Usury, the last subject but one on which I am going to touch in this book, is one which modern people have almost entirely forgotten, and which you will not find mentioned in any book on Economics that I know. Yet its vital importance was recognised throughout all history until quite lately, and it is already forcing itself upon modern people’s notice whether they like it or now. So it is as well to understand it betimes, for it is going to be discussed very widely in the near future.
All codes of law and all writers on morals from the beginning of anything we know about human society have denounced as wrong the practice of USURY.
They have recognised that this practice does grave harm to the State and to society as a whole, and must, therefore, as far as possible, be forbidden.
Now what is Usury, and why does it thus do harm?
Modern people have so far forgotten this exceedingly important matter that they have come to use the word “usury” loosely for “the taking of high interest on a loan.” That is very muddled thinking indeed, as you will see in a moment. The character of Usury has nothing to do with the taking of high or low interest. It is concerned with something quite different.
Usury is the taking of any interest whatever on an UNPRODUCTIVE loan.
A man comes to you and says: “Lend me this piece of capital which you possess” (for instance, a ship, and stores of food with which to feed the sailors during the voyage of the ship). “Using this piece of capital to transport the surplus goods from this country over the sea and to bring back foreign goods which we need here I shall make a profit so large that I can exchange it for at least one hundred tons of wheat. The voyage there and back will take a year.”
You naturally answer: “It is all very well for you to make a profit of one hundred tons of wheat in one year by the use of my ship and of my stores of food for sailors who work the ship, but what about me? I grant you ought to have part of this profit for yourself, as you are taking all the trouble. But I ought to have some, because the ship and stores of food are mine; and unless I lent them to you (since you have none of your own) you would not be able to make that profit by trading of which you speak. Let us go half shares. You shall have fifty tons of wheat and I will take fifty, out of the total profit of one hundred tons.”
The man who proposed to borrow your ship agrees. The bargain is struck, and when the year is over you make a fifty tons profit of wheat on your capital.
That is the earning of interest on a productive loan.
There is nothing morally wrong about that transaction at all. It does no one any harm. It does not weaken the State or society, or even hurt any individual. There is a sheer gain due to wise exchange (which is equivalent to production); everybody is benefited–you that own the capital, the man who uses it, and all society, which benefits by the foreign exchange. Supposing your ship and stores of food were worth a hundred tons of wheat, then your profit of fifty tons fo wheat is a profit of fifty percent, which is very high indeed. But you have a perfect right to it: your capital has produced a real increase of wealth to that extent. If your capital be worth ten times as much, then your profit is only five percent instead of fifty. But your moral right to the fifty percent is just as great as your moral right to the five percent. No one can blame you, and you are doing no harm.
Now supposing that, instead of coming to ask you for the loan of your ship, the man came and asked you for the loan of a sum of money which you happened to have by you and which would be sufficient to buy and stock the ship. It is clear that the transaction remains exactly the same. The loan is productive. He makes a true profit, that is, there is a real increase of wealth for the community, and you and he have a right to take your shares out of it–you because you are the owner of the capital, and he because he took the trouble of organising and overlooking the expedition.
These are examples of profit on a productive loan.
Now suppose a man to come to you if you were a baker and say: “Lend me half a dozen loaves. My family have no bread and I cannot see my way to earning anything for a day or two. But when I begin to earn I will get another half dozen loaves and see that you are not out of pocket.” Then if you were to reply: “I will not let you have half a dozen loaves on those terms. I will let you owe me the bread for a month if you like, but at the end of the month you must give me back seven loaves”: that would be usury.
The man is not using the loan productively; he is consuming the loaves immediately. No more wealth is created by the act. The world is not the richer, nor are you the richer, nor is society in general the richer. No more wealth at all has appeared through the transaction. Therefore the extra loaf that you are claiming is claimed out of nothing. It has to come out of the wealth of the community–in this particular case out of the wealth of the man who borrowed the loaves–instead of coming out of an increment or excess or new wealth. That is why Usury is called “Usury”–which means: “wearing down,” “gradually dilapidating.”
It is clear that if the whole world practiced usury and nothing but usury, if wealth were never lent to be used productively, but only to be consumed unproductively, and yet were to demand interest on the unproductive transaction, then the wealth that was lent would soon eat up all the other wealth in the community until you came to a situation in which there was no more to take. Everyone would be ruined except those who lent; then these, having no more blood to suck, would die themselves, and society would end.
