Time Travelling (Q4-11)
Dec 30th, 2011
The roots of lending can be traced back to the roots of civilization itself. Written loan contracts from Mesopotamia that are more than 3,000 years old showed the development of a credit system that included the concept of interest. Loans are very simple contracts with remarkable properties. One person lends something to another with the promise that it will be repaid in the future. The borrower suddenly has wealth, while the lender takes current wealth and places it in the contractual equivalent of a time machine in order to transfer it to a future date when he might better use it. For doing so, the lender is compensated with interest that makes him better off than in the present.
But, as Dr. Niall Ferguson, Professor of International History at Harvard University, points out, “civilization has long had an ambiguous attitude toward lending and interest.”
The Roman Catholic Church frowned upon the taking of interest during the 13th through 18th centuries in Europe, when finance underwent its greatest dynamism. Islamic Sha’riah still proscribes against lending despite the fact that the mathematics of compound interest originated in the Middle East. The uncomfortable coexistence of finance and religion may be due to the parallels between the term of a loan and the term of a life. The word “finance” comes from Old French and shares a common root with the word “finish”. It was used in the 14th century, according to scholars, to imply a final settlement, and referred to metaphorically in medieval poems which described life itself as a loan from God, and death as its final repayment. French theologians considered lenders as “sellers of time” that acted contrary to natural law. For almost a millennium, loans were considered unholy leaps into the fourth dimension that were contrary to divine plan.
Many people today would blame lending for causing the financial crisis and consider credit as the evil plaguing Europe. Yet, throughout history loans have enabled profound life-serving commerce and industry. They supported Spain’s exploration of the New World, made possible the successful colonization of America, and fueled the Industrial Revolution. The immense progress of human well-being would not have been possible without credit.
The lender’s time machine is interest. A lender tries to calculate in advance the likelihood or unlikelihood that he will be repaid all his capital plus the interest. The less convinced he is that a loan will be repaid, the higher the interest rate he will charge. Higher rates enable lenders to profit for their willingness to take greater risks. The practice of charging interest is therefore an expression of a lender’s ability to project the future, to plan, to analyze, to calculate risk, and to act in the face of uncertainty.
Lending is productive to society, and this fact has been made increasingly clear over the centuries. By choosing to whom he will lend money, a lender determines which projects he will help bring into existence and which individuals he will provide with opportunities to improve the quality of their lives and his. Thus, lenders make themselves money by rewarding people for the virtues of innovation, productiveness, personal responsibility, and entrepreneurial talent; and they withhold their sanction, thus minimizing their losses, from people who exhibit signs of stagnation, laziness, irresponsibility, and inefficiency. Loans are fruitful and enable borrowers to improve their lives or produce new goods or services. And contrary to some theological systems that exist today, lending is not a zero-sum activity: both the borrower and the lender benefit from the exchange (as ultimately does everyone involved in the economy). The lender makes a profit, and the borrower gets to use capital-whether for consumption or investment purposes-that he otherwise would not be able to use.
We witness the direct impact that our lending activities have on companies every day. Currently, our loans help companies generate a quarter billion dollars in sales every year, keep nearly 1,000 people employed, and foster growth and innovation that would otherwise be lost. We cannot travel ahead in time, but we are confident that our investments create a better future for investors, our borrowers, and our society.