Religious perspectives on money-lending

So, I had an encounter with a rather unreasonable libertarian atheist who insisted the Church held back economic development for centuries by outlawing usury, which he said to be a clear indicator of an anti-capitalist worldview. This position is simplistic, contains error in basic facts, and a possible example of anachrony in narrating historical events.

While there existed since Gratian a broad principle that the lending of money for profit is sinful, often overlooked is the fact that canon lawyers used the word “interest” to mean a lawful charge for the loan of money. Generally this was seen as a fair charge to cover factors like risk and opportunity cost. “Usury” then and today has connotations of an unreasonable charge on borrowing money. In the Church, the law on this was often unclear and for a long time not systematized. Many inveighed against charging interest on personal loans, but not commercial ones. Some condemned both.

The Medieval Church proclaimed blanket prohibitions on usury in the 9th, 10th, and 11th centuries. However, this must be seen in light of the economic structure of the time. Borrowing prior to the twelfth century was almost entirely for consumption rather than production or investment. In an agrarian society, tillers of the soil tend to simply borrow to get through hungry periods before the harvest.

With the rapid development of commerce in the 11th and 12th centuries, however, the Church began to properly systematize the law on usury and declared many for-profit financing operations and credit devices as non-usurious. The Church and the Papacy were themselves borrowers and lenders of large sums of money at interest, and Church institutions themselves pioneered strategies for investing the large sums of money they had lying idle in deposit.

Today, governments are borrowing large amounts of money to cover day-to-day operations, like the welfare bill, that they cannot pay off with direct tax collections in the course of a fiscal year. That cannot be justified like borrowing for large, expensive infrastructure projects with long-term benefits. So we might want to consider the nuances of the Medieval Church’s position on borrowing and debt.

The Jewish perspective on this is very similar with some interesting differences. Rabbi Baruch Epstein of Belarus, writing in the early 20th century, says that with economic development in the latter Middle Ages, offering a loan to a neighbour was no longer only to offer him some of your surplus to get him through bad days. It was now handing over capital and ultimately the main tool by which one earns a livelihood. This can be classed as an investment, which enjoys greater esteem in Jewish law than the acceptable interest-free loans and the totally forbidden act of usury.

However, Jewish law, unlike the Church and other systems, never drew a distinction between taking interest and usury. Thus there is the legal category called iksa, where the lender becomes a silent partner in the business so it is not considered a loan at all but an investment.

As is said in the Talmud:

He who lends money is greater than he who performs charity; and he who forms a partnership is greater than all (Talmud Shabbat 63a).

I used to disparage the iksa system as a legal fiction to justify usury but lately I see a beautiful consistency in it.

Good sources on this are Law and Revolution: The Formation of the Western Legal Tradition by Harold Berman, and Judaism, Law, and the Free Market by Joseph Isaac Lifshitz.

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About Cranky Notions
Pro-market, Pro-Israel and argumentative recent blogger. That fella from the Norris scandal.

4 Responses to Religious perspectives on money-lending

  1. You’re saying the Church didn’t hold back capitalism because they merely forbade ‘usury’ (rather than “lawful charge” borrowing). But there is no such thing as usury/unreasonable charge. There is no such thing as reasonable vs unreasonable, only voluntary vs involuntary.

    In a free market, you can’t lend at an interest rate higher than is necessary to cover risk, etc., because competition will undercut you. In a market that is tampered with by government, then it’s not the lender being evil, it’s whoever’s preventing the market from being free. And even then, usury in itself is not bad — it would be the same as if the government put a tax on lending, making the lenders charge more.

    So whatever the Church did to prevent this kind of voluntary trade *did* hold up capitalism, and was bad. But this is an over-simplification: *everybody* believed that lending money was wrong in those days. The Church was only implementing what everybody knew. There didn’t exist better ideas on capitalism at the time, so it’s misleading of your interlocutor to say they had “an anti-capitalist worldview”.

    • Caps on interest rates did not begin with the Medieval Church, and neither did the practice end with them. Indeed, the law is tighter, or at least more extensive, on legal moneylenders today in many respects.

      But I’m not sure how much damage this did to economic progress in either case. I am somewhat swayed by the argument that lax lending laws would have a more limited positive impact given the agrarian limitations I mentioned. Lords might have benefited from being able to make more improvements on the manor, but Medieval England, and kingdoms beyond, did not lack for mills and such. Also, the regime was, as far as I can see, sensibly more liberal on merchant commercial loans (and in fundraising for military ventures).

      I agree with you that what really matters is voluntary vs. voluntary, rather than “reasonable” vs. “unreasonable”. But the initial argument that spurred this on just seemed to be a silly swipe at religion.

      • Lulie says:

        If I understand you correctly, you’re saying that the only people who could make use of loans for capitalistic purposes are “productive” investments, like middle-class people who build mills, and that lords and peasants only use them for bad things like spending (“consumption”).

        But the whole distinction between production and consumption is collectivist. It’s saying that economic activity is only useful if it benefits other people. It’s denying that when you do something for yourself, you’re creating capital — you’re creating a better mind. It’s thinking that a surf is just a body, just a worker, where in fact humans are creative (which also means, ultimately, good for the economy).

        Loans are a way of making a vast range of activities possible that wouldn’t be possible if you had to use cash flow as it came in. That’s just as true for peasants and lords. To “simply borrow to get through hungry periods before the harvest” IS production — production in an agrarian society requires people to be alive to do things. Lords needed loans for warfare (security/warfare is needed regardless of which economic/political system it is).

        I agree that the criticism this atheist guy gave of the Church is wrong, but it wasn’t because the Church was more principled, or “sensibly more liberal”. The dig at the religion was wrong because the flaw he cites was true of everyone — no one understood economics at the time.
        (Reminds me of how people today say Israel is bad for doing some given thing in warfare, when no other country takes as many precautions as Israel.)

      • Now that I think more about it, it was Aristotle who said money should serve only as a medium of exchange, and not the mother of interest.

        With this as the prevailing thought for millennia, the nuances made by the Canonists appear to be a notable, positive development, even if their thinking was not perfect. The Scholastics, like Martin de Azpilcueta, considered all sorts of cool things like the time value of money. This was a long time coming, but the raison d’etre of the Scholastics was to harmonize authoritative Greek, Roman, and religious texts with eachother and with current problems.

        I think its useful to draw a distinction between production and consumption. Borrowing to grow potatoes or make televisions that people want is a far surer foundation to economic growth than borrowing for the consumption of those things (unless you are a Keynesian). However, the line can be blurry. Buying new kitchen equipment can increase the value of a house you intend to sell on. Plus, a serf’s gotta eat. I think in the agrarian economy, moneylenders are likely to be especially wanted yet especially loathed at the same time.

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