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TOWARDS
EXPLORING THE POTENTIAL OF
MARKET
LUCA
OWARDS A MORAL BANKING SYSTEMOTENTIAL OF NON-PROFIT FINANCIAL INSTITUTIONS IN A
ARKET ORIENTED ECONOMY
UCA L. HICKMAN
YSTEM: NSTITUTIONS IN A
Luca L. Hickman
TOWARDS
EXPLORING THE POTENTIAL OF
MARKET
MISES
OCTOBER
Submitted By:
Contact Information:
Date of Submission:
Key Words:
Presentation Date:
2
OWARDS A MORAL BANKING SYSTEMOTENTIAL OF NON-PROFIT FINANCIAL INSTITUTIONS IN A
ARKET ORIENTED ECONOMY
ISTITUTO BRUNO LEONI
ISES SEMINAR, SIXTH EDITION
CTOBER 9-11, 2009 SESTRI LEVANTE, ITALY
Submitted By: Luca L. Hickman
Contact Information:
926 E. Auer Ave., Milwaukee, WI 53212
United States of America • 414-303
Institution: Milwaukee School of Engineering
Date of Submission: August 10, 2009
JEL Codes: G21, G28, G32, L30, E51, E31,E41, E42, E43, E44
Key Words: Non-Profit Finance, Interest-Based Banking, Moral Banking, Currency Debasing, Islamic Banking, Fractional Reserve Banking
Presentation Date: October 11, 2009
Discussant: Kevin Dowd, University of Nottingham
YSTEM: NSTITUTIONS IN A
926 E. Auer Ave., Milwaukee, WI 53212
303-9088 •
G21, G28, G32, L30, E51, E31,E41, E42, E43, E44
Based Banking, Moral Banking, Currency Debasing, Islamic Banking,
Kevin Dowd, University of Nottingham
Towards a Moral Banking System
Copyright © 2009 Luca L. Hickman
All rights reserved, including the right of reproduction in whole or in part in any for
of this publication may be reproduced or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or any information storage or retrieval system now
known or to be invented, without written permission of the aut
brief quotations in a review.
3
Copyright © 2009 Luca L. Hickman
All rights reserved, including the right of reproduction in whole or in part in any for
of this publication may be reproduced or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or any information storage or retrieval system now
known or to be invented, without written permission of the author, except for the inclusion
All rights reserved, including the right of reproduction in whole or in part in any form. No part
of this publication may be reproduced or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or any information storage or retrieval system now
hor, except for the inclusion of
Towards a Moral Banking System
Upon the outermost
Head of that seventh circle…
Where sat the melancholy folk (the usurers)
Out of their eyes
—Dante
(Divine Comedy
5
Upon the outermost
Head of that seventh circle…
Where sat the melancholy folk (the usurers)
Out of their eyes was gushing forth their woe.
Dante Alighieri
(Divine Comedy, Inferno: Canto V
Luca L. Hickman
INTRODUCTION ................................
Financial Foundations ................................
Interest, Inflation and Fractional Reserve Lending
Topical Preview ................................
Personal Motives and Bias ................................
WHAT IS USURY? ................................
From Usury to Interest—A Slow Revolutio
Islamic Definitions ................................
Author’s Definition ................................
USURY AND MORALITY ................................
Logical Investigation ................................
Jewish Teachings ................................
Christianity and Usury ................................
Traditional Positions ................................
Islam and Usury ................................
Inter-Religious Agreement ................................
FRACTIONAL RESERVE BANKING
Logical Investigation ................................
Money Creation and Morality
TOWARDS A MORAL BANKING S
An Alternative System ................................
Financial Reform Goals ................................
Moral Justification for a Value
Reconciliation with Mises ................................
CAVEAT AND CONCLUSION ................................
Reform ................................................................
Urgency of Reform ................................
One Final Thought ................................
ABOUT THE AUTHOR ................................
Work and Personal Interests ................................
BIBLIOGRAPHY ................................
ENDNOTES ................................................................
6
TABLE OF CONTENTS
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nal Reserve Lending ................................................................
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A Slow Revolution ................................................................
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ANKING AND MORALITY ................................................................
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SYSTEM ...............................................................................................
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Moral Justification for a Value-Based System ................................................................
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Luca L. Hickman
Often the masses are plundered and do not know it.
Financial Foundations
In Matthew 7: 24-27, Jesus gave this parable:
Everyone then who hears these words of mine and does them will be like a wise man who built his house on the rock. And the rain fell, and the floods came, and the winds blew and beat on that house, but it did not fall, because it had been founded on the rock. And everyone who hears these words of mine and does not do them will be like a foolish man who built his house on the sand. And the rain fell, and the floods came, and the winds blew and beat against that house, and it fell, and great was the fall of it.
This passage teaches the importance of building one’s life upon a proper foundation. The
foolish man built his home without first selecting the right base; losing everything once the
trials and storms of life blew in. The wise man, however, founded his home upon solid ground.
When troubles attacked, he survived, drawing strength from the unshak
The financial and popular press is awash in stories decrying the current economic situation as a
growing disaster, “an economic storm”, a “financial tsunami”. How then can one expect the
superstructure of the global economy to respond to s
question, one must first examine not the superstructure itself, but the very foundations upon
which it is built.
One, if not the chief, foundation of the modern financial system is the ubiquitous use of debt
based financial instruments. Chief amongst such instruments is the pervasive practice of
lending money at interest. This practice, all but universally adopted in the West and the Orient,
was not so universal only centuries ago. In fact, a great debate once
Christendom about the morality of lending money at interest. Though this debate has largely
been de facto resolved throughout the West, small pockets of resistant thought have
persevered—with varying influence of the centuries.
In order to fully appreciate the depth of the current crisis
subprime mortgages, a sort of step
examining this deepest of foundations. Doing so can both deepen insights and g
ideas.
8
INTRODUCTION
Often the masses are plundered and do not know it.
—
��������
27, Jesus gave this parable:
Everyone then who hears these words of mine and does them will be like a wise man on the rock. And the rain fell, and the floods came, and the winds
blew and beat on that house, but it did not fall, because it had been founded on the rock. And everyone who hears these words of mine and does not do them will be like a foolish
built his house on the sand. And the rain fell, and the floods came, and the winds blew and beat against that house, and it fell, and great was the fall of it.1
This passage teaches the importance of building one’s life upon a proper foundation. The
lish man built his home without first selecting the right base; losing everything once the
trials and storms of life blew in. The wise man, however, founded his home upon solid ground.
When troubles attacked, he survived, drawing strength from the unshaken foundation.
The financial and popular press is awash in stories decrying the current economic situation as a
growing disaster, “an economic storm”, a “financial tsunami”. How then can one expect the
superstructure of the global economy to respond to such rain, floods and wind? To answer that
question, one must first examine not the superstructure itself, but the very foundations upon
One, if not the chief, foundation of the modern financial system is the ubiquitous use of debt
d financial instruments. Chief amongst such instruments is the pervasive practice of
lending money at interest. This practice, all but universally adopted in the West and the Orient,
was not so universal only centuries ago. In fact, a great debate once raged throughout
Christendom about the morality of lending money at interest. Though this debate has largely
resolved throughout the West, small pockets of resistant thought have
with varying influence of the centuries.
r to fully appreciate the depth of the current crisis—a crisis that owes its start to a
subprime mortgages, a sort of step-child of interest-based finance—one ought to begin by
examining this deepest of foundations. Doing so can both deepen insights and g
—Frederic Bastiat
Everyone then who hears these words of mine and does them will be like a wise man on the rock. And the rain fell, and the floods came, and the winds
blew and beat on that house, but it did not fall, because it had been founded on the rock. And everyone who hears these words of mine and does not do them will be like a foolish
built his house on the sand. And the rain fell, and the floods came, and the
This passage teaches the importance of building one’s life upon a proper foundation. The
lish man built his home without first selecting the right base; losing everything once the
trials and storms of life blew in. The wise man, however, founded his home upon solid ground.
en foundation.
The financial and popular press is awash in stories decrying the current economic situation as a
growing disaster, “an economic storm”, a “financial tsunami”. How then can one expect the
uch rain, floods and wind? To answer that
question, one must first examine not the superstructure itself, but the very foundations upon
One, if not the chief, foundation of the modern financial system is the ubiquitous use of debt-
d financial instruments. Chief amongst such instruments is the pervasive practice of
lending money at interest. This practice, all but universally adopted in the West and the Orient,
raged throughout
Christendom about the morality of lending money at interest. Though this debate has largely
resolved throughout the West, small pockets of resistant thought have
a crisis that owes its start to a
one ought to begin by
examining this deepest of foundations. Doing so can both deepen insights and generate new
Luca L. Hickman
Interest, Inflation and Fractional Reserve
Before one further examines interest
interdependent relationship between this and two other ills: Inflation and fractional reserve
lending.
Though many reading this will undoubtedly be familiar with this account of the origins of
fractional reserve banking, it is nonetheless useful to hear it afresh. The great Austrian scholar
Dr. Gary North explained that at one time, goldsmiths functioned
He explained that:
A goldsmith accepts gold bullion as a deposit from a gold owner who wants to have the goldsmith fashion the gold into something lovely. The goldsmith issues a receipt for this specific quantity and fineness of with the receipt, as if it were gold. The receipt is "as good as gold."
Next, the goldsmith discovers something wonderful for him. He can issue receipts for gold for which there is no gold in reserve. Treserve receipts. They are "as good as what is as good as gold." He can spend them into circulation. Better yet, he can loan them into circulation and receive interest. The new money is cheaper to produce than mrestriction of the money supply that is imposed by the cost of mining is now removed.
This version of fractional reserve lending is particularly interesting in the way it directly ties the
origins of this practice to lending at interest. Nevertheless, the most important thing to
remember about fractional reserve lending is its implicit creation of money. Note, this is the
creation of money, not wealth, a distinction which will become more important, a
evident, later.
It is also imperative that the reader recall the connections between fractional
money generating effects, and general economic inflation. As the great American politician,
author, and Austrian School proponent
Ludwig von Mises used to say that governments will always try to get people to focus on prices when thinking about inflation. But rising prices are a inflation itself. Inflation is the increase in the money supply.
Thus, fractional reserve banking and lending money at are inextricably linked to inflation. Von
Mises himself recognized this relationship, and in his 1951 essay
recommended the following course of action:
The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must not be increased by further issuance. No bank must be p
9
Interest, Inflation and Fractional Reserve Lending
Before one further examines interest-based finance, one must first understand the
interdependent relationship between this and two other ills: Inflation and fractional reserve
Though many reading this will undoubtedly be familiar with this account of the origins of
fractional reserve banking, it is nonetheless useful to hear it afresh. The great Austrian scholar
Dr. Gary North explained that at one time, goldsmiths functioned much as bankers do today.
A goldsmith accepts gold bullion as a deposit from a gold owner who wants to have the goldsmith fashion the gold into something lovely. The goldsmith issues a receipt for this specific quantity and fineness of gold. The recipient then finds that he can buy things with the receipt, as if it were gold. The receipt is "as good as gold."
