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The Causes and
Consequences of
Interest Theory
Analyzing Interest
through Conventional
and Islamic Economics
Cem Eyerci
The Causes and Consequences of Interest Theory
Cem Eyerci
The Causes
and Consequences
of Interest Theory
Analyzing Interest through Conventional
and Islamic Economics
Cem Eyerci
Central Bank of the Republic
of Turkey
Ankara, Turkey
ISBN 978-3-030-78701-1 ISBN 978-3-030-78702-8 (eBook)

https://doi.org/10.1007/978-3-030-78702-8
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Preface
Interest has always been a part of humans’ daily economic life. Therefore,
the concept of interest has attracted intense attention and been studied
and discussed by philosophers, religious scholars, lawmakers, administra-
tors, and economists, regarding almost all its economic, social, moral, and
religious aspects. Receiving interest was mostly considered dishonorable,
disrespectable, uncharitable, unjust, and the source of many evils. It was
condemned in many societies for being a sin. For this reason, interest-
based lending has always been restricted by the authorities through legisla-
tive, administrative, and financial arrangements, religion, and ethics. In
cases when it was allowed, the rules of practicing interest were regulated
heavily. However, despite all these concerns and regulations, interest has
always been practiced in economic life.
By the seventeenth century, when the role of interest in economic
life became more significant, scholars began to deal with the concept of
interest more systematically, and many theories were developed on the
nature of interest. Among many others, Böhm-Bawerk’s comprehensive
time-preference theory of interest presented causes for the existence of
interest that may be claimed to be inherent.
On the other hand, a controversy emerged on the consequences
of interest rate control in the relevant literature. It was claimed that
prohibiting interest or limiting its rate, as a type of price control, has
undesired distortive effects on the market in general. If so, the means-ends
consistency in regulations may have to be reevaluated.
v
vi PREFACE
In this book, which is based on my Ph.D. dissertation, the concept of

interest is studied in aspects of its meaning, history, and relevant theories.
The time preference theory and the policy of interest rate control as a
type of price control are introduced. The motivation for banning interest
or limiting its rate and the instruments used in interest rate control are
reviewed. Considering that the supporters of an interest-free economic
system have the most explicit attitude against interest, the basics of the
Islamic economic system are presented, and the prohibition of interest is
analyzed. The approach and response of Islamic economists to the concept
of the time value of money, to the causes of time preference asserted as
the justifiers of interest, and to the claims on the distortive consequences
of interest rate control are scrutinized.
I like to express my gratitude to Dr. Fuat Oğuz for his invaluable
guidance and timely interventions that kept me on track and prevented
the waste of effort on secondary issues, which is highly probable in
such a work. I appreciate Dr. Ömer Demir for his considerable instruc-
tions, critiques, and, specifically, for his persistent encouragement to work
continuously, which was one of the main motivations to run to the
schedule. I owe thanks to Dr. Abdülkadir Develi for his comments that I
benefited much from and Dr. A. Ömer Toprak for frequently reminding
me of the task, which prevented me from slacking off. I also like to
thank Ruth Jenner, Abarna Antonyraj, and their colleagues at Palgrave
Macmillan for their kind assistance while finalizing the book and the
referees, who reviewed the proposal and final version of the book. Finally,
I am grateful to my family for easing many things through their support,
understanding, and patience during this intensive period.
Ankara, Turkey Cem Eyerci

Contents
1 Some Introductory Remarks 1

1.1 The Legitimacy Problem 2
1.2 The Causes of Interest 3
1.3 Is Control of Interest a Good Idea? 4
1.4 Overview of the Content 6
References 9
2 The Concept of Interest: Meaning and History 13
2.1 What Is Interest? 13
2.2 The History of Interest 17
2.2.1 Mesopotamia 18
2.2.2 Ancient India 19
2.2.3 Ancient Greece 20
2.2.4 Ancient Rome 21
2.2.5 Byzantium 22
2.2.6 Interest in the Abrahamic Religions
and Medieval Europe 22
References 28
3 Theoretical Development and the Time Preference
Theory 31
3.1 The Theories of Interest 32
3.1.1 Turgot’s Theory of Interest 33
3.1.2 Productivity and Use Theories 34
vii
viii CONTENTS
3.1.3 Abstinence Theories 35

3.1.4 Labor Theories 36
3.1.5 Exploitation Theories 37
3.1.6 Impatience Theory 38
3.1.7 Loanable Funds Theory 38
3.1.8 Liquidity Preference Theory 39
3.1.9 Pure Time Preference Theory 39
3.2 Böhm-Bawerk’s Time Preference Theory 40
3.2.1 The Theoretical, Social and Political Aspects
of Interest 40
3.2.2 Superiority of Present Goods to Future Goods 43
3.2.2.1 Expectation of a Lower Marginal
Utility in the Future 43
3.2.2.2 Underestimation of the Future 44
3.2.2.3 Technical Superiority of Present Goods
in Production 44
3.2.3 Time Preference and Interest 45
3.3 Critiques of Böhm-Bawerk’s Theory of Interest 47
3.4 The Validity of Böhm-Bawerk’s Theory in Present
Economic System 50
References 51
4 The Motivation for Controlling Interest and Its
Instruments 55
4.1 The Motivation for Prohibiting and Limiting Interest 56
4.1.1 An Income Without Working 57
4.1.2 Benefiting from the Poor People 57
4.1.3 Enhancing the Inequality in Distribution
of Wealth 58
4.1.4 Causing Economic Instability 59
4.1.5 Discounting the Future 59
4.1.6 High Cost on Investment and Development 60
4.1.7 Causing Slavery 60
4.2 The Instruments of Regulating Interest Rates 60
4.2.1 Religious Beliefs 61
4.2.2 Social Norms 62
4.2.3 Legal arrangements 62
4.2.4 Financial Instruments 63
References 65
CONTENTS ix
5 Interest Rate Control 67

5.1 The Price Control and Cheung’s Model 68
5.1.1 The Mechanism and Consequences of Price
Control 70
5.1.1.1 Price Ceiling 71
5.1.1.2 Price Floor 73
5.1.1.3 Signaling Role of Price 75
5.1.2 Cheung’s Price Control Model 77
5.2 The Consequences of Interest Rate Control 80
References 84
6 Basics of Islamic Economics and the Prohibition of Riba 87
6.1 The Basics of Islamic Economic System 89
6.2 Prohibition of Interest 91
6.2.1 The Pre-Islamic Riba 92
6.2.2 Riba in Quran 92
6.2.3 Riba in Sunnah 93
6.2.4 Riba in Fiqh (Islamic Jurisprudence)
and the Traditional Perspective 95
6.3 Contrarians of the Traditional Perspective on Interest 97
6.4 The Alternative Instruments to Interest and Devious
Ways 102
6.4.1 Profit-Loss Sharing Instruments 105
6.4.2 Sale with a Promise to Repurchase 105
6.4.3 Sale of the Right of Use 106
6.4.4 Instruments Based on Forward Sale 106
6.4.5 Cash Waqfs 109
6.4.6 Instruments in Christianity and Judaism 110
Appendix 6.1: A Chronological Bibliography of Islamic
Economics on Interest 111
Appendix 6.2: The Translation of the Term Riba into English 124
References 127
7 Time Preference and Price Control in Islamic
Economics 131
7.1 Time Preference in Islamic Economics Literature 132
7.1.1 Time Value of Money 132
7.1.1.1 The Rejecters 132
7.1.1.2 The Conditional Acceptors 132
7.1.1.3 The Acceptors 134
x CONTENTS
7.1.2 Time Preference in Islamic Economics 134

7.1.2.1 The Rejecters of the Generality
of Positive Time Preference 135
7.1.2.2 The Deniers of the Relation of Positive
Time Preference with Interest 137
7.1.2.3 The Acceptors of Positive Time
Preference as a Common Attitude 138
7.1.3 Islamic Economists, Böhm-Bawerk’s Theory,
and the Time Value of Money 140
7.2 Consideration of Interest Rate Control in Islamic
Economics Literature 142
References 144
8 Conclusion 147
References 158
Index 163
List of Figures
Fig. 2.1 Various breakdowns of interest 16

Fig. 3.1 Böhm-Bawerk’s causes of the superiority of present goods
to future goods 46
Fig. 5.1 The supply–demand curve with price ceiling 71
Fig. 5.2 The supply–demand curve with price floor 74
xi
List of Tables
Table 2.1 The change in the meaning of interest over time 14

Table 2.2 Some definitions of interest made by various scholars 15
Table 2.3 Some annual interest rates practiced in Ancient times
and Medieval Europe 26
Table 3.1 Some theories of interest, their founders and basic
principles 41
Table 4.1 Some examples of the instruments used in interest rate
control 64
Table 5.1 Some cases of price ceilings and probable consequences 73
Table 5.2 Some cases of price floors and probable consequences 76
Table 5.3 Consequences of interest rate control 83
Table 6.1 The views contrary to the traditional concept of Riba 101
Table 6.2 The words used for Riba in nineteen translations
of Quran into English, by verse (frequency) 102
Table 6.3 The words used for Riba in nineteen translations
of Quran into English, by translator (frequency) 103
Table 6.4 The four groups of Muslim scholars’ consideration
of Riba and interest 105
Table 6.5 Some instruments used in Islamic economics alternative
to interest 108
Table 6.6 The alternative instruments to interest in Abrahamic
religions 110
Table 6.7 The term Riba in the Quran’s English translations 125
xiii
xiv LIST OF TABLES
Table 7.1 The approaches of Islamic economists to the time value

of money 135
Table 7.2 The views of Islamic economists on the concept of time
preference 140
CHAPTER 1
Some Introductory Remarks
Lending has been a practice of humans’ daily life presumably since the
prehistoric ages well before the beginning of the usage of coin money.
The first farmers, who lacked seed at sowing time but could not find a
benefactor to receive the seed as gift or aid from, might have borrowed
the seed. The lenders were lending to friends, neighbors, relatives, or
needy people consentingly to receive back an amount of seed equal to
the loan. On the other hand, some of these loans were made to receive
back more at harvest-time (Homer 1963). The increment in the quantity
of the loaned seed was called interest and had been paid for the other
loaned goods and money as well, afterward.
Even though not complicated as it is in modern times, surprisingly still,
the interest-based transactions were not merely comprised of ordinary and
uniform practices. From the beginning, at least since the third millen-
nium BC, there were standard values (Homer 1963) used in exchange,
and beside the basic interest , compound interest was being practiced
(Graeber 2011). The interest rates were changing in time and differen-
tiating according to the place, loaned good, lender, borrower, and the
purpose of the loan.
© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2021
C. Eyerci, The Causes and Consequences of Interest Theory,
https://doi.org/10.1007/978-3-030-78702-8_1
2 C. EYERCI
1.1 The Legitimacy Problem

Along with the practice of interest-based transactions, a debate had
continued on the legitimacy of interest. Since ancient times, many
societies have condemned interest, and the authorities regulated interest-
based transactions due to various concerns (Durkin 1993; Rougeau 1996;
Visser and McIntosh 1998; Sharawy 2000; DeLorenzo 2006; Farooq
2012; Erdem 2018). It has been claimed that interest is an income
received without working, is benefiting from the poor people, causes
economic instability, enhances the inequality in the distribution of wealth,
undermines the spirituality of people, and decreases the tendency to
entrepreneurship, etc.
From ancient societies to the countries of the modern world, the
authorities regulated interest-based transactions in aspects of execution,
registration, and enforcement. However, the interventions were mostly to
limit the rate of interest or to prohibit its practice. The interest rates were
controlled by establishing upper limits changing in time and varying by
the type of loan, lender, and borrower. In some periods of ancient Greece
and ancient Rome, all kinds of interest-based lending were prohibited
(Homer 1963; Visser and McIntosh 1998; Graeber 2011; Olechnowicz
2011).
In the regulation of interest-based transactions, besides legal and finan-
cial means, religious and ethical instruments were used in the past and
being used today as well. Receiving interest is considered a sin and
regulated almost in all religions (Visser and McIntosh 1998). In many
societies, lending at interest has widely been considered unnatural, ethi-
cally disrespectable, and dishonorable (Homer 1963; Olechnowicz 2011;
Graeber 2011). There have been laws regulating the interest-based trans-
actions since ancient Babylonia’s Code of Hammurabi (Homer 1963;
Visser and McIntosh 1998; Graeber 2011; Geisst 2013). Today, in some
countries, interest-bearing loans are entirely prohibited by law. In some
other countries, including developed ones, some interest rate ceilings
are defined (Glaeser and Scheinkman 1994; Reifner, Clerc-Renaud, and
Knobloch 2010). The interest rates are also being controlled by the use
of financial instruments such as lending to needy people at low-interest
rates or free of interest (Homer 1963), and regulating the cost of the
creditors through the reserve requirement ratios imposed by the central
banks (Reifner et al. 2010).
1 SOME INTRODUCTORY REMARKS 3
1.2 The Causes of Interest

On the other hand, since ancient times, along with the evolving exis-
tence of interest and interventions of the authorities, the nature of interest
has been studied much by philosophers, religious scholars, and lawmakers
regarding its economic, moral, and religious aspects. In the seventeenth
century, the role of interest in economic life became more significant by
the increment in the mobility of money and the need for finance due
to the developing trade. In consequence, the supporters of interest-based
transactions, including mercantilists, physiocrats, and classical economists,
came into the scene. In the new era, the scholars dealt with the concept
of interest more, but particularly with its economic aspects rather than
moral and religious aspects this time (Küçükkalay 2018). It was plausible
why a needy borrower, who had no other option, was consentingly paying
interest. However, the cause for the lenders’ consideration of having the
right to receive interest was not clear enough.
Thus, many theories were developed, attempting to explain the cause
of the existence of interest. They mainly tried to answer the question:
Why is there interest? The remaining part of the problem was in the
social and political domain of the issue, and about interest’s effect, neces-
sity, justice, fairness, usefulness, and goodness (Böhm-Bawerk 1890). The
scholars studied the concept of interest within the scope of the distribu-
tion theory. They defined interest as the income received from the capital,
one of the four production factors.
There were monetary theories of interest, which dealt with the deter-
mination of interest rate by considering the quantity and velocity of
money, and nonmonetary ones as well. From another aspect, the interest
theories grounded on various causes, such as the productivity of capital,
abstinence from the unproductive use of capital, human impatience,
return from capital that is a form of stored labor, and exploitation of
needy people.
The theories developed on the concept of time preference were among
the most cited interest theories. Since Böhm-Bawerk is considered the
founder of the modern theory of interest (Conard 1959; Potuzak 2016),
his approach of time preference has particular importance. After severely
criticizing several previous interest theories (Böhm-Bawerk 1890, 1903),
Böhm-Bawerk (1930) developed a new one stating time preference as the
focal point of the issue. The essential difference of his approach from the
others’ methodologies was the distinction he made between the positive
4 C. EYERCI
and normative aspects of the concept of interest. The positive and norma-
tive distinction is very crucial in modern economics in which the first one
focuses on what is, and the second one what ought to be. Böhm-Bawerk
(1890) claimed that the cause of mistakes made in economists’ works on
the theory of interest was the lack of the abovementioned distinction.
Time preference in economics is defined as people’s value attribution to
present goods higher than future ones that have exactly the same quality
and quantity. Thus, interest is the difference between the present and
future values of a good.
Böhm-Bawerk (1930) specified three causes that can be considered
valid in general, for the valuation of present goods higher than future
ones. The first two causes were the preference for more consump-
tion at present. People might prefer to consume more for consumption
smoothing or because of the underestimation of the future due to
the psychological traits of ordinary human beings. The third cause was
not about the preference of present consumption but the desire for
production more in value in the future.
Böhm-Bawerk’s theory of interest has been in the focus of many
scholars, and a number of them criticized it in various aspects (Walker
1892; Clark 1894; Fetter 1902; Fisher 1907; Mises 2006; Keynes 2013).
However, after more than a hundred years of its assertion, the theory is
still being worked on (Olson and Bailey 1981; Becker and Mulligan 1997;
Frederick et al. 2002; Hülsmann 2002; Murphy 2003; Van Suntum and
Neugebauer 2014).
1.3 Is Control of Interest a Good Idea?

Besides the debates on the legitimacy of interest-based transactions and
the cause of interest, there has been a third controversy about whether
controlling interest, namely prohibiting it or limiting its rate, is serving
the purpose or not. Although there are scholars defending regulation
of interest (Smith 1776; Keynes 2013; Metwally 1990; Glaeser and
Scheinkman 1994; Rougeau 1996; Coco and De Meza 2009; Lee 2017;
Cheng 2018), most of the economists are opposed to any ceiling on the
rate of interest today (Durkin 1993). The opponents of limitations claim
that interest rate controls have undesired distortive effects on the market.
The stance of the regulation-opponents originates from their consid-
eration of the concept of price control. Price control is defined as the
restriction on the price of a good or service imposed by an authority. Price
ceilings prevent high prices over a limit as done in rent control, and price
floors do not allow to transact at low prices under a limit as minimum
wages (Coyne and Coyne 2015a). Price controls in a specific market
are imposed for various purposes such as tackling inflation, protecting
the consumers from black-market and exploitation, achieving equity in
the workplace, preventing profiteering by property owners (Lipsey 1977;
Schuettinger and Butler 1979; Bashar 1997; Bourne 2015; Miller 2015;
Siebert 2015; Tabakoğlu 2016; Karadaği 2018).
Although used widely before, and still being used today, there have
been doubts about the usefulness of price controls and even concerns
about their adverse effects. Some controls are claimed to produce results
just opposite to the intention and to have undesired distortive conse-
quences on the market (Schuettinger and Butler 1979). Shortages;
increment in bribery and black-marketing; reduction in investment; wors-
ening in quality of existing properties; reduction in the construction
of new estates; increment in cost of labor; reduction in labor demand;
and increase in unemployment of the less qualified workers are some of
the claimed negativities of price controls (Lipsey 1977; Schuettinger and
Butler 1979; Booth and Davies 2015; Coyne and Coyne 2015b; Miller
2015; Siebert 2015; Snowdon 2015; Wellings 2015).
Yet another problem caused by price control that is argued is about the
signaling role of the price in the market (Schmidtz 2016). Since price is
considered a fast and effective transmitter (Sowell 1980) of a composite
signal that is formed by all the relevant information, any control prevents
this simplest way of the availability of required information in decision-
making and increases uncertainty. Furthermore, the masking effect of
price control may prevent to determine the real reasons for economic
troubles (Coyne and Coyne 2015b).
Being defined as the price of the use of a loan, controlling the rate of
interest is, no doubt, a form of price control. Then, interest rate control
may have effects on the market, similar to the impacts of other price
controls. A ceiling on interest under the market rate reduces the supply
of loans, increases the demand, and causes a shortage. In such a case,
although they are ready to borrow at a higher rate, the more needy
borrowers fall into trouble in finding a loan. Due to the distinction made
by lenders for being riskier, some of the borrowers that lost the opportu-
nity to borrow are guided to usurers, pawnshops, and loan sharks (Durkin
1993; Ellison and Forster 2008; Rigbi 2013). On the other hand, the less
6 C. EYERCI
needy borrowers, who borrow at a relatively lower interest rate, may not
use the loan efficiently.
Regarding the signaling role of price, interest rate control prevents
the transmission of some information, and a lack of information discour-
ages the new lenders from entering the loan market and distorts the free
competition.
The interest rate control may also have some macroeconomic nega-
tivity. The loss of the attraction of capital ownership may decrease
savings, and so, the investment may decline. In consequence, the adversely
affected output, employment, and income may reduce the total wealth
(Durkin 1993).
1.4 Overview of the Content

It has been discussed throughout history whether receiving interest
was licit. The philosophers, jurists, lawmakers, and economists either
legitimized interest or objected to it.
The supporters of interest defined it as a necessity, or at least as a
right, by asserting causes for its existence, referring to its usefulness in
economics, and claiming that interest rate controls have distortive conse-
quences in the market. The opponents, on the other hand, raised many
reasons for its evilness, condemned it, and restricted interest-based trans-
actions, either limiting interest rates or wholly prohibiting it. However,
despite all concerns about it, whether it was allowed or not, interest has
been more or less always practiced (Kuran 1995). As if inevitable, interest-
based transactions made either legally or using loopholes in regulations or
illicitly.
The controversy on interest is partially originating from the normative
aspects of the interest-opponents’ approaches. However, the opposing
economists are increasingly attempting to justify their assertions in the
positive domain. In this context, two interest-relevant issues deserve
special attention and clarification, one on the side of cause and the other
on the effect side.
The first ambiguity is about the reason for the existence of interest.
Among many other causes claimed, time preference seems to be the
most assertive one. In particular, Böhm-Bawerk’s comprehensive theory
presents an existential problem by grounding on the ordinary human
attitude that can be claimed to be inherent.
The second controversial point is about the consequences of interest

rate control. If the prohibition of interest or limiting its rate has undesired
distortive effects on the market as claimed, means-ends consistency in
regulations may be required to reevaluate.
Because the supporters of interest-free economic systems have the most
explicit attitude against interest, the further success of the systems and the
interest-free financial instruments they proposed requires plausible inter-
pretations of these two issues. The conclusion may be either refuting or
entirely or partially acknowledging these two assertions: Time preference
is the cause of interest, and interest rate control has distortive conse-
quences. Whatever the conclusion is, their arguments would be more
accurate, and insofar as it is plausible, the arguments would be more
convincing for others. Therefore, to be financially and socially efficient,
any evaluation, judgment, or regulation on interest has to consider the
coercive demand for the usage of interest and the consequences of interest
rate control.
This book presents the concept of interest in aspects of meaning,
history, and nature by focusing on its causes and consequences. Time pref-
erence, an important reason that seems inevitable, and the non-negligible
implications of interest rate control are highlighted.
Although there are some other interest-free economic models and
movements, Islamic economics may be considered to lead the way by its
numerous supporters, relatively extensive literature, growing market, and
actively operating instruments. Among other reasons that separate Islamic
economics from conventional systems, the prohibition of interest is the
most significant one. Since it is the most cited interest-free economic
system, the basics of Islamic economics are reviewed. Specifically, the
prohibition of interest in Islam is focused, and Islamic economists’ inter-
pretations of time preference and consequences of interest rate control
are evaluated qualitatively.
In Chapter 2, the lexical meaning of interest and the definition of
interest in economics are presented, and the history of interest since
ancient times is reviewed.
In Chapter 3, the theoretical development in the concept of interest
and the prominent interest theories are summarized. Then, Böhm-
Bawerk’s time preference theory of interest is introduced in detail by
presenting his reason for developing a theory distinct from the existing
ones, and the critiques of various scholars and the works testing the
validity of the theory in the contemporary economy are reviewed.
8 C. EYERCI
In Chapter 4, the reasons for the prohibition of interest or limiting its

