AMATTER of

PRINCIPLE AND INTERESTThebricst Po5 ,5sb Histor o Usurp

By Mark A. Senn

eginning with the advent ofcommerce-perhaps as long asseven millennia ago-interest

has traditionally been charged inWestern culture for the use of goods ormoney. Yet extortionate interest-andsometimes all interest-has often beenprohibited, earning the opprobriousepithet "usury." Over time, the prohibi-tion of interest has given way to therealities of commerce and instead hasevolved into the regulation of interest.This article reviews the evolution ofthese principles and their continuedvitality in modem lending.

DefinitionsAny discussion of interest and usury isbeset by definitional problems. Interest,from the Latin interesse, is the differencebetween the lender's position as aresult of late payment and what itsposition would have been if paymenthad been timely (id quod inter est).Usury, from the Latin usus meaninguse, was the (excessive or illegal) chargefor money lent. In contrast to interest,usury bore no relation to the loss forlate payment, but rather accrued fromthe moment the loan was made.Although modem statutes and someolder laws define usury or illegal inter-est by reference to the maximum rate,many older laws do not. As a result,

Mark A. Senn is a shareholder in theDenver, Colorado, firm of SennVisciano Kirschenbaum P.C. and isgroup vice-chair of the Real PropertyLeasing Group.

often one cannot be sure whether therate or the mere collection of interestwas usurious.

Some scholars characterizeinterest as the amountpayable in business transac-tions and usury as theamount charged in personaltransactions. Gustav Cassel,The Nature and Necessity ofInterest 4 (New York 1956).John Donne wrote in "LovesUsury," "For every hour thatthou wilt spare me now/Iwill allow/ usurious god oflove, twenty to thee," evi-dently speaking of a personalrate of interest.

The Earliest RuleThe Code of Hammurabi(1792-1750 B.C.) includedseveral laws permitting inter-est. For example, a loan ofgrain required repayment ofextra grain at 331/3% perannum, and a loan of silverrequired repayment of extra Isilver at 20% per annum. The borrow-er's right to repay commodity loanswith commodities-and not curren-cy-is an important and recurrent topicin usury and interest. See generallyJohn M. Houkes's invaluable AnAnnotated Bibliography on the History ofUsury and Interest from the Earliest TimesThrough the Eighteenth Century(Lewiston 2004). Moreover, the Coderecognized the lawfulness of a divisionof the profits or a doubling of theinvestment as a return when money

was at risk in a speculative investmentas opposed to a loan that had to berepaid. This permission of interest in

exchange for risk has continued in thediscussion of usury and interest.

iThe Old Testament

ApproachesRooted in an agrarian and dannish cul-ture, the Old Testament allowed inter-est to be charged to sojourners whowere presumed to be in business for aprofit: "Unto a stranger thou mayestlend upon usury." Deuteronomy 23:20.The "business purpose" exception tousury survives. Berry v. Martens, No.

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192711, 2002 WL 921069 (Va. Cir. Ct.Mar. 7, 2002) (under state statute, anindividual may not assert usurydefense for a loan made for businesspurposes). One could not charge inter-est to one's own people: "Thou shaltnot lend upon usury to thy brother."Deuteronomy 23:19. Deuteronomy's dou-ble standard vexed thinkers for cen-turies. Benjamin Nelson, The Idea ofUsury (2d ed. 1969). Furthermore, onecould not charge interest to anyonewho had fallen on hard times. Leviticus25:36, 37. David described the man ofGod as "[he] that putteth not out hismoney to usury, nor taketh rewardagainst the innocent." Psalms 15:5 (citedin Matlack Props., Inc. v. Citizens &Southern Nat'l Bank, 162 So. 148, 150(Fla. 1935), holding that corporationscannot raise a usury defense).

The Old Testament is reminiscent ofsome modem loan transactions when itcontrasts a loan in which the principalwas repaid with interest, for example,100 shekels lent with 110 repaid at theend of a year (marbit or tarbit from theHebrew to multiply), and a loan inwhich the interest was deducted fromthe principal, for example, 90 shekelslent with 100 repaid at the end of ayear (neshekh from the Hebrew to bite).Robert Alter, The Five Books of Moses: ATranslation with Commentary (Norton2004) (translator's notes and correspon-dence regarding the translation on filewith the author). A neshekh loan willyield a slightly higher return andappears to have been more stronglycondemned as usury (as it certainlywas by Luther) while marbit was mere-ly an increase or profit.

