This pamphlet is a great summary:
OR TAKING INTEREST
FOR LENDING MONEY
An Overview from Biblical and Modern Perspectives
THE LORD SUDELEY FSA
I have been asked to write about usury from a Christian perspective. This recalls a pamphlet that I published as Chairman of the Conservative Monday Club, with articles by various contributors. I wished to call the pamphlet The Case against Usury but was told that most people do not understand what the word “usury” means. So I changed the title to Are Banks Misusing Your Money? (A Case against Usury).
Usury is usually taken to mean driving hard bargains. The Oxford dictionary defines it as: “the lending of money at interest, especially at an extortionate or illegal rate”. Thus the word signifies the lending of money on which interest is charged – without the lender taking a share of the risk.
For reasons which I will develop, I oppose this practice. I believe that banks and other lending institutions should not be lending at all; instead they should make their money by taking a share of the risk or equity in business enterprises. My interest in this question arose from the tragedy of my own family which was made bankrupt through usury. The June 1999 issue of London Miscellany carried my article on The Sudeley Bankruptcy and its significance for today. At the time, owing to an agricultural depression, we were in debt for about half a million pounds Sterling. Unfortunately, Lloyds Bank refused to accept our collateral so that some assets could be sold on a reasonable timetable to fetch their proper value. Instead, the bank filed for bankruptcy to force immediate payment of the debt. Our creditors got next to nothing while we lost everything.
Biblical Roots of the Christian Condemnation of Usury Recent deciphering of Cuneiform in ancient clay tablets has helped to disclose ancient practice in this regard. During the Bronze Age in Mesopotamia, people began to recognise the invalidity of lending money or interest-bearing debt, as well as the need to cancel debt in order to sustain rural self-sufficiency. The Mesopotamian cradle of enterprise has bequeathed a wealth of economic records from the Third Millennium B.C. We can see how the disorder caused by interest bearing debt mounting beyond the ability of debtors to repay was addressed, in the way it has not been in Third World debt today.
After the Babylonian Captivity, the Jews in the Old Testament adopted this Mesopotamian Clean Slate policy of cancelling debts. The authors of a revived Judaism wove laws into the Old Testament’s first five books (the Torah or Pentateuch) to protect the rural population from large creditors. The freedom from debt advocated by the Covenant Code of Exodus, the Septennial Year of release in Deuteronomy, and the Jubilee Year of the Holiness Code in Leviticus are not just abstract literary ideas, but actual legal practices that freed rural populations from debt servitude, and land from appropriation by foreclosure.
Release from debt was revolutionary in Biblical times because it took power from the hands of rulers and became a sacred popular commandment. Deuteronomy directed that the laws on cancellation of debts be read aloud in public every seven years, so that the population would know that they were to be freed from bondage, this at a time when anyone unable to repay a debt became a slave.
For many centuries scholars have doubted this practice because it would seem to wreak economic havoc. As a result, the Biblical tradition of cancelling debts was lost.
The ancient law in Exodus that forbids the charging of interest on a loan to a fellow Israelite was breached when Israel came in contact with a wider world.
Thus, in Deuteronomy, interest was permitted when dealing with a foreigner – identical to Islamic practice. Thereafter, outside our Christian tradition, usury was forbidden by Aristotle and Mahomet, and within it by St. Thomas Aquinas and Dante. When Virgil takes Dante on his tour of Hell, the poet looks on the shades of usurers seated with the Sodomites on the burning sand. An old commentator observed that the Sodomites and usurers are classed together because Sodomites “make sterile those natural instincts which should result in fertility”, while usurers “make fertile what by its nature is sterile,” that is, they make money “breed” when it should not.
Dante gives us the heraldry of various usurers, especially the Scrovegni, and you may be familiar with Giotto’s painting in the Scrovegni Chapel at Padua. Then, as we know from R.H.Tawney’s classic work, Religion and the Rise of Capitalism, the Church became embroiled in usury in breach of its own rules. It did not help that with the building of Sainte Chapelle to house the Crown of Thorns, the Crown was acquired on a loan or mortgage basis from the bankrupt Byzantine government. With the Reformation, Calvin sanctioned usury. By the 1860s, the writings of such economists as Petty, Locke, Turgot and Bentham had the effect of removing many anti-usury laws from the statute books of Western European countries.
