by Jared Rubin
History of Christian Interest Restrictions
There are many similarities between Islamic and Christian interest histories. Both religions prohibited interest in the premodern period, although its prohibition was not originally part of Christian doctrine. Prior to the fourth century, the Church had very little to say on the issue of interest.21 Doctrine espousing the “evils” of lending at interest existed in the early Judeo-Christian tradition, but there was no explicit prohibition of interest in the New Testament. Widespread denunciation of interest commenced in the early fourth century, with a number of Church councils and synods declaring it a mortal sin. Synods in Elvira (306), Arles (314), Carthage (345–348), Laodicea (372), Hippo (393), Arles (443), and Tarragona (516) all prohibited usurious lending by the clergy, although as a general rule it was prohibited to all Christians as a moral duty.22 The true watershed moment came in 325, when an anti-interest canon was included in the first Ecumenical Council at Nicaea. Unlike smaller synods that only applied to particular regions, this council formulated creeds that were universally binding, thus establishing the sinfulness of taking interest throughout all of Christendom.23
Between the fifth-century decline of the Western Roman Empire and the onset of the Commercial Revolution in the late-tenth century, commerce was limited, and most loans were taken for consumption. As a result, there was little need for the Church to reconsider the interest prohibition. Secular authorities – including Charlemagne – generally supported the Church’s ban on all forms of interest. The economic environment changed, however, with the onset of the Commercial Revolution. As trade revived in Europe, investment lending became more important: medieval historian Robert S. Lopez suggests that “unstinting credit was the great lubricant of the Commercial Revolution.”24 Much as in the Middle East, this meant that interest restrictions became an impediment to economic growth. Political and religious authorities were thus faced with the conflicting goals of promoting economic development – of which they would certainly take their share – and maintaining legal and doctrinal consistency.
Middle Eastern religious authorities responded to a similar situation in the first four Islamic centuries by permitting evasions that did not conspicuously fly in the face of doctrine. The Church chose the opposite approach, at least initially, by strengthening the interest ban in the twelfth and thirteenth centuries. The Church issued decrees at the Second, Third, and Fourth Lateran Councils (1139, 1179, and 1215) that proscribed excommunication for usurers, refused usurers burial in Christian grounds, and interdicted usurers’ offerings.25 The Church strengthened restrictions in the late twelfth century, when Popes Eugene III (1145–1153) and Alexander III (1159–1181) disallowed the mortgage, closing an important loophole used in evading the ban. Alexander III and Urban III (1185–1187) established that it was the intent of the transaction and not its form that determined guilt. In 1234, Pope Gregory IX (1227–1241) issued his Decretales, which forever classed usurers as infames (making them ineligible to hold public office, honors, or to testify in court), commanded princes to expel usurers from their realms, forbade landlords from renting property to usurers, and invalidated the wills and testaments of usurers.26 Put simply, throughout the twelfth and thirteenth centuries, the Church’s “campaign against usury” crystallized into a staunch prohibition in any form, and the moneylender was linked with the worst type of evildoer.
Despite these condemnations, a growing number of secular rulers permitted moderate interest in the thirteenth century, enacting laws that merely capped the legal interest rate. Several rulers at least partially promulgated these laws for personal reasons. Many needed access to credit, which was often obtained through forced loans. Such loans, which were known in Venice, Genoa, Siena, and Florence since the thirteenth century, were incontestable and received relatively small interest.27 Larger loans to secular princes were risky and default was common, and this was reflected in the interest rate they received.