The Greek and RomanSources

A severe critic, Plato (428-347 B.C.)excoriated those who "while they mul-tiply their capital by usury ... are alsomultiplying the drones and the pau-pers." The Republic 281 (FrancesMacDonald Cornford trans., OxfordUniv. Press 1951). He suggested that"voluntary contracts for a loan shouldbe made at the lender's risk." Id. Platoproposed: "Money must not bedeposited with anybody whom onedoes not trust. There must be no lend-

ing at interest, because it will be quitein order for the borrower to refuseabsolutely to return both interest andprincipal." The Laws 165-66 (Trevor J.Saunders trans., Penguin Books 1970).It remained for Plato's student,Aristotle, to make the most enduringcomments about interest.

Natural imagery characterizes theanalysis of Aristotle (384-322 B.C.),who identified three methods ofacquiring goods. Aristotle, Politics I, ix(T.A. Sinclair trans.,Penguin Books 1962).Acquisition from natureby hunting or fishing wasnatural. Exchanginggoods for money wasnatural because it adjust-ed inequalities in the nat-ural distribution ofgoods. After currencywas developed, exchangebecame trade because itwas easier to carry cur-rency than goods.Aristotle approved asnatural the accumulationof wealth in the form ofgoods, but disapprovedas unnatural wealth inthe form of currencyobtained from trade thatdid not produce goodsbut merely exchangedthem. Aristotle recog-rnicA ,,- A rif-filhlf nf flik

zed te dixffc1h f thisudistinction.Definitely unnatural was making

money from money as opposed tomaking money by exchange or eventrade:

Very much disliked is the practiceof charging interest; and the dislikeis fully justified, for the gain arisesout of currency itself, not a productof that for which currency was pro-vided. Currency was intended tobe a means of exchange whereasinterest represents an increase oncurrency itself.. . . [O]f all typesof business this is the most con-trary to nature.

Id. at x. Metal currency could not nat-urally beget currency. In case his feel-

ings about interest were unclear,Aristotle collocated "those ... whowork at degrading occupations,pimps and all such people, andusurers who lend small amounts athigh interest." Nichomachean Ethics 92(Terence Irwin trans., Hackett Pub.Co. 1985). Aristotle's image of the"unnaturalness" of a barren objectlike metal currency having offspringheld sway for many centuries in thedebate over interest and usury

Before faulting Aristotle's economictheory as naively naturalistic, one mustnote that there was experience to sup-port it. A lender might lend seed or ananimal and expect a return of produceor offspring. The return had naturallimits. With the advent of metal curren-cy, a loan had to be repaid with somecurrency. This might work for commer-cial transactions, but it tested the mettleof a farmer whose stock in trade was acommodity with seasonal values.Farmers no longer repaid their debts inkind; rather, when they had a bountifulharvest, the value of the product waslow and the coin expensive. Unable topay their debts, they often lost theirfarms or became slaves. Two centuriesbefore Aristotle, the Greek lawgiverSolon (638-558 B.C.) emancipated the

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lira

slaves, forbade slavery for debt, andreturned foreclosed lands. He also set aminimum value for agricultural prod-ucts and thus converted them to coinor monetized them.

The New Testament AttitudesThe New Testament reflects two atti-tudes toward lending. One attitudecondemns those who withhold supportfrom the needy, and the other encour-ages interest on invested capital. Thecondemnation is found in Luke 6:34, 35:"And if you lend to those from whomyou hope to receive back, what credit isthat to you?... But love your enemies,do good and lend, hoping for nothingin return." The other attitude is demon-strated in both Luke and Matthew fromthe story of the merchant who left hismoney with his servants. Some of theservants invested the money and someof them buried it (from which comes

The New Testamentdistinguishecl loans

to the neecj forpersonal or

hou51ehold reasonsfrom loans b: and tobusiness peoRle forinvestment and gain.

the expression "to bury one's talents,"with "talent" meaning both an ancientmeasure of weight and value and askill or inclination). Although it is aparable, Christ is clearly critical of theservants who did not maximize theirmaster's gain through interest."Wherefore then gavest not thou mymoney into the bank, that at my com-ing I might have required mine ownwith usury?" Luke 19:22-23. In Matthew25:26-27, the master said, "I reap whereI sowed not, and gather where I havenot strewed," echoing Aristotle. Thus,the New Testament distinguished loansto the needy for personal or householdreasons from loans by and to businesspeople for investment and gain. AWisconsin appellate court has held that

"corporations were thought to be lesslikely to yield to the pressures of neces-sity and pay unduly high interestrates." Williams v. Security Sav. & LoanAss'n, 355 N.W.2d 370, 373 (Wis. 1984).This distinction is still made 20 cen-turies later in the Uniform ConsumerCredit Code. Unif. Consumer CreditCode 2601 cmt. 1 (1974).

