An Analysis

“A usurer on his deathbed made his wife and children swear to divide his property in three parts, one for his wife on which she could remarry, one for his sons and daughters, and one to be buried with him in a bag around his neck. This was done, but the family wanted to obtain again the money buried with the usurer, and opened his grave at night. They fled in terror at seeing demons filling the dead man’s mouth with red hot coins.”

Today moneylenders are not regarded with quite such dread, but many bankers would recognise the admonitory tone of this 13th-century morality tale written by Jacques de Vitry, a French preacher. Sometime hated, always approached with caution, bankers have an image problem. Few people any longer share the view, common in de Vitry’s time, that moneylenders are damned because they do the devil’s work. But in many cultures the suspicion lingers that bankers do something inherently anti-social: they charge interest.

Usury—which once meant nothing more than lending money in return for interest—has always attracted the attention of lawmakers and theologians. Three of the world’s great religions have formal prohibitions against it, even though these have not always been followed strictly. The arguments against interest come down essentially to two: lenders are, in effect, getting something for nothing; and a man should help his neighbour without; hope of gain. Such was the contempt for usury in the late Middle Ages that modern banking might have been strangled at birth.

In western societies, the act of charging interest has come to be regarded as respectable. Inflation is nowadays a predictable eroder of capital, and interest; may allow a lender to recover at least the real value of his loan. Interest also partly compensates him for the risk that a borrower will default. So usury now means something different from merely lending at interest: charging an exorbitant rate. But the confusion over whether money lending is wrong remains. “Informal credit markets”—moneylenders operate in most developing countries and, at the margins of society, in many rich ones. By western standards, these often charge borrowers extremely high rates of interest. When their methods of collection involve breaking legs rather than sending a sternly worded letter, a line has been crossed. But short of violence and intimidation, is what they do wrong?

They clearly meet a need. Formal, officially regulated, lenders will not lend to many would-be borrowers—notably the poor, who can offer little in the way of security. It cannot be better that these people should be denied credit altogether than that they should be able to borrow at interest, however “exorbitant”, if they choose. Discomfort at this thought has something to do with the outright criminality of some moneylenders’ behaviour—but that explanation goes only so far. Something of the distaste for lending at interest that all societies (notably Islamic ones) still feel, persists in the West.

The order of things
Early peoples tried to understand the world by classifying the things in it. The metals used as monetary mediums of exchange were seen as inert substances. To multiply them, for instance by charging interest, was unnatural. And interest payments meant, in effect, that money had to he paid for twice—an equally unnatural notion. Aristotle’s writings in the 8th century BC were the start of an influential tradition of natural law in this matter.

But the sternest early criticisms of usury were based on religious objections to this most unfraternal of acts. A surprising feature of the Christian case against usury is how late it developed and how little it was influenced at the outset by specific biblical references. Historians cite the Hadriana, an 8th-century collection of canons and writings, as a crucial document. It contains an epistle from Pope Leo the Great forbidding clerics to act as usurers and declaring that laymen who did so would be guilty of seeking turpe lucrum (shameful gain).

Jews drew on a similar Biblical tradition and also cited Talmudic writings that condemned usury. One reference in particular—in Deuteronomy, chapter 23-set out a fateful injunction:”...unto foreigners thou mayst lend upon interest but unto thy brother thou shalt not lend.” In medieval times, some Christians saw this as an excuse to exempt Je from the prohibition against usury. Excluded from many professions by jealous guilds, some Jews were willing to oblige.
Islamic societies trod an easier path. Specific injunctions in the Koran against riba (interest) were broadly followed, without controversy. They flowed from a broader Islamic principle—that risk should be shared between borrower and lender; lenders were typically entitled to a share in any profits from a venture which they had helped to finance. (In the medieval Islamic world, there were no “banks”. Scholars think the social status and personal connections required to be a successful Islamic lender retarded the development of elaborate credit- granting institutions.)
Things grew stickier for European moneylenders in 850, when the Paris synod recommended excommunication for lay usurers. And horribly sticky after 1179, when Pope Alexander III declared that usury was forbidden by both biblical testaments, excommunicated usurers and denied them Christian burial.

A few years later, a decree of Urban III cited a new chapter and verse, Luke 6:35—”Lend freely, hoping nothing thereby.” For the first time, Jesus himself was said to have forbidden usury. Preachers such as Jacques de Vitry were quick to respond. Spiders, toads and all creatures diabolical became metaphors for the usurer. Practitioners were irretrievably damned. The image of the moneylender dragged down to hell by the bag of money around his neck became a medieval cliche.

