20 July 2010

Is Usury Good?

My wife and I are currently studying the informal credit market in Morocco as part of a worldwide study aimed at improving the provision of microfinance. It has gotten me thinking about usury, a term which by the original Latin definition simply means the charging interest on loans, although more recently it has referred to the charging of unreasonable or deceptive amounts. So is usury good (going by the original definition)?

It has a mixed and controversial history. Since Wikipedia has an excellent recap of it, and since I just lost 2 hours worth of work writing about it, I will just give a brief outline. Some of the ancient civilizations, including Ancient Egypt and Mesopotamia saw it as legitimate and natural, within certain limits. More recently, philosophers, prophets, clergy, and others have considered it wicked and exploitative. The Torah allowed Jews to charge interest only to foreigners, which led to them being the primary financiers (and scapegoats) during much of the European middle ages when they were denied entry into most other occupations. Jesus never explicitly forbid it, although he did make numerous references to charity. The Quran on the other hand explicitly prohibited usury.
"Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever 
God condemns usury, and blesses charities.God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew."
-Al-Baqarah 2:275-280


Which leads Sjona and I to our current predicament. It is incredibly difficult to research informal credit in a country (Morocco) where informal interest is both illegal and forbidden by Islam. Yet, there are microfinance institutions and banks, many of which charge interest. Many people choose to put their money in a non-interest bearing account. Also there are some Islamic banks that will lend money as an "investment" and will share in the profit or loss incurred, which is different than interest which must be paid regardless of the success of the enterprise. This system is a clever work-around, but it still leaves some difficulties. What if a family wants to buy a house that they plan on living in, how is a bank going to "invest" in that?

But is the alternative really better? After the most recent financial crises, many around the world regard financial institutions, from banks to credit card companies with suspicion. From the proliforation of subprime mortages to exorbitant hidden credit card fees, this suspision is well justified.

Many economists would argue that the charging of interest, properly regulated, is crucial for an economy to grow - that in a decentralized economy the interest mechanism directs capital to be spent where it is most productive, in the most efficient manner. In a modern capitalistic economy, it is because of interest, and the banks profit motive, that I can get a mortgage to buy a house, or get a loan to start a business. Who else would be willing to lend me that much money, my rich parents?

In microfinance, there has been an ideological struggle between those that support microfinance as charity and those that support it as business. While charity might offset the high cost of microfinance for the poor*,  many argue that it is not sustainable and will have a limited impact overall. By charging higher interest rates, microfinance businesses argue that they can cover their costs and use the profits to serve larger segments of the population than what would have otherwise been possible. The rapid proliferation of for-profit microfinance is a testament to this. There is definitely a previously unmet demand of people willing to pay a lot for credit. This is not to say that the industry shouldn't be properly regulated to prevent exploitation, or that costs cannot and should not be brought down through such things as more efficient administration and business model innovation, perhaps spurred by a healthy level of competition among providers.

*High cost coming from the very large amount of tiny transactions, and in some cases a high rate of default where there is no collateral.

If we are willing to concede the economic point, that the charging of interest within a just regulatory framework can be economically productive, does that make it good in principle? Is there a better option out there? Interestingly enough, in the tablet of Ishraqat, Baha'u'llah explicity lifts the ban on usury formerly instituted in Islam.

