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1.2.1 Early Attitudes Toward Interest

The lending of money or commodities such as grain in return for interest has been documented as early as 3000 B.C.15 From its inception, the practice seems to have caused controversy in many societies. In part, the charging of interest was condemned on moral and religious grounds; it was considered ungodly and uncharitable for one man to profit from the need of another. In hard times, a borrower could lose all his property and be sold into slavery to pay his debts. The evils caused by usury were very real, and money lending was at times banned outright. For example, under the laws of the Old Testament, one Jew was forbidden to lend at interest to another.16

The complete abolition of money lending at interest is not, however, a realistic solution to the problems that lending can cause or exacerbate. If one person has money or some commodity that another needs, the self-interest of the lender and the desire of the would-be borrower align powerfully. Loan contracts are, after all, consensual agreements, even if not always even-handed ones. Nor do loans at interest invariably spell doom for the borrower. They can and do benefit both parties in most cases, especially in commercial transactions.

Not surprisingly, early commercial societies were tolerant of money lending, although they frequently limited the permissible interest rates. Conversely, societies that nominally prohibited loans at interest created exceptions, particularly for commercial lending.17 To give one example, while the Old Testament condemned usurers and forbade one Jew from collecting interest from another, it allowed the collection of interest from foreigners.18

Medieval Europe, under the powerful influence of the Catholic church, followed a similar path.19 The church repeatedly condemned the assessment of “usury” (i.e., interest),20 but Jews, who were generally not permitted to own land and often were not admitted to craft guilds, were permitted to operate pawnshops.21 As trade gradually increased through the centuries, Christian merchants developed various schemes to avoid the prohibitions, such as assignments of rents, “investments,” and the use of bills of exchange. In 1515, the Fifth Lateran Council, in effect, legitimized the lending of money with interest.22 In England, it was not until 1545 that Parliament legalized charging interest in the modern sense.23 This statute was repealed during the reign of Queen Mary, only to be reenacted in 1570 under Queen Elizabeth. Although interest was legalized, the rate remained capped at or below ten percent.

In 1713, the Statute of Anne was enacted, voiding all contracts for interest at more than five percent.24 The Statute of Anne applied to both direct loans and to forbearances, or creditors’ agreements to postpone collection of a preexisting debt in exchange for interest payments. The Statute of Anne has remained the basic template for Anglo-American usury laws, although the rate ceiling chosen varies.

In 1787, the English philosopher Jeremy Bentham published an influential essay, Letters in Defense of Usury, in which he argued that usury ceilings limited the credit available to those who could not offer security, violated the principle of freedom of contract, and therefore should be abolished. According to Bentham’s view, interest rates should be governed by free market rules of supply and demand. This utilitarian reframing of the debate over usury contributed to the repeal of English usury statutes in 1854 and continues to influence the debate over credit regulation.

Footnotes

  • 15 {15} The records are Sumerian. See Homer, A History of Interest Rates 25 (1963). Those interested in more detail about the history of usury regulation should consult the following sources: Christopher L. Peterson, “Warning: Predatory Lender”—A Proposal for Candid Predatory Small Loan Ordinances, 69 Wash. & Lee L. Rev. 893, 894–897 (2012); Brian M. McCall, Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury, 30 Cardozo L. Rev. 549 (2008); Bodfish, History of Building and Loan Associations in the U.S. (1931); Cobb, Federal Regulation of Depository Institutions: Enforcement Powers and Procedures (1984); The Consumer Finance Industry: Its Costs and Regulation (Chapman & Shea, Eds., 1967); 1 Credit Union Law Service Ch. 1 (Matthew Bender 1987); Curran, Trends in Consumer Credit Legislation (1966); Homer, A History of Interest Rates (1963); Hubachek, Annotations on Small Loan Laws (1938); Kawaja, Regulation of the Consumer Finance Industry: A Case Study of Rate Ceilings and Loan Size Limits in New York State (1971); Bruce M. McCall, Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury, 30 Cardozo Law Rev. 549 (2008); J.B.C. Murray, History of Usury (1866); Saulnier, Industrial Banking Companies and Their Banking Practices (1940); Sherman, Modern Story of Mutual Savings Banks (1934); Welfling, Mutual Savings Banks (1968); Combating the Shark, 8 Law & Contemp. Prob. 1-205 (Winter 1941) (series of articles on usury, small loan laws, and loan sharking); Curran, Legislative Controls As a Response to Consumer-Credit Problems, 8 B.C. Ind. & Com. L. Rev. 409 (1966–1967); Lynn Drysdale & Kathleen Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Socio-Economic Role of Usury Laws in Today’s Society, 51 S.C. L. Rev. 589 (2000); David J. Gerber, Prometheus Born: The High Middle Ages and the Relationship Between Law and Economic Conduct, 38 St. Louis L. J. 673 (1994); Edward L. Glaeser & Jose Scheinkman, Neither a Borrower Nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws, 41 J. Law & Econ. 1 (1998); Note, Interest Rates and the Law: A History of Usury, 1981 Ariz. St. L.J. 61; Jordan & Warren, A Proposed Uniform Code for Consumer Credit, 8 B.C. Ind & Com. L. Rev. 441 (1966–1967); Littlefield, Parties and Transactions Covered By Consumer-Credit Legislation, 8 B.C. Ind. & Com. L. Rev. 463 (1966–1967); Christopher L. Peterson, Truth, Understanding, and High-Cost Consumer Credit: The Historical Context of the Truth in Lending Act, 55 Fla. L. Rev. 807 (2003); Redfield, Savings Banks and Savings and Loan Associations: The Past and the Future, 16 Bus. Law 170 (1960); Roster, Modern Role of Thrifts, 18 Loyola L.A. L. Rev. 1099 (1985); Vincent D. Rougeau, Rediscovering Usury: An Argument for Legal Controls on Credit Card Interest Rates, 67 U. Colo. L. Rev. 1 (1996); John D. Skees, The Resurrection of Historic Usury Principles for Consumption Loans in a Federal Banking System, 55 Cath. U. L. Rev. 1131, 1140–1148 (2006); James J. White, The Usury Trompe l’Oeil, 51 S.C. L. Rev. 445 (Spring 2000).

