When Usury Is Involved

[peristaltor.livejournal.com]

Debt, n. An ingenious substitute for the chain and whip of the slavedriver.

–Ambrose Bierce, The Devil's Dictionary.

When last I commented on debt and default, I noted that Greece, since it will never be able to pay back the gazillions owed to Deutche Bank and others, should simply be allowed to never repay the loans. The loans should be forgiven. In that article, I noted that predatory lending is nothing new to large banks, even when it comes to lending to sovereign nations. There are simply limits to the economic activity that loans can stimulate, meaning that one cannot loan one's economy to highs that enable repayment of principal plus interest. It ain't gonna happen, and shouldn't be expected.

Here's the thing: We have since the end of WWII had a seemingly deliberate attempt to reverse the sage practices of the past and to obliterate from the general memory that these practices were ever regular. We need to revive the normal, and to help that along I'd thought I'd try to revive old terms that are still relevant today, even though most have forgotten what they really mean.

First, let's revisit the simple act of extending credit to another person.

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In either ancient times or recent memory, depending upon your circumstances, around here in the Western European tradition debts were recorded through simple tallies and tally sticks. To make one, take a stick, preferably made of a rough-grained wood like willow. Fine grained woods (like pine) will have too smooth a grain, and make identification more difficult. Notch it according to the amount you wish to record as a debt and the standard lexicon of notches agreed upon by all. Once so indented, you will then saw the right side of the stick half-way through the wood, and on the far left end cut a notch perpendicular to that sawing. The wood should afterward easily split along the grain to the half-way groove. You now have two portions of the original stick, one with a handle and a shorter portion without.

On the handled portion and along the flat side made by the new split, you simply write your name and address, the date, and include a note that you will happily pay the bearer of this stick the amount indicated by the notches on demand. On the other portion, you also note the date of the deal. The debtor takes the short portion home (the "foil," or the "short end of the stick") and the lender gets the handled section (the "stock"; he becomes the "stock holder"). The deal is complete. Later, you simply wait either until a bearer demands money, or (more likely in small communities) for the semi-annual gathering where people reconcile their debts (the "reckoning"). That's when the stockholder will demand payment ("hold you to account") and ask that you pay the debt. Once you pay ("make it whole"), you are entitled to receive the stock, join it to the short end, and burn or break it.

Some of the terms used above still exist in our language, but have migrated to other uses. For example, "Reckoning." Until recently it was just a term I associated with religious fanatics ranting about Divine Justice. Sinners in their wild eyes were headed for "reckonings with God." It turns out these events were quite common here on earth a few hundred years ago, perhaps even more recently. Since few traveled and coin was scarce, everyone used credit instruments like tallies to record transactions:

Since everyone was involved in selling something . . . just about everyone was both creditor and debtor; most family income took the form of promises from other families; everyone knew and kept count of what their neighbors owed one another; and every six months or year or so, communities would held a general public "reckoning," canceling debts out against each other in a great circle, with only those differences then remaining when all was done being settled by use of coin or goods.

(David Graeber, Debt: The First 5,000 Years, Melville House Printing, 2011, pp. 237.)

"Foil" may well be another holdover term inspired by its role in tallies and lost to history. In literature, a character who behaves in a contrary manner to the main is called a foil. This foiling of the plot creates tension and helps move the plot into action and dramatic tension. Also, many may remember the old penny dreadful characters (like Snidely Whiplash of Dudley Dooright fame) who, when their evil plots were interrupted, cried "Curses! Foiled again!" I believe that also finds its meaning in the tally foil; David Graeber spends many chapters documenting how credit debts are often used as a metaphor for debts to society. When Whiplash is "foiled" by Dooright, he is made to pay the debt he incurred with his evil shenanigans, presumably at the next reckoning.

Sticks need not be the de facto material with tallies. In ancient Egypt, money was based upon the harvest. Because of storage losses (rats, fire, mold), this money lost value over time under a system called "demurrage." The Volos, Greece TEM system mentioned in the previous post uses this value system. It works well.

