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Beggar Thy Neighbor: A History of Usury and Debt

Author(s):Geisst, Charles R.
Reviewer(s):Frey, Donald E.

Published by EH.Net (February 2015)

Charles R. Geisst, Beggar Thy Neighbor: A History of Usury and Debt.  Philadelphia: University of Pennsylvania Press, 2013. vi + 388 pp. $40 (cloth), ISBN: 978-0-8122-4462-5.

Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest University.

In eight long chapters, Geisst, who is professor of finance at Manhattan College, covers the history of usury, debt, and related topics. Chapters address ideas, practices, and context; but side-topics sometime obscure the main argument.

Geisst sees usury as an enduring practice, even to the present. Ancient societies placed limits on charging interest, especially for consumption loans to the poor. Roman law singled out compound interest as usury; but today, argues Geisst, the “predatory element in lending still exits” (p. 10). Anti-usury laws have invited evasion; indeed, for centuries, “outsiders” in the dominant culture were both tolerated and persecuted because of being lenders. Despite the passage of time, Geisst finds similarities between recent financial strategies and those of the past. Even during the financial crisis of 2007-2009, Geisst finds usury and debt playing central roles. Geisst makes a meta-ethical claim, rooting anti-usury views in universal “notions of fairness and equity” (pp. 5-6).  My pared-down summary (ignoring discussions of intricate financial instruments and several tangential issues) follows.

The first three chapters span from the ancient world to the decline of dominating religious influence in the West. The successor societies to Rome long condemned compound interest, struggling with lack of mathematical clarity until the work of mathematician Fibonacci (circa 1170 to 1250). Unconditional condemnations of usury (rejecting even simple interest and business loans) came only after Thomas Aquinas (1225-1274) helped transplant Aristotle’s view, that money was unproductive, into Catholic doctrine. (Geisst notes that contemporary Islamic finance circumvents interest in ways that echo those of this period in Europe.)

With time, however, businesses in the Renaissance came to demonstrate a link between borrowed capital and economic growth. Further, Calvinist Protestants, who “rejected the Aristotelian notions” about money accepted as legitimate interest on business loans (pp. 75-76).  And legal thinkers, such as Hugo Grotius, gave the “early reformers considerable momentum” (p. 90). Geisst claims this acceptance of interest was central to what Max Weber called the “Protestant ethic,” though this reviewer notes that Weber’s work was not primarily focused on interest rates.

The secular Enlightenment’s logical endpoint is illustrated by the classical economists who transformed interest from a moral issue to a theoretical and policy issue. Even Adam Smith rationalized limited interest-rate controls in order to direct capital to “productive” projects and away from lifestyle loans to down-at-the-heels aristocrats (p. 124).

Chapter four portrays the transition to our own era during the nineteenth-century (in the UK and U.S.). In short, laissez-faire theory fought traditional anti-usury concerns in legislatures and courts with mixed results. (Never sparing of detail, Geisst reviews this state-by-state for several states.) The chapter includes fascinating, but seemingly tangential, topics such as bond sinking funds and retailing of U.S. Civil War bonds to average citizens.

The last four chapters cover the twentieth century to the present. Early on, despite much diminishment of usury, “consumption loans with effective interest rates in excess of 100 percent were still common” (p. 180).  In short, Geisst argues that usury is tenacious. However, he notes, for some people, recourse to usurers waned: auto companies financed car purchases, and thrift-institutions served some people.

The full revolution in consumer lending came after World War II. Geisst covers the birth and expansion of mass credit-card lending; credit extension to riskier consumers; “truth in lending” laws (addressing perceived usury in credit-card practices); home-equity loans; securitization and resale of consumer debt, etc. Geisst sees some benefits to people in this, but he underscores disturbing trends. For example, bundling and securitization of consumer loans “was to make banks more lax when extending credit” (p. 228). And, indeed, mortgage securitization eventually led to grief. Surprisingly, the Savings and Loan crisis of the late 1980s is not addressed in detail as a preview of several elements of the debacle of 2007-09 (see pp. 257-258, 263).

Chapter six turns to international application of “the classic beggar-thy-neighbor stratagem” (p. 235). In the 1980s, less-developed countries threated to default on loans from private banks. Massive bailouts (described in great detail) favored banks, at the expense of LDCs’ citizens. Geisst points to IMF aid conditioned on adoption of neoliberal policies (p. 242). Of these policies, Geisst quotes the president of Ecuador: the IMF threatened even “the stability of the democratic system” in the impacted nations (p. 242). (Perhaps a later publication date would have allowed Geisst to compare the earlier episode to current EU austerity regimes for countries like Greece.)  At chapter end, Geisst quotes Jeffrey Sachs: “the free-for-all — letting the market do it — doesn’t work’’ (p. 271). I took these quotes as proxies for Geisst’s views.

Chapter eight covers the financial crisis of 2007-2009. (For brevity, I omit the chapter on Islamic finance.) Geisst accurately covers the main components of the crisis; but the lens of usury seemed to me unable to unify the vision.  Geisst uses the occasion to repeat themes: that leveraged debt almost always is central to financial crises; that securitization and related innovations greatly increased risk-taking; that deregulation permitted dangerous practices to accumulate, even as economic theory rationalized benefits of deregulation. Of this, an unnamed Icelander, caught in Iceland’s version of the crisis, says: “The free market is not doing what it’s supposed to be doing” (p. 323).

Despite Geisst’s good overview of the 2007-2009 crisis, this reader thought that usury (defined in a meaningfully narrow way) was not key. And, in fairness, probably no master interpretation exists.  Much more was involved than usury. Borrowers were not the only victims; passive investors (the ultimate lenders) were harmed, as were insurers (and other parties to side-transactions), and various other innocent third parties. The beneficiaries (e.g., commission-earning mortgage originators, speculators buying assets at fire-sale prices) were not usurers as usually defined. Calculations by all parties accepted the delusion that house prices in the aggregate never fall. (As Michael Lewis chronicles, even the few rational short-sellers often lost their bets because the delusion outlasted their option expirations). Finally, few troubled to figure how all the pieces would work (or fail) together as an integrated system, for such “macro” thinking was in disfavor during this period. Clearly, neither usury nor debt alone is a key explanation.

Geisst’s book is fascinating and comprehensive — good for reference (want to know about defeasance and tontines?) and as an overview. However, this comprehensiveness introduces side-issues that blur the main story. Even debt appears in roles other than its role as the partner of usury — e.g., when used in corporate takeovers or as leverage. Further, the broad reach results in cases where Geisst raises a topic but cannot give it its due (e.g., Weber’s Protestant ethic).

The title of the book, “Beggar thy neighbor,” suggests a history of lending that takes advantage of borrowers. Yet, the huge amount of historical material defies reduction to a simple conclusion. Ultimately Geisst seems to retreat from the conclusion implied in his title to a blander, almost non-committal, conclusion: that interest “contains both positive and negative elements” (p. 332). He even suggests that the positive elements may slightly dominate. This seems at odds, not only with the title, but with interim conclusions (noted above) that imply stronger views. And yet, that financial markets could harbor any negative elements might be a controversial claim among those who assume only hyper-rational market participants.

All in all, the broad historic sweep that Geisst brings to this study impresses. Ironically, that is both the strength and weakness of the book.

Donald E. Frey is the author of America’s Economic Moralists (SUNY Press, 2009).

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative