Faith, Usury and Credit in the Middle Ages

The dead man who could not be buried

In a city of medieval Europe, on the death of a money-lender known to have practised usury, a terrible thing might happen: his body would be refused by consecrated ground. The priest denied Christian burial, and the family found itself with the corpse on its hands, shut out of the cemetery like that of a heretic or a suicide. The medieval Church regarded the usurer as a sinner of a particularly odious kind, and the preachers never tired of painting his damnation in nightmarish images: the usurer was he who did not rest even at night, because his money worked even while he slept; he was the one who sold time, which belongs to God alone; he was, in certain depictions, destined for a particular circle of hell, where Dante placed him beside the violent against nature, with a purse hung from his neck for eternity.

It is difficult, for our sensibility, to grasp fully the force of this condemnation. In the world we live in, interest is the most natural and obvious thing: every bank account, every mortgage, every government bond presupposes it, and no one thinks that whoever lends at interest is committing a sin. And yet for more than a millennium, in the heart of European Christendom, to lend money at interest was held a grave moral evil, condemned by councils, forbidden by canon law, preached as a sure road to damnation. This chapter tells the great paradox that arose from it: how a civilisation that condemned interest with such vehemence managed, nonetheless — or perhaps for that very reason — to build some of the most ingenious and enduring instruments of finance, and to lay the foundations of the modern credit system. It is the story of a ban and of the thousand ways it was circumvented; but it is also, more deeply, the story of how money, forced to hide behind fictions and subterfuges, learned precisely in those constraints to become more abstract, more mobile, more powerful.

It is well, before beginning, to clear the ground of a caricature. It would be easy, and false, to tell this affair as the clash between an obscurantist Church, enemy of progress, and enlightened merchants who wrested the future from its hands. The reality was far more intricate and interesting. The condemnation of usury was not dullness, but answered an authentic moral and social concern, the same we had seen at work in the Mesopotamian jubilees: the awareness that debt at interest, left to itself, can crush the weak and break up the community. And the men of the Church were not only censors: they were also, often, subtle theorists of law and economics, who elaborated distinctions and doctrines by which certain forms of gain on lending came little by little to be legitimised. The story that follows is not that of a wall torn down, but of a boundary continually redrawn, in a centuries-long dialogue between theology and business.

The sale of time

To understand why interest was condemned, one must enter the logic by which the medieval theologians thought it. The foundation was twofold: scriptural and philosophical. On the scriptural side, certain passages of the Bible seemed to forbid lending at interest, at least among co-religionists; and the word of Christ inviting men to lend hoping for nothing in return was read as a radical condemnation of every gain on a loan. On this basis the councils of the Church, in the course of the Middle Ages, progressively forbade usury to Christians, imposing ever more severe spiritual penalties, to the point of excluding impenitent usurers from the sacraments and from burial.

But alongside the scriptural ban there worked a philosophical argument, inherited from Aristotle, which gave the condemnation a rational guise and was, for the learned, its heart. Aristotle had held that money is by nature “barren”: a coin does not generate other coins, as a field generates grain or a flock generates lambs. Money was invented by men as a measure of value and a means of exchange, not as a fruit-bearing good; to claim that it should “breed” an interest is to denature it, to make it do what is not proper to it. Interest, in this view, is a gain against nature, because it draws a fruit from a thing barren in its essence. One notes the irony: we had seen in the first chapter that in Mesopotamia the very word for “interest” derived from the young of livestock, as though money ought naturally to breed; now Aristotle overturns exactly that metaphor, denying that money can generate anything at all. Two civilisations, two opposite intuitions about the nature of money, and from that opposition a millennium of disputes would be born.

