Natural resource economics

From Wikipedia, the free encyclopedia

 

Three circles enclosed within one another showing how both economy and society are subsets of our planetary ecological system. This view is useful for correcting the misconception, sometimes drawn from the previous "three pillars" diagram, that portions of social and economic systems can exist independently from the environment.

 

Natural resource economics deals with the supply, demand, and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to develop more sustainable methods of managing those resources to ensure their availability to future generations. Resource economists study interactions between economic and natural systems, with the goal of developing a sustainable and efficient economy.

Areas of discussion

Natural resource economics is a transdisciplinary field of academic research within economics that aims to address the connections and interdependence between human economies and natural ecosystems. Its focus is how to operate an economy within the ecological constraints of earth's natural resources. Resource economics brings together and connects different disciplines within the natural and social sciences connected to broad areas of earth science, human economics, and natural ecosystems. Economic models must be adapted to accommodate the special features of natural resource inputs. The traditional curriculum of natural resource economics emphasized fisheries models, forestry models, and minerals extraction models (i.e. fish, trees, and ore). In recent years, however, other resources, notably air, water, the global climate, and "environmental resources" in general have become increasingly important to policy-making. 

Academic and policy interest has now moved beyond simply the optimal commercial exploitation of the standard trio of resources to encompass management for other objectives. For example, natural resources more broadly defined have recreational, as well as commercial values. They may also contribute to overall social welfare levels, by their mere existence.

The economics and policy area focuses on the human aspects of environmental problems. Traditional areas of environmental and natural resource economics include welfare theory, land/location use, pollution control, resource extraction, and non-market valuation, and also resource exhaustibility, sustainability, environmental management, and environmental policy. Research topics could include the environmental impacts of agriculture, transportation and urbanization, land use in poor and industrialized countries, international trade and the environment, climate change, and methodological advances in non-market valuation, to name just a few.

Hotelling's rule is a 1938 economic model of non-renewable resource management by Harold Hotelling. It shows that efficient exploitation of a nonrenewable and nonaugmentable resource would, under otherwise stable economic conditions, lead to a depletion of the resource. The rule states that this would lead to a net price or "Hotelling rent" for it that rose annually at a rate equal to the rate of interest, reflecting the increasing scarcity of the resource. Nonaugmentable resources of inorganic materials (i.e. minerals) are uncommon; most resources can be augmented by recycling and by the existence and use of substitutes for the end-use products (see below). 

Vogely has stated that the development of a mineral resource occurs in five stages: (1) The current operating margin (rate of production) governed by the proportion of the reserve (resource) already depleted. (2) The intensive development margin governed by the trade-off between the rising necessary investment and quicker realization of revenue. (3) The extensive development margin in which extraction is begun of known but previously uneconomic deposits. (4) The exploration margin in which the search for new deposits (resources) is conducted and the cost per unit extracted is highly uncertain with the cost of failure having to be balanced against finding usable resources (deposits) that have marginal costs of extraction no higher than in the first three stages above. (5) The technology margin which interacts with the first four stages. The Gray-Hotelling (exhaustion) theory is a special case, since it covers only Stages 1–3 and not the far more important Stages 4 and 5.

Simon has stated that the supply of natural resources is infinite (i.e. perpetual).

 

These conflicting views will be substantially reconciled by considering resource-related topics in depth in the next section, or at least minimized.

Furthermore, Hartwick's rule provides insight to the sustainability of welfare in an economy that uses non-renewable resources.

Perpetual resources vs. exhaustibility

Background and introduction

The perpetual resource concept is a complex one because the concept of resource is complex and changes with the advent of new technology (usually more efficient recovery), new needs, and to a lesser degree with new economics (e.g. changes in prices of the material, changes in energy costs, etc.). On the one hand, a material (and its resources) can enter a time of shortage and become a strategic and critical material (an immediate exhaustibility crisis), but on the other hand a material can go out of use, its resource can proceed to being perpetual if it was not before, and then the resource can become a paleoresource when the material goes almost completely out of use (e.g. resources of arrowhead-grade flint). Some of the complexities influencing resources of a material include the extent of recyclability, the availability of suitable substitutes for the material in its end-use products, plus some other less important factors.

