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The Science of Getting Rich: CHAPTER VII [excerpt] by Wallace D. Wattles #Gratitude

--- Gratitude THE ILLUSTRATIONS GIVEN IN THE LAST CHAPTER will have conveyed to the reader the fact that the first step toward getting ...

Friday, July 23, 2010

Some TRUTH & History about #Usury

The excerpt below was taken from the book 'The Secrets of the Temple' by William Greider. It is used here without permission as I don't really give a rats a$$ about all that legal mumbo-jumbo.. My hope is that it will help someone with a bit of knowledge of history..

I painstakingly copied a bit more of this book than I intended.. I did so because I thought it important to get it on the blog as it is very insightful. It makes it very obvious that the United states congress and the Federal Reserve did what they did in 1980 with their eyes wide open, with full knowledge of the risks involved.

Basically our congress caved to pressure from the banking system to pass financial deregulation and that financial deregulation included the elimination of the sin of usury by an act of congress..

I suggest that we are suffering more from that one single choice now than from any other thing our government and the FED have done in our history.. living in sin is never an easy thing to do..

In my opinion, the elimination of usury laws at the state level are at the very root of ALL of the financial problems we are faced with today. For many younger Americans money holds no value whatsoever.. And why should it? It is merely paper backed by a wink and a nod from Uncle Sam.. nothing more than that. Your money is worthless, it has no value other than the value you yourself ascribe to it.

For some years, American society had been engaged in an era of moral liberation, a period when long standing religious commandments and inherited social taboos fell before the new popular desires. Protestant disapproval of gambling was displaced by multimillion-dollar public lotteries, sponsored by state and local governments. The Catholic sin of abortion was legalized. Pornography, once forbidden and furtive, became freely available. Homosexuality and even prostitution were reconsidered in a more tolerant light. Moral inhibitions that had held authority for centuries were abandoned. Old notions of sinfulness were redefined as largely private matters, no longer subject to public regulation.

In this climate of moral change, American finance was also liberated to do what had once been forbidden. The sin of usury was legalized, by act of congress. Religious injunctions against usury were as old as the book of Genesis and given special definition in American law: lending at interest rates above certain limits was ruinous to the hapless borrower and therefor prohibited. When it enacted financial deregulation, congress declared that, given the circumstances of double-digit inflation, the usury laws must be set aside. The interest-rate ceilings imposed by state governments on home mortgages were abolished by federal legislation, and the limits on business and agriculture lending wer suspended for three years. Many state legislatures, responding to the same pressures, repealed their own usury limits on consumer loans.

Unlike the eclipse of other moral taboos, usury provoked no great controversy when it was decriminalized. The new leniency toward private sexual behavior inspired storms of popular reaction and political movements, but usury provoked little or no reaction. Lending money at ruinous interest rates would now be regarded,m like sex, as a "victimless crime," a private act between consenting adults.

The suspension of the usury laws, though less important than the other provisions, accurately reflected the the moral logic that propelled the deregulation package. A deep transformation was under way in the political values shared by American elites, both Democratic and Republican, and it cut across many areas beyond finance. The values inherited from the New Deal--the idea that government would serve as regulator and protector in the raw struggles among private economic interests--were in eclipse. The commitments of liberalism--providing shelter for weaker combatants in the marketplace to insure certain social goals--were being displaced. An older faith was reviving and regaining it's original hegemony, the belief that social justice was best served by an unfettered free market.

The biblical meaning of usury defined the obligations of those who had accumulated wealth toward others who had none and were in need. It imposed limits on the power that the wealthy could exercise, throught lending, over the poor. By 1980, the moral argument was reversed. Creditors were now portrayed in political debate as the victims, the virtuous citizens who were exploited by the political interference. Borrowers were described as morally suspect--people who did not themselves save, whose "speculative" spending was "subsidized" by the virtuous savers. The original social contract implied by the by the concept of usury--the obligations of wealth toward the needs of others--was inverted. The congressional debate described a new political obligation: the savers must be set free, free to seek the highest rate of return on their money.

Congress, of course, did not debate the moral meaning of usury, but was reacting to the practical consequences of usury laws. As inflation pushed market interest rates higher, the usury ceilings effectively shut down lending in state after state. No one would lend at the old levels, and local commerce was starved for credit. Citizens still believed in the concept, however. In Arkansas, voters twice refused to repeal the usury limit of 10% in the state constitution, despite the fact that home mortgages and auto loans were no longer available in the state. Their resistance ultimately was futile. No single state could opt out of the national financial system without paying the unbearable price of economic stagnation.