*note - I had originally posted a shortened version of this quote that I had found on a Baha'i economics compilation website. A reader pointed out that it wasn't the full quote, and so it didn't provide enough context. I have since reposted the full quote. 
As to thy question concerning interest and profit on gold and silver: Some years ago the following passage was revealed from the heaven of the All-Merciful in honour of the one who beareth the name of God, entitled Zaynu'l-Muqarrabin [1] -- upon him be the glory of the Most Glorious. He -- exalted be His Word -- saith: Many people stand in need of this. Because if there were no prospect for gaining interest, the affairs of men would suffer collapse or dislocation. One can seldom find a person who would manifest such consideration towards his fellow-man, his countryman or towards his own brother and would show such tender solicitude for him as to be well-disposed to grant him a loan on benevolent terms. [2] Therefore as a token of favour towards men We have prescribed that interest on money should be treated like other business transactions that are current amongst men. Thus, now that this lucid commandment hath descended from the heaven of the Will of God, it is lawful and proper to charge interest on money, that the people of the world may, in a spirit of amity and fellowship and with joy and gladness, devotedly engage themselves in magnifying the Name of Him Who is the Well-Beloved of all mankind. Verily He ordaineth according to His Own choosing. He hath now made interest on money lawful, even as He had made it unlawful in the past. Within His grasp He holdeth the kingdom of authority. He doeth and ordaineth. He is in truth the Ordainer, the All-Knowing.
[1 One of the early believers who is best known to the friends for his reliable transcriptions of the Tablets of Bahá'u'lláh. (See Memorials of the Faithful pp. 150-153.) ]
[2 Such loans as bear no interest and are repayable whenever the borrower pleases.]

Render thou thanks unto thy Lord, O Zaynu'l-Muqarrabin, for this manifest bounty.

Many ecclesiastics in Persia have, through innumerable designs and devices, been feeding on illicit gains obtained by usury. They have contrived ways to give its outward form a fair semblance of lawfulness. They make a plaything of the laws and ordinances of God, but they understand not.

However, this is a matter that should be practised with moderation and fairness. Our Pen of Glory hath, as a token of wisdom and for the convenience of the people, desisted from laying down its limit. Nevertheless We exhort the loved ones of God to observe justice and fairness, and to do that which would prompt the friends of God to evince tender mercy and compassion towards each other. He is in truth the Counsellor, the Compassionate, the All-Bountiful. God grant that all men may be graciously aided to observe that which the Tongue of the One true God hath uttered. And if they put into practice what We have set forth, God -- exalted be His glory -- will assuredly double their portion through the heaven of His bounty. Verily He is the Generous, the Forgiving, the Compassionate. Praise be unto God, the Most Exalted, the Most Great.

Nevertheless the conduct of these affairs hath been entrusted to the men of the House of Justice that they may enforce them according to the exigencies of the time and the dictates of wisdom.

Once again We exhort all believers to observe justice and fairness and to show forth love and contentment. They are indeed the people of Baha, the companions of the Crimson Ark. Upon them be the peace of God, the Lord of all Names, the Creator of the heavens." -Baha'u'llah - Tablet of Ishraqat. Tablets of Baha'u'llah, pg 133

I wonder what has changed in 1300 years that it was once under the "devils influence", destined to "incur hell", and is now "lawful and pure"  and instrumental to worship with "joy and fragrance, happiness and exultation"? I don't mean this flippantly, I am really interested to know if there are practical reasons for such an abrupt shift, similar to the lifting of the ban on eating pork. 

I am personally relieved, as a Baha'i, that He has allowed usury for the practical benefits. But I am also glad that He goes on to advise moderation, justice, and equity, reminding us that it must be conducted in the spirit of mercy and compassion. This emphasis was definitely forgotten in the recent greed-fueled rise and collapse of the financial market.

It is also interesting that while "The Supreme Pen has withheld itself from laying down its limits, as a wisdom from his Presence and as a convenience for his servants", he has given the Universal House of Justice the authority to regulate it according to the "exigencies of the time".

So to come back to the original question: is usury good? It doesn't seem to be an intrinsic universal good, like love or charity, or an intrinsic universal bad, like murder or rape. Throughout history it has been useful AND destructive. It has been forbidden AND exalted by religion. I guess, like many other things, it is merely a means, the end of which depends on the spiritual state of those involved, and the context in which it is applied.

*Photo: Quentin Metsys, "The Moneylenders" (c. 1515)

23 comments:

  1. Thanks for posting this, Jason. I hadn't known that this question was explicitly addressed by Baha'u'llah.

    The phrase, "this matter must be conducted with moderation and justice," calls to mind the passage in the Prosperity of Humankind, section V, addressing the changes that will be asked of economics:

    "All people will have sooner or later to recover, for example, the capacity for contentment, the welcoming of moral discipline, and the devotion to duty that, until relatively recently, were considered essential aspects of being human."