The second argument, and perhaps the subtlest, was the one concerning time. The usurer, said the theologians, in reality sells something that does not belong to him: he sells time. When I lend a hundred and demand a hundred and ten after a year, those extra ten are the price of the time elapsed, of the waiting, of the deferral. But time is not a commodity a man can own and sell: time belongs to God, it is a gift made to all creatures, and no one has the right to make a market of it. The usurer who charges for time is thus a thief who sells what is God’s and everyone’s. This idea — that to charge for time is a usurpation of a divine good — has an undeniable poetic force, and marks the exact point where the medieval conception parts from ours. For us, time is precisely what justifies interest: a hundred euros today are worth more than a hundred euros a year from now, because in the meantime I could invest them, because I give up the use of them, because the future is uncertain. What for modern thought is the legitimate foundation of interest — the value of time — was for medieval thought the very reason for its condemnation. The whole history of the legitimation of interest is played out in this reversal, and we shall return to it because it is the conceptual heart of the chapter.

The cracks in the ban

A ban so clear-cut clashed, however, with an economic reality that would not let itself be cancelled. To grasp the force of this tension one must recall what was happening to the European economy in the very centuries when the ban on usury was reaching its greatest severity. Beginning roughly in the eleventh century, after the long retrenchment of the early Middle Ages, Europe knew what historians call the commercial revolution: cities grew again, the countryside produced surpluses to sell, trade rekindled along the routes of the Mediterranean and the northern seas, and a new class of merchants began to weave webs of business that crossed the borders of kingdoms. This awakening had an insatiable hunger for credit. A merchant organising an expedition to the East tied up considerable capital for months or years, facing enormous risks, and could not do it with his own money alone: he needed partners to put up capital, advances, loans. The paradox, then, becomes stark: at the very moment when the Church was stiffening its condemnation of lending at interest, the European economy had a growing and incompressible need of it. It was inevitable that between the two terms a space should open, and that this space should be filled by an ingenuity without equal.

Canon law itself, paradoxically, opened the first cracks, because the jurists of the Church elaborated a series of “titles” that justified a recompense even in the absence of usury. If the loan involved for the creditor a real risk of losing the capital, a recompense for that risk was lawful, because it was not the price of time but the covering of a danger. If repayment was delayed beyond the agreed term, the creditor could demand compensation for the harm suffered from the delay. If by lending he gave up a gain he would otherwise have obtained, he could have that lost gain compensated. Each of these distinctions opened a chink, and through those chinks passed, in time, much of medieval finance. The boundary between forbidden usury and lawful gain thus became matter for endless doctrinal discussion, a borderland continually redrawn by theologians and jurists, in which the practice of business and moral reflection chased and shaped each other.

There was, among the distinctions that medieval thought went elaborating, one particularly fruitful, because it caught a real economic difference: that between the loan for consumption and the loan for production. The case the condemnation of usury had most forcibly in view was that of the poor man who, reduced to hunger by a bad harvest or a misfortune, had to go into debt to survive, and whom interest crushed without escape: to lend at extortionate rates to a desperate man so as to profit from his need was, and is, something that repels the moral conscience, and on this case the condemnation kept all its reason. But different was the case of one who borrowed money not to survive, but to undertake: to finance a trading voyage, fit out a ship, start a venture that, if it succeeded, would yield far more than the capital invested. In this second case the loan did not oppress the debtor but put him in a position to earn, and the recompense to the lender appeared not as the exploitation of a need, but as the just share in a common enterprise. The distinction between the loan that succours misery and the one that feeds initiative — between consumer credit and productive credit — became one of the conceptual picklocks with which the lawfulness of interest made its way, and it is not hard to see in it an anticipation of the way we still distinguish today, morally and sometimes legally, predatory usury from the normal financing of economic activity.

Above all these expedients there towers in importance the bill of exchange, the invention that more than any other allowed medieval finance to prosper while circumventing the ban, and that deserves close examination because it is one of the great instruments in the history of money.