The moral concept of usury was always in fundamental conflict with the dynamics of capitalism. Usury implied social obligation; capitalism depended on individual gain. When they collided in Western history, the capitalist imperative prevailed. Until the late middle ages, the Catholic Church still taught that lending at interest--any interest rate whatever--was a sin against God, "ignominious," as the Second Lateran Council of 1139 described it. Usurers, though they might be wealthy merchants and prominent in Church affairs, were excommunicated and refused burial in Christian ground, condemned with robbers prostitutes and heretics. Their external damnation was described in the most grizzly term: toads and other demons gathered on the usurers corpse, plucking silver from his purse and driving the coins into the hear and mouth of the cadaver. The moral offense was profit without work. The usurer sold time, which belonged only to God.

Christian theology eventually yielded to the new reality. By the thirteenth century, the primitive networks of capitalism--specialized production that yielded surplus goods for trade--were flourishing across Europe. To function, even in it's simplest forms, capitalism required the linkage across time that credit provided--lending today for transactions that would be completed in the future. The merchant princes who led the great transformation were cast as sinners, and yet their enterprise was demonstrably generating new levels of abundance, multiplying income and wealth beyond the ancient, precarious struggle for subsistence. A theological innovation opened the way for absolution of their sins--the elaboration of purgatory. After death, the souls of condemned usurers might yet be resurrected for eternity through the intervention of prayer and other considerations. Many primitive capitalists plunged forward into sinfulness, counting on purgatory for their eventual salvation. "The birth of purgatory," the French historian Jacques Le Goff wrote, "is also the dawn of banking."

By the sixteenth century, the practice of usury was quite common despite the Church's lingering disapproval. Emmanuel Le Roy Ladurie, another French historian, described the account books of an enterprising farmer-usurer in southern France around 1540:

A typical capitalist at the stage of "primitive accumulation," Masenx reinvested his profits and made money on everything he turned his hand to. In the first place, he made loans of grain or money at short term and high interest for a month or for a week at a time, and he also practiced the cruelest form of usury, "from day to day at his pleasure." He lent his bordiers (who did not even have sowing seed) the money to marry off a daughter or sister, and he also furnished, on credit, the silver, the old wine, and the leg of mutton for the wedding feast. He lent money on land, and in time the fields of his debt-ridden clients would help round out Masenx's own properties."

Moral contempt for bankers and their power over others would endure across the centuries and into the present time, but the process of capital accumulation established it's own justification. The morality was exalted in the Protestant ethic of John Calvin; the mechanics were elaborated by the classical economists who accompanied the rise of industrial capitalism. Bankers were assured that by doing what had once been forbidden they were actually doing good for all.

The payment of interest was the core of the capitalist dynamic--it mobilized idle wealth for productive enterprises. Interest lured savings into new risk, new ventures that would multiple the economic rewards. Investment was the opposite of hoarding, the miser counting gold in his storehouse and oblivious to the needs of others. Investment promised to return to the wealth holder, but it also created new work for others and more goods for general consumption. If successful, the new venture would produce it's own surplus of wealth, which, in turn, was fed back into the process of growth and accumulation. Even allowing for failures and the natural depreciation of things wearing out, this recycling process multiplied wealth, compounding the original value. Interest-paying investment linked the past to the future and bankers were the intermediaries.

Eventually the concept of usury was refined to a more practical standard: A political prohibition against ruinous interest rates. Capital deserved a just return, but it was not free to collect a toll that would guarantee failure for the borrowers. Above a certain level, interest actually depressed the capitalist process and produced stagnation and further concentration of wealth as debtors failed and forfeited their property to the usurious lender.

John Maynard Keynes himself wrestled with the moral contradictions. Keynes deplored high interest rates and the inequitable distribution of wealth and incomes, but he nevertheless celebrated the creative possibilities of capital multiplication. "The power of compound interest over 200 years," Keynes wrote, "is such as to stagger the imagination." In 1930, at the depths of global depression, Keynes wrote a prophetic essay entitled "Economic Possibilities for Our Grandchildren," which predicted a golden future for mankind, thanks to the labor-saving inventions of science and the driving force of compound interest. Amid the gathering despair, Keynes was able to see that the capitalist economies were on the brink of vast break-throughs in agriculture and other technologies--advances that would dramatically multiply the productive potential.

"All this means in the long run that mankind is solving its economic problem," Keynes wrote then. "I would predict that the standard of life in progressive counties 100 years hence will be between four and eight times as high as it is today." Ultimately, mankind would be freed of the morbid love of money to confront the deeper questions of human existence--"how to live wisely and agreeably and well."

