Opinion

Use it or lose it

Finance | James Brooke Turner | 1 Apr 2007

How did we ever manage without banks, asks James Brooke Turner.

Before the development of adequate locks there must only have been three ways of keeping money secure – guard it, hide it, or lend it to someone else. Lending was useful because it was accountable, diversified and the money could be productive at the same time.

A fable by Aesop tells of a man who wanted to borrow money from a merchant. The merchant refused and buried it instead. Sure enough it was soon stolen by a thief. The merchant later wished that he’d lent the money in the first place as he might at least have got it back. The would-be borrower pointed out that the merchant had lost nothing because he buried it and wasn’t using it. The moral was that there is no point in owning something unless you put it to good use. The parable of the talents in the New Testament tells much the same story.

Lending and borrowing was big business in the ancient world. Writing emerged in Sumaria (now part of Iraq/Iran) out of a need to record commercial transactions sometime before 3,000 BC. With lending came the availability of charging for loans. The Sumarian word for ‘interest’ was the same as their word for ‘calf’. Presumably this was because interest, like a calf, was something additional produced by the principal. But receiving interest for apparently doing nothing became highly contentious.

Unlike cows, money was sterile; it couldn’t produce more money on its own (or even with other money), or if planted in the ground wouldn’t increase in quantity. Leviticus, Aristotle and Sharia law all condemned the lending of money at interest. One reason was that to make a return on an asset required labour, but interest on money required none. In the medieval church this was known as Turpe Lucrum (shameful gain) and was considered a mortal sin.

An effective counterpoint was the need for credit to oil the wheels of the economy. The distinguishing factor between good and bad lending was the risk taken by the lender in order to receive the reward. If the lender hired out his capital for a productive purpose such as buying land to plant, then the interest would be a share of the crop – but if the crop failed there should be no interest. In other words the payment of interest should reflect a share of the risk.

It wasn’t until the Reformation led by Martin Luther that a more pragmatic approach emerged. Henry VIII allowed limited usury in an Act of 1545 (by setting a cap on interest charges) and in particular John Calvin believed that an individual’s soul wasn’t condemned if the source of the money was tainted, but only if it was used for an immoral purpose. This reflected the beginning of the shift from the church making decisions about moral behaviour to individuals deciding.

In Hernando de Soto’s powerful book The Mystery of Capita it is abundantly clear that the ability to lend and borrow is what frees up buried assets for beneficial use. De Soto claims that no matter how humble the asset it should be possible to borrow against it, be it a field in India or a tin shack in Haiti.

James Brooke Turner is finance director at the Nuffield Foundation 

Tweet

Directory: Nuffield Foundation
Who's Who: James Brooke Turner