MATTER of

PRINCIPLE AND INTEREST

,b s Thebricst Po5 5
Histor

o Usurp

By Mark A. Senn
often one cannot be sure whether the rate or the mere collection of interest was usurious. Some scholars characterize interest as the amount payable in business transactions and usury as the amount charged in personal transactions. Gustav Cassel, The Nature and Necessity of Interest 4 (New York 1956). John Donne wrote in "Loves Usury," "For every hour that thou wilt spare me now/I will allow/ usurious god of love, twenty to thee," evidently speaking of a personal rate of interest. The Earliest Rule The Code of Hammurabi (1792-1750 B.C.) included several laws permitting interest. For example, a loan of grain required repayment of extra grain at 331/3% per annum, and a loan of silver required repayment of extra I silver at 20% per annum. The borrower's right to repay commodity loans with commodities-and not currency-is an important and recurrent topic in usury and interest. See generally John M. Houkes's invaluable An Annotated Bibliographyon the History of Usury and Interestfrom the EarliestTimes Through the EighteenthCentury (Lewiston 2004). Moreover, the Code recognized the lawfulness of a division of the profits or a doubling of the investment as a return when money was at risk in a speculative investment as opposed to a loan that had to be repaid. This permission of interest in

commerce-perhaps as long as eginning with the advent of ago-interest seven millennia has traditionally been charged in Western culture for the use of goods or money. Yet extortionate interest-and sometimes all interest-has often been prohibited, earning the opprobrious epithet "usury." Over time, the prohibition of interest has given way to the realities of commerce and instead has evolved into the regulation of interest. This article reviews the evolution of these principles and their continued vitality in modem lending. Definitions Any discussion of interest and usury is beset by definitional problems. Interest, from the Latin interesse, is the difference between the lender's position as a result of late payment and what its position would have been if payment had been timely (id quod inter est). Usury, from the Latin usus meaning use, was the (excessive or illegal) charge for money lent. In contrast to interest, usury bore no relation to the loss for late payment, but rather accrued from the moment the loan was made. Although modem statutes and some older laws define usury or illegal interest by reference to the maximum rate, many older laws do not. As a result,

exchange for risk has continued in the discussion of usury and interest. i Testament The Old Approaches Rooted in an agrarian and dannish culture, the Old Testament allowed interest to be charged to sojourners who were presumed to be in business for a profit: "Unto a stranger thou mayest lend upon usury." Deuteronomy 23:20. The "business purpose" exception to usury survives. Berry v. Martens, No.

Mark A. Senn is a shareholder in the Denver, Colorado, firm of Senn Visciano Kirschenbaum P.C. and is group vice-chair of the Real Property Leasing Group.

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192711, 2002 WL 921069 (Va. Cir. Ct. Mar. 7, 2002) (under state statute, an individual may not assert usury defense for a loan made for business purposes). One could not charge interest to one's own people: "Thou shalt not lend upon usury to thy brother." Deuteronomy 23:19. Deuteronomy's double standard vexed thinkers for centuries. Benjamin Nelson, The Idea of Usury (2d ed. 1969). Furthermore, one could not charge interest to anyone who had fallen on hard times. Leviticus 25:36, 37. David described the man of God as "[he] that putteth not out his money to usury, nor taketh reward against the innocent." Psalms 15:5 (cited in Matlack Props., Inc. v. Citizens & Southern Nat'l Bank, 162 So. 148, 150 (Fla.1935), holding that corporations cannot raise a usury defense). The Old Testament is reminiscent of some modem loan transactions when it contrasts a loan in which the principal was repaid with interest, for example, 100 shekels lent with 110 repaid at the end of a year (marbit or tarbit from the Hebrew to multiply), and a loan in which the interest was deducted from the principal, for example, 90 shekels lent with 100 repaid at the end of a year (neshekh from the Hebrew to bite). Robert Alter, The Five Books of Moses: A Translationwith Commentary (Norton 2004) (translator's notes and correspondence regarding the translation on file with the author). A neshekh loan will yield a slightly higher return and appears to have been more strongly condemned as usury (as it certainly was by Luther) while marbit was merely an increase or profit. The Greek and Roman Sources A severe critic, Plato (428-347 B.C.) excoriated those who "while they multiply their capital by usury ... are also multiplying the drones and the paupers." The Republic 281 (Frances MacDonald Cornford trans., Oxford Univ. Press 1951). He suggested that "voluntary contracts for a loan should be made at the lender's risk." Id. Plato proposed: "Money must not be deposited with anybody whom one does not trust. There must be no lend-

