7. Biblical Banking

CHAPTER SEVEN

BIBLICAL BANKING

Therefore you ought to have deposited my money to the bankers [money exchangers], and at my coming I would have received back my own with interest. (Matthew 25:27)

The translators of the King James Version of the Bible (1611) translated the Greek word toku as “usury.” But it doesn’t mean usury in the Greek; it means “interest.” This is how modern translations translate it. There is a difference between usury and interest.

How did the King James scholars make such an error? Because they assumed that the concept of interest in the Bible always means usury. The Hebrew word “usury” was a term of criticism. Usury referred only to interest taken from a poor fellow believer, in other words, interest secured from a charitable loan. Such usury is prohibited by Biblical law. But interest as such isn’t prohibited.

Before I attempt to prove this from the Old Testament texts, let me point out that in this parable of the talents, Jesus was affirming the importance of productivity and profit. In explaining God’s kingdom, He tells the story of a rich man who goes away, but before he goes, he calls three of his stewards and gives them money (“talents”), each according to his abilities (Matthew 25:15). One receives five talents; one receives two talents; and one receives one talent.

The first two doubled their money through trade (25:16, 17). The third one buried his talent in the ground. Upon the rich man’s return, each servant came to settle his accounts. The master was most pleased with the first man, who doubled a large amount of capital. He is also pleased with the second, who doubled a smaller amount of capital. To both he said, “Well done, good and faithful servant; you were faithful over a few things, I will make you ruler over many things: enter into the joy of your lord” (vv. 21, 23).

But to the third man, who buried his talent because of his fear of losing it in trade, the owner was furious. At least the servant could have placed the money with the money changers and received interest back on it.

Jesus was affirming the legitimacy of both profit through trade and the normal rate of return which is secured by lending money. The two forms of activity are not the same, as the parable indicates, but both are legitimate.

Profit through trade is risky. This is why the third man was afraid to attempt it: “And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that [which] is thine” (v. 25). He thought it would be best just to return the owner’s principal.

The owner criticized him. Why? Because he had forfeited the use of that talent. The only reason anyone forfeits the use of money is to get a greater amount of money in the future. Otherwise, why not just spend it on whatever it will buy today? Why wait? Thus, interest is a basic category of human action. It is inescapable.

Waiting

To show you why interest is inescapable in every aspect of human action, let me give you two examples.

First, assume that I run a national contest. You have just won the grand prize, a brand-new Rolls-Royce automobile. I have paid all the taxes on it. You can either keep it or sell it. It’s up to you.

But I come to you and ask you to make a choice. You can take delivery of the car today, or you can take delivery three years from now. Because Rolls-Royce styles don’t change very often, and because the car probably won’t go down in value, you don’t face a loss of capital directly. But you assume that it won’t appreciate, either. So, what do you do, take delivery now or later?

Obviously, you take delivery of it immediately. Why wait?

What do I have to do to get you to wait? I have to offer you the car, plus something else. Maybe I will toss in a small sedan at the end of three years, or extra money. But to get you to wait for delivery, I have to compensate you, to make it worth your time to wait.

Now, let’s take another example. This time, you’re the buyer of something from me. You want to buy a piece of property. I show you that you can earn one ounce of gold per year net profit from this land, simply by renting it out. You don’t have to do anything. Furthermore, we both agree that the land will probably be able to produce this profit for a thousand years without damage to the land. Then I ask you to pay me one thousand ounces of gold for the land.

You, of course, protest. It isn’t worth a thousand ounces. I counter by showing you that you already agreed that the land will produce a thousand ounces of gold, so why shouldn’t I be entitled to a thousand ounces? We all agree: equal for equal, right?

Where is my argument incorrect? It has to do with the value to you today of those future ounces of gold. I am asking you to give me gold, ounce for ounce, in advance. But what is the thousandth ounce, a thousand and one years from now, really worth to you? Will you give up an ounce of gold today (and all that it will buy) for that thousandth ounce in the distant future for some unnamed heir of yours? I don’t think so.

You apply a discount to that future income. An ounce of gold a thousand years down the road isn’t worth as much to you as an ounce is worth to you today. (If it is, please contact me immediately. Do I have a deal for you! There’s this bridge in New York City that I know you’ll want to buy.) You won’t be here to enjoy it.

But think about this principle. An ounce of gold fifty years from now, or twenty years from now, isn’t worth an ounce today. It also is discounted in your mind. So is an ounce a year from now. We have therefore discovered a law of human action (which applies in every area of economics): the present value of future goods is always discounted in comparison with the immediate value of those same goods.

What is this discount called? I’ll bet you’ve already figured it out. It’s called the rate of interest.

You discount the future value to you of any good compared to what that same good is worth to you immediately, whether it’s that Rolls-Royce or an ounce of gold from that piece of property. For me to get you to hand over the present good today (money), I have to promise to return it to you in the future, plus extra money or other benefit. In other words, I have to pay you interest.