Next, the goldsmith discovers something wonderful for him. He can issue receipts for gold for which there is no gold in reserve. These receipts circulate as if they were 100% reserve receipts. They are "as good as what is as good as gold." He can spend them into circulation. Better yet, he can loan them into circulation and receive interest. The new money is cheaper to produce than mining the gold that each receipt promises to pay. The restriction of the money supply that is imposed by the cost of mining is now removed.
This version of fractional reserve lending is particularly interesting in the way it directly ties the
his practice to lending at interest. Nevertheless, the most important thing to
remember about fractional reserve lending is its implicit creation of money. Note, this is the
creation of money, not wealth, a distinction which will become more important, a
It is also imperative that the reader recall the connections between fractional-reserve lending’s
money generating effects, and general economic inflation. As the great American politician,
author, and Austrian School proponent Congressman Ronald Paul once reminded his readers:
Ludwig von Mises used to say that governments will always try to get people to focus on prices when thinking about inflation. But rising prices are a result of inflation, not
is the increase in the money supply.3
Thus, fractional reserve banking and lending money at are inextricably linked to inflation. Von
Mises himself recognized this relationship, and in his 1951 essay The Return to Sound Money
g course of action:
The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must not be increased by further issuance. No bank must be permitted to expand the total
based finance, one must first understand the
interdependent relationship between this and two other ills: Inflation and fractional reserve
Though many reading this will undoubtedly be familiar with this account of the origins of
fractional reserve banking, it is nonetheless useful to hear it afresh. The great Austrian scholar
much as bankers do today.
A goldsmith accepts gold bullion as a deposit from a gold owner who wants to have the goldsmith fashion the gold into something lovely. The goldsmith issues a receipt for this
gold. The recipient then finds that he can buy things
Next, the goldsmith discovers something wonderful for him. He can issue receipts for hese receipts circulate as if they were 100%
reserve receipts. They are "as good as what is as good as gold." He can spend them into circulation. Better yet, he can loan them into circulation and receive interest. The new
ining the gold that each receipt promises to pay. The restriction of the money supply that is imposed by the cost of mining is now removed.2
This version of fractional reserve lending is particularly interesting in the way it directly ties the
his practice to lending at interest. Nevertheless, the most important thing to
remember about fractional reserve lending is its implicit creation of money. Note, this is the
creation of money, not wealth, a distinction which will become more important, as well as
reserve lending’s
money generating effects, and general economic inflation. As the great American politician,
Congressman Ronald Paul once reminded his readers:
Ludwig von Mises used to say that governments will always try to get people to focus on of inflation, not
Thus, fractional reserve banking and lending money at are inextricably linked to inflation. Von
The Return to Sound Money he
The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must
ermitted to expand the total
Luca L. Hickman
amount of its deposits subject to check or the balance of such deposits of any individual customer, be he a private citizen or the U.S. Treasury, otherwise than by receiving cash deposits in legal-tender banknotes from the publanother domestic bank subject to the same limitations. This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day of the reform.4
Mises himself clearly stood opposed to such modern financial practices, as have many others,
including other prominent economists.
However, to disagree with something on the basis of economic reasoning is quite different from
disagreeing for religious reasons. Some time ago
friend from Kuwait, when he learned that Islamic law forbids the practice of lending money at
interest. From other conversations and personal study, it became clear that a traditionalist
reading of the Judeo-Christian scriptures likewise seemed to condemn this practice. It was at
this point that the author first seriously began examining
reasons behind why one might oppose interest
Topical Preview
What follows is a condensation and analysis of the authors research into these two areas
morality and the economics behind interest
already known and many great economists have expounded on th
institutions, the beginning of this paper focuses on a moral examination of both lending money
at interest, and of maintaining less than a 100% reserve ratio. This examination is done using
the foundational writings as well as imp
three great monotheistic traditions
Next, this paper describes an alternative approach to these current, morally questionable
financial practices. Afterwards, this p
general feasibility. This paper then concludes by comparing and contrasting elements
associated with both the current and the proposed financial institution model.
Personal Motives and Bias
For the sake of credibility and intellectual honesty, it is necessary for the reader to have some
notion of the author’s motives in writing this paper. It is the author’s personal contention that
the practice of lending money at interest is immoral and incomp
Christian or an Islamic worldview.
of fraction-reserve induced inflation is an unjust and unnecessary
debasement. As such, it was the author’s g
solution to reconcile liquidity and efficiency in wealth allocation with a non
reserve banking system. It was within this biased, ideological framework that all research and
work was conducted.
10
amount of its deposits subject to check or the balance of such deposits of any individual customer, be he a private citizen or the U.S. Treasury, otherwise than by receiving cash
tender banknotes from the public or by receiving a check payable by another domestic bank subject to the same limitations. This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day
ly stood opposed to such modern financial practices, as have many others,
including other prominent economists.
However, to disagree with something on the basis of economic reasoning is quite different from
disagreeing for religious reasons. Some time ago, the author was discussing these issues with a
friend from Kuwait, when he learned that Islamic law forbids the practice of lending money at
interest. From other conversations and personal study, it became clear that a traditionalist
Christian scriptures likewise seemed to condemn this practice. It was at
this point that the author first seriously began examining both the morality and the economic
reasons behind why one might oppose interest-based, fractional reserve lending.
What follows is a condensation and analysis of the authors research into these two areas
morality and the economics behind interest-based, fractional reserve lending. Since much is
already known and many great economists have expounded on the economics behind these
institutions, the beginning of this paper focuses on a moral examination of both lending money
at interest, and of maintaining less than a 100% reserve ratio. This examination is done using
the foundational writings as well as important religious teachings associated with the
monotheistic traditions—Christianity, Islam and Judaism.
Next, this paper describes an alternative approach to these current, morally questionable
financial practices. Afterwards, this paper subjects this proposal to tests of moral, economic and
general feasibility. This paper then concludes by comparing and contrasting elements
associated with both the current and the proposed financial institution model.
the sake of credibility and intellectual honesty, it is necessary for the reader to have some
notion of the author’s motives in writing this paper. It is the author’s personal contention that
the practice of lending money at interest is immoral and incompatible with either a Judeo
stian or an Islamic worldview.5 It is also the author’s personal contention that the practice
reserve induced inflation is an unjust and unnecessary vehicle of currency
As such, it was the author’s guiding intent to develop a plausible theoretical
solution to reconcile liquidity and efficiency in wealth allocation with a non-usurious
reserve banking system. It was within this biased, ideological framework that all research and
amount of its deposits subject to check or the balance of such deposits of any individual customer, be he a private citizen or the U.S. Treasury, otherwise than by receiving cash
ic or by receiving a check payable by another domestic bank subject to the same limitations. This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day
ly stood opposed to such modern financial practices, as have many others,
However, to disagree with something on the basis of economic reasoning is quite different from
, the author was discussing these issues with a
friend from Kuwait, when he learned that Islamic law forbids the practice of lending money at
interest. From other conversations and personal study, it became clear that a traditionalist
Christian scriptures likewise seemed to condemn this practice. It was at
the economic
based, fractional reserve lending.
What follows is a condensation and analysis of the authors research into these two areas—the
based, fractional reserve lending. Since much is
e economics behind these
institutions, the beginning of this paper focuses on a moral examination of both lending money
at interest, and of maintaining less than a 100% reserve ratio. This examination is done using
with the world’s
Next, this paper describes an alternative approach to these current, morally questionable
aper subjects this proposal to tests of moral, economic and
general feasibility. This paper then concludes by comparing and contrasting elements
the sake of credibility and intellectual honesty, it is necessary for the reader to have some
notion of the author’s motives in writing this paper. It is the author’s personal contention that
atible with either a Judeo-
It is also the author’s personal contention that the practice
vehicle of currency
uiding intent to develop a plausible theoretical
usurious, full-
reserve banking system. It was within this biased, ideological framework that all research and
Luca L. Hickman
He that plants thorns must never expect to gather roses.
From Usury to Interest—A Slow Revolution
James Buchanan once remarked that revolutions begin in dictionaries
supported by Orwell’s work on politics and language. Such is the case regarding usury, interest
and modern finance. To most, charging interest for monies lent is a natural
function of the financial system.
charged in excess of the rate permissible under civil law.
modern definitions of usury and
degrees. Yet the fickle, statutory distinction
increase compared to another) are
The full, classical meaning of the word
and interest. Usury comes from the Latin noun
specifically the use of borrowed capital. Thus the original meaning for usury wa
for the use of money.7 For centuries, Western scholars drew no moral, economic, or legal
distinctions between degrees of increase. Whether one earned a ten percent or a ten thousand
percent return on a loan, increase was increase, thus u
Thus it remained until the thirteenth or fourteenth century when “interesse” began its long
crawl into the lexicon.8 Interest comes from a Roman legal concept “where it was considered the
difference between the lender’s or other injured p
would have stood if he had not loaned.”
intereo, meaning “to be lost”.10 But this view of interest as damages gives rise to an all
important question: Should “damages” include the profit which the lender might have made
with the money loaned?
If the answer is yes, then maximum interest rates may be seen as a sort of societal
acknowledgement of acceptable recompense for opportunity costs. If the answer is
interest in the classical sense should not include the loss of potential profit, then it is by
definition limited to such things as the fixed costs of making the loan. From the author’s
research, it would appear that it was on this question, whet
damages, that the modern civil distinction between usury and interest was born.
This civil distinction was dramatically reinforced in 1461 when Barbarus, Governor of Perugia,
instituted the first mons pietatis—
11
WHAT IS USURY?
He that plants thorns must never expect to gather roses.
—Pilpay
��������
A Slow Revolution
James Buchanan once remarked that revolutions begin in dictionaries—an assertion strongly
supported by Orwell’s work on politics and language. Such is the case regarding usury, interest
most, charging interest for monies lent is a natural—nay, fundamental
function of the financial system. Usury, to those few acquainted with the term, refers to interest
charged in excess of the rate permissible under civil law.6 It cannot be stressed eno
and interest describe exactly the same behavior, only in varying
statutory distinctions between the two (i.e. lending at one rate of
) are modern contrivances.
full, classical meaning of the word usury encompassed the modern definitions of both
comes from the Latin noun usura meaning the “use” of anything
specifically the use of borrowed capital. Thus the original meaning for usury wa
For centuries, Western scholars drew no moral, economic, or legal
distinctions between degrees of increase. Whether one earned a ten percent or a ten thousand
percent return on a loan, increase was increase, thus usury was usury.
Thus it remained until the thirteenth or fourteenth century when “interesse” began its long
comes from a Roman legal concept “where it was considered the
difference between the lender’s or other injured party’s present position and that in which he
would have stood if he had not loaned.”9 This explains why interest stems from the Latin verb
But this view of interest as damages gives rise to an all
ld “damages” include the profit which the lender might have made
If the answer is yes, then maximum interest rates may be seen as a sort of societal
acknowledgement of acceptable recompense for opportunity costs. If the answer is
interest in the classical sense should not include the loss of potential profit, then it is by
definition limited to such things as the fixed costs of making the loan. From the author’s
research, it would appear that it was on this question, whether loss of potential profit construed
damages, that the modern civil distinction between usury and interest was born.
