The Practice of charging interest for the lending of money is an accepted and integral part of our modern, global, credit-based financial system. After all, the lender takes considerable risk in getting paid back. In fact, the entire Collection Industry is the result of the failure of so many for whatever reason, to repay their loans. So, it seems logical and fair for the lender to have some kind of protection and for there to be incentive to the borrower to honor their contractual obligations. While the amount of interest is usually linked to the risk factor, it seems that the line between "interest" and "usury" has become blurred, almost to the point of public indifference. The question of morality comes into play when interest becomes excessive, yet what that is exactly, is far from clear. In the Credit Card Industry, interest rates of up to 40% are quite common place. It is interesting to note however, that at various times throughout history, and in various cultures, the practice of charging any interest at all has been considered an evil one, virtually synonymous with usury.
Historical Perspective
From the earliest times of recorded lending, interest charged on loans has been controversial. Ancient Indian manuscripts reveal contempt for "usurers" and Ancient Greek philosophers such as Plato, Aristotle, and Cicero were all extremely critical of the practice. The most vocal critics over the centuries have come from the religious communities. The Old Testament and the New Testament are replete with stories reflecting scorn over the "money changers", the Hebrew word for interest; Neshekh, quite literally meaning "a bite". In Luke 6:35 Jesus says "Lend hoping for nothing in return". Although the Romans employed a sliding scale of interest for different situations, for a period of time interest was outlawed entirely in the Roman Republic. In the Middle Ages, the Roman Catholic Church championed the cause against usury, holding it to be a grave sin, Canon Law representing it as "malum in se", or "an evil in itself". Interestingly, although Luther and Calvin spoke out against the "sinful" act, it was during the Protestant Reformation movement on the tide of heavy commercialization that the practice shifted from the arena of public condemnation to that of private conscience. Since that time a distinction has been made between usury and patterns of trade, although there has never emerged a consensus as to where the boundary between the two lies.
Ethical Concerns
To this day, the orthodox branches of Judaism and Islam out rightly ban the practice of charging interest. This is ironic since through history the Jews have been strongly associated with Goldsmiths or money-lenders which were often one and the same. Religious objections to charging interest generally revolved around 2 things. Firstly, from an integrity standpoint, that it is a source of unearned income which essentially undermines the value of honest, hard work and becomes a means to an end in itself. And secondly, that it usually exploits the poor and the vulnerable the most, who generally borrow for survival and not for the purchase of luxury goods. In cases where payments are made against interest first, often never touching the principle, it virtually permanently enslaves the debtor. The ultimate result is that the poor have to work themselves to the bone so that the rich can retire and live comfortably off their interest. College students who apply for credit cards are a good example of this, Issuers entrapping young, inexperienced adults who are generally unaware of the ramifications of the burden they take on. The assumption has always been that a college education leads to a better paying job and while historically this may have been true, even in the best of times, this has left many young adults buried in debt for years. Now, however, the dynamic has changed. Since a college education doesn't even guarantee a job any more, the cost of a college education has risen far beyond its value, presenting a bleak scenario for students who are currently borrowing money to complete their degree.
On the larger scale, Third World countries find themselves in a similar circumstance, having to spend precious capital on interest rather than on infrastructure that would improve the standard of living for their populations.
Islam has been one of the most outspoken critics of the practice of usury and they have taken the lead in developing a banking system that does not lend money usuriously. Of course, the penalties for not repaying debt, are likely quite severe, so perhaps the high interest incentive is perhaps moot.
Credit Cards and the Question of Usury
In the US, each State has its own set of rules with regard to the "usury limits" and the variation is considerable. The basic legal rate of interest in New Mexico is 15%, whereas in Delaware, Wisconsin and Michigan it's only 5%. At the same time, the Federal Government has set parameters for "National" banks tying interest rates to the Fed prime interest rate and allowing them to ignore State usury limits entirely. Banks have different interest rates for different kinds of loans, credit cards loans being higher that auto or mortgage, for example.
The structure of Credit Card debt and other forms of unsecured lending is uniquely hazardous. Where secured loans offer reasonable rates in a set repayment time frame, unsecured loans have no repayment plan with much higher interest. While most people agree that there is a point at which interest becomes outrageous, there is no consensus as to what that is. Since most States no longer have caps on Credit Card interest rates, and since most Issuers are located in states without usury laws (South Dakota, Delaware, Nevada), Issuers have been able to dodge the issue of usury. In 1978 the Supreme Court, in "Marquette vs. First Omaha Service Corp" gave National banks the ability to charge their highest rates to people living across state lines and thus ignore individual State usury laws. This opened the door to the banks' ability to essentially charge anything they want as long as it is disclosed to the borrower. In the past few decades States have been complicit in the deregulation movement, loosening their own usury lawsto maintain their share of the credit card business.
While there were some token bones thrown to consumers to provide better transparency, Congress missed a perfect opportunity with the Credit Card Act of 2009 to curb usurious lending. While the intent of the law is to protect consumers from legal trickery, fearful that it might hamper the flow of credit, the new law does nothing to establish a federal usury standard for credit cards. There are, in fact, many more protections for the lenders, and it appears that as far as interest goes, we haven't come close to seeing the worst yet. Last Fall, a First Premier Bank marketer mailed test (9) offers of credit cards featuring 79.9% with 59.9% annual interest on cards with a $300 limit to people with bad credit. Apparently the response of takers at 2% was higher than their normal response of 1% - 1.2%. In March, First Premier dropped the 59.9% APR down to 49.9%. In addition to increasing interest, many Issuers are now charging substantial annual fees for the privilege of having a credit card. Cash Calls are at 97% and Payday Loans can be as high as 300%.
Issuers are not the only ones who charge interest to the Credit Card Debtor. In structuring a settlement with a Debtor, the Issuer's interest may or may not be included in the settlement, but unless the settlement is a flat fee payment, new interest by the Collector is often part of the equation. The reason is that the cost of carrying the debt over time can have a cost associated with it to the Debt owner that purchased the accounts from the Issuer or from another Debt Buyer. Short statues of limitation only add to the risk to the Debt Buyer.
Inherent Economic Instability
At the macro scale of lending and borrowing, there is much written about how much of the Casino economics that caused the recent recession can be laid at the feet of our interest-base banking system. The leveraging issue aside, as US interest rates increased to offset the effects of house price inflation, a loan default chain reaction occurred. One of the main objections to the interest-based economy by many economists is the repeating "boom and bust" cycles that it creates which makes it inherently instable. Some suggest that compounding interest may actually cause inflation.
Even strong capitalists, such as Adam Smith and John Maynard Keynes, were acutely aware of the dangers of usury and in favor of controlling interest, yet it is clearly a slippery slope. Senator Ron Paul, who favors market driven interest rates, has taken up the banner for many modern critics of Federal Reserve interest manipulation and the banking infrastructure that protects it. He believes that it is completely wrong for commercial banks to hold a monopoly on the money supply and on the credit creation process. The idea that banks can charge interest (including to government) on money which they have created out of nothing, is immoral and fraudulent.
The current financial system is a monopolistic structure that bypasses any real form of competition. The best interest rates go to those who need it the least for either the staking of more wealth or the purchase of luxury goods. It is, in effect, a stacked deck of wealth redistribution wherein the rich get richer and the poor get poorer. If you argue that money is an essential government sanctioned product of sorts, and that all people should therefore have equal access, then the system might even be considered unconstitutional. The relentlessness dynamic of compound interest, often imposed in the face of adversity, sets up a cruel plot that is very different from equity-based returns on investment. There is much we can learn from past cultures and rethinking the wisdom of our systems and reassessing our values.