Creating `Additional Money’ or Lending beyond Reserves
Once the abolition of usury allowed the lending of money, those who did it soon realised that they could do so fraudulently, in my view, by lending far beyond their own reserves. That is, in Tudor times, the goldsmiths, the antecedents of our present banking industry, realised that not all the gold plate and bullion deposited with them would be withdrawn at the same time. So they invented the audacious and fraudulent trick of issuing promissory notes – the precursor of our present bank notes – to represent an excess of what they really had, or what might be called “additional money”.
To summarise what I see as the main problem, the use of bank credit, which consists not just of loans of the bank’s reserves but the creation of additional money, cuts money loose from the real economy where goods and services are exchanged. In this way, money is treated as a commodity though it should not be used to reproduce itself. When the money supply increases by this means, the previously existing supply is debased, resulting in inflation.
To revert to history, during the reign of Louis XIV in France, Dutch banks lent beyond their reserves. The American Revolution and Britain’s war against Napoleon were financed by unfounded paper currency. Our Bank Charter Act of 1844 finally accepted that paper notes were indeed circulating as money and attempted to regulate their creation and circulation.
In the US at least a third of the price rises during and after the First World War were due to the Federal Reserve System permitting banks to lend beyond their reserves, and the severity of the consequent major contradictions in 1920-1921 and 1929-1933 were attributable to acts of commission or omissions by the “Fed”.
In his Encyclical Quadragessimo Anno of 1931, Pope Pius XI remarked that: “…the power to create money and to expand and contract the money supply at will carries with it too great an opportunity of economic domination (and therefore ultimately tyranny) to be left to private control without injury to the community at large.”
From the 18th century until the beginning of the 20th the terms on which money could be created oscillated between the state and the private banking industry in the US, with dangerous consequences. For example, during the 18th century, Britain forbade the issue of paper money in the colonies. The American Revolution was, as mentioned, funded by paper money. President Abraham Lincoln declared: “Governments should create, issue and circulate all currency and credits needed to satisfy the spending power of Governments and the buying power of consumers. By adopting these principles the taxpayer would be saved immense sums of interest.”
With Lincoln’s Greenbacks the public became accustomed to Government-issued, debt-free money. It resulted in great prosperity in the opening up of the American West. Then the Federal Reserve Act of 1913 transferred control of the money supply from the Government to a private banking elite.
Gold or ‘Backing a Currency’
When Sir Robert Peel introduced his famous Bank Act of 1844, it was held that the value or purchasing power of money was due to the metal composing it and into which it was legally convertible. Gold was held to have a fixed value the world over. During the First World War, the Gold Standard was suspended, and then again by President Nixon in 1971 to pay for the Vietnam War. Since then the US has had a totally debt-backed monetary system. Banks create money out of
the issuance of new debts.
In the UK between 1963 and 1997, the role of notes and coins and their proportion of the money stock have fallen from over 20% to less than 4%. Notes and coins are created free from debt. By contrast all ‘numerical money’ or bank credits comes into existence in parallel with an equivalent amount of debt.
The over-availability of such additional numerical money – or bank credit created out of debt – is particularly reflected in the way it has increased the price of housing.
In 1960, 19% of the value of the nation’s houses was subject to mortgages. The credit for a house has become a prime example of banks not only charging exorbitant rates of interest but also establishing and potentially controlling houses as assets. It is generally estimated that with an average mortgage four times the original value is paid.
Apart from the private sector we need also to glance at banks and National Debt. The mechanism of National Debt is quite simple.
It involves the assumption of debt by the Government to obtain additional revenue to cover the annual shortfall of taxation. So to pay for the war against Louis XIV, the Bank of England was chartered in 1694 and started out in the business of loaning out several times over the money it held in reserve, all at interest. Such lending at a prudent rate took a quantum leap to pay for the First World War, extended further to pay for the Second World War, while the US took an even greater quantum leap to finance the Vietnam War. By 1971, the gap was unbridgeable and increasing at a rate beyond control. So Nixon had no choice but to cancel the right of the Government to exchange dollars for gold so as to remove the gap altogether.
America wins – Keynes loses in the Bretton Woods Agreement
Turning to debt on the present international scene, we need to look at why during the terms of the Bretton Woods Agreement in 1944 the Americans wished to over-ride the sage advice of Keynes. We will also see how they enforced their point of view in a way which had nothing to do with the validity of the argument on the other side, and its negative consequence of creating a Third World Debt that were as inherently unrepayable as were the cancelled debts in ancient Mesopotamia and the Old Testament.
