Last year, I gave a talk in which I suggested that one of the most consequential changes to the rules governing money had taken place nearly five hundred years earlier, during the reign of Henry VIII.
Most people remember Henry for his six wives, his determination to secure a male heir, and his break with the Roman Catholic Church. Far fewer associate him with a change in the law governing usury — the practice of charging for the use of money lent.
Yet I had become convinced that this change was enormously important. I suspected it had helped set in motion developments whose consequences continued to shape our financial system centuries later.
At the time, I was particularly interested in the circumstances surrounding Henry’s break with Rome. I wondered whether his determination to resolve his marital difficulties, despite the objections of the Church, had opened the door to further compromises with principles that had previously been regarded as inviolable.
It was a compelling story, and I told it with considerable conviction.
But was it true?
Recent events have brought me back to that question.
If you’ve been following my previous newsletters, you’ll know that my concerns about Bitcoin have led me to reconsider some of the assumptions I once held about decentralisation, governance and the rules that determine how a system operates.
That process has also brought me back to an idea I had been considering long before I wrote Truth Decay: an investigation into why rules designed to produce good outcomes sometimes produce results very different from those intended.
I called it Bad Rules?
The question mark is important. Before deciding whether a rule is good or bad, surely we ought to understand what problem it was intended to solve, how people responded to it, and what happened when it was changed.
So I decided to return to Henry VIII and the history of usury. But rather than beginning with the king, I wanted to understand the rule he had inherited.
Why had charging interest been regarded as such a serious moral problem in the first place?
A World Without Interest?
Today, interest is so familiar that we rarely question its legitimacy.
We pay interest on mortgages, credit cards and business loans. We receive it on savings. Governments borrow enormous sums and pay interest on their debts. The financial system relies upon the assumption that money available today has a value different from money available at some future date.
To most of us, this seems perfectly reasonable.
If I lend someone my savings for several years, I give up the opportunity to use that money myself. I accept the possibility that I may never see it again. Why shouldn’t I receive something in return?
And if someone has the ability and determination to establish a business but lacks the money to purchase the equipment they need, a loan could transform their life.
Without access to capital, their productive potential might never be realised.
Surely lending can be a good thing?
Yet for centuries, influential religious and philosophical thinkers regarded usury as a serious injustice.
At first glance, it is tempting to dismiss their objections as belonging to an earlier age, when people understood far less about economics.
But I’ve learned to be wary of that temptation.
Sometimes an idea that appears foolish from our modern perspective begins to look rather different when we understand the problem its advocates were trying to solve.
And the more I read, the more I began to suspect that the medieval objections deserved considerably more attention than I had previously given them.
What Is Money Supposed to Do?
The objections to usury did not begin with medieval Christianity.
Aristotle, writing in ancient Greece, distinguished between acquiring wealth through productive activity and acquiring it through money itself. He regarded money primarily as something that facilitated exchange, rather than something that should generate more money merely by being possessed.
His concern was not identical to the later Christian prohibition, but it raised a question that remains surprisingly relevant.
What is money actually for?
Is it simply a means of exchanging the things people produce? Is it a store of purchasing power? Or should the possession of money itself provide an entitlement to an increasing share of the wealth produced by others?
These are not quite the same questions.
The biblical objections to interest introduced another concern.
In passages such as Exodus and Leviticus, lending is discussed in the context of poverty and the obligation to support people who have fallen into difficulty.
Imagine someone whose harvest has failed, leaving them unable to feed their family until the following season.
A neighbour has sufficient grain or money to help.
Should that neighbour be entitled to profit from the family’s misfortune?
There is something deeply uncomfortable about the idea that one person’s desperation should become another person’s financial opportunity.
And I don’t think that discomfort has disappeared simply because we now live in a world of banks, financial markets and electronic payments.
We still recognise the difference between helping someone through a difficult period and exploiting their lack of alternatives.
The difficulty comes when we try to establish exactly where that difference lies.