rate are summarized. The legal, religious, ethical, and financial instru-
ments used in the regulation of interest are presented in the second
section.
In Chapter 5, the concept of price control concerning its mechanism
and consequences is reviewed, and Steven Cheung’s price control model,
which applies to any price control regulation, is introduced. According to
Cheung, for a correct evaluation of the consequences of a price control
regulation, the specification of constraints proper to the real market
practice should be available. However, the complexity of control regula-
tions does not allow estimating the correct constraints. Cheung’s theory
attempts to propose a methodology that helps to investigate the relevant
constraints of any price control rather than explaining the implications
of a specific control. Lastly, the consequences of interest rate controls in
various markets are evaluated.
In Chapter 6, after summarizing its historical background and its
distinctions from conventional systems, the basic principles of the Islamic
economic system are presented. Prohibition of interest, the main distinc-
tive feature of Islamic economics, is reviewed regarding its origins
from the Quran (the holy book) and Sunnah (practices of the Prophet).
The traditional view of Islam on interest is presented by referring to
the approach of fiqh (Islamic jurisprudence) to interest. The opposing
views to the mainstream approach are summarized, and the instruments
alternative to interest-based transactions and other devious ways used to
overcome the prohibition are introduced. A chronological bibliography
of Islamic economics on the concept of interest is also attached to the
chapter in Appendix 6.1.
In Chapter 7, the Islamic economists’ interpretations of the concept
of the time value of money, the causes of time preference asserted as the
justifiers of interest, and the claims about the distortive consequences of
interest rate control are evaluated in detail, beginning from the twentieth
mid-century.
Finally, in Chapter 8, the content of the previous chapters is summa-
rized, and the findings are concluded.
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———. 1930. The Positive Theory of Capital. New York: G.E.Stechert.
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CHAPTER 2
The Concept of Interest: Meaning and History
Interest had existed long before the beginning of the efforts to under-
stand and define it. In the first section of this chapter, the literal meaning
of the word interest is presented, and its ascribed meaning as an economic
term is scrutinized in aspects of various definitions and types. The history
of interest is reviewed beginning from the ancient times in terms of the
rates, causes, and regulations of interest, and the enforcement tools of
defaulted loans, in the second section.
2.1 What Is Interest?

The word interest means to be between as a combination of two words;
inter means between and esse means to be. As Online Etymology Dictio-
nary (2019) defines, the word interest was used in meanings of “legal
claim or right; a concern; a benefit, advantage, a being concerned or
affected …” (entry of interest ) in the middle of the fifteenth century.
The word interest was derived from the Latin word of interesse, which
initially meant a penalty of a defaulted or late repaid loan. However, the
origin of interest was closely related to the meaning of usury that was
defined as the repayment of a loan exceeding the principal in medieval
Europe (Persky 2007). In time, usury evolved to mean excessive interest
in most of the world by the adoption of the meaning of interest to be the
increment in the repaid loan at an acceptable rate.

Switzerland AG 2021
14 C. EYERCI
Although the word has been used in some other meanings in the
past and today as well (Table 2.1), the earliest relevant usage was in the
sixteenth century (“Interest in Online Etymology Dictionary” 2019), the
same as in its present meaning of payment for the use of borrowed money.
At present, the relevant meaning of interest is defined in Merriam-
Webster (2019) dictionary as “a: charge for borrowed money generally a
percentage of the amount borrowed, b: the profit in goods or money that
is made on invested capital, c: an excess above what is due or expected”
(entry of interest ). The Oxford Advanced Learner’s Dictionary (2000)
preferred a single definition as “the extra money that you pay back when
you borrow money or that you receive when you invest money” (p. 625).
Even though the dictionaries define interest as the increment in money
lent, it is clear that interest-bearing transactions of goods besides money
were made in the past and are still being partially made today.
However, some scholars used the word interest in various meanings as
an economic term (Table 2.2). Irving Fisher (1930) defined interest as
the name of all types of income. Joseph Schumpeter’s (1934) definition
was narrower than Fisher’s was, that named all returns, except the wages,
as interest.
Table 2.1 The change in the meaning of interest over time
Era Meaning of interest
The Latin origin Interesse: A penalty of a defaulted or late repaid loan

(inter: between + esse: to be)
Medieval The repayment of a loan exceeding the principal
Fifteenth century Legal claim or right; a concern; a benefit, advantage, a being
concerned or affected
(Online Etymology Dictionary)
Sixteenth century Payment for the use of borrowed money
(Online Etymology Dictionary)
Today a. Charge for borrowed money generally a percentage of the
amount borrowed
b. The profit in goods or money that is made on invested
capital
c. An excess above what is due or expected
(Merriam-Webster Dictionary)
The extra money that you pay back when you borrow money or
that you receive when you invest money
(The Oxford Advanced Learner’s Dictionary)
2 THE CONCEPT OF INTEREST: MEANING AND HISTORY 15
Table 2.2 Some definitions of interest made by various scholars
Scholar Definition of interest
Turgot (1766) The price of the use of loaned money

Smith (1776) The revenue derived from the stock that lent
to others
Senior (Medema and Samuels 2003) The revenue of the lender for abstaining from
present consumption
James Mill (Conard 1959) The revenue of stored labor, a form of capital
Böhm-Bawerk (1890) The income that flows from the capital
Fisher (1930) The name of all types of income
Schumpeter (1934) All returns, except the wages
Knight (Conard 1959) Interest and rent are the same
Some other scholars regarded interest as it is commonly accepted: the

increment in a loan when it is paid back, but made some additional
definitions due to their approaches to the nature of interest. Frank H.
Knight, for example, asserted that interest and rent are the same (Conard
1959). Anne Robert Jacques Turgot (1766) defined interest as the price
of the use of loaned money. Adam Smith (1776) described interest as
the revenue derived from the stock that lent to others. Nassau W. Senior
defined interest as the lender receives for her abstaining from present
consumption (Medema and Samuels 2003). As a final example, according
to James Mill, interest is the revenue of stored labor, a form of capital
(Conard 1959).
No matter how the word interest is defined, one should possess an asset
to be able to lend. Capital, the mentioned asset to be lent, is characterized
by Böhm-Bawerk (1890) as “… a complex of goods that originate in
a previous process of production, and are destined, not for immediate
consumption, but to serve as means of acquiring further goods” (p. 6).
Since the current consumption vanishes before being used as capital and
the land is not produced, Böhm-Bawerk excluded these two assets from
the scope of capital. Thus, Böhm-Bawerk also made a distinct definition
of interest: the income that flows from capital is interest.
On the other hand, there are various breakdowns of interest (Fig. 2.1).
Gross interest , for example, is the increment in the loan paid back by the
borrower, which also involves the transaction costs such as taxes and risk
premiums. Differently, net interest is the real income of the lender that
received for the lent capital, after the deduction of the costs from the gross
16 C. EYERCI
Capital employed Natural

in production interest
Return of
capital Transferred right Contract/loan
of use of capital interest
Use of durables (e.g. Use of perishables

building, vehicle) (e.g. money, grain)
Rent/hire Interest
Transaction costs (taxes,

Gross risk premiums, bank Net
interest charges, etc.) reduced. interest
The loss (due to the

Nominal Real
increase in the general
interest level of prices) reduced.
interest
Fig. 2.1 Various breakdowns of interest
interest. In other words, when there is a transaction cost, the interest rates
of a loan for a lender and a borrower are not equal.
Another breakdown is of natural interest and contract or loan interest .
The value of a product increases by the use of capital in production. In
general, the increment in the value of the product is higher than the value
of capital used. The increment above the invested capital is the profit of
capital, namely natural interest . The owner of capital does not always
employ it himself in production but gives it to someone else against
a fixed remuneration. The remuneration received from capital that is
durable such as building, vehicle, or tool, is called hire or rent. When the
capital is perishable as money, grain, or another commodity, the income is
called interest. Both rent and interest are called contract or loan interest
(Böhm-Bawerk 1890).
The distinction between nominal interest and real interest should also
be considered. Nominal interest is simply the interest on a loan or invest-
ment. In case of the existence of inflation, the real value of the capital at
the lending or investment time, especially when capital is money, cannot
be kept at the end of the lending or investment period. The real interest
is the normalized nominal interest by the inflation rate.
The interest rate, which is the ratio of the amount of increment to
the amount of capital lent, has some determinants. These determinants
are essential to understand what the rate means. The interest rate may
change according to the
• time, maturity, size, place, and legality of the loan,

• taxability of the interest income,
• level of the reliability of the borrower,
• existence of indemnity,
• institutional identity of the lender.
Within the scope of this book, unless otherwise specified, that is

intended by interest is net and real interest , but not the gross, natural,
rent based loan or nominal interest.
2.2 The History of Interest

Lending has been utilized in economic life since the prehistoric ages.
Although the usage of money as the coin had begun at the first millen-
nium BC, lending had existed well before the emergence of money. The
Neolithic farmers, who had given seed to others by expecting return,
might be the first lenders. The amount of repayment for the loans to a
friend, neighbor, or relative could be equal to the amount lent. However,
some of these lenders received back more at harvest-time. Similarly, cattle
had been lent and received with their calves at the repayment time
(Homer 1963). The increased part of the seed and the calves of the cattle
were called interest, and requested for loans of other goods and money as
well, in many ancient, medieval, and modern societies.
Metals like gold, silver, lead, bronze, and copper had begun to be
loaned at interest by the development of mining. The exchange of metals
had been made by weight before the emergence of money (Homer 1963).
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There are findings regarding the practice of interest in Mesopotamia,