ing at interest, because it will be quite in order for the borrower to refuse absolutely to return both interest and principal." The Laws 165-66 (Trevor J. Saunders trans., Penguin Books 1970). It remained for Plato's student, Aristotle, to make the most enduring comments about interest. Natural imagery characterizes the analysis of Aristotle (384-322 B.C.), who identified three methods of acquiring goods. Aristotle, Politics I, ix (T.A. Sinclair trans., Penguin Books 1962). Acquisition from nature by hunting or fishing was natural. Exchanging goods for money was natural because it adjusted inequalities in the natural distribution of goods. After currency was developed, exchange became trade because it was easier to carry currency than goods. Aristotle approved as natural the accumulation of wealth in the form of goods, but disapproved as unnatural wealth in the form of currency obtained from trade that did not produce goods but merely exchanged them. Aristotle recogA rnicA ,,- rif-filhlf
zed te dixffc1h f

ings about interest were unclear, Aristotle collocated "those ... who work at degrading occupations, pimps and all such people, and usurers who lend small amounts at high interest." Nichomachean Ethics 92 (Terence Irwin trans., Hackett Pub. Co. 1985). Aristotle's image of the "unnaturalness" of a barren object like metal currency having offspring held sway for many centuries in the debate over interest and usury

lira

nf flik
thisu

distinction. Definitely unnatural was making money from money as opposed to making money by exchange or even trade: Very much disliked is the practice of charging interest; and the dislike is fully justified, for the gain arises out of currency itself, not a product of that for which currency was provided. Currency was intended to be a means of exchange whereas interest represents an increase on currency itself.. . . [O]f all types of business this is the most contrary to nature. Id. at x. Metal currency could not naturally beget currency. In case his feel-

Before faulting Aristotle's economic theory as naively naturalistic, one must note that there was experience to support it. A lender might lend seed or an animal and expect a return of produce or offspring. The return had natural limits. With the advent of metal currency, a loan had to be repaid with some currency. This might work for commercial transactions, but it tested the mettle of a farmer whose stock in trade was a commodity with seasonal values. Farmers no longer repaid their debts in kind; rather, when they had a bountiful harvest, the value of the product was low and the coin expensive. Unable to pay their debts, they often lost their farms or became slaves. Two centuries before Aristotle, the Greek lawgiver Solon (638-558 B.C.) emancipated the

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slaves, forbade slavery for debt, and returned foreclosed lands. He also set a minimum value for agricultural products and thus converted them to coin or monetized them. The New Testament Attitudes The New Testament reflects two attitudes toward lending. One attitude condemns those who withhold support from the needy, and the other encourages interest on invested capital. The condemnation is found in Luke 6:34, 35: "And if you lend to those from whom you hope to receive back, what credit is that to you?... But love your enemies, do good and lend, hoping for nothing in return." The other attitude is demonstrated in both Luke and Matthew from the story of the merchant who left his money with his servants. Some of the servants invested the money and some of them buried it (from which comes

