11.1 Usury-Free Banking as Social Business

In the sixteenth century the Miller was the lynchpin of the rural economy. He played no part in the county’s financial economy unless, like the Miller in Geoffrey Chaucer’s Canterbury Tales, he accumulated enough wealth to have need of the exchanges. Millers dealt in corn not coin. The local organic farmers of the day…there was no other type…brought him ten sacks of corn. He put one aside for his own use and ground the corn from the other nine sacks between his millstones.

The millstones were driven, not by the Miller’s water, but by the water from the local streams and rivers diverted into the Miller’s mill race under conditions agreed by all the users of the water. With the Miller there was never a dispute because the water was returned untainted downstream of his mill. Nine sacks of flour were returned to the organic farmer who would bring them home by horse and cart and give them to his wife and the wives of everybody who helped him bring in the harvest, to make bread to put on the family table.

The mill was a money-free business. It was run, not to maximise the Miller’s profit, but to meet the need of local farmers. The Miller made his living from milling and was paid a Just Price for converting corn into flour. The mill, like the church and the tavern, was part of the common wealth of the village. The principle could be applied more widely when it made sense to do so. The village cowherd, for instance, could be looked after by the young boys of the village while the young girls milked them…or vice versa. Each of the cows could be the personal possession of a single household or several households. Alternatively the herd could be the common wealth of the village. The principles of anarchism, syndicalism and communism represent some of these ways.

In good times Coinage and Farm Credit would have no part to play in this microeconomic system. And if provision were made for bad times by providing granaries for surplus grain, in bad times too the village could manage. The Real Economy has no need of the Financial Economy under the natural order. Our ancestors did not draw a distinction between the real and the financial economy so Dante did not need to worry whether usurious manipulation was in corn or coin when consigning Usurers to their place alongside Murderers in the innermost circle of Hell. In fact for the Real Economy to place itself at the mercy of the Financial Economy, powerful forces must come into play. Acts of God in the form of a blight that destroys a harvest is a powerful force. Enclosing of the commons is a powerful force.[i] But the most powerful force of all is the institutionalising of the theft of personal possessions and common wealth[ii]. This is what has been happening.

Instead of the financial system evolving ‘as if people mattered’ to use the subtitle of E.F. Schumacher’s[1] 1966 publication Small is Beautiful[2], it has been regarded as the plaything of greedy, unaccountable judicial persons like transnational corporations, private equity funds, off-shore trusts and a host of other legally contrived devices. The result has been the inversion of society. [iii]

The English legal system has failed to keep pace. The Common Law, Magna Carta, the justices and equity deliberations of the Courts of Equity have struggled like Canute against the tide. The rights of the real persons have been overwhelmed by the claims made by judicial persons as they have bulldozed the legal system and corrupted the judiciary and the legislature. Thomas Jefferson was dead set against the idea that real people and judicial persons should be equal before the law, correctly anticipating its consequences.[iv]

As a society, we must find ways to ring-fence the urgent clamour of the commercial world. In our many little personal worlds moral principles can hold sway. This is well-nigh impossible in profit-maximising limited liability enterprises. The pressure of short-term financial returns to shareholders are too great, however high-minded might be the intentions of the top people. Moral principles must be embedded in legislation.

For the Labour Government of the 1930s and 40s, R.H. Tawney developed the idea of Property (worked capital) and Improperty (idle capital). This survived in the tax laws of the Harold Wilson Labour Government of the 1960s which discriminated between Earned and Unearned Income.[v] The moral idea enshrined in The Doctrine of Usury ran even deeper.

If there were risks and these were fairly shared…the guiding principles of The Doctrine of Usury were always Justice and Equity…then it was Partnership. The Christian and the Jewish doctrines were identical to the Moslem doctrine and indeed to the doctrine of the past five thousand years back to the Romans, the Ancient Greeks and beyond to the Egyptians and the Babylonians.

