Sunday, January 25, 2009

Is it Time to Look at Usury as a Sin Again?

Hey, how'd you like John Thain, the Clark Kent lookalike, he of the 1.2 million dollar office renovation and ex-head of Merrill Lynch?

Back in September, when Hank Paulson called in a bunch of Wall Street bigshots to take a look at what should be done with Lehman Bros and the other investment houses in trouble, Thain made sure that he and his boys at Merrill were going to be well taken care of. When Merrill was picked up by Bank of America, he didn't come clean on just how bad things were at Merrill. Now that he's attempted to use some of that bailout money to pay out bonuses to himself and his buddies and the true Merrill losses can be clearly seen on the books, he's been canned by BoA. See this article:

Mr Thain realised that Mr Paulson was making little progress in finding a consensus about how to save Lehman. By Saturday night, with no bailout on the table and no firm bidder, Mr Thain concluded that not only would Lehman collapse but that Merrill would be next, and he phoned Ken Lewis, the chief executive of America’s biggest retail bank, Bank of America, based in Charlotte, North Carolina.

By Sunday afternoon the deal to sell Merrill Lynch for $50 billion to BoA was signed and sealed. It was not just the takeover Mr Thain raced through. He also tried to seize a $10 million bonus for himself and forced through the early payment of up to $4 billion of bonuses to Merrill’s top executives despite knowing about the rapidly escalating losses the bank was incurring.

By December, just three months into the merger, Mr Lewis began to discover from his own integration team that Merrill was on course to lose $3 billion in the fourth quarter and $15.4 billion over the year. The shock forced him this month to go to the US Treasury and beg for $118 billion in asset guarantees and $20 billion in rescue financing.

On Thursday, Mr Lewis flew from Charlotte to Manhattan to sack John Thain. As every financier knows, consistency is key to success. How appropriate, then, that a banker who had long enjoyed the excesses of Wall Street should choose to go skiing in the rich resorts of Colorado once BoA’s losses were out in the open.

These guys are unbelievable.

You know, I have auditors from PricewaterhouseCoopers poring over just about everything I do, according to Sarbanes-Oxley regulations. When they ask me if a particular business representative from the Billing Dept. was authorized to sign off on the minor code changes we've made, I'm tempted to ask them if they've already found out where the federal bank bailout money went last Fall. I'm tempted to ask them if they've figured out what was in the "black box" Bernie Madoff used to run his Ponzi Scheme.

The working world really is a lot like that TV show The Office, but even more surreal. You can't make up this kind of absurdity.

The banks still aren't lending. Nobody knows where the bailout money went, and wherever it went, it apparently didn't work. In the meantime, they say the average American household is carrying well over $5,000 in credit card debt, and credit card rates are at a usurious rate of over 14%. The credit card industry will be the next thing to go kablooey, I suppose.

This all reminded me of a passage from Judge John T. Noonan's book
A Church That Can And Cannot Change: The Development Of Catholic Moral Teaching, on the subject of usury. During the Middle Ages, of course, the lending of money at interest was considered a sin. Around the 1570's or so, there was movement on this teaching. Noonan describes what provided the impetus for the change - The German Triple Contract.

The Triple Contract

On June 22, 1573, a commission of Jesuit provincials and theologians, meeting in Rome, issued a decision to guide all Jesuit confessors, preachers, and moralists in their treatment of the so-called "German contract" or "5 percent contract," whereby five percent was charged on money advanced to another person. Generically, the contract was a loan from which profit was made; as such it was usurious and therefore morally unlawful, the commission ruled.

Analysis showed that there was a way of looking at it that made it right.

A contract of partnership in which the capitalist got a return on the capital he invested was perfectly legitimate. Say he could reasonably expect 10 percent. Then suppose he entered into a contract of insurance guaranteeing the return of his principal and surrendered 3 percent of his expected 10 percent in exchange for the guarantee. Again, it was perfectly legitimate.

Suppose he surrendered another 2 percent to be guaranteed his profit - also legitimate.

Then suppose he entered these contracts of guaranty with his partner, so that 5 percent of the expected return on the capital went to his partner, and he was guaranteed the return of his capital and 5 percent. The three contracts were all lawful. What was wrong with collapsing them into a single contract, "the triple contract"? What was wrong with finding the triple contract not spelled out but implicit in every contract at 5 percent where investor intended to act lawfully?

