Usury and the collapse of empires

The American government recently played Russian roulette with its economy by threatening to default on its debt. Of course, nobody actually thought that the Americans would truly default at this time. After all, the Americans can quite literally print dollars to pay their debt. But it is also possible that the USA has entered a state of decline: massive public and private debts without growth quickly leads to collapse.

While it is a cliché, I am fascinated by the analogy between the American superpower and the fall of the Roman Empire. The economics of the Roman Empire during its decline bear some similarity to our current situation.

Rome partially moved away from a gold-based currency some time during its decline. It started to mint coins with less gold content. Similarly, the Americans switched to a fiat currency in the seventies under Nixon. The American government no longer guarantees a gold equivalent for the American dollar. In both cases, the currency became backed by the great economical and military power of the government. Unfortunately, this type of backing loses its efficiency when a decline is hinted. Your dollars are only valuable if you think that the USA will keep growing stronger. If you think that the American economy might suffer on the long term, then American dollars are much less interesting. Thus, predictions of decline become self-fulfilling.

During the fall of the Roman Empire, many citizens were enticed to borrow from the super wealthy. Eventually, the peasant class was wiped out: they became serfs. Serfs live in conditions where they cannot possibly expect to improve their conditions. They constantly owe more than they earn. They are, effectively, slaves.

The Catholic Church, which emerged at the time, correspondingly considered usury to be a sin. While it seems that the stance of the Catholic Church on usury is quite a bit more flexible today, religions like Islam still forbid usury. Judaism only allows usury toward non-Jews.

What is usury? Lending money knowing that it will make people poorer. Correspondingly, most consumer debt is usury. It is a transfer of wealth from the poor to the rich which makes us, overall, poorer. Lending money to Greece at this time is also usury.

Could the religious stance against usury be wise?

Economists who expect people to be rational won’t believe in usury. Surely, people borrow money to be better off. Yet the average credit card debt per household is over $15,000 in the USA (and it grows all the time, of course). Does anyone believe that these $15,000 are invested in highly profitable ventures? (They would need to be highly profitable since credit cards often charge over 15% for loans.)

Conclusion: This is meant to be a lighthearted commentary. I am an amateur economist. But can anyone convince me that credit card companies produce wealth by charging exorbitant interests to people who use the money to buy beer and chips? When more and more of our economy is based on such usury, is it not a sign of decline? Won’t the American peasants become serfs at this rate?

Note: 45 million of Americans are dependent on government food stamps. According to Business Insider, credit card debt is growing much faster than the median household income. Despite massive defaults on mortgages between 2007 and 2010, consumer debt has remained stable.

20 thoughts on “Usury and the collapse of empires”

  1. @Will

    I think it is a joint responsibility. If you sell cigarettes that kill people, you can’t just blame the individuals.

    If you lend money to someone who will get much poorer as a result, and you know that this will be the result, then you should bear some of the responsibility for the harm you cause.

    Ultimately, the people could rise and refuse to honor abusive loans. That is what people in Iceland and Greece are doing.

  2. I think it’s tempting to blame others for our personal problems such as governments and banks. Years ago I obtained a variable rate mortgage and bought a house which I paid off before I hit 40. I had car payments at one point but I bought my last beemer with cash. I use credit cards responsibly for convenience (online purchases for example) or to get points for groceries, but then I pay it off each month, so no interest payments.

  3. I once plotted out a fictional world (for a game) in which the main goal of the ruling powers was stability.

    There was an entire government body with rather extreme powers devoted to ensuring financial stability. Usury and practising economics without a license were both capital crimes.

    While I don’t really support this as a policy, I can’t help but occasionally be tempted to.

  4. On the topic of US decline, see also “Après l’empire” d’Emmanuel Todd, published about ten years ago.

  5. Basically all credit card companies are evil, no doubt. But as I looked up the definition of usury, it seems as the line between ‘interest’ and ‘usury’ is subjective (and would float with inflation).

    Interest itself is a very good thing. Take any massive project and consider that without the mobility of capital, a single or small group of people would have to take huge risks in order to build it, so it would likely not get built. With the ability to make money by lending money and huge liquid markets, the risk can be shared across a very large number of people, minimizing it to an amazing degree. With risk under control, mega-projects are possible, so we get giant ships, super skyscrapers, massive dams (and of course lots of TVs shows …)

    Of course if you don’t like those sort of things …

    Paul.

  6. “Economists who expect people to be rational won’t believe in usury.”