    Baha'u'llah presents the matter of 'interest on money' hand-in-hand with the spiritual qualities of moderation, justice, and equity. This combination of material practice and spiritual attitudes suggests that credit/interest may be a 'capacity' that can be developed. The purpose of this capacity, perhaps, would be "that the mercy of His beloved ones, and their compassion, may be manifested toward each other."

    Articulating economic capacities that are aligned with the Writings of Baha'u'llah seems like an exciting space.

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  2. Lev,

    Thanks for the insightful comment

    I didn't know that Baha'u'llah had addressed it either, but I became curious because it is so ubiquitous, yet Baha'is never mention it has a problem.

    Your right, rethinking economics as a moral as well as a practical discipline will be increasingly important, and exciting, in the years ahead.

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  3. http://www.scribd.com/doc/19218645/null

    On page twenty of this publication there is a brief description of Baha'i-inspired community banking in Nepal. It gives a good overview, and certainly leaves the reader curious to learn more.

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  4. Thanks for the reference. ECTA's strategy of using local savings to self capitalize local lending is a good way to address the sustainability challenge, as well as promote local empowerment.

    Though I don't think acquiring outside capital is necessarily a bad thing in certain situations to augment the process...Each community must find what strategies work best for them, at the same time we are living in a world community that shares knowledge and resources.

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  5. From an economic standpoint, usury is necessary for lending to occur in a modern economy. Lending money COSTS money. Not just in administrative time etc., but in the opportunity cost of having that money issued as a loan rather than invested. In fact, receiving interest in money you put in the bank and paying interest on loans are 2 sides of the same coin and without one you could not have the other. Without interest paid on investments, there would be no investments. Think about how our economy would look in that case. I don't think 1300 years ago the economy was quite so complex as to require interest paid on money invested/loaned in order to function.

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  6. Thats a good point Jake, opportunity cost is also a good reason for usury. But there is another quite complex model of investment that doesn't require interest, that being the Muslim investment bank, which offers interest free savings accounts (turns out saving services are valuable even without accruing interest), and which shares both the cost or gain from the borrowers investment. Also, governments can also invest in their citizens interest free, or at a highly subsidized price. I think the main argument for usury is that it is the smartest way to allocate funds.

    Also, I agree with you that the complexity of the economy probably demands the use of interest, which might be the biggest practical reason that Baha'u'llah lifted the prohibition. So perhaps the economy didn't require usury in Muhammad's day, I wonder though, is that enough to turn something that at one time "incured hell" into something that leads people towards God, a more complex economy? What level of complexity does an economy need to have to turn something evil into something good?

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  7. Well I admit to not knowing much about Muslim banking practices, but I understand savings without interest can be beneficial in mitigating financial risk. My savings account provides so little interest that it's actually dis-savings when inflation is factored in, but I still have it (inflation, by the way, is another reason why usury is necessary). However, try not to look at individual components as examples of how usury is not necessary. Governments can only invest in citizens interest free or at subsidized rates because they are not competing with 1000s of other corporations. Governments also obtain funds via taxation. Profit is generally a necessary precondition to taxation. Businesses generally can't profit if there isn't a return on their investments. Most wouldn't even get off the ground without loans/investment. I think you'd also be hard pressed to find a successful Muslim economy that abides strictly by usury laws.

    The Baha'i Faith is the first to appear at a time when GLOBAL unity is possible. The interconnectedness (social/economic/spiritual) of the world now compared to 1300 years ago is unfathomable. This interconnectedness is necessary for world unity. We are also told, as Baha'is that material progress is a good thing, in fact part of our purpose here. Now if usury is necessary to continue material progress in a highly interconnected (and one day unified) world, then yes I think it makes sense that it goes from "evil" to "good."

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  8. Well said. I just found it striking that the same phenomenon could be described so differently by two successive prophets.

    When I mentioned government investment, I was thinking mainly of more socialist economies that have nationalized most, if not all of their major industries. If a government owns a company, then the profit goes to them directly, without any need to tax the company. They can then use this profit to reinvest in the company, or invest in another company, without the need to take a loan. Now of course, governments often borrow from other governments and pay interest....so yeah, round and round we go. I think we agree on the general point that usury is the most efficient (I know you dislike this word in an economic context) and only workable way to allocate investment in a globalized world.