Nothing was wrong, concluded the commission.

We seem to be in the world of Enron's financing where loans are packaged as sales and insurance companies guarantee the interest. How did such intricate lawyerly analysis come to occupy the attention of the most acute moral theologians in Europe? What development of doctrine was represented by this decision of 1573, which was reaffirmed by another Jesuit commission in 1581 that at the same time taught that a loan at 5 percent was "intrinsically evil?" To answer these questions it is necessary to look at Scripture and fifteen hundred years of reflection on Scripture.

Were you able to follow all that?

Ah, those lax Jesuits. :-)

I don't know if I followed it all properly, but it sure sounded a lot like collateralized debt and insured credit default swaps to me. The same kind of stuff that did such damage to Enron, Lehman, Fannie Mae and AIG and others....

Were we too rash when it came to easing up on usury? Is it time to take a look at it again? After all, it was the only thing that Christ ever became violent about.

Christ Driving the Money Changers out of the Temple, by Valentin De Boulogne (c. 1618)

I glazed over a bit going over the ins and outs of what Noonan went on to describe, but there was one thing he left out. By 1580 or so, the heifer had already left the barn, because John Calvin had already offered his opinion that money could be lent at interest, and his advice was already being followed in Protestant Europe. It's fair to assume that Venetian and Florentine merchants already knew a thing or two about doing business with credit too.

Now, I'm not one of these guys who gets all dewey-eyed about the supposed splendor of the Middle Ages and the golden 13th Century of reforming popes and scholastic saints, etc.... There was too much strappado, trial by fire, trial by water, breaking-on-the-wheel, burning-at-the-stake, crusading and that sort of thing for me to get too sentimental about it.

On the other hand, there were great achievements that are now underappreciated, and some valuable good that has been lost. We've certainly heard plenty over the years about the "Protestant Work Ethic" and the contribution of the Reformers to the spirit of democratic capitalism from the likes of Max Weber to Paul Blanshard to William Manchester to Samuel Huntington and so on, comparing it favorably to the supposed backwardness and slothfulness to be found in latifundist, agrarian Catholic countries.

Therefore, I think it's fair to pay attention to a different take from British author Tom Hodgkinson....

IF THERE’S ONE element of my book How To Be Free that the scoffers really rounded on, it was the positive light I threw on various medieval institutions and approaches to life. To see anything good in the Middle Ages contradicts our neophyte conditioning. But the medievals really did have some excellent ideas. Community rather than individuality was at the heart of the medieval approach to things. For example, Florence and the city states called themselves communes, and governed themselves with a revolving panel of guild master craftsmen.

Well, the medieval approach to economics is particularly interesting given what is happening in the financial world right now, because it specifically banned usury, that is, the lending of money at interest. Usury was reserved for the lowest of the low. It was not the done thing. The medieval society had taken to heart Biblical injunctions against usury and also the example of Jesus turning over the tables of the money-changers.

Usury was wrong for a variety of reasons. Firstly, by charging interest on loans, you were taking advantage of the bad luck of your fellow human. The medievals had a stronger belief in Providence than we do today. So it did not necessarily mark you out as a loser if you needed to borrow money. And your bad luck, which was caused by God, should certainly not provide an opportunity for another to exploit you. This of course is the precise opposite to the situation we’ve been living with for the last two or three hundred years, where the whole financial system revolves around usury and indeed, till recently, those who most successfully exploited others were known as the Masters of the Universe. usury is a profoundly selfish and unneighbourly practice. Usury is robbing the poor to feed the rich (and it is still banned today in Islam).

Money for the medievals was not for hoarding or for lending, but for spending. To accummulate it for is own sake would be to commit the sin of avaritia, or greed, a deadly sin. Medieval cathedrals are full of unsympathetic carvings of the spend thrift “money bags” character, the miser who jealously hoarded his cash. Greed was bad.

Usury was also banned because in committing it, you committed the sin of sloth: you had not worked, you had not created anything, you had merely waited and you had made a profit. This was was wrong.

Furthermore, in lending money at interest, you were in effect selling time, and time did not belong to man. It to belonged to God. It was later, in the 18th century, that the dynamic Benjamin Franklin changed things when he wrote: “Time is money” and “Credit is money”. For the medieval to think in such terms would be a colossal arrogance...

