Pope Sixtus V called it “contrary to Christian charity.” The third Lateran Council proclaimed it “a heresy” worthy of excommunication. Both Old and New Testaments denounced it, as did Plato, Aristotle, Moses, the Buddha, and Muhammad. The offensive practice? Usury, defined as the charging of interest on a loan.
By the 13th century, however, Christians began to distinguish between interest that was usurious and interest that wasn’t. Usury was gradually redefined as the charging of “excessive” interest. What was excessive? In the regulation of trade and banking, governments set up legal interest rates, and usury tended to mean rates above that standard.
Today interest is no longer thought of as usurious, unless it is excessive or exploitative. Even Catholic dioceses charge interest on loans to their parishes. A once heretical practice has become commonplace.
Muslims also have a longstanding religious prohibition on usury (meaning “interest”) to which they have strictly adhered. Recently, however, Islamic finance has developed a variety of “Shariah-compliant” investments, some of which resemble bonds. In 2009, Shariah-compliant global debt had already reached $1 trillion. Rather than allow lenders to charge interest, Shariah-compliant investments consider lenders and borrowers partners, in something of a profit-sharing arrangement.
Last year’s financial crisis in Dubai, however, exposed a problem with these new investments. Untested in the courts, the investments left lenders not knowing where they stood (in terms of priority of being repaid) in the event of a default. When Dubai World, a state-owned conglomerate that had expanded too quickly, sought to restructure a quarter of a billion dollars of debt, the lack of precedent became painfully clear. In that case, the government of Dubai eventually stepped in to back the debt.
But the larger issue—that is, rethinking the religious prohibition against usury—remains. The situation might eventually be resolved among Muslims through a redefinition of usury to mean only “excessive interest,” as happened in Christianity. Or it might lead Shariah-compliant investments to continue developing, possibly even becoming an alternative to the interest-based approach used elsewhere in the world. With the World Bank and the British government prepared to sell Shariah-compliant bonds, they seem to be betting on the latter alternative.
UNCTAD - the United Nations Conference on Trade and Development and other world organizations such as the World Bank and many regional development banks have been operating since soon after World War II to help developing countries develope their economies and to trade with other nations especially theri nearby neighboring countries. Developing more bi-lateral and multi-lateral trade and development between countries often lead to more peaceful relations betwen countries. Nations are a lot less likely to go to war with nations that are customers or suppliers of goods . So trade and developmement are a powerful way of tending to keep the world at peace. People who are well feed or prosperous are less likely to start wars for scares resource. And trade is an excellent way of nations sharing and sitributing resources without resort to "wars of liberation" .
Ironically most "poor nations" do in fact have resources often in abundance but they are primitievely undeveloped. Almost every country has hugh opportunities to very profitably develop at least some basic resources suchas agricultural or water resource but this does take capital from development banks. This has fproven to have very hugh payouts when and if the projects are successfully completed.
It is a real shame that this type of good work is so unknown to most Catholics who seem fixated on a distribution of resources from far away rather than developing resources where resources are lacking. Allowing people to develop what they have is far more permanenet and beneficial than having people depend on gifts of others to get basic resources such as food that they will need again and again. Places like India and China showed they were able to devlop and take care of themselves by development and trade.
I once waited, trying to be patient, in a store in Toronto where a Mid-Eatern woman was selling tons of lottery tickets. When I finally got up there to pay for my soda, I asked her, "Do you have gambling in your country back home." She laughed and told me she had become addicted to gambling and had to give it up, and asked me, "Don't you know that horse racing started in my part of the world?"
We laughed, and then had a good conversation about our lives, including a shared remark that "maybe gambling together can bring our countries together!"
Of course, this was in jest but brought out similarities.
The Bond idea is outstanding. A good way to bring two cultures together in a constructive manner.
Could we start doing this with student loans? Limit them to, say, 2% interest? [I won't go as far to suggest that Jesuit colleges take the lead in this :-)]
bill
Speaking of Jubilee, I understand that in Biblical times, every 50th year all debts were forgiven, prisoners freed, and land redistributed. The year of Jubilee has historically been seen as a time of great abundance and celebration. I'm so taken with the idea that my dog's name is "Jubilee".
http://www.pbs.org/wnet/ascentofmoney/
You can actually watch if for nothing on your computer but it is a lower quality version.
