AND FORGIVE US OUR DEBTS • • .

Murray Sayle traces the consumer debt

crisis back to its origins and discovers that the rot started about 500 years ago

QUITE APART from being the main- spring of market economies and the root of all evil, the love of money is, many people believe, somehow behind the violent insta- bilities now buffeting the world economy. Not, of course, our trustworthy gold-tinted coin of the realm, but the kind of paper, plastic, unreal or imaginary money piled up by the mushroom growth in our use of credit.

This explosion in lend- ing and borrowing has been hailed, especially in bank advertisements, as a triumph of the new tech- nology. Bronze boxes spit money in the street, shop assistants gift-wrap mer- chandise on a wave of magic celluloid. Spectator readers, however, know that economic affairs, like other fashions, go in long waves, or cycles (`Time to get on our cycles', 8 August). The dream of a successful, self-regulating, morally neutral economic system recedes further with every new business failure. The way to a bet- ter world may not after all be bigger computers, faster printing presses or more credit cards for

schoolchildren. Perhaps we need to re-examine how we got up the creek we're up, to find some fork at which, in all innocence, we may have taken the wrong financial turn- ing.

Such thoughts in mind, this writer has just attended a conference in London on `Money and Morals — Just Credit', a gath- ering of ecumenical scope chaired by an engaging Australian Dominican, Fr Antho- ny Fisher, OP. Many people must have noticed that the collapse of Moscow- flavoured socialism and the almost simulta- neous worldwide chaos in market economies have left a huge gap in our understanding of how the world might work better. Dominicans, the Order of Preachers founded by the heavyweight intellectual St Dominic in AD 1215, have been among the first to recognise a possi- bly God-given opening here for a resur- gence of Christian teaching. 'Our Order missed the boat badly in the 15th century on this whole question of credit, usury and money-lending,' a cleric told me at the con- ference. 'We hope, God willing, to get aboard this time.'

Our word 'economics' comes from the Greek oikos, a family or household, and normia, rules or management. Aristotle, the first writer on the subject, took the family or group of families in a farming vil- lage as the basic economic unit, and con- demned the charging of interest on intra-family or intra-village loans as being destructive of village harmony. Gifts or interest-free loans, however, tended to increase community prosperity. Rich and

poor were alike entitled to a share of the resulting benefits, if any.

But back to our ancient Hebrews. TheY were also commanded in the clearest terms not to charge interest on their loans. The Just Man described in Psalm XV, as well as not beating his servants, slandering his neighbours or bribing judges, 'does not lend his money out at interest'. The New Testament enthusiastically takes up the prohibition. Luke (vi, 33-35) enjoins us to `lend, expecting nothing in return'. 'Even sinners lend to sinners,' the Apostle adds optimistically. The version of the Lord's Prayer reported by St Matthew (interest- ingly enough, in pre-apostolic life a tax col- lector by the name of Levy, and so well versed in financial fiddles) clearly says, `Forgive us our debts, as we forgive our debtors.' The Authorised Version has the sibilant 'trespassers', suggesting a connec- tion with poachers and gamekeepers, but the Revised makes it `debts'; the Greek original has opheilyma, coming from the verb 'to owe'; and the Latin of the Vulgate plainly and unequivocally says that it is deb- ita nostra we are to forgive and be forgiven. Matthew, in fact, writes so much about debts and debtors that many commentators have suspected a major depression, or early Kondratiev downwave, in the Holy Land of 1,992 years ago.