This civil distinction was dramatically reinforced in 1461 when Barbarus, Governor of Perugia,
—a public pawnshop “financed by charitable donations and run
Pilpay
an assertion strongly
supported by Orwell’s work on politics and language. Such is the case regarding usury, interest
nay, fundamental
, to those few acquainted with the term, refers to interest
It cannot be stressed enough, that
describe exactly the same behavior, only in varying
lending at one rate of
encompassed the modern definitions of both usury
meaning the “use” of anything—
specifically the use of borrowed capital. Thus the original meaning for usury was the price paid
For centuries, Western scholars drew no moral, economic, or legal
distinctions between degrees of increase. Whether one earned a ten percent or a ten thousand
Thus it remained until the thirteenth or fourteenth century when “interesse” began its long
comes from a Roman legal concept “where it was considered the
arty’s present position and that in which he
stems from the Latin verb
But this view of interest as damages gives rise to an all
ld “damages” include the profit which the lender might have made
If the answer is yes, then maximum interest rates may be seen as a sort of societal
acknowledgement of acceptable recompense for opportunity costs. If the answer is no, and
interest in the classical sense should not include the loss of potential profit, then it is by
definition limited to such things as the fixed costs of making the loan. From the author’s
her loss of potential profit construed
damages, that the modern civil distinction between usury and interest was born.
This civil distinction was dramatically reinforced in 1461 when Barbarus, Governor of Perugia,
blic pawnshop “financed by charitable donations and run
Luca L. Hickman
for the benefit of the poor.”11 Yet Barbarus’ pawnshops charged borrowers at a 6% rate to pay
for operational expenses.12 Despite theological opposition, Pope Paul II approved of this
system, agreeing that “sums repaid above the principle were not usury but were interest
contributions [i.e. damages] to defray the cost of operation.”
as Homer and Sylla explain, “the idea of institutional loans at interest became establ
overwhelmingly accepted.”14
Thus was born the peculiar separation between lending money above or below a
governmentally approved rate. To lend above rendered one guilty of usury, and the manifold
condemnations which are still associated with th
gain and prestige; rendering one a servant of the poor, as under Barbarus, or a patriot, as under
the defense loans made to states like Venice, Florence and Genoa.
Islamic Definitions
So far, the history of usury and interest discussed comes from a wholly Western perspective.
Yet at the same time Western scholars and financiers began separating interest from usury, the
Muslim world had its own advanced and robust approach to finance. In this issue of
definitions, however, the Muslim world seems far less ambiguous about its approach to lending
money at a rate of increase.
Islamic jurists and economist alike make frequent reference to
“increase, excess, growth, rise, etc.”
In the pre-Islamic period the word business transactions. The common feature of these transactions was that a fixed amount was required over the principal due.
Lewis and Algaoud refine this, formally defining
A monetary advantage without a countervalue which has been stipulated in favor of one of the two contracting parties in an exchange of two monetary values.
It is important to note that ribā in Islam, much like
limited to interest on a loan. Ribā
and ribā al-buyu. The former relates to usury involving loans, while the latter
involving trade.19 However, this second form of
scope of this paper, and will not be considered here. Thus whenever
reference to interest.
Author’s Definition
What moderns call “interest” and ancient
rose by any other name.” Blackstone reasoned well when he quipped that:
12
Yet Barbarus’ pawnshops charged borrowers at a 6% rate to pay
Despite theological opposition, Pope Paul II approved of this
that “sums repaid above the principle were not usury but were interest
contributions [i.e. damages] to defray the cost of operation.”13 Other nations soon followed, and
as Homer and Sylla explain, “the idea of institutional loans at interest became establ
Thus was born the peculiar separation between lending money above or below a
governmentally approved rate. To lend above rendered one guilty of usury, and the manifold
condemnations which are still associated with that word. Yet to lend at interest provided both
gain and prestige; rendering one a servant of the poor, as under Barbarus, or a patriot, as under
the defense loans made to states like Venice, Florence and Genoa.15
usury and interest discussed comes from a wholly Western perspective.
Yet at the same time Western scholars and financiers began separating interest from usury, the
Muslim world had its own advanced and robust approach to finance. In this issue of
itions, however, the Muslim world seems far less ambiguous about its approach to lending
Islamic jurists and economist alike make frequent reference to ribā, an Arabic word meaning
“increase, excess, growth, rise, etc.”16 According to Khan:
Islamic period the word ribā was used conventionally to identify a class of business transactions. The common feature of these transactions was that a fixed amount was required over the principal due.17
his, formally defining Ribā as:
A monetary advantage without a countervalue which has been stipulated in favor of one of the two contracting parties in an exchange of two monetary values.18
in Islam, much like usury in the Judeo-Christian scriptures, is not
ibā in Islamic law can refer to either of two things,
. The former relates to usury involving loans, while the latter relates to usury
However, this second form of ribā, namely ribā al-buyu is clearly outside the
scope of this paper, and will not be considered here. Thus whenever ribā is used, it is with
What moderns call “interest” and ancients called “usury” the great Shakespeare would call “a
rose by any other name.” Blackstone reasoned well when he quipped that:
Yet Barbarus’ pawnshops charged borrowers at a 6% rate to pay
Despite theological opposition, Pope Paul II approved of this
that “sums repaid above the principle were not usury but were interest
Other nations soon followed, and
as Homer and Sylla explain, “the idea of institutional loans at interest became established and
Thus was born the peculiar separation between lending money above or below a
governmentally approved rate. To lend above rendered one guilty of usury, and the manifold
at word. Yet to lend at interest provided both
gain and prestige; rendering one a servant of the poor, as under Barbarus, or a patriot, as under
usury and interest discussed comes from a wholly Western perspective.
Yet at the same time Western scholars and financiers began separating interest from usury, the
Muslim world had its own advanced and robust approach to finance. In this issue of
itions, however, the Muslim world seems far less ambiguous about its approach to lending
, an Arabic word meaning
was used conventionally to identify a class of business transactions. The common feature of these transactions was that a fixed amount
A monetary advantage without a countervalue which has been stipulated in favor of one
Christian scriptures, is not
in Islamic law can refer to either of two things, ribā al-qarud
relates to usury
is clearly outside the
is used, it is with
s called “usury” the great Shakespeare would call “a
Luca L. Hickman
When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for thethink it lawful, and usury by those who do not.
Such is the human condition when modern distinctions are drawn between usury and interest.
Given the purpose of this paper, it is wise to spend some time
definitions.
For the purposes of this paper, usury
accepted Islamic definition of ribā
wares above the legally established rate”. Rather,
gain above principle, irrespective of rate. Unless otherwise stated, this is the definition of usury
employed in this paper. Interest, however, will continue to be used in its curren
state, referring to “a gain taken for a loan of money or wares below the legally established rate.”
13
When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.20
Such is the human condition when modern distinctions are drawn between usury and interest.
Given the purpose of this paper, it is wise to spend some time in developing appropriate
usury is used in its full, classical sense with deference to the
ibā. Thus usury is not the “gain taken for a loan of money or
established rate”. Rather, usury becomes a general prohibition against
gain above principle, irrespective of rate. Unless otherwise stated, this is the definition of usury
employed in this paper. Interest, however, will continue to be used in its curren
state, referring to “a gain taken for a loan of money or wares below the legally established rate.”
When money is lent on a contract to receive not only the principal sum again, but also an use, the increase is called interest by those who
Such is the human condition when modern distinctions are drawn between usury and interest.
in developing appropriate
is used in its full, classical sense with deference to the
is not the “gain taken for a loan of money or
becomes a general prohibition against
gain above principle, irrespective of rate. Unless otherwise stated, this is the definition of usury
employed in this paper. Interest, however, will continue to be used in its currently accepted
state, referring to “a gain taken for a loan of money or wares below the legally established rate.”
Luca L. Hickman
A man is usually more careful of his money than he
Logical Investigation
Even before a theological analysis of usury within the teachings and traditions of the West’s
monotheistic religions is carried out, it is possible to find flaws within the current
understanding of usury versus interest. These fla
a single appeal to any religious tradition.
The most obvious criticism of the morality of (or, in this case, perhaps the ethics behind) current
interest-based finance is the arbitrary distinction between usury
lending at a fraction of a percent under an artificial limit is perfectly acceptable while lending at
the same small degree above said limit is punishable by fines and imprisonments? How is it
that a mere fraction of a fraction of one percent could make such a difference?
Clearly then, the distinction between usury and interest seem to violate the precepts of natural
law. Especially when one realizes that maximum acceptable interest rates vary from nation to
nation, and often vary from region to region within a country itself. Thus, if one accepts the
validity of distinguishing one rate of increase compared to another, one needs must enter the
realm of positive law.
Here too, one sees a dilemma. If the goal of positive law
of setting a legal maximum interest rate ought to be to find a rate at which the greatest good is
done for the greatest number of people. Apart from being anathema to those who reject
utilitarianism, such a goal presupposes that there is a non
communal utility. Must this be so?
Or suppose that, for a given community, a ten percent interest rate would maximize general
utility. Further suppose that this community has imposed a
interest rate. Would it not be “just”
civic-minded banker to break the law, and lend at what could be called usury? Would not
usury, following such reasoning, become “good”
“bad”? Once lending money at an increase is divided between acceptable and unacceptable
levels of increase, any moral condemnation of usury becomes untenable at best. M
ethical, justification for upholding interest yet forbidding “excessive” interest finds unstable
anchorage in positive law.
14
USURY AND MORALITY
A man is usually more careful of his money than he
is of his principles.
—Edgar Watson Howe
��������
Even before a theological analysis of usury within the teachings and traditions of the West’s
monotheistic religions is carried out, it is possible to find flaws within the current
understanding of usury versus interest. These flaws can be readily exposed without so much as
a single appeal to any religious tradition.
The most obvious criticism of the morality of (or, in this case, perhaps the ethics behind) current
based finance is the arbitrary distinction between usury and interest. Why is it that
lending at a fraction of a percent under an artificial limit is perfectly acceptable while lending at
the same small degree above said limit is punishable by fines and imprisonments? How is it
on of one percent could make such a difference?
Clearly then, the distinction between usury and interest seem to violate the precepts of natural
law. Especially when one realizes that maximum acceptable interest rates vary from nation to
n vary from region to region within a country itself. Thus, if one accepts the
validity of distinguishing one rate of increase compared to another, one needs must enter the
Here too, one sees a dilemma. If the goal of positive law is inherently utilitarian, then the goal
of setting a legal maximum interest rate ought to be to find a rate at which the greatest good is
done for the greatest number of people. Apart from being anathema to those who reject
resupposes that there is a non-zero interest rate which maximizes
communal utility. Must this be so?
