Bankers, Usury, and Wealth Today

Today’s essay is the third of four in a series by James E. Hartley on what literature can teach us about economics. You can read the first and second here.

On Wall Street he and a few others—how many?—three hundred, four hundred, five hundred?—had become precisely that…Masters of the Universe. There was…no limit whatsoever. […] Moving the lever that moves the world was what he was doing.

That was Sherman McCoy in Tom Wolfe’s brilliant 1987 novel, The Bonfire of the Vanities. As an expression of the age, it is right up there with Gordon Gekko’s “greed is good” from Oliver Stone’s 1987 Wall Street.

Over time, the popular perception of bankers as soulless and depraved hasn’t changed a bit. In 2011 a protest about the wealth distribution was dubbed Occupy Wall Street. Interestingly, no protests targeted the industries that generate even greater wealth: Silicon Valley, Hollywood, and major sports stadiums. Nor were the protests in the parking lots at Wal-Mart, Target, or Home Depot. The anger about the wealth distribution was directed straight at bankers.

As we have seen over the last couple of essays in this series, the contemporary discussion about wealth distribution is not really about inequality per se. Underneath the discussion about the wealth distribution is an often unstated belief that high levels of wealth were not earned in an appropriate manner. One avenue of this discontent is the latent belief that merchant activity is immoral, violating the principle that goods should always sell for their Just Price. The belief that a good has an inherent just price has vanished, but the implications of that belief still lingers a bit.

The most vehement criticisms of wealth are translated into criticisms of the financial industry. When, and why, did the financial sector begin to arouse such ire?

The Financier

Complaints about bankers long predate Sherman McCoy and Gordon Gekko. American history is filled with complaints about Main Street versus Wall Street. Andrew Jackson’s fight against the Second Bank of the United Sates is part of the lore. Banking regulation is littered with measures attempting to prevent banks from becoming large and potentially powerful.

Theodore Dreiser’s 1912 novel, The Financier, depicts the longstanding view of bankers, which makes the fictional 1980s bankers look tame and mild-mannered. The Financier is the story of Frank Cowperwood, who rises from humble origins to become the titular financier.

In the first chapter, Dreiser provides an unforgettable portrait of Cowperwood. At the age of ten, young Frank regularly passed by a fish market. “One day he saw a squid and a lobster put into the tank, and in connection with them was witness to a tragedy which stayed with him all his life and cleared things up considerably intellectually.” A few days later, the drama was done; the lobster had carved up the squid. Frank’s life was set:

“The squid couldn’t kill the lobster—he had no weapon. The lobster could kill the squid—he was heavily armed. There was nothing for the squid to feed on; the lobster had the squid as prey. What was the result to be? What else could it be? He didn’t have a chance,” he concluded firmly, as he trotted on homeward.

That is on page 5 of the novel. The next 500 pages are a record of how Frank became a lobster. Through prosperous times and crises, Frank rises and falls and rises again in the mysterious world of finance. He is deeply involved in shady backroom deals and with corrupt politicians.

It is a devastating portrait of a financier. The true nature of Cowperwood’s soul becomes obvious when he charged with embezzlement and larceny of public funds.

Cowperwood, despite various solemn thoughts concerning a possible period of incarceration which this hue and cry now suggested, and what that meant to his parents, his wife and children, his business associates, and his friends, was as calm and collected as one might assume his great mental resources would permit him to be. During all this whirl of disaster he had never once lost his head or his courage. That thing conscience, which obsesses and rides some people to destruction, did not trouble him at all. He had no consciousness of what is currently known as sin. There were just two faces to the shield of life from the point of view of his peculiar mind—strength and weakness. Right and wrong? He did not know about those. They were bound up in metaphysical abstrusities about which he did not care to bother. Good and evil? Those were toys of clerics, by which they made money.

It isn’t just Frank, though. The novel has many soulless financiers, caring nothing about anyone around them.

The Sin of Usury

Dreiser paints a bleak picture of finance. Yet, upon closer inspection, it is hard to see what is so particularly immoral about bankers. For one, other professions lead can lead to riches, too: why does a rich banker’s wealth seem more inappropriate acquired than a rich computer programmer’s, for example?

Furthermore, everyone benefits from banking and finance. Some people want to save and others want to borrow, and the financier comes along to help the savers and borrowers find each other. There are enormous cost advantages to their work. Suppose you want to buy a house and need to borrow a few hundred thousand dollars. To whom would you go? Your friends or your family? If you asked complete strangers, would they lend to you? At the very moment you realize you would never be able to buy a house, a friendly financier comes along and lends you funds borrowed from people you have never seen. The same thing happens for a business that wants to expand its operations or someone who wants to go to college or buy a car. Financiers seem so useful. So why such hatred for the ones that are successful?

