Usury

The other day I reported that throughout history many nations including ancient China, ancient Greece, ancient Rome, and the Christian church in medieval Europe have outlawed loans with any interest. 

Sometimes it takes a while but eventually my brain asked why would anyone lend money when there’s no interest?

Apparently in those countries that banned usury the biggest borrowers were the kings and emperors; zero interest rates were very much in their own favor and hence the bans on interest.

Not lending a king some money could be punishable by death in the worst case, or lead to a loss of opportunity through the failure to receive royal charters (i.e. monopolies). Many other ‘intangible’ benefits of lending money existed.

In addition, while interest on repayments might have been banned there were no laws against the collateral being worth much more than the loan. Hence there was often an implied interest rate in the case of default.

So the lenders did have an ‘interest’ in lending money. However that interest couldn’t necessarily be facilely calculated as a single percentage rate of the amount loaned.

Without an actual record of every transaction throughout history, every off-book intangible benefit to the lenders, the value of every default event, the inherent value of avoiding the risk of death and torture through the provision of loans, how on earth can the Bank of England claim that interests rates are currently at a 5000 year low?

It does make one think about the opportunity of reverting to old lending practices.

Governments could get zero interest loans with no collateral so long as they gave away royal or state charters in the process (that cost them no more than five minutes of voting time in parliament).

Business loans could also have zero interest so long as the collateral was worth, say, twice the loan amount. This would be the ultimate low doc situation since the lender would make more money when there is a failure to repay and hence wouldn’t really give a stuff about due diligence around the capacity to repay.

My guess is that the rise of interest on repayments coincided with the rise of taxes and the ability to deduct such interest. It’s not really that complicated.