The bill of exchange

Let us imagine a merchant of Florence who must pay for a consignment of wool to a supplier in Bruges, in Flanders. To carry the gold or silver coins physically across half of Europe would be madness: journeys were long, roads infested with brigands, borders bristling with tolls, and the risk of losing everything enormous. The bill of exchange solved the problem elegantly. The Florentine merchant paid the sum in florins to a banker of Florence, and received in exchange a bill: a document by which the banker ordered his correspondent in Bruges to pay, to whoever presented the bill, the equivalent in Flemish money. The merchant sent the bill to the supplier, or had it conveyed to him through an agent; the supplier presented it to the banker’s Flemish correspondent and collected. No coin had crossed Europe: only a sheet of paper, a promise of payment, had travelled, and the value had passed from Florence to Bruges without a single florin leaving Tuscany.

This alone would suffice to make the bill of exchange a great invention: it made money mobile across space without physically moving the metal, dematerialising value into a writing, exactly as the Mesopotamian tablets had dematerialised it millennia before, but now across distances. Value returned to being what in the end it had always been: information, promise, the record of a credit. But the bill of exchange had a second use, subtler and more subversive, and it was this that made it so precious in the world of the usury ban: it allowed interest to be hidden inside the exchange between currencies.

Here is the mechanism. The bill did not merely transfer money across space: it transferred it also across time, because between the issue of the bill in Florence and its payment in Bruges weeks or months passed, the time of the journey and of the customary terms of the marketplace. And the exchange rate between the two currencies — how many Flemish pennies for a florin — was fixed so as to incorporate, covertly, a recompense for that time. A skilled banker combined bills of exchange out and back between two marketplaces, exploiting the differences between the exchange rates of the two currencies, and drew from it a profit that was, in economic substance, an interest on the capital advanced, but that in legal form was a gain on currency exchange, a perfectly lawful activity. Forbidden interest disguised itself as permitted exchange. The keenest theologians were not naïve, and suspected very well that behind the exchange usury often hid; they discussed it at length, distinguishing the “real” exchange, tied to a true transfer between marketplaces, from the “fictitious”, simulated for the sole purpose of masking a loan. But the matter was technical and elusive, the proof of usurious intent difficult, and in fact the bill of exchange became the instrument through which the international finance of the late Middle Ages and the Renaissance conducted much of its business, lending at interest under the false guise of exchange [Goetzmann 2016].

Who could lend

The ban on usury did not weigh on everyone in the same way, and this had profound social consequences, which must be told with precision because they touch one of the most delicate pages in European history. Since to Christians lending at interest was forbidden, while commerce and sovereigns desperately needed it, the role of the pawn loan and of small consumer credit was left in large part to those not bound by that ban, or bound differently. Among these, in many regions of Europe, were the Jews. Excluded from most trades and from landed property, pushed to the margins of Christian society, the Jews were often allowed — indeed, in a sense, left as one of the few possible activities — to lend at interest, precisely because the canon ban did not concern them and the Mosaic one permitted interest toward outsiders. Thus arose a situation as convenient as it was perverse for Christian society: an indispensable but morally condemned economic function was delegated to a minority, which performed it, drew from it a living, and paid the price in terms of hatred and precariousness.

This delegation was a trap. The Jewish lender, indispensable so long as there was need of credit, became the scapegoat when debtors — sovereigns included — wished to rid themselves of their debts or sought a target for popular discontent. The rancour toward the usurer, which preaching fed, joined with religious hostility, and from it came accusations, persecutions, expulsions: Jewish communities were driven from entire kingdoms, and not seldom the expulsion was also a convenient way to cancel the debts the powerful had contracted with them. It would be a mistake, however, and a historical simplification, to identify outright “Jew” and “lender”: the great majority of Jews did not practise lending, and lived by humble trades; and on the other hand much of medieval credit, above all the international and large-scale kind, was in Christian hands. Alongside the Jews, in fact, there lent also the “Lombards” — so were called generically the merchant-bankers of northern and central Italy, Tuscans in particular — who through the fictions of exchange and the lawful titles managed to lend at interest while remaining, at least formally, within the bounds of Christian law. The pawn-lending of the Lombards left its trace even in names: certain financial districts and certain pawnshops of Europe still bear, in their designation, the memory of those Italian lenders. The historical truth, in short, is that medieval credit was practised by many, Christians and Jews, each within his own constraints and with his own expedients, and that its moral condemnation struck the one with religious persecution and the other with suspicion, without ever managing to root out a function society could not do without [Homer & Sylla 2005].

