The Theories of Interest: From Ethics to Economics

This discussion has from time to time bordered upon the re­lated field of the theory of interest and profit. In fact, no dis­cussion of capital would be complete without an analysis of these two subjects which have proved themselves to be among the most controversial in economic theory. Much of the early literature on interest was concerned with its ethical rather than its economic aspects. Plato condemned interest as it applied to loans. Aris­totle, investigating the various aspects of economic life more deeply than Plato, also condemned it on the ground that money was barren and could not reproduce itself. To require payment over and above the value of the thing itself when it had produced nothing, he believed, was unjust. The early Christian fathers de­clared that usury was sinful, but they had not only the Greek philosophers but also biblical precedent for their objection. It remained for Aquinas to modify the earlier Christian doctrine in the face of clearly observed conditions and practices in his own time. He divided material wealth into those articles which were consumed in use and those which were used without consuming. The first could not be loaned but only purchased outright; the second could be leased for use and returned. Money, somewhat illogically it seems to us moderns, was looked upon as of the former variety. Hence Aquinas sided with Aristotle in con­demning the dishonest practice of requiring more than its face value as the sale price of money.

Nevertheless, interest could be paid to persons who were professional usurers (who were usually not controlled by Christian doctrine) if the borrowers desired the money for good purposes. Two general conditions prevailed during the Middle Ages when payment of interest might be considered legitimate. One, damnum emergens, oc­curred when the owner realized a loss because of having loaned the money. The second, lucrum cessans, was the occasion of the owner losing an opportunity for profit while his money was loaned to another. Christian doctrine approved the first but raised doubts against the second. The general trend was to in­crease the number of exceptions to the prohibition against interest. Purchases on credit might carry a higher price; bills of ex­change were discounted; money invested in partnerships was allowed to earn interest; city debts carried interest and lending societies were able to set a rate. The periodic decline of the pro­hibition against usury corresponded closely to the rise of oppor­tunities to invest money in productive enterprise. The final break in religious objections came when Calvin took a positive view on the legitimacy of interest, with only minor reservations. For a time following the Reformation, usury laws setting a maximum rate of interest existed. Then, finally, under the attacks of men like Bentham the laws were abolished. Bentham's point of view was that the usury laws made it easy for the old settled business enterprises to get money, but new industries which involved risk but which also were the origins of progress could not borrow because no lender would assume so great a risk at such a low rate of interest. At last, during the 20th century, usury laws re­turned in the form of small loan acts regulating the amount of interest allowable on loans of less than a certain small sum, commonly $300.