Usury

Usury (]

In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral. [cite journal | last = Roover | first = Raymond | title = The Scholastics, Usury, and Foreign Exchang | journal = Business History Review | month = Autumn | year = 1967 | volume = 41 | doi = 10.2307/3112192 | pages = 257 ] The most important of these was "lucrum cessans" (profits given up) which allowed for the lender to charge interest "to compensate him for profit foregone in investing the money himself." Harv|Rothbard|1995|p=46 This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of "lucrum cessans" profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).

=Other Contexts=

Usury in literature

In "The Divine Comedy" Dante places the usurers in the inner ring of the seventh circle of hell, below even suicides. (Showing how cultural attitudes have changed since the 14th century, the usurers' ring was shared only by the blasphemers and sodomites.)

In the 16th century it was necessary for Shylock to convert to Christianity and forsake usury before he could be redeemed in the climax of "The Merchant of Venice". Thomas Lodge's didactic tirade against London moneylenders, "An Alarum against Usurers containing tried experiences against worldly abuses" tried to incite the educated class against the harm usurers seemed to induce in their victims.

By the 18th century usury was more often treated as a metaphor than a crime in itself, so that Jeremy Bentham's "Defense of Usury" was not as shocking as it would have appeared two centuries earlier.

In the early 20th century Ezra Pound's anti-usury poetry was not primarily based on the moral injustice of interest but on the fact that excess capital was no longer devoted to artistic patronage, as it could now be used for capitalist business investment. ( [http://www.englit.ed.ac.uk/studying/undergrd/american_lit_2/Handouts/cmc_pound.htm] ).

Usury and the law

"When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not." (Blackstone's Commentaries on the Laws of England, p. 1336).

In the United States, "usury laws" are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, although it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.

Congress has opted to put a federal criminal limit on interest rates by the RICO definitions of "unlawful debt" which make it a federal felony to lend money at an interest rate more than two times the local state usury rate and then try to collect that "unlawful debt". [18 U.S.C. § 1961 (6)(B). See generally, Racketeer Influenced and Corrupt Organizations Act]

It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, although that term is also applied to non-coercive usurious lending, or even to the practice of making consumer loans without a license in jurisdictions that require licenses.

Usury and royalties

Royalties are contractual obligations of the Issuer of the royalty, made for the benefit of the holder of the royalty. Royalties require the payment of an agreed percentage of revenue of the Issuer, for an agreed period of time. In the event a royalty is purchased from an Issuer, the future revenue upon which the royalty is based is unknown at the time of the original transaction. Therefore, the cumulative amount of the future royalty payments is also an unknown. Royalty payments are not interest and royalties expire without value at their maturity. To be usurious payments made and received for the use of funds must be considered interest for loaned funds which require repayment at the maturity of the loan.

Usury statutes in the United States

Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.

If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided "ab-initio" [NY Gen Oblig 5-501 et seq. and NY 1503.]

However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 "Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp." case that the National Banking Act of 1863 allowed nationally-chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence."Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.", ussc|439|299|1978.] In 1980, due to inflation, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits . This effectively overrode all state and local usury laws. [ [http://www.lectlaw.com/files/ban02.htm Usury rate limits Reference: Interest rate usury limits for U.S. states] , 'Lectric Law Library.] [http://www.fdic.gov/bank/analytical/bank/bt_9805.html The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate] , Federal Deposit Insurance Corporation "Bank Trends" Newsletter, March, 1998.] The 1968 Truth in Lending Act does not regulate rates, except in the cases of some mortgages, but it does require uniform or standardized disclosure of costs and charges. [ [http://www.access.gpo.gov/uscode/title15/chapter41_subchapteri_parta_.html FDIC, Truth in Lending Act] .]

= Avoidance Mechanisms =

Interest-free Banks

The JAK members bank represents an example of how it is possible to create a usury-free saving and loaning system, offering a feasible financial tool to all its members. Other examples of interest-free banking come from the Islamic banking used in the Muslim world.

Islamic banking

: "Main article": Islamic banking

In a partnership or joint venture where money is lent, the creditor only provides the capital yet is guaranteed a fixed amount of profit. The debtor, however, puts in time and effort, but is made to bear the risk of loss. Muslim scholars argue that such practice is unjust. [Maududi(1967), vol. i, pg. 199] As an alternative to usury, Islam strongly encourages charity and direct investment in which the debtor shares whatever profit or loss the business may incur.

=Ethical arguments for and against usury=

Freedom of trade

The primary ethical argument in defense of usury has been the argument of negative freedom against the "restraint of trade" since the borrower has voluntarily entered into the usury contract.Fact|date=August 2007 Opponents note, however, that borrowers may be tricked into signing such contracts, assume there is a usury law cap on interest that does not exist, or be driven to accept such an interest rate out of necessity.Fact|date=August 2007 At the same time however, except for related party transactions where feelings of compassion, guilt, etc, compel the lender to lend without interest, in un-related party transactions where neither the borrower nor the lender has any predetermined attachment to one another, there is no incentive for the lender to lend or for the borrower to repay the debt without usury.

Investment

A practical argument for usury in welfare economics is that charging interest is essential to guiding the investment process, based on the claim that profits are required to direct investments to their most productive use (solving the economic calculation problem). According to this argument, interest-driven investment is essential to economic growth, and therefore to the very existence of industrial civilization. This practical argument for the utility of usury treats all "unearned" returns to capital as interest; traditionally, guaranteed interest is usurious, whereas dividends from shared ventures are less so. In this tradition, the practical case against usury does not completely apply (although replacing debt market investments with stock market savings may not always be desirable). Officially, this is how capitalist Islamic states solve the calculation problem. An example of the 'moral' difference between dividend income and interest income is found in "The Merchant of Venice": Shylock lends Antonio money for trade speculation, demanding repayment in flesh should Antonio's project fail utterly (accepting none of the business risk).