For the next 1,600 years the Church, at least in principle, resolutely opposed the charging of interest on all loans, as Islam does to this day (both have found loop- holes, based on the sharing of risk and reward). 'Usury', which in Latin simply means 'to use', long ago acquired the nasty ring it still has. 'You usurers derive profit from misery, joy from others' tears,' thun- dered the great St Basil of Cappadocia in 370 AD. 'Take no interest from your broth- er, nor feed him at your profit.' This would seem to forbid the faithful even running a Greek takeaway, but Fr Roger Ruston, OP, told the London conference on money and morals that the Prophetic and Patristric prohibition on interest, far from being capricious, rested at the time on sound practical and ethical reasoning. The First Commandment directs us to love God and our neighbour as an absolute and inescapable duty. In giving to the poor, therefore, we are simply repaying a debt, as what we give already belongs to them (or to us, if we happen to be among the poor) as our fair share of God's gifts to the whole human family. But farmers need seed, tradesmen need tools, widows need suste- nance in order to realise these heavenly gifts. To give or lend these productive necessities is, therefore, no more, nor less, than commendable charity. To charge interest is, however, to trans- fer wealth from the poor (or, as we would now say, socio-economic groups C and D) who are always with us, to the rich, the As and Bs, who are also ever-present and already nicely fixed, thanks. Usury clearly frustrates the Divine purpose, especially if it sets up a permanent one-way cash flow from those who have not to those who have, which is bound to happen in an eco- nomically stagnant society. As an offence against charity, usury therefore stands con- demned as wicked and sinful behaviour. But is all interest usury? Fr Ruston com- pares usury to murder, although only, of course, for purposes of exegesis. All mur- der is killing, but not all killing is murder, i as in self-defence, war, UN peacekeeping etc. Similarly, not all interest-taking is usurY. As the relatively secure world of the Hebrew village widened into the hazards and opportunities of the Roman empire, moralists came to see that those who financed trade, and thereby shared in its risks, were entitled to a reasonable cut of the profits. Similarly, when socio-economic groups C and D were feeling the pinch they stood a better chance of finding a helping hand in impersonal urban society if they offered some inducement above the warm glow of charity in return for a timely loan. There were also running expenses and a premium to cover the risks of non-repay- ment to be considered. Around AD 400, St Augustine redefined usury as interest-tak- ing 'beyond just entitlement', or, as we now say, fair suck of the sauce bottle, brothers. But who is to say what is fair, what is just?

At this point Judaism may come in for unfair blame. Anti-Semitism, alas, usually flourishes in times of economic crisis, as among the Neanderthal capitalists now emerging in eastern Europe. In mediaeval times, all Europe was in theory governed not by fallible men but by Christian moral principles, just as Confucian ethics rule China and Japan to this day. Our aristocra- cy and gentry of the Middle Ages were per- petually strapped for cash and seldom left their main source of income, the peasantry, much above bare subsistence.

Jews, on the other hand, denied access to land by feudalism, took up urban pursuits, among them commerce and its inevitable ancillary, money-lending. The moral rules governing credit and interest were, and are, identical for Jews and Christians, but Jews often had both funds to spare and a certain freedom from the interference of preachy, immensely rich religious institutions. Oscar Wilde put the situation well: Jews were criticised for lending at interest, especially by Christians, who themselves refused to advance a penny whatever terms were offered.

Mediaeval kings were thus strategically placed to swindle their Jewish subjects. The wars of the Middle Ages, no more produc- tive then than wars are now, were frequent- ly financed by compulsory loans from prosperous and not so prosperous Jewish merchants, to be repaid from the loot of conquered provinces, if any. The Crusades made matters worse by sowing hatred of all non-Christians and, as often as not, by requiring an incompetent king to be ran- somed from the Saracens. Welshing kings did not, of course, describe themselves as such, but instead concocted fantastic charges of sorcery and ritual murder against Jews in general, backed up by a tor- tured reading of the Bible that made them, and not the Romans, the guilty men of the Crucifixion. The next step was the mass expulsion of Jewish creditors initiated by our own Edward I, after his hammering of the Scots yielded nothing plusher than the Stone of Scone, a heartless scam soon imi- tated by all the other crooked monarchs of Europe.

The gentle Franciscans, the 'Little Broth- ers of the Poor', stepped into the economic gap thus created. The brothers' chain of saintly pawnshops, called Montes Pietatis, Mountains of Piety, or Monts de Pete in common parlance, still flourish. They charge 1 to 5 per cent a month for 'admin- istrative expenses' on small loans to the needy. Founding this popular service was the 'boat' the Dominicans now regret miss- ing. Even the improvident Order of Preachers themselves fell into the habit of hocking their habits when offerings slumped every winter, all the while denouncing usury as sinful.