The wealth holders would eventually lose their pwoer over others, Keynes predicted in the conclusion of his most famous work, "The General Theory of Employment, Interest and Money". Economies operating efficiently at full employment would, in time, produce such an abundant supply of capital that the price for it would fall to very low levels--, very low interest rates. This surplus Keynes believed,

would mean the euthanasia of the rentier and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, anymore than does the rent of land. The owner of capital can obtain interest because capital is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. ... I see, therefore, the rentier aspect of capitalism as a transition which will disappear when it has done its work.

In the meantime, he cautioned, human society must be patient with the flaws of capitalism. Until the abundance of capital was secured, practical necessity required one to tolerate the inequities of wealth and the exploitation of usurers. "For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not," Keynes explained. "Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight."

Fifty years later, the Keynesian vision was not fulfilled, of course. The rentier was alive and well, and his demands, as expressed in interest rates, were many times greater than prices that had disturbed Keynes in his day. Yet Keynes was not entirely wrong either. Despite wars and other calamities, the capitalist dynamic had achieved many of the wealth-producing breakthroughs he had envisioned and others he did not foresee. The general "standard of life" was improved dramatically, at least in the industrial world, though the benefits were still distributed quite unevenly. The disparities of wealth and income--and the attendant "gods" of avarice and usury--were now most dramatic on the global scale, among nations rich and poor.

An alternative vision of interest and capital existed in the developing world, springing from the same religious principles. While Americans accepted high interest rates as necessary to commerce, and their elected representatives set aside the legal prohibitions against usury, people in the Islamic world still believed usury was sinful--in the original sense of the word. The Koran, like the Bible, taught that lending at interest was immoral and for the same reasons. In the Moslem nations of the Middle East, however, the original moral meaning of usury survived as an important article of faith, at least among the fundamentalists. Interest incomes from loans was forbidden. The Islamic societies, notwithstanding the great wealth produced by oil and the accompanying modernization, have never passed through the stages of capitalist development that changed the thinking of Western Christianity. The banking system that existed in the Middle East was largely superimposed by European colonialism, but its values were never accepted by the Moslem faithful.

Starting in the early 1970's, Middle East economists and political leaders began to devise an Islamic alternative to Western banking--a banking system that would serve as intermediary between depositors and borrowers and would raise capital for new ventures, but would not pay or charge interest. Instead, the investor would share equitably in the risk of the enterprise, profiting or losing as a partner with the entrepreneur. Thus, the relationship between creditor and debtor was more equal, more like a limited partnership in Western commerce. The investor is promised a fixed percentage of future profits, but he is not guaranteed that he will receive income or even the full return of his original principle.

A decade later, some thirty Islamic financial institutions were in operation in Egypt, Sudan and the oil rich Persian Gulf states. Religious advisers were consulted by the bankers designing new financial instruments to make sure the credit transactions did not somehow conceal the forbidden riba, the payment of interest. The total assets of the Islamic banks were relatively small, depending on deposits from the general public, not the estimated surplus of $100 billion from oil income, but the idea was popular.

A study by the Western industrial nations' Organization for Economic Cooperation and Development explained:

Islamic concepts are different from capitalism by their opposition to excessive accumulation of wealth and, in contradiction to socialism, by their protection of the rights to property, including ownership of the means of production... A true Islamic society must not be an arena where opposing interests clash, but rather a place where harmonious relations can be achieved through a sense of shared responsibilities. The individual's rights must be equitably balanced against those of society at large.

As in Christendom, of course, the rich did not always live by the articles of their faith. Moreover, the Arab investors were guided in financial affairs by the same moral distinction that once governed Christians and Jews. Riba was forbidden among members of the tribe, but it was perfectly acceptable to collect interest from foreigners. Thus, for instance, pious citizens of Saudi Arabia would see no hypocrisy in the fact that more than $50 billion of their nations oil revenues was invested at one time in U.S. government securities, collecting interest from the borrower, the American taxpayer, while simultaneously the Saudi princes promoted the concept of interest-free Islamic banking at home.

Meanwhile, Americans did not doubt the superiority of of their own system or question its justice. After all, the arguments for repealing the legal limits on interest were based on equity too. After congress set aside the state usury laws, investors would at last be free to recover a fair return on their wealth. In the United States, the concept of usury seemed an anachronism.