There was an enormous amount of productivity in the Middle Ages, and an enormous amount of global trade, particularly before the Black Death. But, as G. K. Chesterton points out, it was trade based on the values of cooperation rather than competition. Work and commerce was arranged around the guild system, later more or less destroyed during the Reformation. Guilds were brotherhoods of workers who banded together to protect their own interests. To undercut your brother in the Guild of Linen-dyers, for example, by offering the same cloth at a cheaper rate, was profoundly unethical behaviour, because you were acting in your own interest rather than the broader interest of the guild. It was unbrotherly to overcharge or undercut.

Overwork, too, another damaging feature of contemporary civilization, was frowned upon. To work too hard showed a lack of faith in God’s providence. “Consider the lilies of the field,” Jesus had said in the Sermon on the Mount, his great Taoist line: “They toil not, neither do they spin.” Do not worry about tomorrow, Jesus had said. Do not store up your wealth. Things will be all right. It was the exact opposite of what we have been conditioned to believe today, which is that you should get pensions and insurance and worry about the future.

Now far from being somehow creatively or technologically inferior to our own age, this was the system that produced the cathedrals, architectural feats that have yet to be bettered. It produced the beautiful city states such as Florence and Arezzo. It produced illuminated manuscripts, and the freedom-loving republics of Amsterdam and Antwerp. It was a less exploitative system: all that sailing around the world and plundering came later. The people were more closely connected to the land. In short, it was an anti-capitalist system of trade and production. But it was not communist because it was not statist. This is where the right wingers get it so wrong when they state that the only alternative to capitalism doesn’t work and it’s called communism.

Today we are seeing a swing back towards medieval economics. The usurers are being punished and their faces paraded on the front of newspapers. Our ethical pundits are calling for the top bankers to be named and shamed, to do penance, to confess. In the same way, the medieval usurer, on his deathbed, was required to give back all the profits of his extortion if he wanted to go to heaven...

Our economists might do well to explore further the medieval system. It tried to be fair, it tried to guard against exploitation, it produced many things of great beauty and it lasted until Calvin. And at its heart was a sense that we are all this together, we are brothers and sisters, and we should behave as cooperators and not competitors.

There's the knock on John Calvin. Interesting. I noticed once that Peter Maurin, co-founder with Dorothy Day of the Catholic Worker Movement, and normally a pretty mild-mannered fellow, worked over your man Calvin pretty harshly in his collection of writings called Easy Essays:

Before John Calvin people were not allowed to lend money at interest.
John Calvin decided to legalize money-lending at interest in spite of the teachings of the Prophets of Israel and the Fathers of the Church.

Protestant countries tried to keep up with John Calvin and money-lending at interest became the general practice.

And money ceased to be a means of exchange and began to be a means to make money.

So people lent money on time and started to think of time in terms of money and said to each other: "Time is money."

When John Calvin legalized money-lending at interest, he made the bank account the standard of values.

When the bank account became the standard of values, people ceased to produce for use and began to produce for profits.

When people began to produce for profits they became wealth-producing maniacs.

When people became wealth-producing maniacs they produced too much wealth.

When people found out that they had produced too much wealth they went on an orgy of wealth-destruction and destroyed ten million lives besides.

Because John Calvin legalized money-lending at interest, the State has legalized money-lending at interest.

Because the State has legalized money-lending at interest, home owners have mortgaged their farms; institutions have mortgaged their buildings; congregations have mortgaged their churches; cities, counties, States and Federal Government have mortgaged their budgets.

So people find themselves in all kinds of financial difficulties because the State has legalized money-lending at interest in spite of the teachings of the Prophets of Israel and the Fathers of the Church.

Was this fair? Could a modern economy ever have taken off without allowing the lending of money at interest? Was the creation of the modern economy a good thing?

I'm certainly no fan of the theology of John Calvin, but was the criticism of him on this particular matter fair? One thing I'll grant to Calvin. He was a darned good lawyer. If you can get past the presuppositions on which he built his arguments (whether we agree with them or not), he usually had the ability to defend his ideas with cold, ironclad, bulletproof logic. You can check it out in one of the links below.

Thomas Aquinas Concerning Usury

John Calvin Concerning Usury

Jeremy Bentham: In Defense of Usury


Liam said...

Wow -- quite a post, Jeff. I like the idea of referring to things being usurious not because there is interest, but because the interest is so high. Like a couple of my credit cards.