The Federal Government suddenly became compellingly interested in resource issues on December 7, 1941, shortly after which Japan cut the U.S. off from tin and rubber and made some other materials very difficult to obtain, such as tungsten. This was the worst case for resource availability, becoming a strategic and critical material. After the war a government stockpile of strategic and critical materials was set up, having around 100 different materials which were purchased for cash or obtained by trading off U.S. agricultural commodities for them. In the longer term, scarcity of tin later led to completely substituting aluminum foil for tin foil and polymer lined steel cans and aseptic packaging substituting for tin electroplated steel cans.

Resources change over time with technology and economics; more efficient recovery leads to a drop in the ore grade needed. The average grade of the copper ore processed has dropped from 4.0% copper in 1900 to 1.63% in 1920, 1.20% in 1940, 0.73% in 1960, 0.47% in 1980, and 0.44% in 2000.

Cobalt had been in an iffy supply status ever since the Belgian Congo (world's only significant source of cobalt) was given a hasty independence in 1960 and the cobalt-producing province seceded as Katanga, followed by several wars and insurgencies, local government removals, railroads destroyed, and nationalizations. This was topped off by an invasion of the province by Katangan rebels in 1978 that disrupted supply and transportation and caused the cobalt price to briefly triple. While the cobalt supply was disrupted and the price shot up, nickel and other substitutes were pressed into service.

Following this, the idea of a "Resource War" by the Soviets became popular. Rather than the chaos that resulted from the Zairean cobalt situation, this would be planned, a strategy designed to destroy economic activity outside the Soviet bloc by the acquisition of vital resources by noneconomic means (military?) outside the Soviet bloc (Third World?), then withholding these minerals from the West.

An important way of getting around a cobalt situation or a "Resource War" situation is to use substitutes for a material in its end-uses. Some criteria for a satisfactory substitute are (1) ready availability domestically in adequate quantities or availability from contiguous nations, or possibly from overseas allies, (2) possessing physical and chemical properties, performance, and longevity comparable to the material of first choice, (3) well-established and known behavior and properties particularly as a component in exotic alloys, and (4) an ability for processing and fabrication with minimal changes in existing technology, capital plant, and processing and fabricating facilities. Some suggested substitutions were alunite for bauxite to make alumina, molybdenum and/or nickel for cobalt, and aluminum alloy automobile radiators for copper alloy automobile radiators. Materials can be eliminated without material substitutes, for example by using discharges of high tension electricity to shape hard objects that were formerly shaped by mineral abrasives, giving superior performance at lower cost, or by using computers/satellites to replace copper wire (land lines).

An important way of replacing a resource is by synthesis, for example, industrial diamonds and many kinds of graphite, although a certain kind of graphite could be almost replaced by a recycled product. Most graphite is synthetic, for example, graphite electrodes, graphite fiber, graphite shapes (machined or unmachined), and graphite powder.

Another way of replacing or extending a resource is by recycling the material desired from scrap or waste. This depends on whether or not the material is dissipated or is available as a no longer usable durable product. Reclamation of the durable product depends on its resistance to chemical and physical breakdown, quantities available, price of availability, and the ease of extraction from the original product. For example, bismuth in stomach medicine is hopelessly scattered (dissipated) and therefore impossible to recover, while bismuth alloys can be easily recovered and recycled. A good example where recycling makes a big difference is the resource availability situation for graphite, where flake graphite can be recovered from a renewable resource called kish, a steelmaking waste created when carbon separates out as graphite within the kish from the molten metal along with slag. After it is cold, the kish can be processed.

Several other kinds of resources need to be introduced. If strategic and critical materials are the worst case for resources, unless mitigated by substitution and/or recycling, one of the best is an abundant resource. An abundant resource is one whose material has so far found little use, such as using high-aluminous clays or anorthosite to produce alumina, and magnesium before it was recovered from seawater. An abundant resource is quite similar to a perpetual resource. The reserve base is the part of an identified resource that has a reasonable potential for becoming economically available at a time beyond when currently proven technology and current economics are in operation. Identified resources are those whose location, grade, quality, and quantity are known or estimated from specific geologic evidence. Reserves are that part of the reserve base that can be economically extracted at the time of determination; reserves should not be used as a surrogate for resources because they are often distorted by taxation or the owning firm's public relations needs.