The Surprising Sophistication of Medieval Thinking
One of the books I read while travelling was Odd Langholm’s The Legacy of Scholasticism in Economic Thought: Antecedents of Choice and Power.
I won’t pretend it was light holiday reading!
But it helped me appreciate something I had previously underestimated. Medieval scholars were not simply repeating religious prohibitions without considering their practical implications. They were wrestling with difficult questions about value, justice, coercion, risk and the circumstances in which an exchange could genuinely be considered voluntary.
Thomas Aquinas, one of the most influential medieval theologians, developed an argument against charging for the use of money lent.
His reasoning was that money, when lent for spending, was rather like wine or grain. Its ordinary use involved consuming or transferring it. Charging separately for that use, while also requiring repayment of the original amount, appeared to him to involve charging twice for the same thing.
We may question whether that understanding of money adequately captures its economic possibilities, particularly the opportunities forgone by someone who lends it.
But Aquinas was not simply objecting to people becoming wealthy.
He was attempting to establish what constituted a just exchange.
And here I encountered something that surprised me.
Aquinas distinguished between an ordinary loan, in which the borrower was obliged to repay the principal, and an arrangement in which someone provided capital to a merchant while sharing the risk of the venture.
In the latter case, receiving a share of the profits could be legitimate.
He also recognised that a lender might reasonably be compensated for certain losses actually incurred because of a loan.
The distinctions were not identical to our modern understanding of investment and interest, and medieval scholars did not all agree about where the boundaries should lie.
Nevertheless, the picture was considerably more nuanced than the simple claim that the Church prohibited anyone from receiving more money than they had originally provided.
The underlying concern was not merely whether money could generate a return.
It was whether the arrangement was just.
And that brought me to an even more difficult question.
When Is a Choice Really a Choice?
Suppose two people approach a lender.
The first has developed a promising business idea but needs money to purchase equipment. The loan will enable them to produce something valuable, earn an income and perhaps employ others.
The second has no business opportunity. They are struggling to pay for food and shelter and see borrowing as their only immediate means of survival.
Both agree to repay the money with interest.
Both sign their contracts voluntarily.
But are these transactions morally equivalent?
This is not an entirely theoretical question for me, because I have experienced something of both situations.
In 2007, I borrowed money to establish my own dental practice. I had the skills, the determination and the willingness to work, but I didn’t have the capital necessary to get the business off the ground. Borrowing was the only realistic way I could turn my productive energy into a business of my own.
The interest rate was 11%.
At the time, I accepted that as the price of the opportunity. Without the loan, I couldn’t have established the practice. I was investing in my future, and I believed that the business I built would eventually justify the cost of borrowing.
But I was also extremely naive about money and how the financial system worked.
I opened my business just as the world was approaching the financial crisis of 2008. What followed was far more difficult than I had imagined. During the second, third and fourth years of building the practice, I found myself operating on the verge of bankruptcy.
The business needed time to become established, but the financial obligations didn’t wait for it to become profitable.
And eventually I found myself needing another loan, not to expand my productive capacity, but simply to pay the bills and cover the necessities of life while I struggled to keep the business going.
I had moved from being the first borrower in our example to being the second.
Yet nothing fundamental about my ambition, my willingness to work or my ability to provide a useful service had changed.
The circumstances surrounding the debt had changed.
Looking back, I can see that the original loan gave me an opportunity I might otherwise never have had. I can also see how the obligation to service that debt became an additional burden at precisely the moment when my business was most vulnerable.
Was the original loan a good thing or a bad thing?
I don’t think the answer is straightforward.
Nor do I think the fact that I agreed to an 11% interest rate necessarily tells us whether the arrangement was fair. The lender was taking a risk, and I was asking to borrow a substantial amount of money to establish a new business. But I was also making a decision without fully understanding the financial system or the economic risks I was taking.
And the consequences of that decision were not confined to the purpose for which I had originally borrowed.
This experience has made me particularly interested in the medieval thinkers’ concern with choice, necessity and power.
