Usury

Wayne A.M. Visser and Alastair McIntosh provide a short, scholarly summary of history of this term in "A Short Review of the Historical Critique of Usury".¹ The religious prohibition against usury is found in all of the world religions. The first recorded use of the term "derives from the Vedic {basically, Hindu - e-hadj} texts of Ancient India (2,000-1,400 BC) in which the “usurer” (kusidin) is mentioned several times and interpreted as any lender at interest." The Christian tradition is found in Luke 6: 34-35: "And if ye lend to them of whom ye hope to receive, what thank have ye? for sinners also lend to sinners, to receive as much again. But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great, and ye shall be the children of the Highest: for he is kind unto the unthankful and to the evil.". However, the biblical usury theme borrows strongly from Judaism. Visser and McIntosh remark, "The Hebrew word for interest is neshekh, literally meaning "a bite" and is believed to refer to the exaction of interest from the point of view of the debtor." Perhaps the most famous literary reference to usury is Shakespeare's The Merchant of Venice, although I fear the Bard took the Hebrew for "bite" a bit too literally...

More recently, usury has generally been interpreted in both the religious and secular context to refer to the undesirable practice of lending at excessive rates, rather than as a ban on all interest-based lending. The exception is current-day Islam, and the growing practice of Islamic Banking.²

Many legal jurisdictions have usury laws that function to limit the amount of interest creditors may charge. In spite of the popularity of such laws for consumer advocates, these laws have been on the books in one form or another for ages, and owe their origin to the religious heritage of the word. One way to conceptualize this difference is, in the context of contemporary consumer protection, the debtor is the victim of usury and the creditor is the perpetrator; whereas in the Christian religious context, both the creditor and the debtor are harmed by usury; the creditor (or more accurately, his soul) is harmed because the worldly lure of interest perverts the Christian spirit of altruistic charity. Discussion of the economic implications of usury laws is addressed adequately by the interest node.

Commentary on the Other Contributions to this Node

Shanoyu claims the United States has wage slaves subjected to credit card usury. A wage slave is someone who is paid a wage, but is not free to quit their job, change jobs, or to attempt to organize for collective bargaining. That such slaves exist in the US is certainly news to me!

Its true many people don't manage their credit very well. Such people probably shouldn't be allowed to buy cigarettes, lotto tickets, etc. both of which are at least as "addictive" as credit cards. But, we permit all those things and more because freedom includes the freedom to screw up. Oh yeah: the "usual" way to get out of long term debt is not suicide or the lotto, its called personal bankruptcy. There are any number of outfits that will take you through this process, at little or no upfront cost; the good ones will even prevent you from making unrealistic repayment commitments. In the worse case, you can rack up mounds of debt, declare personal bankruptcy, and emerge a mere seven years later with a completely unblemished credit record.

Interest rates don't increase from 6% to 30% by magic. While the fine print of a typical credit card contract is quite dense, the basic outlines of the terms really aren't rocket science: the initial rate is promotional; there's an easy-to-read, legally required chart on or near the last page that shows the actual, non-promotional interest rate; pay your minimum payment on time, every time, and your interest rate will stay low, typically 9-15% which isn't bad for an unsecured loan. Pay your balance in full each month and you won't pay a single dime in interest! Use your card from time to time, pay your balances in full, and you may find (as this author found in the past year) offers to take out a cash advance at 3.9 percent, this rate guaranteed not to increase until the entire cash advance is paid back!

There are few barriers to entry in the credit providing business; you need to be little more than a local bank in order to start making loans and issue your own credit card using at one of at least three competing clearing houses (Visa/MC, Discover, or American Express). Because of this, the credit markets are competitive, interest rates stay reasonable as long as you play by the rules. Eliserh points out that usury statues exist in many states, but are effectively circumvented by states that keep their usury laws weak or non-existant in order to encourage credit card companies to set up shop in those states. Consumers presumably are aware that many states offer usury protection, as these laws are publicized by any number of institutions such as Consumer Reports Magazine, Ralph Nader's state Public Interest Research groups (e.g. NYPIRG, and each states own bureaucracy in charge of consumer protection. Yet consumers don't appear to find the protection afforded by credit cards issued in states with usury laws attractive. So strong usury laws probably aren't that necessary so long as you believe the consumer is capable of managing their own affairs rationally.