Comprehensive natural resource models

Harrison Brown and associates stated that humanity will process lower and lower grade "ore". Iron will come from low-grade iron-bearing material such as raw rock from anywhere in an iron formation, not much different from the input used to make taconite pellets in North America and elsewhere today. As coking coal reserves decline, pig iron and steel production will use non-coke-using processes (i.e. electric steel). The aluminum industry could shift from using bauxite to using anorthosite and clay. Magnesium metal and magnesia consumption (i.e. in refractories), currently obtained from seawater, will increase. Sulfur will be obtained from pyrites, then gypsum or anhydrite. Metals such as copper, zinc, nickel, and lead will be obtained from manganese nodules or the Phosphoria formation (sic!). These changes could occur irregularly in different parts of the world. While Europe and North America might use anorthosite or clay as raw material for aluminum, other parts of the world might use bauxite, and while North America might use taconite, Brazil might use iron ore. New materials will appear (note: they have), the result of technological advances, some acting as substitutes and some with new properties. Recycling will become more common and more efficient (note: it has!). Ultimately, minerals and metals will be obtained by processing "average" rock. Rock, 100 tonnes of "average" igneous rock, will yield eight tonnes of aluminum, five tonnes of iron, and 0.6 tonnes of titanium.

The USGS model based on crustal abundance data and the reserve-abundance relationship of McKelvey, is applied to several metals in the Earth's crust (worldwide) and in the U.S. crust. The potential currently recoverable (present technology, economy) resources that come closest to the McKelvey relationship are those that have been sought for the longest time, such as copper, zinc, lead, silver, gold and molybdenum. Metals that do not follow the McKelvey relationship are ones that are byproducts (of major metals) or haven't been vital to the economy until recently (titanium, aluminum to a lesser degree). Bismuth is an example of a byproduct metal that doesn't follow the relationship very well; the 3% lead reserves in the western U.S. would have only 100 ppm bismuth, clearly too low-grade for a bismuth reserve. The world recoverable resource potential is 2,120 million tonnes for copper, 2,590 million tonnes for nickel, 3,400 million tonnes for zinc, 3,519 BILLION tonnes for aluminum, and 2,035 BILLION tonnes for iron.

Diverse authors have further contributions. Some think the number of substitutes is almost infinite, particularly with the flow of new materials from the chemical industry; identical end products can be made from different materials and starting points. Plastics can be good electrical conductors. Since all materials are 100 times weaker than they theoretically should be, it ought to be possible to eliminate areas of dislocations and greatly strengthen them, enabling lesser quantities to be used. To summarize, "mining" companies will have more and more diverse products, the world economy is moving away from materials towards services, and the population seems to be levelling, all of which implies a lessening of demand growth for materials; much of the materials will be recovered from somewhat uncommon rocks, there will be much more coproducts and byproducts from a given operation, and more trade in minerals and materials.

Trend towards perpetual resources

As radical new technology impacts the materials and minerals world more and more powerfully, the materials used are more and more likely to have perpetual resources. There are already more and more materials that have perpetual resources and less and less materials that have nonrenewable resources or are strategic and critical materials. Some materials that have perpetual resources such as salt,stone, magnesium, and common clay were mentioned previously. Thanks to new technology, synthetic diamonds were added to the list of perpetual resources, since they can be easily made from a lump of another form of carbon. Synthetic graphite, is made in large quantities (graphite electrodes, graphite fiber) from carbon precursors such as petroleum coke or a textile fiber. A firm named Liquidmetal Technologies, Inc. is utilizing the removal of dislocations in a material with a technique that overcomes performance limitations caused by inherent weaknesses in the crystal atomic structure. It makes amorphous metal alloys, which retain a random atomic structure when the hot metal solidifies, rather than the crystalline atomic structure (with dislocations) that normally forms when hot metal solidifies. These amorphous alloys have much better performance properties than usual; for example, their zirconium-titanium Liquidmetal alloys are 250% stronger than a standard titanium alloy. The Liquidmetal alloys can supplant many high performance alloys.

