Friday, 1 January 2010

The Banking Crisis: Usury Was/Is to Blame

It's All About Usury

by John Médaille

With all the turmoil in the financial industry, you would think that there would be a national conversation of money and lending. You would think that this would be a good time to re-examine the way we create money and the way we lend it. You would think, especially, that it would be a good time to review the subject of usury, especially since the credit card market is about to collapse in the same way the mortgage market did. But no, that conversation has not taken place.

Indeed, the last great economist to address the subject was J. M. Keynes, back in the 1930's. Keynes, who was no friend of the Church, surprised himself by finding that the Church's restrictions on usury made perfect economic sense, a sense ignored by classical economists:

"Provisions against usury are amongst the most ancient economic practices of which we have record. The destruction of the inducement to invest by an excessive liquidity preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds. I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together, namely, the rate of interest and the marginal efficiency of capital." [ The General Theory , 351-2]

What Keynes is saying in this somewhat technical language is that when returns to pure loans are higher than returns to actual investments, you will have a problem; if you can make more money lending to consumers at 25% than to auto makers at 10%, then the money for making things will dry up, and loans will shift to consumption and speculation. We have often noted this problem in the pages of The Distributist Review , (see The Utopia of Usurers , Usury! , Usury: Wealth Without Work , and many other articles) but we can't honestly claim that we have made a big impression on the public. However, Thomas Geoghagen in the pages of Harper's Magazine , has written an indictment of the current system entitled “Infinite Debt: How unlimited interest rates destroyed the economy.”

There is an interesting parallel between the lifting of the usury laws and the abolishing of the abortion laws: both were accomplished not by democratic process, but by legislative fiat; in Marquette National Bank v. First of Omaha Service Corp. , a 1978 Supreme Court opinion, the court found that an 1864 law prohibited the states from enforcing usury laws in their own state if it was legal in another state. For all practical purposes, this ended usury laws.

The lifting of the usury laws had dire unintended consequences, one of which was the decline of manufacturing:

"It may be hard to grasp how the dismantling of usury laws might lead to the loss of our industrial base. But it's true: it led to the loss of our best middle-class jobs. Here's a little primer on how it happened. First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had “cheap money” flooding in from China, Saudi Arabia, and even the Fourth World. May God forgive us—we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn't even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that's the kind of thing that got the “normal” big return; i.e., not 5 percent but 35 percent or even more."

But in addition to the economic effect, it had a profound effect on the moral character of the nation:

"The change in credit-card caps also had a bad effect on the moral character of the nation. Because interest rates were so high, the banks no longer wanted borrowers with good moral character. Look at the way lending has changed just since the time I was in law school in the early 1970s. Even then, the mantra of my teachers in contracts and commercial paper was: “The loan must be repaid!” I have a friend, a professor, who still quotes that refrain. But it's out of date. At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don't really want the loan to be repaid—they want us to be irresponsible, or at least to have a certain amount of bad character."

One question, however, is why we were willing to oblige the bankers by displaying such a poor moral character. No doubt the convenience of the credit card was a factor, but there is more to it than that. One reason is that we had to. The shift in the economy from manufacturing to finance meant that workers were no longer able to bargain for wages through unions and other means. Since 1972, the median hourly wage has stagnated. We experienced a very odd phenomenon: productivity exploded, but wages remained the same. Obviously, there was not enough purchasing power to clear the markets. Workers responded in two ways. One was to work more hours and put more family members to work, with a devastation effect on family life. The other was to borrow more. Further, the best and brightest of our students no longer went into engineering or manufacturing, but into finance. We started to lose even the knowledge of how to make things. As Thomas Geoghagen points out, not only did financial companies account for 40% of corporate profits in 2003, (up from 18% in 1988) but this may understate the problem. Many “manufacturing” firms, like GM and GE, actually made their profits from their finance divisions. GM became a company that manufactured cars in order to make loans on them.

Our current bailout plans are mainly directed at the banks, the hedge funds, the insurance companies, and other financial institutions. But this will not work. Without restoring manufacturing, farming, mining, and other basic industries, we cannot rescue the economy. But we have the order exactly reversed. The bankers get an instant bailout, no questions asked, while manufacturers, like the Big Three, have to crawl over broken glass to get what amounts to “chump change” in the context of the overall “rescue” numbers. Moreover, “contracts” with the derivative traders of AIG are regarded as sacred and unbreakable, while union contracts are broken at will.

It is the habit of the modernists to despise the past, and so it is no surprise that a restriction which existed in most cultures from the time of the Babylonians to the time of Jimmy Carter would be overturned. Yet, even modern-ism posits some empiricism, actually looking at the effects of an action. It is now long enough to look at the effects of the Supreme Courts 1978 decision. And without revisiting this decision, we cannot fix the economy.

Reprinted from The Distributist Review.


FC Note:

The above is interesting not least because it seeks to defend industry, something many Distributists are accused of ignoring or degrading. Of course Belloc did cover industry in his Essay on the Restoration of Property, espousing the ideal of workers' co-ops for large industries which cannot be based on the 'small is beautiful' model. from memory he gave the example of the railways.