By means of the mutuum-an agree-ment by which money or goods werelent with required repayment includinginterest if provided in the mutuum-Roman law recognized loans at inter-est. Around 533 A.D., EmperorJustinian compiled Roman law in theCorpus Juris Civilis, which set limits oninterest based on the borrower's statusand ability to pay The rates rangedfrom 8% per annum for commercialloans to 4% for illustrious people andfarmers. Risky nautical loans earned anexceptional 12%. Houkes, supra, at 69.

From the Middle Ages tothe Industrial Revolution

Adopting the Aristotelian view,Thomas Aquinas (1224-74) wrote:"Charging for the loan of money isunjust as such, for you are sellingsomething that doesn't exist." ThomasAquinas, Summa Theologica ch. 11, at396 (Timothy McDermott ed., ChristianClassics/Thomas More Pub. 1991).Aquinas identified things that are con-sumed by their proper use so that theiruse cannot be separated from the thingitself--such as food and wine. Onecannot sell something that is intendedto be consumed and charge for itsuse-such as selling a bottle of wineand charging the buyer for drinking it.Because money is intended to be con-sumed, it is wrong to charge for its use.The proper charge-its "just price"-isits return. On the other hand, one cancharge for the use of a house because itis returned after it is used. Beginning inthe fourth century, Christian theolo-gians condemned interest in thestrongest terms, often equating it withmurder (as Cato had) because it tookthe borrower's life. Dante placedusurers below suicides in the seventhcircle of the Inferno (Canto XVII).

Before one blithely condemns theChurch's early prohibition on interest,

consideration is due to the position inwhich the Church found itself whentrying to protect oppressed borrowers:it could enjoin interest altogether orattempt to regulate its fluctuating rate.The Church chose the latter and sim-pler course. Evidently aware of theprevalence and need for interest in theemerging economic system, however,the Church later countenanced severalcasuistries to avoid the notion of inter-est as an unnatural growth of moneyand allowed compensation for moneylent and not timely repaid in four cir-cumstances. Eric Kerridge, Usury,Interest and the Reformation 7 et seq.(2002). Although the last papal word-Pope Benedict XIV's Vix Pervenit (OnUsury and Other Dishonest Profit) in1745-strictly forbade interest, theexceptions and modem rules blunt thisedict.

Dominating the reasons for allowingthe payment of money for the use ofmoney was poena conventionalis (thestandard penalty). If a secured loanwas not repaid when due, the lenderwas allowed a reasonable percentage ofthe loan for his forbearance in not for-feiting the bond or pursuing his legalrights. Like a modem credit card, noextra payment was due if the loan wasrepaid timely. In The Merchant of Venice,Antonio would not have owed Shylockinterest if he had repaid the loan whendue; however, Shylock did not sharethe risk of Antonio's venture, hischarge of a pound of flesh was exces-sive, and thus his loan was usurious.

"Emergent loss" (damnum emergens)compensated the lender for indirectloss occasioned by not having themoney he would have had if the loanhad been repaid when it was due. Ifthe lender's house was damaged andthen further damaged because thelender could not afford to repair itwithout the overdue money the lendersuffered damnum emergens. Lucrum ces-sans (cessant gain) was the loss sus-tained by the lender who missed aprofitable opportunity because a loanhad not been timely repaid. Togetherdamnum emergens and lucrum cessanswere damna et interesse. Originally theamount was specified in the loan butlater became a periodic charge.

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Maitland noted that the creditor'sright to collect damages for late pay-ment became part of English law:"There is no usury here, for there hasbeen no bargain that the creditor shallreceive any certain sum for the use ofhis money, still, so far as we can see,the plaintiff gets damages though hehas only proved that the debt was notpaid when it was due." Sir FrederickPollock & Frederic William Maitland, 2The History of English Law Before theTime of Edward 1216 (1899).

Expectation of profitsfrom a business withthe concomitant risk ofloss entitled a lender toany share he couldnegotiate without fearof usury. This is the doc-trine of periculum sortis:"Suppose you wereasked to lend a muttonchop to a ravenous dog,upon what terms wouldyou lend it?" LordBramwell, quoted inKerridge, supra, at 11.This recalls Hammurabiand presages Blackstoneand modem law.