There is evidence that the money [the Egyptians] used—this negative interest money made of clay shards—was the root of the good life they enjoyed. The ostraka system, known as the corn standard system, was used for over 2,000 years until the Roman conquest of Egypt around 30 BC. When the Romans replaced the ostraka with their gold and silver, the long period of prosperity ended. From then on, positive interest charges accrued to Rome. Over time, this in turn changed Egypt into the equivalent of a developing country: poverty increased, as did the gap between the rich and the poor.

(Gwendolyn Hallsmith & Bernard Lietaer, Creating Wealth: Growing Local Economies With Local Currencies, New Society Publishers, 2011, p. 57, Emphasis mine.)

To understand why the Egyptians suffered under metal coin currency, we have to introduce a few more terms.

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Everyone thinks they know how "capitalism" works, but how many of you know the origin of the word? Quite simply, "The word's origin comes from caput, the head of a cow, from a time when pastoral civilizations counted the livestock they owned to determine their wealth." (Hallsmith & Lietaer, ibid, pp. 43-44.) Just like a cow bred for calves and milked, rather than slaughtered and eaten immediately, capital is something that can create additional wealth without being consumed in the process.

We should also learn that "interest," as in the additional money needed on top of the principal to retire a loan, was originally a legal work-around to obfuscate the collection of "usury," the payment one charged on one's loaned money. It turned out that just about every civilization with a decently long history outlawed usury–or found necessary occasional solutions–thanks to the damage the practice did to the long-term survival of said civilization. Still, the temptation to charge money for money was too great to resist:

The great discovery in this case was the notion of interesse, which is where our word "interest" originally comes from: a compensation for loss suffered because of late payment. The argument soon became that if a merchant made a commercial loan even for some minimal period (say, a month), it was not usurious for him to charge a percentage for each month afterward, since this was a penalty, not rental for the money, and it was justified as compensation for the profit he would have made, had he placed it in some profitable investment, as any merchant would ordinarily be expected to do.

(David Graeber, Debt: The First 5,000 Years, Melville House Printing, 2011, p. 290.)

Where the upright citizens of the local could not justify even interesse, they could always keep an outcast subset of humanity around to do the dirty work with money that needed to happen.

In medieval Europe . . . lords often . . . [employed] Jews as surrogates. Many would even speak of "our" Jews—that is, Jews under their personal protection—though in practice this usually meant that they would first deny Jews in their territories any means of making a living except by usury (guaranteeing that they would be widely detested), then periodically turn on them, claiming they were detestable creatures, and take the money for themselves.

(Graeber, ibid, p. 11.)

In places where usury is allowed, wealth tends to accumulate with those that lend it, leading to financial and social instability if allowed to accumulate unchecked. First, it is lent, as we read in Plutarch from around 100 ACE:

And as King Darius sent to the city of Athens his lieutenants Datis and Artaphernes with chains and cords, to bind the prisoners they should take; so these usurers, bringing into Greece boxes full of schedules, bills, and obligatory contracts, as so many irons and fetters for the shackling of poor criminals. . . .

For at the very delivery of their money, they immediately ask it back, taking it up at the same moment they lay it down; and they let out that again to interest which they take for the use of what they have before lent.

So that they laugh at those natural philosophers who hold that nothing can be made of nothing and of that which has no existence; but whith them usury is engendered of that which neither is nor ever was.

(Quoted in Graeber, ibid, pp. 232-233.)

. . . [T]hose natural philosophers who hold that nothing can be made of nothing. . . . Why, sounds like money becomes the capital for lenders, doesn't it?

For those who regard money as a source of wealth in and of itself, it can be a difficult task to envision why lending with usury concentrates money with those that lend it. Remember, though, that if it is created at the time it is lent, the only way for additional wealth to be later circulated is for that coin to be created and circulated as well at a later date. This is where Plutarch's observation becomes so important: as they deliver the money to their lenders, they "immediately ask it back." Without money in circulation, no one can conduct business.

And if you happen to be the sorry person who can't get enough to pay your debts . . . well, there are a few more terms to introduce.