  • 16 {16} Exodus 22:25; Leviticus 25:35–25:37; Deuteronomy 23:19–23:20. See Commonwealth v. Donoghue, 63 S.W.2d 3 (Ky. Ct. App. 1933) (quoting a fourth century Christian theologian’s views of usury and referring to Old Testament prohibitions); Paul B. Razor, Biblical Roots of Modern Consumer Credit Law, 10 J. L. & Religion 157 (1993–1994).

  • 17 {17} See John D. Skees, The Resurrection of Historic Usury Principles for Consumption Loans in a Federal Banking System, 55 Cath. U. L. Rev. 1131, 1142–1148 (2006) (arguing that, under historic Christian teachings governing usury, there was a distinction between commercial lending, where usury was permitted, and consumer lending to the poor, where usury was forbidden); Brian M. McCall, Learning from Our History: Evaluating the Modern Housing Finance Market in Light of Ancient Principles of Justice, 60 S.C. L. Rev. 707, 711–715 (2009).

  • 18 {18} See Deuteronomy 23:19–23:20. Cf. Walid S. Hegazy, Contemporary Islamic Finance: From Socioeconomic Idealism to Pure Legalism, 7 Chi. J. Int’l L. 581 (2007) (discussing Islamic law prohibitions on usury and different responses to those prohibitions); Theodore Karasik, Frederic Wehrey & Steven Strom, Islamic Finance in a Global Context: Opportunities and Challenges, 7 Chi. J. Int’l L. 379 (2007); Paul B. Razor, Biblical Roots of Modern Consumer Credit Law, 10 J. L. & Religion 157 (1993–1994).

  • 19 {19} See Brian McCall, Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury, 30 Cardozo L. Rev. 549 (2008) (discussing in detail the thinking of the Catholic church during the middle ages on usury).

  • 20 {20} In medieval terms the word “usury,” derived from the Latin “usera,” equated with what we would call “interest” today. The prohibition of usury was essentially a prohibition of charging for the use of money. However, common law distinguished reimbursement for a loss associated with a loan from charges for the use of money and permitted the former while forbidding the latter. This legal compensation for loss was known as “interesse” from the Latin “intereo” meaning “to be lost.” Thus legal charges associated with a loan appear to have evolved to the modern notion of “interest,” while illegal charges eventually came to be called “usury.” See Homer, A History of Interest Rates 73–74 (1963); William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 199–201 (2012) (the intention of gaining a profit from lending was “sinful” until the 16th century).

    For a discussion of Mormon and Christian scriptural views of usury, see Steven M. Graves & Christopher L. Peterson, Usury Law and the Christian Right: Faith-Based Political Power and the Geography of American Payday Loan Regulation, 57 Cath. U. L. Rev. 637 (Spring 2008).

  • 21 {21} See Adam Teller, Economic Life, YIVO Encyclopedia of Jews in Eastern Europe 5 (Aug. 2010), available at www.yivoencyclopedia.org. See also Luigi Pascali, Barcelona Graduate School of Economics, Jewish Communities in the Italian Renaissance and the Current Economic Performance, Working Paper Series No. 562 (Mar. 2012), available at http://research.barcelonagse.eu.

  • 22 William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 196–197 (2012) (discussing the position taken by this council and noting that Pope Benedict XIV later formally enunciated the permissibility of charging of interest when it is “honest gain” in a papal encyclical in 1745).

  • 23 {22} 37 Hen. 8, C. 9 (1545). The statute was entitled “An Act Against Usury,” doublespeak apparently having preceded George Orwell by several centuries. See also Commonwealth v. Donoghue, 63 S.W.2d 3 (Ky. Ct. App. 1933) (discussing the development of English usury law).

  • 24 {23} J. B. C. Murray, History of Usury 50–51 (1866).