The idle ramblings of a Jack of some trades, Master of none

Apr 20, 2010

Usurer? Sinner!

While I'm not clued up on why there is a prohibition against usury (the taking of interest) in the Abrahamic faiths, I am fairly certain that there have always been workarounds, obfuscations, economy with the truth, and considerable ingenuity on the part of lenders to extract their pound of flesh. As it was considered a mortal sin to take any interest on a loan, lenders no doubt twisted themselves into knots to avoid the damnation of their eternal souls. Borrowers, of course, could affect a superior tone.

The usual answers to why a lender would charge interest are: the human desire for immediate gratification implies that a rupee today is worth more than a rupee tomorrow; inflation depreciates the value of a rupee over time; it is likely that repayments in the distant future are risky owing to unforeseen circumstances such as the death or the flight of the borrower, and this risk ought to be priced into the loan.

In the medieval English period, inflation appears not to have been a serious concern. Default risk, on the other hand, has always been a matter of worry for lenders. Loaning money to kings would have appeared particularly fraught - not only could the sovereign refuse to pay, he might also confiscate the lenders' assets and put them to death, just because he could.

How was the poor lender to protect himself, and yet avoid consigning his soul to the Devil? Specific examples of financial cleverness can be found in economic history1.

One way around usury was for the borrower to sign a document stating that he had borrowed a larger amount than he actually received from the lender. The borrower might agree, for instance, that his loan was £100 to be paid off in a year, whereas he obtained £66 13s 4d in hand. (This worked out to 50% annual interest. No wonder the lender was not held in particularly high esteem.)

Another way around would be for the borrower to bestow 'gifts' upon the lender at some future date, in gratitude for the lender's assistance. As long as there was no intentional connection between the loan and the gift, this was eminently acceptable to religious figures in the Middle Ages. King Edward III of England granted gifts of £11,000 to the Italian bankers, Bardi, for their loan of £42,000.

Yet another way was for the lender to issue a series of claims of damages - penalties for not repaying the loan - after setting an infeasibly early date for repayment of the original loan. Italian lenders in the 13th century used to impose a penalty every two months of one mark for every ten marks lent, equivalent to an annual interest rate of 60%.

Naturally such obfuscations also needed to be mirrored in the official accounts:
A large-scale example of the massaging of figures to produce a predetermined outcome can be found in the audits of the accounts of the Ricciardi with Edward I in 1276 and 1279. In both cases, the king was left owing a suspiciously round sum to the Ricciardi, namely £13,333 13s 4d (or exactly 20,000m) in 1276 and £23,000 in 1279. It seems likely that the Ricciardi and the king had agreed on a reasonable figure to cover the Ricciardi’s costs and leave them in profit. In order to justify this within the Exchequer system of accounts, it was necessary for the payments made by the Ricciardi to exceed their receipts by exactly the figures agreed. In the case of 1279, we can catch the Exchequer clerks in the act of ‘cooking the books’. The 1279 account follows the standard format, first listing all the Ricciardi credits and then all the Ricciardi discharges. The total received by the Ricciardi was £178,478 19½d, while their expenditure and allowances listed in the account come to £189,797 19s 6d. Thus we can calculate an actual Ricciardi surplus of £11,319 17s 10½d. This meant that, in order to reach the ‘correct’ figure of £23,000, the Exchequer clerks had to either reduce the Ricciardi receipts or inflate their expenses. They seem to have chosen the latter course but, fortunately for us, the clerk responsible for the account muddled his sums. When calculating the total advanced by the Ricciardi to the king, he deducted the agreed £23,000 from the total Ricciardi receipts, instead of adding it, thus making a total of £155,478 19 ½d for expenditure by the Ricciardi. As a result, the Ricciardi appeared to owe £23,000 to the king. This mistake was corrected and the ‘right’ figure of £201,478 19½d supplied below. This is simply the most egregious example of a practice that must have been widespread.1


1. A. R. Bell, C. Brooks, T. Moore, 2008. Interest in medieval accounts: Examples from England, 1272-1340. ICMA Centre Discussion Papers in Finance, DP2008-07, Reading.

2. Credit Finance in the Middle Ages.


Anonymous said...

I had an annotated edition of a work by Gresham, the bad money drives out good money guy, with annotations. It more or less explained how the wool trade with the Flemish was carried on with borrowed money, in such a way as to avoid explicit interest charges, but leaving the lenders a profit. Alas, I can't recall how it worked, and I gave the book to an economist (a money and banking guy) named Thomas. (He's a Kansas State U. Prof.)

Fëanor said...

Is there any way you can get that book back from the economist without charging him interest? :-) (Thanks for stopping by.)

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