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Most of us are familiar with the game of chess, shops that loan money based on small collateral, and people with an insignificant place in society. Pawns and peons, it turns out, are pretty much one and the same. One can pawn one's valuables for coin or credit. In ancient times, this could include members of your family. Yes, you could pawn your children to pay your debts. You could even pawn yourself. If you were fit, you might become a peon, a foot soldier in (for example) a Roman legion. Pawn and peon, after all, are both words based on the Latin "pedo," or "foot."

Though long, this passage might illuminate the shifting situation from credit to coin:

If we look at Eurasian history over the course of the last five thousand years, what we see is a broad alternation between periods dominated by credit money and periods in which gold and silver come to dominate—that is, those during which at least a large share of transaction were conducted with pieces of valuable metal being passed from hand to hand.

Why? The single most important factor would appear to be war. Bullion predominates, above all, in periods of generalized violence. There's a very simple reason for that. Gold and silver coins are distinguished from credit arrangements by one spectacular feature: they can be stolen. A debt is, by definition, a record, as well as a relation of trust. Someone accepting gold or silver in exchange for merchandise, on the other hand, need trust nothing more than the accuracy of the scales, the quality of the metal, and the likelihood that someone else will be willing to accept it. In a world where war and the threat of violence are everywhere . . . there are obvious advantages to making one's transactions simple. This is all the more true when dealing with soldiers. On the one hand, soldiers tend to have access to a great deal of loot, much of which consists of gold and silver, and will always seek a way to trade it for the better things in life. On the other, a heavily armed itinerant soldier is the very definition of a poor credit risk. . . .

For much of human history, then, an ingot of gold [or] silver, stamped or not, has served the same role as the contemporary drug dealer's suitcase full of unmarked bills: an object without a history, valuable because one knows it will be accepted in exchange for other goods just about anywhere, no questions asked. As a result, while credit systems tend to dominate in periods of relative social peace, or across networks of trust (whether created by states or, in most periods, transnational institutions like merchants guilds or communities of faith), in periods characterized by widespread war and plunder, they tend to be replaced by precious metals.

(Graeber, ibid, p. 213.)

Let us also remember that, even in "periods of relative social peace," slaves were still legal. One (or one's family) could easily go into debt peonage without the use of coin, becoming a servant to one's lender when one could not (for example) summon enough crops in the harvest to pay the agreed debt. The only difference between the coined debt peon and one bound by Plutarch's "schedules, bills, and obligatory contracts" is bound where the peon will be bound. Coin is portable, and tends to move from one locality to another; credit less so. In fact, debt peonage must have become quite a problem for Roman society:

It seems significant . . . that the traditional date of the first Roman coinage—338 BC—is almost exactly the date when debt bondage was finally outlawed (336 BC). Again, coinage, minted from war spoils, didn't cause the crisis. It was used as a solution.

In fact, the entire Roman empire, at its height, could be understood as a vast machine for the extraction of precious metals and their coining and distribution to the military—combined with taxation policies designed to encourage conquered populations to adopt coins in their everyday transactions.

(Graeber, ibid., pp. 230-231.)

The Romans outlaw peonage and mint coins instead, exporting the war necessary to secure more metal for coin and slaves, expanding their empire in the process. In the Middle Ages, usury is outlawed in Europe, but Jews conveniently kept to issue credit at a profit and expand the money supply beyond what the crops and cows would provide. And every time the practice was resurrected, people fell into debt peonage (whatever it may have been called). Their only option beyond servitude was to flee civilization and try eeking out a living in the wilderness. This left the farms untended, the herds absconded. When the debt got too large for the economy to service, even the rich ran the risk of going hungry.

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Which is why another word must be introduced: "Jubilee," a cancellation of debts.

