UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review, which has been on the web since 1995, is now published from Freeport, Maine. See main page for full contents

June 16, 2008

WILL OBAMA TAKE ON CREDIT CARD USURY?

If Obama takes on this issue, one the Progressive Review has long pushed, it would be his first strong move in the economic area and unique in modern traditional politics.

ABC NEWS One of the more ambitious ideas [Obama] is considering, according to a campaign spokeswoman, would be to restore government regulation of credit card interest rates. The government has not been involved in interest rate regulation for 30 years, after a Supreme Court ruling blocked states from effectively engaging in the practice. . .

Stricter regulation of interest rates would likely provoke a titanic struggle with the credit card industry, which would argue that the government should not meddle in the free market. But advocates of re-regulating interest rates argue that this change is needed to prevent more families from falling into bankruptcy.

As part of his "Change That Works for You" tour, Obama held a roundtable talk in Chicago last week with three consumers apparently gouged by the credit card industry. He was joined at the event by Harvard law professor Elizabeth Warren, the nation's leading advocate of re-regulating credit card interest rates.

"The key is that you need to break the cycle of no regulation," Warren told ABC News. "Currently, the states can't regulate and the federal government won't. So there are two ways to fix that: Either let the states do the regulating or put some regulation in at the federal level."

Harvard Law School professor David Wilkins introduced Warren to Obama when the Democratic senator from Illinois was getting ready to run for the U.S. Senate in 2004. . .

Warren says that she has not directly discussed the reimposition of usury laws with Obama, but she hopes that he will take up the cause if elected. . .

If Obama goes beyond studying ways to more strictly regulate interest rates to actually proposing such changes, credit card companies are sure to argue that such a move would dry up credit for higher-risk borrowers.

Warren dismisses such arguments.

"That is the most astonishing claim that I can imagine a corporate representative making," said Warren. "Let me retranslate it: 'If I can't trick these people and fool these people about the actual cost of credit, then I can't make a profit off of them, and I will stop lending it."

"To state the question is to answer it," she continued.

"The truth is," she said, "I think there is a profit to be made in lending to low-income working families. ... There are lenders who do it every day."

STEPHEN ZRLENGA, DIRECTOR, AMERICAN MONETARY INSTITUTE - Aristotle (384-322 Bc) Formulated the classical view against usury. Aristotle understood that money is sterile; it doesn't beget more money the way cows beget more cows. He knew that "Money exists not by nature but by law":

"The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. . . Wherefore of all modes of getting wealth, this is the most unnatural."

And Aristotle really disliked usurers, "those who ply sordid trades, pimps and all such people, and those who lend small sums at high rates. For all these take more than they ought, and from the wrong sources. What is common to them is evidently a sordid love of gain"

The Scholastics (1100 -1500 AD), church scholars familiar with the available writings in existence, echoed Aristotle. Acquinas argued that money is a measure, and usury "diversifys the measure" placing extra demands on the money mechanism which harmed its function as a measure. . .

The Scholastics made the first attempt at a science of economics and their main concern was usury; but this was not the same as just charging interest. It was generally not forbidden to earn interest if the lender was actually taking some risk, without a guaranteed gain. Interest could also be charged when the lender suffered some loss or passed up some opportunity by extending the loan. . .

Two types of loans were always exempt from bans on interest: the "Societas", where the lender assumed some portion of the risk of the enterprise. Also exempt was the "Census" - an obligation to pay an annual return based on some "fruitful" property. At first it was paid in real produce, later in money.

The Census was normally capitalized at 8 times the annual return, but the risk of the "fruitful" base was on the lender not the borrower, for if the crop were destroyed by weather, the borrower had no obligation that year. Later cities issued "census" obligations based an tax revenues, which came to be called "rents".

Usury was much more than charging interest - it was taking unfair advantage; usury was an anti-social misuse of the money mechanism. Similar to the term Riba in the Islamic world.

The church's condemnation of usury: Pope Innocent IV (1250-1261) noted that if usury were permitted, rich people would prefer to put their money in a usurious loan rather than invest in agriculture. Only the poor would do the farming and they didn't have the animals and tools to do it. Famine would result. Burudian, a professor at the University of Paris wrote that: "Usury is evil. . . because the usurer seeks avariciously what has no finite limits". . . . St. Bernardine of Siena (1380-1444) observed that usury concentrates the money of the community into the hands of the few.