With the dawn of modern times, Protestant money-lenders invaded the financial field, and from then on credit has been reshaping our world. In 1541, hard-up husband Henry VIII legalised borrowing at interest of 10 per cent, reduced by his suc- cessors to 8 per cent in 1624, 6 per cent in 1660 and 5 per cent in 1713. Made possible by rising productivity and the emergence of a cashed-up middle class, this legitimisation and subsequent easing of interest rates had a lot to do with funding the oncoming Industrial Revolution. In 1775, for instance, the Birmingham businessman Matthew Boulton borrowed £10,000 from the London banks to finance the develop- ment and marketing of the amusing steam- engine invented by his impractical Scottish partner, James Watt. Within a decade, their firm was exporting steam-engines to Holland, founding the world-wide reputa- tion British engineering is now busy losing — a textbook example of the way in which credit, wisely used, has promoted some of man's most useful innovations. (I got this from a textbook, James Watt and the Steam Engine.) Here was positive proof that money-lenders could at least sometimes be on the side of the angels of rising produc- tivity.

As early as the 1550s, Jean Calvin of Geneva, home of the numbered bank account, took a more debatable step. Hon- est Jean distinguished usury, the ugly sin, from credit creation, the wholesome Protestant pastime, by reference to the pre- vailing 'market rate' of interest. This rate was (and is) not, of course, the result of divine or even clerical surveillance of the economic process, but only what a crowd of Genevan bankers thought they could get away with. Another banker, Robert Jacques Turgot, and then our own Jeremy Bentham developed the idea, arguing that money was only a commodity, interest its price and that the 'price of money' (and the terms of loans) should be set by supply and demand, just like the price of fish.

This doctrine, of course, smells very like the idea of the self-regulating, morally neu- tral economy we now see in so much trou- ble. Such a system is perfectly feasible (in jungles, for instance) although the implica- tion that the result will be socially accept- able is getting much harder to demonstrate to, for example, unemployed coal-miners. Nevertheless, by 1867 legal control of inter- est rates in general had been abolished in Britain and most European countries, Protestant and Catholic alike. Nothing very much happened. In those far-off, gold-sta- bilised Victorian days, secured loans, like the government's, paid around 3 per cent, prime commercial paper a little more. Bankrupts shot themselves like gentlemen, or emigrated to the colonies. The 1927 Money-Lenders Act set 48 per cent as the approximate line dividing usury from law- ful interest on small personal loans. In 1958, British banks, for the first time, began allowing their customers unsecured overdrafts, up to £500, repayable at 10 per cent in 24 monthly instalments. Few guessed the pit that innovation papered over.

Our own attitudes, if we examine them fairly, reflect a lot of the moral agonising that has gone on down the ages over credit and interest. Within our families, in our vil- lage, or its modern equivalent, the office, it would seem to most of us quite wrong to charge a colleague interest on a fiver until payday, much less on a pony for an elderly aunt's flutter on the 2.30 at Ascot. This principle can be spread very widely: the Dominicans' conference heard from Mrs Margaret Nolan, who helps run a credit union in a small Tyneside town, with 89 per cent unemployment, where friends and neighbours have lent each other more than £400,000 in recent years with bad debts of under £200. Britain has more than 1,500 of these credit unions, some of them quite prosperous: the London Taxi-Drivers', for instance, was the first to lend out more than £1 million to its members, some 25 years ago, and still tides many a cabby over a spell of fine weather. Our moral reason- ing here is very like that of the ancient Hebrews. We still live in groups and when my wallet is bulging and yours is empty a friendly short-term loan will help you out, cost me little or nothing, favour community harmony and dispose you to do the same for me some other time.

