Global Financial Crises: The Role of the Lending-for-Profit Industry

Background

The problem of indebtedness of the scale we are witnessing is relatively a new phenomenon in human history. Prior to the 18th century, we hardly hear of the phenomenon termed as ‘debt crises’. The main reason was because prior to that, there was never any lending-for-profit industry on a very large scale.

To be sure, the practice of lending for profit is not a new one. It is commonly referred to as ‘usury’ and the evidence that it is an old activity can be found in the Bible where not less than 26 scriptures and verses in the Bible referred to it (New King James Bible, 2012). The practice is also condemned by philosophers such as Plato and Aristotle (World Guide, 2012). Other major religions that condemn it are Islam and Hinduism. As a result, all over the world there was no lending-for-profit industry on a significant scale.

However two Protestant philosophers and priests were the main persons responsible for changing the situation in Europe. They were John Eck and John Calvin (Eck & Calvin, 2012). The essence of their arguments was that usury does not refer to all forms of interest-charging loans. They managed to convince other Protestant priests that the term ‘usury’ actually only refers to situations where an excessive interest rate was charged on loans or to situations of ‘biting’ loans (such as loans given out to single mothers with many children by unscrupulous loans sharks). On the other hand, loans given out to businessmen or traders should not be considered as usury, especially if the rate charged is low. They argued that those were cases of ‘productive loans’ which they argued were actually good for the growth of the economy. The Protestant church gradually agreed with the arguments and eventually did not view the practice of charging interests on loans as necessarily evil.

John Eck and John Calvin’s arguments were supported by other liberal thinkers such as Jeremy Bentham and Adam Smith. As a result the practice of charging interest on loans given out to businessmen and traders became gradually acceptable, even by the Catholic Church. Soon many wealthy merchants entered the ‘Money lending’ industry which later evolved to become the finance or banking industry (Economic History Encyclopaedia, 2012).