Divine and human law: All mankind's moral and legal codes censured usury, normally with mild limits on interest rates. But the Old Testament strictly forbade Jews from taking usury from their "brothers" (other Jews), and discouraged taking it from strangers. The Scholastics looked on all mankind as brothers. Other codes restricted usury:

- Code Of Hammurabi (2130-2088 BC) limited usury to 33%;

- Hindoo Law - Damdupat - limited interest to the full amount of the loan;

- Roman Law limited interest; Justinian's 6th century Code reduced the 12½% limit of Constantine the Great, to 4-8%, and accumulated interest could not exceed principal.

- The Koran totally forbids usury, from the 7th century;

- Charlemagne's laws flatly forbade usury in 806 AD.

- Magna Carta placed limits on usury in 1215 AD.

- Most states of the United States enforced usury limits until 1981.

Action against usurers: Pope Leo the Great (440-461) laid the cornerstone for later usury laws when he forbade clerics from taking usury and condemned laymen for it. In 850 the Synod of Paris excommunicated all usurers. The 2nd Lateran Council (1139) declared that unrepentant usurers were condemned by both the Old and New Testaments. Pope Urban III (1185-87) cited Christ's words "lend freely, hoping nothing thereby" (Luke 6:35).

Judicial action was taken against those openly practicing usury and the Church never condoned Jewish usury activity. Christian usurers who used semantic tricks in making loans were worried about excommunication and being denied the sacraments, especially burial in sacred ground. They used every word trick to avoid the usury label. Goods were sold on credit at a higher price which factored interest in. "Dry Exchange" bills in foreign currency were not sent for collection but resold to the borrower for a higher amount, reflecting interest.

Usurers were required to make monetary restitution to their "victims", and if they couldn't be found, to the poor through the Church. . . The heirs of usurers were also required to make restitution.

Fall of the usury prohibition: As economies became more dynamic, with real growth possibilities, it became clear that charging interest on business loans where the borrowing merchant prospered, couldn't be condemned as greed or lack of charity and by 1516 the idea of a lending institution charging interest for its services had been overwhelming accepted.

Calvin's reformation: John Calvin finished off the usury ban in 1536. But his arguments were shallow compared to the Scholastics: "When I buy a field does not money breed money?", he asked rhetorically. For centuries the Scholastics had demonstrated the correct answer is no - it is the field not the money which grows products. Calvin wasn't enthusiastic about usury. . . He considered usury sinful only if it hurt ones neighbor and that it was generally legitimate in business loans.

How capitalism viewed interest: The justification for charging interest evolved historically in works promoting capitalism. One recurring theme was to attack Aristotle. Francis Bacon's Works (1610) thrashed the Scholastics for: "almost having incorporated the contentious philosophy of Aristotle into the body of Christian religion... Usury is a thing allowed by reason of the hardness of men's hearts. For since there must be borrowing and lending, and men are so hard of heart as they will not lend freely, usury must be permitted

In William Petty's 1682 Quantulumcunque Concerning Money usury is redefined as: "A reward for forbearing the use of your own money for a term of time agreed upon, whatsoever need your self may have of it in the meanwhile."

This ascetic rewarding of self denial, with religious overtones, is still used by some in the 20th century, but Adam Smith's 1776 Wealth Of Nations, capitalism's "bible," put aside these earlier rationales, and justified usury in economic terms:

"The interest or the use of money. . . is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money. Part of that profit naturally belongs to the borrower who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit." This is how interest is popularly viewed today. But Smith overlooked that the lender gets his profit even when the enterprise loses; he ignored the successful business structures used by Venice for centuries, where the lender's return was based on actual profits. Smith's endorsement did not remove the stigma against usury; and the debate continued.

Eleven years later Jeremy Bentham's In Defence Of Usury (1787) . . . dismissed the harmful effects of usury on the common man: "Simple people will be robbed more in buying goods than in borrowing money." . . .

Despite continuous pressure and support from the financial community, the various justifications for usury proved inadequate in 1836 when John Whipple, an American lawyer wrote The Importance Of Usury Laws -An Answer To Jeremy Bentham. Whipple proved the impossibility of sustaining long term metallic usury:

"If 5 English pennies... had been... at 5 per cent compound interest from the beginning of the Christian era until the present time, it would amount in gold of standard fineness to 32,366,648,157 spheres of gold each eight thousand miles in diameter, or as large as the earth."

Whipple knew that answering the usury question required an accurate view of the nature of money, and he echoed Aristotle:

"It was never intended as an article of trade, as an article possessing an inherent value in itself, (but) as a representative or test of the value of all other articles." . . .