Ancient India, Ancient Greece, Ancient Rome, Byzantium, and Medieval
Europe as it is briefed in the following. The Abrahamic religions (Judaism,
Christianity, and Islam) strictly intervened in the practice of interest, and
their approach to the issue has to be considered to comprehend how the
perception of interest and its practice evolved to present conception.
The rate of interest changed in time and varied due to the type of
the loan (personal, mortgage, maritime, commerce, etc.) and identity of
the borrower (citizen, merchant, state, etc.) and lender (banker, church,
pawnbroker, etc.).
2.2.1 Mesopotamia
In ancient Sumer, from the third millennium BC to 1900 BC, grain and
silver were standard values (Homer 1963). The Sumerian writings, avail-
able today, were mostly about records of commercial transactions and
contracts, including interest-based loans. In the twenty-fourth century
BC, a Sumerian legal code regulated the loan transactions and freed the
people imprisoned for the debt not paid back (Vincent 2014). The Sume-
rian people were familiar with loans not only at basic interest but also at
compound interest (Graeber 2011). The usual rate of interest for a loan
of barley was 331/3, and for a loan of silver was 20% (Homer 1963).
The Sumerian financial practices that survived until the Babylonian era
took place in the Code of Hammurabi, which came into force circa 1800
BC. The Code allowed lending at interest, but a maximum interest rate
was defined for each type of loan. It was mandatory to make the loan
contracts before an officer and witnesses in Babylonia. If not, the lender
could not claim anything. The lender also lost the repayment if an interest
rate over the maximum level was defined. Pledges and sureties were used
to protect the lender in a case of default. People such as wife, concubine,
children, and slaves or possessions like land, house, and door were allowed
to pledge. The slavery of such people was possible only for three years.
The limit on the slavery period has extended later (Homer 1963).
The loans were usually in grain and silver. Similar to the Sumerian era,
the maximum interest rate on loans of grain (one third per annum) was
higher than on loans of silver (20% per annum) for more than a thousand
years. Although the usual maximum interest rate on loans of silver was
20%, there were also examples as 25 and 12% per annum. The lenders
were not only the individuals, but the temples were also lending. The
temples used lower levels of interest rates such as 20% for loans of barley,
and 61/4% for loans of silver to help the poor people. Even the temples
lent without interest in some cases. The interest rates were higher in the
neighboring countries of Babylonia in that era (Homer 1963).
In the period of 732–625 BC, when the Assyrians dominated, the legal
maximum interest rate remained the same in Babylonia. However, the
interest rates in Assyria itself were not the same as the Babylonian rates.
Although there is no evidence of any interest rate limits used in Assyria
in the ninth and eighth century BC, the normal interest rates on grain
loans were 30–50%, and on silver loans were 20–40% per annum (Homer
1963).
Then, in the Neo-Babylonian Empire, from 625 to 539 BC, the
allowed maximum interest rate on grain loans was reduced to 20%, and it
became equal to the rate on silver loans. Lending with interest rates higher
than the defined maximum level was rarely allowed. However, usually, the
rates in the loan market were below the maximum rates of interest. There
were examples that professional creditors lent at 112/3% and some others
lent at interest rates varying between 162/3 and 20% (Homer 1963).
The loans at interest survived for thousands of years in Mesopotamia
with the frequent interventions of the authorities. However, the interven-
tions were not only for the regulation of lending. For the restoration of
justice and equity, the protection of widows and orphans, or other similar
reasons, the debts were abolished several times in Sumer, Babylonia, and
Assyria (Graeber 2011).
2.2.2 Ancient India

The earliest information about the existence of loans at interest in ancient
India is of the period of the twentieth to fourteenth century BC. It is
known more about the loans at interest in the later centuries of seventh to
first BC. A Hindu law was made, and lending at interest became forbidden
for the upper classes such as priests and the warriors. On the contrary, the
Hindu temples were allowed and commonly lent at interest. In the second
century AD, the Laws of Manu, the Hindu code, defined the interest rates
above the legal rate to be usurious and such attempts to be against the law.
On the other hand, in medieval India, the Hindu law emphasized that the
one who could not repay a loan would be reborn as a slave of her lender
or her horse or ox. The same attitude was observed in Buddhism (Visser
and McIntosh 1998; Graeber 2011).
20 C. EYERCI
The earlier rules limited the interest rate of loans at 15% per annum,
except for commercial loans. Then, various limits were defined for each
caste in the range of 24–60% per annum (Graeber 2011).
2.2.3 Ancient Greece

The population lived around the Aegean Sea from 2400 to 1200 BC is
known to reach a high level of economic activity. However, there is not
any information about lending made at interest. On the other hand, the
Greek poet Hesiod mentioned the interest-free seed loans. In this period,
cattle were the standard values at the beginning. Later, metals were begun
to use for exchange. In the seventh century BC, the Greeks developed an
economic system based on trade. The loans at interest were used much in
commerce (Homer 1963).
At the beginning of the sixth century BC, the farmers faced massive
economic troubles. They were producing but could not keep most of
their production. Slavery for non-repaid loans was allowed and frequently
observed. In 594 BC, Solon, a prominent wise man, was empowered by
Athens with legislative power for a limited period to revise the laws. Solon
made radical reforms. Many debts were canceled or reduced by the revi-
sion of laws. The slaves for unpaid loans were released. The limits and
restrictions on the interest rates were removed. However, personal slavery
established for not paid loans was forbidden. Instead, the loans began to
be secured by real estate. Bankers that lent to individuals and states were
prevalent in the fourth century BC. Various assets such as state revenues,
cargoes, pawns, and real estate were used to secure the loans. Besides,
unsecured loans were also made (Homer 1963).
In the fourth century BC, during the lifetime of Aristotle, it was
believed that the loans aiming profit were unnatural and dishonorable.
Aristotle classified wealth acquiring in two types. The necessary and
honorable one was household management. The retail trade in which
people gain from one another was regarded to be unnatural. Mostly
the deal of money, lending at interest, had been hated. Money was for
exchange only (Olechnowicz 2011). Even so, this belief did not resolve
the existence of loans at interest.
In ancient Greece, interest rates highly varied in time. The rates
differed among cities and were not the same for different types of loans.
The normal interest rate of loans of silver in Athens in Solon’s time (the
sixth century BC) was 16–18%. It was 6–10% in the second century BC
and 8–9% in the first century AD. The interest rate on the real estate loans
varied between 62/3 and 18% in the period of fifth to second century BC.
The interest rate on loans to cities was 7–48%, to industry and commerce
was 12–38%, and the rate on the earnings of endowment funds was
6–16%. There were some other types of lending, such as personal and
usurious loans. The interest rates of these types varied in a wide range,
for example, 36% in the fifth century BC, various rates from 10 to 9000%
in the fourth, and 24% in the third century BC (Homer 1963).
2.2.4 Ancient Rome

The Romans of high status had income from landholding and usury, but
the activities of commerce and industry were regarded dishonorable and
left to the former slaves (Baumol 1990) and foreigners. That may be
the reason for observing fewer records of interest rates in ancient Rome,
compared to ancient Greece. The first known form of money in ancient
Rome was cattle and some other animals. By the fifth century BC, copper
and bronze became to be used for exchange. Rome began to use the silver
coin in the second century BC (Homer 1963).
Before 443 BC, the loans were secured by slavery, and the defaulted
debtors were sold in foreign lands. In 443 BC, Twelve Tables codified
Roman law. According to the Tables, the debtors were allowed for thirty
days to pay. In case of default, the lender was able to seize and fetter the
debtor but had to feed him. On the other hand, creditors receiving an
interest higher than the legal maximum of 81/3% per annum had to pay
a fine. In 347 BC, the maximum rate was reduced to 41/6% per annum,
and around 342 BC, it again increased to 81/3% (Homer 1963). Once in
340 BC, the loans at interest were totally banned within the Lex Genucia
reforms, but this did not prevent the existence of loans at interest, and
the rules changed back again (Visser and McIntosh 1998).
In 326 BC, the imprisonment of Romans for debt became forbidden
for the first time. In 192 BC, the foreigners were also covered by the
law. Rome was the financial center of the world by the first century BC
(Homer 1963).
The legal maximum interest rates of Rome were around 12% from the
first century BC to the fourth century AD. Besides, the normal interest
rates varied in a range of 4–12% in the same period. The interest rates in
the Roman provinces were quite different from the ones in Rome (Homer
1963).
22 C. EYERCI
It is a general acceptance that the loans were not at interest in Egypt

until the eighth century BC. Lending was probably among the neighbors
only, and it was free of interest (Graeber 2011). During the Roman domi-
nation, in the fifth century BC, the interest rate on the loan of grain was
100%, and of silver was 85% in Egypt. In the second century BC, the rates
were 5–10% in Egypt and 8–12% in Asia Minor. In the second century
AD, the interest rates were 6–50% in Egypt, 6–12% in Asia Minor, and
5–12% in Roman Africa (Homer 1963).
2.2.5 Byzantium
About the era of the Eastern Roman Empire, regarding interest, only the
legal limits are known. Since the interest rates were considered too high,
the legal maximums of interest rates were reduced to a range of 4–8%
by the Justinian Code in the sixth century. Bankers and ordinary citi-
zens were allowed to charge 8 and 6%, respectively. The interest rates of
maritime loans per voyage and the loans of commodities payable in kind
were limited to 12%. The interest of the loans to churches and founda-
tions were lower, 3%. Besides, accumulated interest was not allowed to
exceed the principal. The legal limits in the seventh and eighth centuries
were the same as in the sixth century. In the ninth and tenth centuries,
the legal limits increased to 81/3–111/8% range (Homer 1963).
2.2.6 Interest in the Abrahamic Religions and Medieval Europe

Considering that more than half of the world population is composed
of the adherents of the Abrahamic religions (Judaism, Christianity, and
Islam), their approaches to the concept of interest deserve a close exam-
ination. More importantly, the evolution of the perception of interest
and its practice into the present conventional conception has taken place
essentially in Christian Europe and continued in the Western World. On
the other hand, presumably, the most prominent interest-free approach
that is claimed to be an alternative to the conventional view has emerged
within Islamic economics thought.
Christianity and Islam forbade lending at interest. However, Judaism
defines some exceptions. The Jews were not allowed to lend at interest
to other Jews and to non-Jews, who believed in the relevant rules of
Torah, but it was permitted to make interest-based transactions with
others (Visser and McIntosh 1998).
After the emergence of Christianity, an ambiguity arose about the

legitimacy of interest due to various contradicting decrees in old and
new testaments. The result of the attempts to overcome the uncertainty
was against interest, and in the fourth century AD, the Roman Catholic
Church prohibited to lend at interest for the clergy (Visser and McIntosh
1998).
Circa 800, during the reign of Charlemagne, the earlier prohibitions
were adopted as state law, and the interest restriction was extended,
covering all people (Küçükkalay 2018). However, Jews were not included
in the prohibition and were accepted as legal moneylenders by the Church
(Geisst 2013). After about 300 years, in the eleventh century, the scholars
examined the practice of interest in detail, and it was declared that lending
at interest was a form of robbery, so it was a sin. In the twelfth century,
Pope Alexander III decreed that forward sales at a price above the cash
price were usurious. According to the decree, usurers were guilty of being
uncharitable and avarice, and sinners against justice. Therefore, they had
been excommunicated (Homer 1963). The decree also widened the scope
of the prohibition of interest. The lending types that were legal previously
and similar to interest-bearing loans were prohibited (Küçükkalay 2018).
The essential attitude did not change much until the emergence of
Protestantism in the sixteenth century. Within the thought of Refor-
mation, Luther, Calvin, and others asserted that interest should not be
condemned, and thus the prohibition of interest was removed gradually.
However, some of the pioneers of the new approach had reservations on
the legitimacy of interest. For example, although he came to be known
as wholly supporting it, Calvin defined cases in which interest remained
sinful. Disregarding any reservations, the sympathy to interest spread out,
and by the changed attitude of the authorities on interest, usury was
redefined as the interest above the acceptable rate (Visser and McIntosh
1998).
While the prohibition of interest was weakening in Protestant coun-
tries, the tightness of the Church policies continued until the eighteenth
century in the Catholic world. Even though some credit forms such as
insurance contracts and state loans were allowed and used along a few
centuries, the Catholic Church came to approve new lending forms that
were easing the usage of interest in the eighteenth century (Homer 1963;
Chown 1996). In the nineteenth century, it was decreed that everyone
was allowed to receive interest at a rate not more than the defined
maximum (Homer 1963), and it is still the view of the Church (Visser
and McIntosh 1998).
24 C. EYERCI
It should be noted that various prohibitions and regulations of interest

