Capital and Interest: A Critical History of Economical Theory

Roscher has well remarked that on the lower stages of economical development there regularly appears a lively dislike to the taking of interest. Credit has still little place in production. Almost all loans are loans for consumption, and are, as a rule, loans to people in distress. The creditor is usually rich, the debtor poor; and the former appears in the hateful light of a man who squeezes something from the little of the poor, in the shape of interest, to add it to his own superfluous wealth. It is not to be wondered at, then, that both the ancient world and the Christian Middle Ages were exceedingly unfavourable to usury; for the ancient world, in spite of some few economical flights, had never developed very much of a credit system, and the Middle Ages, after the decay of the Roman culture, found themselves, in industry as in so many other things, thrown back to the circumstances of primitive times.

In both periods this dislike has left documentary record.

The hostile expressions of the ancient world are not few in number, but they are of trifling importance as regards development of theory. They consist partly of a number of legislative acts forbidding the taking of interest,—some of them reaching back to a very early date,
*13—partly of more or less incidental utterances of philosophic or philosophising writers.

The legal prohibitions of interest may, of course, be taken as evidence of a strong and widespread conviction of the evils connected with its practice. But it can scarcely be said that they were founded on any distinct theory; at any rate no such theory has been handed down to us. The philosophic writers, again—like Plato, Aristotle, the two Catos, Cicero, Seneca, Plautus, and others—usually touch on the subject too cursorily to give any foundation in theory for their unfavourable judgment. Moreover, the context often makes it doubtful whether they object to interest as such, or only to an excess of it; and, in the former case, whether their objection is on the ground of a peculiar blot inherent in interest itself, or only because it usually favours the riches they despise.
*14

One passage in ancient literature has, in my opinion, a direct value for the history of theory, inasmuch as it allows us to infer what really was the opinion of its author on the economic nature of interest; that is, the often quoted passage in the first book of Aristotle’s
Politics. He there says: “Of the two sorts of money-making one, as I have just said, is a part of household management, the other is retail trade: the former necessary and honourable, the latter a kind of exchange which is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term Usury (
) which means the birth of money from money, is applied to the breeding of money, because the off-spring resembles the parent. Wherefore of all modes of making money this is the most unnatural” (Jowett’s
Translation, p. 19).

What this positively amounts to may be summed up thus: money is by nature incapable of bearing fruit; the lender’s gain therefore cannot come from the peculiar power of the money; it can only come from a defrauding of the borrower (
). Interest is therefore a gain got by abuse and injustice.

That the writers of old pagan times did not go more deeply into the question admits of a very simple explanation. The question was no longer a practical one. In course of time the authority of the state had become reconciled to the taking of interest. In Attica interest had for long been free from legal restriction. The universal empire of Rome, without formally rescinding those severe laws which entirely forbade the taking of interest, had first condoned, then formally sanctioned it by the institution of legal rates.
*15 The fact was that economical relations had become too complicated to find sufficient scope under a system naturally so limited as that of gratuitous credit. Merchants and practical men were, without exception, steadily on the side of interest. In such circumstances, to write in favour of it was superfluous, to write against it was hopeless; and it is a most significant indication of this state of matters that almost the only quarter in which interest was still censured—and that in a resigned kind of way—was in the works of the philosophical writers.

The writers of the Christian Middle Ages had more occasion to treat the subject thoroughly.

The dark days which preceded and followed the break up of the Roman Empire had brought a reaction in economical matters, which, in its turn, had the natural result of strengthening the old hostile feeling against interest. The peculiar spirit of Christianity worked in the same direction. The exploitation of poor debtors by rich creditors must have appeared in a peculiarly hateful light to one whose religion taught him to look upon gentleness and charity as among the greatest virtues, and to think little of the goods of this world. But what had most influence was that, in the sacred writings of the New Testament, were found certain passages which, as usually interpreted, seemed to contain a direct divine prohibition of the taking of interest. This was particularly true of the famous passage in Luke: “Lend, hoping for nothing again.”
*16 The powerful support which the spirit of the time, already hostile to interest, thus found in the express utterance of divine authority, gave it the power once more to draw legislation to its side. The Christian Church lent its arm. Step by step it managed to introduce the prohibition into legislation. First the taking of interest was forbidden by the Church, and to the clergy only. Then it was forbidden the laity also, but still the prohibition only came from the Church. At last even the temporal legislation succumbed to the Church’s influence, and gave its severe statutes the sanction of Roman law.
*17

