When Polonius tells Laertes in Hamlet, “Neither a borrower nor a lender be,” perhaps Shakespeare was speaking from family experience. In the early 1570s, his father, John Shakespeare, was accused in court several times of lending money at usurious rates. While, in modern terms, he settled one case, he was fined in another. It is unclear if these cases were connected to the decline of Shakespeare Sr’s business, but he managed to get into debt himself, echoing Polonius’ warning. Under the laws at the time, usury, the practice of charging interest on debts, was called “a vice most odious and detestable.”
Yet by the time Adam Smith wrote his Inquiry into the Nature and Causes of the Wealth of Nations two hundred years later, credit was an established element of commercial life. Smith devoted an entire chapter to “Of Stock Lent at Interest.” He noted that the borrower viewed the loan as capital, which could either be consumed or, more productively, used as capital for enterprise. In the intervening two hundred years, credit had become an economic institution.
The gap between these two pillars of British literature was filled with the development of English commerce from its medieval form to something we would recognize today. Part of that development was the realization that time does not always cooperate with our financial undertakings. Costs arrive today when income is expected tomorrow. Bridging that gap requires both credit and interest. Commerce worked that out, but explaining why required the development of economics.
Credit did not arise across the Western world because its societies were uniquely greedy or exploitative, nor because bankers somehow imposed a mechanism to extract rent from happily self-sufficient communities. It arose because advanced commercial life requires its existence. That moral hero, the entrepreneur, must often assemble labor and capital before a single unit is sold. Credit bridges the interval.
That is also why credit appears repeatedly even where kings, priests, or populist politicians have tried to suppress it. It appears in many different forms. Sometimes it is a straightforward loan. Sometimes it is trade credit, deferred payment, or discounting. Sometimes it is tailored to the borrower, sometimes it is offered on similar terms to everyone. The underlying function is always the same: providing funds to those who need them, when they need them.
Yet those kings, priests, and populist politicians keep advancing similar objections: that credit is simply greed, or exploitation. Virtually every Western society has had laws against usury on the books, and many still do. What explains how credit continually overcomes this opposition?
The old case against usury was not completely irrational; it was often a moral response to real abuse. Many anti-usury laws grew out of a world where borrowing was not about business investment but relief from distress. A poor man borrowed only because he had suffered a crop failure, a medical emergency, or other personal tragedy. To profit from another man’s desperation seemed predatory. Medieval theologians considered money to be “barren,” as only a medium of exchange. St. Thomas Aquinas argued that charging interest is intrinsically unjust because it demands a double payment: the return of the principal and a price for its use.
This doctrine weakened when commercial societies discovered, first in practice and then in theory (as is so often the case), that money in a market economy is not, in fact, economically barren. Command over money is valuable because it gives access to opportunities, allows one to bear uncertainty and frees one from waiting. Western society evolved from condemning all interest to distinguishing legitimate interest from exploitative usury, thereby more realistically reflecting time, risk, and opportunity cost.
Yet old beliefs linger. Even Adam Smith thought that interest should be capped to benefit the prudent, which led to correspondence with Jeremy Bentham, who argued that rates should be able to float. Bentham’s argument was one that still has validity today: adults should be free to contract on whatever terms they choose and attempts to suppress high-rate lending will only block risky but potentially productive enterprise.
The debate between Smith and Bentham represented a turning point. The West in general gradually moved from asking whether any payment for the use of money was illicit to asking instead what counts as extortionate or abusive, thereby separating the existence of credit from the abuse of credit, a distinction that matters. A society can condemn fraud, coercion, and rapacious terms; this does not mean that all interest is predation.
If commercial credit had triumphed over usury laws, however, a new critique would soon emerge. Karl Marx approached credit from another direction, treating credit as part of the capitalist system of exploitation. In Das Kapital, he argued that it allowed the capitalist to spend money he hadn’t earned yet, thereby disconnecting reality from expectation and serving as the means by which the capitalist steals the value of his production from the worker. This in turn allowed companies to continue producing goods no one would be interested in purchasing, resulting in overproduction, all based on a mirage of “fictitious capital,” which made the world look wealthier than it was. This was what led to financial crises.
It was Eugen von Böhm-Bawerk, an Austrian economist from the turn of the twentieth century, who refuted Marx’s analysis in his work Capital and Interest and other treatises. He realized that human beings have a time preference and that people and indeed society prefer jam today over jam tomorrow. So, far from stealing from or exploiting the worker, the capitalist is actually paying him a premium by giving him higher wages for producing something that might not be sold for some time. Credit allows the capitalist to do this.
The wages Marx views as low are in fact discounted, because the worker gets $100 today instead of the potential of $110 in a year. The 10 percent discount represents the price of getting money immediately, satisfying the worker’s time-preference. Again, von Böhm-Bawerk shows us that credit allows this to happen.
As for the argument that credit facilitates crises, von Böhm-Bawerk’s theory of value reveals that the failure of companies to sell produced goods is not a phenomenon of the existence of credit, but a miscalculation of subjective value by the company. By articulating a theory of subjective value rather than labor value, von Böhm-Bawerk demolishes Marx’s interpretation of credit.
Thus, a world without credit would not be a world without exploitation in Marx’s sense. It would be a poorer world with fewer enterprises, fewer homes, fewer durable goods, and far less social mobility.
Credit is therefore at the center of production rather than at its margins. It should not be viewed as a device to gratify impatient consumers, but as a way of coordinating stages of production that unfold over time. Interest is the price attached to the use of present goods in a world where future goods are discounted and productive processes take time.
Schumpeter added another important insight. In his Theory of Economic Development, credit is how the entrepreneur acquires command over resources needed to carry out new combinations. As the economist David Henderson succinctly puts it in his “ten pillars of economic wisdom,” the only way to create wealth is to move resources from a lower-valued to a higher-valued use. Innovation requires withdrawing labor and materials from established uses and redirecting them toward untried purposes, which cannot usually be financed out of existing cash reserves. The entrepreneur therefore needs access to purchasing power before she realizes success. In Schumpeter’s framework, bank credit is what allows the innovator to bid resources away from old uses and bring something new into existence.
So, credit actually helps reorder the economy for the better, financing the experiment before the market has validated it. Schumpeter therefore treated credit as integral to entrepreneurship, innovation, and economic progress. A society that wants to increase wealth while disdaining credit is like the man who wants to win the lottery but refuses to buy a ticket.
Human beings live through time, which means their wants, incomes, obligations, and plans do not line up neatly. Risk is inescapable, but credit is what makes civilization durable under those conditions. Families can survive shocks, firms can organize production, entrepreneurs can innovate, and savers can grow wealth by providing the capital that helps families, firms, and entrepreneurs.
We can continue to argue about what rules should govern lending, what terms are abusive, and what legal framework best disciplines fraud and excess (although we might do well to lean towards Bentham rather than Smith in this one limited case.) Credit exists wherever people need to juggle the cost of effort now with the delayed benefit of later rewards. In other words, it is credit that allows us to build anything more durable than a day’s subsistence, whatever the experience of Shakespeare’s dad.