Exploration of the ocean bottom in the last fifty years revealed manganese nodules and phosphate nodules in many locations. More recently, polymetallic sulfide deposits have been discovered and polymetallic sulfide "black muds" are being presently deposited from "black smokers"  The cobalt scarcity situation of 1978 has a new option now: recover it from manganese nodules. A Korean firm plans to start developing a manganese nodule recovery operation in 2010; the manganese nodules recovered would average 27% to 30% manganese, 1.25% to 1.5% nickel, 1% to 1.4% copper, and 0.2% to 0.25% cobalt (commercial grade)  Nautilus Minerals Ltd. is planning to recover commercial grade material averaging 29.9% zinc, 2.3% lead, and 0.5% copper from massive ocean-bottom polymetallic sulfide deposits using an underwater vacuum cleaner-like device that combines some current technologies in a new way. Partnering with Nautilus are Tech Cominco Ltd. and Anglo-American Ltd., world-leading international firms.

There are also other robot mining techniques that could be applied under the ocean. Rio Tinto is using satellite links to allow workers 1500 kilometers away to operate drilling rigs, load cargo, dig out ore and dump it on conveyor belts, and place explosives to subsequently blast rock and earth. The firm can keep workers out of danger this way, and also use fewer workers. Such technology reduces costs and offsets declines in metal content of ore reserves. Thus a variety of minerals and metals are obtainable from unconventional sources with resources available in huge quantities.

Finally, what is a perpetual resource? The ASTM definition for a perpetual resource is "one that is virtually inexhaustible on a human time-scale". Examples given include solar energy, tidal energy, and wind energy, to which should be added salt, stone, magnesium, diamonds, and other materials mentioned above. A study on the biogeophysical aspects of sustainability came up with a rule of prudent practice that a resource stock should last 700 years to achieve sustainability or become a perpetual resource, or for a worse case, 350 years.

If a resource lasting 700 or more years is perpetual, one that lasts 350 to 700 years can be called an abundant resource, and is so defined here. How long the material can be recovered from its resource depends on human need and changes in technology from extraction through the life cycle of the product to final disposal, plus recyclability of the material and availability of satisfactory substitutes. Specifically, this shows that exhaustibility does not occur until these factors weaken and play out: the availability of substitutes, the extent of recycling and its feasibility, more efficient manufacturing of the final consumer product, more durable and longer-lasting consumer products, and even a number of other factors.

The most recent resource information and guidance on the kinds of resources that must be considered is covered on the Resource Guide-Update 

Transitioning: perpetual resources to paleoresources

Perpetual resources can transition to being a paleoresource. A paleoresource is one that has little or no demand for the material extracted from it; an obsolescent material, humans no longer need it. The classic paleoresource is an arrowhead-grade flint resource; no one makes flint arrowheads or spearheads anymore—making a sharpened piece of scrap steel and using it is much simpler. Obsolescent products include tin cans, tin foil, the schoolhouse slate blackboard, and radium in medical technology. Radium has been replaced by much cheaper cobalt-60 and other radioisotopes in radiation treatment. Noncorroding lead as a cable covering has been replaced by plastics.

Pennsylvania anthracite is another material where the trend towards obsolescence and becoming a paleoresource can be shown statistically. Production of anthracite was 70.4 million tonnes in 1905, 49.8 million tonnes in 1945, 13.5 million tonnes in 1965, 4.3 million tonnes in 1985, and 1.5 million tonnes in 2005. The amount used per person was 84 kg per person in 1905, 7.1 kg in 1965, and 0.8 kg in 2005. Compare this to the USGS anthracite reserves of 18.6 billion tonnes and total resources of 79 billion tonnes; the anthracite demand has dropped so much that these resources are more than perpetual.

