INTEREST LAWS. In the modern world, interest is ordinarily charged on all loans, with only exorbitant rates considered usurious. During the Middle Ages, however, any repayment in excess of the amount lent constituted usury, which was both a violation of civil law and a sin against God. Medieval Christians had inherited inconsistent precedents to govern the lending of money. The ancient Hebrews proscribed charging interest to their own people, but permitted it to be exacted from foreigners. At the same time, the Talmud declared money "sterile," implying that no one should expect to profit from lending it. The Greeks and Romans regulated interest rates, although the requirements of commerce and finance in the ancient world precluded an absolute prohibition. Despite this confused legacy, medieval churchmen concurred that usury, which they believed occasioned covetousness and greed, was evil.
Lawyers disagreed with theologians on the issue of usury, however. Medieval law allowed entrepreneurs to profit from lending money if they could demonstrate that they would have earned more from investing in another enterprise. The attempt to make up the difference between the amount of a loan and the profits that a lender might otherwise have attained gave rise to the modern distinction between usury—the illicit charges enjoined upon a debtor—and interest—the legitimate costs paid for borrowing.
The Massachusetts general assembly enacted the first usury law in American history in 1661.By 1791, all of the original thirteen states had adopted similar legislation. The charters of the First and Second Banks of the United States prohibited charging more than 6 percent on loans. In the twentieth century, state laws fixed maximum interest rates between 6 and 12 percent.
The federal government did not begin to monitor interest rates until 1969, when the Consumer Credit Protection Act, or the Truth-in-Lending Act as it is more commonly known, went into effect. Among other regulatory provisions, this law requires commercial lenders to disclose the total cost of borrowing as an annual average percentage rate. In addition, the Credit Control Act of 1969 authorizes the Federal Reserve Board to set national maximum and minimum interest rates on all credit transactions.
There are also laws designating the amount of interest institutional lenders may pay to attract public investment. To remedy the banking crisis of the 1930s, the Banking Act of 1933 discontinued interest payments on demand deposits (checking accounts) by all Federal Reserve Banks and by nonmember banks with deposits insured by the Federal Deposit Insurance Corporation (FDIC).The law further limited interest payments on time deposits (savings accounts) to the maximum rates that the Federal Reserve Board had established according to Regulation Q of the Federal Reserve Act.
To create financial markets more receptive to changing economic conditions, bankers have lobbied Congress to relax or repeal restrictions on interest rates since the 1960s. In response, the Senate and House banking committees fashioned the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).The DIDMCA phased out Regulation Q over a period of six years, annulled state usury laws for all federally insured lenders, and sanctioned interest-bearing checking accounts. Deregulation increased competition, lowered profit margins, and led to bank failures and consolidations, but it did not consistently raise the interest rates paid on deposits or reduce the interest rates charged for loans.
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Nelson, Benjamin N. The Idea of Usury: From Tribal Brotherhood to Universal Otherhood. Princeton, N.J.: Princeton University Press, 1949.