To Home page

The Usury problem

The Christian concept of usury presupposes that capitalism was divinely ordained in the fall, and that we are commanded to use capital productively and wisely.

This is quite different from the communist concept of usury, which is that making money on a mortgage is sinful, because only labour is productive and capital is unproductive. The communists rejects interest, and all return on capital, full stop. Not that it matters, since communist money is worthless, and no one has any productive property under communism.

Christians are allowed to make money from loans made for productive purposes, provided the loan actually turns out to be productive – Christians are allowed to profit from capital goods, and allowed to profit from loans made to create capital goods. If the loan turns out to be a bad use of capital, if it turns out to be an unproductive use of capital, the lender has to share the pain with the borrower. The lender gets back the house in the housing slump, and the cattle in a drought.

Credit card debt, however, is unlikely to be productive. And missed payments are not productive either, and should not become a profit centre for someone who lends money to short time preference people who probably should not be borrowing.

The old Christian concept of usury is that you can lend money at interest against productive property, but not against the person. If you lend against the person, the debt is erased by full repayment without interest, and if you charge interest, not recoverable against the person, only against his credit rating.

So, you lend money to the peasant to buy some cattle, the cattle produce more cattle, and you get some of the extra cattle, or, more conveniently, a fixed amount of money per year for the peasant’s use of that cattle, or the mortgagor’s use of that house. The loan is secured by productive property, not secured against the person, and you are entitled to some of that production.

And if things don’t work out, he is free and clear if he returns the cattle or the house.

The Islamic ban on usury is similar to the Christian ban, but their frame is rather than the lender shares the risk, rather than the lender is charging rental on a productive property. The dark enlightenment frame is game theoretic, that the lender often knows better than the borrower what is a bad loan for the borrower, and should not have incentive to trap the borrower in a bad loan, but all these different frames amount to the same thing in the end – if the loan goes well, the borrower winds up paying back more than he borrowed, and if it goes badly, both parties suffer the consequences. If you finance your house from Dubai Islamic Bank, and the house appreciates, it is exactly the same as if you financed your house from Bank of America. The difference happens if the bank lends into a housing boom, and then there is a housing slump.

If you lend money to buy a house in the middle of a housing boom, you collect interest on the mortgage, but then there is a housing slump, the mortgagor returns the house in good order and condition, but in the middle of housing slump, the mortgagee is sol under the old Christian laws, and the mortgagor, though now houseless, is free and clear of debt.

Well, lenders did not like that. They wanted their money even if things did not work out, and they wanted to be able to lend money to someone to throw a big party, someone who probably did not understand the concept of compound interest, and then own that someone.

And the Jews of course operated by different rules, and Kings would borrow from the Jews, and then give the Jews exemption from the Christian laws, so that they could lend money against the person to Christians.

And then, things got messier with fractional reserve banking.

People want to lend short and borrow long, borrow money with fixed schedule for paying it back in many years, and lend money with the proviso that they can have it back at any time, money on deposit.

And so, the magic of term transformation. The banker takes in ten thousand gold pieces on deposit, returnable on demand at low interest, and lends out nine thousand gold pieces on land, on cattle, and on conspicuous consumption, at rather higher interest.

The banker hopes that not everyone will try to withdraw at the same time.

And, since the banker does not want to find himself in the real estate business when there is a slump in real estate prices, or the cattle business when there is a drought, he lobbies against the Christian rules on usury, and in favour of the Jewish rules. If you buy a house on a mortgage, and the price falls below the mortgage, he wants to sell the house over your head, and then go after you for the difference.

Since it is rather dangerous to move gold around, and safer to move ownership of gold around, people, instead using gold pieces as money, start using banknotes as money, bits of paper backed by claims against real property, if the lending is more or less Christian, and claims against real people, if it is not all that Christian.

And then, one day it rains on everyone, and everyone hits up the bank at the same time for the money they had stashed away for a rainy day, and you have a financial crisis.

And, under the rules the bankers lobbied for, the angry depositors can take all their stuff, and probably give the bankers a horsewhipping.

So the bankers rush to the government, and say, “financial crisis, bailout”

And then instead of banknotes backed by claims against property, you get government notes backed by claims against taxpayers.

And here we are. Jewish rules, fiat money.

Well, how does cryptocurrency address this? It is backed by absolutely nothing at all.

No, not quite nothing at all, for what it is backed by is the that cryptocurrency can be owned more securely than anything else, and moved across the world at the speed of light, making it very useful as money. You own crypto currency by having the secrets that control it, which are harder for governments or bad guys to find, and a lot easier to transport through airports. What it is backed by is that it is a form of property right that is easy to defend, and a form of property that is easy to move around.

Now it is probable that if cryptocurrency successfully replaces the dollar, the same story will begin again from the beginning, only with crypto currency in place of gold, but we are starting out from a clean slate. You cannot lend cryptocurrency against the person, because you cannot find the person. So when, in the future, people start borrowing and lending in crypto currency, the Christian rules will be inherently in effect when the process starts all over.

So, clean slate. Keeping it clean may well turn out to be difficult.

But gold was inconvenient and dangerous to move around, so people preferred to move claims against bankers around. So, it will prove a lot easier for people to hang onto cryptocurrency, rather than leaving their gold with the bankers, so the pressure to repeat the story that happened with gold will be considerably less.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.