Since anthracite resources are so far into the perpetual resource range and demand for anthracite has dropped so far, is it possible to see how anthracite might become a paleoresource? Probably by customers continuing to disappear (i.e. convert to other kinds of energy for space heating), the supply network atrophy as anthracite coal dealers can't retain enough business to cover costs and close, and mines with too small a volume to cover costs also close. This is a mutually reinforcing process: customers convert to other forms of cleaner energy that produce less pollution and carbon dioxide, then the coal dealer has to close because of lack of enough sales volume to cover costs. The coal dealer's other customers are then forced to convert unless they can find another nearby coal dealer. Finally the anthracite mine closes because it doesn't have enough sales volume to cover its costs.

Economic rent

From Wikipedia, the free encyclopedia

In economics, economic rent is any payment to an owner or factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other "contrived" (assuming the market is natural, and does not come about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.

In the moral economy of the economics tradition broadly, economic rent is opposed to producer surplus, or normal profit, both of which are theorized to involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent is viewed as unearned revenue while economic profit is a narrower term describing surplus income earned by choosing between risk-adjusted alternatives. Unlike economic profit, economic rent cannot be theoretically eliminated by competition because any actions the recipient of the income may take such as improving the object to be rented will then change the total income to contract rent. Still, the total income is made up of economic profit (earned) plus economic rent (unearned).

For a produced commodity, economic rent may be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For education and occupational licensing, it is the knowledge, performance, and ethical standards, as well as the cost of permits and licenses that are collectively controlled as to their number, regardless of the competence and willingness of those who wish to compete on price alone in the area being licensed. In regard to labor, economic rent can be created by the existence of mass education, labor laws, state social reproduction supports, democracy, guilds, and labor unions (e.g., higher pay for some workers, where collective action creates a scarcity of such workers, as opposed to an ideal condition where labor competes with other factors of production on price alone). For most other production, including agriculture and extraction, economic rent is due to a scarcity (uneven distribution) of natural resources (e.g., land, oil, or minerals).

When economic rent is privatized, the recipient of economic rent is referred to as a rentier.

By contrast, in production theory, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor.

Economic rent is different from other unearned and passive income, including contract rent. This distinction has important implications for public revenue and tax policy. As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources such as minerals and oil and gas.

Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "external rent", whereby one economy received rent from other economies.

Definitions

According to Robert Tollison (1982), economic rents are "excess returns" above the "normal levels" that are generated in competitive markets. More specifically, a rent is "a return in excess of the resource owner's opportunity cost".

Henry George, best known for his proposal for a single tax on land, defines rent as "the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership" and as "the share of wealth given to landowners because they have an exclusive right to the use of those natural capabilities."

The law professors Lucian Bebchuk and Jesse Fried define the term as "extra returns that firms or individuals obtain due to their positional advantages."

In simple terms, economic rent is an excess where there is no enterprise or costs of production.

Classical rent (land rent)

In political economy, including physiocracy, classical economics, Georgism, and other schools of economic thought, land is recognized as an inelastic factor of production. Land, in this sense, means exclusive access rights to any natural opportunity. Rent is the share paid to freeholders for allowing production on the land they control.

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ....

— Adam Smith: The Wealth of Nations

David Ricardo is credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships.

Johann Heinrich von Thünen was influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population, increasing the profitability of commerce and providing for the division and specialization of labor, that commanded higher municipal rents. These high rents determined that land in a central city would not be allocated to farming but be allocated instead to more profitable residential or commercial uses.

Observing that a tax on the unearned rent of land would not distort economic activities, Henry George proposed that publicly collected land rents (land value taxation) should be the primary (or only) source of public revenue, though he also advocated public ownership, taxation, and regulation of natural monopolies and monopolies of scale that cannot be eliminated by regulation.

Neoclassical Paretian rent

Neoclassical economics extends the concept of rent to include factors other than natural resource rents.

• "The excess earnings over the amount necessary to keep the factor in its current occupation."
• "The difference between what a factor of production is paid and how much it would need to be paid to remain in its current use."
• "A return over and above opportunity costs, or the normal return necessary to keep a resource in its current use."

