The Prophets of Interest: Answers to an Ancient Problem

For as long as people have lent money, someone has asked what a fair return should be, and what happens when debts grow faster than the means to pay them.

The answers come from kings, prophets, monks, theologians and economists. Some cancel debts. Some set a fair price. Some share the risk, and some return the profits to the people. This article gathers their ideas.

The first prophets

The Hebrew prophet Ezekiel counts the righteous man as one who “hath not given forth upon usury, neither hath taken any increase”.¹ Long before him, Babylon set the first known limits on interest. The Code of Hammurabi, around 1780 BC, allowed twenty per cent a year on silver and thirty-three and a third per cent on grain.²

Babylonian scribes also worked out why limits matter. Their calculations show a debt at twenty per cent multiplying sixty-four times in thirty years, while a herd of animals grows quickly at first and then levels off.³ Debt keeps compounding; the means to repay it eventually slow down.

Wiping the slate clean

The oldest answer is cancellation. Babylonian rulers periodically proclaimed a “clean slate”. Personal farming debts were cancelled, families held in debt bondage were freed and land returned to its owners, while business debts stayed in place.³

The reason was practical as well as moral. Free farmers paid taxes, worked on public projects and served as soldiers.^3,4 A kingdom of debt-bound labourers had fewer of all three.

The Bible carries the idea forward. Leviticus 25 sets a Jubilee every fiftieth year to “proclaim liberty throughout all the land”, when land returns to its families.⁵ The economist Michael Hudson reads Jesus’s first sermon as a proclamation of the Jubilee, and notes that the “debts” of the Lord’s Prayer are often translated as “trespasses”.⁶

A modern jubilee

Professor Steve Keen, known for warning of the 2008 financial crisis, proposes a Modern Debt Jubilee designed to be fair to savers as well as borrowers.^4,7

• The government creates money and gives every adult the same sum.
• People with debts must use it to pay them down.
• People without debts must use it to buy newly issued shares or Jubilee Bonds, which give them a new source of income.
• Banks can buy Jubilee Bonds, whose interest replaces the income they lose from private debt.

For the United States, Keen suggests $100,000 for every working-age adult, enough to clear household debt entirely.⁴ Hudson’s summary of the principle is simple: “The only way you can escape and maintain stable economic relations is to write down the debts.”³

Setting a fair price

A second answer is to cap the rate. Hammurabi did so in Babylon, and Henry VIII’s Parliament did so in England in 1545, permitting interest up to ten per cent a year.^2,8 Britain still caps the cost of payday loans at 0.8 per cent a day, with total charges limited to the amount borrowed.⁹

Compensation for real costs

Medieval theologians took a more searching approach. They forbade charging for the loan itself, and allowed a lender compensation for real costs that lending caused. These grounds were called extrinsic titles, meaning claims arising from outside the loan.^10,11

• Arising loss (damnum emergens): a loss the lender suffered because of the loan, such as selling goods cheaply to raise the money.
• Lost profit (lucrum cessans): a profit the lender could prove they gave up, such as the income from an orchard they meant to buy.
• Risk to the principal (periculum sortis): the chance of losing the money lent.
• Late payment (poena): an agreed penalty when the borrower missed the date.

These grounds were accepted gradually. Arising loss and late penalties were widely recognised; lost profit was long debated; and the Church formally recognised risk in 1645.^10,12 The theologians of the School of Salamanca, in sixteenth-century Spain, developed the fullest account.¹¹

Their list anticipates most of a modern interest rate. The Bank of England divides a lender’s rate into funding costs, credit risk, operating costs and a mark-up.¹³

Lending at cost

In fifteenth-century Italy, the Franciscans answered high-interest moneylending with charitable pawn banks, the monti di pietà. The first, founded by the papal governor of Perugia, charged only enough interest to cover the costs of its loans.¹⁴ In 1515 Pope Leo X confirmed that a monte di pietà “may licitly charge money for outlays, losses, and even for a moderate return”.¹⁴

The monti combined two answers in one institution: a fair price, and a purpose beyond profit.

Sharing the risk

The medieval Church drew its line around risk. Profits from investing in an enterprise were always permitted, as was rent for the use of property.¹² A partner who shared the venture could share its gains.

Dr Craig Wright, who researched medieval workarounds to interest restrictions, identifies the same principle in early Christian and Islamic law: the objection is to “not having a share of the risk if you’re getting the profit”.¹⁵

Islamic finance builds on this idea. It prohibits riba, usually translated as interest, and offers partnerships in its place.¹⁶ In a mudarabah, one party provides the capital and the other the work, and they divide the profit by an agreed share. If the venture fails, the investor bears the financial loss.¹⁶

Profit-sharing suits ventures whose results both parties can see clearly: businesses, partnerships and shared ownership of property. The economist Robert Townsend showed why fixed repayments suit loans whose profits are costly to check. With a fixed payment, the lender needs to examine the books only if the borrower fails to pay.¹⁷ Each method has its natural place.

