I’ve recently taken a renewed interest in economics and finance, and I find myself wishing that there was a good blog about Judaism and economics. I read plenty of Jewish blogs that are interested in economic issues, like the JSpot blog run by Jewish Funds for Justice. What I’m really looking for though is a blog that addressed the economic implications of Jewish social justice and mitzvot.
A couple of months ago, my friend Yechiel Newman gave a wonderful dvar Torah about charging interest, and I have adapted it, with his permission, for this blog. I hope to one day convince him to blog about Judaism and economics, but for now, all we get is a taste:
One of the classic rivalries between Jewish thinkers is that of the Rambam (Maimonides) and the Ravad (Rabbi Avraham Ben David of Posquieres). These two great Jewish philosophers found little they agreed on and went to great lengths to discuss their disagreements. In fact, when I was teenager growing up in Brooklyn, the rabbis at my yeshivah would joke that the proof of God’s existence can be easily deduced. The logic was simple — The Rambam stated that God exists and the Ravad did not disagree.
If truth can be deduced from the absence of disagreement between rivals, then, it follows, there can be no greater truth than of the evil of charging interest on loans. For Islam, Christianity and Judaism universally agree that collecting interest is prohibited.
The Koran in Sura Al-Imran verse 130 states
O you who believe! Devour not interest, for it goes on multiplying itself and be mindful of your obligation to Allah that you may prosper; and safeguard yourselves against the Fire which is prepared for disbelievers. (Koran 3:130)
The prohibition against collecting interest is seen in the Torah a few times. For example, in Exodus 22:24
The New Testament, in the Parable of the Talents seems to suggest that interest was actually acceptable. Briefly, the Parable speaks of three servants, each of whom was entrusted with a sum of money during their master’s absence. Two of the servants used the money in the service of some business venture, and doubled the initial sum. The last servant, who was given the least money, feared that he would lose what little was given to him, and so he buried the money to ensure that he could return it to his master when his master returned to collect it. In Matthew 25:29 we see the last servant being chastised by the master for this act: “Then you ought to have put my money in the bank, and on my arrival I would have received my money back with interest.”
However, in spite of this verse, in the Middle Ages, the Church eschewed their own teachings and declared the charging of interest as usury, and, therefore, illegal.
So, whether you are a Muslim, a Christian, or a Jew, the evil of interest is spelled out to you in no uncertain terms.
As an aside, the Buddhists spent so much time convincing their followers to divest themselves of all worldly possessions that developing a position on the “interest issue” was not high on their agenda.
For Jews, the halachic prohibition against interest is far-reaching in scope. Jewish borrowers are not allowed to offer preferential discounts in to a lender in their business dealings, as that could be construed as implied interest (Avak Ribbit). Even something as insignificant as the borrower thanking the lender is prohibited, as this display of gratitude is considered an ill-gotten gain from the loan.
A modern day thinker may wonder, how is it possible to live in a world without interest? Surely interest, as a free-market inducement between borrower and lender cannot be forbidden under a reasonable social system. Though borrowers would certainly prefer not to pay interest, lenders do not charge it out of cruelty, but as a reflection of two factors: the risk inherent in lending money to another, and the time value of money (a dollar now is worth more than a dollar next year irrespective of risk, simply because you can exchange today’s dollar today, but you must wait until next year to convert that dollar into some good or service). What kind of socio-economic system is the Torah advocating?
The importance of interest was explored by Ludwig von Mises — one of the founders of the Austrian School of Economics and a noted Libertarian thinker. Von Mises wrote in his treatise on Human Action:
Therefore there cannot be any question of abolishing interest by any institution, laws or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in 100 years no less than a present apple. What can be abolished by laws and decrees is merely the rights of capitalists to receive interest. But such decrees would … very soon throw mankind back into the original state of natural poverty.1
Facilitating commerce, and in particular, loans, was something the Gemara felt strongly about. In Sanhedrin 2b the Gemara discusses the importance of judges performing rigorous due diligence of all witnesses that come before them. The Gemara ponders the possibility that a distinction should be drawn between the typical due diligence necessary of all witnesses and the due diligence necessary when witnesses come forth on monetary matters. The Gemara states that if the courts were to apply the same level of rigor in their examination of witnesses to loan contracts as to witnesses in other matters, the courts would be placing a heavy burden on lenders trying to recover their money. The Gemara therefore ruled that extensive due diligence of loan witnesses was not in the public’s interest since it will effectively “lock the doors of the lender to the borrower”.
Though normally the courts required a very high standard of proof in order to uphold a claim, in the case of loan contracts, such a high standard would greatly increase the risk that a lender would be unable to collect on his loan. Since lenders would be unable to collect interest commensurate with this level of increased risk, lenders would simply pull out of the capital market, and seek other investments with lower risks and better rates of return.
With the policy of not “locking the doors of lenders” in mind, Jews have developed a special type of loan document called Heter Iska (literally, a business permit). The Iska contract is structured like a trust or partnership, but, viewed in the abstract, has a financial outcome in line with that of loaning money for interest. The way it works is that two parties who might have normally entered into a lending relationship instead form a partnership or trust. The would-be lender becomes an investor, providing capital to the would-be borrower, who in turn becomes the manager of the trust. Profits are divided in such a manner that the investor earns a rate similar to what he would have earned as a lender charging interest. In addition, a buyout clause enables the manager to ‘repay’ the investor and end their relationship. (See JLaw.com for a standard Heter Iska form.) Note that while the Heter Iska functions well so long as the business venture is profitable, as a practical matter, the failure of such a venture leaves the lender cum investor with little halachic recourse for recovering his investment should the business fail. Such cases often wind up in secular courts – see Kenneth Ryesky’s treatment of the Heter Iska in secular courts.