made by the Church during many centuries did not merely stem from
religious motivations. In some periods, some merchants, who were able
to use instruments for evading the Church’s regulations, supported the
prohibitions. Thus, the others, lacking the abovementioned instruments,
were kept away from the market. In consequence of the ban on interest,
the implicit interest rate observed was higher than the rate that would be
if it were legal; a small group of merchant bankers took the monopoly
power; the pawnbrokers that publicly lent at interest emerged. The
administrators, privileged merchants, and the Church shared the rents
that originated from the prohibition of interest (Koyama 2010).
The acceptable interest rate that was not exceeding an upper limit has
been a much-debated issue all the time, and defining it is still an unsolved
problem. However, today, the Church’s decree does not influence the
practice of law much in most of the Christian populated countries.
Despite the abovementioned and many other regulations of religious
and administrative authorities for the prohibition of interest, the interest-
bearing practices always existed in Europe illegally or semi-legally. Along
with the revival of trade and industry in the eleventh century, the need
for the finance of economic activities increased, and some new forms of
lending developed. The supporters of interest emerged by using some
loopholes in the law and contradictions in the Church’s arguments (Visser
and McIntosh 1998).
The new instruments helped to meet the need for lending but not
explicitly considered a sin. For example, the pawnbrokers, who were Jews
in general and often tolerated and licensed through heavy fees, made
secured consumption loans at an interest rate of 321/2–300% per annum.
State loans might be another example. Some states forced the wealthy
citizens to lend to the state in proportion to their wealth. The states were
defining the date of repayment, and annual payments were made to the
lenders as gifts. The rate of interest was low, and nobody was voluntary for
making such loans. In the fourteenth century, a practice was developed by
the partnerships that one partner was insuring the investor partner against
loss. In the sixteenth century, the Church unofficially approved the prac-
tice of profit insurance, and the interest received from such investments
was used to support the needy people and the Church (Homer 1963).
The records of interest rates became available again, after a long time,
in the twelfth century. In England, the Jews were the primary lenders.
The usual interest rate was changing in a range of 431/3–120% due to the
quality of the security. The maturity of the loans was not longer than a
year, and the often-used interest rates were weekly rates. At the end of the
century, the interest rate was between 10 and 16% in the Netherlands, and
20% in Genoa (Homer 1963).
In the thirteenth and fourteenth centuries, the types of loans diver-
sified. There were loans to princes, personal loans, commercial loans,
deposits, mortgages, and loans to states. The interest rates varied due
to the type of loan and state. For example, the interest rates were in a
range of 5–40% in the thirteenth century. The upper limits defined for
pawnshops in some states were higher up to 300%. The variation of the
interest rates among the loan types and the countries remained similar
during a few centuries. In the second half of the seventeenth century,
the interest rates of various loan types decreased to some extent. In these
years, the interest rates of short-term commercial loans were 13/4–41/2%
in the Dutch Republic and 3–6% in England. Short-term deposits had
interest rates of 3–4% in the Dutch Republic and 4–6% in England. The
interest rates used in mortgages and other long-term debts were 3–121/2%
in the Dutch Republic, 4–6% in England, and 5–81/3% in France (Homer
1963).
The traditional Islamic view on interest did not become evident
during the lifetime of the Prophet, in the early decades of the seventh
century. Riba, which means increase, addition, or expansion (Chapra
1996), is prohibited both in the Quran (the holy book) and in Sunnah
(practices of the Prophet). However, there has been a long-continued
debate on the scope of riba after the Prophet. Although there are many
others, the widely accepted definition for riba is “any increment in the
amount of borrowed money or asset on the repayment day.” According to
this traditional and most common view, riba means interest. Since interest
is not allowed, at any rate, a riba-based or interest-based lending is the
same as usury.
Although not honored much, there have been various approaches
distinct from the traditional one. Some scholars differentiate the loans
for consumption from the ones for production. They claim that the
income from the former is not allowed due to being riba, and the income
from the latter is allowed since it is an interest. Some others assert that
the simple interest is not implied by riba, but the inhibited action is
receiving compound interest. Another approach defines the prohibited
riba to be the same as usury or excessive interest, but excludes interest at
an acceptable rate from riba and legitimates it.
The interest rates of some transactions in Ancient times and Medieval
Europe are summarized in Table 2.3.
26
Table 2.3 Some annual interest rates practiced in Ancient times and Medieval Europe
Era Normal rates Lower Excessive

(%) rates (%) rates (%)
Mesopotamia- 3rd millennium BC to 1900 BC 331/3 (for grain)

C. EYERCI
Sumer 20 (for silver)

Mesopotamia- More than 1000 years after 1800 BC 331/3 (for grain) 20 (for grain)
Babylonia 20 (for silver) 61/4 (for silver)
Mesopotamia- 1st millennium BC 30–50 (for grain)
Assyria 20–40 (for silver)
Mesopotamia- 625–539 BC 20 (for grain) 112/3
Neo-Babylonia 20 (for silver)
Ancient India Seventh to first century BC 20 60
Ancient Greece Sixth century BC 16–18 9000
Second century BC 6–10 (fourth century BC)
First century AD 8–9
Ancient Rome Fourth century BC 81/3 (for silver) 4
First century BC to fourth century AD 12
Ancient Rome- Fifth century BC 100 (for grain)
Egypt 85 (for silver)
Second century BC 5–10
Second century AD 6–50
Ancient Rome- Second century BC 8–12
Asia Minor Second century AD 6–12
Era Normal rates Lower Excessive
(%) rates (%) rates (%)
Ancient Rome- Second century AD 5–12

Roman Africa
Byzantium Sixth century 4–8 3
Medieval Europe Twelfth century 431/3–120 (England)
2
10–16 (Netherlands)
20 (Genoa)
Thirteenth century 5–40 300
(Pawnbrokers)
Seventeenth century 3–6 (England)
5–81/3(France)
Source: Homer (1963) and Graeber (2011)

THE CONCEPT OF INTEREST: MEANING AND HISTORY
27
28 C. EYERCI
References
Baumol, William. 1990. “Entrepreneurship: Productive, Unproductive and
Destructive.” The Journal of Political Economy 98 (5–1): 893–921.
Böhm-Bawerk, Eugen. 1890. Capital and Interest: A Critical History of Econom-
ical Theory. London: The Macmillan Company.
Chapra, Muhammad Umer. 1996. What Is Islamic Economics? Vol. 9. Islamic
Development Bank, Islamic Research and Training Institute.
Chown, John F. 1996. A History of Money: From AD 800. London: Routledge.
Conard, Joseph W. 1959. An Introduction to the Theory of Interest. Berkeley:
University of California Press.
Fisher, Irving. 1930. The Theory of Interest. New York: The Macmillan Company.
Geisst, Charles R. 2013. Beggar Thy Neighbor: A History of Usury and Debt.
University of Pennsylvania Press.
Graeber, David. 2011. Debt: The First 5000 Years. New York: Melville House
Publishing.
Homer, Sidney. 1963. A History of Interest Rates. New Jersey: Rutgers University
Press.
“Interest in Merriam-Webster’s Dictinonary.” 2019. In . https://www.merriam-
webster.com/dictionary/interest. Accesed on February 17, 2019.
“Interest in Online Etymology Dictionary.” 2019. In . https://www.etymonline.
com/word/interest. Accessed on February 17, 2019.
“Interest in Oxford Advanced Learner’s Dictionary.” 2000. In . New York:
Oxford University Press.
Koyama, Mark. 2010. “Evading the Taint of Usury.” Explorations in Economic
History 47 (4).
Küçükkalay, Abdullah Mesud. 2018. İktisadi Düşüncede Faiz [Interest in
Economic Thought]. Konya: Çizgi Kitabevi.
Medema, Steven G., and Warren J. Samuels, eds. 2003. The History of Economic
Thought: A Reader. London: Routledge.
Olechnowicz, Cheryl A. 2011. “History of Usury: The Transition of Usury
through Ancient Greece, the Rise of Christianity and Islam, and the Expan-
sion of Long-Distance Trade and Capitalism.” Gettysburg Economic Review 5:
97–109.
Persky, Joseph. 2007. “Retrospectives: From Usury to Interest.” Journal of
Economic Perspectives 21 (1): 227–36.
Schumpeter, Joseph A. 1934. The Theory of Economic Development. Cambridge:
Harvard University Press.
Smith, Adam. 1776. The Wealth of Nations. The Electric Book Co.
Turgot, Anne Robert Jacques. 1766. “Reflections on the Formation and Distri-
bution of Wealth.” In The Turgot Collection, edited by David Gordon, 5–65.
Ludwig von Mises Institute.
Vincent, Joshua. 2014. “Historical, Religious and Scholastic Prohibition of

Usury: The Common Origins of Western and Islamic Financial Practices.”
Law School Student Scholarship. Paper 600.
Visser, Wayne AM, and Alastair McIntosh. 1998. “A Short Review of the Histor-
ical Critique of Usury.” Accounting, Business & Financial History 8 (2):
175–89.
CHAPTER 3
Theoretical Development and the Time

Preference Theory
The significant role of interest of Interestin lending has always moti-

vated people to think about the nature of interest since ancient times.
The philosophers, wise men, religious scholars, and the lawmakers eval-
uated it economically, morally, and religiously well before modern times.
In time, the mobility of money and the need to finance increased further
by the development of trade and industry. Besides, the attitude against
the legitimacy of interest weakened in Europe by the widening of Protes-
tantism. By the seventeenth century, along with the increased significance
of the role of interest in economic life, scholars began to deal with the
concept of interest more systematically. The leading mercantilist, physio-
crat, and classical economists took part in the pro-interest movement and
asserted that interest is legitimate. These economists studied the nature of
interest as it was done before. However, this time, the economic aspects
of interest, but not religious and moral ones, were in the center of the
issue (Küçükkalay 2018). Many theories were developed to explain the
causes of the existence of interest and its role in economic activities.
The most cited theories of interest were developed on the concept
of time preference. As being considered the founder of the modern theory
of interest, among others, it must be pointed out that Böhm-Bawerk’s
approach of time preference has particular importance.
In this chapter, firstly, the basic principles of the significant theories of
interest are briefly summarized. In the second section, Böhm-Bawerk’s

Switzerland AG 2021
32 C. EYERCI
arguments for developing a new theory distinct from the existing ones
are presented, and his time preference theory of interest is introduced
in more detail. The critiques of Böhm-Bawerk’s theory made by various
scholars are reviewed in the third section. Lastly, the validity of the theory
in the current economic system is evaluated.
3.1 The Theories of Interest

