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Religious prohibitions against usury

Religious prohibitions against usury

By Clyde G. Reed and Cliff T. Bekar

Explorations in Economic History, Vol. 40 (2003)

Abstract: Roman Catholic usury prohibitions created an explicit negative “tie-in” between salvation and consumption lending at interest. We view the prohibitions as a response to severe consumption smoothing problems created by the substitutability of capital market transactions for traditional smoothing mechanisms—informal pooling and charity. We demonstrate consistency between our model and the broad features of the Roman Catholic chronology of prohibitions.

Introduction: Why do religions prohibit usury? From a non-historical perspective, interest rate policy might seem an unlikely candidate for inclusion as a central tenet of religious doctrine. Yet history is replete with examples: Vedic India, Judaism (from the fifth century BC to the 20th century), Roman Catholicism (from the 12th century to the 19th century), and Islam (from the seventh century to the present). Our focus is on the Roman Catholic case. As potential barriers to economic development in traditional societies, these prohibitions deserve attention as they impose high costs by constraining or eliminating the capital market.

We propose an economic explanation of Roman Catholic usury prohibitions that combines elements of the theory of the firm and industrial organization with recent research on reciprocal exchange and informal income pooling. The analysis views usury prohibitions as a response to a consumption smoothing problem. It contains three essential elements: the role of charity and informal pooling in providing economy-wide consumption smoothing and averting social/economic crises, the substitutability of capital market transactions for charity and informal pooling in smoothing consumption, and the Churchs use of usury prohibitions to create a negative tie-in between salvation and consumption lending at interest. We find that when pooling and charity are the principal consumption smoothing devices available to a signifi- cant portion of the population, and when the effectiveness of pooling and charity is threatened by the alternative of the capital market, the Church rails against usury. When pooling and charity are not essential for consumption smoothing, or when the capital market does not threaten pooling and charity, the Church pays little or no attention to usury.

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