It should be noted that both Christians and Muslims have also found ways to work around the prohibition against charging interest. When the Church issued its decree against usury it allowed Jews to engage in money-lending. Jews, who were left out of the formal guild system, found themselves with no other source of income than money-lending. In the long term, the results were disastrous for the Jewish people since they would eventually find themselves stereotyped as evil for conducting these very loan. In the near term though, Jewish bankers quickly became an integral and irreplaceable cog in the European economy, providing financing for everyone, from farmers to craftsmen, merchants to manor lords, and even kings and generals.
Islam, under Sharia, takes a slightly different approach than the Heter Iska. Muslim lenders enlist a third party who sells an asset to the borrower at a guaranteed profit. This profit is paid out to the seller, who is an agent of the lender, over the period of the loan. For example, let’s say Yousef wishes to borrow $10,000. Abdul is willing to lend $10,000 to Yousef at a 20% interest rate. To circumvent the prohibition against interest, Abdul purchases a car from Faisal for $10,000, and sells the car to Yousef on a payment plan of $1,000 per month. Yousef winds up paying $12,000 over the course of the year in exchange for the $10,000 he received at the beginning of the year. Neither Abdul nor Yousef ever take delivery of the car, or even see the car. For that matter, the car may not even exist! This so-called “business transaction” has created a situation in Saudi Arabia where a car dealer with eight dusty Yugos on his car lot has annual revenues greater than the Gross National Product of a mid-sized country.
So we are left with an economic puzzle. If interest is acceptable, as can be seen from the Heter Iska document, then why does it state clearly in the Torah that interest is forbidden? And, if interest is forbidden, why are we given this easy out with the Heter Iska? On the one hand we have a direct prohibition against interest up to and including receiving a spoken thank-you, and, on the other hand, we are allowed to engage in transactions that are essentially the same as interest bearing loans.
To attack this puzzle I suggest we look at the context of the laws relating to interest.
If we look at the relevant texts we will find that the laws of interest are closely related to some interesting laws about employment and collateral. We are told an employer must pay wages on the day that the work is done. We are not supposed to let the sun set without fully compensating an employee for a day’s work. Additionally, we find that if a poor person comes to you for a loan and collateralizes that loan with his own garments, then you, the lender, need to return the garment to the borrower each night before sunset, since, as the text says, “This alone is his covering .. With what shall he sleep” (Ex. 22:26). The Chafetz Chaim took it for granted that these three laws were intertwined. In fact, the first chapter of the Chafetz Chaim’s book, Ahavath Chesed, is titled “Laws of Loans, Pledges, and Wages.”
It is the proximity of these laws that helps us to solve our interest puzzle. I suggest, that The Torah is not instructing the two parties to a loan to defy the natural laws of the market. Rather, the Torah is teaching us how to conduct ourselves when there is a disparity in power between the two parties. By including the laws of loans among the laws of employment and collateral the Torah is telling us that when we find ourselves in a more powerful position, because of another person’s financial weakness, we should not exploit that opportunity.
Many people in this room may have read the works of Ayn Rand. The collection of her writings form a system of ethics known as Objectivism. Objectivism teaches us that selfishness is a good thing. Adam Smith, an economist most famous for how writings on free trade postulates that when each person arranges his affairs in the most “selfish” way an “invisible hand” causes the outcome to be best for society.
John Mackey, founder and CEO of Whole Foods, questions this worldview in an inspiring speech he gave to a recent Libertarian conference
… despite her literary greatness and many positive contributions to the freedom movement, I believe that Rand has also harmed the movement. How? She was overly provocative. The “virtue of selfishness” is an oxymoron. Selfishness is not a virtue. Now, I understand all the arguments — I’ve read all the books. I know that self-interest channeled to the social good, as expressed through Adam Smith’s “invisible hand,” is the single most brilliant insight about social organization ever made in history. That being said, selfishness (as opposed to self-interest) is still not a virtue. It is something to be discouraged, and not something to be supported.2
I believe John Mackey’s message echoes the message we are meant to take from the Torah’s prohibition against charging interest on a loan.
Interest per se is a great thing. It allows us to rise from the natural poverty, as Von Mises stated. In the form of microfinance, interest enables thousands of people from developing countries to escape hardship. In the form of a mortgage interest it allows each of us to own a home. Interest is a tool to harness risk and to temper inflation. For all of these reasons and many more, we are given the Heter Iska.
But, interest also has a darker side. As an example, there are companies in the United States that offer “payday anticipation loans – very short term loans that are to be repaid from the borrower’s next paycheck. These loans are given at very high rates of interest and are only attractive to people who cannot wait until their payday at the end of the week. Although the moral case for these loans can be made from an economic perspective, the Torah instructs us otherwise. The Torah tells the employer not to exploit his position of power and force the employee to borrow money that is rightfully his. The Torah tells the employer to pay the employee immediately.
In this week’s Parsha we are instructed “Kedoshim Tehiyu” — be holy. This positive commandment to follow a moral compass in our daily actions is a catch-all. It is recognition that we are faced with economic puzzles each day that call for moral clarity. Faced with the duality of interest as both a source of good and an instrument of evil – Kedoshim Tehiyu instructs us to use the Heter Iska where appropriate, but, also, take care to not exploit our neighbors in their time of greatest need.