The warrior monks and the first international bank

There is, in the heart of the Middle Ages, an affair that seems invented by a novelist, and that illustrates better than any other how credit could nest even where one would least expect it: the financial history of the Order of the Temple. The Templars arose at the beginning of the twelfth century as a monastic-military order, warrior monks vowed to protect pilgrims bound for the Holy Land. But within a few generations that religious order transformed itself, alongside its military mission, into something resembling in surprising ways an international banking network, perhaps the first of Christian Europe. The logic was, at first, practical. A pilgrim or crusader setting out for the East could not carry with him all the gold needed for the journey without exposing himself to robbery. The Templars, who possessed fortified houses along all the great routes, from western Europe to the Levant, offered a solution: the pilgrim deposited his money in a Templar house at home, received a document, and could withdraw the equivalent in a Templar house along the way or at his destination. Value travelled in the form of a writing, kept by the order’s network, while the gold stayed safe.

From this function of deposit and transfer the Templars passed to a true financial activity on a vast scale. They kept treasures on behalf of kings and of private persons, because their fortified houses and their reputation for reliability made them the safest depositaries of the time; they granted loans, managed estates, served as treasurers for sovereigns. Their religious character conferred on them an aura of inviolability and trust that no lay banker could boast, and their international network, governed by an order’s discipline, gave their credit an unequalled solidity. For a couple of centuries the Order of the Temple was, among other things, one of the great financial powers of Europe.

And this very thing was, in the end, their ruin, in an episode that shows the dark side of the relationship between credit and power. At the beginning of the fourteenth century the king of France, Philip the Fair, heavily indebted and short of money, set his eyes on the wealth of the order. In 1307 he had the Templars of the kingdom arrested en masse, in a single day and by treachery; he subjected them to infamous trials, founded on charges of heresy and impiety extorted by torture; and he obtained at last, pressing on the pope, the suppression of the order, sanctioned around 1312, and the confiscation of its goods. The grand master was burned at the stake some years later. The destruction of the Templars is surrounded, even today, by a thick fog of legends — hidden treasures, curses, secret survivals — of which it is well to be wary almost always: romance and esotericism have worked on it for centuries. But beneath the legends there remains a clear and instructive historical fact: one of the first great financial networks in European history was annihilated not by an economic failure, but by an act of force of political power, which found it more convenient to destroy its creditors than to pay them. It is a lesson we shall meet again, with other protagonists, in the next chapter: credit that lends to kings always walks a tightrope, because the sovereign debtor, when he will not or cannot pay, has force on his side [Ferguson 2008].

The fairs and the debt of cities

While the bill of exchange made money mobile between marketplaces, medieval Europe was also building the places and institutions in which that money circulated and multiplied. The fairs of Champagne, in north-eastern France, were for a couple of centuries the great commercial and financial crossroads of the continent: merchants from all over Europe converged there, the cloth of the North met the spices and products of the Mediterranean, and above all accounts were settled there. For the fairs were not only markets of goods: they were also, and increasingly, markets of money and credit, where debts contracted elsewhere were settled, bills of exchange discounted, loans renewed. Little by little the financial function of the fairs took precedence over the mercantile one: what was really exchanged there, in the end, was not so much the bales of wool as the promises of payment, and the calendar of the great European fairs became the rhythm on which the financial heart of the continent beat, the deadlines at which the debts of half of Europe came to maturity and to settlement.