Rulers throughout Western Europe granted permission to Jewish lenders and select groups of Christian pawnbrokers to lend at interest. The most famous Christian moneylenders were the lombards, who spread throughout Europe in the middle of the thirteenth century. Being from Lombardy, they were foreigners wherever they practiced and were required to obtain charters from local magnates. In Bruges, the first charters granted to the lombards in 1281 explicitly stipulated that interest was not permitted under the penalty of heavy fines. However, this fine was only payable once a year regardless of the number of transgressions – a clear indication that the grant was permitting, not prohibiting, interest.28 This stipulation was dropped a mere twenty-five years later; in 1306, municipal accounts stated that lombards were allowed to lend at a weekly rate of 2d. a pound per week (43⅓ percent per annum) and not higher. Interest caps of 43⅓ percent per annum were not unique to Bruges, but were ubiquitous throughout Western Europe, including the rest of the Low Countries, Northern France, Western Germany, Castile, and Aragon. Throughout Western Europe, fines paid by pawnbrokers to local rulers turned into regular license fees, which were an important source of revenue that often left moneylenders with little net profit. In return, rulers enforced and upheld the pawnbrokers’ monopolies and provided other legal protections and services.29 Table 4.1 includes a sample of such interest laws from the thirteenth–fifteenth centuries.
Table 4.1 Interest Laws in Late Medieval Western Europe
Location Date(s) Law
Legal maxima, general laws
Catalonia 10th century; 1235 10th century: legal max rate of 12.5%
1235: Christians permitted to lend at 12%
Venice 12th–14th centuries Loans at 20% customary, courts enforced rates between 5–12%
England 12th–15th centuries Only immoderate interest subject to persecution
Aragon 1241 Jews and Moors limited to 20%, Christians limited to 12%
Cordova 1241 Legal max rate of 12.5%
Seville 1250 Legal max rate of 12.5%
Murcia 1266 Legal max rate of 12.5%
Florence 1345–1346 All usury persecution ceased following a financial crash
France 1349 Interest up to 15% authorized for fairs at Champagne and Brie
London 1363 Usury prosecution became sole jurisdiction of civil authorities
Legal maxima, pawnshops
Milan End of 12th century Legal max rate of 15%
Verona 1228 Legal max rate of 12.5%
Sicily Mid-13th century Legal max rate of 10%
Modena 1270 Legal max rate of 20%
Genoa 13th century Legal max rate of 15%
England 13th century Legal max rate of 43⅓%
Provence 13th century Legal max rate of 300%
Germany 13th–14th centuries 13th: legal max rate of 173%; 14th: legal max rate of 43⅓%
Bruges 1306, 1404, 1432 Legal max rate of 43⅓%
France 1311, 1361 1311: legal max rate of 20%; 1361: legal max rate of 86%
Lombardy 1390 Legal max rate of 10%
Burgundy End of 14th century Legal max rate of 87%
Florence 15th century Legal max rate of 20%
Reprinted from Explorations in Economic History, Vol. 47, No. 2, Jared Rubin “Bills of Exchange, Interest Bans, and Impersonal Exchange in Islam and Christianity”, pp. 213–227, 2010, with permission from Elsevier. Sources for the table are de Roover (1948, p. 104), Lane (1966, p. 61–63), Cipolla (1967, p. 65), Gilchrist (1969, p. 112–113). Grice-Hutchinson (1978, p. 36–41, 48), Helmholz (1986), Le Goff (1988, p. 72), Homer and Sylla (1991, p. 97, 103, 110), and Gelpi and Julien-Labruyère (2000, p. 27).
Despite being legal in most locales, open lending at interest was still explicitly prohibited by the Church. It is thus not surprising that European lenders, like their Middle Eastern counterparts, found alternative mechanisms for extending credit. Early alternatives arose for legitimate purposes. Examples include partnerships (societas or commenda) and the census (or rente), an annuity on a fruitful good. These contracts had features similar
to interest-bearing loans and grew deeply embedded in commercial relations.
