What do Queens Mary and Elizabeth, Charlemagne, Hammurabi, Plato, and Dante have in common? They all condemned, outlawed or regulated usury, the charging of exorbitant interest on money lending.
In the Old Testament the Prophet Ezekiel included usury in a list of “abominable things,” along with rape, murder, robbery and idolatry. Ezekiel 18:19-13.
The Quran 2:275-276 states: "...those you take usury will arise on the Day of Resurrection like someone tormented by Satan's touch. That is because they say 'Trade and usury are the same,' But God has allowed trade and forbidden usury. Whoever, on receiving God's warning, stops taking usury make keep his past gains -- God will be his judge -- but whoever goes back to usury will be an inhabitant of the Fire, therein to remain."
The Code of Hammurabi regulated the interest that could be charged on a loan.
Plato and Aristotle believed usury was immoral and unjust. In ancient Athens the Greeks first regulated interest rates, and then deregulated it. After deregulation, there was so much debt that citizens were sold into slavery and threatened revolt.
In eleventh century England, the charging of any loan interest at all was punishable by confiscation of the usurer’s land and chattels.
In his work “The Inferno,” Dante placed usurers at the lowest ledge in the seventh circle of hell – lower even than murderers.
During the reign of Queen Mary, the English Parliament again disallowed the collection of interest.
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Recently, Amy Goodman of Democracy Now! interviewed Chicago based lawyer and author, Thomas Geoghegan. The main topic of their discussion was Mr. Geoghegan's recent Harper’s Magazine cover story, “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy."
While I have not had the opportunity to read the Harper's article personally, I did listen with much interest to Amy Goodman's interview with the author, a transcript of which can be found here.
According to Mr. Geoghegan, we in the US have not focused enough on the role that usury has played in the making of our current economic predicament.
Prior to about 1978 or so, loan interest rates in this country were capped around eight or nine percent, and most were controlled by individual state usury laws, but in the 1970s, we began to deregulate this industry.
In the 1978 case of Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., a unanimous Supreme Court decision held that state anti-usury laws regulating interest rates cannot be enforced against nationally-chartered banks based in other states.
According to Thomas Geoghegan, that was "the big deregulation that precedes all other deregulations," and it effectively blasted open the ceiling that had existed on the interest rates that banks could get from their clients. Marquette v. First of Omaha essentially opened the door for national banks to offer high interest credit cards to anyone in the U.S. that they deemed qualified.
Said Mr. Geoghegan during the Democracy Now interview, "The effect of this was that the big national banks were not subject to any state usury law, because the Banking Act of 1864 had no interest rate cap on it, not contemplating the kind of situation that we’re in today. And in effect, this sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loan weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high."
During the following ten years, many states began repealing or loosening their anti-usury laws, with the intention of allowing local, in-state banks to compete more equally with the big national banks. This resulted in greater and greater usage of credit cards and the subsequent accumulation of huge personal debt by most consumers, much to the long term detriment of the US economy.
Prior to the rise of the easy credit culture that usury deregulation ushered in, moral character was important in qualifying for any type of financial lending. If a local bank could only get a seven or eight percent return on a loan, they wanted to be as certain as possible that the loan would be repaid according to their terms.
After deregulation, these same banks had to compete in a much larger pool of lenders who could charge immorally high interest rates of 20, 25, or 30 percent and the smaller lenders had to follow suit and charge similar rates to remain viable. Moral character and other similar factors in determining creditworthiness became irrelevant simply because it was much more profitable to load consumers with debt and accumulate the interest. The financial sector was suddenly generating extremely high rates of return in comparison to what investors were getting from manufacturing and other productive investments.
Back in 1776, Adam Smith, often heralded as the original free market economist, warned of how important it is to maintain sensible interest rate ceilings on money lending to prevent too much of the available capital from flooding into the financial sector and starving manufacturing and the other productive elements of an economy. This is exactly what we have witnessed over the past few decades in the US and most of the world.
According to Geoghegan, in abandoning our long global heritage of laws against usury we have created an environment flush with incentives for investment into risky speculation and derivatives.
Why would an investor put his or her money into industries which offer a return of three to five percent, or less from service and manufacturing when they can get a return of twenty or thirty percent investing in the financial sector?
Thomas Geoghegan suggests that we should re-establish usury laws in the US in the form of an interest cap of about fifteen or sixteen percent on all lending. I tend to agree, although I would suggest lowering the bar even further to around ten or twelve percent or less, given the huge profits many in finance have reaped in the recent past.
Tom Geoghegan also suggests the formation of some form of state-run banks to make low interest loans to consumers as an alternative to the current predatory payday lending system that often preys upon the poorest of the poor.
Geoghegan further recommends that we restructure our banking entities to ensure that they behave more like guardians of the public trust than generators of private wealth, and force them to do what banks ought to be doing: channelling financial resources into the globally competitive, productive parts of our economy and accepting lower rates of return in the short term. That's an idea that would definitely require drastic changes to the internal corporate structure of banks, but at this point in history it certainly seems necessary.
Finally, Mr. Geoghegan states that the Obama administration, and government in general, needs to begin encouraging future oriented thinking within the financial community, a notion I have advocated for a long while now. Investors, bankers, and the heads of all corporate entities should, by legislative force if necessary, be made to see beyond the end of their current profit and loss statement, to look beyond even the next few fiscal years. I would envision something along the lines of the old Native American admonition for leaders to examine the effect all decisions will have on seven generations into the future, after all, that which equals a huge profit today may lead to certain destruction a little further down the road.
Thurman
AWOP Contributor
Author of Random Abstractions Blog
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