As in the case of the ship, it matters not in the least whether the actual thing, the loaves of bread, are lent, or money is lent with which to buy them. The test is whether the loan is productive or not. The intention of Usury is present when the money is lent at interest on what the lender KNOWS will be an unproductive purpose, and the actual practice of Usury is present when the loan, having as a fact been used unproductively, interest is none the less demanded.
As in every other case of right and wrong whatsoever, there is, of course, a broad margin in which it is very difficult to draw the line. A man guilty of usury and trying to excuse himself might say, even in the case of food lent to a starving man: “The loan may not look directly productive, but indirectly it was productive, for it saved the man’s life and thus later on he was able to work and produce wealth.”
The other way about (though there is not much danger of that nowadays), a man trying to get out of interest on a productive loan might say in many cases: “The loan was not really productive. It is true I made a profit on it, but that profit was not additional wealth for the community. It only represented what I got out of somebody else on a bargain.”
In this margin of uncertainty we have only common sense to guide us, as in every other similar case. We know pretty well in each particular example we come across whether a loan is productive or not; whether we are borrowing or lending for a productive purpose, or for a charitable or luxurious one, or for one in every way unproductive.
The proof that this feeling about usury is right is to be found in the private conduct of individuals in their social relations. If a poor man in distress goes to a rich friend and borrows ten pounds, he pays it back when he can; and the rich man would think it dishonourable to charge interest. But if a man borrowed ten pounds of one for the purpose of doing something which was likely to increase its value, and we knew that this was his purpose, we should have a perfect right to share the results with him, and no one would think the claim dishonourable.
Usury, then, is essentially a claim to increment, or extra wealth, which is not there to be claimed. It is a practice which diminishes the capital wealth of the needy and eats it up to the profit of the lender; so that, if Usury go unchecked, it must in the absorption of all private property into the hands of a few money brokers.
Now, these things being so, the nature of Usury being pretty clear, and both the moral wrong of it and the injury it does to society being equally clear, how is it that the modern world for so long forgot all about it, and how is it that it is forcing itself upon the attention of the modern world again in spite of that forgetfulness?
I will answer both of those questions.
The wrong and the very nature of Usury came to be forgotten with the great expansion of financial dealings which arose in the middle and end of the seventeenth century–that is, about 250 years ago–in Europe. In the simpler times, when commercial transactions were open and upon a comparatively small scale, and done between men who knew each other, you could pretty usually tell, as you can in private life, whether a loan were a loan required for a productive or an unproductive purpose. The burden of proof lay upon the lender. It was no excuse in lending a man money to say: “I did not know what he wanted to do with it, so I charged him 10 percent, thinking that very probably he was going to use it productively.” The courts of justice would not admit such a plea, and they were quite right. For under the simple conditions of the old days the judge would answer: “It was your business to know. A man does not come borrowing money unless he is in either personal necessity or has some productive scheme for which he wants to use the money. If you thought it was a productive scheme you would certainly have asked him about it in order to share the profits, and that fact that you did not trouble to find out whether it were productive or no shows that you are indifferent to the wrong of usury, and iwlling to do that wrong under the pretence that it was not your business to inquire.”
The attitude of the law on money-lending in the old days was very much what it is today with regard to certain poisonous chemicals which may be used well or ill. The seller of those chemicals has to ask what they are going to be used for, and is responsible if he fails to inquire. In the same way the old Christian law said a lender was bound to find out if his loan were intended for production or not. If the law had not done this, then usury would have been universal and would have eaten up the State, to the profit of the few people who lent out their money: as it is doing now.
But as trade became more and more complicated and much larger and lost its personal character, as the Banking System arose on a large scale and great companies with any number of shareholders,–when, indeed, most lenders could not know for what their money was being lent, but only that they had put it into some financial institution with the object of fructifying it–then the opportunity for usury came in, and it soon permeated all commerce.
Suppose a man today, for instance, to put money into an Insurance Company. It pays him, let us say, 5 percent interest on his money. He does not know, and cannot know–no one can know–exactly how that particular bit of money is being used. It is merged in the whole lump of the funds the Insurance Company has to deal with. A great deal of it will be used productively. It will go to the purchase of steam engines and stores of food, ships, and so on, which in use increase the wealth of the world; and the money spent in buying these things has a perfect right to profit and does no harm to anyone by taking profit. But a certain proportion will be used unproductively. The original investor knows nothing about that, and even the managers of the company know nothing about it.