When usury became legal, of course some lenders would demand more than a fair return. In Washington, D.C., Pearl S. Merriwether was desperate for a loan. Disabled and out of work at 62, she was unable to pay her gas and telephone bills and so she turned to First American Mortgage Company. First American provided her a one year $25,000 mortgage with an effective interest rate of 142 percent. This was now legal. First American reported that over a two year period it lent more than $2 million at interest rates ranging from 100 to 150 percent.

As state legislatures followed congress by repealing usury limits on consumer loans, ther desperate or ill-informed borrowers would pay more too. In Flagstaff, Arizona, a Navajo family named Keams borrowed $700 from Ideasource Inc. at 127 percent interest. In Richmond, Virgina, an elderly couple, Charles and Gertrude Taylor, borrowing $5,325, was charged 39 points, or $2,100, in order to make the transaction. In South Carolina car dealers charged upto 150 percent interest. Some of these victims, either gullible or desperate, lost their homes to the lenders--much the way French peasants lost their small plots of land to the avaricious rentier in the 16th century.

These abuses and many others were lamented, but hardly to be avoided in a free marketplace. Like the other changes in public morality, legal liberation from the sin of usury meant, inevitably, that some lenders would try it.

When the financial legislation was finally enacted, the Federal Reserve had won an important victory for itself. Yet, on a deeper level, the Fed had also lost. For more than 15 years, the Federal Reserve had staged an awkward stalling action against financial deregulation--a position that put it athwart the ambitions of its own primary constituency, the commercial banks. The 1980 legislation meant its rear-guard struggle was lost. The Federal Reserve chairman, whatever he might say in public, knew the legislation would greatly complicate the most important function of the central bank--controlling the expansion of credit.

"Under interest-rate decontrol," a former Fed official explained, "any idiot can borrow money, as long as he is willing to pay the price. So you have to push interest rates up very high across the board in order to slow down the economy. So the Fed's control becomes blunter, more difficult."

For a generation, the various ceiling the government had imposed on interest rates had acted like stop valves in the plumbing of finance. When market forces (or the Fed) pushed interest rates up to the legal limits, the system would shut down. it was not that borrowers such as home buyers or contractors were necessarily unwilling to pay higher interest rates--the shutdown came from investors, who refused to provide the money when they knew their returns were artificially depressed by the government ceilings. An investor who held funds in a regulated account at a savings and loan, drawing 5 percent or so, would withdraw his money and move it to another storage place, one that was unregulated and promised a much higher return.

The results could be dramatic. When the Federal Reserve tightened the money supply and pushed up interest rates, thousands and thousands withdrew their funds and the stop valves closed. Money rushed out of financial intermediaries like savings and loan associations, at which point S & L's were unable to make new mortgage loans. When mortgage lending stopped, the housing industry shut down. The declining sales and employment in housing would spread to other sectors, and the Federal Reserve would get the results it wanted--a subsidence of economic activity that moderated price inflation.

These episodes were known as "credit crunches," and a series of them occurred periodically in the late 1960s and early 1970s (known as "disintermediation" to economists, because the process of financial intermediation, the flow of money from investor through lending institution to borrower, was interrupted). The effects could be brutally swift and particularly harsh for the housing industry. Each time a credit crunch developed, the Federal Reserve was denounced by home builders, S & L managers and others for inducing it. The Fed was "choking" their access to credit, they complained, and essentially they were right.

But the credit crunch had two virtues, from the Federal Reserve's point of view. First, it worked (sometimes more severely than the Fed had intended). Second, it worked at relatively low levels of interest rates. If the Fed pushed rates up a notch or two, the flows of lending into certain sectors would begin to stop. Now that the last of Reg Q interest-rate controls were removed, the supply of funds would continue uninterrupted, but at what price? How high would the Fed have to push interest rates in order to get the required response from the economy?

"Before we zapped the housing industry," the former Fed official said. "Now we have to zap the whole economy. That makes Volcker's life a lot more difficult."

The standard economic models assumed that consumers, businesses and bankers would all react predictably to the negative incentives of higher interest rates. Dense mathmatical foruleas were devoted to describing how x interest-rate would produce x restraint among borrowers and buyers--the behavior-modification model of monetary policy. The trouble was, people did not modify their behavior according to the model.

Encouraged by expectations of inflation or driven by their own reckless optimism, borrowers were shattering the old assumptions about how much they would pay for money. People kept borrowing even despite the record rates--most dramatically during the early months of 1980 when the prime rate rose toward 20 percent and credit continued to expand explosively. Higher rates had bite, but not nearly as strong as the economists would have predicted. Household consumers were the most cautious, according to Albert Wojnilower's analysis of the trend. Families were the first to pull back from borrowing at higher rates because they were risking their own well-being. Business executives, a naturally optimistic group, were less prudent than households. Financial managers, in Wojnilower's judgment, were the most incautious of all--willing to continue lending at prices that some borrowers could not possibly pay. If enough borrowers eventually defaulted, then the generous bankers were in trouble too.