Getting around the usury prohibition started much earlier than the 16th century, though. We tend to think of banking as a Renaissance institution, but it goes back much further. There were different ways to justify it (one was to charge an obligatory "late fee" on money lent) and scholastic thinkers were coming up with ways around it in the late Middle Ages. Banks, and interest, already existed by the time of the great Gothic Cathedrals.

Not that when I think of Thain and Madoff I'm not tempted with ideas of heads on pikes and whatnot.

Jeff said...


Yeah, they had banks in Siena and then there were folks like the Medici too, right? So it's not really fair to lay the whole blame at old Calvin's feet after all.

Not that when I think of Thain and Madoff I'm not tempted with ideas of heads on pikes and whatnot.

Put the heads up there well-salted, so the gulls and hawks don't pick 'em clean too quickly.

Liam said...

I'm cool with blaming Calvin for things, though.

Garpu said...

Pretty strong words from Maurin. I sure hope there's some reform of student loans. If you really want to be sick about lending practices, take a look at them. I know I'll be paying them off for the rest of my life.

I think it all boils down to the prosperity gospel sin of being poor. If you go to college now, there's no way to avoid student loans, unless your parents are independently wealthy. Free rides just don't exist like they used to.

speaking of prosperity gospel, I wouldn't blame Protestants for usury, though. My in-laws, for instance, are pretty damn anti-prosperity gospel. Don't know if I'd exactly throw them in with Calvinists, either. New England low-church Protestants are weird.

Jeff said...

Student loans. Thanks so much for cheering me the heck up Jennifer.

Six kids. My God, my God, what am I going to do...

crystal said...

the average American household is carrying well over $5,000 in credit card debt

Yeah, that would be me :(

The usury thing made an impact in medieval times on Christian -Jewish relations, I think. Jews, at least in England, couldn't have trades or own land, but could be money lenders and I believe the king got a cut. Ivanhoe :)

Garpu said...

Things have to change. If the current financial aid model stays in place, colleges are going to collapse, because there will be nobody able to afford it or finance it. (Most operating costs are funded by private investments or tuition.)

This administration has made noises about combating poverty. The best way is to encourage learning, and I hope for all of our sakes, they do. No Child Left Behind hurt an entire generation.

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Jeff said...

I put up "making money" as a string of text and I'm supposed to be the Slumdog Millionaire?

cowboyangel said...

Interesting post, Jeff.

We joke about putting Thain and Maddof's heads on pikes, but I think one of the most devastating psychological aspects of what's happening is that people are getting away with so much without being punished. It's the Age of Impunity. Whether it's Bush & Ceheny or all of the Bigs on Wall Street. It leads to tremendous anger and hopelessness in the society.

I've already warned you against student loans. I won't say anymore on that.

Jeff said...

Hi William,

They've got to get through college somehow.

I haven't been commenting, but I've been enjoying your prose. :)

What can be done about these scoundrels? As my co-worker Harry used to say (before he got laid off), "Basically, we've got to start whacking some of these people." Maybe nonviolence is overrated, eh?

Here is someone advocating that they be put in the pillories.

Where's the Interest? said...

Excellent post. Have to link to it for future reference.

One thing to add in our current system isn't just the CDO/CDS junk. But the origin of our money.

The money in your pocket or on a computer screen is equal to a debt owed to a bank. Due to the creation of treasuries by our government or by fractional reserve banking by your local bank, we've allowed money to be created out of thin air. But, not just any money. No, it is only the principal amount to a debt. Thus as more debts are created, more money goes into the system. As money is paid back without new debt, it is like burying the money in the ground never to be used again.

What's even worse is that this money is only the principal amount of the debt at a bank. There's no money in the system to pay interest on these debts. This compounds itself as people pay off loans with money from someone else's principal payment and before long, major collapse.

So, is usury a sin? Yes, and since there really is no such thing as a new economy, or some mathematically way to solve finance, that the old rules may not have only been based on the "due unto others" idea, but maybe the early church already knew the problem of usury as described above.

We need to wake people up and get them to ask, "Where's the Interest?"

Jeff said...

Hey, thanks for the post and for the link. You know, I've never really thought about it in those terms. Very interesting. I'm very much looking forward to where you'll be going with that on your blog. Good luck with that!

TheMerchant said...

Jeff, Check out these sites:

On usury: