Did Adam Smith Promote Usury?

According to some narratives, Adam Smith placed our capitalist system on an unsound foundation, and that foundation is debt. Founding an economy on debt–and by extension, the damnable sin of usury–means that a Smithian economics puts neighbor in an uncomfortable relationship with neighbor, since our relationships now rest on the fact that you owe me, or vice versa. Not only that, but the profit that the black-hatted capitalists of this picture chase is nothing more than the unnatural fruit of usury: the illicit child somehow begotten of barren metals.

 

This is, to some extent, an understandable belief to infer. After all, debt is all around us. Most of our finances begin with debt (in the form of a mortgage) and end with debt (in the form of a credit card). The popularity of cash apps like Venmo exist largely to help us share or resolve small debts with our friends and loved ones. When we look closely at our economic system we see a tangled mess of debts; so tangled that even many of our investments involve the purchasing of debts. And since Smith is one of the key architects of our economic system, doesn’t it follow that this debt-based economy is part of his intellectual legacy? 

 

Some narratives go even further. The point of capitalism, this account says, is to separate the workers from their labor and its fruit. Capitalism was devised to accomplish this through the proliferation of interest bearing loans, trapping the workers of the world in a system where the harder they work, the richer the wealthy become. Smith’s calculating mind rehabilitated the sin of usury by placing it in the banks, calling it “loans” and “capital”, and then suggesting that it was the fast path to wealth. Smith, in this account, is a trickster who engineered a system that works to consolidate wealth among the wealthy. 

 

This story, logical and intuitive to many, suffers from one simple flaw: it is wrong. The sea change brought about by Adam Smith was not that he expanded the issuance of interest bearing loans to the masses. Nor is it the case that the Smithian revolution froze social mobility, cementing wealth among the already-rich families and firms. In fact, the truth is quite the opposite. 

 

First, let us consider what Smith says about loans and interest. The surprising thing about this task is that it actually is not very daunting: only a handful of the thousand or so pages of The Wealth of Nations deal with loans and interest at all. Moreover, Smith, whose tone is often quite directive of policy and principle, offers no deviation from the existing English policy. 

 

What was the existing English policy towards lending? Was it Smith who transformed sinful usury into helpful lending? The historical record answers no. The system Smith critiqued–the mercantile system–had already accomplished this feat when merchant ships took on numerous investors and sought to trade without having to carry a stock of coinage. International banks transferred wealth with paper records rather than bags of gold, speeding up the cost of business well before Smith put pen to paper. Smith lists the different rates allowed by the English monarchs: Henry VIII (10%), Edward VI (0%), Elizabeth (10%), James I (8%), and so on. Upon these policies Smith casts no critique, merely suggesting that “all these different statutory regulations seem to have been made with great propriety.”(I.ix.5) There are a great many directives and prescriptions in The Wealth of Nations: increasing usury is not one of them. 

 

This becomes even more apparent when we see why Smith cares about interest rates. Smith’s desire is to see that the legal rate remains regulated by the market rate, and this concern is regulated by the very practical concern of enforceability. He says that “though the legal rate of interest has in France frequently been lower than in England, the market rate has generally been higher; for there, as in other countries, they have several very safe and easy methods of evading the law.”(I.ix.9) He notes that France’s policy that kept interest rates far lower than the market rate was well intentioned, but of poor effect in practice. 

 

Since Smith leaves the existent interest policies in place he appears protected from the claim that he rehabilitated usury. Perhaps he is guilty of proliferating lending, leading us to an unequal and unjust system? Here the answer is also no. Smith’s suggestions regarding lending sound like simple common sense: a foolish loan does no favors for either the borrower or the lender, and those who engage in them frequently will suffer enough natural consequences that there should be no need for the government to impose additional dissuasion. Inasmuch as governments have intervened in “too big to fail” or other bailout programs they are not following Smith’s advice; and their attempts to take the sting out of the bee have introduced us to new and unfortunate hazards. But leaving that where it is, we can see at this point that Smith’s legacy does not offer invidious support to usurers or lenders. 

 

One last accusation against Smith remains: Did he corrupt Christian teaching regarding lending? This notion is also historically false. Medieval thinkers centuries earlier (most notably Thomas Aquinas) had long before differentiated between lending with interest and usury. Smith’s warnings regarding lending remain practical and prudent: foolish lending leads to painful consequences. Those who wish to decry all lending with interest as a sin would do better to take up their case with Aquinas, and not Smith. 

 

An observation must be made for Smith’s benefit. The revolutionary idea behind The Wealth of Nations is that the wealth of a nation is not to be found in its coffers, but in the production of its citizens. It is a central tenet of Smith’s book that capital has to be disbursed among the citizenry and not amassed in exclusive storehouses. The way for a nation to build its wealth is to allow its citizens to make decisions with their own capital for their own good. This means that, not only does the popular narrative not fit this picture, but it runs contrary to it. Smith is advocating for the dispersion of capital, not its consolidation. If his system is working on behalf of someone, it certainly is not for the oligarch.

 

There is no denying that lending in a capitalistic system can, and does, run wild. There is no denying that certain lending practices are usurious and wrong. But the wealth of nations is not built upon a system of easy loans and predatory interest. It is built on the ability of people to make practically wise decisions that, in aggregate and guided by the Invisible Hand, contribute to an efficient and salutary system. One of the main reasons that Smith’s prescriptions proved so effective is that the citizenry trusted that their efforts could improve their lot in life. The myth that capitalism was founded upon loans and interest threatens to erode that trust and stymie our corporate wellbeing. We do well to remember the truth.

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