On usury there is one correction needed to the above. Interest of 2% on an unproductive loan is still usury. e.g. a credit card charging 2% which a person uses to buy a coat - is still usury because the person has to pay back the debt plus 2% but is unlikely to earn any extra money from a coat he has bought to wear.

On the other hand a loan of £1 million made to an industry with a business plan to make £20 million in the first year, can charge 50% on the loan over a year because the loan is productive. That's not to say 50% is usual or acceptable to many - but an agreement fixed on a productive loan is not in and of itself usurious.

Of course this makes the above article even more relevant because the banks' profits (and their/our crisis) has arisen because they have placed priorities on unproductive loans - pure usury! - to people who can ill afford it, because they made more money out of that than (shudder!) investing in their own country, their own infrastructure, their own compatriots' skills etc.

Needless to add, this brings to the fore the simple fact that financiers have no national loyalty.

How else could any group of people who had brought a country to its knees and mired it in debt for generations say that if their bonuses were blocked for one year it would drive "the best" (ahem) bankers overseas?

The New Unhappy Lords have grown fat from usury's profits. We need to learn the lessons to avoid many a lean year.


P.S. The booklet Usury by Belloc is available from FC, alongside many books on economics, Distributism and much else of interest to intelligent patriots.


King of the Paupers said...

Jct: The effect on behavior of playing musical chairs with money all our lives in the mort-gage death-gamble contract promising to repay 110 when only 100 were borrowed into circulation is not yet considered enough.

CP said...

The FC note on this post is important and am delighted this point was mentioned.

These books are obligatory reading for those who intend to be active.

Masonry in Washington DC said...

Who invented usury, please refresh my memory

King of the Paupers said...

Jct: One tale to show how interest occurs quite easily,
Especially when humans find themselves in scarcity:
A father leaving his estate, his sons he has but four,
To each of them he gives a sac of seed to grow some more.
The first son had misfortune due to natural event,
The loss of crop to a tornado, the predicament.
The second son, he suffered too, with locusts in his field,
His children soon would starve after an insufficient yield.
The third son had a tiny crop, but it was touch-and-go,
He had eight kids who ate most everything that he could grow.
The fourth son's crop was bountiful, his granaries were full.
His brothers asked if some spare seeds might be available.
In his right ear he heard advice that he knew to be true,
"Do help them out and should you fail, they'll be there helping you."
But in his wrong ear he heard words so greedy in their tone,
"Don't risk security for your success was all your own.
But if you rent your seeds to them and gain from what they reap,
You soon won't have to work with interest to earn your keep."
At some point in man's history, a brother chose that way,
Enslaved with debt all of the others lasting to this day.

Anonymous said...

The Medici's were great exponents of this money lending practice.... but of course they termed it something else!

Final Conflict said...

Many people say the Medicis began Usury/Capitalism.

sad to say Usury was practiced long before: but the greed of Europeans has long been used by those who would undermine Europe & Christianity.

King of the Paupers said...

"Many people say the Medicis began Usury/Capitalism." is my book report on the Babylonian Woe by Davis Astle, the only book on money AND CREDIT in antiquity. The gold bullion brokers had an international cartel then as they've had till now for thousands of years. Any time you hear of inflation, you know there's usury creating the mortgage deathgamble knocking people into slavery and foreclosure of their possessions.

Anonymous said...

The Bank of England up until the turn of the century had to maintain the same level of interest, ie. neither up nor down went the rate.

Things began to change once the international houses of finance 'bought' the nation's power brokers.

As regards the Medicis, the Vatican referred to the practise by several names but the bottom line is that they were the Popes bankers and they practiced USURY, don't try and throw the 'undermining European Christianity' nonsense, the only ones who were 'undermining European Christianity' were those who appointed themselves the 'keepers of European Christianity'.

Anonymous said...

If it weren't for the Vatican thru the ages Christianity would have splintered into a thousand pieces.

Within a few years of the Protestants they were split between Calvinists and Lutherans -- following man not Christ! -- and so it went on.

Under Edward VI the protestants burnt at the steak Anabaptists and those prods who denied the Trinity...

Once you open the stable door.

As for Usury - there are ways around it which the unscrupulous will always try - but lending money and banking per se, are not usurious.

You can't run nations on bartering potatoes and corn.

But you can ban usury on unprofitable loans: which is the traditional Christian stance [as well as local bartering etc.!]

Anonymous said...

No one said that lending money/banking were 'usurious'.

King of the Paupers said...

"lending money and banking per se, are not usurious. You can't run nations on bartering potatoes and corn. But you can ban usury on unprofitable loans: which is the traditional Christian stance [as well as local bartering etc.!]."
Jct: The problem is that in Thomas 95: Jesus said: If you have money, do not lend it out at interest." Lend expecting nothing of the entrepreneur's profit but knowing that as your abundance is now a supply for his want, his abundance will later be a supply for your want. (Paul Corr II, 8:14) In that way, he who gathered much didn't have too much and he who gathered little didn't have too little, that there be equal." So, productive or unproductive, zero interest. See my Satan's Usury or God's Dividend on Time

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