On the other hand, we also recognise that our broker, stock- or pawn-, is entitled to a reasonable return on what he lends us, even if he holds our hunter as security and puts it in his window. We even acknowl- edge that interest-bearing loans may be legitimate even if not needed to help us through a lean time, but only to satisfy some passing hedonistic impulse:

There's a pawnshop on a corner In Pittsburg, Pennsylvania, And I just have to have five or ten From that pawnshop on a corner In Pittsburg, Pennsylvania,

Just to be with my angel again The difference is our recognition that money is some people's stock-in-trade, and we must compensate them for not using it profitably somewhere else. In return, the professionals offer a one-sided service, without reciprocal obligation. Similarly, we expect our banker to pay out when we need to use our money, not when he does.

Folk wisdom thus arrived at a rough compromise between the rival claims of community kindness and commercial enterprise in matters of money and morals, and by the early 1970s it was generally believed that usury and credit were dead issues. Predictably, they were just waiting to spring to life.

Te Yom Kippur war of 1973 was the pretext for the long-planned Opec cartel to pounce. Overnight, the price of crude tripled. Oily sheikhs deposited billions in their banks, mostly British and American. Banks make their money by lending it out, and in Africa and Latin America there is always someone who wants to borrow, at any rate of interest. True, they seldom if ever pay back, but the then head of the American Citibank saved the day with his doctrine of 'sovereign debt': an indepen- dent state, he argued, can never go bankrupt, and so its paper can be carried on the asset side of the books more or less indefinitely. The result, Phil Baker of Oxfam told our conference, is the Third World debt of $1.7 trillion, a sizable piece of change compara- ble to the combined external debt of Amer- ica, Canada, Australia and New Zealand. Like the wealthy English-speakers, poor Third Worlders cannot even pay the inter- est on their debts, the prices realised by the food and raw materials they export having fallen to their lowest level since the 1930s (another sign. that Kondratiev's cycle is running right on time). Many of the dollars they borrowed, it is true, wound up in the Swiss bank accounts of their ruling elites, ready to be lent back for seconds and thirds. But, the kindly Oxfam man argued, with people starving in poor countries for lack of imports this is no time for recrimi- nations and, anyway, nobody's perfect. He endorses the Nassau Formula, proposed by John Major, that 70 per cent of the Third World debt be forgiven, provided the other 30 per cent is repaid with interest and the debtors trim public spending, cut welfare payments, deregulate finance and generally practise what sound like his own policies. Banks, of course, do not like to hear talk of forgiving debt. It messes up their books and removes what they call 'moral hazard, — people forgiven debts tend to run up more, they argue, confident that they Will be forgiven again (banks are curiously ambivalent about whether they want peo- ple to borrow or not. Try one). Nassau, however, is far away while, as the manage- ment consultant Ben Andradi of accoun- tants Arthur Anderson explained to the money and morals conference, another debt crisis looms much nearer home. In July 1980, as we well remember, Britain began the deregulation of banking and finance which soon spread to other parts of the English-speaking world, but no further. Building societies, investment com- panies and even department stores were soon handing out what looked uncommon- ly like chequebooks and taking deposits On which they paid what looked even more like interest. The banks had to follow suit and their source of cheap funds — remain: ber your old interest-free current account! — dried up. Retail banking, Andradi esti- mates, has not been profitable for close on a decade. Ever resourceful, bankers have had to look for people who will borrow at ever higher rates of interest so they can pay out interest to their own depositors and still have something over for their btfieck financiere (`garnished with especially costly ingredients'). The result has been — stand back — an explosion in unsecured credit, the bankers catch-all term for plastic, credit cards, fash- ion cards, store cards and all the various kinds of overdrafts. Negligible, or a

banker's idea of negligible in 1980, British domestic unsecured credit last year hit the tidy sum of £79 billion. This has not, how- ever, been lent at anything like uniform interest rates. Those who can get over- drafts are likely to pay APRs (annual per- centage rates) in the low 20 per cent range. Bank cards charge more like 30 per cent, store cards (generally not financed by the shops concerned but by independent busi- nesses in which General Electric of the United States, for instance, has a very big stake) between 35 and 40 per cent. Addi- tional charges can often get these rates closer to 70 per cent.

