In the old days, usury was considered immoral. Archaeological research shows that interest rates 3700 years ago in the City of Ur in present-day Iraq were 20% for silver metal and 33 1/3% for grain, and that's not per annum. The time-frame for lending was from planting a crop to harvesting a crop. So, annual interest rates were much higher than you would think. It was during this time-frame that compound interest was invented. Compound interest is interest on the interest owed. Sumerian and later Babylonian societies had their problems with money lenders. Babylonian King Hammurabi, circa 1700 B.C., recognized that some degree of credit was necessary for wheels to turn and crops to be planted. The Code of Hammurabi tried to fix the system with laws to regulate interest rates, witnesses, giving, repaying loans, and even debt jubilees.
The story of usury in the Bible is synonymous with exploitation. You can find verses in Exodus, Leviticus, Deuteronomy, Proverbs, Psalms, and Nehemiah. One colorful story concerns the Hebrew prophet, Ezekiel. He included usury with rape, murder, robbery, and idolatry in a list of "detestable things" that would receive the punishment of God (Ezekiel 18:10-13). It is interesting to note that the Exodus and Leviticus verses apply only to lending to the poor and needy. In Deuteronomy, the prohibition applies to all money-lending other than business dealings with foreigners. While there were no exact dates when these rules were handed down, it would appear that they were written in the fifth and sixth centuries B.C, a little more than 1000 years after Hammurabi.
Move forward another 1000 years, and we come to the Prophet Muhammad's era. There are eight verses in the Qur'an which condemn taking interest. In Hadith, Muhammed is said to have compared taking interest to committing adultery 36 times and committing incest with one's mother, which demonstrates the intensity and seriousness of the issue in Islamic thought.
Another 1000 years, and we're in the Middle Ages. The attitudes towards banking and interest began to change in Europe with the Reformation. Interest was still a moral hazard, but it was tolerable. Sometime in the early 1600s, the church redefined usury as "excessive interest." Interest earnings were acceptable if it remained within socially accepted parameters, whatever they might be. It was apparent at this stage that the Islamic trading guidelines began to differentiate from those in the Western world. But why? What are the reasons that usurious interest is taboo?
In my upcoming book, Muslim Mechanics, I detail these five reasons:
Unscrupulous people use usury to exploit the poor and needy. This theme is redundant in the Code of Hammurabi, the Vedic texts of ancient India, and Exodus and Leviticus' chapters in the Bible. Plato even thought usury was wrong. Plato's grief was because it showed a lack of generosity toward the poor. Besides, it was contrary to the welfare of the state to set one class against the other. Even in modern times, there are "loan sharks" who make their living off the poor.
Usury is an unearned income. It was considered unnatural that an inanimate object such as money could reproduce like a flock or a field. Plato's student, Aristotle, argued that money's natural use was as a medium of exchange. Dante, the author of Divine Comedy, suggested that to live without labor was unnatural. He consequently put usurers in the circle of hell alongside the inhabitants of Sodom.
Usury is a mechanism of inequitable wealth redistribution. A familiar axiom of capitalist businessmen is that "the rich get richer and the poor get poorer." To those economies that have put together large pools of money, charging interest is a strong incentive to rent out that capital to the highest bidder. Capital is a precursor to technology, and wealthy countries soon have the technology to make more capital.
Another way of looking at money is that currency provision is a government service to which all individuals should have access. Consequently, not all individuals have access because the hoarding of cash has become a quasi-monopoly. Each unit of currency has some degree of utility, which increases for the poor but decreases for the rich. Economists say that society has inefficient use of money's utility since the rich have most of the capital.
Usury relates to the practice of discounting future values. As mentioned earlier, the use of compounded interest dates to the Code of Hammurabi some 3700 years ago. Research shows that the higher the discount rate (the interest rate), the faster we use natural resources. A project approved using a hurdle rate significantly higher than the current interest rate is considered a project with an attractive return rate. This type of project incentivizes businesses to operate quickly and effectively. Other studies show that discounting can lead to species extinction if the prevailing rate happens to be higher than the exploited species' reproduction rate. The logical conclusion of using discounted rates guides the decision-maker to maximize their capital even at future generations' expense.
Usury encourages debt. In a modern business balance sheet, there is a certain amount of debt versus equity. Debt is borrowed money, while equity represents the owner's stake in the business. A high level of borrowed money indicates the degree of leverage. High leverage is risky, but if one is willing to take the risk, they could make lots of money with just a little of their own money. Cultural views on risk are also at work. American companies have higher debt ratios on their balance sheet than do European or Asian businesses. When a person can borrow money with just a small regular interest payment, their risk level is low.
On the plus side, there is one fair use for usury. Interest rates are synonymous with being the cost of money. In other words, a high-interest rate means that money has a high price. A product's supply and demand reach equilibrium in a free-market economy when the customer is willing to pay the price for a product. The product supplier is ready to produce that product for what the customer is willing to pay. Supply and demand in a free-market economy are probably the best way to determine the best product use. However, central banks in the world's highest developed nations have monkey-wrenched interest rates and money distribution such that the supply and demand of money don't work anymore. Interest rates are kept artificially low, and money supply is printed on demand. There is no free market distribution of money in effect anymore. Usury, which can measure market demand, has ceased to be a functioning measuring device. Perhaps the balance has shifted, and usury is taboo. The system will have to be reset, or we will need to find another way to get around usury.