With theReformation, Christianstrictures loosened.Martin Luther railedagainst interest general-ly, but John Calvin wasmore lenient, favoring arecognition of the bor-rower's circumstances.An early proponent of capitalism,Calvin would have allowed loans atinterest to businesspeople but not tothe needy. Italian bankers employedbills of exchange to avoid receivinginterest on a loan. The "borrower"took, for example, Florentine florinsand agreed to repay the "lender" inducats at the Venetian market rate-but at a slightly greater value of ducatsafter the exchange for florins. With theadded benefit of easier transmissionthan coins, bills of exchange soonbecame currency throughout the conti-nent and largely supplanted gold andsilver. Jack Weatherford, The History ofMoney 73-79 (1997).

Renting and lending were closelyallied in another evasion of interest.Early English law secured debts in sev-eral ways whose unifying characteristicwas a conveyance to the lender with aduty to reconvey on repayment. Ingages, the borrower/gagor conveyedhis property to the lender/gagee whothen rented it back to the gagor in oneof two ways: a vivum or vadium gage(the live gage), in which the rent wasapplied to the debt and there was nousury, and a morturn vadium or mort-

gage (the dead gage), in which the rentwas not applied to the debt and therecould be usury. A similar result couldbe reached by a lender's buying a termof years, which seemed to be a fairexchange but often allowed the lenderto profit unconscionably from the fruitsof the land. When the loan was repaid,the gage ended and the property wasreconveyed to the borrower, or thelease ended. Often loans were extend-ed. When land values rose, however,the lender was better off foreclosingthan extending. Borrowers soughtequitable relief in chancery court bymeans of the equity of redemption,which prevented foreclosure of lands

whose value exceeded the loan so longas interest was paid. Theodore ET.Plucknett, A Concise History of theCommon Law 572-73, 604 (5th ed. 1956).

In the end, the Church's generalprohibition on interest did not hinderthe collection of interest, the ascent ofthe northern Italian banking families,or a revolution in commerce during theRenaissance. "[T]he economic revolu-tion and the emancipation of thought .. supplied the necessary conditionsfor a scientific treatment of the problemof interest." Cassel, supra, at 6. One caneven give the Church credit. John T.Noonan (now on the Ninth CircuitCourt of Appeals) argued, "For threecenturies some of the best minds ofWestern Europe participated in thisidealistic effort to frame the intellectualand moral conditions under whichcredit might justly be extended," andthus began the scientific approach tobanking. John T. Noonan, The ScholasticAnalysis of Usury 407 (1957). The prohi-bition of interest became the regulationof interest. For example, Sir WilliamBlackstone recalled maximum interestrates of 10% during the reigns of HenryVIII (1509-47) and Elizabeth I(1558-1603), 8% during the reign ofJames I (1603-25), 6% during the reignof Charles I (1625-49), and 5% duringthe reign of Anne (1702-14). WilliamBlackstone, 2 Commentaries on the Lawsof England 463 (1769).

The Emerging View inEngland and America

To Blackstone, commerce could notsubsist without the mutual use ofextensive credit. Recognizing the defi-nitional problems, he noted that"increase by way of compensation forthe use ... is generally called interestby those who think it lawful, andusury by those who do not so." Interestseemed to Blackstone to be a moderatecharge for the use of money, whileusury seemed to be an exorbitantcharge for it. Blackstone believed thatinterest rates were composed of twofactors: inconvenience for the inabilityto use the money and risk of its loss.

Equally weighted, the interest attrib-uted to inconvenience was inverselyrelated to the amount of specie in circu-

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lation, and the interest charged for riskwas directly related to the degree ofrisk. Ship loans-or bottomry-werevery risky and carried high interestrates; classical Greek thought had rec-ognized the risks and justified rewardsof ship loans. Insurance contracts(which Blackstone, among others, ana-lyzed with usury and interest) did notinvolve inconvenience because nomoney was lost, but they did carry therisk of total loss. If the interest becauseof inconvenience was 3%, then,Blackstone continued, the rate on goodpersonal security would be 5%, on agovernment loan 3%, and on a loansecured by a mortgage 4/6.

The beginning of the 19th century-coincident with the AmericanRevolution and the IndustrialRevolution-saw English thoughtreconsider the basis of the usury laws.Jeremy Bentham wrote in Defence ofUsury (1787, Letter 1), "no man of ripeyears and of sound mind, acting freelyand with his eyes open, ought to behindered... from making such bar-gain, in the way of obtaining money, ashe thinks fit: nor, (what is a necessaryconsequence) any body hindered fromsupplying him, upon any terms hethinks proper to accede to." Benthamadduced Blackstone to support hiscase. In The Principles of Morals andLegislation 252 (1823 reprint), Benthamsaid usury was a consensual crime (ifone at all) that "cannot merit a place inthe catalog of offenses, unless the con-sent were either unfairly obtained orunfreely." England repealed its usurystatute in the middle of the 19th century

Historically, American usury lawshave been "an almost uncanny barom-eter of shifts in the political and eco-nomic demand for money" LawrenceM. Friedman, A History of American Law543-45 (1985). Although some statesallowed market forces to drive interestrates, others legislated usurious rates,usually higher in the West wheremoney was scarce and where highrates were needed to attract capital.This phenomenon suggests that thepolicy followed the economy. Some ter-ritories eliminated usury laws (often atthe beginning of their statehood whenthe government granted vast tracts of

land and land was cheap but moneywas not) to attract money from theEast. When land values fell and fore-closures loomed, states reenacted usurylaws. Farmers bore the brunt of interestcosts-as in Solon's day-but laterunions took up the banner against highinterest rates that pressed their urbanmembers. Some states still recognizeusury, but its importance has beenweakened by the federal preemption ofstate law in the 1980s. See, e.g.,National Bank Act, 12 U.S.C. 85, 86(2004); Depository InstitutionsDeregulation and Monetary ControlAct of 1980 (DIDMCA), 12 U.S.C 1735f-7, 1831d. That preemption ledto contemporary credit card interestrates and charges that some callusurious.

Today and TomorrowIn reviewing the "extremely compli-cated history" of usury (as MaxWeber assesses it in The ProtestantEthic and the Spirit of Capitalism(1904-05)), one discerns occasionalabsolute prohibitions of interest-ofwhich Aristotle and Aquinas were theforemost exponents-but more com-monly sees the recognition of a legiti-mate role for interest in commercialsettings. Interest is variously justifiedas the payment for sharing a risk orforegoing the use of the lender'smoney. Thus, the term "usury" itselfevolved from charging any interest tocharging excessive or exorbitant inter-est. One historian characterized theevolution of thought about interest asbeginning with allowing loans to the"other" but not to one's brother inDeuteronomy, progressing to prohibit-ing loans to the "brother" as inimicalto universal brotherhood in canonicalrules, and ending with "universal oth-erhood" with modem capitalism inwhich loans are generally allowedand all people are "others." Nelson,supra, at xiv-xxv.

Secular and religious thought arenow oddly juxtaposed. The Church'smodem position acknowledges that"there is always present. . . somejust reason for demanding the legalrate of interest and ... an evengreater rate of interest provided there

be just and proportionate reasons fordemanding it." T. Lincoln Bouscaren& Adam C. Ellis, Canon Laws: A Textand Commentary 844-45 (1951) (com-menting on canon 1543). Canon 1543prohibits interest if "it is evident thatthe legal rate is exorbitant," butacknowledges an absolute right tointerest. The Church now seems to con-done usury if there are "just and pro-portionate reasons for demanding it."

Ethical defenses to usury arefounded on freedom of contract, noton restraint of trade. Practical argu-ments for interest (or usury) maintainthat profits are essential to guideinvestments, as Calvin might havesaid. The modem use of dividends onequities is analogous to returns for thesharing of risk (a traditional exceptionto usury) and are distinguished frominterest on bonds (guaranteed with-out risk to the investor and historical-ly usury). In a debate as old asHammurabi, risk of default by shakyborrowers can be a justification forhigh interest rates for credit cards; inthis view, the "risk" argument againstusury trumps the "guaranteed pay-ment" argument for usury.

New terminology continues thebiblical prohibition of usury asoppression of the poor. For example,"loan sharking" encompasses lend-ing above legal rates, using threats orviolence to collect a debt, or makingloans without the required license.The latest image-laden term is"predatory lending," which involvesoverpriced loans, unaffordable loans,loans without net economic benefitto the borrower, and loans withexploitative terms that the borrowerdoes not understand. See DebraPogrund Stark, Unmasking thePredatory Loan in Sheep's Clothing: ALegislative Proposal, 21 Harv.BlackLetter L.J. 129 (2005). Consistentwith law and policy that Solonexpounded in ancient Greece, Stark'sproposal would protect consumersfrom oppressive personal loanssecured by a dwelling.

Daily, interest on this importantprinciple continues to accrue. U

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