From the beginning, the theory of interest has been studied within
the theory of distribution. Accordingly, there are four factors of
production in the economy. The workers, landholders, capital owners,
and entrepreneurs receive wage, rent, interest, and profit, respectively.
However, there have also been some different approaches to the cate-
gorization of income. Irving Fisher (1930), for example, asserted that
all types of income are interest. Frank H. Knight regarded interest and
rent to be the same. As another example, according to Joseph A. Schum-
peter (1934), all returns, except the wages, may be considered a form of
interest. He defined interest as a deduction from profit like a tax (Conard
1959).
The main question that the theories of interest try to answer is why
the lenders of money request and receive payment as interest. There is
another question that accompanied the main one: How is the interest rate
determined? In general, these two issues have been regarded as separate
fields (Conard 1959). However, there were some scholars, like Fisher,
who contradicted it. Fisher (1930) claimed that the answer to the second
question would also include the answer to the first one.
From another point of view, the main theoretical problem in interest
studies is about the causes of interest. The question pursues, almost the
same as the abovementioned first question does: Why is there interest?
The rest of the problem is about the social and political aspects, and deals
with the effects of interest; discusses on the necessity, justice, fairness,
usefulness, and goodness of interest; tries to decide whether it should be
continued or stopped to use, or modified (Böhm-Bawerk 1890).
Many economists, including most of the classical ones, studied on
nonmonetary theories of interest, in which the quantity and velocity of
money were not considered in the determination of interest rate. On the
contrary, monetary theories were prominent both before and after the
classical economists. The reason for the diversity of classical economists
might be their more theoretical approach to the issue compared to others.
3 THEORETICAL DEVELOPMENT AND THE TIME PREFERENCE … 33
The pre and postclassical economists were personally involved in the

economic activities and administration of the economy more than the
classical ones (Conard 1959).
The manner of approaching the issue may be another aspect of the clas-
sification of the theories of interest. Böhm-Bawerk (1890), for example,
grouped the interest theories as colorless theories, productivity theories,
abstinence theories, labor theories, and exploitation theories.
Böhm-Bawerk grouped several economists’ assertions on interest
under colorless theories due to not influencing much on the develop-
ment of interest theory. He included Turgot, Adam Smith, Ricardo, and
McCulloch’s works in this group. Smith and some scholars asserted that
when interest does not exist, the owner of capital would not be moti-
vated to employ the capital productively. Some others thought that there
was no need to explain interest. The alleged causes of interest by some
other economists were peculiar and too shallow to be a theory. Although
Böhm-Bawerk classified Adam Smith and Ricardo’s works in this group
and did not regard them as complete interest theories, he stated that the
seeds of many later theories were involved in their exertions.
Some of the prominent interest theories, including the ones mentioned
above, are briefly reviewed in the following. Although Turgot is noted
among the colorless theories by Böhm-Bawerk, his assertion is worth
evaluating due to being considered the first scientific approach.
3.1.1 Turgot’s Theory of Interest

Anne Robert Jacques Turgot, the French physiocrat, was introduced by
Böhm-Bawerk (1890) to be the first scholar who scientifically studied the
issue of interest. Turgot defined that lending money at interest was a kind
of trade, in which the lender sells the use of money to the borrower. It
is the same as renting in that the use of a rented property is sold. Thus,
interest is the price of the use of money (Turgot 1766).
When some capital is lent, the lender risks it and loses the income
that might be earned by its use during the loan period. On the other
hand, the borrower can employ the capital in an investment and make a
profit. However, the real causes of the legitimacy of receiving interest are
quite different. Since the capital is the lender’s own, any capital owner has
the right to lend at interest. A lender can do whatever he wants, either
keeping the money or lending it by setting conditions or something else.
It is just like exchange transactions in which commodities are sold (Turgot
Another random document with
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have been through what it relieved me from to know how not suffering from one’s food
all the while, after having suffered all one’s life, and at last having it cease and vanish,
could make one joyously and extravagantly relegate all out-of-door motion to a more
and more casual and negligible importance. To live without the hell goad of needing to
walk, with time for reading and indoor pursuits,—a delicious, insidious bribe! So,
more and more, I gave up locomotion, and at last almost completely. A year and a half
ago the thoracic worry began. Walking seemed to make it worse, tested by short spurts.
So I thought non-walking more and more the remedy, and applied it more and more,
and ate less and less, naturally. My heart was really disgusted all the while at my
having ceased to call upon it. I have begun to do so again, and with the most luminous
response. I am better the second half hour of my walk than the first, and better the
third than the second.… I am, in short, returning, after an interval deplorably long
and fallacious, to a due amount of reasonable exercise and a due amount of food for
the same.
A Page from an Autograph Letter from Henry James to Horace Fletcher

My one visit to Lamb House was in company with Horace Fletcher. The
meeting with Henry James at dinner had corrected several preconceived ideas
and confirmed others. Some writers are revealed by their books, others conceal
themselves in their fictional prototypes. It had always been a question in my
mind whether Henry James gave to his stories his own personality or received
his personality from his stories. This visit settled my doubts.
The home was a perfect expression of the host, and possessed an
individuality no less unique. I think it was Coventry Patmore who christened it
“a jewel set in the plain,”—located as it was at the rising end of one of those
meandering streets of Rye, in Sussex, England, Georgian in line and perfect in
appointment.
In receiving us, Henry James gave one the impression of performing a
long-established ritual. He had been reading in the garden, and when we
arrived he came out into the hall with hand extended, expressing a massive
cordiality.
“Welcome to my beloved Fletcher,” he cried; and as he grasped my hand
he said, as if by way of explanation,
“He saved my life, you know, and what is more, he improved my
disposition. By rights he should receive all my future royalties,—but I doubt if
he does!”
His conversation was much more intelligible than his books. It was
ponderous, but every now and then a subtle humor relieved the impression
that he felt himself on exhibition. One could see that he was accustomed to
play the lion; but with Fletcher present, toward whom he evidently felt a deep
obligation, he talked intimately of himself and of the handicap his stomach
infelicities had proved in his work. The joy with which he proclaimed his
emancipation showed the real man,—a Henry James unknown to his
characters or to his public.
If William James had not taken up science as a profession and thus

become a philosopher, he would have been a printer. No other commercial
pursuit so invited him as “the honorable, honored, and productive business of
printing,” as he expressed it in a letter to his mother in 1863. Naturally, with
such a conception of the practice of book manufacture, he was always
particularly concerned with the physical format of his volumes. He once told
me that my ability to translate his “fool ideas” into type showed the benefit of
a Harvard education! He had no patience with any lapse on the part of the
proofreader, and when the galleys of his books reached this point in the
manufacture even my most experienced readers were on the anxious seat. On
the other hand, he was generous in his appreciation when a proofreader called
his attention to some slip in his copy that he had overlooked.
After his volume Pragmatism appeared and created such universal attention,
a series of “popular” lectures on the subject was announced at Cambridge.
The Harpers had just published a novel of mine entitled The Spell, in
connection with which I had devoted much time to the study of humanism
and the humanists of the fifteenth century. Because of my familiarity with a
kindred subject, I must confess to a sense of mortification that in reading
Pragmatism I found myself beyond my depth. A “popular” presentation
appealed to me as an opportunity for intellectual development, so I attended
the first lecture, armed with pencil and notebook. Afterwards it so happened
that Professor James was on the trolley car when I boarded it at Harvard
Square, and I sat down beside him.
“I was surprised to see you at my lecture,” he remarked. “Don’t you get
enough of me at your office?”
I told him of my excursions into other philosophic pastures, and of my
chagrin to find so little in pragmatic fields upon which my hungry mind could
feed. He smiled at my language, and entered heartily into the spirit.
“And today?” he inquired mischievously.—“I hope that today I guided you
successfully.”
“You did,” I declared, opening my notebook, and showing him the entry:
“Nothing is the only resultant of the one thing which is not.”
“That led me home,” I said soberly, with an intentional double meaning.
Professor James laughed heartily.
“Did I really say that? I have no doubt I did. It simply proves my
contention that philosophers too frequently exercise their prerogative of
concealing themselves behind meaningless expressions.”
Two of Professor James’ typographic hobbies were paper labels and as few
words as possible on the title page. In the matter of supplying scant copy for
the title, he won my eternal gratitude, for many a book, otherwise
typographically attractive, is ruined by overloading the title with too much
matter. This is the first page that catches the eye, and its relation to the book is
the same as the door of a house. Only recently I opened a volume to a
beautiful title page. The type was perfectly arranged in proportion and margin,
the decoration was charming and in complete harmony with the type. It was
set by an artist-printer and did him credit; but turning a few more pages I
found myself face to face with a red-blooded story of western life, when the
title had prepared me for something as delicate as Milton’s L’Allegro. A
renaissance door on a New England farmhouse would have been equally
appropriate!
I commend to those who love books the fascinating study of title pages. I
entered upon it from curiosity, and quickly found in it an abiding hobby. The
early manuscripts and first printed volumes possessed no title pages, due
probably to the fact that the handmade paper and parchment were so costly
that the saving of a seemingly unnecessary page was a consideration. The incipit
at the top of the first page, reading “Here beginneth” and then adding the
name of the author and the subject, answered every purpose; and on the last
page the explicit marked the conclusion of the work, and offered the printer an
excellent opportunity to record his name and the date of the printing. Most of
the early printers were modest in recording their achievements, but in the
famous volume De Veritate Catholicæ Fidei the printer says of himself:
This new edition was furnished us to print in Venice by Nicolas Jenson of France.…
Kind toward all, beneficent, generous, truthful and steadfast in the beauty, dignity, and
accuracy of his printing, let me (with the indulgence of all) name him the first in the
whole world; first likewise in his marvelous speed. He exists in this, our time, as a
special gift from Heaven to men. June thirteen, in the year of Redemption 1489.
Farewell
Bibliographers contend that the first title page was used in a book printed
by Arnold Ther Hoernen of Cologne in 1470. In this volume an extra leaf is
employed containing simply an introduction at the top. It has always seemed
to me that this leaf is more likely to have been added by the printer to correct
a careless omission of the introduction on his first page of text. Occasionally,
in the humanistic manuscript volumes in the Laurenziana Library, at Florence,
there occurs a “mirror” title (see opp. page), which consists of an illuminated
page made up of a large circle in the center containing the name of the book,
sometimes surrounded by smaller circles, in which are recorded the titles of
the various sections. This seems far more likely to have been suggestive of
what came to be the formal title page.
MIRROR TITLE
From Augustinus: Opera, 1485. Laurenziana Library, Florence
By the end of the fifteenth century the title page was in universal use, and
printers showed great ingenuity in arranging the type in the form of wine cups,
drinking glasses, funnels, inverted cones, and half-diamonds. During the
sixteenth century great artists like Dürer, Holbein, Rubens, and Mantegna
executed superbly engraved titles entirely out of keeping with the poor
typography of the books themselves. In many of the volumes the title page
served the double purpose of title and full-page illustration (see pages 228 and
241). What splendid examples would have resulted if the age of engraved titles
had coincided with the high-water mark in the art of printing!
As the art of printing declined, the engraved title was discarded, and the
printer of the seventeenth century seemed to feel it incumbent upon him to
cover the entire page with type. If you recall the early examples of American
Colonial printing, which were based upon the English models of the time, you
will gain an excellent idea of the grotesque tendency of that period. The
Elzevirs were the only ones who retained the engraved title (page 241). The
Baskerville volumes (page 247), in the middle of the eighteenth century, showed
a return to good taste and harmonious co-ordination with the text; but there
was no beauty in the title until Didot in Paris and Bodoni in Parma, Italy,
introduced the so-called “modern” face, which is peculiarly well adapted to
display (page 253). William Morris, in the late nineteenth century, successfully
combined decoration with type,—over-decorated, in the minds of many, but in
perfect keeping with the type pages of the volumes themselves. Cobden-
Sanderson, at the Doves Press, returned to the extreme in simplicity and good
taste (page 265), excelling all other printers in securing from the blank space on
the leaf the fullest possible value. One of Cobden-Sanderson’s classic remarks
is, “I always give greater attention, in the typography of a book, to what I leave
out than to what I put in.”
The name of William Morris today may be more familiar to booklovers

than that of Cobden-Sanderson, but I venture to predict that within a single
decade the latter’s work as printer and binder at the Doves Press at
Hammersmith, London, will prove to have been a more determining factor in
printing as an art than that of William Morris at the Kelmscott Press, and that
the general verdict will be that Cobden-Sanderson carried out the splendid
principles laid down by Morris more consistently than did that great artist-
craftsman himself.
T. J. COBDEN-SANDERSON, 1841–1922
From Etching by Alphonse Legros, 1893
The story of Cobden-Sanderson’s life is an interesting human document.

