Usury : A new definition and the possiblity of usury-free lending

I'd already mentioned Nicholas Shaxson's discussion of usuary in his book "Treasure Islands". Here's what he said:

"The practise of usury - lending money out at excessive interest rates - has a nasty historical taint. The prophet Ezekiel included it with rape, murder and robbery in a list of abominable things; the books of Exodus, Deuteronomy and Leviticus forbid it, and Plato and Aristotle called it immoral and unjust. In Dante's Inferno 'lewd usurers' sit in the seventh circle of hell, and the Koran states that 'whoever goes back to usury will be an inhabitant of the Fire".

Pretty strong stuff.

The problem is that the definition of what are "excessive interest rates'' is ill-defined.  There are clearly some cases where hopefully everyone would agree. For example, the payday loans companies in the UK are pretty abominable. I see that my favorite payday loan company, Quid24.com, has changed its system. Before, it was offering an APR rate of an unbelievable 14348%. Its website is now offering a much more modest rate of only 5558%. I still think that is "unreasonable".

However, I think that there is potentially a simpler and much more straightforward definition of usuary. How about limiting the term to the case where someone charges interest for lending money that they don't actually have to lend? In other words, interest charged when money is created using fractional reserve banking, the system that allows commercial banks to lend out money that they don't possess. Perhaps it would be fair to include this "with rape, murder and robbery in a list of abominable things".

If banks were acting as the vast majority of people think they do, by lending out money that already exists, then there would be no problem - even if sometimes the difference between the rate of interest their savers and the rate that they use to lend out sometimes gets quite large. 

Interestingly, there are now systems that allow money to be lent directly from one person to another - effectively short circuiting the banks.  For example, in France, there is a newly created system called "Prêt d'union" that organises loans between individuals. Suppose that you have a spare €10,000 that you would like to invest. Prêt d'Union has a system that allows you to lend it for a period that you define in advance. If you lend for 2 years, you get a return of 4% per annum. But if you lend for 3 years, you get 5% increasing to 5.7% over 4 years and 6.5% over 5 years.

On the other side, if you want to borrow money, you pay a rate that is very close than the rate paid to the investors. There is a handling fee, and insurance that means that the actual effective rate paid by the borrower goes up, but the difference between the rates paid to the investor and the rate paid by the borrower are reasonable.... no sign of usury there.   The table shows the details that I got by simulating various loans using the website.

The problem is that you might well ask why you should go and borrow money from the Prêt D'Union sytem when you can often get lower rates from commercial banks. Fair point. But the difference is that the commercial banks don't have to have the money they lend you. As far as they are concerned, any rate of interest allows them to make profits. When they create the money themselves, they don't even have to pay their savers anything. And if they need a bit more backing to keep the books looking OK they just have to go to their freind Mario Draghi at the E.C.B. who will happily generate an extra €1 trillion (as he did in december 2011 and february 2012) and lend it to the commercial banks at 1%.

Sure, the commercial banks do in fact pay their savers something - even though they don't actually have to. But, in my opinion, this is largely cosmetic - to give the impression that they are lending out their savers money when they make loans. The fact is that they don't need savers - and that is the reason why interest rates for savers are so terrible.

The sort of lending mechanism being developed by Prêt d'Union seems to me to demonstrate that there is a real alternative to relying on commercial banks.  A 6.50% rate of return for an investor is actually very good - especially with inflation at only 2-3% a year.

But above all, I think that there is a moral reason for preferring this sort of system. With the sorts of system proposed by Prêt D'Union, there is no creation of money, and no charging of interest for debt creation. Using my proposed definition, there is no usury either. The world would be a better place.