The Renaissance financiers got around the interest problem by calling the cost of borrowing money, a fee. In a short time the whole idea of objecting to interest disappeared as it became clear that the usury idea was actually harmful for people as it reduced trade and caused poverty.
This seems almost counter-intuitive to me-but if your point holds, 2% interest for student loans might stop colleges from growing? Financiers would be less likely to lend at 2% so many students wouldn't even get to go to college? And guys like me would be forced to leave? So what looks like a good idea is not a good idea?
Please explain more. And can you speculate on how government intervention mandating interest rates would be good/bad/unknown? And how does the Fed rate tie into this?
Or maybe I should take an economics course? bill
Watch the videos or get Ferguson's book and read it when you have time. The videos are entertaining and educational. They will certainly not provide anywhere near a total education on this topic but you will get a sense of the roller coaster events that result from encouraging economic activity. Average wealth is based on total wealth divided by the number of people. So anything that increases the total wealth will raise the average wealth. Now that does not guarantee that all will participate equally in this wealth generation process and that gets people riled up and has been the cause of much hostility since the world began. But there is no doubt that credit and risk taking have led to great increases in wealth over the centuries and to limit it is to then limit wealth creation and institutionalize poverty. So yes, enforcing usury laws is a form of poverty creation.
If one wants to subsidize education, then cheap interest loans are a way of doing that. But it is a transfer of money and it might be a good one but it is taking money from someone else to give to another. There is an argument going on in the country now about the education bubble (large increases in tuition over the inflation rate) and how that has been encouraged or caused by college loans. The universities know they can charge exorbitant fees because all their students can get loans.
http://www.realclearpolitics.com/articles/2010/09/06/the_higher_education_bubble_ready_to_burst_107029.html
One result of all this is that some students are entering the job market with incredible bills. So one could argue that cheaper college loans might just encourage even more irrational tuition increases and more debt for new graduates. Here is a story of a student who will not date because he does not want to saddle any potential mate with his $200,000 college bill.
http://www.thefrisky.com/post/246-dear-wendy-im-afraid-to-date-because-im-190000-in-debt/
This may be excessive but one of the things my wife and I are proud of is that none of our children owed a dime after graduating from college. But that is becoming more difficult as some of the tuitions, room and board at prestigious schools are approaching $50,000 a year.
You said that maybe you should take an economic course. For the past three weeks I have been sampling the video courses (all free) of Salman Khan. Most are on various forms of mathematics but there are several on economics, money and banking and investing. You might want to look at them in your spare time especially the banking ones. Here is the link. Just scroll down to you find the appropriate topic.
http://www.khanacademy.org/
The planet money podcast the other day talked about incentives in economic behavior. Many times what seems like a good incentive can produce very negative results. Certainly the incentive of providing easy financing for home ownership back fired in a major way. What could have been more desirable than providing inexpensive loans to help people get a home. Well we found out how that worked out. Millions are paying the cost of that noble experiment.
It would be very beneficial beneficial if Moslem state made development laans in the region to fellow Moslem states and and other nearby countries especially to establish more secure food sources and other basic commodities.
The reason almost all aid is really loans is there are always far more development projects than could ever be funded at on be time. like everything else in economic development money is a scarce resource. A small interest paymnet is the price of getting that scarce resource that helps allocate the resource toward the greatest need., These capitalistic principles have greatly aided the maximum possible denefit from the development monies available by charging a modest interest rate on the loan. Laons with interest is the way that international development of less developed countries is financed. When the loan and interest are paid off fresh new development loans thus increasing over time the amount of development funds that are available. This system of ldevelopment oans has worked very well since just after World War II. It would work for moslem countries.
Thanks for giving me things to follow up on. The theme of this article is a really good one. Economic interdependency would seem to me to be a good way to encourage peaceful cooperation. The details of how this gets done seem tricky and sometimes counter-intuitive. Again, grateful for your greater knowledge and experience in this area. bill