The Death and Revival of Usury in China: An Institutional Analysis

Abstract:

The practice of usury has recently provoked an intense debate in China. While the practice is widely condemned, prominent figures have sought to legitimize it with economic analysis. The institutional competition between ancient usury and modern money and banking has persisted for centuries and seems far from ending. This article examines the institutional factors underpinning the revival of usury in China after a thirty-year stretch (1948–1978), during which the practice had virtually disappeared. The revival of usury is attributed mainly to a pattern of uneven development in China. Usury, by its nature, is a drag on economic productivity and a source of social discord. As China endeavors to achieve a more broad-based human flourishing, the practice of usury must be prohibited strictly once more.

Keywords::

• institutional change
• modern banking system
• usury

JEL Classification Codes::

• B52
• K42
• N2

Notes

¹ Guanxi is “a network of personal relationships emerging from the fundamentals of Chinese culture, traditions, and social organization” (Anderson and Lee 2011, 778).

² “[W]orking rules operate ... by placing certain limits or creating certain enlargements for the choices and powers of individuals, who are the parties to transactions, and these limits and enlargements may be condensed into four volitional verbs, (1) may, (2) must, (3) can, and (4) cannot” (Commons [1924]

³ Although many U.S. states retain usury statutes, they have been rendered ineffective by the Marquette decision (1978), wherein the Supreme Court ruled that nationally chartered banks were exempt from state usury laws (Frank 2010).

⁴ “[A] judicial enforcement system that is characterized by short, cheap and simple proceedings creates favorable conditions for bank lending. Even though changing legal codes and improving the quality of the judicial enforcement system is difficult, the economic returns of such changes can be large” (Maresch, Ferrando and Moro 2015, 13).

Additional information

Notes on contributors

Hao Cheng

Hao Cheng is an associate professor of finance in the School of Economics and Management at Nanchang University (China). The author would like to acknowledge the financial support of the National Social Science Foundation of China in funding the research (Grant No.15BJY 147).