Interest and Usury
The great period of the medieval theory of interest and of the associated doctrine of usury might be viewed as a long thirteenth century, beginning in the mid-twelfth century with the Decretum by Gratian and ending in the first years of the fourteenth century with the Tractatus de Usuris by Alexander Lombard.
Historically, it might be viewed as one aspect of a broader history concerning the three great monotheisms (see Ege 2014). Analytically, as in the case of the conception of price, the problem of interest rests on an entanglement of its positive and its normative side: properly speaking, the theory of interest and the doctrine of usury. For a modern reader, this entails the methodological prerequisite of dis-entanglement, although the neglect of such prerequisite also has a relevant history - namely, the history of economists who have sought precursors of their theories in the thought of the Middle Ages. We find, for instance, a most suggestive prefiguration of the idea that only business profit raises interest above zero (Schumpeter 1954: 105) or that underemployment could be efficiently fought by increasing the incentive to invest, which means lowering interest rates (the argument, found in Sommerville 1931, is taken up by Keynes 1936 [1973]: 351-2).Hereafter, we will try not only to separate positive and normative statements, but also to explain how and why they were embedded. On the one hand, we can consider as granted that the schoolmen did have explanations of a possible difference between the amount lent on the occasion of a money loan and the amount paid back by the borrower. On the other hand, all explanations were not equally acceptable on moral grounds. From this point of view, this seems similar to what we have already encountered in the case of the analysis of price: a play with three characters - the two participants in the transaction (here, a creditor and a debtor) and the moralist (for instance, a priest, or a judge at an ecclesiastical court).
During this period, the explanations given for the difference between the money lent and the money paid back looked very much like those we are familiar with today: they favoured, not exclusively, time preference, technical productivity, risk-taking, liquidity preference, and negotiation power.
Nonetheless, from a moral point of view, at least one of them was clearly not admissible: the use of greater power in negotiation in order to obtain this difference, which today we would naturally view as interest. However, the mere factual existence of interest does not by itself show how it should be explained. The creditor and the debtor might know it, but the moralist does not.Such a perspective, which views the problem faced by the moralist as a variant of a classical asymmetric information problem, constitutes an efficient reading guide for controversies which ran throughout the long thirteenth century, and helps dispel the impression of confused, if not indeed contradictory, statements. The various positions of the schoolmen regarding usury can be understood as so many attempts to avoid the committing of a major sin, and to obtain the relevant information on the actual interpretation of interest which should prevail.
These discussions on interest and usury dealt with money, either directly in the case of money-lending, or indirectly in the case of other operations regarded as possible substitutes for money-lending. In these discussions, the focus was on the morality of the lender and of the borrower, on their respective negotiation power, and on their information, with the question of the value of the money lent remaining in the background.