosperity. It was that Jews were exempt from lending Through its long history, interest and is not a coincidence that the outcry against to gentiles and accepted as moneylenders usury have gone from being anathema to usury has been most shrill during those dif- by the church in the Middle Ages. That being big business in the contemporary ficult times. loophole allowed them to compete with www.MoAF.org | Spring 2013 | FINANCIAL HISTORY 21 the Lombards and Cahors who about the future value of a were allowed to lend at interest. unit of currency and, most In medieval Europe, these famously, how many rabbits groups were the main mon- would be the result of an origi- eylenders before the arrival nal pair, assuming continuous of the Jews. Curiously, none rabbit compounding. But he was condemned for it, and the avoided the usury issue, as did Lombards were responsible for his equally-famous countryman the development of the money Luca Pacioli two centuries later markets in the 14th century. The when he discussed double entry Italian bankers in particular bookkeeping. Fibonacci did, became financiers to monarchs however, tackle the problem of and princes as far north as Eng- debasing a currency, a politi- land. Their experiences with cally correct topic in the 13th Edward III in particular were century for kings and princes. unpleasant, but their skills were There is a great temptation highly sought after in countries to criticize various usury and where the treasuries were either interest ceilings as being incon- low on cash or management sistent over the centuries. The skills. Despite the general ban on medieval church adopted a ban interest, the moneylenders were on usury, similar to the one tolerated and even occasionally in the Muslim world, only to put the feet of monarchs to the see it circumvented with great fire when the interest bill was frequency between the 12th and overdue. Jewish lenders usu- 19th centuries. Different com- ally were less fortunate. This mentators had sundry opinions apparent contradiction can be © Michael Nicholson/Corbis on the subject, but all agreed explained by a combination of Adam Smith, considered the father of free market that interest needed to be con- tradition, religion and law. The economic theory, favored a ceiling on interest. trolled. Even Adam Smith, con- Lombards were the barbarian sidered the father of free market tribe that conquered Rome in economic theory, favored a ceil- the sixth century; the Cahors for money lending because the Scholastics ing on interest. But as usury and were the descendants of the Visigoths accepted Aristotle’s dictum that money was interest approached the 19th century, it who settled in France. Neither group had sterile, having no intrinsic qualities other became more clear that there was a great any provisions against interest or usury in than being used as a medium of exchange. deal of consistency in the way they were their laws because both came from societ- It could not beget itself, and therefore usury treated, given the differences in cultures ies that originally used barter or payment was not useful. Unknown (or ignored) and political motives of those opposed to in kind rather than money. Natural law in was the discovery of Justinian’s Code in them. The tendency to abuse one’s posi- the late Roman Empire assumed a com- 1130. In it, the prohibition against anato- tion as a lender was recognized by most monality among civilized societies, but cismus (Cicero’s term) and alterum tan- commentators regardless of their political that did not include barbarians. Neither tum compound interest. Normal rates of or moral position. group had a tradition against usury; each interest were tolerated, but adding interest The term “beggar thy neighbor” today is continued to pursue its newly-acquired to outstanding principal was banned. But used to describe an international trade prac- money lending skills without interrup- medieval church law would not even admit tice where one nation attempts to establish tion. No loud objection was heard until to ordinary interest despite the distinction advantage over its trading partners through the Lombards were conquered by Char- between the two in Roman law. restrictive trade practices or policies. This lemagne in 800, but by that time their Compound interest would not become derives from a mercantilist idea that owed tradition was established. a math exercise until the Middle Ages, its origins to an era when colonial pow- The barbarian invasions also relegated when the Italian mathematician Fibonacci ers exploited their far-flung colonies and much of Roman law to the shadows of discussed compound interest questions ensured that they exported more than they history until the general revival of learn- and puzzles. Because of the usury prohi- imported. Before the mercantilist period, ing in the 17th century. When many books bition, he carefully avoided discussions however, the term was associated more that had been missing for centuries reap- about loan values and instead focused on simply with borrowing and lending.

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