The only basis for Shanoyu's statements seems to be a barely acknowledged, wholesale acceptance of a fairly recent re-interpretation of traditional Adhesion Theory³ by the Critical Legal Studies or "Crits" movement, who are in turn indebted (if you'll forgive the pun) to such luminaries as Jacques Derrida and the Deconstruction movement. According to the Crits, average people cannot meaningfully be said to exercise informed consent and free will when entering into Contracts of Adhesion such as employment contracts or the credit card agreement. Therefore, it is the role of the government to unilaterally supersede the terms of contracts between nominally free, consenting, private parties. The Crit's points are philosophical; they are not necessarily based on an empirical judgment about how much workers are actually paid and how much interest they are actually charged. Even well-paid workers paying affordable interest rates are wage slaves paying usury, because they are part of a system that is giving them favorable treatment not for their benefit but for the system's own, nefarious reasons. Think "house slave" in the American antebellum South.

Only if one accepts the "Crit" theory, under which neither employment nor debt is voluntary, can one credibly argue that US creditors practice "usury" against "wage slaves". The pros and cons of the "Crit" movement are beyond the scope of this write-up. Sadly, Shanoyu adds little to the discussion, other than to vent in a GTKY fashion that is particularly galling in a node that should contain referential or historical information about this term.

Footnotes

1. First published in Accounting, Business & Financial History, 8:2, Routledge, London, July 1998, pp. 175-189. It's available at http://www.alastairmcintosh.com/articles/1998_usury.htm, accessed Oct. 10, 2003.

2. See for example the web site of the Islamic Party Of Britain, "The Facts About Usury: Why Islam Is Against Lending Money At Interest", at http://www.islamic-awareness.org/History/usury.html, accessed Oct 10, 2003.

3. Thanks eliserh for pointing out that traditional Adhesion Theory long predates the Critical Legal Studies movement. Traditional Adhesion Theory is certainly sufficient basis for certain usury laws, but such theory would dictate that the usury laws only take into account the provisions of the credit contract (e.g. are its terms "unconscionable") when "policing the bargain", and not the income of the debtor. A usurious contract is so regardless of whether the debtor party is well off or not. The usury statute from Ohio cited by eliserh is an example.

To get all the way to Shanoyu's finding of wage slaves subject to usury in the United States, one must, in my opinion, venture into Critical Legal Studies. I don't know enough about how the German law cited by eliserh interprets vague (in my opinion) terms such as "state of duress", "inexperience", "lack of judgment" or "substantial weakness of will" (!?!) but I suspect these are polite circumlocutions for what I'd call the socio-economic status of the debtor. If this is correct, the German usury law would draw from the Critical Legal Studies movement.

Usury is a criminal offence, which consists of charging interest in excess of a certain statutorily specified rate, whether the credit agreement is an adhesion contract or not. Two typical usury statutes are:

"Criminal usury" means illegally charging, taking, or receiving any money or other property as interest on an extension of credit at a rate exceeding twenty-five per cent per annum or the equivalent rate for a longer or shorter period, unless either:

(1) The rate of interest is otherwise authorized by law;
(2) The creditor and the debtor, or all the creditors and all the debtors are members of the same immediate family.

O.R.C. § 2905.21(H) (making criminal usury a felony of the fourth degree)

Usury

Whoever exploits the state of duress, inexperience, lack of judgment, or substantial weakness of will of another by obtaining for himself or a third party,

1. in exchange for the rental of residential space or related accessory services,
2. in exchange for an extension of credit,
4. in exchange for obtaining one of the aforementioned services from a third party,

a promise or guarantee of pecuniary advantages that are substantially disproportionate to the service or to the obtaining of said service, shall be liable to a fine. If several persons participate as service providers, brokers, or in any other way, sentence 1 shall apply to any of such persons who exploits the state of duress or other weakness of the other for himself or a third party in order to obtain an excessive pecuniary advantage. ¹

§ 291 Strafgesetzbuch (German Penal Code)

Statutes of this sort have been around for quite some time², going back at least to the days of canon law in Western Europe. The policy they advance is quite simple: protection of debtors from predatory lending practices. Without statutes limiting the amount of interest that a creditor could charge, creditors could easily guarantee themselves a lifetime of income simply by ensuring that the interest rate charged is too high to allow for full payment of the balance. While usury laws certainly also protect debtors who do not manage their credit well, it is no more accurate to claim that this is their sole purpose and effect than it would be to claim that fraud statutes are there to protect people who are too gullible to be allowed to participate in commerce anyway.