Moral suspicion of bankers’ wealth is quite ancient. In fact, modern mistrust of banks is tame compared to ancient criticisms of it. Here is Aristotle:

The most hated [means of earning income], and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And the term usury which means the birth of money from money is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of making money this is the most unnatural.

If you thought that was harsh, look at the list of sins to which the prophet Ezekiel compares collecting interest:

Behold, the princes of Israel in you, every one according to his power, have been bent on shedding blood. Father and mother are treated with contempt in you; the sojourner suffers extortion in your midst; the fatherless and the widow are wronged in you. You have despised my holy things and profaned my Sabbaths. There are men in you who slander to shed blood, and people in you who eat on the mountains; they commit lewdness in your midst. In you men uncover their fathers’ nakedness; in you they violate women who are unclean in their menstrual impurity. One commits abomination with his neighbor’s wife; another lewdly defiles his daughter-in-law; another in you violates his sister, his father’s daughter. In you they take bribes to shed blood; you take interest and profit and make gain of your neighbors by extortion; but me you have forgotten, declares the Lord GOD. (Ezekiel 22:6-12, ESV)

Aristotle and Ezekiel are not outliers. It is difficult to find anyone before around 1600 who said anything different about bankers.

Indeed, just go back a few hundred years and everyone (everyone!) would have agreed that your banker was doing something worthy of absolute condemnation by charging you interest on your student loans and home mortgage. You would be right to be indignant about the wealth gained by those godless blood-suckers. Before you become too indignant, however, remember: if you are collecting interest on your checking or savings accounts, you are every bit as worthy of condemnation as the people from whom you borrowed. No wonder bankers generated such ire; their entire job is arranging to pay one set of horrible people interest in order to charge interest to another set of people.

This idea that collecting interest on your savings account is as bad as those things Ezekiel lists strikes the modern ear as quite odd. If you are like most people, you never knew you were doing something tantamount to murder when you received your interest payments. Why did everyone think interest was so wrong?

The argument about the immorality of usury begins with the idea of a Just Price. In this case, however, it is very easy to determine the Just Price. How much is a $20 bill worth? Imagine you needed to break a $20. You would expect four $5 dollar bills, or two $10 bill. If you demanded more than $20, or someone offered less, would you consider that a fair exchange? Perhaps you are so desperate you might agree to be cheated, but your agreement doesn’t change the nature of the wrong.

Interest is exactly that situation. I lend you one sum of money and then demand a larger sum in exchange. I lend you a bottle of wine and then expect two bottles of wine in exchange. In both cases, I am demanding more in return than the amount I gave you. That is deeply immoral. Regardless of what we think about this today, for many generations before us, there was an obvious reason to despise bankers; they are ignoring Christ Himself and refusing to lend expecting nothing in return.

Is Usury Still a Sin?

We clearly no longer live in an age where most people believe charging interest is a vile sin. What changed? Sometime around the early 18^th century, there is an increasing acceptance of the idea of charging interest. It is almost certainly not a coincidence that this change in the moral code coincided with the first glimpses of the Industrial Revolution.

Consider the difference in the nature of loans in a rural agricultural society and a modern industrial society. Why would a farmer in 400 BC want to borrow funds? The most probable answer is that the money is necessary to buy food. In such a world, charging interest is equivalent to charging higher prices for food to poor people than to wealthier people who do not need to borrow. Now compare someone wanting to borrow money in order to build a new factory that will produce cloth to be sold at a profit. Is it really wrong for a person who has saved enough funds to pay the cost of a new factory to ask for a portion of the returns from that factory? Why should anyone lend with no expectation of a return to someone who is going to use the loan to reap profits?

As the nature of the economy changed, the purpose of a loan underwent a massive transformation. It is rather difficult in a modern economy to simply adopt the older prohibition on usury. Once upon a time, people condemned all merchant activity and all banking activity, but as we have seen, the rationale for those condemnations have been obviated by developments in the economy. This is why you feel zero moral guilt from charging interest on your savings account; the institution to which you are lending is using your funds to generate a profit stream and, unless charging interest is inherently immoral, there is no reason why you should not share in the wealth.

Dreiser’s novel still offers a moral lesson, but it is not a lesson about finance. Frank Cowperwood’s occupation is not the source of his immorality. If he had become a grocer or a lawyer, his complete lack of a conscience would have been no less blameworthy. In an era in which everyone believed that financiers were inherently immoral, this important moral lesson of novel could easily be lost. It is only when we realize that there is nothing inherently immoral about banking that we can realize the universality of The Financier. Bankers aren’t the only workers in high-profit sectors who behave badly, so the unique distrust about bankers is largely vestigial.

However, this raises another related question: why do people distrust the wealthy? In the final essay in this series, we will look to Ebenezer Scrooge for an explanation.