Keynes sought to foster a balance of trade between nations to avoid the scenario in which nations became creditors and others debtors through their trade accounts. Creditor nations were those which exported more than they imported and so ended up with surplus revenues from an imbalance of trade. Debtor nations were those whose imports exceeded their exports, and so suffered a loss through a trading deficit. Keynes’ fiscal device of the Clearing Union placed an equal obligation on creditor and debtor nations to maintain a balance of trade. For America, however, as a creditor nation exporting more than she imported, the notion she might be under an obligation to expend her surplus trade revenues back into other economies was deemed to be completely unacceptable.
How did the Americans get their way against Keynes’ advice? We are still too close to the war for most to judge whether we should have entered it. However, at least some revisionist history has been written to insist that Germany was looking East.
Germany never wanted to go to war with England and Neville Chamberlain saw we could not win it without the financial assistance of America which, since the Treaty of Versailles, wished to destroy the British Empire.
By the turn of the 1940s, our gold and dollar reserves were nearly exhausted, and by the terms of American Lend-Lease which enabled us to carry on in the war, our industry had to be switched from exports to war production. Whereas our Empire had been held together by Imperial Preference, the Americans tied the obligations of what is known as multilateral trade into their loan.
That is, tariff barriers would be reduced and non-discriminatory in effect, applying in equal measure to all countries. As US Secretary of State Cordell Hull said: “…multi-lateral trade was the knife with which to open the oyster shell of the British Empire. “Thus, while we won the war on paper, in point of fact we lost it to the US. As an extra condition of the continuation of their war loan, the Americans forced on the British Parliament their understanding of what should be the terms of the Bretton Woods Agreement, rather than that of Keynes.
Third World Debts or National Debts on the International Scene
What were the consequences for international trade following American rejection of Keynes’ advice? The model was that a nation wishing to develop should a) borrow funds from the World Bank and the IMF to invest in agricultural and industrial projects, b) export products resulting from investment of these funds, c) repay the capital loan from export revenues gained and d) end up in an improved position with a more highly developed economy.
But this paradigm is flawed. No Third World country has ever succeeded in restoring solvency once funds have been borrowed from the World Bank and the IMF. Third World countries have made huge efforts only to service the debt; they cannot repay the capital. Payments of interest charges far exceed the amount of the principal loaned in the first place. So the Third World has been sustained by continual bailouts of additional credit. When this happens, Third World countries are invariably required to devalue their currencies and thus reduce the price of their exports, not least their export of raw materials. For decades, therefore, the Third World has been transferring vast quantities of primary commodities, manufactured goods, raw materials and minerals to the wealthy nations, when the acknowledged need for Third World countries is to direct less effort towards exports and develop their agricultural and industrial infrastructure for their own domestic purposes. At the moment their agriculture and industry are driven into decline and decay.
Whilst as I have explained that the old Christian teaching on usury is clear, the churches have to date failed to lead in providing any remedy for Third World Debt. The Jubilee 2000/Christian Aid effort has considered debt as a series of unpleasant numbers to be reduced, whilst failing to tackle its cause.
If there is any region where protest against debt should be at its most intense, it is Latin America. Yet this continent’s liberation theologians seem to have a blind spot for Biblical economic law. The Vatican has given us no Papal Encyclical to relate Third World Debt to the Old Testament cancellation of unrepayable debts.
The Myth of Inflation and the Reality of Bankruptcies
To examine the modern consequences of usury, inflation has been due to the creation of new units of additional money. With our economy so dependent on the US, during the last four decades the Fed has doubled the American money supply every ten years. That fact, and the system of fractional reserve in which banks lend far beyond their own reserves, sometimes given as a proportion of 10 to 1 but with hedge funding actually far higher, constitute the real causes of inflation and the reduction of buying power.
It has also been argued that usury or an interest-based system of money intensifies business cycles. In a recession, the payment of interest acts as a fixed cost outside a company’s control, and the higher the debt the worse its implications. Under the Islamic system where lending is not allowed and the bank has to take a share of the equity, repayment would be determined by profitability.
In my Monday Club pamphlet, Austin Mitchell MP says “…bankruptcy is the daughter of usury or debt.” In private correspondence with me he has been more blunt, stating that it is usury with its intensification of business cycles which drives many people into bankruptcy.
