Interest and its excessive twin usury were fraught with controversy from pre-Biblical times until the demands of capitalism prevailed over religious and ethical objections in the 18th century, according to a new book by a Purdue University professor emeritus.
John M. Houkes, the first head of the Krannert School of Management's Special Collection of Literature in Business and Economic History, is the author of "An Annotated Bibliography on the History of Usury and Interest from the Earliest Times Through the Eighteenth Century" (Edwin Mellen Press).
Houkes writes that early objections to interest and usury were generally religiously and morally based and pervaded most ancient cultures.
"In the Old Testament and in India, the attitude was 'don't exploit the poor,'" Houkes said. "The early cultural exception was China. Confucius didn't see a problem with charging a fee for lending money."
But while charging interest - and certainly usury, or excessive interest - was prohibited in most ancient cultures, Houkes acknowledges that the need for money and, therefore, for borrowing it, have always been facts of life.
"Nothing changes," he said. "History repeats itself. I started my history with the oldest written records, the Greeks and the Old Testament. But you can go back to the Mesopotamians who kept records of borrowing and lending on stone tablets.
"Islam, historically and to this day, has the strictest taboos against charging interest for the use of money. But its adherents use the difference between the purchase price and the selling price that recognizes the time-value of money in the same way that charging interest does."
Aristotle, said Houkes, started all of the negative press on interest by "pronouncing that money is barren, that money cannot engender money. The Christians picked it up from Aristotle and added the moral stricture of the responsibility of treating other men as brothers."
But the need for capital in the initial post-medieval movement toward globalism pressured the prohibitions on lending money.
"The moral question became a business question," Houkes said. "A Genoa trader might have to pay 20 percent interest - more than double the prevailing 8 percent interest - to outfit his ship in recognition of the risk of his venture and the greater possibility the lender could lose his money."
And as capitalism fully emerged in Europe and America in the 18th century, interest became a fact of life for the businessman. There were national differences, but generally interest rates settled in both policy and practice at between 4 percent and 6 percent.
But national priorities often drove the capital markets that acceptance of interest created.
"In the fledgling United States, the main idea was to develop the huge country agriculturally, so there was a sense that it was better for the speculators in New York and Philadelphia to invest in the American enterprise rather than do business in Europe," Houkes said.
Houkes also writes about Benjamin Franklin's wisely exhorting his countrymen in the pre-Revolutionary period to save in his "Poor Richard's Almanack," "Advice to a Young Tradesman" and "Inquiry into the Nature and Necessity of a Paper Currency."
"At that point in the young republic, you could make 3 percent to 4 percent on savings," Houkes said. "The result of this saving was the development of a middle class and capital to develop the country."
After the Revolutionary War, Alexander Hamilton, as George Washington's Secretary of the Treasury, argued for lowering interest rates to quicken the flow of currency to develop industry and to keep the public debt low.
Houkes views today's credit card interest rates and payday loan companies as usurious, but notes that most state laws against usury, which persisted into the middle of the 20th century, have either been revoked or are no longer enforced. But, by and large, Houkes sees interest today as, "a fair bargain."
"Most people have accepted the post-medieval attitude about interest as an acceptable way of doing business. It's still charitable to not exploit the poor, but if you give someone else the use of your capital, you can't invest it, so you're entitled to a fee for the use of your money."
"An Annotated Bibliography on the History of Usury and Interest from the Earliest Times Through the Eighteenth Century" includes more than 500 bibliographic references and 800 names in the index.
Houkes did much of his research for his book at Purdue's Krannert Special Collection of Literature in Business and Economic History, which is composed of more than 8,000 books, pamphlets and periodical titles. About 3,000 of the pieces were published between 1502 and 1875. The collection includes a first edition of "Wealth of Nations" by Adam Smith and Thomas Malthus' "Essay on the Principles of Population."
Related Web site:
Krannert Special Collections: http://www.lib.purdue.edu/mel/speccoll.html