Which brings us back to this image, something many of you might note is the Rosetta Stone. We all know the story, about how it was found in 1799 and finally used to crack the Egyptian hieroglyphic alphabet. David Graeber adds this tidbit: "It's well known that the Rosetta Stone, written in both Greek and Egyptian, proved to be the key that made it possible to translate Egyptian hieroglyphics. Few are aware of what it actually says. The stela was originally raised to announce an amnesty, for both debtors and for prisoners, declared by Ptolemy V in 196 BC." (Graeber, ibid, p. 219, me with the emphasis.)

That, historically, was the proscribed method of staving off financial disaster in the past, to simply forgive debts when the debt burden grew too great. And this is exactly the opposite of what the IMF and the World Bank have seen fit to recommend, now that the world's money supply has metastacized far beyond what the debtor nations are able to pay.

It seems to me that we are long overdue for some kind of Biblical-style Jubilee: one that would affect both international debt and consumer debt. It would be salutary not just because it would relieve so much genuine human suffering, but also because it would be our way of reminding ourselves that money is not ineffable, that paying one's debts is not the essence of morality, that all these things are human arrangements and that if democracy is to mean anything, it is the ability to all agree to arrange things in a different way.

(Graeber, ibid, p. 390.)

What different way would that be? I guess that would depend upon the democracy in question. After all, we as a people only find ourselves in the thralls of a debt-money monopoly because we agree to said monopoly, and only then because we have been snookered into believing that it is not what it actually is:

We have all been trained to believe that an economy requires a monopoly of a single currency, and that bank-debt money is the only type of currency that is appropriate for a modern economy. Furthermore, anybody who has taken a course in economic theory is convinced that money is a passive medium that simply facilitates exchanges that would happened otherwise anyway. In other words, the implicit hypothesis underlying the entire economic theory from Adam Smith to today is that different kinds of money wouldn't encourage different types of exchanges, don't affect the relationships among their users or motivate different types of investments. In short, for a conventional economist, using another type of money doesn't make any sense. That is of course true when one compares the use of different national currencies: they are all generated through bank-debt with interest, i.e., they are all of the same type. But there is plenty of empirical evidence from the thousands of complimentary currency systems in existence today that using different types of currencies does encourage different kinds of exchanges, and/or significantly changes the relationships amongst their users.

(Hallsmith & Lietaer, ibid, pp. 208-209.)

To quote Henry Ford, "The people must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few."

Comments

[underlankers.livejournal.com]

Wouldn't those changes reflect the broader evolution of economics since WWII? I mean after WWII virtually every center of economics/military power was reduced except the USA, so that would naturally alter policies and politics in a short-term sense that was never going to last forever.

[peristaltor.livejournal.com]

Which changes, those in the economics discipline/dogma?

[underlankers.livejournal.com]

Those changes in the economic *systems* that resulted from the disappearance of a multipolar system and the emergence of an unequal bipolar system.

[peristaltor.livejournal.com]

What about Switzerland? The World Bank and IMF come from there, and they were not touched as much by the war.

Actually, there might be something in this, once we consider the role of the WIR Bank, a major issuer of alternative credit clearing. They started in 1933 issuing alternative credit between businessmen. I wonder. Did their success prompt the rise of banker protection dogma as a response against alternatives to the dominant currency?

Interesting.

[notmrgarrison.livejournal.com]

It turned out that just about every civilization with a decently long history outlawed usury–or found necessary occasional solutions–thanks to the damage the practice did to the long-term survival of said civilization.

I'm guessing they also thought slavery was cool and the earth was flat.
Have any modern countries outlawed it? How would anyone afford a house? Most people couldn't buy a car without a loan either.

[mrbogey.livejournal.com]

What benefit do people and organizations get from loans without interest?

The problem with usury is only that humans suck at conceptualizing growth.

[underlankers.livejournal.com]

Good to know that some sins are perfectly hunky-dory for Bible-believing Christians to follow. Gay marriage is the existential threat to all existence, but the explicitly divinely Verboten usury is quite necessary for Mammon and thus God wills it.

[notmrgarrison.livejournal.com]

You left out abortion.