Lending for production

Professor Richard Werner, the economist who coined the term “quantitative easing”, sorts credit by what it pays for.¹⁸

His answer is to guide credit towards productive investment. Wright reaches a similar rule from a moral starting point: good credit “creates assets that endure beyond the life of the debt”, such as a family home, a business expansion or essential infrastructure.¹⁹ A loan for a plumber’s van builds future earnings; a loan for a holiday leaves only the repayments.

Banking close to home

Werner’s preferred lender is the local bank. “A banking sector dominated by many small, local, not-for-profit banks avoids banking crises,” he argues. Germany is his example: around seventy per cent of its banking sector consists of locally controlled savings banks and cooperative banks lending mostly to small and medium-sized firms.¹⁸

Local lenders know their borrowers. They can judge a business by its owner, its trade and its town, and they stay with their customers through a recession.²⁰ Britain’s building societies grew from the same instinct: members paid regular sums into a common fund, and each in turn received the means to buy a house. Wright describes building societies, friendly societies and cooperatives as alternatives “lived, practised, and proven over centuries”.¹⁹

Returning the surplus

Another answer keeps interest and changes who receives it.

To the members

A mutual building society has no shareholders. Its profits return to the people who save and borrow with it. In the words of Leeds Building Society: “We don’t have shareholders so we don’t pay dividends. We reinvest profit into the business for the benefit of current and future members.”²¹

To the community

Germany’s savings banks, the Sparkassen, use their profits “exclusively to strengthen its financial base and to provide benefits for society”. In 2023 the group put €508 million into arts, social projects, education, sport and the environment, and it supports 771 charitable foundations. The first savings bank opened in Hamburg in 1778.²²

To the public purse

The Bank of North Dakota, founded in 1919, is owned by the state. Its profits fund the state budget, development and infrastructure loans, and the bank’s own reserves. It made its first transfer to the state in 1945.²³ The Bank of England has paid the Treasury in place of shareholder dividends since its nationalisation in 1946.²⁴

Money creation for the public

Most money today is created by commercial banks when they lend.¹⁸ The Chicago Plan of 1933 proposed that banks hold full reserves and that the government issue the money instead. An IMF paper revisiting the plan in 2012 describes government-issued money as “equity in the commonwealth”, with the gains from creating it flowing to the public.²⁵

Hudson draws the same conclusion: “Keeping money and credit creation public instead of privatizing it is the most important step to keep down the cost of living and business.”²⁶

Taxing the land

Much modern lending finances property, and much of a property’s price is the value of its location. Hudson argues that taxing land values keeps that value from being borrowed against and bid ever higher: “The land tax is by far the best way of keeping housing prices down.”²⁷ The revenue then funds public services in place of taxes on work and trade.

Honest money

The Austrian School of economics sees interest as natural. Eugen von Böhm-Bawerk explains it through time preference: people prefer having things sooner to having them later, so a lender is paid for waiting.²⁸ The true rate, in this view, is set by how much people choose to save.

Ludwig von Mises and Friedrich Hayek trace booms and busts to rates pushed below that level. Cheap credit encourages long projects that real savings cannot support, and the bust follows when the mismatch shows.²⁹ Their answer is honest money. Murray Rothbard calls for gold, an end to central banking and banks that hold full reserves. He sees banks lending genuine savings as “productive and unexceptionable”.³⁰

Saifedean Ammous carries these ideas into Bitcoin, arguing that a fixed supply rewards saving: “nobody got rich by printing debt.”³¹ Wright adds that money lives through use: a coin becomes money only when people spend it widely, cheaply and often. “You can only be spent into it.”³² Werner pairs a fixed-supply coin with local banks creating credit on top of it, as banks did under the gold standard.³³

Restraint and responsibility

Some answers rest on conduct more than on institutions.

Lenders carry their own risk. Wright argues that guarantees and rescues teach banks to lend carelessly: “Moral hazard has become the organising principle of finance.”¹⁹ A lender who bears its own losses checks each borrower with care.

Borrow rarely, and for lasting value. Wright distinguishes debt for necessity from debt for display: “Credit is not evil; it is a tool that lets people smooth time, invest ahead of income, build rather than wait.”³⁴

Lend with conscience. In the same essay he writes: “The point is ‘lending without conscience is vile.’”³⁴

Teach it early. “This needs to be drummed into kids at school. The basics on the use of money and credit.”¹⁹

Soften the fall. England added cushions of its own: bankruptcy in 1542, and the end of imprisonment for most debts in 1869.^35,36 A failed debtor could start again.

A toolkit of answers

Conclusion

Across four thousand years, the same insight returns. Interest works when it rewards a real service: risk carried, costs met, and production made possible. When debts grow faster than the means to pay, each age has found an answer, whether a cancelled slate, a fair price, a shared venture or a bank that serves its town.

These answers sit comfortably together. A local savings bank can lend at a fair rate, share profits with its community and support its borrowers through hard years. The prophets of interest, ancient and modern, give us the parts. The task is to assemble them.