He told it to me one evening, its significance being heightened by the
simplicity of the recital. At seventeen he was apprenticed to an engineer, but
he worked less than a year in the draft room. He disliked business as business,
and began to read for Cambridge, with the idea of entering the Church. While
at Trinity College he read for mathematical honors, but three years later,
having given up all idea of going into the Church, he left Cambridge, refusing
honors and a degree, which he might have had, as a protest against the
competitive system and the “warp” it gave to all university teaching. Then, for
seven or eight years, he devoted himself to Carlyle and the study of literature,
“Chiefly German philosophy,” he said, “which is perhaps not literature,”
supporting himself by desultory writing and practicing medicine. When he was
thirty years old he was admitted to the Bar, which profession he abandoned
thirteen years later to become a manual laborer. The following is quoted from
notes which I made after this conversation:
I despaired of knowledge in a philosophical sense, yet I yearned to do or to make
something. This was the basic idea of my life. At this time it was gradually revealed to
me that the arts and crafts of life might be employed to make society itself a work of
art, sound and beautiful as a whole, and in all its parts.
It is difficult to associate Cobden-Sanderson’s really tremendous
contributions to bookmaking as an art with his self-effacing personality. If I
had met the man before I had become intimately acquainted with his work, I
should have been disappointed; having had him interpreted to me by his
books before I met him, his unique personality proved a definite inspiration
and gave me an entirely new viewpoint on many phases of the art of
typography in its application to human life.
In person, Cobden-Sanderson was of slight build, with sloping shoulders,
his most noticeable feature being his reddish beard tinged with gray. He was
nervous and shy, and while talking seldom looked one squarely in the eye, yet
at no time could one doubt the absolute sincerity of his every word and act.
He was hopelessly absent-minded. Invited to dine with me in London, he
appeared the evening before the date set, retiring overwhelmed with
embarrassment when he discovered his mistake. On the following evening he
forgot the appointment altogether! Later, when in Boston, he accepted an
invitation to dine with a literary society, but failed to appear because he could
not remember where the dinner was to be held. He had mislaid his note of
invitation and could not recall the name of the man who sent it. On that
evening he dashed madly around the city in a taxicab for over an hour, finally
ending up at his hotel in absolute exhaustion while the members of the literary
society dined without their lion!
While president of the Society of Printers in Boston, I arranged for
Cobden-Sanderson to come to America to deliver some lectures on The Ideal
Book. Among these were four given at Harvard University. At the conclusion
of the last lecture he came to my library, thoroughly tired out and completely
discouraged. Seated in a great easy chair he remained for several moments in
absolute silence, resting his face upon his hands. Suddenly, without a moment’s
warning, he straightened up and said with all the vehemence at his command,
“I am the veriest impostor who ever came to your shores!”
Seeing my surprise and incredulity, he added,
“I have come to America to tell you people how to make books. In New
York they took me to see the great Morgan Library and other collections.
They showed me rare incunabula. They expected me to know all about them,
and to be enthusiastic over them. As a matter of fact, I know nothing about
the work of the great master-printers, and care less!”
My face must have disclosed my thoughts, for he held up a restraining
hand.
“Don’t think me such an egotist as my words imply. It isn’t that at all. It is
true that I am interested only in my own work, but that is because my work
means something more to me than the books I produce. When I print a book
or bind one it is because I have a message in my soul which I am impelled to
give mankind, and it comes out through my fingers. Other men express their
messages in different media,—in stone or on canvas. I have discovered that the
book is my medium. When I bind and decorate a volume I seem to be setting
myself, like a magnetized needle, or like an ancient temple, in line and all
square, not alone with my own ideal of society, but with that orderly and
rhythmical whole which is the revelation of science and the normal of
developed humanity. You asked me a while ago to explain certain
inconsistencies in my work, and I told you that there was no explanation. That
is because each piece of work represents me at the time I do it. Sometimes it is
good and sometimes poor, but, in any case, it stands as the expression of
myself at the time I did it.”
As he spoke I wondered if Cobden-Sanderson had not explained why, in
the various arts, the work of those master-spirits of the past had not been
surpassed or even equaled during the intervening centuries. It is a matter for
consideration, when the world has shown such spectacular advance along
material lines, that in painting, in sculpture, in architecture, in printing, the
work of the old masters still stands supreme. In their time, when men had
messages in their souls to give the world, the interpretation came out through
their fingers, expressed in the medium with which each was familiar. Before
the invention of printing, the masses received those messages directly from the
marble or the canvas, or from the design of some great building. The printed
book opened to the world a storehouse of wisdom hitherto unavailable, and
made individual effort less conspicuous and therefore less demanded. The few
outstanding figures in every art have been those who, like Cobden-Sanderson,
have set themselves “in line and all square, not alone with their own ideals of
society, but with that orderly and rhythmical whole which is the revelation of
science and the normal of developed humanity.” It is what Cobden-Sanderson
has done rather than his written words, that conveys the greatest message.
While Theodore Roosevelt was President of the United States, and on the
occasion of one of his several visits to Boston, his secretary wrote that the
President would like to examine with me some of the special volumes I had
built. I knew him to be an omnivorous reader, but until then did not realize his
deep interest in the physical side of books.
He came to the University Press one bitterly cold day in January, and
entered my office wrapped in a huge fur coat. After greeting him I asked if he
wouldn’t lay the coat aside.
“Of course I will,” he replied briskly; “it is just as easy to catch hot as it is
to catch cold.”
We devoted ourselves for an hour to an examination and discussion of
certain volumes I had produced. One of these was a small twelve-mo entitled
Trophies of Heredia containing poems by José-Maria de Heredia, brought out in
artistic format for a Boston publishing house, which had proved a complete
failure from a commercial standpoint. Probably not over two hundred copies
of the book were ever sold. Evidently one of these had fallen into the
President’s hands, for he seized my copy eagerly, saying,
“Hello! I didn’t remember that you made this. Extraordinary volume, isn’t
it? I want to show you something.”
Quickly turning to one of the pages he pointed to the line, The hidden
warmth of the Polar Sea.
“What do you think of that?” he demanded. “Did you ever think of the
Polar Sea as being warm? And by Jove he’s right,—it is warm!”
Later, in Washington, I accepted his invitation for luncheon at the White
House and for an afternoon in his library, where we continued our discussion
of books. Before we turned to the volumes, he showed me some of the
unusual presents which various potentates had given him, such as a jade bear
from the Tzar of Russia, a revolver from Admiral Togo, and line drawings
made personally by the Kaiser, showing in detail every ship in our Navy. When
I expressed surprise that such exact knowledge should be in the possession of
another country, my host became serious.
“The Kaiser is a most extraordinary fellow,” he said deliberately,—“not
every one realizes how extraordinary. He and I have corresponded ever since I
became President, and I tell you that if his letters were ever published they
would bring on a world war. Thank God I don’t have to leave them behind
when I retire. That’s one prerogative the President has, at any rate.”
I often thought of these comments after the World War broke out. An
echo of them came while the desperate struggle was in full force. Ernest
Harold Baynes, nature-lover and expert on birds, was visiting at my house,
having dined with the ex-President at Oyster Bay the week before. In speaking
of the dinner, Baynes said that Roosevelt declared that had he been President,
Germany would never have forced the war at the time she did. When pressed
to explain, Roosevelt said:
“The Kaiser would have remembered what he outlined to me in some
letters he wrote while I was President. Bill knows me, and I know Bill!”
From the library we extended our examination to the family living-room,
where there were other volumes of interest on the tables or in the bookcases.
From these, the President picked up a hand-lettered, illuminated manuscript
which he had just received as a present from King Menelik of Abyssinia. Some
one had told him that it was a manuscript of the twelfth or thirteenth century,
but to a student of the art of illumination it was clearly a modern copy of an
old manuscript. The hand lettering was excellent, but the decoration included
colors impossible to secure with the ancient pigments, and the parchment was
distinctly of modern origin.
“You are just the one to tell me about this,” Mr. Roosevelt exclaimed. “Is it
an original manuscript?”
He so obviously wished to receive an affirmative reply that I temporized
by asking if some letter of description had not come with it.
“Oh, yes,” he replied, immediately divining the occasion of my question
and showing his disappointment; “there was a missive, which is now in the
archives of the State Department. I saw a translation of it, but it is only one of
those banal expressions similar to any one of my own utterances, when I cable,
for instance, to my imperial brother, the Emperor of Austria, how touched and
moved I am to learn that his cousin, the lady with the ten names, has been
safely delivered of a child!”
The President was particularly interested in the subject of illustration, and
he showed me several examples, asking for a description of the various
processes. From that we passed on to a discussion of the varying demand
from the time when I first began to make books. I explained that the
development of the halftone plate and of the four-color process plates had
been practically within this period,—that prior to 1890 the excessive cost of
woodcuts, steel engravings, or lithography confined illustration to expensive
volumes. The halftone opened the way for profuse illustration at minimum
expense.
The President showed me an impression from one of Timothy Cole’s
marvelous woodcuts, and we agreed that the halftone had never taken the
place of any process that depends upon the hand for execution. The very
perfection to which the art of halftone reproduction has been carried is a
danger point in considering the permanence of its popularity. This does not
apply to its use in newspapers, but in reproducing with such slavish fidelity
photographs of objects perpetuated in books of permanent value. It seemed
paradoxical to say that the nearer perfection an art attains the less interesting it
becomes, because the very variation incidental to hand work in any art is what
relieves the monotony of that perfection attained through mechanical means.
Since then, a few leading engravers have demonstrated how the halftone may
be improved by hand work. This combination has opened up new possibilities
that guarantee its continued popularity.
With the tremendous increase in the cost of manufacturing books during
and since the World War, publishers found that by omitting illustrations from
their volumes they could come nearer to keeping the cost within the required
limits, so for a period illustrated volumes became limited in number
There is no question that the public loves pictures, and the development
during recent years of so-called newspapers from which the public gleans the
daily news by means of halftone illustrations, is, in a way, a reversion to the
time before the printing press, when the masses received their education
wholly through pictorial design. The popularity of moving pictures is another
evidence. I have always wished that this phase had developed at the time of
our discussion, for I am sure Mr. Roosevelt would have had some interesting
comments to make on its significance. I like to believe that this tendency will
correct itself, for, after all, the pictures which are most worth while are those
which we ourselves draw subconsciously from impressions made through
intellectual exploits
CHAPTER IV
The Lure of Illumination

