The History of Usury

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Note a theme developing in the 20th century
Lobbyist and Special Interest Groups at work?

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The History of Usury

With credit to James M. Ackerman, Interest Rates and the Law: A History of Usury, 1981, Arizona St. L.J.61 (1981)
What do Hammurabi, Plato, Charlemagne, Dante and Queens Mary and Elizabeth have in common? They all condemned, outlawed or regulated the charging of interest on loans. In fact, until the early 1900s interest rates in the United States were kept at or near 10%. And until 1979, loan laws provided some interest rate cap in every state.

Then everything changed. Governments and banks put profits before people. And now the lending industry is spiraling out of control.

u·su·ry (yoo'zhe-ree) n.pl. u·su·ries

1. The practice of lending money and charging the borrower interest, especially at an exorbitant or illegally high rate. 2. An excessive or illegally high rate of interest charged on borrowed money. 3. Archaic. Interest charged or paid on a loan.

Old Testament


The Prophet Ezekiel includes usury in a list of “abominable things,” along with rape, murder, robbery and idolatry. Ezekiel 18:19-13.


Jews are forbidden to lend at interest to one another. Exodus 22:25; Deuteronomy 23:19-20, Leviticus 25:35-37.

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1750 B.C.


The Code of Hammurabi regulates the interest that can be charged on a loan. Historical records indicate that many loans were made below the legal limit.

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800-600 B.C.


Both Plato and Aristotle believed usury was immoral and unjust. The Greeks at first regulate interest, and then deregulate it. After deregulation, there was so much unregulated debt that Athenians were sold into slavery and threatened revolt.

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443 B.C.


The Romans adopt the “Twelve Tables” and cap interest at 8 1/3%.

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88 B.C.


The Roman usury rate is raised to 12%.

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533 A.D.


The Roman “Code of Justinian” sets a graduated maximum interest rate that did not go over 8 1/3 % for loans to ordinary citizens. This law lasts until 1543 A.D.

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7th century


The Quran 2:275-276 states: "...those you take usury will arise on the Day of Resurrection like someone tormented by Satan's touch. That is because they say 'Trade and usury are the same,' But God has allowed trade and forbidden usury. Whoever, on receiving God's warning, stops taking usury make keep his past gains -- God will be his judge -- but whoever goes back to usury will be an inhabitant of the Fire, therein to remain."

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800 A.D.


Charlemagne outlaws interest throughout his empire.

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11th century


In England, the taking of any interest at all is punishable by taking the usurer’s land and chattels.

Medieval Canon Law


Usury is punishable by ex-communication.

Medieval Roman Law


Usurer’s are fined 4X the amount taken, while robbery is penalized at twice the amount taken.

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1306-1321


Dante pens “The Inferno,” in which he places usurers at the lowest ledge in the seventh circle of hell – lower than murderers.

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1553-1558


During the reign of Queen Mary, English Parliament again disallows the collection of interest.

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1570


During the Reign of Queen Elizabeth, interest rates in England are limited to under 10%. This law lasts until 1854.

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Early 18th Century


American colonies adopt usury laws, setting the interest cap at 8%.

After 1776

All of the States in the Union adopt a general usury. Most states set the interest limit at 6%.

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Early 1900s


A move to deregulation causes 11 states to eliminate their usury laws. Nine more states raise the usury cap to 10% or 12%. Banks are not making personal loans. “Salary Lenders” fill the need by “purchasing” a worker’s future wages in exchange for a high fee – equal to a lending rate of 10% - 33%.

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1916


A Uniform Small Loan Law allows specially-licensed lenders to charge higher interest rates—up to 36%—in return for adhering to strict standards of lending.

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1945-1979


All states adopt special loan laws that cap interest at higher than the general usury rate—at 36%—but cap it nevertheless.
1977 The federal government passes the “Community Reinvestment Act” (CRA) which requires banks to invest in their communities.

1978


The US Supreme Court decides that national banks may export the state interest rate law of their home state into any state where they do business. In response, South Dakota eliminates its interest rate caps. Several credit card issuing banks move to South Dakota and operate nationally with no interest rate cap.

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1980


Congress preempts state interest rate controls on all first lien mortgages. This enables predatory mortgage lenders to make seemingly affordable loans, like adjustable rate and interest-only loans, that lead to foreclosure for many.

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1994


Congress adopts the Home Ownership and Equity Protection Act of 1994, which provides some substantive protections to home mortgage borrowers with interest rates or points that are extraordinarily expensive, but sets no limits on what can be charged for these loans.

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1994-2005


Many states and cities try to protect their citizens by adopting state statutes and local ordinances to curb predatory lending, but preemption claims by the federal government impede their efforts. Numerous bills are introduced in Congress to protect consumers in a wide range of transactions, including rent-to-own, credit cards, payday lending, and predatory mortgage lending, but none of these bills makes it to a hearing.
2001-2007 Predatory and mainly subprime lenders make home loans to people who cannot afford them, boosting their own profits in the short term. Many of these loans are packaged and sold to Wall Street.
2005 After extensive pressure from the industry, the federal government changes bankruptcy laws, making it harder for consumers to discharge debts and get a clean start in bankruptcy.

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2006


Congress passes the “Talent Amendment” which to caps interest on loans made to active military personnel and their families at 36%, reacting to findings that high-cost payday lenders had been targeting the military.

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2007


Foreclosure rates begin to increase dramatically as a result of predatory mortgage lending.