On the steep side? A NatWest spokesman, explaining why his bank charged a Watford woman 69 per cent APR to clear her £700 overdraft, said last week, 'Our rates have to reflect the higher risk with this kind of lending.' Indeed they do but, as speaker after speaker reported, banks in general are paradoxically urging their overdrawn customers to borrow more at, of course, higher rates of interest, and some are offering credit to children as young as 13.

Andradi, a staunch and eloquent free- market advocate, explained that they were responding to market forces. Banks and other lenders, he reported, prefer what are called 'revolvers' in the trade, that is, peo- ple who never clear their debts and thus became the basis of a continuously prof- itable portfolio. There is a tacit agreement not to compete for this business by lower- ing APRs, but of course, he added, every- one has freedom of choice, and no one is forced to buy or borrow or, we might add, to beg or steal.

Other speakers recalled Matthew, Chap- ter vii, in which the apostle calls on us not to put temptation in the way of our broth- ers or sisters. One noted that free-market theories pay little regard to 'the difference in status or the power realities of a loan contract between, say, a fashion-mad Glas- gow teenager and a wily London or New York finance company'. Free-market advo- cates, another said, deploy two persuasive arguments, but never at the same time. When the economic cycle is going up, they point to the efficiency of the unregulated market mechanism. When the cycle is going down, they forget efficiency and con- centrate on everyone's right to do whatever they like with their money, free and unsu- pervised by Big Brother. This is a powerful point. It is nice to be free, and fun to be rich, but it may be optimistic or even fraud- ulent to promise both.

My own contribution to the discussion was an attempt at synthesis. Aristotle, the ancient Hebrews and the Christian fathers were, in my view, on to something in their denunciation of interest and periodic attempts to lift its burden. In a static econ- omy where individual productivity does not rise, or rises slower than the rate of interest demanded, wealth will be steadily and inevitably transferred from borrowers to lenders, poor to rich, with the divisive results feared by the ancients. More recent researchers have discovered that economic growth is, in general, faster in economies with a mass market, that is, with less income inequality and hence with purchas- ing power spread more widely through the community. Even a big difference in what the richer and poorer pay for their credit will, it seems, slow economic growth. According to a calculation reported by Fr Fisher, British Cs and Ds now pay APRs reaching £1 per £100 per week, As and Bs only 60p for the same unsecured loan. The prophet Ezekiel would have hit the Temple roof.

When individual productivity is rising, however, both principal and interest can be repaid from the new wealth generated (interest is generally low at these times anyway) and inequality tends to narrow as a mass market develops and industry expands to supply it. Somewhere about the middle of the 50-year economic cycle, alas, productivity growth slows or stops, for complex reasons not yet fully understood. There has been, for instance, little growth in average individual productivity in any English-speaking economy for the past 20 years. Output has expanded, but by bring- ing more and more people, particularly migrants and women, into the labour force, with the attendant social evils. At this stage in the cycle, disproportionately high rates of interest do indeed begin a process of slowing economic growth and widening inequality or, as the prophet put it, giving to them that have and taking away from them that have not, yea, even the little that we have.

`This is where we really blew it,' Fr Rus- ton told me. 'We stuck to our blanket pro- hibition on interest far too long, then simply backed down and withdrew all our objections to credit and interest charges. What we need to find is a moral mecha- nism that links the growth of credit to rises in productivity, and an agreed way of dis- tinguishing productive and unproductive investment. It looks as if it's back to the illuminated manuscripts.' Adam Smith, I reminded him, could make a valuable ally. The Glasgow sage was (as his admirers can often forget) adamant that the creation of credit should be rigorously controlled in the interests of more and freer trade and general prosperity. This is a serious task for the future, but what are we to do right now? Next year, as it happens, is a Sabbath Year, a Year of Grace. Uncollectable debts are going to be remitted anyway, we may be sure, but by the clumsy, destructive mechanism of bankruptcy, with all its attendant misery and unemployment. The ancient prophets may have shown us a better way. We could depawn the old ram's horn, breathe deep, and let rip one mighty, debt-dissolving, economy-reviving, interest-slashing, bank- baffling blast .