But the most future-laden innovation matured in the city-states of Italy, and it concerns the birth of something that would change forever the relationship between money and the state: public debt. The Italian merchant republics — Venice, Genoa, Florence — had a chronic need of money, above all to finance their wars, frequent and costly. To procure it, instead of resorting only to the loans of individual bankers, they had recourse to a new practice: the forced loan. The state imposed on its wealthier citizens that they lend it money in proportion to their wealth; but — and here is the great invention — it was not a tax to be lost, but a loan, on which the state recognised an interest and which it undertook, at least in principle, to repay. The credits of the citizens toward the state were recorded in special public registers, in a fund of the debt that in Venice and elsewhere was called the monte, and — a decisive step — those credits could be ceded, sold to others. The negotiable public debt security was born: a piece of wealth that was neither land nor goods nor money, but a promise of the state to pay an interest and one day the capital, and that precisely as a promise could circulate, be bought and sold, change hands.

Alongside the monte of the public debt, the same late-medieval world saw the birth of another institution that bears in its name the same word, but answered an opposite and revealing purpose: the Monte di Pietà. Promoted from the fifteenth century above all by the Franciscan friars, who made of help to the poor their mission, the Monte di Pietà was a pawnshop of a charitable nature: it lent to the needy small sums against the deposit of an object in pledge, applying a modest interest, the minimum necessary to cover the costs of running the institution. Its declared purpose was to wrest the poor from the claws of the usurers, offering them credit on humane terms where otherwise they would have found only the loan shark. But the Monte di Pietà raised, precisely because it applied an interest, a lively theological controversy: was it lawful that a pious institution should charge an interest, however small, however to the poor and for their good? From it arose a heated debate, which concluded with the recognition of the lawfulness of that moderate interest, as destined not to profit but to the survival of the charitable work. The affair is instructive because it shows the doctrine of usury in the act of transforming itself from within, forced by reality to distinguish between the predatory interest of the loan shark and the legitimate interest of one who lends for a good end and to cover real costs: another step, and one of great symbolic weight because taken within the Church itself, toward the normalisation of interest.

The significance of the invention of negotiable public debt is hard to overstate, and we shall return to it at length in the book. For the first time, the state financed itself not only by taxing, but by selling its own debt to the citizens, turning subjects into creditors and the public debt into a form of investable wealth. Value, once again, had dematerialised into a promise: the monte security was worth not for what it was — an entry in a register — but for what it promised, the interest and the repayment. And meanwhile, through the loans of the monti, interest too found a de facto legitimation: because if it was the state itself, the public authority, that recognised and paid an interest to its creditors, it became ever harder to maintain that all interest was, as such, sin. The interest-bearing public debt was, among other things, a powerful force of normalisation of interest [Davies 2002].

Why interest

We come thus to the conceptual knot of the chapter, to the question the medieval history raises of itself: why, in the end, was interest accepted? For what reason did a gain condemned for a millennium as mortal sin end by being recognised as lawful, to the point of becoming the obvious and undisputed foundation of all modern finance? The answer lies not in a single event, in a date, in a decree that from one day to the next abolished the ban. It lies in a slow change in the way of thinking money and time, matured in those centuries of fictions and distinctions, and whose deep logic we can grasp.

The heart of the question, as we anticipated, is time. The medieval conception condemned interest because it saw in time a good of God, which no one could sell. The modern conception legitimises interest because it sees in time, precisely, what gives value to money. Between the two views stands a recognition that matured gradually in practice before ever in theory: the recognition that to dispose of a wealth today is worth more than to dispose of it tomorrow, and that whoever gives up that “more” by lending has a right to a recompense. The reasons for this “more” are three, and they were already implicit in the titles the canon jurists had elaborated to justify lawful gain. The first is risk: whoever lends may not be repaid, and a recompense for this danger is just, because it remunerates not time but uncertainty. The second is opportunity cost, what the medievals called the foregone gain: whoever lends gives up the alternative uses of his money, and that renunciation has a price. The third is time preference, the human propensity to value the present more than the future: a good available at once is preferable to the same good available later, and this preference, universal, founds the value of time in economics.