For fifteen hundred years this turn of affairs gave abundant support to those writers who were hostile to interest. The old pagan philosophers could fling their denunciations on the world without much proving, because they were neither inclined nor able to give them practical effect. As a “Platonic” utterance of the idealists their criticism had not sufficient weight in the world of practice to be either seriously opposed or seriously defended. But now the matter had again become practical. Once the Word of God was made victorious on earth, a hostility immediately showed itself, against which the righteousness of the new laws had to be defended. This task naturally fell to the theological and legal literature of the Church, and thus began a literary movement on the subject of loan interest which accompanied the canonist prohibition from its earliest rise far into the eighteenth century.

About the twelfth century of our era is observable a noteworthy departure in the character of this literature. Before that century the controversy is mainly confined to the theologians, and even the way in which it is treated is essentially theoiogical. To prove the unrighteousness of loan interest appeal is made to God and His revelation, to passages of Holy Writ, to the commandments concerning charity, righteousness, and so on; only rarely, and then in the most general terms, to legal and economical considerations. It is the fathers of the Church who express themselves most thoroughly on the subject, although even their treatment can scarcely be called thorough.
*18

After the twelfth century, however, the discussion is conducted on a gradually broadening economic basis. To proofs from Revelation are added appeals to the authority of revered fathers of the Church, to canonists and philosophers—even pagan philosophers,—to old and new laws, to deductions from the
jus divinum, the
jus humanum, and—what is particularly important for us as touching the economic side of the matter—to deductions from the
jus naturale. And now the lawyers begin to take a more active part in the movement alongside the theologians—first the canon lawyers and then the legists.

The very ample and careful attention which these writers gave to the subject is chiefly due to the fact that the prohibition of interest pressed more hardly as time went on, and required to be more strongly defended against the reaction of the trade it oppressed. The prohibition had originally been imposed in economical circumstances of such a nature that it was easily borne. Moreover, during its first hundred years the prohibition had so little command of external force, that where practical life felt itself hampered by the restraint it could disregard it without much danger. But later, as industry and commerce grew, their increasing necessity for credit must have made the hampering effects of the prohibition increasingly vexatious. At the same time the prohibition became more felt as it extended to wider circles, and as its transgression was punished more severely. Thus it was inevitable that its collisions with the economical world should become much more numerous and much more serious. Its most natural ally, public opinion, which had originally given it the fullest support, began to withdraw from it. There was urgent need of assistance from theory, and this assistance was readily obtained from the growing science.
*19

Of the two phases of the canonist writings on this subject, the first is almost without value for the history of theory. Its theologising and moralising do little more than simply express abhorrence of the taking of interest and appeal to authorities.
*20

Of greater importance is the second phase, although neither as regards the number of its writers nor the very imposing array of arguments they introduced.
*21 For what originally emanated from the few was soon slavishly repeated by the many, and the stock of arguments collected by the earlier writers soon passed to the later as an heirloom that was above argument. But the greater number of these arguments are merely appeals to authority, or they are of a moralising character, or they are of no force whatever. Only a comparatively small number of them—mostly deductions from the
jus naturale—can lay claim to any theoretical interest. If, even of these arguments, many should appear to a reader of to-day little calculated to convince anybody, it should not be forgotten that at that time it was not their office to convince. What man had to believe already stood fixed and fast. The all-efficient ground of conviction was the Word of God, which, as they understood it, had condemned interest. The rational arguments which were found to agree with the divine prohibition were scarcely more than a kind of flying buttress, which could afford to be the slighter that it had not to carry the main burden of proof.
*22

I shall very shortly state those rational arguments that have an interest for us, and verify them by one or two quotations from such writers as have given them clear and practical expression.

First of all, we meet with Aristotle’s argument of the barrenness of money; only that the theoretically important point of interest being a parasite on the produce of other people’s industry, is more sharply brought out by the canonists. Thus Gonzalez Tellez:
*23 “So then, as money breeds no money, it is contrary to nature to take anything beyond the sum lent, and it may with more propriety be said that it is taken from industry than from money, for money certainly does not breed, as Aristotle has related.” And in still plainer terms Covarruvias:
*24 “The fourth ground is that money brings forth no fruit from itself, nor gives birth to anything. On this account it is inadmissible and unfair to take anything over and above the lent sum for the use of the same, since this is not so much taken from money, which brings forth no fruit, as from the industry of another.”

