f Money nd Morals
Despite the many loopholes and exceptions, usury laws still had teeth. “It would be a mistake to regard the Church’s sweeping prohibition as a sort of Volstead Act respected only by partisans, casually enforced, and lightly regarded,” write the economic historians Sidney Homer and Richard Sylla in A History of Interest Rates (2005). So why did the prohibition on usury fade away? One interpretation is that it was simply dogma – just like the belief that the Sun revolves around the Earth – that diminished in force as the Catholic Church splintered and lost political authority. Consider the Church like a business, whose core product was salvation, the economists Robert B. Ekelund and Robert F. Hébert have argued. When the Catholic Church held a monopoly in Europe, the clergy could “sell” salvation at high prices – including strict prohibitions and purchased “indulgences,” which usurious sinners could buy in order to be absolved. But in the 1500s, during the Reformation, theologians such as Martin Luther denounced these practices. They advocated a more direct relationship with God that did not rely on priests as intermediaries, and founded new Christian movements such as Protestantism. The effect was that of a new company undercutting a monopoly. As Christian factions competed for believers, it led to a faith-based “race to the bottom.” And to increase their appeal, sects made fewer demands on believers – which meant weakening their stance on usury. Here’s another view on why usury became less sinful: economic development eventually meant it wasn’t worth the trade-off. In 16th-century Europe, the economy was
Even while clergy such as Cardinal de Vitry preached fire and brimstone against usury, the Church was increasingly willing to borrow money itself. Debt became essential to fighting wars, which both monarchs and the Pope needed to fund. Europe’s first real private bank had been founded in the 1100s by the Knights Templar, a Catholic military order that fought in the Crusades. The Knights protected pilgrims who travelled to the Holy Land, and this protection included safeguarding their funds by allowing pilgrims to deposit money in Europe and withdraw it in the Holy Land. Over time, the Templars offered a greater range of financial services; one of their loans relied on Crown Jewels as collateral. The Knights Templar disbanded in 1312, but other bankers extended the practice of lending until, by the 1500s, merchants were buying and selling business debts in fairs across Europe. Eventually kings, politicians, and business people embraced usury wholesale, and the Church looked the other way. In 1462, Franciscan monks in Italy created the first non-profit pawnshops or monti di pietà (“banks of piety”), which went on to spread across Europe. The idea was to be like a Grameen Bank in Renaissance Italy – a lender of last resort, displacing loan sharks who extorted desperate borrowers. The Pope went on to approve ever more kinds of financial instruments, until lending with interest was effectively allowed.
66 | November 2017
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