Excessive rates

In addition to the defense of interest as such, the practice of charging "high" interest rates is defended by those who point out that such rates reflect the very fact that the loans are being given to creditors with a high risk of default (in a competitive debt market the interest spread simply covers the credit risk). Economists of the Austrian school say that there is no such thing as a "just" interest rate separate from the free market equilibrium determined by the time-preferences of individual lenders and debtors. (Other free market theorists take a similar view on the merit of an unregulated debt market, but may not explain the subjective estimate of a worthwhile interest-rate bargain through time preference.)

Adverse selection and enforcement methods

Some have defended the threat or use of force (legal or illegal) against non-payers (such as required by Shylock). This position is based on the idea that without force there will be a market failure - since very high interest loans will only be taken up by those intending to default. The need for enforcement stems from this adverse selection problem rather than any immorality inherent in moneylenders. "See:" "The market for lemons".

Today's credit reporting system in industrialized countries obviates much of the need for the use of force. Since all potential lenders can quickly learn of one's delinquent status, non-payers may find an unwilling seller for many important goods, like apartment rentals, mortgages, renting of expensive equipment without a deposit, and in many cases, insurance or employment. In the minds of many debtors, such considerations outweigh fear of force brought against them. Fact|date=February 2007

Charities

Some low-interest charity loans (such as small business micro-loans) have made a defense on the fact that interest rates allow for the indefinite administration of the charity, the replacement of defaulted loans, and in some cases, the creation of additional loan pools in other regions. These people say that the final "ethical result" of the interest rates justifies the means of charging them.

=See also=

* Contractum trinius
* Loansharking (traditional occupation of Mafiosi)
* Money changing
* Payday loans
* Predatory lending
* "Vix Pervenit"
* Title loan
* Usury Act 1660
* Usury Free Day

=Further reading=

Web

* [http://gifc.blogspot.com Global Islamic Finance & Commerce]
* [http://www.hazariba.com/ Usury is Riba in Islam, this is an exclusive site on the subject of Riba (ar-Riba, usury, interest), answering the logic and reasoning for the prohibition of usury]
* [http://fax.libs.uga.edu/HB539xE46/ USURY] , A Scriptural, Ethical and Economic View, by Calvin Elliott, 1902. "(a searchable facsimile at the University of Georgia Libraries; DjVu & [http://fax.libs.uga.edu/HB539xE46/1f/usury.pdf layered PDF] format)"
* [http://www.newadvent.org/cathen/15235c.htm Catholic Encyclopedia article on Usury, 1912]
* [http://www.newadvent.org/summa/3078.htm Question 78. The sin of usury] (St Thomas Aquinas' "Summa Theologiæ")
* [http://www.godrules.net/library/luther/NEW1luther_d1.htm Luther's Sermon on Trading and Usury]
* [http://tera-3.ul.cs.cmu.edu/cgi-bin/getImage.pl?target=/data/www/NASD/4a7f1db4-5792-415c-be79-266f41eef20a/009/499/PTIFF/00000808.tif&rs=1 "Concordia Cyclopedia": Usury]
* [http://degenhart.us/blog/?p=106 What Love Is This? A Renunciation of the Economics of Calvinism]
* [http://www.musicreform.com/facs/Economics/Usury.pdf Dr. Ian Hodge on Usury]
* [http://littlegeneva.com/docs/North.pdf S.C. Mooney's Response to Dr. Gary North's critique of Usury:Destroyer of Nations]
* [http://eh.net/encyclopedia/article/jones.usury Norman Jones's article on usury from EH.NET's Encyclopedia]
* [http://www.islamic-finance.com/item5_f.htm Islamic definition of Usury]
* [http://www.usurylaw.com/ Usury laws by state.]
* [http://www.alastairmcintosh.com/articles/1998_usury.htm History of Religious Injunctions Against Usury]
* [http://www.heretical.com/miscellx/usury.html Origin of Modern Banking and Usury in Britain]
* [http://www.accesstoinsight.org/lib/authors/bodhi/waytoend.html#ch4 Buddha on Right Livelihood and Usury]
* [http://www.jewishencyclopedia.com/view.jsp?artid=58&letter=U Usury] (Jewish Encyclopedia, 1906 ed.)
* [http://www.friends-partners.org/partners/beyond-the-pale/english/13.html Usury] (Beyond the Pale exposition, friends-partners.org)
* [http://socserv.mcmaster.ca/econ/ugcm/3ll3/bentham/usury Defence of Usury] by Jeremy Bentham. 1787
* [http://www.efm.bris.ac.uk/het/bacon/bacon002.htm Of Usury] by Francis Bacon

Books

* 'In Restraint of Usury: the Lending of Money at Interest', Sir Harry Page, The Chartered Institute of Public Finance and Accounts, London, 1985,
* The Bibliography therein - particularly:
* 'The Idea of Usury: from Tribal Brotherhood to Universal Otherhood', Benjamin Nelson, 2nd Edition, University of Chicago Press, Chicago and London, 1949, enlarged 2nd edition, 1969.
* 'Interest and Inflation Free Money: Creating an Exchange Medium That Works for Everybody and Protects the Earth', Margrit Kennedy, with Declan Kennedy: Illustrations by Helmut Creutz; New and Expanded Edition, New Society Publishers, Philadelphia, PA, USA and Gabriola Island, BC, Canada, 1995.

=References=