This conceptual labour did not take place against theology, but in large part within it, and it is another point on which it is well to insist so as not to fall into the caricature of the Church as enemy of money. The great scholastic theologians, and Thomas Aquinas above all, devoted to the question of usury analyses of extraordinary finesse, and it was precisely they, with their distinctions, who built the intellectual scaffolding that would later make it possible to legitimise interest. Thomas reaffirmed, it is true, the ban, founding it on the Aristotelian idea of the barrenness of money and on the argument that to charge for the use of a thing consumed in using it — like money spent — is to charge twice for the same thing. But in discussing the exceptions, in weighing the titles that justified a recompense, in distinguishing the cases, he and his successors sharpened conceptual instruments that went in the opposite direction. Particularly important was the reflection on the societas, the contract of partnership: if two persons associate in an enterprise, one putting in labour and the other capital, and divide the gains and the losses, whoever has furnished the capital has a right to a share of the profit, and this is not usury, because he shares in the risk of the enterprise. From this figure — the capital that, sharing the risk, has a right to the fruit — would sprout much of modern finance, from the joint-stock company to venture investment. The theologians who believed they were defending the ban were, without knowing it, building the foundations of its end.

When these three reasons — risk, opportunity cost, time preference — came little by little to be recognised as legitimate foundations of a recompense on a loan, the ban on usury lost its basis, and interest ceased to be sin to become what it is for us: the price of time and of risk, the remuneration of one who puts his capital at the disposal of others. The transformation was neither rapid nor painless, and it was not the work of a single thinker or a single school: it was the slow settling of a new evidence, against which the old condemnation long fought a rearguard battle. But the sense of the change is clear, and it is one of the great watersheds in the history of money. The Middle Ages had inherited from Aristotle the idea that money was barren; it came out with the opposite idea, that money, set to work in time, is fecund, and that to make a capital bear fruit is not against nature but is indeed the very motor of prosperity. In this conversion — from barren money to fecund money, from the time of God to the time that has a price — is enclosed the birth of the modern financial mentality.

To this change of doctrines there corresponded, slowly, a change of mentalities and of images, which is perhaps the deepest sign of the transformation under way. The figure of the merchant, long regarded with suspicion — he who buys cheap to sell dear, who gains without producing, who handles others’ money — began to redeem and ennoble itself. Commerce was seen ever more not as a morally suspect activity, but as a service rendered to society, which brings goods where they are needed and makes cities flourish; and the honest, diligent merchant, who kept his books scrupulously and honoured his commitments, became a respectable figure, even an exemplary one. The merchants themselves fed this new image: many of them, tormented by the suspicion of having gained unlawfully, left by testament large sums to works of charity, restitutions, pious foundations, as if to redeem with benefaction the shadow of usury that might weigh on their affairs. It was a way, this too, of reconciling money with conscience, of holding together faith and profit. And meanwhile, in the shops and counting-houses of the Italian cities, the instrument was being refined that would give that new class its most powerful weapon and its clearest conscience: the systematic keeping of accounts, the ledger in which every debit and every credit found its place. But of this, and of the men who made of it an empire, we must speak in the next chapter.

There remains, of this whole affair, a last lesson worth retaining, because it belies an easy moral. One might think that the ban on usury only hindered the development of finance, holding it back for centuries with a religious prejudice. But the truth is subtler and more surprising: it was precisely the need to circumvent the ban that drove the medieval merchant-bankers to invent instruments of an extraordinary refinement — the bill of exchange, the trading companies, the public debt securities — that no society free of the ban, and therefore free to lend openly at interest, would have needed to conceive. Constraint, as often happens, was the mother of invention. And money, forced by moral condemnation to dematerialise itself, to hide behind currency exchange, to travel in the form of a writing rather than of metal, learned precisely in those constraints to become what it would more and more be: not a thing, but a promise running across space and time. It is to those who made of those promises an empire — the great bankers of the Renaissance — that the next chapter is devoted.