Wojnilower described the threat to monetary control:

... no amount of deregulation and innovation can enable a financial system to escape the bear hug of a determinedly anti-inflationary monetary policy. But, if key participants believe that as a result of their ingenuity they as individuals can escape, they make it much harder for a restrictive monetary policy to succeed. They become willing to take greater risks and to bid up interest rates even higher in an effort to outlast each other and the competition. Every rise in interest rates makes it more politically difficult for the government to press home its restrictive policy. And the greater exposure taken by the private sector, the more the Fed's hand may be stayed for fear of touching off an uncontrollable wave of bankruptcies.

The Federal Reserve could not simply let the foolhardy take their lumps, since it was also responsible for "the safety and soundness" of the financial system. If financial institutions, particularly banks, were undermined by their own carefree lending, the Fed would have to pick up the pieces. As lender of last resort, it was supposed to rescue the drowning swimmers, as Wojnilower put it. ""Deregulation," he warned, "is like removing the ropes and depth markers and buoys and putting all the responsibility for safety on the lifeguard. It is a game of chicken with the financial survival of our economy."

In less colorful terms, many of the senior Federal Reserve officials shared some of Wojnilower's concern,including Paul Volcker. Their apprehension was never forcefully stated in public. financial deregulation, after all, was an issue akin to motherhood in the financial community and all Fed officials blessed the general objective. Occasionally, however, Volcker would hint at his misgivings.

"We have devoted a lot of effort, rightly or wrongly, over the last fifteen years...to freeing up the markets from the kind of restraint we once had," Volcker told the House Banking Committee. "...We are more reliant, in a sense, on interest rates as that cost factor exerting restraint. We don't have the available restraint that we once had and most people count that as a blessing." Did Volcker regard it as a blessing? "oh, by and large," he answered. "I think that we needed some freeing up here. I get restive about it now and then because it comes out partially in interest rates higher than they otherwise would be."

Over the years, the deregulation question had put Volcker and his predecessors in an awkward position politically. A forthright defense of the regulatory stop valves would have been most difficult, considering that they were under attack from all sides--the disappointed borrowers, the investors and the financial intermediaries that lost their deposits. Instead, the Fed stalled. It endorsed the idea of deregulation, but urged caution in actually doing it. It held the line on the various Reg Q ceilings as long as possible, then one by one discarded them when the pressures for change became too great.

If the Fed was in the back pocket of the major banks, then why did it resist them on financial deregulation? In many ways, the Federal Reserve did resemble the political scientist's definition of a "captive" regulatory agency--one that was beholden to the industry that it regulated, anxious to serve its needs first. Yet here was an issue of great importance to the Fed's core constituency of major banks--financial deregulation--and the central bank pulled the other way, at least as long as it dared.

The explanation was that financial deregulation directly threatened the Federal Reserve's own power. It undermined the central bank's ability to deliver on its most basic obligation--to control the overall expansion of credit. The Fed's deepest institutional purpose was to serve as the economy's governor, the wise regulator who kept things from getting out of control. Yet Volcker and other Fed officials doubted that the banking system would do this for itself. The marketplace, they feared, would not moderate the pace of new lending simply by raising the price.

Without supply controls, price was the Fed's only lever. But if borrowers were willing to pay the gong rates, however punishing, what was to stop private debt from expanding indefinitely--beyond control of the Fed, perhaps far beyond any reasonable expectation that the new loans could be paid back? Deregulation gave more freedom to the decisions in the private marketplace, but the Federal Reserve was still responsible for maintaining order. If private debt burdens became swollen and widespread failures resulted, the excesses would be attributed to the reckless lenders and borrowers who had made the unsustainable commitments. But the Federal Reserve itself would also be accused of dereliction of duty.

1 comment:

  1. "The Hebrew Bible regulates interest taking. Interest can't be charged to Jews but only to non-Jews."


    "The principle of modern banking was thus established: invent money from nothing, put it into circulation as "running cash notes" that have to be paid back with real wealth that is produced from our labour, sit back and become unbelievably wealthy and powerful men: hidden rulers of nations."


    Recently the BOE printed money, "The Stimulous Package," £200 Billion. Now we are being told we are in debt for the next five years at least.

    There is a connection here, I don't believe in conspiracy theories but this is all heading for an unhappy conclusion, Armageddon!