Keynes’s liquidity preference and the usury doctrine: their connection and continuing policy relevance

Abstract

The purpose of this paper is to support the spirit of the early medieval prohibition of payment for the use of money, with arguments based on the economics of Keynes. At the heart of the usury doctrine is the idea that a creditor cannot expect both the security of a claim on a fixed sum of money and to derive an income from it; security comes at a price, one way or another. The consequences of the unwillingness of modern society to accept this are illustrated by reference to two problems of the modern international financial and monetary system: bank bailouts and the lack of a supranational reserve currency.

Keywords:

• Interest
• probability
• monetary system
• commodity standard
• deposit insurance

JEL Classifications:

• B31
• E42
• F33
• G21

Acknowledgements

This paper develops the argument for policy ideas originally put forward in Speakers’ Corner pieces in this journal (Hayes 2010b, 2013). PKSG Working Paper 1502 is an earlier version. I am grateful to four anonymous referees for their trouble and patience in helping me to clarify my argument, to participants in seminars at Cambridge and Bournemouth and to Bernat Sellarès for his comments on the working paper. Any errors or omissions remain my responsibility alone.

Notes

¹ Dempsey’s own concept of ‘institutional usury’ depends upon the loanable funds fallacy (Hayes 2010a). A full critique of Dempsey and Divine is matter for another paper. Clary (2011) argues that the payment of interest on central bank reserves rewards no genuine sacrifice on the part of member banks.

² For a brief wider survey including Hindu, Buddhist and Islamic literature, see Visser and Macintosh (1998).

³ Vix Pervenit stays out of the argument over lucrum cessans. It states clearly both that a pure rent-charge is illicit and also that there may be a legitimate basis for a payment under the extrinsic titles (‘not at all intrinsic to the loan contract’). An example of a legitimate payment in a modern context might be index-linking to protect purchasing power. The Pope left the discernment of the status of a particular payment to the theologians and canon lawyers. Later Vatican documents do not provide any further clarification.

⁴ This can take many forms, from simple partnership to incorporation as company or co-operative society. The extent of limited liability is a separate and complex issue.

⁵ Keynes had made this distinction in A Treatise on Money (Keynes 1930), prompting Somerville (1931) to make the overt connection to usury doctrine, accepted with reservations by Keynes (Cannan et al. 1932). At that stage, Keynes had not fully articulated the concepts of effective demand and liquidity preference, as in The General Theory.

⁶ Keynes did not accept the Scholastics’ own arguments against the legitimacy of a payment for the use of money (Cannan et al. 1932). Although these arguments are worth reconsidering, space precludes doing so further in this paper.

⁷ Davidson is by no means alone among the post-Keynesians. Both Kalecki (1971) and Minsky (1975) also rejected Keynes’s notion of liquidity, so that the view presented here is a minority (unique?) position among post-Keynesian economists. For a full exposition see Hayes (2006, 2012).