‘Beautiful credit! The foundation of modern society. Who
shall say that this is not the golden age of mutual trust, of
unlimited reliance upon human promises? That is a peculiar
condition of society which enables a whole nation to
instantly recognize point and meaning in the familiar
newspaper anecdote, which puts into the mouth of a distinguished
speculator in lands and mines this remark: –
“I wasn’t worth a cent two years ago, and now I owe two
millions of dollars.”’
- Mark Twain, The Gilded Age
Since the time one caveman borrowed another’s flint axe, mankind has been in debt.
Historical records show that debt agreements precede coins by around two thousand years.
Ever since those first debts, there have been disagreements about how that debt should
be paid back. The verb ‘to pay’ comes from the Latin pacare, meaning to pacify or
appease. When it comes to livestock, payment could come in the form of offspring – the
Sumerian word for interest, mas, means calves. The Roman word for a herd of
animals, pecua, was the basis for the word pecunia for money, word that
survives in the form of ‘pecuniary interest’ today.
Loans that were secured on land could be serviced by paying the lender the ‘first
fruits’ of the harvest. No doubt there were plenty of loans that were repaid without
interest but simply by the return of the good in question, as modern man might borrow his
neighbour’s paper promises lawnmower. But the idea of interest seems as old as loans
themselves. The question was really not whether interest should be paid, but how much.
Hammurabi, the ruler of Babylon around 1800 BC, set a limit of 33.3 per cent for loans of
grain and 20 per cent for those of silver.
The Romans also imposed a maximum rate for loans; Julius Caesar’s assassin Brutus was
rebuked for charging a rate of 48 per cent for a loan to the city of Salamis when the
official ceiling was 12 per cent. Jewish custom forbade the charging of excessive interest
to fellow religionists (‘Thou shalt not lend upon usury to thy brother’, Deuteronomy
23:19), so they had to turn to Gentiles when they needed to borrow money. Jews also
developed the concept of a jubilee every fifty years, at which point all debts were
written off, a good moment for a celebration.
The idea that interest is in some way unnatural, or an unfair imposition, is also
ancient. Aristotle argued that, since coins did not bear fruit, interest should not be
paid on monetary debt. Christians adapted the concept of usury from the Old Testament,
with the Council of Nicea in 325 prohibiting clerics from the practice. Usury was
condemned outright, even though Deuteronomy allowed the practice of usury with
‘strangers’.
What the Church did not do is make it entirely clear what usury meant. One definition,
from St Augustine, was ‘to expect to receive something more than you have given’. This
statement did not mean that interest should not be paid at all, but that creditors should
only be compensated for the loss incurred from lending. This could be defined as the
‘opportunity cost’: what the lender might have done with the money if it had not been
lent. Profitable investment was clearly not ruled out. After all, the parable of the
talents suggests that some form of interest was acceptable. The lazy servant who buried
his master’s money is told that ‘You ought therefore to have deposited my money with the
bankers, and at my coming I should have received back my own with interest’ (Matthew
25:27).
The Bible is full of such contradictions. Nevertheless, the restriction on usury was
real and undoubtedly the development of credit was restricted as a result. Ways were found
round the injunction. The business of pawn-broking, for example, continued through the
Middle Ages. Usurers were sufficiently common for Dante to condemn them to the seventh
circle of hell. This dislike of moneylenders has lasted through the centuries, with
particular prejudice against the Jews, as epitomized in the character of Shakespeare’s
Shylock. This was monstrously unfair since in many countries Jews were not allowed to own
land or enter respectable professions. Money-lending was one of their few remaining
options. (Modern immigrants often face a similar catch-22; condemned either for being
idle, or for taking people’s jobs, and usually both at the same time.)
Since trade depends on credit, credit was provided. The historian Charles Kindleberger
concluded that, ‘The usury laws of the Church did not so much cut down the amount of
lending and borrowing as complicate them by the necessity to disguise the state of
affairs.’ Similarly, while Islam forbids interest payments in theory, ways are found
around the injunction in practice. The underlying idea is that the lender should share in
the profits with the borrower – for example, if a loan is made against a house, then a
lender should share in the benefits of a rise in price.
The Reformation of the sixteenth century led to a decisive break in Christian
tradition. The Protestant clerics, such as John Calvin, were noticeably more favourable to
the lending of money at interest. Calvin edged back to the Roman principle of setting a
maximum rate, in his case 5 per cent. Some saw the change in doctrine as explaining the
economic success of the Northern European Protestant nations (England and Holland)
relative to the Southern Catholic nations. The Protestant work ethic also explained the
rather harsh attitude towards debtors, which saw many sent to prison. But there were at
least some loopholes. Daniel Defoe, the author of Robinson Crusoe, was known as the
‘Sunday gentleman’ because he only appeared in polite society on the Sabbath, a day when
debtors were traditionally immune from arrest.