In the parable of the talents, the master was angry with the fearful steward because the steward only gave him back his original coin. At the very least, the master said, he could have lent it to the money changers, and have received back some interest.

Banks, Risk, and Interest

Information isn’t free of charge. Someone has to pay for it. You may be given it as a gift (“Let me give you a piece of my mind, friend!”), but people seldom value such free advice (“Buddy, I don’t think you can spare a piece of your mind!”) So, usually we have to pay for it. Nobody complains about having to pay for something valuable.

Say that you have a lot of cash. You’re a frugal person and concerned about your future. You want to have a “nest egg” for the future. So, you’re interested in loaning out some of the money.

I come to you and tell you that I know a businessman with a great idea for a profitable investment. He wants a partner to put up the money. He will pay the partner 25 percent of the profits. But if he goes bankrupt, the partner loses the investment. No, you think to yourself, that’s too risky.

You counter with this offer: have the businessman guarantee me out of his own pocket a 10 percent rate of return on my money, whether the project works or not. Then I’ll loan him the money.

What do I do? First, I go to the businessman. He thinks he will be able to make 30 percent on the money.

Second, I ask myself that magic question: “What’s in it for me?” For my trouble in putting the deal together—that is, for my information of where the money is (you) and where the profit opportunity is (the businessman)—I should get something. So, I ask the businessman, are you willing to pay 13 percent for the use of the money? If he says yes, then I come back to you and get the money from you.

The businessman gets his money and the chance at making a lot more. You get your 10 percent rate of return (your discount of future goods as against present goods), and I get 3 percent on the deal for my trouble.

That’s honest banking. It is the exchange of information. It is also the exchange of risk. You’re worried about your risks in the future. You want more capital to deal with those risks. The businessman worries about the risks of guaranteeing the creditor (me) 13 percent, but he feels that the risk is worth it. I worry about the risks of the businessman going bankrupt and fleeing the country, since I have to pay you your 10 percent. But I figure it’s worth my risk.

We have voluntarily exchanged risk. Each person is now more comfortable with his own fears. Each man gets something for his trouble. We all bear risk, but we bear an amount of risk that’s closer to what we want than would have been possible if I, the deal-putter-together, had not come onto the scene.

As you have probably recognized, I am the banker in this example.

A bank is not an evil institution. It is a marvelous institution in principle. It allows the profitable exchange of information and the profitable exchange of risk. Those who participate all believe that they will be better off with this institution than without it.

The fact is, banking has been one of the crucial institutions in the development of the modern world. It fulfills a crucial function. It allows us all to deal more successfully with an uncertain (completely unknown) and risky (partially unknown) future. Banking allows us to spread our risks.

The Marks of Honest Banking

There must be a lender. We call him the depositor. He has to give up the use of his money for a specified period of time. In exchange, he is offered a specified rate of interest, to be paid to him in addition to the return of his original invested money when the loan comes due.

There must be a borrower. He is someone who believes that his opportunities for putting the capital to use outweighs the expense (and risk) of having to repay the principal plus the interest. He may be a producer. He may be a customer. But he brings collateral to the table (his past performance, his future prospects, his idea, etc.) and promises to repay.

There must be an evaluator. This is the banker. He assesses the risk of not being repaid. He bears the risk of paying off the depositor if the borrower defaults. He must evaluate the credit worthiness of the borrower. He gets paid for his trouble by the spread: the difference between the rate of interest the borrower pays him and the rate of interest he pays the depositor after the transaction is over.

There is nothing immoral about such transactions. The Bible nowhere prohibits them, with one exception: charity loans. (I shall cover these later on.) These sorts of transactions are expected to be beneficial to all the participants, or else the participants wouldn’t enter into such transactions voluntarily.

In the next chapter, I will discuss some highly immoral aspects of a perverted form of banking. But as I have outlined banking here, there is nothing wrong with it. The key to bear in mind is the question of the use of the money. The depositor gives up the use of his money during the period of the loan. He can’t get something for nothing. If he gets a rate of interest, he gets it because he doesn’t have the use of his money in the interim. When he loans it out, it is no longer his money. He has given up ownership and use of present money in exchange for future money. He doesn’t get something (a rate of interest) for nothing (no true transfer of ownership). Whenever this fundamental transfer of ownership is violated, banking becomes immoral, as I shall show in the next chapter.

What if the depositor needs “his” money back early? That shouldn’t be too hard. He goes to the banker and makes a loan request. The banker knows that the businessman is probably going to repay the loan. The banker can make a loan to the depositor out of bank capital, or he can loan him money from another depositor’s account, with the note from the original businessman as collateral.

But to get money now, the depositor either takes a discount (doesn’t get all the money originally agreed to be repaid), or else he has to promise to repay the bank extra money when the repayment of the loan falls due. The point is, nobody gets something for nothing. The depositor is asking for money that has been loaned out. It isn’t in the bank any longer. To get “his” money early, he has to borrow it from someone else, for during the period of the loan, it isn’t his money any more.