In the US the Chapter 11 provision allows businesses to put themselves into a protected situation to create a breathing space and ensured survival for many American businesses. By contrast, in the UK a bank’s reporting accountant may recommend liquidation – to be not the debtor’s physician but mortician – because the insolvency arm of the bank’s accountancy house gets the fees and the business from it. Here, as Austin Mitchell MP remarks in my Monday Club pamphlet on usury, we operate a culture of closure whilst a healthy economy needs a culture of nurture – not a rush to close businesses which may have a future. The market for insolvency is guaranteed by the state; auditors owe no duty of care to stakeholders; and clients are not consulted when a bank orders an accountant’s report and forecloses. And there is no regulation of the excessive fees charged by insolvency practitioners.
“Phoenixing” is alive and kicking with the aid of insolvency practitioners. In one reported case, an individual who went to an insolvency practitioner to make his company insolvent then had it sold back to him at knockdown value to leave the creditors in the air.
In other ways our bankruptcy laws are not working properly. A bankrupt is likely to know more than anyone else about his own affairs yet is boxed in and not allowed to represent himself. Whilst a criminal is innocent until proved guilty, a bankrupt is presumed to be guilty and is not allowed to have an adviser present at any questioning.
As happened in our case, creditors can expand their claims. In our case they were doubled, because these claims are not independently and adequately audited. One accountant, Christopher Arkell, former editor of London Miscellany, presented a paper on this subject to the Forum for Stable Currencies, quoting at length a case between the Inland Revenue and a cafe near Heathrow Airport. Had I not been thrown out of the House of Lords as an hereditary peer, I would have introduced a Bill on this abuse.
Perhaps the best that can be hoped for now is that a judge will clean it all up when the next case comes along. When Parliament passes a statute, it cannot be expected to anticipate every contingency. Lord Denning often used to say “…we can’t wait for Parliament to come round to this, I will sort it out.” Whilst under the theory of our constitution judges are meant only to interpret the law, I have rarely met one who does not think he is there to bend it or make it.
Bankruptcy as Vendetta
Bankruptcy can be abused when employed not for economic purposes but to pursue a vendetta. Take the case of the Duke of Westminster who wished to punish his brother Earl Beauchamp for homosexuality. In my own family’s case, Lloyds Bank is suspected of using bankruptcy for political instead of economic purposes. It is suggested that as a very powerful politician Joseph Chamberlain, who helped to build Lloyds Bank into becoming one of the Big Five – both he and the bank came from Birmingham and banks are sensitive to political pressure – used the bank to destroy the 4th Lord Sudeley, partly owing to class jealousy but also because they fell out over Home Rule for Ireland.
On that issue, when Chamberlain took so many Liberals with him into the Tory Party and thus destroyed the old Whig interest, the 4th Lord Sudeley stayed behind as a Liberal Unionist. As a middle class Radical, Chamberlain loathed the old Whig aristocracy such as the 4th Lord Sudeley for their espousal of reform in order to exercise a restraining hand. At a more ordinary level, most bank customers are not made bankrupt by banks – they prefer Individual Voluntary Arrangements or IVAs. Some bank managers, however, notably those with a grudge, prefer to enforce bankruptcy even though they know it will produce a lower return for creditors than an IVA.
When filing for bankruptcy, a bank has no duty to keep records, and the law of libel prevents us from suggesting that they are hiding anything when they are in total control of their own information. I investigated this question in the June 1999 issue of London Miscellany. To obtain any information, we need a new independent regulator with proper search powers as per Customs and Excise.
The Secretary of the Historical Manuscripts Commission told me that Parliament should not seek to impose proper statutory controls as this would encourage the concealment and early destruction of the records it is sought to preserve. But the ease and economy with which banks’ records are stored with computer technology requires a change of thinking.
The Future of Money
Now that we have seen the harm inflicted by usury, how do we see the future? At the beginning of this paper I described how Lloyds Bank could act as it did to force the immediate payment of the debt on the nail because the bank would not accept the collateral of our other assets. Dr. Stanley Chapman of Nottingham University, who presented a paper on this subject at a public conference that I held on the history of my family, blames my great-grandfather, the 4th Lord Sudeley, for failing to observe the cardinal rule in business that liquidity or cash flow is more important than capital. That rule no longer applies.