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  9. Absolutely. It IS interesting to note the difference in successive prophets. I wonder what contrasts the next revelation will bring?

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  10. I hope the next revelation brings wine back...

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  11. Stick to Coke !

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  12. There are some shades of meaning that need to be addressed here. Usury may be synonymous with charging interest in a broad sense, but its more common meaning is excessive and/or unlawful interest. I do not think the principle of justice promoted by the Baha'i Teachings in general would permit usury. Usury equates to malicious, predatory greed whereas interest on principal in modest and commercially established levels does not and can therefore be considered an accepted business practice. It (predatory usury) may have been common during the time of Muhammad, thus possibly was disallowed then as a spiritual law, to restrain the base natures of people at the time.

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  13. Dear Jake,

    The reason usury was prohibited in former times is because it was generally poor peasants who had to borrow money for seed and then pay it back at exorbitant rates which meant the peasant would have to give up the bulk of his harvest to the lender and once again not be able to buy seed. He therefore was trapped in a cycle of debt peonage. What has changed in the last 1300 years is the emergence of merchant capitalism wherein big business depends on investment and loans.
    I would say that Baha'is should still avoid being involved in lending practices which exploit the poor.

    warmest, Susan

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  14. You didn't quote the entire passage, which mentions that too few people are generous enough in modern times, for a complete ban on usury to be enforced without causing more harm than good. That doesn't mean that usury is a good thing, though.


    "As to thy question concerning interest and profit on gold and silver: Some years ago the following passage was revealed from the heaven of the All-Merciful in honour of the one who beareth the name of God, entitled Zaynu'l-Muqarrabin [1] -- upon him be the glory of the Most Glorious. He -- exalted be His Word -- saith: Many people stand in need of this. Because if there were no prospect for gaining interest, the affairs of men would suffer collapse or dislocation. One can seldom find a person who would manifest such consideration towards his fellow-man, his countryman or towards his own brother and would show such tender solicitude for him as to be well-disposed to grant him a loan on benevolent terms. [2] Therefore as a token of favour towards men We have prescribed that interest on money should be treated like other business transactions that are current amongst men. Thus, now that this lucid commandment hath descended from the heaven of the Will of God, it is lawful and proper to charge interest on money, that the people of the world may, in a spirit of amity and fellowship and with joy and gladness, devotedly engage themselves in magnifying the Name of Him Who is the Well-Beloved of all mankind. Verily He ordaineth according to His Own choosing. He hath now made interest on money lawful, even as He had made it unlawful in the past. Within His grasp He holdeth the kingdom of authority. He doeth and ordaineth. He is in truth the Ordainer, the All-Knowing.
    [1 One of the early believers who is best known to the friends for his reliable transcriptions of the Tablets of Bahá'u'lláh. (See Memorials of the Faithful pp. 150-153.) ]
    [2 Such loans as bear no interest and are repayable whenever the borrower pleases.]

    Render thou thanks unto thy Lord, O Zaynu'l-Muqarrabin, for this manifest bounty.

    Many ecclesiastics in Persia have, through innumerable designs and devices, been feeding on illicit gains obtained by usury. They have contrived ways to give its outward form a fair semblance of lawfulness. They make a plaything of the laws and ordinances of God, but they understand not.

    However, this is a matter that should be practised with moderation and fairness. Our Pen of Glory hath, as a token of wisdom and for the convenience of the people, desisted from laying down its limit. Nevertheless We exhort the loved ones of God to observe justice and fairness, and to do that which would prompt the friends of God to evince tender mercy and compassion towards each other. He is in truth the Counsellor, the Compassionate, the All-Bountiful. God grant that all men may be graciously aided to observe that which the Tongue of the One true God hath uttered. And if they put into practice what We have set forth, God -- exalted be His glory -- will assuredly double their portion through the heaven of His bounty. Verily He is the Generous, the Forgiving, the Compassionate. Praise be unto God, the Most Exalted, the Most Great.