Poor Shylock

Moneylending was such a preoccupation partly because society could not get along without it. Despite the prohibitions, chronic indebtedness was a feature of medieval life—though most debts were small and short-term, lasting only a few clays or weeks. Since debt was ubiquitous, it is hardly surprising that moneylenders—however necessary—should have been so widely despised. For centuries European culture offered relentless hostility towards usurers in general and Jews in particular. The paradigmatic usurer was Shylock, vengeful and pitiless.
But the truth is more complicated. Medieval archives paint a more shaded picture of Europe’s social attitudes towards moneylenders. Usurers were certainly disliked, especially when times were hard and debts therefore more onerous. At the same time, however, usury was widely regarded as something to be tolerated and, occasionally welcomed. The relationship between lender and borrower was not perceived as one between exploiter and exploited, as the moral prohibitions of the time would suggest, but as something' more ambiguous.

Consider Bondavid of Draguignan, for instance. This Jewish moneylender was put on trial in Marseilles in 1317. He marshalled 24 respectable citizens to attest to his good reputation. Because money lending was so widespread, it was highly competitive: its practitioners could not afford to be as strict or as harsh as their conventional, portrayal suggests. Interest rates, though high by modern standards, were not always punitive- (Compound interest was often forbidden by civil authorities.) One study argues that medieval rates were typically not very different from those charged to American businesses during the depression of the 1930s.

Equally in defiance of stereotype, Christian moneylenders were often less popular than their Jewish counterparts. In 1285, in the diocese of Cahors in France, 37 parishioners were convicted of usury after the local populace had grown weary of its debts. The "Cahorsins" migrated throughout Europe to practise their trade. When Jews were expelled from France in 1306, they were missed. Geoffrey of Paris, a chronicler, wrote: "All the poor complain, for the Jews were much milder in the conduct of business than the Christians are now." The Jews were recalled by popular request in. 1315.
And there were the Lombards—Christian moneylenders from Pisa, Florence and Siena. Like the Jews, they paid taxes in order to lend openly. By the 14th century they were involved in high state finance as well as in granting smaller personal credits. Rulers (including popes) had learnt how to exploit the moneylenders from whom they too borrowed—by controlling interest rates and declaring periodic exemptions from debts. Three houses— the Bardi, the Perruzzi and the Acciajoli—were ruined when Edward III of England defaulted on a large loan, A century later the Medici too had reason to rue their dealings with monarchs.

The fact that Christians were prominent among moneylenders gave religious authorities cause for concern. The ethics preached by the church and the reality of the marketplace were painfully at odds. Even as the European economy expanded, the church extended its opposition to usury. In 1311 the Council of Vienne issued Ex Gravi, an influential decree which said that any legitimation of usury was heresy.

This tension persisted, though the official sanctions against moneylending gradually eroded. As trade grew, merchants needed more complex forms of credit, and theologians began to find ways to justify the payment of interest. These included financial contracts similar to those favoured by Islam, based on the idea of risk-sharing, in which the lender took interest only as payment for sharing in the risks of a trading venture. Increasingly, theologians also accepted transactions in which the interest element was barely disguised.
The most important and controversial financial innovation in this respect was the bill of exchange—the instrument that was arguably the forerunner of modern banking. Because bills were issued at a discount to the face value at which they were eventually redeemed, they appeared not to charge interest directly. Yet discounts varied to reflect different risks—in effect, riskier borrowers paid higher rates of interest.

Why did the Catholic church reluctantly relax its ban? The expansion of the European economy and the consequent rise in the demand for credit were important forces. At the same time, theological thought was growing more sophisticated, drawing ever finer distinctions between this loan and that bill. Rich merchant bankers found social status easier to come by than their moneylending counterparts, even though the distinction between what each group did was far from absolute. Jacques Le Goff, a French historian, thinks the 13th-century invention of Purgatory was also important for the development of modern banking. Once usurers no longer expected to go straight to Hell but to linger in this new place, moneylending acquired redemptive possibilities, and thus a larger measure of respectability.

Neither borrower nor lender

With time, usury in Europe was first regulated, then institutionalised, But, like compound interest, deep cultural prejudices had accumulated almost unnoticed, directed now at banks rather than at their moneylending precursors, these continued at intervals to be voiced. In many countries the legality of usury was debated: in the 17th century Britain briefly outlawed it again.
Anti-usury sentiment often mingled with other forms of radicalism. When they set up central banks, governments made themselves vulnerable to criticisms that drew on new economic thinking as well as on older beliefs. Finance became more explicitly an arm of the state: now bankers were in cahoots with politicians to bleed the common people. In the 18th-century, popular imagination linked banking to state profligacy, high taxes and corruption. In early 19th-century Britain, the unproductive wealth of financiers was denounced by radicals and religious nonconformists, who espoused the productive virtues of labour and capital. By the end of the century the plutocrat, not the capitalist, remained the enemy of choice.