The societas presented the first real problem for Christian bishops and theologians since one could profit from a partnership solely by risking capital. This problem was resolved over a long series of discussions between 1270 and 1450, when the societas was justified as legitimate within the context of Christian thought, with risk employed as grounds for the reward. The Church did not extend this justification to interest-bearing loans in general, however; it only accommodated the societas, which by this time was essential to commerce. Likewise, the census was eventually justified by religious authorities as legitimate within the context of Christian thought. The census was like an annuity and was a normal form of long-term investment in landed properties for both nobles and peasants, especially in France and Italy.30 As the money economy blossomed, borrowers converted payments into cash, and the census resembled an interest-bearing loan with rates generally ranging from 4 percent to 10 percent.31 Pope Innocent IV declared them legitimate in 1251, but the Church did not fully resolve this issue for two more centuries. The Church eventually crafted justifications for its use within the context of Christian thought, although it only applied the justifications to the census, which had become so customary that “no one could recall a contrary practice.”32
The societas and the census were justified due to their widespread use and their commercial necessity. This does not mean that they were “ruses,” like Islamic hiyal, employed to deliberately evade the interest ban. These transactions entailed costs and risks that likely eliminated most potential profits for those using them for anything but their natural purpose. Yet the arguments justifying the societas and the census were important in molding Christian interest theory. The Church later employed these arguments to expand the set of permissible transactions.
As commerce expanded even further in the thirteenth and fourteenth centuries, with Venetian and Genoese merchants conducting business in the Mediterranean and throughout the continent, it was increasingly apparent that the Church’s interest restrictions had a practical effect on commerce. This was manifested in the methods employed by lenders to evade the interest ban. Unlike the societas and the census, which could be employed for legitimate purposes, lenders began employing financial instruments whose main purpose was circumventing the ban. One example is the triple contract, which consisted of three different types of transactions: a contract of partnership (societas), insurance on the principal of the partnership, and a contract where one sold an uncertain future gain for a lesser certain gain. Each individual contract was valid, but when combined, simulated a risk-free loan. Other examples include the mortgage, dry exchange, and fictitious sales. These contractual forms were eventually justified by Christian religious authorities, often by resolving them into other, lawful contracts. Churchmen permitted these practices by appealing to theoretical concepts such as lucrum cessans (literally “profit ceasing,” a pre–Adam Smith term for the opportunity cost of lent money), damnum emergens (loss occurring due to not having lent money), and interesse (originally a penalty paid for late repayment), all of which quickly gained currency in theological circles and presaged the Church’s official relaxation of the ban.33
A final blow to anti-usury doctrine occurred at Lateran V (1512–1517), when the Church officially sanctioned the monte di pietà, or pious pawn bank. Montes were originally charitable, religious institutions, introduced by the Franciscans Perugia and Orvieto in 1462, that collected funds to provide loans to the poor.34 As public pawnshops, montes were fashioned to help the poor gain credit while protecting Christians from the sin of usury, charging interest of up to 15 percent to cover costs. This rate was well below the one offered by other pawnbrokers, but still high enough to receive condemnation from the Church. The montes spread quickly throughout much of Europe – there were eighty-seven in Italy alone – before the Church sanctioned them at Lateran V. The montes, being the first institutions that lent openly at interest that the Church sanctioned, brought about the virtual disappearance of publicly licensed pawnbrokers and became a vital source of consumption loans for the poor. Indeed, a study by Luigi Pascali (2016) suggests that the increased access to credit afforded by the montes had an effect that has lasted to the present day – those areas with montes in the past currently have more banks per capita and wider availability of credit.35
Explaining Differences in Islamic and Christian Interest Restrictions
At first blush, the differences in Christian and Islamic interest restrictions seem rather innocuous. In both Western Europe and the Middle East, lenders were able to get around interest restrictions using ruses or complicated financial instruments sanctioned by religious authorities. But the details of these histories highlight many aspects of the more general differences in the paths these economies took. One obvious parallel is that the early vibrancy of Islamic legal interpretation coincided with the rise of Middle Eastern economies. And, at some later point, both Islamic legal theory and economic performance stagnated. But why were Islamic interest restrictions never fully alleviated? Why did Islamic legal theory on interest stagnate, and what can this tell us about the broader economic performance of the Middle East?