The consumption of money and of other kinds of lent goods furnished a second “natural right” argument. This is very clearly and fully put by Thomas Aquinas. He contends that there are certain things the use of which consists in the consumption of the articles themselves, such as grain and wine. On that account the use of these things cannot be separated from the articles themselves, and if the use be transferred to any one the article itself must necessary be transferred with it. When an article of this sort then is lent the property in it will always be transferred. Now it would evidently be unjust if a man should sell wine, and yet separate therefrom the use of the wine. In so doing he would either sell the same article twice, or he would sell something which did not exist. Exactly in the same way is it unjust for a man to lend things of this sort at interest. Here also he asks two prices for one article; he asks for replacement of a similar article and he asks a price for the use of the article, which we call interest or usury. Now as the use of money lies in its consumption or in its spending, it is inadmissible in itself, on the same grounds, to ask a price for the use of money.
*25 According to this reasoning interest appears as a price filched or extorted for a thing that does not really exist, the separate and independent “use” of consumable goods.

A similar conclusion is arrived at by a third argument that recurs over and over again in stereotyped form. The goods lent pass over into the property of the debtor. Therefore the use of the goods for which the lender is paid interest is the use of another person’s goods, and from that the lender cannot draw a profit without injustice. Thus Gonzalez Tellez: “For the creator who makes a profit out of a thing belonging to another person enriches himself at the hurt of another.” And still more sharply Vaconius Vacuna:
*26 “Therefore he who gets fruit from that money, whether it be pieces of money or anything else, gets it from a thing which does not belong to him, and it is accordingly all the same as if he were to steal it.”

Lastly, in a very strange argument, first, I believe, incorporated by Thomas Aquinas in the canonists’
répertoire, interest is looked upon as the hypocritical and underhand price asked for a good common to all—namely, time. The usurers who receive more, by the amount of their interest, than they have given, seek a pretext to make the prohibited business appear a fair one. This pretext is offered them by time. They would have time recognised as the equivalent for which they receive the surplus income formed by the interest. That this is their intention is evident from the fact that they raise or reduce their claim of interest according as the time for which a loan is given is long or short. But time is a common good that belongs to no one in particular, but is given to all equally by God. When, therefore, the usurer would charge a price for time, as though it were a good received from him, he defrauds his neighbour, to whom the time he sells already belongs as much as it does to him, the seller, and he defrauds God, for whose free gift he demands a price.
*27

To sum up. In the eyes of the canonists loan interest is simply an income which the lender draws by fraud or force from the resources of the borrower. The lender is paid in interest for fruits which barren money cannot bear. He sells a “use” which does not exist, or a use which already belongs to the borrower. And finally, he sells time, which belongs to the borrower just as much as it does to the lender and to all men. In short, regard it as we may, interest always appears as a parasitic profit, extorted or filched from the defrauded borrower.

This judgment was not applied to the interest that accrues from the lending of durable goods, such as houses, furniture, etc. Just as little did it affect the natural profit acquired by personal exertions. That this natural profit might be an income distinct from that due to the undertaker for his labour, was but little noticed, especially at the beginning of the period; and, so far as it was noticed, little thought was given to it. At any rate the principle of this kind of profit was not challenged. Thus,
e.g. the canonist Zabarella
*28 deplores the existence of loan interest on this ground among others, that the agriculturists, looking for a “more certain” profit, would be tempted to put their money out at interest rather than employ it in production, and thus the food of the people would suffer,—a line of thought which evidently sees nothing objectionable in the investment of capital in agriculture, and the profit drawn from that. It was not even considered necessary that the owner of capital should employ it personally, if only he did not let the ownership of it out of his hands. Thus profit made from a sleeping partnership was, at least, not forbidden.
*29 And the case where one entrusts another with a sum of money, but retains the ownership of it, is decided by the stern Thomas Aquinas in the words: that such an one may unhesitatingly appropriate the profit resulting from the sum of money. He need not want for a just title to it, “for he, as it were, receives the fruit of his own estate”—not, as the holy Thomas carefully adds, a fruit that springs directly from the coins, but a fruit that springs from those things that have been obtained in just exchange for the coins.
*30

Where, as not seldom occurs notwithstanding this, exception is taken to profit obtained by personal exertions, the exception is not so much to the profit as such, as to some concrete and objectionable manner of getting it: as,
e.g. by business conducted in an avaricious or quite fraudulent way, or by forbidden traffic in money, and such like.