Or suppose that, for a given community, a ten percent interest rate would maximize general
utility. Further suppose that this community has imposed a significantly lower maximum
interest rate. Would it not be “just”—following utilitarian, positive law reasoning
minded banker to break the law, and lend at what could be called usury? Would not
usury, following such reasoning, become “good”, while lending at interest would become
Once lending money at an increase is divided between acceptable and unacceptable
levels of increase, any moral condemnation of usury becomes untenable at best. M
lding interest yet forbidding “excessive” interest finds unstable
Edgar Watson Howe
Even before a theological analysis of usury within the teachings and traditions of the West’s
monotheistic religions is carried out, it is possible to find flaws within the current
ws can be readily exposed without so much as
The most obvious criticism of the morality of (or, in this case, perhaps the ethics behind) current
and interest. Why is it that
lending at a fraction of a percent under an artificial limit is perfectly acceptable while lending at
the same small degree above said limit is punishable by fines and imprisonments? How is it
Clearly then, the distinction between usury and interest seem to violate the precepts of natural
law. Especially when one realizes that maximum acceptable interest rates vary from nation to
n vary from region to region within a country itself. Thus, if one accepts the
validity of distinguishing one rate of increase compared to another, one needs must enter the
is inherently utilitarian, then the goal
of setting a legal maximum interest rate ought to be to find a rate at which the greatest good is
done for the greatest number of people. Apart from being anathema to those who reject
zero interest rate which maximizes
Or suppose that, for a given community, a ten percent interest rate would maximize general
significantly lower maximum
following utilitarian, positive law reasoning—for the
minded banker to break the law, and lend at what could be called usury? Would not
, while lending at interest would become
Once lending money at an increase is divided between acceptable and unacceptable
levels of increase, any moral condemnation of usury becomes untenable at best. Moral, or even
lding interest yet forbidding “excessive” interest finds unstable
Luca L. Hickman
However, the great monotheistic traditions of the Western Hemisphere are much less
ambiguous in their approaches to this subject. Quite surprisingly, in fact, tr
Christian and Islamic teachings very nearly agree in their treatment of this subject.
Understanding the moral reasoning behind these teachings makes for a lively and enlightening
discussion.
Jewish Teachings
The Hebraic traditions concerning the morality of
passages in the Tanakh.† To aid in understanding these passages, ea
translations—the New International Version (NIV) and the King James Version (KJV). These
passages include:
Exodus 22:25:
"If you lend money to one of my people among you who is needy, do not be like a moneylender; charge
him no interest.
Leviticus 25:35-37:
If one of your countrymen becomes poor and is
unable to support himself among you, help him as you would an alien or a temporary resident, so he
can continue to live among you.interest of any kind from him, but fear your God, so that your countryman may continue to live among you. You must not lend him money at
interest or sell him food at a profit.
Deuteronomy 23: 19-20:
Do not charge your brother interest, whether on money or food or anything else that may earn
interest. You may charge a foreigner interest, but not a brother Israelite, so that the LORD your God may bless you in everything you put your
in the land you are entering to possess.
Psalm 15: 1,5:
† The Hebrew Bible. To aid in understanding these passages, each is givenInternational Version (NIV) and the King James Version (KJV). Observe how the KJV translates the original Hebrew as “usury” while the NIV translates the same as “interest”. Note: The NIV translation appears at left.
15
However, the great monotheistic traditions of the Western Hemisphere are much less
ambiguous in their approaches to this subject. Quite surprisingly, in fact, traditional Jewish,
Christian and Islamic teachings very nearly agree in their treatment of this subject.
Understanding the moral reasoning behind these teachings makes for a lively and enlightening
rning the morality of lending at increase stem from several key
To aid in understanding these passages, each is given in two
the New International Version (NIV) and the King James Version (KJV). These
"If you lend money to one of my people among you who is needy, do not be like a moneylender; charge
If thou lend money to any of my people that is poor
by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he
can continue to live among you. Do not take m him, but fear your God,
so that your countryman may continue to live You must not lend him money at
interest or sell him food at a profit.
And if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him: though he be a stranger, or a sojourner; that he may live with thee. Take thou no usury of him, or increase: but fear thy God; that thy brother may
live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
Do not charge your brother interest, whether on money or food or anything else that may earn
interest. You may charge a foreigner interest, but not a brother Israelite, so that the LORD your God may bless you in everything you put your hand to
in the land you are entering to possess.
Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any
thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to
in the land whither thou goest to possess it.
To aid in understanding these passages, each is given in two translations; the New International Version (NIV) and the King James Version (KJV). Observe how the KJV translates the original Hebrew as “usury” while the NIV translates the same as “interest”. Note: The NIV translation
However, the great monotheistic traditions of the Western Hemisphere are much less
aditional Jewish,
Christian and Islamic teachings very nearly agree in their treatment of this subject.
Understanding the moral reasoning behind these teachings makes for a lively and enlightening
stem from several key
ch is given in two
the New International Version (NIV) and the King James Version (KJV). These
If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer,
lay upon him usury.
And if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him: yea,
a stranger, or a sojourner; that he may live with thee. Take thou no usury of him, or increase: but fear thy God; that thy brother may
live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any
thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou
lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to
in the land whither thou goest to possess it.
in two translations; the New International Version (NIV) and the King James Version (KJV). Observe how the KJV translates the original Hebrew as “usury” while the NIV translates the same as “interest”. Note: The NIV translation
Luca L. Hickman
LORD, who may dwell in your sanctuary? Who may live on your holy hill?
[He] who lends his money without usurynot accept a bribe against the innocent. He who
does these things will never be shaken.
Ezekiel 18:8-9:
He does not lend at usury or take excessive
interest. He withholds his hand from doing wrong and judges fairly between man and man.
follows my decrees and faithfully keeThat man is righteous; he will surely live, declares
the Sovereign LORD.
Clearly, the Hebrew Scriptures are less than warm towards usury. Interestingly,
James translates the original Hebrew
to the New Bible Dictionary:
The word ‘usury’ in the AV [Authorized Version, commonly known as the King James] has not the modern sense of exorbitant interest. The complainnot that interest is excessive but that it is charged at all.
Of special curiosity is the apparent exception for lending at interest to foreigners expressed in
Deuteronomy 23. On the surface, it would seem that God forbade the Jewish people from
lending at interest to one another, but allowed them to lend to Gentiles.
Because of this generally accepted interpretation of Deuteronomy 23, the Jewish people have
traditionally engaged in lending money at interest to Gentiles, especially in Europe durin
medieval period. It should be noted, however, that the Jewish people were by no means the
only, or even the largest, such lenders.
As will be discussed later, the Christian Church during the medieval period generally forbade
lending money at interest at the penalty of excommunication. Writing about the Jewish lenders,
Homer and Sylla explained that:
They were, of course, unaffected by excommunication. They were not excused, and their traffic was deplored and morally condemned. However, the Jewmonopoly on medieval usury. They were early in the field, but their operations were usually small and marginal.
Nevertheless, following this interpretation of Deuteronomy 23, lending at increase to a fellow
Jew was immoral. Because of this, J
16
LORD, who may dwell in your sanctuary? Who may live on your holy hill?
ithout usury and does not accept a bribe against the innocent. He who
will never be shaken.
LORD, who shall abide in thy tabernacle? whoshall dwell in thy holy hill?
He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth
these things shall never be moved.
He does not lend at usury or take excessive interest. He withholds his hand from doing wrong
and judges fairly between man and man. He follows my decrees and faithfully keeps my laws. That man is righteous; he will surely live, declares
the Sovereign LORD.
He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true judgment
between man and man, Hath walked in my statutes, and hath kept my judgments, to deal truly; he is just, he shall surely live, saith the Lord GOD.
Clearly, the Hebrew Scriptures are less than warm towards usury. Interestingly,
nslates the original Hebrew as usury while the newer renders it as interest
The word ‘usury’ in the AV [Authorized Version, commonly known as the King James] has not the modern sense of exorbitant interest. The complaint in the Old Testamentnot that interest is excessive but that it is charged at all.21
Of special curiosity is the apparent exception for lending at interest to foreigners expressed in
Deuteronomy 23. On the surface, it would seem that God forbade the Jewish people from
ding at interest to one another, but allowed them to lend to Gentiles.
Because of this generally accepted interpretation of Deuteronomy 23, the Jewish people have
traditionally engaged in lending money at interest to Gentiles, especially in Europe durin
medieval period. It should be noted, however, that the Jewish people were by no means the
only, or even the largest, such lenders.
As will be discussed later, the Christian Church during the medieval period generally forbade
rest at the penalty of excommunication. Writing about the Jewish lenders,
Homer and Sylla explained that:
They were, of course, unaffected by excommunication. They were not excused, and their traffic was deplored and morally condemned. However, the Jews held no monopoly on medieval usury. They were early in the field, but their operations were usually small and marginal.22
Nevertheless, following this interpretation of Deuteronomy 23, lending at increase to a fellow
Jew was immoral. Because of this, Jewish scholars began teaching that lending money to fellow
LORD, who shall abide in thy tabernacle? who shall dwell in thy holy hill?
putteth not out his money to usury, nor t the innocent. He that doeth shall never be moved.
He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true judgment
h walked in my statutes, and hath kept my judgments, to deal truly; he is just, he shall surely live, saith the Lord GOD.
Clearly, the Hebrew Scriptures are less than warm towards usury. Interestingly, the older King
interest. According
The word ‘usury’ in the AV [Authorized Version, commonly known as the King James] in the Old Testament is
Of special curiosity is the apparent exception for lending at interest to foreigners expressed in
Deuteronomy 23. On the surface, it would seem that God forbade the Jewish people from
Because of this generally accepted interpretation of Deuteronomy 23, the Jewish people have
traditionally engaged in lending money at interest to Gentiles, especially in Europe during the
medieval period. It should be noted, however, that the Jewish people were by no means the
As will be discussed later, the Christian Church during the medieval period generally forbade
rest at the penalty of excommunication. Writing about the Jewish lenders,
They were, of course, unaffected by excommunication. They were not excused, and s held no
monopoly on medieval usury. They were early in the field, but their operations were
Nevertheless, following this interpretation of Deuteronomy 23, lending at increase to a fellow
ewish scholars began teaching that lending money to fellow
Luca L. Hickman
Jews was permissible, provided that usury was not exacted. In fact, Jewish thought teaches that
when made to alleviate temporary financial difficulties such loans are not only moral, but
charitable.
For example, Maimonides—arguably the greatest medieval Jewish philosopher and Torah
scholar—taught that “a loan is better than charity
this teaching and the broader religious
communities, especially in Eastern Europe, began making interest free loans available to the
poor.24 This tradition has continued to the present,
Free Loan Society of New York.
Christianity and Usury
Christian teaching is likewise based, in part, on the three passages quoted above. To this,
however, are added several others. One such passage may be found in the gospe
Luke 6:35, Jesus teaches:
But love your enemies, do good to tto them without expecting to get anything back. Then your reward will be great, and you will be sons of the Most High, because he is kind to the
ungrateful and wicke
As Lewis and Algaoud explained:
Jesus himself exhibited a distinctly antifrom the temple, while the Sermon on the Mount revealed strongly antisentiments as well.25
Traditional Positions
The traditional position of the Church
highly opposed to usury. 26 In fact, a canon prohib
Council of Nicea—the first general council of the Christian Church.
usury to all case when one “expect[s] to receive something more than you have given.” While
the Second Lateran Council declared usurers infamous.