"corporations were thought to be less likely to yield to the pressures of necessity and pay unduly high interest rates." Williams v. Security Sav. & Loan Ass'n, 355 N.W.2d 370, 373 (Wis. 1984). This distinction is still made 20 centuries later in the Uniform Consumer Credit Code. Unif. Consumer Credit Code 2601 cmt. 1 (1974). By means of the mutuum-an agreement by which money or goods were lent with required repayment including interest if provided in the mutuumRoman law recognized loans at interest. Around 533 A.D., Emperor Justinian compiled Roman law in the Corpus Juris Civilis, which set limits on interest based on the borrower's status and ability to pay The rates ranged from 8% per annum for commercial loans to 4% for illustrious people and farmers. Risky nautical loans earned an exceptional 12%. Houkes, supra, at 69. From the Middle Ages to the Industrial Revolution Adopting the Aristotelian view, Thomas Aquinas (1224-74) wrote: "Charging for the loan of money is unjust as such, for you are selling something that doesn't exist." Thomas Aquinas, Summa Theologica ch. 11, at 396 (Timothy McDermott ed., Christian Classics/Thomas More Pub. 1991). Aquinas identified things that are consumed by their proper use so that their use cannot be separated from the thing itself--such as food and wine. One cannot sell something that is intended to be consumed and charge for its use-such as selling a bottle of wine and charging the buyer for drinking it. Because money is intended to be consumed, it is wrong to charge for its use. The proper charge-its "just price"-is its return. On the other hand, one can charge for the use of a house because it is returned after it is used. Beginning in the fourth century, Christian theologians condemned interest in the strongest terms, often equating it with murder (as Cato had) because it took the borrower's life. Dante placed usurers below suicides in the seventh circle of the Inferno (Canto XVII). Before one blithely condemns the Church's early prohibition on interest,

The New Testament distinguishecl loans

to the neecj for

personal or
hou51ehold reasons from loans b: and to business peoRle for investment and gain.
the expression "to bury one's talents," with "talent" meaning both an ancient measure of weight and value and a skill or inclination). Although it is a parable, Christ is clearly critical of the servants who did not maximize their master's gain through interest. "Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?" Luke 19:22-23. In Matthew 25:26-27, the master said, "I reap where I sowed not, and gather where I have not strewed," echoing Aristotle. Thus, the New Testament distinguished loans to the needy for personal or household reasons from loans by and to business people for investment and gain. A Wisconsin appellate court has held that

consideration is due to the position in which the Church found itself when trying to protect oppressed borrowers: it could enjoin interest altogether or attempt to regulate its fluctuating rate. The Church chose the latter and simpler course. Evidently aware of the prevalence and need for interest in the emerging economic system, however, the Church later countenanced several casuistries to avoid the notion of interest as an unnatural growth of money and allowed compensation for money lent and not timely repaid in four circumstances. Eric Kerridge, Usury, Interest and the Reformation 7 et seq. (2002). Although the last papal wordPope Benedict XIV's Vix Pervenit (On Usury and Other Dishonest Profit) in 1745-strictly forbade interest, the exceptions and modem rules blunt this edict. Dominating the reasons for allowing the payment of money for the use of money was poena conventionalis (the standard penalty). If a secured loan was not repaid when due, the lender was allowed a reasonable percentage of the loan for his forbearance in not forfeiting the bond or pursuing his legal rights. Like a modem credit card, no extra payment was due if the loan was repaid timely. In The Merchant of Venice, Antonio would not have owed Shylock interest if he had repaid the loan when due; however, Shylock did not share the risk of Antonio's venture, his charge of a pound of flesh was excessive, and thus his loan was usurious. "Emergent loss" (damnum emergens) compensated the lender for indirect loss occasioned by not having the money he would have had if the loan had been repaid when it was due. If the lender's house was damaged and then further damaged because the lender could not afford to repair it without the overdue money the lender suffered damnum emergens. Lucrum cessans (cessant gain) was the loss sustained by the lender who missed a profitable opportunity because a loan had not been timely repaid. Together damnum emergens and lucrum cessans were damna et interesse. Originally the amount was specified in the loan but later became a periodic charge.

