An Ancient Basis for Tomorrow's Financial Regulations: Rethinking Usury Law

On Thursday, Treasury Secretary Timothy Geithner announced sweeping changes in the nation's finance rules, specifically targeting the derivative financial products that led to the credit crisis, mortgage crisis, banking crisis, and the crisis in the American automobile industry.. Predictably, some conservatives have responded that such policies would lead to "socialism," or a similar compromise of the free-enterprise American dream.

In fact, such regulations are as old as the Ten Commandments, and as American as apple pie: they are nothing more than an update of the ancient prohibitions on usury, or the unfair charging of interest. And while today, "usury" has a whiff of the antiquarian about it (or worse, one of antisemitism), if we look closely at what usury laws were meant to do, I think we'll discover that they are much more relevant, and worthy, than we might suppose.

Western civilization's original usury laws are found in the Bible: the Torah contains several prohibitions against lending money at interest, and the New Testament several condemnations of it. Deuteronomy 23:20-21 is representative: "Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it."

I will return to the distinction between Israelite and foreigner below, but first, however, I want to explore rationales for the usury prohibition in the first place. In the Deuteronomy passage above, the reason is somewhat generic: interest is forbidden, like many other ritual and ethical acts, "so that the Lord thy God may bless thee in all that thou puttest thy hand unto."

In Leviticus 25:35-37, however, a more specific reason is given: "And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase."

Here, at least two reasons are given: first, the ethical value of caring for the poor, and second, "that thy brother may live with thee." If one were to charge interest, the text suggests, the bonds of society would collapse; rich and poor could not live together. Later commentators developed these dual rationales. St. Thomas Aquinas, for example, said that usury is both morally wrong and an improper form of "double-charging," because money is a means of commerce, not a thing in itself.

"That thy brother may live with me," in other words, is a prudential argument, not a moral/ethical one. The concern here is not only that usury is immoral -- it takes advantage of the weak -- but also that civil society itself would be compromised if usury were allowed. This, not ethnocentrism, is why lending to foreigners was allowed; the concern was with the economic health and civil cohesion of Israelite society, which would are not threatened by lending to outsiders. But if usury multiplied risk and magnified inequity within the community of Israel, chaos would result.

Notice, too, that these twin rationales extend the purview of usury law far beyond the narrow contemporary meaning of charging excessive interest. Today, all states have usury statutes that cap the rate of interest for loans. But the Biblical and exegetical usury statutes are broader: they are aimed at the moral turpitude, societal inequity, and economic instability inherent in making money from money.

Translated into today's economic realities, this has indeed come to pass. Wealthy institutions have lured poor people into unsustainable and unstable credit arrangements, and indeed, the basic cords of our society have begun to fray. As we have seen in the excesses of executive compensation, we have lost the moral compass which once tied pay to some notions of actual work and fairness, rather than to the made-up prices of economic bubbles. Indeed, our current crisis is exactly the economic, societal, and ethical chaos which the usury laws sought to prevent.

Today's derivatives market, for example, is precisely about "making money from money" -- but taken to new and ludicrous extremes. The credit default swaps which were largely responsible for sinking insurance giant A.I.G. were essentially bets about whether certain debts would be paid or defaulted-upon. Now, as it happened, debtors defaulted in such numbers that they brought down the house. But this derivative security should never have been legal in the first place. It is a bet on making money from money; or rather, a bet on making money from lending money at a near-usurious rate of interest, and thus a usurious attempt to make money from making money from making money. As the Bible itself knew, bubbles pop.

The anti-usury value does not and should not depend on the percentage rate of interest. It is a wider prohibition, both ethical and prudential, against making money from money. Of course, it cannot be taken too literally, either; credit is what makes our economy run, as we have now learned the hard way. But in principle, anti-usury values are fundamental to the American experience, and more needed now than ever.

To ban or heavily regulate usurious derivative securities is not socialism. It's the Bible.