All this is fairly easy to understand. There are no hidden secrets here. Banking fundamentals aren’t mysterious. It’s simply a method of exchanging present and future risks, present and future goods, with a middleman who puts the deals together. And it’s all governed by this rule: “You don’t get something for nothing.”

Charitable Loans

The Old Testament forbade lenders from making interest-bearing loans to poverty-stricken brothers in the faith. “If you lend money to any of My people who are poor among you, you shall not be like a moneylender [usurer—KJV]; you shall not charge him interest [usury—KJV]” (Exodus 22:25). The New American Standard Version reads: “If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.”

The Bible is not speaking here simply about money loans. Interest is a phenomenon that relates to all human action, so this prohibition applies on any sort of loan. “And if one of your brethren becomes poor, and falls into poverty among you; then you shall help him…. Take no usury or interest from him; but fear your God; that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit” (Leviticus 25:35a, 36–37). Notice: it speaks of the poor brother. This is not a prohibition against business loans.

The warning against profiting from charitable loans from those who share the faith is clear: “One who increases his possessions by usury and extortion gathers it for him who will pity the poor” (Proverbs 28:8). In other words, the evil man lays up treasure unjustly, but the righteous man will eventually earn it back. This is in line with another promise of Proverbs, “the wealth of the sinner is stored up for the righteous” (13:22b).

Yes, the lender who lends money to a poor fellow believer can legitimately ask only for a return of the principal. He may not ask for anything extra. This means that he forfeits the interest that might otherwise have been earned in some sort of business loan. The lender suffers a loss, for he forfeits the use of his capital over time, and bears the risk that the loan will never be repaid. But God will reward the generous lender, Proverbs says. In effect, God pays the interest payment to the righteous lender. God becomes a kind of heavenly co-signer of the poor man’s note. Specifically, the generous lender will prosper at the expense of the unrighteous exploiter in a society which is governed by the law of God.

Charity loans in the Old Testament were supposed to be cancelled nationally every seventh year (Deuteronomy 15). Those who had defaulted on charity loans and had been put into servitude as payment were to be released in this year. This indicates that the zero-interest loan used the individual’s own freedom as collateral. If he defaulted, he could go into servitude until the seventh year. So, men took debt seriously.

Conclusion

Lending money at interest isn’t immoral and shouldn’t be made illegal. It shouldn’t be controlled by the State in any way. The Bible teaches that loans at interest to poor fellow believers should not be made, but the Bible is equally emphatic that it is God who punishes this type of loan. There is no mention of any civil penalties. It is a religious matter. Someone has to define “fellow believer” and “poor.” This is not something the civil authorities should concern themselves with. At most, church authorities might penalize usurers, not the State.

But most loans in a society are business loans or loans made to people who have credit references and collateral. These are not poor people. They come with credit worthiness. This is a true capital asset. A man’s reputation as an honest and efficient businessman who pays his debts (and has few of them) is certainly a valuable asset. It can be borrowed against under certain circumstances. Certainly, by putting collateral against the loan, he adds to his credibility.

Why should someone with a great idea to serve customers but without enough cash on hand to finance the initial delivery of this service or product not be allowed to seek out other people to put up the money? Why shouldn’t others be allowed to share this vision and share in the rewards? Some people may want an “equity” position: shares of ownership in the business, rain or shine, boom or bust. Others may not want to become entrepreneurs, but they are willing to forgo the use of their money for an interest return. Jesus teaches in His parable of the talents that both kinds of investments are legitimate: higher-risk profit seeking, as well as guaranteed-return interest seeking.

Summary

The fundamentals of Biblical banking are these:

1. The King James translators erroneously translated the Greek word for “interest” as “usury.”

2. Usury in the Old Testament refers exclusively to interest taken from a poor fellow-believer.

3. Jesus described the kingdom of God in terms of profit seeking and interest seeking: a positive rate of return.

4. Interest is a basic category of human action; it is inescapable.

5. It arises from the fact that we discount the present value of future goods as against what those same goods are worth to us right now.

6. Information isn’t a free good; someone pays for it.

7. Some people prefer to lend money at a high enough rate of interest, as a means of providing for themselves in the future.

8. Other people have needs and opportunities that they prefer to satisfy now, and pay for through interest owed in the future.

9. Middlemen bring these two sorts of people together; these middlemen are called bankers.

10. Their information isn’t free.

11. They make their money through the “spread”: the difference between interest promised to them by the borrower and interest promised by them to the depositor.

12. Through lending and borrowing, people exchange degrees of risk.

13. The key to honest banking is the transfer of ownership of the capital asset: what is lent to the borrower cannot simultaneously be used by the lender.

14. Charity loans to poor fellow believers should not have any interest payment attached to them.

15. God rewards the generous, zero-interest lender to the poor.