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Maitland noted that the creditor's right to collect damages for late payment became part of English law: "There is no usury here, for there has been no bargain that the creditor shall receive any certain sum for the use of his money, still, so far as we can see, the plaintiff gets damages though he has only proved that the debt was not paid when it was due." Sir Frederick Pollock & Frederic William Maitland, 2 The History of English Law Before the Time of Edward 1216 (1899). Expectation of profits from a business with the concomitant risk of loss entitled a lender to any share he could negotiate without fear of usury. This is the doctrine of periculum sortis: "Suppose you were asked to lend a mutton chop to a ravenous dog, upon what terms would you lend it?" Lord Bramwell, quoted in Kerridge, supra, at 11. This recalls Hammurabi and presages Blackstone and modem law. With the Reformation, Christian strictures loosened. Martin Luther railed against interest generally, but John Calvin was more lenient, favoring a recognition of the borrower's circumstances. An early proponent of capitalism, Calvin would have allowed loans at interest to businesspeople but not to the needy. Italian bankers employed bills of exchange to avoid receiving interest on a loan. The "borrower" took, for example, Florentine florins and agreed to repay the "lender" in ducats at the Venetian market ratebut at a slightly greater value of ducats after the exchange for florins. With the added benefit of easier transmission than coins, bills of exchange soon became currency throughout the continent and largely supplanted gold and silver. Jack Weatherford, The History of Money 73-79 (1997).

Renting and lending were closely allied in another evasion of interest. Early English law secured debts in several ways whose unifying characteristic was a conveyance to the lender with a duty to reconvey on repayment. In gages, the borrower/gagor conveyed his property to the lender/gagee who then rented it back to the gagor in one of two ways: a vivum or vadium gage (the live gage), in which the rent was applied to the debt and there was no usury, and a morturn vadium or mort-

whose value exceeded the loan so long as interest was paid. Theodore ET. Plucknett, A Concise History of the Common Law 572-73, 604 (5th ed. 1956). In the end, the Church's general prohibition on interest did not hinder the collection of interest, the ascent of the northern Italian banking families, or a revolution in commerce during the Renaissance. "[T]he economic revolution and the emancipation of thought .. supplied the necessary conditions for a scientific treatment of the problem of interest." Cassel, supra, at 6. One can even give the Church credit. John T. Noonan (now on the Ninth Circuit Court of Appeals) argued, "For three centuries some of the best minds of Western Europe participated in this idealistic effort to frame the intellectual and moral conditions under which credit might justly be extended," and thus began the scientific approach to banking. John T. Noonan, The Scholastic Analysis of Usury 407 (1957). The prohibition of interest became the regulation of interest. For example, Sir William Blackstone recalled maximum interest rates of 10% during the reigns of Henry VIII (1509-47) and Elizabeth I (1558-1603), 8% during the reign of James I (1603-25), 6% during the reign of Charles I (1625-49), and 5% during the reign of Anne (1702-14). William Blackstone, 2 Commentarieson the Laws of England 463 (1769). The Emerging View in England and America To Blackstone, commerce could not subsist without the mutual use of extensive credit. Recognizing the definitional problems, he noted that "increase by way of compensation for the use ... is generally called interest by those who think it lawful, and usury by those who do not so." Interest seemed to Blackstone to be a moderate charge for the use of money, while usury seemed to be an exorbitant charge for it. Blackstone believed that interest rates were composed of two factors: inconvenience for the inability to use the money and risk of its loss. Equally weighted, the interest attributed to inconvenience was inversely related to the amount of specie in circu-

gage (the dead gage), in which the rent was not applied to the debt and there could be usury. A similar result could be reached by a lender's buying a term of years, which seemed to be a fair exchange but often allowed the lender to profit unconscionably from the fruits of the land. When the loan was repaid, the gage ended and the property was reconveyed to the borrower, or the lease ended. Often loans were extended. When land values rose, however, the lender was better off foreclosing than extending. Borrowers sought equitable relief in chancery court by means of the equity of redemption, which prevented foreclosure of lands

