A friend asked me recently to share some of my thoughts on usury--the meaning of the OT prohibitions, their validity in the NT, and their applicability in the modern world. As usual, my thoughts turned out to be rather wordy, so I decided it was worth exploring them in a two- or three-part blog series.
So, what was the original purpose of the ban on usury in the Old Testament?
I do not buy the idea that the ban on usury was simply on charitable loans, that commercial loans of any sort were not envisioned, because they weren't relevant in that sort of economy. On this reading, they were relevant in the economy of trading with non-Israelites, and that was why the law in Deuteronomy permitted them to charge interest to aliens. From the reading I have done, it seems the main function of loans in the ANE economy at the time the usury laws were given was to finance farmers--either simply to buy seed to plant extra crops for the next year, or to expand their fields to increase their production; a hefty portion of the crop's yield was then usually demanded as interest. Now, this means that such loans fell somewhere along a spectrum between commercial and charitable. For the very small subsistence farmer, who was so poor he hadn't been able to save any of his seed from the year before, and had to take out a loan to buy seed to plant a crop for the coming year, the loan would have much of the character of a charitable loan. For a more well-off farmer, who was looking for an opportunity to rapidly boost his production, such loans would have been basically commercial loans. Clearly there was then a significant place in even a rather agrarian economy like ancient Israel for productive commercial lending. So I don't buy the idea that the ban was simply not envisioning the possibility of such loans.
Why then would God have wanted to ban usury, even in cases when it wasn't straightforwardly exploiting a brother? Three reasons, it seems to me. First, because even prudent commercial loans, for clearly profitable enterprises, can quickly become enslaving. Human nature being what it is, people tend to grasp for more than is wise, overconfident in their abilities, and so a borrower will borrow a little more than he can really afford at a higher rate than he can really afford, and will soon find himself and his farm at the mercy of his creditors; this would be particularly so in an agrarian economy where so much one's production depended on factors outside one's control. The instability and unhealthy dependency that widespread credit introduces into an economy can be readily seen in our current financial crisis. God wanted his people to be free, and such freedom would quickly be endangered if for-profit lending was allowed a large foothold in their economy.
Second, because credit-driven production requires aggressive expansion. To make an interest-paying loan worthwhile, you have to use it to expand your business and boost your production at a higher rate than the rate of interest; and of course, credit enables you to expand much faster than you would otherwise be able to do. Of course, this is why credit is viewed as so wonderful and absolutely necessary in the modern economy--we are told that it is the only way in which we could generate as much economic growth as we have seen in the past couple centuries, and this is the way we're going to overcome poverty. But of course, the problem is that credit-driven growth does not end poverty, because it increases inequality, at least, it certainly does in an economy like ancient Israel, where, with a limited amount of land to go around, and most of the economy dependent on the land, the only way for a borrower to expand his enterprise is to dispossess other smaller producers. And then, of course, once he has expanded his enterprise so that he is much larger than nearby producers, he can command a much lower rate of interest than smaller borrowers, and so is able to continually strengthen his position relative to them. In short, interest-bearing credit helps to consolidate larger and larger slices of the pie in certain hands at the expense of others.
Third, because usurious credit reduces the need for cooperation and interdependence, since its absence would have to be filled either by interest-free loans or capital investments. Interest-free loans would be more likely to establish brotherly relationships among Israelites, instead of the master-slave relationships that usurious credit would tend to engender. If such loans were not forthcoming, then an Israelite wanting to embark on a risky business enterprise would need to solicit cooperative investment from fellow Israelites, who would share both the risk and the profits of the venture with him, instead of having a low-risk claim on his assets should he fail, as the creditor would. This would mean a greater likelihood that Israelite society would be characterized by relationships of cooperation and interdependence.
The chief rationales for banning usury then, it seems to me, are just the same as that for the seven-year debt cancellation and the Jubilee law: to maintain a well-distributed possession of the land and its produce, in which each family maintained its patrimony; without these policies, there would have been a tendency over time for the land ownership to become gradually consolidated in wealthier hands, while more and more Israelites would become landless serfs. With these policies, the people of God would be more likely to be free, equal, and interdependent.
Why then were they allowed to lend to foreigners? The answer seems simple enough, if the problem with usury was not so much that there was something inherently unjust about charging it, but rather that its regular practice would have baleful implications for the economy of God's people. Since the economies of the foreigners already operated on usury, with the inequalities and difficulties this created, then for the Israelites to lend to them would not have any serious effects on them, and such lending would presumably have remained a relatively small part of the Israelite economy--clearly, the law was not designed for the kind of permanent Diaspora that made money-lending the core of the Jewish economy for two millenia.