Regarding the dispute over Deuteronomy 23, Saint Jerome argued that the prohibition against
usury was universalized. Homer and Sylla explain that:
The troublesome permission in Deuteronomy to take usury from strangers had besuperseded by the concept of universal brotherhood: there were no strangers. The essence of the approach to usury was expressed in the opinion of St. Raymond: “One ought to lend to one’s needy neighbor only for God and principally from charity.
17
Jews was permissible, provided that usury was not exacted. In fact, Jewish thought teaches that
when made to alleviate temporary financial difficulties such loans are not only moral, but
arguably the greatest medieval Jewish philosopher and Torah
loan is better than charity, for it enables one to help oneself
this teaching and the broader religious concept of tzedakah—or charity—that Jewish
communities, especially in Eastern Europe, began making interest free loans available to the
This tradition has continued to the present, embodied in such institutions as the Hebrew
Christian teaching is likewise based, in part, on the three passages quoted above. To this,
however, are added several others. One such passage may be found in the gospe
But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be sons of the Most High, because he is kind to the
ungrateful and wicked.
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.
As Lewis and Algaoud explained:
Jesus himself exhibited a distinctly anti-usury attitude when he cast the money-m the temple, while the Sermon on the Mount revealed strongly anti-wealth
The traditional position of the Church—specifically the Roman Catholic Church
In fact, a canon prohibiting usury by clerics was passed at the
the first general council of the Christian Church.27 St. Augustine expanded
usury to all case when one “expect[s] to receive something more than you have given.” While
clared usurers infamous. 28
Regarding the dispute over Deuteronomy 23, Saint Jerome argued that the prohibition against
usury was universalized. Homer and Sylla explain that:
The troublesome permission in Deuteronomy to take usury from strangers had besuperseded by the concept of universal brotherhood: there were no strangers. The essence of the approach to usury was expressed in the opinion of St. Raymond: “One ought to lend to one’s needy neighbor only for God and principally from charity.
Jews was permissible, provided that usury was not exacted. In fact, Jewish thought teaches that
when made to alleviate temporary financial difficulties such loans are not only moral, but
arguably the greatest medieval Jewish philosopher and Torah
p oneself.”23 It is from
that Jewish
communities, especially in Eastern Europe, began making interest free loans available to the
embodied in such institutions as the Hebrew
Christian teaching is likewise based, in part, on the three passages quoted above. To this,
however, are added several others. One such passage may be found in the gospel of Luke. In
But love ye your enemies, and do good, and lend, 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.
-lenders wealth
specifically the Roman Catholic Church—was thus
iting usury by clerics was passed at the
St. Augustine expanded
usury to all case when one “expect[s] to receive something more than you have given.” While
Regarding the dispute over Deuteronomy 23, Saint Jerome argued that the prohibition against
The troublesome permission in Deuteronomy to take usury from strangers had been superseded by the concept of universal brotherhood: there were no strangers. The essence of the approach to usury was expressed in the opinion of St. Raymond: “One ought to lend to one’s needy neighbor only for God and principally from charity.29
Luca L. Hickman
St. Thomas Aquinas went further, stating that “to take usury from any man is simply evil…”
Over time, however, the Church’s position towards usury began first to so
entirely as discussed earlier. By the mid
allowed by civil law may be charged by anyone, and in 1950, Pius XII declared that bankers
“earn their livelihood honestly.”
Islam and Usury
Islam is yet more explicit in its denunciation of usury.
of Ribā or usury rests in five Qur’anic verses.
Those who swallow Ribā can’t rise up save as he ariseth whom the devil hat prostrated by [his] touch. That is because they say:trading and forbiddeth Ribā. [he] desists [in obedience], he shall keep that which is past, and his affair henceforth is with Allah. As for him who returneth [to They will abide therein. (II: 275) Allah hath blighted Ribā and made impious and the guilty. (II 276) O, you who believe, keep your duty with Allah and relinquish what remains of you are believers. (II 278) But if you do [it] not, then be apprised of war from Allah and His Messenger; and if you repent, then you shall have your capital. Wrong not279) O, you who believe, devour not Allah, that you may be successful.
It is important to note that the absence of
Judeo-Christian teachings, the prohibition against interest is but one of many financ
guidelines. 33 While both modern
teachings against usury, Islam has been considerably less ambiguous. Although, in practice,
interest based finance is widely carried out within the Islamic w
remain clear. Khan even stated that “as financial transactions are concerned there has never
been disagreement among jurists….”, though he conceded that some controversy has arisen
over exactly what type of transactions sho
Iqbal and Mirakhor distilled Islam’s teachings towards usury writing that:
Generally, any risk-bearing instrument reflecting a real asset and earning a variable rate of return tied to the performance of the aslaw.35
18
homas Aquinas went further, stating that “to take usury from any man is simply evil…”
Over time, however, the Church’s position towards usury began first to soften, then to change
entirely as discussed earlier. By the mid-1800s, the Catholic Church decreed that interest
allowed by civil law may be charged by anyone, and in 1950, Pius XII declared that bankers
“earn their livelihood honestly.”31
Islam is yet more explicit in its denunciation of usury. According to Khan, Islam’s
r usury rests in five Qur’anic verses.32 These are:
can’t rise up save as he ariseth whom the devil hat prostrated by [his] touch. That is because they say: trade is just like Ribā, whereas Allah permitteth
Ribā. He unto whom an admonition from his Lord cometh and ], he shall keep that which is past, and his affair henceforth is
with Allah. As for him who returneth [to Ribā] such are the rightful owners of the fire. (II: 275)
and made Sadaqat [charities] fruitful. Allah loveth not the (II 276)
keep your duty with Allah and relinquish what remains of
But if you do [it] not, then be apprised of war from Allah and His Messenger; and if you repent, then you shall have your capital. Wrong not, and you shall not be wronged.
O, you who believe, devour not Ribā, doubling and redoubling, and keep your duty with ah, that you may be successful. (III: 129)
It is important to note that the absence of Ribā does not an Islamic system make. Rather, as with
Christian teachings, the prohibition against interest is but one of many financ
While both modern Judaism and Christianity have all but abandoned the original
against usury, Islam has been considerably less ambiguous. Although, in practice,
interest based finance is widely carried out within the Islamic world, the clerical prohibitions
remain clear. Khan even stated that “as financial transactions are concerned there has never
been disagreement among jurists….”, though he conceded that some controversy has arisen
over exactly what type of transactions should be subject to the Qur’anic injunction.
Iqbal and Mirakhor distilled Islam’s teachings towards usury writing that:
bearing instrument reflecting a real asset and earning a variable rate of return tied to the performance of the asset is considered to be consistent with Islamic
homas Aquinas went further, stating that “to take usury from any man is simply evil…”30
ften, then to change
eed that interest
allowed by civil law may be charged by anyone, and in 1950, Pius XII declared that bankers
According to Khan, Islam’s prohibition
can’t rise up save as he ariseth whom the devil hat prostrated whereas Allah permitteth
He unto whom an admonition from his Lord cometh and ], he shall keep that which is past, and his affair henceforth is
] such are the rightful owners of the fire.
not the
keep your duty with Allah and relinquish what remains of Ribā, if
But if you do [it] not, then be apprised of war from Allah and His Messenger; and if you , and you shall not be wronged. (II:
and keep your duty with
does not an Islamic system make. Rather, as with
Christian teachings, the prohibition against interest is but one of many financial
and Christianity have all but abandoned the original
against usury, Islam has been considerably less ambiguous. Although, in practice,
orld, the clerical prohibitions
remain clear. Khan even stated that “as financial transactions are concerned there has never
been disagreement among jurists….”, though he conceded that some controversy has arisen
uld be subject to the Qur’anic injunction. 34
bearing instrument reflecting a real asset and earning a variable rate set is considered to be consistent with Islamic
Luca L. Hickman
Khan wrote with greater certitude, saying that:
The essence for the injunction of demand a fixed return over the principal loan irrespective of what happens with the loaned money.36
It would seem then, that usury has no place within an Islamic moral structure.
Inter-Religious Agreement
The Islamic definition of ribā is exceedingly near the classical definition of
held to by both Christian and Hebrew Holy texts. Lewis and Algaoud recognized this great
similarity, observing that:
English versions of the Holy Qur’an On the face of it, the Islamic position on usury would seem to be little different from the official Christian position in the Middle Ages.
In this, and from our previous logical investigations into t
perspective, the hope of reaching a broad inter
19
Khan wrote with greater certitude, saying that:
The essence for the injunction of Ribā…is the fact that it is unjust for the lender to demand a fixed return over the principal loan irrespective of what happens with the
It would seem then, that usury has no place within an Islamic moral structure.
is exceedingly near the classical definition of usury
held to by both Christian and Hebrew Holy texts. Lewis and Algaoud recognized this great
English versions of the Holy Qur’an translate the Arabic word ribā as interest or usury. On the face of it, the Islamic position on usury would seem to be little different from the official Christian position in the Middle Ages.37
In this, and from our previous logical investigations into the more Lockean, natural
perspective, the hope of reaching a broad inter-religious agreement on the morality of usury.
is the fact that it is unjust for the lender to demand a fixed return over the principal loan irrespective of what happens with the
usury—a definition
held to by both Christian and Hebrew Holy texts. Lewis and Algaoud recognized this great
as interest or usury. On the face of it, the Islamic position on usury would seem to be little different from the
he more Lockean, natural-rights
religious agreement on the morality of usury.
Luca L. Hickman
FRACTIONAL
Money is a handmaiden, if thou knowest how to use it,
Logical Investigation
Much has been written on the economic consequences of fractional reserve banking, perhaps
most notably by the late Milton Friedman. However, the moral implications of fractional
reserve lending have received significantly less att
between fractional reserve lending and usury, it is wise to take a moment to explore the moral
implications of this often economically maligned practice.
Money Creation and Morality
How fractional reserve banking creates money is a well studied phenomenon. The often
overlooked question is, is this process
Firstly, these money creating effects seem little different
the jargon and legalities are stripped
wonderful albeit brief essay entitled
comparison, not once, but ten separate
fractional reserve banking “fractional
Unsurprisingly, this is anathema
the reward for honest work i.e. the addition of value to society.
of Bangladesh explained:
The fractional reserve system versus 100% reserves would have different policy implications. Under the former system, banks would have the ability to draw profits on funds that they have exerted no prspirit of Islamic banking. 41
Currency Debasement and Wealth Redistribution
Fractional reserve lending has yet another consequence of questionable morality: namely its
redistribution of wealth through c
source of inflation, one immediately recognizes that fractional reserve banking
leads to inflation. Furthermore, i
rising prices stealing billions in capital purchasing power every year
inescapable conclusion that fractional reserve banking is a direct
enormous amounts of wealth are stolen. One can argue then that fractional reserve bank
tantamount to an invasion of property rights
20
RACTIONAL RESERVE BANKING AND MORALITY
Money is a handmaiden, if thou knowest how to use it,
a mistress, if thou knowest not.