Despite the unprecedented expansion of factory-based manufacturing, bankers, not industrialists, had to contend with social and religious prejudices.

In late 19th-century France a series of financial scandals culminating in the Panama Canal affair ended the careers of leading politicians and helped to confirm bankers' place in popular demonology. Racy novels such as Maupassant's "Bel-Ami" worked to the same end. The mystique surrounding banking and finance became more threatening as the businesses grew to be truly international and ever more opaque to the outside observer. Banks played an increasing role in allocating resources—channelling investment and wealth in some directions but not in others. As first socialism, then communism, developed a coherent ideology, this aspect of banking took on a new significance.
So popular dislike of banks became multi-faceted, organising itself around different issues—now anti-semitism (of which it was merely one strand), now financial panic. America blamed its banks for the depression that followed the Wall Street crash in 1929. As a result, restrictive legislation that remains in place today rained down upon them. America's extraordinarily numerous small banks—the product of those restrictive laws—have sought protection from competition by playing on fears of "big banks". And several states still have usury laws that limit the interest rates which banks can charge borrowers.

Evidently, therefore, little has changed. In Britain, for example, economic recession and the banks' own blunders have exposed a wide streak of anti-bank feeling. During the booming 1980s, envy and suspicion of "yuppie" wealth was the rule—an unlikely democratisation of the plutocratic demon. After the bubble, calumny. Banks have been pilloried for their harsh treatment of customers, especially the small and weak.

Modern anti-banking sentiment has its dark side. Some still allege that bankers, with Jews and Freemasons to the fore, are conspiring to take over the world. Heavily laced with anti-Semitism and nationalism, this crude nonsense co-opts older forms of those prejudices and uses them to support the politics of the lunatic right.

The people's bank

Consumer groups have offered a more politically effective critique—that banks are not subject to normal business rules. Because their services are essential, they can recover from mistakes by overcharging customers; and, in extremes, their regulators stand ready to rescue them. These critics have a point: banks are treated differently from other businesses, and there is a flourishing debate among economists (the 20th century's theologians) as to whether this makes sense.
Other modern critics attack the banks for the narrowness of their thinking, their short-termism and their lack of community spirit. They fail, this complaint goes, to lend to everybody who needs it. In this way, usury may have been rehabilitated—there's too little of it—but bankers have not been.
In America the idea of social or "ethical" banking is currently attracting attention. On this view, at least some financial institutions need to be kept small and should be designed to serve particular communities and investment policies.

Successful "community banks", which largely ignore the mainstream banking system, have sprung up all around the world. Credit unions collectives of private individuals who pool their savings and provide credit to each other, have also flourished, just as mutual and co-operative societies did a century ago. And some communities have set up non-monetary credit systems in which goods and services are exchanged (and the tax-man frustrated) around inventories of obligations—you owe me two credits for painting your house, but I owe you one for fixing my washing machine. All these are experiments in "popular capitalism", in which people try to expunge those aspects of banking which they most resent—including, as tradition requires, the payment of interest.

One ancient and modern culture points to a distinct alternative. The clarity of Islam's anti-usury laws meant they were unchallenged until the 19th century, when Islam came into frequent contact with western assumptions about banking. Then, however, things became mightily complicated. Western financiers argued that trade and economic development were only possible if Islamic countries adopted western financial methods. With time, some big ones, notably Saudi Arabia, did, and western-style commercial banks were created over the objections of theologians.
Recent years, however, have seen a slow counter-revolution. Dozens of Islamic banks have been founded from Jordan to South Africa. These have successfully appealed to depositors' religious faith. Thanks to the principle of risk-sharing, the banks enjoy a more exalted social standing than rival institutions, so much so that some western banks are dabbling with Islamic finance and pondering its applicability elsewhere.

To put it mildly, Islamic banking is not without its problems. Strict adherence to religion implies a very limited range of financial transactions. This in turn limits the ability of Islamic institutions to interact with other financial systems. Just as Catholic theologians eventually found reasons to allow interest-bearing banking, so Islamic scholars are under pressure to extend the range of transactions permitted by law.

It would be too crude to suggest that bankers have been hated for centuries simply because they do something which makes people uncomfortable, and wrong to argue that the hatred has been either uniform or unwavering. Yet loan-sharks who today charge excessive rates of interest are not fundamentally different from banks. Moneylending is the banks' central function and the critique of it seems protean—witness the way it runs across the political spectrum. Except in bad times, the risks and costs that interest charges defray are intangible, so bankers seem to get some thing for nothing. Until they can show society otherwise, they will go on wondering, in their very own Purgatory, why they are so unloved.