A transaction can be legally voluntary without the parties having anything approaching equal bargaining power. And someone who initially borrows to create an opportunity may subsequently find themselves borrowing simply to survive the obligations that opportunity has created.
Of course, prohibiting interest would not necessarily have helped me. Without access to that first loan, I might never have established my practice at all.
And that is precisely the dilemma.
If we prohibit interest entirely, we may prevent exploitative lending. But we may also prevent people from obtaining the capital they need to improve their lives.
If we permit interest, we may enable productive investment and economic opportunity. But we may also allow debt to become an increasingly heavy burden when circumstances change.
We could try to distinguish between different kinds of loans, different borrowers and different purposes.
But who would make those distinctions? How would they be enforced? And how could we prevent people from finding ways around the restrictions?
I began to see that the challenge was not simply deciding whether usury was right or wrong.
It was devising rules that could distinguish between circumstances in which lending was beneficial and circumstances in which it became exploitative.
And that is a much harder problem.
What Happens When Rules Meet Human Behaviour?
There was another discovery waiting for me.
For all the medieval objections to usury, lending and credit did not disappear.
Merchants still needed to finance trade. Goods had to be transported between distant markets. Money was required before profits could be realised, and commercial ventures involved risks that had to be shared.
People developed increasingly sophisticated arrangements involving partnerships, bills of exchange and other forms of finance.
Some genuinely differed from ordinary loans because the participants shared commercial risks. Others raised difficult questions about whether prohibited returns were simply being obtained through more complicated transactions.
This is where my interest in rules and incentives becomes particularly relevant.
A rule may be intended to prevent a particular behaviour. But the people affected by it do not necessarily abandon their objectives. They may look for alternative ways to achieve them.
Sometimes those alternatives are beneficial innovations. Sometimes they undermine the purpose of the original restriction.
And sometimes it is extraordinarily difficult to tell the difference.
So I found myself reconsidering the story I had told about Henry VIII.
I had approached the subject believing that an important moral safeguard had been weakened, perhaps opening the way for centuries of increasingly problematic financial arrangements.
I still believe the medieval concerns about exploitation were valid.
But I can now see that the rules themselves presented serious difficulties. They attempted to preserve an important moral distinction in a world where the economic realities were becoming increasingly complex.
And that left me with a question I had not properly considered before.
What happens when a society believes a practice is morally dangerous, but cannot find an effective way to prevent it without also preventing something beneficial?
Does it strengthen the prohibition?
Does it create exceptions?
Or does it begin to permit what it still believes to be wrong, hoping that regulation will contain the harm?
Enter Henry VIII
This is where our story is about to take an unexpected turn.
In 1545, during the reign of Henry VIII, the English Parliament passed legislation establishing a legal ceiling of 10% on lending.
But there was something remarkable about the statute.
Although it allowed lending within that limit to escape the penalties imposed by the law, it still described usury as unlawful.
Henry’s government had not simply announced that the moral objections were mistaken.
Instead, England was moving towards a distinction between what was regarded as morally wrong and what the law would tolerate.
Why?
Was this a pragmatic response to the difficulties of enforcing earlier prohibitions? Was it connected to England’s changing commercial needs, the financial pressures on the Crown, or the extraordinary political and religious upheavals Henry had set in motion?
And how much did Henry’s break with Rome matter to the authority of the English state to make such a change?
Those are the questions I want to investigate next.
Because Henry VIII did much more than challenge the authority of the Pope over his marriage.
He helped transform where England located the power to decide its own rules.
And once that authority had changed, the consequences might extend far beyond the question that had first brought it into dispute.
I began this investigation believing I understood the significance of Henry’s decision.
I’m no longer quite so sure.
But I am increasingly convinced that understanding what happened next may tell us something important about how rules change, how people adapt to them, and how the consequences of those changes can compound over time.
Until next time, enthusiasts!
Victoria
Next time: Henry VIII — The King Who Changed the Rules.
Usury Laws
If you would like further context on my views on Henry VIII and his impact on usury Laws. Watch this talk I gave last year at the Mallorca Blockchain Conference.
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