Apr

15

 I became curious on the issue of usury sometime back and found an article (which I cannot re-discover) which made the following case:

Once upon a time in Europe, most people lived in widely separated agrarian communities under the power and protection of a "lord." These were essentially closed communities with closed economies. As a result, the lord of the village did his best to make sure his community possessed all the trades and skills necessary to get by year-to-year. Surpluses were rare, trade even rarer.

So it wasn't unusual for a village economy to have roughly the same amount of capital circulating from year to year to year. Any significant or ongoing loss of capital could cripple an already fragile economy. An overwhelming amount of the capital (and labor) was controlled by the lord with the church coming in a distant second. It was apparent to most that the viability of the community depended almost totally on the fiscal wisdom of the lord.

Lords had significant holdings in land, crops, and rents; many were also very ambitious, others merely spendthrifts. It was not unheard of for a lord to borrow against any one or several of his many assets. If these "loans" were at no interest, repayments could be made out of the regular expected flow of funds - and the village's capital would remain static. However, a loan at interest meant that each payment meant a small loss to the capital base.

The larger the loans, the longer the prepayment, the more the capital base dwindled. If, and when, a loan was completely repaid (with interest), the community would be that much poorer. Obviously, it would be the peasants, tradesman, and artisans who would suffer first and most; the lord and the church later. So the church banned usury as a measure to short-stop "executive mismanagement."

As far as I can determine there was no scriptural issue here. In fact, in the parable of the talents, one man buried his coin lest it be lost, incurring the wrath of the master. He incurred that wrath anyway for not putting the coin to productive use and, at the least, he should "have deposited my money with the bankers, and at my coming I should have received back my own with interest."

I'm not familiar with the Hebrew of Islamic positions on this issue, so I can't say whether or not theirs are similar or more nuanced.


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1 Comment so far

  1. Ed on April 15, 2013 1:04 pm

    That is an interesting story. I think it depends on what the loan is for. If it is for consumption, then yes, paying the interest would pull capital out of the village without anything to replace it. However, if it was to increase production, the ratio of goods to currency would change, giving each unit of currency more purchasing power increasing the wealth of the village. Would the increase in productivity “pay” for the interest? Well, that seems to be the basic idea of “cost of capital”. The interest rate it the hurdle rate that determines if the expected productivity increase pays for the loan.

    Just consider poor people vs. the wealthy and what they borrow for. Poor people borrow for consumption and deplete their wealth, wealthy people borrow through LLC’s to buy productive assets or businesses and increase their wealth. So the impact of a loan largely depends on who it is to and for what ends.
    It seems to be a basic principle of finance.

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