The framework employed in this book indicates that a Muslim lender had to weigh three factors before deciding to transact: the total profit available under each type of transaction, secular penalties (primarily the nonenforceability of the contract), and otherworldly penalties. Given the “double penalty” – worldly and otherworldly – from undertaking any type of transaction that blatantly violated Islamic law, lenders had incentive to incur transaction costs via hiyal, which allowed them to cohere to Islamic law. There was little incentive to further push the envelope of what was permissible. In most cases, the additional benefits of lending openly at interest were simply not large enough to overcome the costs of doing so.
There were, therefore, two primary forces affecting the demand for change in interest restrictions. The first consisted of underlying economic conditions: where profitable opportunities for large-scale investment were available, demand for interest-bearing loans was higher, and thus demand for relaxation of restrictions was greater. The second force was the costs – worldly and otherworldly – of lending. The presence of the “double cost” jointly imposed by rulers and religious authorities throughout most of Middle Eastern history dominated the benefits of transgressing the restrictions. The upshot was that there was little demand for changes in anti-interest laws and policies.
Lenders’ actions made up only part of the broader equilibrium in which Islamic interest theory stagnated. Another key component was that Muslim rulers had little incentive to permit anything beyond what religious authorities permitted. Muslim rulers faced a dilemma with respect to legalizing interest. On the one hand, they stood to gain if they permitted lenders to openly take interest. More rapidly flowing commerce would increase their tax base, allowing them to propagate their rule while relying less on legitimacy provided by the religious elite. But the cost of openly permitting interest was enormous, since the legitimacy of their rule depended on their compliance with Islamic law. Islamic doctrine states that good Muslims should follow rulers who act in accordance with Islam, and rulers who do not should be overthrown. Hence, rulers were happy to permit actions that did not blatantly violate Islamic law, but not permit anything beyond this. The optimal solution for most Muslim rulers was clear: permit what religious authorities permitted and no more.
Meanwhile, Muslim religious authorities stood to gain from permitting actions that the citizenry frequently practiced. If people viewed the religious elite as ineffectual in their ability to affect lending at interest, this could have spilled over into their ability to dictate views on marriage, inheritance, or political power. Yet, religious authorities stood to lose their power to legitimize if they suddenly and dramatically reinterpreted doctrine: a primary source of authority in both Islam and Christianity is the clerical monopoly on eternal
truths. Given these conflicting motivations – one pushing toward reinterpretation and the other toward conserving the past – it was in the religious authority’s interest to find some middle ground. And since neither lenders nor political authorities pushed the envelope of what was permissible too far, religious authorities had incentive to permit ruses (hiyal) that had become customary, but nothing else. Why would the religious establishment undertake a costly reinterpretation of doctrine when nobody was asking for it?
Put simply, in the absence of a demand for change in interest restrictions by lenders and merchants, rulers and religious authorities had no desire to relax these restrictions. These forces reinforced each other, leading to a situation where none of the relevant parties desired a full relaxation of interest laws. Of course, it was possible that some outside event could have sparked demand for interest-bearing loans among merchants, which would have in turn altered the decision-making calculus of all of the relevant parties. The point, however, is that the self-reinforcing nature of this equilibrium meant that the bar for such an event was high.
The relationship between interest history and the more general economic history of the Middle East is clear. Commerce and trade flourished in the first four Islamic centuries, with Islamic doctrine readily accommodating the pressing needs of the day. The same is true for Islamic interest doctrine. The set of permissible hiyal expanded rapidly in the first few Islamic centuries as Muslim clerics accommodated the desires of lenders. At some point, Islamic reinterpretation of interest restrictions slowed without interest ever fully permitted. The stagnation of interest doctrine paralleled the broader stagnation of Islamic thought highlighted by the “closing of the gate of ijtihad.” The ensuing equilibrium was one that was associated with little endogenous institutional change: religious legitimacy remained vital in most Islamic polities, and endogenous factors were unlikely to undermine the status quo.
