Thursday, 24 February 2011

Usury vrs Interest

I have been browsing through some articles and books about "commercial" arithmetic and its history. Along the way I realized I had not understood the shades of difference in the meaning of usury and interest.

In the middle ages commercial arithmetics seldom discussed compound interest. This was because under canon law it was illegal to charge for the use of money.
Geoffrey Poitras of Simon Fraser University describes the situation in his "From Commercial Arithmetic to Life Annuities:
The Early History of Financial Economics, 1478-1776."
While partnerships could be used to disguise the payment of simple interest, the explicit recognition of a ' profit on profit' payment could bring the sanctions of canon law upon those requiring the receipt of such a payment. For flagrant violation, these sanctions could include ex-communication and even banishment. If such payments were made, and there is some evidence that payment of compound interest was a regular business practice at the time of the Treviso, such payments were made in silence.

It is obvious from the resurrected documents of Chuquet's "Triparty" that compound interest was known, and used, but never openly until later.

It was this church proscription against payment for the use of money, usury, that created the term. Once more in the words of Poitras, "More precisely, under canon law interisse (from the Latin verb "to be lost")
was acceptable while usura (from the Latin noun "use") was not. Compensation could be charged for a loan (mutuum) only if it was a reimbursement for a loss or expense, no net gains were permitted."
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