IV
THE LURE OF ILLUMINATION
Sitting one day in the librarian’s office in the Laurenziana Library, in

Florence, the conversation turned upon the subject of illumination. Taking a
key from his pocket, my friend Guido Biagi unlocked one of the drawers in the
ancient wooden desk in front of him, and lifted from it a small, purple vellum
case, inlaid with jewels. Opening it carefully, he exposed a volume similarly
bound and similarly adorned. Then, as he turned the leaves, and the full
splendor of the masterpiece was spread out before me,—the marvelous
delicacy of design, the gorgeousness of color, the magnificence of decoration
and miniature,—I drew in my breath excitedly, and bent nearer to the
magnifying glass which was required in tracing the intricacy of the work.
This was a Book of Hours illuminated by Francesco d’Antonio del Cherico,
which had once belonged to Lorenzo de’ Medici, and was representative of the
best of the fifteenth-century Italian work (page 146). The hand letters were
written by Antonio Sinibaldi in humanistic characters upon the finest and
rarest parchment; the illumination, with its beaten gold and gorgeous colors,
was so close a representation of the jewels themselves as to make one almost
believe that the gems were inlaid upon the page! And it was the very volume
that had many times rested in the hands of Lorenzo the Magnificent, as it was
at that moment resting in mine!
For the first time the art of illumination became real to me,—not
something merely to be gazed at with respect and admiration, but an
expression of artistic accomplishment to be studied and understood, and made
a part of one’s life.
The underlying thought that has inspired illumination in books from its
very beginning is more interesting even than the splendid pages which
challenge one’s comprehension and almost pass beyond his power of
understanding. To the ancients, as we have seen, the rarest gems in all the
world were gems of thought. The book was the tangible and visible expression
of man’s intellect, worthy of the noblest presentation. These true lovers of
books engaged scribes to write the text in minium of rare brilliancy brought
from India or Spain, or in Byzantine ink of pure Oriental gold; they selected,
to write upon, the finest material possible,—sometimes nothing less than
virgin parchment, soft as velvet, made from the skins of still-born kids; they
employed the greatest artists of the day to draw decorations or to paint
miniatures; and they enclosed this glorified thought of man, now perpetuated
for all time, in a cover devised sometimes of tablets of beaten gold, or of ivory
inlaid with precious jewels (page 112).
CARVED IVORY BINDING

Jeweled with Rubies and Turquoises
From Psalter (12th Century). Brit. Mus. Eger. MS. 1139
(Reduced in size)
For centuries, this glorification was primarily bestowed upon religious

manuscripts, and illumination came to be associated with the Church, but by
the fourteenth century the art ceased to be confined to the cloister. Wealthy
patrons recognized that it offered too splendid a medium of expression to
permit limitation; and lay artists were employed to add their talents in
increasing the illuminated treasures of the world.
There would seem to be no reason why so satisfying an art as that of
illumination should not continue to be employed to make beautifully printed
books still more beautiful, yet even among those who really love and know
books there is a surprising lack of knowledge concerning this fascinating work.
The art of Raphael and Rubens has been a part of our every-day life and is
familiar to us; but the names of Francesco d’Antonio, Jean Foucquet, and Jean
Bourdichon have never become household words, and the masterpieces of the
illuminator’s art which stand to their credit seem almost shrouded in a hazy
and mysterious indefiniteness.
I have learned from my own experience that even fragmentary study
brings rich rewards:—the interest in discovering that instead of being merely
decorative, the art of illumination is as definitive in recording the temporary or
fashionable customs of various periods as history itself. There is a satisfaction
in learning to distinguish the characteristics of each well-defined school:—of
recognizing the fretted arcades and mosaics of church decoration in the
Romanesque style; the stained glass of the Gothic cathedrals in the schools of
England, France, Germany, or Italy; the love of flower cultivation in the work
of the Netherlandish artists; the echo of the skill of the goldsmith and
enameller in the French manuscripts; and the glory of the gem cutter in those
of the Italian Renaissance. There is the romance connected with each great
masterpiece as it passes from artist to patron, and then on down the centuries,
commemorating loyal devotion to saintly attributes; expressing fealty at
coronations or congratulations at Royal marriages; conveying expressions of
devotion and affection from noble lords and ladies, one to the other.
Illuminated volumes were not the playthings of the common people, and in
their peregrinations to their final resting places in libraries and museums, they
passed along a Royal road and became clothed with fascinating associations.
There was a time when I thought I knew enough about the various schools
to recognize the locality of origin or the approximate date of a manuscript, but
I soon learned my presumption. Illuminators of one country, particularly of
France, scattered themselves all over Europe, retaining the basic principles of
their own national style, yet adding to it something significant of the country
in which they worked. Of course, there are certain external evidences which
help. The vellum itself tells a story: if it is peculiarly white and fine, and highly
polished, the presumption is that it is Italian or dates earlier than the tenth
century; if very thin and soft, it was made from the skins of still-born calves or
kids, and is probably of the thirteenth or fourteenth centuries.
The colors, too, contribute their share. Each old-time artist ground or
mixed his own pigments,—red and blue, and less commonly yellow, green,
purple, black, and white. Certain shades are characteristic of certain periods.
The application of gold differs from time to time: in England, for instance,
gold powder was used until the twelfth century, after which date gold leaf is
beautifully laid on the sheet. The raised-gold letters and decorations were
made by building up with a peculiar clay, after the design had been drawn in
outline, over which the gold leaf was skilfully laid and burnished with an agate.
As the student applies himself to the subject, one clue leads him to
another, and he pursues his search with a fascination that soon becomes an
obsession. That chance acquaintance with Francesco d’Antonio inspired me to
become better acquainted with this art. It took me into different monasteries
and libraries, always following “the quest,” and lured me on to further seeking
by learning of new beauties for which to search, and of new examples to be
studied. Even as I write this, I am told that at Chantilly, in the Musée Condé,
the Très Riches Heures of the Duc de Berry is the most beautiful example of the
French school. I have never seen it, and I now have a new objective on my
next visit to France!
In this quest, covering many years, I have come to single out certain
manuscripts as signifying to me certain interesting developments in the art
during its evolution, and I study them whenever the opportunity offers. It is of
these that I make a record here. Some might select other examples as better
illustrative from their own viewpoints; some might draw conclusions different
from mine from the same examples,—and we might all be right!
There is little for us to examine in our pilgrimage until the Emperor
Justinian, after the conflagration in the year 532, which completely wiped out
Constantinople with its magnificent monuments, reconstructed and rebuilt the
city. There are two copies of Virgil at the Vatican Library in Rome, to be sure,
which are earlier than that, and form links in the chain between illumination as
illustration and as book decoration; there is the Roman Calendar in the Imperial
Library at Vienna, in which for the first time is combined decoration with
illustration; there is the Ambrosiana Homer at Milan, of which an excellent
reproduction may be found in any large library,—made under the supervision
of Achille Ratti, before he became Pope Pius XI; there are the burnt fragments
of the Cottonian Genesis at the British Museum in London,—none more than
four inches square, and running down to one inch, some perforated with
holes, and almost obliterated, others still preserving the ancient colors of the
design, with the Greek letters clearly legible after sixteen centuries.
These are historical and interesting, but we are seeking beauty. In the
splendor of the rebirth of Constantinople, to which all the known world
contributed gold, and silver, and jewels, medieval illumination found its
beginning. Artists could now afford to send to the Far East and to the
southern shores of Europe for their costly materials. Brilliant minium came
from India and from Spain, lapis lazuli from Persia and Bokhara, and the
famous Byzantine gold ink was manufactured by the illuminators themselves
out of pure Oriental gold. The vellum was stained with rose and scarlet tints
and purple dyes, upon which the gold and silver inks contrasted with
marvelous brilliancy.
Gorgeousness was the fashion of the times in everything from architecture
to dress, and in the wealth and sumptuous materials at their command the
artists mistook splendor for beauty. The Byzantine figure work is based upon
models as rigid as those of the Egyptians, and shows little life or variety (opp.
page). Landscapes and trees are symbolic and fanciful. Buildings have no regard
for relative proportions, and are tinted merely as parts of the general color
scheme. The illuminators adhered so closely to mechanical rules that the
volumes lack even individuality.

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The Causes and Consequences of

Interest Theory: Analyzing Interest

ISBN 978-3-030-78701-1 ISBN 978-3-030-78702-8 (eBook)

In this book, which is based on my Ph.D. dissertation, the concept of

Ankara, Turkey Cem Eyerci

1 Some Introductory Remarks 1

3.1.3 Abstinence Theories 35

5 Interest Rate Control 67

7.1.2 Time Preference in Islamic Economics 134

Fig. 2.1 Various breakdowns of interest 16

Table 2.1 The change in the meaning of interest over time 14

Table 7.1 The approaches of Islamic economists to the time value

Some Introductory Remarks

© The Author(s), under exclusive license to Springer Nature 1

1.1 The Legitimacy Problem

1.2 The Causes of Interest

1.3 Is Control of Interest a Good Idea?

1.4 Overview of the Content

The second controversial point is about the consequences of interest

In Chapter 4, the reasons for the prohibition of interest or limiting its

Erdem, Ekrem. 2018. “Kur’an’da Riba (Faiz) Ayetlerinin Kademeli Nüzulü ve

The Concept of Interest: Meaning and History

2.1 What Is Interest?

© The Author(s), under exclusive license to Springer Nature 13

Table 2.1 The change in the meaning of interest over time

Era Meaning of interest

The Latin origin Interesse: A penalty of a defaulted or late repaid loan

Table 2.2 Some definitions of interest made by various scholars

Scholar Definition of interest

Turgot (1766) The price of the use of loaned money

Some other scholars regarded interest as it is commonly accepted: the

Capital employed Natural

Use of durables (e.g. Use of perishables

Transaction costs (taxes,

The loss (due to the

Fig. 2.1 Various breakdowns of interest

• time, maturity, size, place, and legality of the loan,

Within the scope of this book, unless otherwise specified, that is

2.2 The History of Interest

There are findings regarding the practice of interest in Mesopotamia,

2.2.2 Ancient India

2.2.3 Ancient Greece

2.2.4 Ancient Rome

It is a general acceptance that the loans were not at interest in Egypt

2.2.6 Interest in the Abrahamic Religions and Medieval Europe

After the emergence of Christianity, an ambiguity arose about the

It should be noted that various prohibitions and regulations of interest

Era Normal rates Lower Excessive

Mesopotamia- 3rd millennium BC to 1900 BC 331/3 (for grain)

Sumer 20 (for silver)

Ancient Rome- Second century AD 5–12

Source: Homer (1963) and Graeber (2011)

Vincent, Joshua. 2014. “Historical, Religious and Scholastic Prohibition of

Theoretical Development and the Time

The significant role of interest of Interestin lending has always moti-

© The Author(s), under exclusive license to Springer Nature 31

3.1 The Theories of Interest

The pre and postclassical economists were personally involved in the

3.1.1 Turgot’s Theory of Interest

A Page from an Autograph Letter from Henry James to Horace Fletcher

If William James had not taken up science as a profession and thus

The name of William Morris today may be more familiar to booklovers

The story of Cobden-Sanderson’s life is an interesting human document.