Just Agreements between merchants in the form of Trade Credit or Merchant Adventures were legitimate in the eyes of both the Law and the Church. Any concern they might have was not about the amount of the fee or the rate of interest but about the nature of the arrangement and in particular the morality of any new development when measured against the Doctrine of Usury. It was Bentham[3] and not Calvin[4] who was principally responsible for breaking with thousands of years of doctrine in the European Christian World.

Twenty years ago Margrit Kennedy[5] published a short book entitled Interest and Inflation Free Money.[6] She cited German studies of the Interest Content in the prices of different products and services. Her conclusion was that inflation was caused by interest-bearing money. The studies also suggested that the greater the capital content and the longer the term of the funding, the higher the proportion of interest in the price. In the case of water and sewerage service interest could account for half of the price. Kennedy believed that much of a country’s business and economic activity could be interest-free.

The fifth chapter of Henry Swabey’s History of Usury and the English Church is about Church Mints and R.H. Tawney in his ten-essay introduction to Thomas Wilson’s Discourse Upon Usurye devotes two of them to the subject of the Elizabethan exchanges. Mints and exchanges are the bedrock of every financial system. The edifices built upon these basic foundations are seldom essential for the sound operation of a real economy. Over elaboration and complexity, in and of itself, is often the problem. ‘When something is wrong,’ Leopold Kohr[7] once wrote, ‘Something is too big.’

One interesting conclusion arising from Swabey’s investigation is that over the past thousand years, mints and exchanges have come and gone in England. As the enforcement of the Church’s Doctrine of Usury has waxed and waned, so Coinage Power has flown to and from the centre. Good times and bad times in the Real Economy seemed to correlate with the flow. Decentralised mints would appear to be essential for prosperity. There are periods in the past thousand years of England’s written history when these mints and exchanges served the needs of the gentlemen, the shop-keepers and the yeoman farmers who had a part to play in the cash economy of their age. But they were seldom more than a small minority.

Calvin is often cited as the theologian who drove the wedge into the Doctrine of Usury and set the merchants free from the constraints of its traditional prohibition. It is true that in the United States in the nineteenth century it was the Calvinist churches who sided with the Bankers against populist politicians like Andrew Jackson[8] and their championing of the public right to issue currency.

But the Calvinist churches misunderstood the subtlety of Calvin’s teaching and the context in which he developed his doctrine. The principal villain was not Calvin but Bentham. Bentham equated interest with usury. It seems he knew no better. He was a blunt man. The measure of his success is clear from any survey of a dozen undergraduates. Eight or nine of those asked will have no idea what usury is and the others will tell you it is an old-fashioned word for interest.

One of the most exciting developments in recent years has been the way in which the Grameen Banks[vi] have recreated the system of usury-free mints and exchanges set up in England by the Usury Law of 1571 and have developed the techniques of lending out money to the poor at interest but not at usury. And they are ridiculously successful. The Loan Recovery Rates of nearly all Grameen Banks are in the high nineties and average 98%. This compares with the 70% and below for many conventional banks…before taking account of the billions upon billions of write-offs and write-downs generated by the Credit Crunch.

Grameen Loans meet the fairness criteria of the Doctrine of Usury by being subject to renegotiation by the borrower in the light of his changed situation. They also follow the ABC Analysis[vii] approach of the 1571 Law of Usury by specifying a repayment ceiling above which they do not go.[viii]

The Grameen Banks provide microcredit programmes at interest rates that fit into one of two zones: the Green Zone, which equals the cost of funds at the market rate plus up to 10 percent, and the Yellow Zone, which equals the cost of funds at the market rate. Other microcredit suppliers are now moving into the Red Zone above these rates of interest with profit-maximization as their goal.

But the Grameen Banks avoid this territory. They are not in business to earn large profits for shareholders and other investors but have very different objectives. Institutionalising the traditional Moneylender System is not one of them. In Bangladesh, for instance, the Grameen Bank has very successful Home Loans for The Poor[ix] and Microcredit Lending to beggars.[x]

The Financial Economy we have grown up with is not the only possibility. In fact it is a historic aberration. It is also unsustainable. The arithmetic is against it. The system serves the power and control agenda of The Few. It can continue to do so. But it should not be allowed to run amok among The Many, which is what it is doing.

