Friday, May 22, 2015

Credit Unions, Usury, and the Rise of Consumer Credit in the United States

Credit unions were one of a number of American institutions that tackled the credit problems of the urban working class in the early 20th Century. Taken together, these institutions helped to demonstrate that industrial and salaried workers were safe credit bets, opening the door to consumer lending by commercial banks and helping to foster our "consumer culture."
The question of credit for Jane and Joe worker was bound up with the issue of usury. "Usury" narrowly defined means the charging of interest on a loan, but more broadly it can mean "excessive" interest, illegal interest, or simply dishonest or abusive lending practices.
The Judea-Christian heritage frowned on the charging of interest, particularly on loans to individuals in need. In Exodus (22:25 RSV) we read: "If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest."
Nehemiah (5:1-6), hearing the complaints of the people of Israel in a time of famine, scolds the nobles and says, "Let us abandon this exacting of interest. Return to them this very day their fields, their vineyards, their olive orchards, and their houses, and the percentage of money, grain, wine, and oil you have been exacting from them." As a result of such teachings, Jewish law forbade charging interest on loans, except loans to non-Jews.
The New Testament also encouraged generosity in lending without expectation of gain and voiced suspicion of accumulated wealth. The Christian church continued the ban on lending at interest, but, of course, such bans could not prevent people from having to borrow, nor lenders from getting around the bans in one way or another. One escape hatch was the proviso in Jewish law that Jews could lend to non-Jews. This led to some Jews, excluded from most occupations, becoming lenders to Christians, ranging from pawnbroking to financing wars.
With the Industrial Revolution, starting in England in the 18th Century, it became more and more evident that credit was a necessary lubricant for business and trade. Economists like Adam Smith saw interest as a useful tool, although he advocated limits on how much could be charged. The churches themselves, especially the Protestants, began conceding that some interest was morally allowable. England eventually abolished its usury limit of 6 percent in 1854, leaving control to market forces. (Borrowers who feel an interest charge is exorbitant can take the lender to court, but this obviously doesn't happen often. In recent years, consumer advocates have pushed for usury limits to protect borrowers.)