    Nevertheless the conduct of these affairs hath been entrusted to the men of the House of Justice that they may enforce them according to the exigencies of the time and the dictates of wisdom.

    Once again We exhort all believers to observe justice and fairness and to show forth love and contentment. They are indeed the people of Baha, the companions of the Crimson Ark. Upon them be the peace of God, the Lord of all Names, the Creator of the heavens."

    (Baha'u'llah, Tablets of Baha'u'llah, p. 133)

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  15. In Muslim countries, Baha'is will certainly obey the ban on usury, though, because our teachings command that we live as peace-loving, law-abiding citizens, who try to live in harmony with other people, and who believe in the Qur'an as a book revealed by God.

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  16. Ned,

    As I state in the introduction, I am referring to usury by its original Latin definition, which I was trying to imply was the commercial level set by a non-monopolistic market equilibrium . I am definitely not advocating it in the predatory sense.

    Susan,

    Thanks for the historical example, it definitely gives good perspective as to why Muhammad prohibited the practice. I think we can all agree that exploitation of any kind is bad

    Anonymous,

    Thanks for providing the full quote. I found the posted quote on an Baha'i economics compilation site, and I should have gone to the original reference, which includes much more context.

    So do you think interest is not good, only necessary due to our limited spiritual state? If so, aren't we allowing the ends to justify the means?

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  17. Good point Susan. I think we generally agree. I have no doubt that the reasons you cite are the main cause of the ban on usury. However, peonage still exists in many parts of the world today. Why then would Baha'u'llah create a law that re-opened up a segment of population to exploitation? I still feel that the core of this lies in the movement towards interconnectedness and world unity.

    Psychological and economic research has found that trust and cooperation can only occur in small groups, where interactions are repeated and where the nature of the actors is known. This probably describes most market interactions 1300 years ago. Therefore, lending without interest is feasible since the risk premium (risk premium is the value of the difference between a risky and a risk free investment/loan) is small or non-existent. That is not to say that exploitation could not happen under such circumstances (it clearly did), only that a ban on usury would not greatly hinder economic activity, and in fact could be beneficial. In today's society, however, the group is very large (not only do we have huge banking chains, but also internet transactions), transactions between 2 specific actors are rarely repeated (also due to sheer numbers of lenders/borrowers in the same market), and each actor knows very little about the others. In this case the risk premium of lending is high because default is more likely, or at least perceived to be more likely. Not allowing interest to be charged would significantly hinder commerce in a global economy because lending and investment would grind to a halt. The most recent economic crisis illustrates this.

    Also, to address the question posed in the post above mine, I think that it's not that interest on money isn't a bad thing. Rather it's that in earlier times, our spiritual and socioeconomic conditions led it to be harmful. In today's society we are creating the material and spiritual conditions for a unified world. With that in mind I think it's more that we are approaching a spiritual state wherein we can actually practice usury in a spiritual manner rather than a predatory one.

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  18. Here is another relevant quotation from Baha'u'llah about Baha'i debtor-creditor ethics:

    2047. In connection with the demands for payment of which thou hast written in thy letter, it is manifestly clear that anyone who hath the ability to settle his debts, and yet neglecteth to do so, hath not acted in accordance with the good pleasure of the one true God. Those who incur debts should strive to settle them with all diligence and application. God's binding commandments with respect to trustworthiness, uprightness and the honouring of rights have been recorded in clear and perspicuous language in all the sacred Books, Tablets, Scriptures and holy Writings. Well is it with him whom the fleeting vanities of the world have not deprived of a lasting adornment, and whom avarice and negligence have not shut out from the illumination of the sun of trustworthiness. These matters, however, depend on the existence of ability, for the making of a demand is contingent upon ability to meet it. By the Lord of the Book, the former is not permissible in the absence of the latter. To this testifieth the Verse: "Respite thy debtor till he findeth means to pay."[1]
    [1 Qur'án 2:280]

    (From a Tablet- translated from the Arabic)

    (Compilations, The Compilation of Compilations vol II, p. 336)

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  19. Here are 2 more related Baha'i quotations (keyword search for "financier"):

    A financier with colossal wealth should not exist whilst near him is a poor man in dire necessity. When we see poverty allowed to reach a condition of starvation it is a sure sign that somewhere we shall find tyranny. Men must bestir themselves in this matter, and no longer delay in altering conditions which bring the misery of grinding poverty to a very large number of the people. The rich must give of their abundance, they must soften their hearts and cultivate a compassionate intelligence, taking thought for those sad ones who are suffering from lack of the very necessities of life.
    There must be special laws made, dealing with these extremes of riches and of want.