Of course, credit card companies in the United States have had little difficulty circumventing these statutes. Many will notice that their credit card is issued by a corporation that lists its address in South Dakota or another similarly nonpopulous state. There is a rather simple reason for choosing such a less-than-prestigious place for one's headquarters: the lack of usury laws. Coupled with densely-worded "choice of law" provisions in their contracts³, credit card companies can avoid any real limits on their ability to charge usurious interest.

The main — if not sole — source of protection for credit card holders in the United States is the Truth In Lending Act (TILA), which imposes certain disclosure requirements on lenders in order to prevent lenders from hiding exorbitant fees from customers. However, enforcement of TILA is spotty at best, and many lenders violate it with abandon.

¹Wucher

(1) Wer die Zwangslage, die Unerfahrenheit, den Mangel an Urteilsvermögen oder die erhebliche Willensschwäche eines anderen dadurch ausbeutet, daß er sich oder einem Dritten

1. für die Vermietung von Räumen zum Wohnen oder damit verbundene Nebenleistungen,
2. für die Gewährung eines Kredits,
3. für eine sonstige Leistung oder
4. für die Vermittlung einer der vorbezeichneten Leistungen

Vermögensvorteile versprechen oder gewähren läßt, die in einem auffälligen Mißverhältnis zu der Leistung oder deren Vermittlung stehen, wird mit Freiheitsstrafe bis zu drei Jahren oder mit Geldstrafe bestraft. Wirken mehrere Personen als Leistende, Vermittler oder in anderer Weise mit und ergibt sich dadurch ein auffälliges Mißverhältnis zwischen sämtlichen Vermögensvorteilen und sämtlichen Gegenleistungen, so gilt Satz 1 für jeden, der die Zwangslage oder sonstige Schwäche des anderen für sich oder einen Dritten zur Erzielung eines übermäßigen Vermögensvorteils ausnutzt.

(2) In besonders schweren Fällen ist die Strafe Freiheitsstrafe von sechs Monaten bis zu zehn Jahren. Ein besonders schwerer Fall liegt in der Regel vor, wenn der Täter

1. durch die Tat den anderen in wirtschaftliche Not bringt,
2. die Tat gewerbsmäßig begeht,
3. sich durch Wechsel wucherische Vermögensvorteile versprechen läßt.

²While e-hadj, above, seems to believe that usury statutes are somehow the outgrowth of the Critical Legal Studies movement, they have in fact existed for centuries, while CLS has been around for scarcely half a century.

³e-hadj also seems confused about the nature of adhesion contracts, ascribing the classification and the legal principles related to them to CLS, and (even more inexplicably) to Noam Chomsky. In fact, limits on contract terms based on notions of fairness, such as unconscionability, have been around for much longer than CLS or Noam Chomsky. Adhesion contracts are not treated differently based on a notion of "wage slavery," but because the consumer has no opportunity to negotiate with the merchant who drafted the terms, and thus must either accept the contract as written or reject the deal altogether. Because of this substantial difference from the traditional — invidiually negotiated — contract, courts and legislatures do more of what is called "policing the bargain," i.e. ensuring that neither side is exploiting the other's lack of bargaining power.

U"su*ry (?), n. [OE. usurie, usure, F. usure, L. usura use, usury, interest, fr. uti, p. p. usus, to use. See Use, v. t.]

1.

A premium or increase paid, or stipulated to be paid, for a loan, as of money; interest.

Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury. Deut. xxiii. 19.

Thou oughtest therefore to have put my money to the exchanges, and then at my coming I should have received mine own with usury. Matt. xxv. 27.

What he borrows from the ancients, he repays with usury of is own. Dryden.

2.

The practice of taking interest.

Usury . . . bringeth the treasure of a realm or state into a few nds. Bacon.

3. Law

Interest in excess of a legal rate charged to a borrower for the use of money.

⇒ The practice of requiring in repayment of money lent anything more than the amount lent, was formerly thought to be a great moral wrong, and the greater, the more was taken. Now it is not deemed more wrong to take pay for the use of money than for the use of a house, or a horse, or any other property. But the lingering influence of the former opinion, together with the fact that the nature of money makes it easier for the lender to oppress the borrower, has caused nearly all Christian nations to fix by law the rate of compensation for the use of money. Of late years, however, the opinion that money should be borrowed and repaid, or bought and sold, upon whatever terms the parties should agree to, like any other property, has gained ground everywhere.

Am. Cyc.

© Webster 1913.