This view is clearly drawn from Aristotle's concept of money that money exists not by nature but by law. Aristotle clearly identifies the essence of money as an abstract legal institution invented by society - a creature of the law.

One can imagine how advanced the world of finance would be today if someone like Whipple were present at the Constitutional Convention in 1787. Had his viewpoint been distilled into law many unnecessary hardships (and wars?) could have been avoided. Instead the delegates operated under a primitive commodity concept of money, similar to that of the ancient oriental system and ignored the crucial monetary questions. . .

The modern world is now getting a taste of real usury. Up to 1981, interest limits (usually under 10%) were in effect in most of the USA. Today credit card debt is very high and growing, along with personal bankruptcy rates. Most people are paying 21 - 25% interest on their credit cards each year. Money they really can't afford to pay. Some economists actually favor letting the market charge whatever interest rates people can be forced to pay. But this should not continue - it will do so much harm to society that all the free market economists in the world chanting in unison won't be able to hide the damage.

Approaching the usury question intelligently requires a better understanding of the nature of money. . . How should civilized society view usury? First I think we have to admit that we don't have the full answer. But we do know parts of it. . .

7 Comments:

Anonymous Anonymous said...

One of the main purposes of government should be to protect the weak against the strong. Predators will always figure a way to justify their predation. In fact, they will attempt to claim virtue. It has been said, the root of all evil is the love of money. There certainly is ample evidence of that. Ultimately to counter this the human race needs to develop a sustainable and merciful social arrangement. It would be best that this be arrived at based on a shared understanding. Until that time we will need to depend on laws to preclude the worst excesses. But that is clearly a stopgap measure.

June 17, 2008 12:15 PM  
Anonymous Anonymous said...

The headline asks a question.

Simple answer: Only if hell freezes over.

Longer answer: He will probably do something that he calls credit card reform, but just like the recent bankruptcy law, it will do more for the credit card industry's bottom line than it does for my bank balance.

The only possible exception would be if Obama turns out to be a sheep in wolf's clothing who has been lying to all his billionaire contributors about looking out for their interests.

June 17, 2008 4:24 PM  
Anonymous Anonymous said...

I hope he does - if not, this meltdown will keep on 'trickling down'. Funny how the success of our economy never made it to folks at my level (we just tumbled out of the middle class in the last two years), but the failures already have: interest rates on 2 cards have just been jumped - not because of anything on my part, but because of bad choices these banks made. And I note that while my rates have gone up in response to the problems of these companies, the pay to their execs has remained unaffected.

December 1, 2008 10:32 AM  
Blogger Steven G. Berry said...

1. Outlaw unearned income

2. A real "Bank of America"

3. Jubilee

4. Politicians selected by lot

We need an economic/political reboot, followed by execution of a new societal program.

The banks are the government, the government is the banks. This must end.

Forgiveness of all debt. Money issued by a truly representative government (by lot) and any interest payments abolished.

February 9, 2009 6:51 AM  
Anonymous Anonymous said...

The credit card companies, some of which will/or have received bailout money, should not be able to charge rates as high as 30%...which, yes, has happened to me. It is ridiculous. Why are all the cards addressed in South Dakota? No "usery" laws? President Obama, How about some reasonable rates, please?

February 19, 2009 12:02 PM  
Anonymous Anonymous said...

It is very unfair that credit card companies are not even allowing good payers (which I am one) to jump from a high interest card to a lower one. That's right, they will extend a low rate on new purchases but not balance transfers, and it's like they are all in this together to keep you in a high interest rate mode. Discover told me I could have a 1.9% interest rate on new debt but would not allow a balance transfer on higher interest from another card--Citi, who just jumped me from $56 a month payment to $82 at 17% interest on $3,700. That is way too much. Obama must not let this usury by the credit card companies continue. That jump means my $56 payment last month equated to only $5 off my entire bill last month. If other credit card companies do the same thing, I won't be able to even make the payments, much less think about getting debt-free, which is what I so desire and try for. And that is more difficult to achieve since my employer (and I'm grateful to have a job) didn't give raises last year and may not this.

June 27, 2009 3:46 AM  
Anonymous Anonymous said...

The USA version of "The Free Market Economy" has been nothing more than a smoke screen concept to justify the deregulation of everything -- thus allowing criminal activites to be carried out within a lawless society.

Yes, I know without unbridled greed innovation can not trive...

October 8, 2009 6:56 PM  

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