The Problem of Interest Rates
In a previous article on the blog, the relationship between ethics and economics was briefly discussed through the lens of economic development, demonstrating that the human factor is essential for understanding different economic theories on development and, therefore, involves ethical considerations. In this article, an extremely thorny issue in the relationship between ethics and economics will be addressed: the problem of interest rates.
Aristotle condemned the payment of interest from a purely naturalistic, non-ethical perspective: money does not bear fruit, it does not reproduce, so it makes no sense to lend 100 gold coins and demand 120 after some time, since a hundred coins cannot reproduce. In other words, his condemnation of interest charges was not related to ethical issues.
This perspective would change with Christianity. Just as the Old Testament of the Bible prohibits charging interest on loans between Jews, the New Testament establishes that a Christian could not charge interest from another Christian; however, Jews could charge interest from Christians and vice versa. The French historian Jacques Le Goff observes that, in modern times, Jews have been attributed with introducing interest-bearing loans in medieval Europe, but Christian monastic orders were responsible for a significant portion of these operations until the 13th century. Le Goff states that usury was condemned for several reasons: it led to the sin of greed, it represented a price placed on time (and time belongs only to God), it was considered unjust, and it was seen as a sin against nature (which is a divine creation), following the Scholastic formulation. According to medieval theology, the usurer was someone destined for a horrific punishment in hell, from which he could only escape if, through an act of charity, he returned the sinfully gained money. The condemnation of charging interest thus acquired a moral veneer.
However, from the 14th century onward, this began to change. The Scholastics came to understand the notion of risk, which is inherent in all commercial operations, and they began to justify the difference between the amount lent and the amount to be repaid based on the risk the lender faced of not being repaid by the debtor. Raymond De Roover notes that the Scholastics also admitted that a penalty could be imposed if a debtor failed to pay on time. Secondly, the concept of lucrum cessans (opportunity cost) emerged—essentially, the idea that if I have 100 gold coins, I could spend them on food, clothing, general comforts, or even buy wheat seeds to plant; if I lend them, I can neither consume nor invest. According to De Roover, Saint Antoninus defended this concept on the grounds that a loan made by a merchant would deprive him of the opportunity to invest his money, making it acceptable to charge interest.
From this perspective, one can see that whoever lends money renounces the benefits it could bring and therefore deserves compensation. At this point, the issue shifts to defining what constitutes a fair interest rate. The act itself is no longer necessarily immoral but becomes condemnable under certain circumstances. Interest itself is no longer condemned—only excessive interest is, an argument that persists to this day.
Saint Bernardino of Siena, as Raymond De Roover points out, contributed to the discussion on interest and usury by establishing that goods have different values over time; the Scholastics had previously determined that charging higher prices for credit sales was a form of usury, but Saint Bernardino used the concept of value differentiation over time to argue that, in reality, the cash price included an implicit discount.
Later, John Calvin would contribute to the moral analysis of interest by distinguishing between two types of loans: those taken by workers seeking to invest in their businesses and improve their lives, and those taken solely for consumption and pleasure. The Swiss theologian argued that the first type of loan should not be subject to interest (or the interest should be proportionate to the appreciation of capital), while the second type was inherently condemnable, and high interest rates would at least serve to discourage it.
Thus, one sees that interest, once so heavily condemned, became an acceptable practice, and the moral critique could be circumvented by different hypotheses such as those put forward by the Italian saints Bernardino and Antoninus Pius. These authors, to be fair, offer a deeper economic reflection than many later scholars who addressed the subject. The mercantilists, for example, never understood the distinction between flows and stocks; the physiocrats were completely unaware of the concept of capital appreciation, working only with agricultural production as the source of wealth; and the classical economists paid little attention to the issue of money and its operations. However, in the late 19th century, the Austrian School would develop its ideas on currency and interest, even drawing upon the Scholastics and other Church fathers.
The Austrian analysis of interest disregards the moral discussion, but they cannot be blamed for this: after all, the Church scholars had already abandoned it. The question that remains is: what should the prevailing interest rate in the economy be? The answers vary, but they almost always adopt either a technical bias (which is correct) or a political one (which presents itself as correct but rarely is).