With Lloyds Bank being far back in the Stone Age, a similar case occurred a century later. A company, Heritage plc, a distributor of household wares, had ample assets but an immediate cash flow problem. This could have been resolved if Lloyds Bank had not withdrawn their facility within the space of two banking hours. Based on this case, Dr. Rudi Vis MP introduced an Adjournment Debate in the House of Commons. The result: a mandatory grace period of 28 days to realise assets, effective from 1th April 2001. I congratulate Dr. Vis on this major and very satisfactory change in the law.
To move further forward, we must stress that our case derives its strength from the fact that it is not party political. Historically the case for removing the supply of money from banks and having Governments reassume them, i.e., by issuing credit on a debt-free basis, has been supported from quite disparate quarters: Gladstone Disraeli, Pope Pius XI with his Encyclical Quadragessimo Anno, Russia’s 19th century Tsars who prevented the setting up of a privately owned central bank, and US Presidents Jefferson and Abraham Lincoln. My Monday Club pamphlet on usury cites speeches in the House of Lords from Lord Caithness, ex Tory Front Bench and Labour peer Lord Beswick, as well as a paper by Austin Mitchell, Labour MP, leading officer of the Forum for Stable Currencies, also supported by Sir Richard Body, for many years a Tory MP.
Of course, people will always wish to borrow money no matter how objectionable the terms. With this wish being so ingrained in our monetary system and the vested banking interest so powerful, it has been said that it will be very difficult to get rid of usury altogether. Austin Mitchell MP tells us that most Parliamentarians shy away from any mention of the word usury, and with his orthodox (commonly regarded as unorthodox) views, he is in a tiny minority in the House of Commons.
As the UK is unique with the dominance of its financial rather than manufacturing sector, our banks are more powerful than those in Germany and the US.
Nevertheless there are some encouraging signs when, as with the rise of early Christianity, cells are being formed. Especially in the US over the past 20 years, the importance of the banks has fallen with the increase in equity funding. In the US the aggregate amount of capital controlled by the banking system is now actually less than that in the hands of a mutual fund industry.
On the whole the Japanese do not borrow as consumers; they save. So if the Sumitomo Bank wishes to earn money for its investors, it is obliged to take risks by investing in industry and commerce.
Malaysia became the first country to establish a fully Islamic system with an interbank money market operating on a profit sharing concept in which the provider of funds earns a profit from his investments instead of paying interest.
Guernsey continues, as it has done for 200 years, to use debt-free money to pay for large building projects.
During the 1980s in the UK, when rising unemployment and plummeting job security made many people feel they were losing what autonomy and power they had over their own lives, groups of people got together to trade services. They set up Local Exchange Trading Systems or LETS and developed their own money. Other organisations have emerged as “commercial barter companies”.
“That this House, concerned at the rising burden of private debt, public borrowing, student borrowing and public-private finance initiatives;
• notes that the proportion of publicly created money in circulation has fallen from 20% of the money supply in 1964 to 3% today;
• believes that increasing the proportion of publicly created money in issue may provide a new means of financing public investment;
• further notes that it is suggested that the use of publicly created money can cut the cost of public investment by at least one half of what it would otherwise be by eliminating the need to pay interest;
• accepts that such a policy can be adopted without any impact on inflation if suitable regulatory changes are made;
• and therefore urges the Treasury and Treasury Select Committee to commission independent reviews on procedures for increasing the proportion of publicly created money in the economy and on the benefits of so doing and report them to this House.”
We recommend that Britain should encourage the Commonwealth into monetary cooperation as a model for the creation of wealth. At the moment the Commonwealth has nothing in common nor is it wealthy. But it could represent both if ‘global Sterling’ were a clean and stable currency free from debt and interest and administered as a public service – instead of fostering private wealth in the banking sector.
Further reading is given in the bibliography. In particular I would recommend Michael Hudson’s pamphlet The Lost Biblical Tradition of Debt Cancellations; R. H. Tawney’s classic work Religion and the Rise of Capitalism on the old Catholic teaching and how it was superseded by Calvin; Peter Selby Bishop of Worcester’s Grace and Mortgage, especially in relation to Third World Debt, Michael Rowbotham’s Goodbye America, and the classic definition of money given by Aristotle: that it is barren, it can be the medium of exchange only and never the mother of interest.
Whilst it is sometimes supposed that Aristotle was writing in an era of barter economy that is no longer relevant, that is not the case. We still agree with the old Christian and Islamic condemnation of usury: that the interest charged on a loan is the increment out of excrement.