The Global Exchanges for rich and unreal persons can be ring-fenced as soon as alternative arrangements have been made for the financial needs of real people and their real economies. We have no need for compound interest. Grameen Banks use simple interest.[xi] Exchange rates are a symptom of a flawed system that seeks to use the outdated methods of the Mercantile Era to run a Global Economy in the Digital Age. The Real Economy needs to decouple from the Currency Exchanges as a matter of urgency. It will have almost no effect on real people only a few percent of the transactions have anything to do with the Real Economy. Grameen Banks lend only in local currency.

[i] There are many ways to do this. The local Bigman can arrange for the water to be diverted away from the mill. The seed can be monopolised and only released at sowing time subject to usurious fixing of the corn price after the harvest six months hence. There are many tricks. All of them have been practised at one time or another. There are always rogues in the world. And sooner or later they have always got their comeuppance.

[ii] We need to discriminate between the personal possessions of individuals, families and households; the private property of judicial persons like limited liability companies and trust funds; the legal claims of real and judicial persons vis-à-vis pension funds, insurance and annuities; and the common wealth with many beneficiaries for both capital and income…often dealt with independently…and a competent receiver for that property who holds and administers it on behalf of a specific group of persons…perhaps in perpetuity or on behalf of their heirs. Although just as there is an understanding that the present parliament may not bind future parliaments there is also an understanding that present generations may not bind future generations. In the case of trusts and the Courts of Equity this has developed into a rule of thumb that the conditions of a trust are to be followed to the letter and the spirit of the trust purpose for 21 years but can then be adapted to changed conditions if it is deemed appropriate to do so.

[iii] The idea of societal inversion was first discussed by Thomas Robertson in his 1947 classic Human Ecology. A recent revival of the idea appeared in a paper accepted for the Work Forum at the Radical Consultation in September 2001 entitled The Foundations of Structural Sociology. The workshop papers are available online at http://www.cesc.net/adobeweb/radcon/work.pdf . The inversion can also be described diagrammatically.

[iv] On matters of concern only to disputes between the three impersonal spheres of economic activity, there is little reason for the public purse to get involved. Perhaps it is time to think again about the division between our courts…Magistrates, Equity, Chancery etc. Once the clutter has been cleared and sorted it will be easier to focus in on the needs of real people.

[v] There is a wealth of good scholarship linking sound moral principles to legislative action. E.F. Schumacher, for instance, in This I Believe has an essay entitled How to Abolish Speculation in the section on Cities and Land where he reminds his readers of the good sense in Henry George’s proposal of removing to the commonwealth the windfall gains associated with public decisions (e.g. planning permission). Halford Mackinder believed another fundamental issue was the conflict between Locality and Interests, implying that there should be a legal hierarchy of equality before the law based on a slogan like Judicial Persons Good, Local Places Better, Real People Best. This could be worked up into legislative language. Montesquieu thought highly of the traditional English habit of primogeniture whereby large estates pass intact to the eldest son and Alexis de Tocqueville homed in on this device when making his assessment of Democracy in America. Tom Paine in Agrarian Justice calculated that a 3% inheritance tax would suffice to provide generous pensions and social security for all.

[vi] Grameen went back to the drawing board in 1999 and came back with a major upgrade in 2001 which they refer to as Grameen II. ‘The differences between Grameen I and Grameen II are many and interesting’ (to quote the Nobel Prize Winner Muhammad Yunus who founded the Grameen Movement…see the full story in The Poor Always Pay Back: The Grameen II Story. Predictably attempts have been made to discredit the Grameen Microcredit idea by hijacking the meaning of Social Business. There were 3000 delegates at a Microcredit Summit in Washington in 1997 prompting Yunus to classify microcredit programmes as Poverty-focused (Type 1) and Profit Maximizing (Type 2). Type 2 was just fine as long as they were targeted at the Middle Classes. They should be kept away from The Poor.