The labeling of this version of rent as "Paretian" may be a misnomer in that Vilfredo Pareto, the economist for whom this kind of rent was named, may or may not have proffered any conceptual formulation of rent.

Monopoly rent

Monopoly rent refers to those economic rents derived from monopolies, which can result from (1) denial of access to an asset or (2) the unique qualities of an asset. Examples of monopoly rent include: rents associated from legally enforced knowledge monopolies derived from intellectual property like patents or copyrights; rents associated with 'de facto' monopolies of companies like Microsoft and Intel who control the underlying standards in an industry or product line (e.g. Microsoft Office); rents associated with 'natural monopolies' of public or private utilities (e.g. telephone, electricity, railways, etc.); and rents associated with network effects of platform technologies controlled by companies like Facebook, Google, or Amazon.

Labour

The generalization of the concept of rent to include opportunity cost has served to highlight the role of political barriers in creating and privatizing rents. For example, a person seeking to become a member of a medieval guild makes a huge investment in training and education, which has limited potential application outside of that guild. In a competitive market, the wages of a member of the guild would be set so that the expected net return on the investment in training would be just enough to justify making the investment. In a sense, the required investment is a natural barrier to entry, discouraging some would-be members from making the necessary investment in training to enter the competitive market for the services of the guild. This is a natural "free market" self-limiting control on the number of guild members and/or the cost of training necessitated by certification. Some of those who would have opted for a particular guild may decide to join a different guild or occupation.

However, a political restriction on the number of people entering into the competitive market for services of the guild has the effect of raising the return on investments in the guild's training, especially for those already practicing, by creating an artificial scarcity of guild members. To the extent that a constraint on entrants to the guild actually increases the returns to guild members as opposed to ensuring competence, then the practice of limiting entrants to the field is a rent-seeking activity, and the excess return realized by the guild members is economic rent.

The same model explains the high wages in some modern professions that have been able to both obtain legal protection from competition and limit their membership, notably medical doctors, actuaries, and lawyers. In countries where the creation of new universities is limited by legal charter, such as the UK, it also applies to professors. It may also apply to careers that are inherently competitive in the sense that there is a fixed number of slots, such as football league positions, music charts, or urban territory for illegal drug selling. These jobs are characterised by the existence of a small number of rich members of the guild, along with a much larger surrounding of poor people competing against each other under very poor conditions as they "pay their dues" to try to join the guild. (Reference: "Freakonomics: Why do drug dealers live with their Moms?").

Terminology relating to rent

Gross rent

Gross rent refers to the rent paid for the services of land and the capital invested on it. It consists of economic rent, interest on capital invested for improvement of land, and reward for the risk taken by the landlord in investing his or her capital.

Scarcity rent

Scarcity rent refers to the price paid for the use of homogeneous land when its supply is limited in relation to demand. If all units of land are homogeneous but demand exceeds supply, all land will earn economic rent by virtue of its scarcity.

Differential rent

Differential rent refers to the rent that arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. The term was first proposed by David Ricardo.

Contract rent

Contract rent refers to rent that is mutually agreed upon between the landowner and the user. It may be equal to the economic rent of the factor.

Information rent

Information rent is rent an agent derives from having information not provided to the principal.

Usury

From Wikipedia, the free encyclopedia

 

Of Usury, from Brant's Stultifera Navis (Ship of Fools), 1494; woodcut attributed to Albrecht Dürer

 

Usury is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. The term may be used in a moral sense—condemning, taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in excess of the maximum rate that is allowed by law. A loan may be considered usurious because of excessive or abusive interest rates or other factors defined by a nation's laws. Someone who practices usury can be called a usurer, but in contemporary English may be called a loan shark. 

Originally, usury meant the charging of interest of any kind and, in some Christian societies and even today in many Islamic societies, charging any interest at all was considered usury. During the Sutra period in India (7th to 2nd centuries BC) there were laws prohibiting the highest castes from practicing usury. Similar condemnations are found in religious texts from Buddhism, Judaism, Christianity, and Islam (the term is riba in Arabic and ribbit in Hebrew). At times, many nations from ancient Greece to ancient Rome have outlawed loans with any interest. Though the Roman Empire eventually allowed loans with carefully restricted interest rates, the Catholic Church in medieval Europe banned the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). Religious prohibitions on usury are predicated upon the belief that charging interest on a loan is a sin.