    (Abdu'l-Baha, Paris Talks, p. 153)

    The greatest means for prevention is that whereby the laws of the community will be so framed and enacted that it will not be possible for a few to be millionaires and many destitute. One of Bahá'u'lláh's teachings is the adjustment of means of livelihood in human society. Under this adjustment there can be no extremes in human conditions as regards wealth and sustenance. For the community needs financier, farmer merchant and laborer just as an army must be composed of commander, officers and privates. All cannot be commanders; all cannot be officers or privates. Each in his station in the social fabric must be competent; each in his function according to ability; but justness of opportunity for all.

    (Abdu'l-Baha, Foundations of World Unity, p. 36)

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  20. Here is another Baha'i quotation about the responsibilities of money-lenders/bankers/financiers:

    The ideals of Peace must be nurtured and spread among the inhabitants of the world; they must be instructed in the school of Peace and the evils of war. First: The financiers and bankers must desist from lending money to any government contemplating to wage an unjust war upon an innocent nation.

    (Compilations, The Compilation of Compilations vol II, p. 172)

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  21. Susan said: "The reason usury was prohibited in former times is because [...]", and "What has changed in the last 1300 years is [...]"

    A certain lack of humility there I think? You can't jump into the middle of a discussion and proclaim you know the singular answer.

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  22. A very good and appreciated effort! There is one thought I would like to offer for consideration. Shoghi Effendi refers to the laws of the Kitáb-i-Aqdas as being largely intended for a society destined to emerge in the fullness of time (paraphrasing as closely as I can; I once had the whole quote memorized but I’m getting old). Many of those laws make little or no sense in today’s world, but in a world based on spiritual values they make perfect sense. This must also apply to the concept of usury. In today’s world, the lending of money is a full-fledged industry, intended to create huge profits. It is so lucrative that the idea of buying on credit is nearly universal, and immense resources are spent on promoting it, especially on young and first-time buyers. As this entire practice is patently immoral, so must be this application of usury.

    I would recommend to all who have read this post to read a fascinating and insightful book entitled Sacred Economics, by Charles Eisenstein. He condemns the practice of usury, in its current manifestation, as being detrimental to economics. But the whole focus of his book is on recreating a new economy based on the sacredness of abundance and giving, as God did for us when He created. For those of you who have also studied the Right of God, you will be thrilled to read the manifold parallels between this Law and the ideas of this book.

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  23. Thank you for the wonderful article!

    There is one thought I would like to offer for consideration. Shoghi Effendi refers to the laws of the Kitáb-i-Aqdas as being largely intended for a society destined to emerge in the fullness of time (paraphrasing as closely as I can; I once had the whole quote memorized but I’m getting old). Many of those laws make little or no sense in today’s world, but in a world based on spiritual values they make perfect sense. This must also apply to the concept of usury. In today’s world, the lending of money is a full-fledged industry, intended to create huge profits. It is so lucrative that the idea of buying on credit is nearly universal, and immense resources are spent on promoting it, especially on young and first-time buyers. As this entire practice is patently immoral, so must be this application of usury.

    I would recommend to all who have read this post to read a fascinating and insightful book entitled Sacred Economics, by Charles Eisenstein. He condemns the practice of usury, in its current manifestation, as being detrimental to economics. But the whole focus of his book is on recreating a new economy based on the sacredness of abundance and giving, as God did for us when He created. For those of you who have also studied the Right of God, you will be thrilled to read the manifold parallels between this Law and the ideas of this book.

    ReplyDelete