Is It Wrong to Charge Interest on a Loan?
Last week I posted some lines related to economics from the Westminster Larger Catechism. In one place, where the catechism was forbidding “usury,” I added the gloss “e.g., loan-sharks.” This prompted a stern chiding in the comment thread:
You know perfectly well that usury in the Bible and in the 17th Century WCF was not defined as “loan sharking”. It was defined as charging a rate of interest greater than zero.
Feel free to think that the Bible is outdated and wrong about this. But please have the guts to come out and say that you think the Bible is wrong. Don’t redefine Biblical words to mean something they don’t mean just so you can claim you agree with the Bible when the fact is that you don’t.
Those are strong words. This gentleman claims that the Westminster divines opposed charging interest of any kind under any circumstance and maintains that I think they were wrong and the Bible is wrong.
I took out the gloss because I could see how the point I was trying to make with a parenthetical note should not be thrown in matter-of-factly as the correct reading. My point demanded a more substantive explanation. And that’s what I want to offer now.
What’s At Stake
Before we examine the charge that interest is unbiblical, let’s understand all that is at stake in this discussion. We may like to think that making money off of interest is uniquely the occupation of bankers, Wall Street types, and other (seemingly) super-rich “bad guys.” But charging interest on a loan is what your credit card company does. It’s what the big box store does when you buy a refrigerator. It’s what the car company does when they let you walk off the lot with a new vehicle and almost no money down. It’s what your mortgage company does in order to make home ownership possible. It’s what the government does in issuing student loans. And essentially it’s what you do if you put money in a bank or buy government bonds; you are letting someone else use your money because they promise to keep it safe and give it back to you with interest.
None of this proves for a second that charging interesting is acceptable, but it does mean that those who oppose interest on biblical grounds should be prepared to oppose (and abstain from) almost everything about modern economies.
A Short History of Usury
For much of church history Christians have been opposed to charging interest on most loans. This makes sense given the biblical injunctions. According to Leviticus 25:37, “You shall not lend [your brother] your money at interest.” Exodus 22:25 stipulates” “If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him.” Deuteronomy 23:20 says much the same thing about loans within the Israelite community, but with the important caveat that “you may charge a foreigner interest.” We can see why charging interest has often been frowned upon.
But it would be a mistake to think the church has been opposed to charging interest on every kind of loan. Usury has always been considered a sin. But not every sort of interest-bearing loan has been considered usury. There is a long history of defining usury as a loan of subsistence as opposed to a loan of capital. Loans in the Old Testament were given to those who were destitute and poor. This is the explicit context in the passages above from Exodus and Leviticus. When someone in the covenant community has hit rock bottom, the best thing to do is to give them what they need. The next best thing is a loan. And the one thing you must not do is give them a loan with interest. The situation calls for charity. It is not an opportunity for making money at the expense of someone else’s misfortune.
But a loan as a business venture or investment risk has historically been considered a different kind of loan. Samuel Gregg, in his Banking, Justice, and the Common Good, observes about the history of usury and the church: “it does not appear that there were any serious objections to people lending others capital. There is even considerable evidence that the clergy provided a type of banking service for their confreres” (30). To be sure, throughout much of Christendom, the church prohibited Christians from charging interest. This is why banking became a heavily Jewish enterprise. They were allowed to charge interest on loans (Deut. 23:20). As result, the Jews were often reviled for being “moneylenders,” their unique role in the financial industry being a contributing factor to centuries of antisemitism.
Over time, however, Christians grew more careful in defining usury. The Fifth Lateran Council (1512-17) defined usury as “nothing else than gain or profit drawn from the use of a thing that is by its nature sterile, a profit acquired without labor, costs, or risk.” This meant that if the lender lent money with labor, cost, or risk to himself he could charge interest without being guilty of usury. Likewise, Calvin talked about acceptable and unacceptable kinds of usury. Making money off the poor is one thing, but “if we have to do with the rich, that usury is freely permitted.” Surely, he argues, “usury ought to be paid to the creditor in addition to the principal, to compensate his loss.” In short, “reason does not suffer us to admit that all usury is to be condemned without exception” (Commentary on Exodus).
Similarly, Ursinus, in his Commentary on the Heidelberg Catechism observes that “All just contracts, the contracts of paying rent, a just compensation for any loss, partnership, buying, etc., are exempted from usury.” In other words, not every kind of interest is usury. Some are, and some aren’t. It depends on whether the loan will help the borrower or most likely hurt them. “There are many questions respecting usury,” Ursinus writes, “concerning which we may judge according the rule which Christ has laid down: Whatever ye would that men should do to you, do ye even so to them.”
Given this history in the Christian church and in the Reformed church in particular, it’s incredibly unlikely that the Westminster Divines intended to condemn every kind of interest-bearing loan. The problem has been–and continues to be–predatory lending. No doubt, some in the financial industry have sinned in their lending practices. Just because we can’t say every loan is usury, doesn’t mean nothing is usury. For example, in many poorer neighborhoods you will find institutions which charge astronomically high interest rates to give people cash advances. Are these higher rates justified because of their risks involved? Or is this precisely the sort of usury–making a buck off the poor to their ruin–that Christians have always condemned? In The Ascent of Money Niall Ferguson maintains that the earliest days of banking were populated by “loan sharks” like these, which is why I used the phrase I did in my parenthetical gloss last week.
Charging interest on a loan has been suspect during much of human history. Jay Richards explains:
By modern standards, almost everyone was dirt-poor. Only the rich, a tiny minority, had any money to lend. Any money lending, then, would involve rich people lending to their poor neighbors, probably their kin, for a basic need like food. . . .People hid extra money. So while a person might be entitled to have his money returned to him, it seemed uncharitable to charge a poor person for temporarily using money that would otherwise just be collecting dust. . . .And charging huge interest rates that couldn’t be repaid would add insult to injury, since it would exploit a person’s bad fortune and ignorance. Thus, given the historical context and the belief that money was sterile, the ban on usury made a lot of sense. (Money, Greed, and God, 140).
So did the church change its mind about usury? No, but it did become more precise with its definition. “Usury isn’t charging interest on a loan to offset the risk of the loan and the cost of forgoing other uses for the money; it’s unjustly charging someone for a loan by exploiting them when they’re in dire straits” (144). This seems to be a fair distinction given the context of the Old Testament provisions.
I do not believe the Bible or the Westminster Standards prohibit the charging of any interest in every circumstance. This has not been the universal position of the church. “Rather, it taught that it is wrong to charge interest on a loan by virtue of the very making of the loan, rather than by virtue of some factor related to the loan that provided a basis for fair compensation” (Banking, 35). There are still bad banks, bad lenders, and bad loans. But neither the Bible nor the tradition of the church requires us to think that banks, lenders, and loans are bad just because they are banks, lenders, and loans.