��������
Much has been written on the economic consequences of fractional reserve banking, perhaps
most notably by the late Milton Friedman. However, the moral implications of fractional
reserve lending have received significantly less attention. Moreover, given the coupled
between fractional reserve lending and usury, it is wise to take a moment to explore the moral
implications of this often economically maligned practice.38
king creates money is a well studied phenomenon. The often
process moral? It can convincingly be shown that it is not.
money creating effects seem little different than outright counterfeiting
stripped away, money is still being created out of nothing.
wonderful albeit brief essay entitled Fractional Reserve Banking Murray Rothbard made this very
, not once, but ten separate times.39 Rothbard even went so far as to rename
“fractional-reserve counterfeiting”.40
anathema to all three monotheistic traditions, which hold that wealth is
the reward for honest work i.e. the addition of value to society. For example, as the Islami Bank
The fractional reserve system versus 100% reserves would have different policy implications. Under the former system, banks would have the ability to draw profits on funds that they have exerted no productive effort. Such earning is against the original
Wealth Redistribution
Fractional reserve lending has yet another consequence of questionable morality: namely its
through currency debasement. Remembering Mises insights into the
tion, one immediately recognizes that fractional reserve banking by its very nature
leads to inflation. Furthermore, inflation erodes wealth and impedes entrepreneurship, with
prices stealing billions in capital purchasing power every year. This leads to the
inescapable conclusion that fractional reserve banking is a direct mechanism whereby
amounts of wealth are stolen. One can argue then that fractional reserve bank
tantamount to an invasion of property rights—an interesting argument deserving further study.
ORALITY
—Horace
Much has been written on the economic consequences of fractional reserve banking, perhaps
most notably by the late Milton Friedman. However, the moral implications of fractional
coupled history
between fractional reserve lending and usury, it is wise to take a moment to explore the moral
king creates money is a well studied phenomenon. The often
It can convincingly be shown that it is not.
counterfeiting. Once all
away, money is still being created out of nothing. In his
Murray Rothbard made this very
nt so far as to rename
to all three monotheistic traditions, which hold that wealth is
r example, as the Islami Bank
The fractional reserve system versus 100% reserves would have different policy implications. Under the former system, banks would have the ability to draw profits on
oductive effort. Such earning is against the original
Fractional reserve lending has yet another consequence of questionable morality: namely its
Remembering Mises insights into the
by its very nature
nflation erodes wealth and impedes entrepreneurship, with
. This leads to the
whereby
amounts of wealth are stolen. One can argue then that fractional reserve banking is
an interesting argument deserving further study.
Luca L. Hickman
Of further moral concern is the fact that
egregiously regressive. As Congressman Paul explained:
Those who receive the new money first receive it before prices have yet risen. They enjoy a windfall. Meanwhile, as they spend the new money, and the next wave of recipients spend it, and so on, prices begin to rise throughout the economymoney has trickled down to most people. The average person is now paying higher prices while still earning his old income, which has not yet been adjusted to account for the higher money supply. By the time the new money has made its way throughout teconomy, average people have all this time been paying higher prices, and only now can begin to break even. The enrichment of the politically well connectedthose who get the newly created money first: government contractors, big banks,like—comes at the direct expense of everyone else.
Though Congressman Paul was
central banks, the outcome is nonetheless identical. Fractional reserve banking
of welfare for the wealthy. A Robin Hood in reverse, robbing the masses to enrich the few.
Once again, one finds such effects completely at odds with Jewish, Christian and Islamic
teachings. What scholar from either of these religions would defend the morality of
resources of the poor for the enrichment of the wealthy?
viewed with suspension our outright contempt.
inflation-caused fluctuations in the value of money tanta
which the Scriptures call an “abomination to the LORD”.
Similar sentiments have been expressed by Islamic jurists, some of whom have stressed the
need “for policies to maintain the stability of the value of currenc
some Islamic economists have argued that a truly Islamic banking system should be based on
100% reserve requirement.45
General Instability
One last topic too large to discuss fully, yet deserving mention are the cyclic effect
based, fractional reserve lending have on the economy according to the Austrian business cycle
theory. Hayek wrote that:
So long as we make use of bank credit as a means of furthering economic development we shall have to put up with the resulpay for a speed of development exceeding that which people voluntarily make possible through their savings and which therefore has to be extorted from them.
If this view is accurate, then the instabili
throughout society.
21
Of further moral concern is the fact that this inflation is not uniform—rather, its effects are
egregiously regressive. As Congressman Paul explained:
hose who receive the new money first receive it before prices have yet risen. They enjoy a windfall. Meanwhile, as they spend the new money, and the next wave of recipients spend it, and so on, prices begin to rise throughout the economy—well before the money has trickled down to most people. The average person is now paying higher prices while still earning his old income, which has not yet been adjusted to account for the higher money supply. By the time the new money has made its way throughout teconomy, average people have all this time been paying higher prices, and only now can begin to break even. The enrichment of the politically well connected—in other words, those who get the newly created money first: government contractors, big banks,
comes at the direct expense of everyone else.42
Though Congressman Paul was describing the Cantillon effects of new money creation by
utcome is nonetheless identical. Fractional reserve banking
A Robin Hood in reverse, robbing the masses to enrich the few.
Once again, one finds such effects completely at odds with Jewish, Christian and Islamic
teachings. What scholar from either of these religions would defend the morality of
resources of the poor for the enrichment of the wealthy? Furthermore, inflation itself is often
viewed with suspension our outright contempt. Some Christian scholars have likened the
caused fluctuations in the value of money tantamount to unjust weights and measures,
which the Scriptures call an “abomination to the LORD”.43
Similar sentiments have been expressed by Islamic jurists, some of whom have stressed the
for policies to maintain the stability of the value of currency.”44 Little wonder then why
some Islamic economists have argued that a truly Islamic banking system should be based on
One last topic too large to discuss fully, yet deserving mention are the cyclic effect
based, fractional reserve lending have on the economy according to the Austrian business cycle
So long as we make use of bank credit as a means of furthering economic development we shall have to put up with the resulting trade cycles. They are in a sense the price we pay for a speed of development exceeding that which people voluntarily make possible through their savings and which therefore has to be extorted from them.46
If this view is accurate, then the instability caused by such a system causes yet further suffering
rather, its effects are
hose who receive the new money first receive it before prices have yet risen. They enjoy a windfall. Meanwhile, as they spend the new money, and the next wave of recipients
well before the new money has trickled down to most people. The average person is now paying higher prices while still earning his old income, which has not yet been adjusted to account for the higher money supply. By the time the new money has made its way throughout the economy, average people have all this time been paying higher prices, and only now can
in other words, those who get the newly created money first: government contractors, big banks, and the
of new money creation by
utcome is nonetheless identical. Fractional reserve banking is simply a form
A Robin Hood in reverse, robbing the masses to enrich the few.
Once again, one finds such effects completely at odds with Jewish, Christian and Islamic
teachings. What scholar from either of these religions would defend the morality of stealing the
Furthermore, inflation itself is often
Some Christian scholars have likened the
mount to unjust weights and measures,
Similar sentiments have been expressed by Islamic jurists, some of whom have stressed the
Little wonder then why
some Islamic economists have argued that a truly Islamic banking system should be based on a
One last topic too large to discuss fully, yet deserving mention are the cyclic effects interest-
based, fractional reserve lending have on the economy according to the Austrian business cycle
So long as we make use of bank credit as a means of furthering economic development ting trade cycles. They are in a sense the price we
pay for a speed of development exceeding that which people voluntarily make possible
system causes yet further suffering
Luca L. Hickman
TOWARDS
Silver and gold are not the only coin; virtue too passes
An Alternative System
So far, several ills of the current financial system have been identified, yet, as Zeuxis said,
“Criticism comes easier than craftsmanship.”
proposing a theoretically viable alternativ
part of many individuals. At this time, it is best to focus on clearly laying out the goals such an
alternative system ought to strive towards.
virtuous and less problematic financial system, it is necessary to define objectives along both
moral and economic lines of reasoning.
Financial Reform Goals
Firstly, any financial institution which intends to operat
full-reserve system. This immediately relieves said institution from the myriad problems
associated with artificial money creation. Secondly, a moral financial institution must take great
care to ensure that usury is avoided in all its forms. This, of cours
Within the Islamic world, many
interest-based finance. This has centered around commercial loans where the bank enters into a
partnership with a client, sharing in
have not been entirely successful. Part of the great difficulty rests in
profit for the benefit of both depositors and shareholders.
Perhaps a more effective way of doing
(NPFI) Such an institution could operate using an endowment, and could charge a simple fee to
cover the costs of making the loan. Such an NPFI could maintain its endowment in the face of
general economic inflation by lending on a value
the principle plus whatever losses accrued to the NPFI due to inflation over the repayment
period.
To better understand proposal, it is wise to take a moment to examine, i
those costs which would underlie both the operation (
(or economic) costs associated with each type of financial institution. In order, these are:
Economic costs associated with a For
i. Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
ii. Opportunity costs of parting with the principle.
iii. Loss due to inflation.
22
OWARDS A MORAL BANKING SYSTEM Silver and gold are not the only coin; virtue too passes
current all over the world.
— Euripides
��������
So far, several ills of the current financial system have been identified, yet, as Zeuxis said,
“Criticism comes easier than craftsmanship.” The task of reforming this system, or even of
proposing a theoretically viable alternative, is considerable, and will require great efforts on the
part of many individuals. At this time, it is best to focus on clearly laying out the goals such an
alternative system ought to strive towards. Since the broader goal is a move towards a more
uous and less problematic financial system, it is necessary to define objectives along both
moral and economic lines of reasoning.
Firstly, any financial institution which intends to operate in a moral fashion must operate on a
reserve system. This immediately relieves said institution from the myriad problems
associated with artificial money creation. Secondly, a moral financial institution must take great
care to ensure that usury is avoided in all its forms. This, of course, is easier said than done.
Within the Islamic world, many financial institutions have taken great strides in eliminating
based finance. This has centered around commercial loans where the bank enters into a
partnership with a client, sharing in either the ventures profit or loss. However, these attempts
have not been entirely successful. Part of the great difficulty rests in their having to make a
profit for the benefit of both depositors and shareholders.
Perhaps a more effective way of doing this would be to create a non-profit financial institution.
(NPFI) Such an institution could operate using an endowment, and could charge a simple fee to
ng the loan. Such an NPFI could maintain its endowment in the face of
l economic inflation by lending on a value-based system. Thus borrowers would repay
the principle plus whatever losses accrued to the NPFI due to inflation over the repayment
, it is wise to take a moment to examine, in an albeit abstract way,
those costs which would underlie both the operation (real or accounting costs) and opportunity
(or economic) costs associated with each type of financial institution. In order, these are:
a For-Profit Financial Institution (FPFI):
Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
Opportunity costs of parting with the principle.
