Encyclopedia of Money: Usury Laws

Usury laws either prohibit payment of interest on loans or set a maximum interest rate that lenders can charge. Historically, the medieval Catholic Church disapproved of charging interest on loans. As late as 1950 Pope Pius XII felt it necessary to reassure people that bankers earn their livelihood honestly. In the late medieval period the Church began to relent, allowing certain forms of credit involving the payment of up to 5 percent interest.

In the early history of France, the French crown often forced subjects to loan money to the crown at zero percent interest. Businesses worked around the Church’s prohibition on interest. In 1311 Philip the Fair (IV), drawing a distinction between usury and trade loans made at fairs, set a maximum of 2 1/2 percent interest for commercial loans between fairs. (The annualized rate of this maximum equaled about 15 percent.) In 1601 Henry IV for reasons that were unclear issued an edict putting a 6 1/4 percent legal ceiling on interest rates. The edict was widely disregarded, but his government probably saw it as a way of promoting commerce. Under the regime of Cardinal Richelieu the crown issued a royal edict (1634) further reducing the legal rate of interest to 5 5/9 percent, citing the evil effects of high interest rates that allow people to live on interest income instead of engaging in commerce.

During the time of Colbert, Louis XIV issued a royal edict (1665) lowering the maximum rate of interest to 5 percent. The discussion leading up to this edict was revealing. Feeling pangs of conscience for sanctioning the payment of interest, given the attitude of the Church, Louis XIV before issuing the edict held an informal meeting with five of the “most learned doctors” of The Sorbonne to discuss the matter. The dean of the faculty spoke first and said that such a weighty matter should be discussed at a meeting of the whole faculty. The faculty took up the subject in the light of Scripture, writings of Church fathers, the decisions of various councils, and decrees of popes. One of the doctors reported their findings saying that “no doctor of the Sorbonne could approve the proposition that one could take interest on money or set the rate thereof” (Cole, 1964.)

In 1766 a law attempted to lower the interest rates in France from 5 percent to 4 percent, but it was not obeyed, leaving interest rates in the 5 percent range until the French Revolution, when interest rate ceilings were abolished.

Even in England, the most commercialized of the European states, charging interest was a shady activity. Writing in the early 1600s the famous English philosopher and statesman, Francis Bacon, cited arguments of his day against usury, which he defined as “interest, not necessarily excessive.” It was said “[t]hat the usurer is the greatest Sabbath-breaker, because his plough goeth every Sunday that the usurer breaketh the first law that was made for mankind after the fall which was in the sweat of thy face shalt thou eat bread—not in the sweat of another’s face” (Bacon, 1969).

Under the reign of Elizabeth I, the English government enacted a usury law condemning but allowing a maximum of 10 percent interest to be paid. The wording of this law reflected the gradual change in the meaning of the word usury. Now the term usury referred to excessive interest. The legal interest rate ceiling in England remained at 10 percent from 1571 to 1624. From 1624 to 1651 the interest rate ceiling stood at 8 percent, and the period from 1651 to 1714 saw interest rates fall to 6 percent. An amendment to the usury law in 1715 reduced the ceiling to 5 percent, where it remained until the end of the eighteenth century. Parliament abolished the usury law in 1854. Interest rate ceilings did not apply to loans to the government.

In the United States individual states kept usury laws on the books into the 1970s. High inflation rates in the 1970s lifted interest rates well above state usury ceilings, and states repealed usury ceilings to prevent a disappearance of credit financing. The view has survived into the modern era that low interest rates contribute to economic prosperity. The proper method of securing low interest rates, however, is to provide for an ample supply of credit rather than putting a legal lid on interest rates. The ample supply of credit must come from savings rather than printing up new money, which can cause inflation.