A client comes to them and says: “I want a loan of a thousand pounds.” They are quite unable, under modern conditions, to go into an examination of what he is going to do with it. He gives security and gets his loan. He may be a man in distress who gets it in order to pay his debts, or he may be a man who is going to start a business. The company cannot go into that. It has to make a general rule of so much interest upon what it lends, under the implied supposition, of course, that the loan is normally productive. But the borrower can use it unproductively, and often does and intends to do so.
Thus, with a very large volume of impersonal business, the presence of usury is inevitable. But though inevitable, and though therefore the practice of it, being indirect and distant, cannot be imputed to this man or that, usury inevitably produces its disastrous effects, and the modern world is at last coming to feel those effects very sharply.
A few pence lent out at usury some twenty centuries ago would amount now, at compound interest, to more wealth than there is in the whole world; which is a sufficient proof that usury is unjust and, as a permanent trade method, impossible.
The large proportion of usurious payments which are now being made on account of the impersonal and indirect character of nearly all transactions, is beginning to lay such a burden upon the world as a whole that there is danger of a breakdown.
If you keep on taking wealth as though from an increase, when really there is no increase out of which that wealth can come, the process must, sooner or later, come to an end. It is as though you were to claim a hundred bushels of apples every year from an orchard after the orchard had ceased to bear, or as though you were to claim a daily supply of water from a spring which had dried up. The man who would have to pay the apples would have to get them as best he could, but by the time the claim was being made on all the orchards of the world, by the time that usury was asking a million bushels of apples a year, though only half a million were being produced, there would be a jam. The interest would not be forthcoming, and the machinery for collecting it would stop working. Long before it actually stopped, of course, people would find increasing difficulty in getting their interest and increasing trouble would appear in all the commercial world.
Now that is exactly what is beginning to happen today after about two centuries of usury and one century of unrestricted usury. So far we have got out of it by all manner of makeshifts. Those who have borrowed the money and have promised to pay, say, 5 percent, are allowed to change and to pay only 2 1/2 percent. Or, by the process of debasing currency, which I described earlier in this book, the value of the money is changed, so that a man who has been set down to pay, say, a hundred sheep a year, is really only paying 50 or 30 sheep a year. A more drastic method is the method of “writing off” loans altogether–simply saying: “I simply cannot get my interest, and so I must stop asking for it.” That is what happens when a Government goes bankrupt, as the Government of Germany has done.
If you look at the usury created by the Great War, you will see this kind of thing going on on all sides. The Governments that were fighting borrowed money from individuals and promised interest upon it. Most of that money was not used productively: it was used for buying wheat and metal, and machinery and the rest, but the wheat was not used to feed workmen who were producing more wealth. It was used to feed soldiers who were producing no wealth, and so were the ships and the metal and the machinery, etc. Therefore when the individuals who had lent the money began collecting from the Government interest upon what they had lent they were asking every year for wealth which simply was not there, and the Governments have got out of their promise to pay a usurious interest in all sorts of ways–some by repudiating, that is saying that they would not pay (the Russians have done that), others by debasing currency in various degrees. The English Government has cut down what it promised to pay to about half, and by taxing this it has further reduced it to rather less than a third. The French Government, by inflation and by taxation, have reduced it much more–to less than a fourth, or perhaps more like a sixth or an eighth.
The Germans have reduced it by inflation to pretty well nothing, which is the same really as repudiating the debt altogether.
So what we see in a general survey is this–
1. Usury is both wrong morally and bad for society, because it is the claim for an increase of wealth which is not really present at all. It is trying to get something where there is nothing out of which that something can be paid.
2. This action must therefore progressively and increasingly soak up the wealth which men produce into the hands of those who lend money, until at last all the wealth is so soaked up and the process comes to an end.
3. That is what has happened in the case of the modern world, largely through unproductive expenditure on war, which expenditure has been met by borrowing money and promising interest upon it although the money was not producing any further wealth.
4. The modern world has therefore reached a limit in this process and the future of usurious investment is in doubt.
Though these conclusions are perfectly clear, it is unfortunately not possible to say that this or that is a way out of our difficulties; that by this or that law we can stop usury in the future and can go back to healthier conditions. Trade is still spread all over the world. It is still impersonal and money continues to be lent out at interest unproductively, with the recurring necessity of repaying the debt and failing to keep up payments which have been promised. Things will not get right again in this respect until society becomes as simple as it used to be, and we shall have to go through a pretty bad time before we get back to that.
This article is an excerpt from
Economics for Helen – A Brief Outline of Real Economy
by Hilaire Belloc