[vii] There are two aspects to the Parliament of 1571’s deliberations on the Act of 1571. Firstly they took the Francis Bacon line (see his Essay on Usury…a masterpiece of concise erudition) and in effect did an ABC analysis of the problem of usury by saying there is outrageous behaviour (A), sensible socially acceptable behaviour (C) and then a grey area in between (B). As a first approximation civil society was given the OK to adopt 10% as the discerning factor (Bacon put it at 5%) and the Doctrine of Discernment is a key concept in Catholic Christian Ethics. So we get Class A Usury as anything over 10%, Class B Usury as 0-10% and Class C Usury at 0% and under…at which point the Lender pays the Borrower a Stewardship Fee for looking after his money. Secondly Parliament adopted distinctly different approaches to the three classes of usury in the administrative procedures of the Doctrine of Usury. Class C cases are dismissed out of hand. ‘No case to answer! Don’t waste the Court’s time! Credit makes the world go round! Of course the Merchants are right and the Theologians are splitting hairs! Go dance on pins! However The Poor should pay lower and not higher rates of interest for their credit. Why? Because they are poor so they don’t have any money. Christian Charity, common courtesy and run-of-the-mill justice. Class A cases are also dismissed…but done so by the Courts so that the dismissal is backed up by the full force of the Law, its Prisons, and its Law Enforcers and the Property Confiscators. The Penalty imposed on the Usurer is three times the amount stolen…although previously as Swabey demonstrates it was much worse than this for the Usurers…eternal damnation, no Christian burial and then some. One of the real subtleties in the Act of 1571 is the manner in which Civil Society is commanded to deal with Class B Usury. Here the Parliament of 1571 takes what constitutes in effect a Citizen’s Arrest approach. Tawney’s understanding of this is spot on in his Compromise of 1571 essay where he quotes from the author of The Death of Usurie (1595)…Page 82 in the full text version.

[viii] The Grameen ceiling is twice the sum borrowed…a Repayment to Principal Ratio of 2.0. In my 1998 Canterbury Papers I suggested a ceiling of 1.3 as a way to compel the financial system to incorporate the period of the loan, the interest and the fees into a single measure. Grameen’s thinking is along similar lines. Discussion of public policy should be refocused away from interest rates which are bedevilled by the (minor usury induced) problem of inflation, to concentrate instead on the Judaic seven year rule…and mortgages in this country are now stretching out to 50 years and beyond…by combining principal and interest into a single acceptable/unacceptable usury index based on the money received by the Borrower and the money returned to the Lender. In this country the Office of Fair Trading has a de facto definition of unacceptable monopoly as in excess of 30% market share. So let’s use the same number so that the break point between Class A and Class B Usury is not ten percent (or 8 or 6 or 5) but the point at which Repayment to Principal Ratio exceeds 1.30.

[ix] The Grameen Home Loan Programme should be the model for the first Public Credit issue in the UK. Instead of turning building societies into unsuccessful bankers which was the effect of the act of vandalisation by the Thatcher Government, they should have been confederated into a Freddie Mac and Fannie Mae at the county level and outsourced to Grameen for the introduction of Grameen principles for one-home owners in the UK.

[x] The Grameen Struggling Members Programme currently lends microcredit to 100 000 beggars. To date the Beggars Loan Programme has lent out 95 million taka and had 63 million of it repaid. Meanwhile 10 000 beggars have managed to take themselves off begging.

[xi] Here is how simple interest works. If a peasant farmer borrows £10 for half a year to buy seed from Monsanto at 1% per month and then has a bad harvest and pays back after the next harvest instead, his repayment ratio is £10 + £0.60 + £1.20 = £11.80 divided by £10 or 1.18 after two years as opposed to 1.06 if he had paid back as he originally expected after six months at the first harvest.

2 responses to “11.1 Usury-Free Banking as Social Business

  1. No, Paul, I don’t trade forex and don’t know forex agents.


  2. Pingback: 1215: Usury Forbidden by Magna Carta until 1694 when Private Bank of England Chartered by King of crooks….. | TheFlippinTruth

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