[usekh.livejournal.com]

Actually many Islamic countries forbid it. They do however work around it http://en.wikipedia.org/wiki/Islamic_banking

[notmrgarrison.livejournal.com]

Yeah, I know that. By "modern", I didn't mean present day countries living in the dark ages (death penalty for being gay, marrying 8 year old girls, not allowing interest)

[peristaltor.livejournal.com]

Modern countries are in the thrall of the modern banking system, which accepts usury, so no. The last quote from Hallsmith & Lietaer contains the gist of the problem.

[fizzyland.livejournal.com]

You wrote many words. As someone who communicates mainly through macros, this will take me some time to digest.

[the-rukh.livejournal.com]

(http://1.bp.blogspot.com/-hSnj1JL02Wc/TbQrjFBO-dI/AAAAAAAAF3Y/fhv0ACbvOrE/s1600/caveman_wife_money_invention_1138015.jpg)

[sophia-sadek.livejournal.com]

Cool icon. Do you suppose that Gort was the inspiration for the Cylons?

[peristaltor.livejournal.com]

Consider the hard return lines my attempt to parse the meal into courses. ;-)

[foreverbeach.livejournal.com]

Dismissing it as "predatory lending" isn't really fair. It takes two to tango, after all. If the Greek government had borrowed all that money not to expand public sector employment and benefits, but to increase its country's productive capacity by building out infrastructure and making capital improvements (and to be clear, I don't think it should have done either), it might well be in a position to pay back the loans easily. But borrowing to increase consumption is pretty much always a terrible idea, whereas borrowing to increase production can go either way.

So, to reiterate, if you're gonna take those low interest rate loans, use the funds to build factories and build out farming and enhance infrastructure to make your country the kind of place where it's great to open businesses or live, instead of simply adding to future obligations by using the funds for immediate consumption and enlarging the public sector.

[peristaltor.livejournal.com]

If the Greek government had borrowed all that money . . . to increase its country's productive capacity by building out infrastructure and making capital improvements . . . it might well be in a position to pay back the loans easily.

I would agree with that. The real question, though, is who made the loan arrangements on behalf of the Greek citizenry, and what expectation did Deutche Bank (among others) have to rely upon those arrangers to do the right thing (stated above), instead of abscond with a vast majority of it and use the rest to secure electoral sweeteners best described as bribery through funding.

I'd have to say DB probably knew in advance that most of the cash would not be put to productive use. They sadly have a bit of a history with regards to questionable lending.

That said, what rights have the people who must undergo the massive cutbacks? They didn't sign those loan papers, after all. Hey, Iceland is facing the same thing, and they're choosing to go after the fraudsters that put the gov on the hook with criminal prosecution.

[foreverbeach.livejournal.com]

No argument with any of that.

[sophia-sadek.livejournal.com]

I am indebted to you for that capital account of financial language.

The only one I can contribute is the source of hedging. It was originally an agricultural practice that shielded an orchard from wild pollen that would otherwise blow in to reduce the fat of the fruit. (Of course, the ancients did not know exactly how the hedge worked, but it did.)

[peristaltor.livejournal.com]

That is interesting. Thanks.

[caerbannogbunny.livejournal.com]

The problem with debt forgiveness is that it breaks down the willingness to lend and essentially removes the ability for many people to deal with variability in nature (as in farm yields) and the economy as well as simple variation in ability. The issue with loaning money for profit--which is a "ratchet" that can move resources from one group to another--causing collapse is most likely because of this variability and the tendency for many people to make better short term decisions than long term decisions.

Which is where the debt accumulates.

The problem, of course, is finding ways to incentivize the ongoing health of the system, in spite of individual preferences, without breaking down the system of trust (i.e. willingness to lend) as well as effectively manage system variability.

[peristaltor.livejournal.com]

The willingness to lend proves cyclical anyway, so that breakdown of trust will be temporary. It's the almost certain inevitability of the ratcheting of wealth that proves the key problem over time, the over-accumulation of wealth at the top (usually with those that issue loans).

I would agree that there are few incentives to avoid this concentration and find ways to fund the better health of society. The Hallsmith and Lietaer book mentioned a few involving parallel currencies, which I found a bit too broad for an already long post.