Euripides
So far, several ills of the current financial system have been identified, yet, as Zeuxis said,
The task of reforming this system, or even of
e, is considerable, and will require great efforts on the
part of many individuals. At this time, it is best to focus on clearly laying out the goals such an
Since the broader goal is a move towards a more
uous and less problematic financial system, it is necessary to define objectives along both
e in a moral fashion must operate on a
reserve system. This immediately relieves said institution from the myriad problems
associated with artificial money creation. Secondly, a moral financial institution must take great
e, is easier said than done.
financial institutions have taken great strides in eliminating
based finance. This has centered around commercial loans where the bank enters into a
either the ventures profit or loss. However, these attempts
having to make a
profit financial institution.
(NPFI) Such an institution could operate using an endowment, and could charge a simple fee to
ng the loan. Such an NPFI could maintain its endowment in the face of
based system. Thus borrowers would repay
the principle plus whatever losses accrued to the NPFI due to inflation over the repayment
n an albeit abstract way,
) and opportunity
(or economic) costs associated with each type of financial institution. In order, these are:
Luca L. Hickman
iv. Depositor costs. (i.e. the interest given to entice depositors to utilize
v. The bank’s profits.
vi. Taxes.
“Real” or “accounting” costs associated
i. Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
ii. Loss due to inflation.
iii. Depositor costs. (i.e. the interest given to entice depositors
iv. The bank’s profits.
v. Taxes.
Economic costs associated with an NPFI:
i. Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
ii. Opportunity costs of parting with the principle.
“Real” or “accounting” costs associate
i. Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
The reader will note the obvious exclusion of the bank’s profits
both cost categories associated with the non
the financial institution proposed is to operate using an endowment, the costs associated with
depositors are likewise excluded.
There is, however, one final point which must be considered. That is the
loan category referenced above in each of the four cost statements. Despite the temptation to
assume equal fixed costs between financial systems, this is not an assumption which can validly
be made.
Some fixed costs will undoubtedly disappear
while other costs will just as certainly be magnified and still more, new costs may appear
as dedicating resources towards obtaining additional donations. From the author’s perspective,
it seems foolish to attempt any sort of logical investigation into the differences in the fixed costs
of operating the bank which must be passed onto the borrower. Rather, an empirical
investigation is the only sort which can do justice to the great complexity of this issue. This is
clearly an area for further study. However, it is the author’s empirically unsupported
contention that such fixed costs will not become prohibitively large to the successful operation
of the proposed non-profit financial institution.
Moral Justification for a Value-
One must remember that modern currencies
value, not value in and of themselves. The ideal NPFI lends value without compensation.
23
Depositor costs. (i.e. the interest given to entice depositors to utilize your bank.)
ssociated with an FPFI:
Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
Depositor costs. (i.e. the interest given to entice depositors to utilize your bank.)
sts associated with an NPFI:
Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
Opportunity costs of parting with the principle.47
ssociated with an NPFI:
Fixed cost of making the loan. (e.g. personnel costs, security costs, etc.)
The reader will note the obvious exclusion of the bank’s profits—and with profits, taxes
both cost categories associated with the non-profit model. The reader will also note that, since
the financial institution proposed is to operate using an endowment, the costs associated with
depositors are likewise excluded.
There is, however, one final point which must be considered. That is the fixed cost of making the
category referenced above in each of the four cost statements. Despite the temptation to
assume equal fixed costs between financial systems, this is not an assumption which can validly
Some fixed costs will undoubtedly disappear—like the cost of maintaining tellers and ATMs
while other costs will just as certainly be magnified and still more, new costs may appear
as dedicating resources towards obtaining additional donations. From the author’s perspective,
ny sort of logical investigation into the differences in the fixed costs
of operating the bank which must be passed onto the borrower. Rather, an empirical
investigation is the only sort which can do justice to the great complexity of this issue. This is
clearly an area for further study. However, it is the author’s empirically unsupported
contention that such fixed costs will not become prohibitively large to the successful operation
profit financial institution.
-Based System
One must remember that modern currencies—be they Dollars, Euros, or Pounds
value, not value in and of themselves. The ideal NPFI lends value without compensation.
your bank.)
to utilize your bank.)
and with profits, taxes—in
will also note that, since
the financial institution proposed is to operate using an endowment, the costs associated with
ixed cost of making the
category referenced above in each of the four cost statements. Despite the temptation to
assume equal fixed costs between financial systems, this is not an assumption which can validly
maintaining tellers and ATMs—
while other costs will just as certainly be magnified and still more, new costs may appear—such
as dedicating resources towards obtaining additional donations. From the author’s perspective,
ny sort of logical investigation into the differences in the fixed costs
of operating the bank which must be passed onto the borrower. Rather, an empirical
investigation is the only sort which can do justice to the great complexity of this issue. This is
clearly an area for further study. However, it is the author’s empirically unsupported
contention that such fixed costs will not become prohibitively large to the successful operation
be they Dollars, Euros, or Pounds—are units of
value, not value in and of themselves. The ideal NPFI lends value without compensation.
Luca L. Hickman
Indeed, this characteristic is the definitive one f
what could be seen as a variable interest rate
different from true usury, one needs must have a proper understanding of value versus units of
value.
As the American journalist Steven Jacobson so adroitly explained:
The definition of the word “dollar” has undergone such a transformation to hide the fact that it is not money, but a unit of measurement for gold and silver coin. Logically, if there are no gold and silver coins, there are no dollars of anything. Dollars cannot be money any more than quarts can be milk. A unit of measurement cannot replace or become the “thing” for which it is a measure. However, in the mind of the public, this is exactly what hasled to believe that a dollar is both money and a measure of it. This is what George Orwell called “double-think,” where the mind is infiltrated with conflicting concepts.
This understanding of the nature of value versus unit
great work, The Wealth of Nations
But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measureof other things; so a commodity [or indeed, a currency] which is itself continually varying in its own value, can never be an accurate measure of the value of other commodities.49
Smith even argued that the money price of goods was not the
“nominal price only.”50
While charging for the losses incurred due to inflation may outwardly resemble a variable
interest rate to the uninformed, the goal is to collect an equal amount of value as was lent.
Indeed, this argument is nullified when one realizes that in deflationary times, something
tantamount to a negative interest rate would occur
the practice of lending and collecting equal amounts of value (i.e. accounting f
completely in keeping with both the letter and the spirit of those moral traditions and logical
deductions which condemn usury.
Reconciliation with Mises
Mises argued that money does not measure value; rather, agreeing with Menger’s subje
theory of economic value, Mises taught that:
24
Indeed, this characteristic is the definitive one for an NPFI. To understand how the charging of
what could be seen as a variable interest rate—namely charging for inflationary losses
different from true usury, one needs must have a proper understanding of value versus units of
rican journalist Steven Jacobson so adroitly explained:
The definition of the word “dollar” has undergone such a transformation to hide the fact that it is not money, but a unit of measurement for gold and silver coin. Logically, if
silver coins, there are no dollars of anything. Dollars cannot be money any more than quarts can be milk. A unit of measurement cannot replace or become the “thing” for which it is a measure.
However, in the mind of the public, this is exactly what has happened. People have been led to believe that a dollar is both money and a measure of it. This is what George
think,” where the mind is infiltrated with conflicting concepts.
This understanding of the nature of value versus units of value can likewise be found in Smith’s
The Wealth of Nations. In it, he wrote:
But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity [or indeed, a currency] which is itself continually varying in its own value, can never be an accurate measure of the value of other
Smith even argued that the money price of goods was not their real price; instead calling it the
While charging for the losses incurred due to inflation may outwardly resemble a variable
interest rate to the uninformed, the goal is to collect an equal amount of value as was lent.
his argument is nullified when one realizes that in deflationary times, something
tantamount to a negative interest rate would occur—actually benefiting the borrower. Surely,
the practice of lending and collecting equal amounts of value (i.e. accounting for inflation) is
completely in keeping with both the letter and the spirit of those moral traditions and logical
deductions which condemn usury.
Mises argued that money does not measure value; rather, agreeing with Menger’s subje
theory of economic value, Mises taught that:
or an NPFI. To understand how the charging of
namely charging for inflationary losses—is quite
different from true usury, one needs must have a proper understanding of value versus units of
The definition of the word “dollar” has undergone such a transformation to hide the fact that it is not money, but a unit of measurement for gold and silver coin. Logically, if
silver coins, there are no dollars of anything. Dollars cannot be money any more than quarts can be milk. A unit of measurement cannot replace or
happened. People have been led to believe that a dollar is both money and a measure of it. This is what George
think,” where the mind is infiltrated with conflicting concepts.48
s of value can likewise be found in Smith’s
But as a measure of quantity, such as the natural foot, fathom, or handful, which is of the quantity
of other things; so a commodity [or indeed, a currency] which is itself continually varying in its own value, can never be an accurate measure of the value of other
ir real price; instead calling it the
While charging for the losses incurred due to inflation may outwardly resemble a variable
interest rate to the uninformed, the goal is to collect an equal amount of value as was lent.
his argument is nullified when one realizes that in deflationary times, something
actually benefiting the borrower. Surely,
or inflation) is
completely in keeping with both the letter and the spirit of those moral traditions and logical
Mises argued that money does not measure value; rather, agreeing with Menger’s subjective
Luca L. Hickman
Money is neither an abstractan economic good and as such it is valued and appraised on its own merits, i.e., the services which a man expec
This view is not at odds with the value
can be seen as a lender of a given quantity of money, i.e. a given value of economic goods per
Mises. The NPFI then seeks to recover this v
repayment period. However, due to inflation (or deflation) the very metric of denomination
i.e. currency—will certainly have changed. Thus, to recoup “like value for like value” an NPFI
must account for inflation. Such a practice is wholly in keeping with Mises’ views on the
commodity nature of money.
25
Money is neither an abstract numéraire nor a standard of value or prices. It is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the
hich a man expects from holding cash.51
This view is not at odds with the value-based reasoning presented above. The proposed NPFI
can be seen as a lender of a given quantity of money, i.e. a given value of economic goods per
Mises. The NPFI then seeks to recover this value of goods over the duration of the loan
repayment period. However, due to inflation (or deflation) the very metric of denomination
will certainly have changed. Thus, to recoup “like value for like value” an NPFI
on. Such a practice is wholly in keeping with Mises’ views on the
nor a standard of value or prices. It is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the
based reasoning presented above. The proposed NPFI
can be seen as a lender of a given quantity of money, i.e. a given value of economic goods per
alue of goods over the duration of the loan
repayment period. However, due to inflation (or deflation) the very metric of denomination—
will certainly have changed. Thus, to recoup “like value for like value” an NPFI
on. Such a practice is wholly in keeping with Mises’ views on the
Luca L. Hickman
C
There is no subtler, no surer means of overturning the existing basis of
society than to debauch the currency. The process engages all
hidden forces of economic law on the side of destruction,
and does it in a manner which not one man in a
Reform
It is delusional to suppose that meaningful
resistance from entrenched interests. While this is true of all reforms, it is especially true of
those revisions instituted within governments, for wit
of the financial world are at a decided advantage
much needed reform outside of governmental controls and regulations
establishment of charitable NPFIs.