History

Usury (in the original sense of any interest) was at times denounced by a number of religious leaders and philosophers in the ancient world, including Moses, Plato, Aristotle, Cato, Cicero, Seneca, Aquinas, Muhammad, and Gautama Buddha.

Certain negative historical renditions of usury carry with them social connotations of perceived "unjust" or "discriminatory" lending practices. The historian Paul Johnson, comments:

Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest. Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ...Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Hebrew took a different view of the matter.

Theological historian John Noonan argues that "the doctrine [of usury] was enunciated by popes, expressed by three ecumenical councils, proclaimed by bishops, and taught unanimously by theologians."

Roman Empire

Banking during the Roman Empire was different from modern banking. During the Principate, most banking activities were conducted by private individuals who operated as large banking firms do today. Anybody that had any available liquid assets and wished to lend it out could easily do so.

The annual rates of interest on loans varied in the range of 4–12 percent, but when the interest rate was higher, it typically was not 15–16 percent but either 24 percent or 48 percent. They quoted them on a monthly basis, and the most common rates were multiples of twelve. Monthly rates tended to range from simple fractions to 3–4 percent, perhaps because lenders used Roman numerals.

Money lending during this period was largely a matter of private loans advanced to persons persistently in debt or temporarily so until harvest time. Mostly, it was undertaken by exceedingly rich men prepared to take on a high risk if the profit looked good; interest rates were fixed privately and were almost entirely unrestricted by law. Investment was always regarded as a matter of seeking personal profit, often on a large scale. Banking was of the small, back-street variety, run by the urban lower-middle class of petty shopkeepers. By the 3rd century, acute currency problems in the Empire drove such banking into decline. The rich who were in a position to take advantage of the situation became the moneylenders when the increasing tax demands in the last declining days of the Empire crippled and eventually destroyed the peasant class by reducing tenant-farmers to serfs. It was evident that usury meant exploitation of the poor.

Cicero, in the second book of his treatise De Officiis, relates the following conversation between an unnamed questioner and Cato:

...of whom, when inquiry was made, what was the best policy in the management of one's property, he answered "Good grazing." "What was next?" "Tolerable grazing." "What third?" "Bad grazing." "What fourth?" "Tilling." And when he who had interrogated him inquired, "What do you think of lending at usury?" Then Cato answered, "What do you think of murder?"

Judaism

Jews are forbidden from usury in dealing with fellow Jews, and this lending is to be considered tzedakah, or charity. However, there are permissions to charge interest on loans to non-Jews. This is outlined in the Jewish scriptures of the Torah, which Christians hold as part of the Old Testament, and other books of the Tanakh.

If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.

Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase.

Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it.

that hath withdrawn his hand from the poor, that hath not received interest nor increase, hath executed Mine ordinances, hath walked in My statutes; he shall not die for the iniquity of his father, he shall surely live.

In thee have they taken gifts to shed blood; thou hast taken interest and increase, and thou hast greedily gained of thy neighbours by oppression, and hast forgotten Me, saith the Lord GOD.

Then I consulted with myself, and contended with the nobles and the rulers, and said unto them: 'Ye lend upon pledge, every one to his brother.' And I held a great assembly against them.

He that putteth not out his money on interest, nor taketh a bribe against the innocent. He that doeth these things shall never be moved.

Johnson contends that the Torah treats lending as philanthropy in a poor community whose aim was collective survival, but which is not obliged to be charitable towards outsiders.

A great deal of Jewish legal scholarship in the Dark and the Middle Ages was devoted to making business dealings fair, honest and efficient.

As the Jews were ostracized from most professions by local rulers during the middle ages, the Western churches and the guilds, they were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending. Natural tensions between creditors and debtors were added to social, political, religious, and economic strains.

