Usury

Background

Usury refers to the act of charging excessively high-interest rates on loans. Historically, it encompassed any charge on loans but has since evolved to describe rates significantly above those commonly found in the market for similarly risky loans.

Historical Context

The definition and social acceptability of usury have evolved over centuries. In medieval times, many religions, including Christianity and Islam, outrightly prohibited any form of interest. However, with the advent of modern finance, the concept shifted to focus on what constitutes “excessive” interest.

In many jurisdictions, laws were enacted to prevent usury by setting maximum legal interest rates or by providing guidelines to identify what constitutes an unfair rate.

Definitions and Concepts

1. Usury: Charging excessive interest on loans, which is considered exploitative and above reasonable or legal limits.
2. Interest rate: The amount a lender charges a borrower, expressed as a percentage of the principal, for the use of assets.
3. Principal: The amount of money borrowed or the amount still owed on a loan, separate from interest.
4. Market rate: The prevailing interest rate available for loans with similar risk characteristics within a certain marketplace.

Major Analytical Frameworks

Classical Economics

Classical economists like Adam Smith argued that money should generate value without exploitative extractions, considering usury harmful to economic stability.

Neoclassical Economics

Neoclassical economists focus on market equilibrium and advocate for market-determined interest rates but recognize the potential for market failures that justify regulation against usury.

Keynesian Economics

Keynesian economics emphasizes government intervention to regulate interest rates, especially to curb predatory lending practices during economic downturns.

Marxian Economics

Marx viewed usury as a historical instrument of exploitation, maintaining wealth inequality by concentrating capital among lenders at the expense of borrowers.

Institutional Economics

Institutional economics highlights the role legal and social norms play in defining and combating usury, underscoring the importance of regulatory frameworks.

Behavioral Economics

Behavioral economists analyze how psychological factors influence lending and borrowing behaviors, often leading borrowers to accept usurious terms due to cognitive biases.

Post-Keynesian Economics

Post-Keynesians stress the importance of fairness and stability in financial markets, advocating for stronger regulatory measures against usury to protect vulnerable borrowers.

Austrian Economics

The Austrian School typically criticizes state intervention in interest rates, arguing it distorts the natural balance of savings and investment.

Development Economics

In developing contexts, usury can stall economic progress, making microfinance frameworks and fair-interest credit systems crucial for sustainable development.

Monetarism

Monetarists focus on controlling inflation through money supply rather than interest rate caps, but acknowledge the need for some restrictions to curb excessively risky lending.

Comparative Analysis

In comparing different economic schools of thought, nuanced positions on usury emerge:

• Classical and Written Off Marxian: reject any form of exploitative interest.
• Neoclassical and Austrian: lean toward market solutions, with mixed views on regulation.
• Keynesian and Post-Keynesian: support intervention to ensure fairness.
• Behavioral Economics Risks: highlight the irrational borrowing behaviors countered by protective regulations.

Case Studies

Examining countries with strict usury laws like France, German efficiency-driven limits, or inadequate enforcement scenarios in some developing nations, provides insights into the effectiveness of such regulations.

Suggested Books for Further Studies

1. Debt: The First 5,000 Years by David Graeber.
2. The Ascent of Money: A Financial History of the World by Niall Ferguson.
3. Capitalism and Freedom by Milton Friedman.
4. Usury Law and the Common Law by Alice Platzer.

Related Terms with Definitions

1. Predatory Lending: Imposing unfair and abusive loan terms on borrowers, often with deceptive tactics.
2. APR (Annual Percentage Rate): The annual rate charged for borrowing, representing the yearly cost of the loan.
3. Default Interest Rate: Higher penalty rate imposed on borrowers who fail to make payments as agreed.
4. Secured Loan: A loan backed by collateral to reduce risk for the lender.
5. Unsecured Loan: A loan without collateral, usually at higher interest rates due to increased risk.