Urgency of Reform
The current financial crisis presents a manifold opportunity to test the
financial model as well as the broader reformist concepts behind such an institution. This
opportunity is largely shaped by two factors.
the intellectual foundations of the
debt-financing as indicated by the rising interest in equity
Secondly, the current crisis has greatly eroded
of the current debt-financing model.
before, and the eventual outcome of this crisis remains a matter of speculation. Nevertheless,
the general atmosphere at present
market, in the author’s opinion.
One Final Thought
Whether called “interest” or “usury”
inherently incompatible with the great moral traditions of the West. Moreover, such a system,
when combined with the likewise immoral practice of fractional reserve banking, contributes to
the mass erosion—or, more accurately,
annually. If true reform—be it moral or economic
come as a journey towards a moral banking system. The primary purpose of this paper was to
reignite a once blazing debate over the very foundations of modern
purpose was to offer one potential path towards a more moral banking system. Regardless of
how this specific proposal is received by the world at large, it is the
this primary purpose be realized.
26
CAVEAT AND CONCLUSION There is no subtler, no surer means of overturning the existing basis of
society than to debauch the currency. The process engages all the
hidden forces of economic law on the side of destruction,
and does it in a manner which not one man in a
million is able to diagnose.
—Lord Keynes
��������
meaningful financial reform is possible without significant
resistance from entrenched interests. While this is true of all reforms, it is especially true of
those revisions instituted within governments, for within the halls of power, the vested interests
of the financial world are at a decided advantage. Thus, this paper has sought to introduce
much needed reform outside of governmental controls and regulations—chiefly through the
FIs.
The current financial crisis presents a manifold opportunity to test the proposed
as well as the broader reformist concepts behind such an institution. This
opportunity is largely shaped by two factors. Firstly, the current financial crisis has weakened
the current banking system—specifically the overreliance on
financing as indicated by the rising interest in equity-based, Islamic banking.
s has greatly eroded the public’s confidence in the long
financing model. This system has successfully faced many a calamity
before, and the eventual outcome of this crisis remains a matter of speculation. Nevertheless,
the general atmosphere at present is favorable towards the testing of new ideas in the capital
er called “interest” or “usury” lending money with the expectation of increase is
ble with the great moral traditions of the West. Moreover, such a system,
when combined with the likewise immoral practice of fractional reserve banking, contributes to
or, more accurately, the mass theft—of many billions of dollars of va
be it moral or economic—is to come to the financial world, it must
come as a journey towards a moral banking system. The primary purpose of this paper was to
reignite a once blazing debate over the very foundations of modern finance. The secondary
purpose was to offer one potential path towards a more moral banking system. Regardless of
how this specific proposal is received by the world at large, it is the author’s sincere desire that
this primary purpose be realized.
There is no subtler, no surer means of overturning the existing basis of
Lord Keynes
possible without significant
resistance from entrenched interests. While this is true of all reforms, it is especially true of
hin the halls of power, the vested interests
. Thus, this paper has sought to introduce
chiefly through the
proposed non-profit
as well as the broader reformist concepts behind such an institution. This
Firstly, the current financial crisis has weakened
specifically the overreliance on
based, Islamic banking.
long-term stability
has successfully faced many a calamity
before, and the eventual outcome of this crisis remains a matter of speculation. Nevertheless,
favorable towards the testing of new ideas in the capital
lending money with the expectation of increase is
ble with the great moral traditions of the West. Moreover, such a system,
when combined with the likewise immoral practice of fractional reserve banking, contributes to
of many billions of dollars of value
is to come to the financial world, it must
come as a journey towards a moral banking system. The primary purpose of this paper was to
finance. The secondary
purpose was to offer one potential path towards a more moral banking system. Regardless of
uthor’s sincere desire that
Luca L. Hickman
The very foundations of Western finance are unstable. Rightly did the Psalmist cry, “If the
foundations be destroyed, what can the righteous do?” In the words of T. S. Eliot, let us,
therefore, dismantle this failed—
fires.” Let us begin by once again discussing the reasonability
of continuing the fractional reserve, interest
27
very foundations of Western finance are unstable. Rightly did the Psalmist cry, “If the
foundations be destroyed, what can the righteous do?” In the words of T. S. Eliot, let us,
—and failing—superstructure, and bring “old timber to new
fires.” Let us begin by once again discussing the reasonability—moral, economic and political
of continuing the fractional reserve, interest-based financial system now in place.
very foundations of Western finance are unstable. Rightly did the Psalmist cry, “If the
foundations be destroyed, what can the righteous do?” In the words of T. S. Eliot, let us,
timber to new
moral, economic and political—
based financial system now in place.
Luca L. Hickman
Carry on any enterprise as if all future su
Work and Personal Interests
Luca Hickman is a full-time student studying under a jointly administered program through
the Milwaukee School of Engineering in the United States and the Fachhochschule Lübeck in
Germany. In addition to his work in economics and finance, Mr. Hickman is also a freelance
writer with an interest in energy and environmental policy. He has presented papers on the
subject of American Corn-Ethanol Policy at international conferences, an
soon-to-be-published book on the subject entitled
A proud resident of Wisconsin, Mr. Hickman enjoys fishing, hunting, hiking and spending time
with his family.
To stay up to date with Mr. Hickman’s latest work, vis
28
ABOUT THE AUTHOR Carry on any enterprise as if all future success depended on it.
—Cardinal Richelieu
��������
time student studying under a jointly administered program through
the Milwaukee School of Engineering in the United States and the Fachhochschule Lübeck in
Germany. In addition to his work in economics and finance, Mr. Hickman is also a freelance
writer with an interest in energy and environmental policy. He has presented papers on the
Ethanol Policy at international conferences, and is the author of a
published book on the subject entitled The Ethanol Myths.
A proud resident of Wisconsin, Mr. Hickman enjoys fishing, hunting, hiking and spending time
To stay up to date with Mr. Hickman’s latest work, visit his website at:
www.paxetlux.org
ccess depended on it.
Cardinal Richelieu
time student studying under a jointly administered program through
the Milwaukee School of Engineering in the United States and the Fachhochschule Lübeck in
Germany. In addition to his work in economics and finance, Mr. Hickman is also a freelance
writer with an interest in energy and environmental policy. He has presented papers on the
d is the author of a
A proud resident of Wisconsin, Mr. Hickman enjoys fishing, hunting, hiking and spending time
it his website at:
Luca L. Hickman
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Luca L. Hickman
Few discoveries are more irritating than those which expose the pedigree of ideas.
1 English Standard Version
2 (North, Mises on Money Part IV 2002)
3 (Paul 2008), pages 144-145
4 (North, Mises on Money Part IV 2002)
5 The author here makes reference to the modern sense, i.e. the sum paid for the use of money, not the classical sense of damages or costs associated with making a loan. Hence the author is advancing both the classical definition of usury and the classical prohibition against it as being immoral.
6 (Elliott 1902) pages 9-10
7 (Homer and Sylla 2005) page 71
8 (Homer and Sylla 2005) page 71 and 1902) page 9
9 (Homer and Sylla 2005) page 71
10 (Homer and Sylla 2005) page 71
11 (Homer and Sylla 2005) page 76
12 (Homer and Sylla 2005) page 76. This 6% rate came in contrast to the 32 ½% to 43 ½% rates previously permitted to private pawnshops.
13 (Homer and Sylla 2005) page 76
14 (Homer and Sylla 2005) page 77
15 (Homer and Sylla 2005) page 72
16 (Khan 1985), page 24
17 (Khan 1985), page 24
31
ENDNOTES Few discoveries are more irritating than those which expose the pedigree of ideas.
—Lord Acton
��������
(North, Mises on Money Part IV 2002)
es on Money Part IV 2002)
The author here makes reference to interest in the modern sense, i.e. the sum paid for the use of money, not the classical sense of damages or costs associated with making a loan. Hence the
cal definition of usury and the classical prohibition against it
page 71 and (Elliott
page 76. This 6% rate came in contrast to the 32 ½% to 43 ½% rates previously permitted to private pawnshops.
18 (Lewis and Algaoud 2001), page
19 (Lewis and Algaoud 2001), page 35. It is also worth noting that ribā al-buyu can take two forms: Ribā al-fadl (which involves an exchange of unequal qualities or quantities of the same commodity simultaneously) and (which involves the non-simultaneous exchange of equal quality and quantities of the same commodity according to Lewis and Algaoud.
20 (Elliott 1902) page 10
21 (Willingale 1988)
22 (Homer and Sylla 2005), page 70
23 (Hebrew Free Loan Society; 2009)
24 (Hebrew Free Loan Society; 2009)
25 (Lewis and Algaoud 2001), page 187
26 The reader is again reminded that usury here is used in its full classical sense of any gain on principle received as a reward for lending.
27 (Homer and Sylla 2005), page 68
28 (Homer and Sylla 2005), page 68
29 (Homer and Sylla 2005), page 69
30 (Homer and Sylla 2005), page 69
31 (Homer and Sylla 2005), page 78
32 (Khan 1985), pages 23-24
33 (Iqbal and Mirakhor 1987), page 1
34 (Khan 1985), page 26
Few discoveries are more irritating than those which expose the pedigree of ideas.
, page 34
, page 35. It is also can take two
which involves an exchange of unequal qualities or quantities of the same
and ribā al-nisa simultaneous exchange
es of the same according to Lewis and Algaoud.)
, page 70
ociety; 2009)
(Hebrew Free Loan Society; 2009)
, page 187
The reader is again reminded that usury here is used in its full classical sense of any gain on
ceived as a reward for lending.
, page 68
, page 68
, page 69
, page 69
, page 78
, page 1
Luca L. Hickman
35 (Iqbal and Mirakhor 1987), page 5
36 (Khan 1985), page 27
37 (Lewis and Algaoud 2001), page 186
38 Maligned, at least, within certain circles of economic thought.
39 (Rothbard n.d.)
40 (Rothbard n.d.)
41 ( Islami Bank Bangladesh Limited n.d.)
42 (Paul 2008) page 143
43 Proverbs 11:1, KJV
44 (Iqbal and Mirakhor 1987), page 7
45 (Khan 1985), page 85
46 (Khan 1985), page 82
47 Although, since the non-profit banking system being discussed exists for the explicit purpose of making interest-free loans, the opportunity cost of doing so is simply the foregone opportunity to grant the loan to someone else—ostensibly someone who was less “deserving”.
48 (C. R. Smith 2001) page 129
49 (A. Smith 2003) page 47
50 (A. Smith 2003) page 47
51 (North, Mises on Money, Introduction 2002)
32
, page 5
, page 186
Maligned, at least, within certain circles of
( Islami Bank Bangladesh Limited n.d.)
, page 7
profit banking system being discussed exists for the explicit
free loans, the opportunity cost of doing so is simply the foregone opportunity to grant the loan to
meone who was
(North, Mises on Money, Introduction 2002)