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The launch of Americans for Fairness in Lending (AFFIL), a national multi-organization collaborative message and action campaign designed to raise public awareness and generate outrage about predatory lending.
2008 Unpaid mortgages cause mortgage-backed securities on Wall Street to continue to "go bad," triggering widespread economic downturn in both the United States and around the world. Some commercial and investment banks go bankrupt, and some are the object of government "bailouts."

http://www.affil.org/consumer_rsc/usury.php

[terisan]

1. South Dakota & Delaware: 2 small population states whose Credit Card policies hurt millions.

They had been represented in congress by 2 powerful Senatiors-Daschle and Biden--one of whom is in a position of immense power in Washington as Vice president; the other of whom was almost in a position of immense power in Washington as Health Czar and Secretary of Health and Human Services.

While I think it may be possible for leopards to change their stripes--I believe it is a very rare event.

Are their any DU members from South Dakota and Delaware who might speak to the credit card industries in their states?

[PSPS]

2. Interesting, but somewhat slanted in its recap of contemporary times

History is always interesting. But this "Americans for Fairness in Lending" conveniently leaves out many important things that are responsible for the current financial turmoil.

It describes itself as being formed because, among other things, "many families were overwhelmed by credit problems and soaring debt burdens." Well, OK. One could rightfully say that wages have been stagnant for over 20 years. Thirty years ago, a family could maintain a decent standard of living, educate the children and keep food "on the family" with a single income. Reagan brought an end to that, and families required two incomes to get by. Among other things, Reagan shifted the overall tax burden in the country from income tax to the payroll tax, which only taxes wages under $97,500 today. This is supposed to be allocated to Social Security, but Reagan began the practice of having the government "borrow" from the Social Security Trust Fund to make up for the missing revenue from income taxes, thus driving Social Security into theoretical insolvency. Thus began the demise of two things most loathed by the wealthy right-wing: Social Security and the government itself.

Anyway, back to this "history of usury." The agenda of this outfit is revealed in this snippet:

2001-2007 Predatory and mainly subprime lenders make home loans to people who cannot afford them, boosting their own profits in the short term.

Notice how they leave out the word "available." Lenders made such home loans "available" to people. Nobody forced people to sign up for them. This is an important distinction because, without the word "available," one might be led to believe that people had no choice but to take out these loans. In fact, they did have a choice. It's just that greed and avarice got in their way. Instead of purchasing a house they could afford, they went for the $750K McMansion with a no-doc option-ARM NINJA loan that, for the first two to five years, permitted the borrower to make virtually any payment, sometimes no payment at all. They would think to themselves that, before the loan recast, they could either refinance it with another NINJA loan or just "flip" the house. Then they would have gotten away with their charade. In the meantime, a procession of Home Equity Lines of Credit could be obtained to finance the BMW, boat, $20K cruises and boob jobs.

Unfortunately for them, the house of cards fell down leaving most of them holding the bag. Now they're stuck with a mortgage they can't afford on a house that was never worth the price they agreed to pay for it.

So along come articles like this that try to frame the problem as being one of "predatory lenders" instead of what it really is -- a problem created by their own greed and avarice. These borrowers knew what they were doing. And, now that they've been caught, they're looking for any flimsy excuse they can to shift the blame onto someone or anything else so they can continue the charade. Only, this time, they want the taxpayer to pony up the cost of their malfeasance.

And I don't like it.

[notesdev]

3. Telling it like it is

Glad to see I'm not the only one aware of just how egregious borrower behavior was in so many cases - some seem to like to pretend that borrowers were angelic dupes.

I don't own a home. Why should I pay for one for someone whose eyes were bigger than their wallet?

[Kat45]

4. Some borrowers fit into that category, but certainly not all of them.

Other borrowers were naive, uneducated on economic matters, capable for paying their mortgages until losing their well-paying jobs and not being able to find another...and a myriad of other things. The greed an avarice of lenders preyed on all kinds of people. Sure, there is plenty of blame to go around but I would say that the bulk of it goes to the lenders.

[PSPS]

6. My description applies to most of them

If you look at foreclosure statistics, you'll see that the very large majority of these defaulting loans were just the type I described -- people intentionally exposing themselves to risk by buying more than they could afford.

All lending institutions that offered these no-doc NINJA loans also offered normal mortgages that required income documentation and down payments. In fact, the NINJA loans came with a higher interest rate. So why would anyone intentionally sign up for a higher interest rate? Simple. They didn't want to have to document their inadequate income to cover that $750K McMansion. In other words, they were fully cognizant of what they were doing.

These people must lose their houses. Doing anything else will just forestall the necessary downward adjustment of housing prices back to affordable levels. The sooner the air is let out of the bubble, the faster we'll have a working economy again.

On the other hand, those who did buy within their means and, because of job loss or catastrophic medical expense, they just can't quite make the mortgage payment are worthy of some assistance. And Obama's plan, so far, seems to limit its benefits to these people. As I understand it, the 80-105%/FHA requirement will exclude all the liar's loans.

[Kat45]

5. Thank you for this. I never knew that loans were once interest-free.

I've realized for quite some time that usury is rampant, but I had no idea that loans were ever granted without at least some reasonable interest. Good history lesson.

[Terry in Austin]

7. Usury, the heart of capitalism

That's one message here, for sure. Thanks for this post, because it cuts through a lot of BS about the "C" word.

Lending money at interest is the defining activity of capitalism. Take it away, and you no longer have capitalism. It's a "stupid money trick," a flaw in the very idea of money that people found they could exploit very early in the game.

Make money with money, rather than by productive work -- hey, what's not to like? Small wonder that there were so many historical prohibitions against it.