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lation, and the interest charged for risk was directly related to the degree of risk. Ship loans-or bottomry-were very risky and carried high interest rates; classical Greek thought had recognized the risks and justified rewards of ship loans. Insurance contracts (which Blackstone, among others, analyzed with usury and interest) did not involve inconvenience because no money was lost, but they did carry the risk of total loss. If the interest because of inconvenience was 3%, then, Blackstone continued, the rate on good personal security would be 5%, on a government loan 3%, and on a loan secured by a mortgage 4/6. The beginning of the 19th centurycoincident with the American Revolution and the Industrial Revolution-saw English thought reconsider the basis of the usury laws. Jeremy Bentham wrote in Defence of Usury (1787, Letter 1), "no man of ripe years and of sound mind, acting freely and with his eyes open, ought to be hindered... from making such bargain, in the way of obtaining money, as he thinks fit: nor, (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to." Bentham adduced Blackstone to support his case. In The Principlesof Morals and Legislation 252 (1823 reprint), Bentham said usury was a consensual crime (if one at all) that "cannot merit a place in the catalog of offenses, unless the consent were either unfairly obtained or unfreely." England repealed its usury statute in the middle of the 19th century Historically, American usury laws have been "an almost uncanny barometer of shifts in the political and economic demand for money" Lawrence M. Friedman, A History of American Law 543-45 (1985). Although some states allowed market forces to drive interest rates, others legislated usurious rates, usually higher in the West where money was scarce and where high rates were needed to attract capital. This phenomenon suggests that the policy followed the economy. Some territories eliminated usury laws (often at the beginning of their statehood when the government granted vast tracts of

land and land was cheap but money was not) to attract money from the East. When land values fell and foreclosures loomed, states reenacted usury laws. Farmers bore the brunt of interest costs-as in Solon's day-but later unions took up the banner against high interest rates that pressed their urban members. Some states still recognize usury, but its importance has been weakened by the federal preemption of state law in the 1980s. See, e.g., National Bank Act, 12 U.S.C. 85, 86 (2004); Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), 12 U.S.C 1735f-7, 1831d. That preemption led to contemporary credit card interest rates and charges that some call usurious. Today and Tomorrow In reviewing the "extremely complicated history" of usury (as Max Weber assesses it in The Protestant Ethic and the Spirit of Capitalism (1904-05)), one discerns occasional absolute prohibitions of interest-of which Aristotle and Aquinas were the foremost exponents-but more commonly sees the recognition of a legitimate role for interest in commercial settings. Interest is variously justified as the payment for sharing a risk or foregoing the use of the lender's money. Thus, the term "usury" itself evolved from charging any interest to charging excessive or exorbitant interest. One historian characterized the evolution of thought about interest as beginning with allowing loans to the "other" but not to one's brother in Deuteronomy, progressing to prohibiting loans to the "brother" as inimical to universal brotherhood in canonical rules, and ending with "universal otherhood" with modem capitalism in which loans are generally allowed and all people are "others." Nelson, supra, at xiv-xxv. Secular and religious thought are now oddly juxtaposed. The Church's modem position acknowledges that "there is always present. . . some just reason for demanding the legal rate of interest and ... an even greater rate of interest provided there

be just and proportionate reasons for demanding it." T. Lincoln Bouscaren & Adam C. Ellis, Canon Laws: A Text and Commentary 844-45 (1951) (commenting on canon 1543). Canon 1543 prohibits interest if "it is evident that the legal rate is exorbitant," but acknowledges an absolute right to interest. The Church now seems to condone usury if there are "just and proportionate reasons for demanding it." Ethical defenses to usury are founded on freedom of contract, not on restraint of trade. Practical arguments for interest (or usury) maintain that profits are essential to guide investments, as Calvin might have said. The modem use of dividends on equities is analogous to returns for the sharing of risk (a traditional exception to usury) and are distinguished from interest on bonds (guaranteed without risk to the investor and historically usury). In a debate as old as Hammurabi, risk of default by shaky borrowers can be a justification for high interest rates for credit cards; in this view, the "risk" argument against usury trumps the "guaranteed payment" argument for usury. New terminology continues the biblical prohibition of usury as oppression of the poor. For example, "loan sharking" encompasses lending above legal rates, using threats or violence to collect a debt, or making loans without the required license. The latest image-laden term is "predatory lending," which involves overpriced loans, unaffordable loans, loans without net economic benefit to the borrower, and loans with exploitative terms that the borrower does not understand. See Debra Pogrund Stark, Unmasking the PredatoryLoan in Sheep's Clothing: A Legislative Proposal,21 Harv. BlackLetter L.J. 129 (2005). Consistent with law and policy that Solon expounded in ancient Greece, Stark's proposal would protect consumers from oppressive personal loans secured by a dwelling. Daily, interest on this important principle continues to accrue. U

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