    Economists other than the behavioural type. The concept of bounded rationality is fairly widely known. So people make sub-optimal decisions.

    Also, consider whether it does actually make people poorer. They spend the credit card $$. But hey, bankruptcy isn’t so bad these days…

    In the words of Captain Jack Sparrow, ‘Take what you can, give nothing back.’

    Just some thoughts, don’t know if I agree with them myself.

  7. Credit card companies produce wealth by facilitating transactions *and* charging interests. When used wisely, a credit card is a fantastic way to purchase products and services. That fantastic power requires knowing what one can afford. If someone doesn’t know what is affordable and what is not, well, he does have bigger problems than a credit card.

  8. Hi Luis

    I’m playing Devil’s advocate here. But consider what happens when people buy things they cannot afford:

    a) Bankruptcy does not lead to a massive decline in life quality. In other places at other times, it has.

    b) Government steps in and picks up the tab. Both on large, corporate scales and small, individual scales.

    While I’d agree with your moral point about what people should not do, doing those things may still make them better off.

    Witness the looting here in the UK. It’s wrong, but most of the people won’t be caught and little will happen if they are. Their utility will rise in the short term (lootz!), and their long term utility is unlikely to suffer whether punished or not (youth unemployment being sky high anyhow, and the state will still embrace them).

    Before arguing that people are irrational I think we should look at the incentives they face.

  9. I always enjoy yet one more moralizing sermon from a “responsible credit-card user”. It makes me laugh! I have several colleagues from grad school (now with PhDs in operations research or machine learning) who are employed by credit card companies. They build models to discover which consumers are most likely to spend too much and incur huge interest fees and penalties, and they use these models to “string along” consumers further and further into this behavior.

  10. Hi conjectures,

    I totally agree with you that people face a series of incentives and the current ones do not emphasize personal responsability.

  11. Dear Dan,
    The U.S. problem with the recent debt ceiling debacle is very much a political one and a symptom of a dysfunctional Congress. Is spending out of control on the wrong things? That’s a value judgement since my potato chips may have equal value to your granola in terms of personal utility. And the U.S. ability to spend is only limited by what our lenders will loan, and so far, the U.S. is the best investment that they, e.g., China, are willing to make. Further, why not borrow more from China — might make them less inclined to take us over, lest they risk not having their debt repaid.
    Also, in economic terms, how is gold different from greenbacks? Currency is just an artificial medium on which we place value — so we don’t have to barter with chickens and stuff. I think gold is a pretty rock when polished but whatever buys me groceries is pretty valuable today, and I my grocer’s not taking gold payment today.
    And as to the fall of U.S. Empire, I don’t suspect it will happen in our lifetime, or at least, while any of us are still alive. Besides, if the U.S. goes down, Canada’s coming with us, and we won’t let that happen to North America, will we?
    Be well.
    Joe T.

  12. Hi for an absolutely fantastic book on economics, the roman empire and the effect usury had on it and the boom and bust cycle usury creates you have urgently got to read war cycle’s peace cycles by richard kelly hoskins an absolutely amazing book

  13. When we corresponded last December, your thinking was that the U.S. was on a collision course with another recession. That hasn’t occurred but that is not to say that the U.S. economy is humming along. It is doing much better that many of its colleague economies in Europe, however, and the European Union absolutely wants the U.S. to keep chugging along at a growth rate that, although modest, is well about the EU.

    As for the rising U.S. debt, this is a concern for the long run, not the short run. The big “if” is whether holders of U.S. debt continue to feel that their money is safe and they can generate a sufficient return to continue to be a lender. So far, the answer is yes.

    Over the long run, however, debt becomes a major issue and this needs to be addressed, beginning with meaningful steps now such as getting more to a balanced national budget in the years ahead.

    As for usury, I don’t know if I’ll be able to read the book you recommend but will consider it.

    I’ve always felt that interest payments are commensurate with the lender’s perception of the risk of the loan and that the market, more or less, determines rates. When this is taken to a macroeconomic level, as say for a country, the central bank plays a major role in influencing interest rates by its buying and selling (bonds) in the open market.

  14. @Joe

    I have made no prediction regarding the U.S. entering a new recession. I don’t make such technical predictions. This being said…

    In absolute terms, the U.S. unemployment rate has still not recovered to its 2008 level. The per capita GDP in the U.S. has not recovered to its 2008 level.

    For the poorest Americans, there has been no recovery at all.

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