...financial oppression of Jews tended to occur in areas where they were most disliked, and if Jews reacted by concentrating on moneylending to non-Jews, the unpopularity—and so, of course, the pressure—would increase. Thus the Jews became an element in a vicious circle. The Christians, on the basis of the Biblical rulings, condemned interest-taking absolutely, and from 1179 those who practiced it were excommunicated. Catholic autocrats frequently imposed the harshest financial burdens on the Jews. The Jews reacted by engaging in the one business where Christian laws actually discriminated in their favor, and became identified with the hated trade of moneylending.

Several historical rulings in Jewish law have mitigated the allowances for usury toward non-Jews. For instance, the 15th-century commentator Rabbi Isaac Abrabanel specified that the rubric for allowing interest does not apply to Christians or Muslims, because their faith systems have a common ethical basis originating from Judaism. The medieval commentator Rabbi David Kimchi extended this principle to non-Jews who show consideration for Jews, saying they should be treated with the same consideration when they borrow.

England

In England, the departing Crusaders were joined by crowds of debtors in the massacres of Jews at London and York in 1189–1190. In 1275, Edward I of England passed the Statute of the Jewry which made usury illegal and linked it to blasphemy, in order to seize the assets of the violators. Scores of English Jews were arrested, 300 were hanged and their property went to the Crown. In 1290, all Jews were to be expelled from England, allowed to take only what they could carry; the rest of their property became the Crown's. Usury was cited as the official reason for the Edict of Expulsion; however, not all Jews were expelled: it was easy to avoid expulsion by converting to Christianity. Many other crowned heads of Europe expelled the Jews, although again converts to Christianity were no longer considered Jewish. Many of these forced converts still secretly practiced their faith.

The growth of the Lombard bankers and pawnbrokers, who moved from city to city, was along the pilgrim routes. 

Die Wucherfrage is the title of a Lutheran Church–Missouri Synod work against usury from 1869. Usury is condemned in 19th-century Missouri Synod doctrinal statements.

 

In the 16th century, short-term interest rates dropped dramatically (from around 20–30% p.a. to around 9–10% p.a.). This was caused by refined commercial techniques, increased capital availability, the Reformation, and other reasons. The lower rates weakened religious scruples about lending at interest, although the debate did not cease altogether.

The 18th century papal prohibition on usury meant that it was a sin to charge interest on a money loan. As set forth by Thomas Aquinas in the 13th century, the natural essence of money was as a measure of value or intermediary in exchange. The increase of money through usury violated this essence and according to the same Thomistic analysis, a just transaction was one characterized by an equality of exchange, one where each side received exactly his due. Interest on a loan, in excess of the principal, would violate the balance of an exchange between debtor and creditor and was therefore unjust. 

Charles Eisenstein has argued that pivotal change in the English-speaking world came with lawful rights to charge interest on lent money, particularly the 1545 Act, "An Act Against Usurie" (37 Hen. VIII, c. 9) of King Henry VIII of England.

Christianity

Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.

Church councils

The First Council of Nicaea, in 325, forbade clergy from engaging in usury

Forasmuch as many enrolled among the Clergy, following covetousness and lust of gain, have forgotten the divine Scripture, which says, "He has not given his money upon usury" [Ezek. xviii, 8], and in lending money ask the hundredth of the sum [as monthly interest], the holy and great Synod thinks it just that if after this decree any one be found to receive usury, whether he accomplish it by secret transaction or otherwise, as by demanding the whole and one half, or by using any other contrivance whatever for filthy lucre's sake, he shall be deposed from the clergy and his name stricken from the list. (canon 17).

At the time, usury was interest of any kind, and the canon forbade the clergy to lend money at interest rates even as low as 1 percent per year. Later ecumenical councils applied this regulation to the laity.

Lateran III decreed that persons who accepted interest on loans could receive neither the sacraments nor Christian burial.

Nearly everywhere the crime of usury has become so firmly rooted that many, omitting other business, practise usury as if it were permitted, and in no way observe how it is forbidden in both the Old and New Testament. We therefore declare that notorious usurers should not be admitted to communion of the altar or receive christian burial if they die in this sin. Whoever receives them or gives them christian burial should be compelled to give back what he has received, and let him remain suspended from the performance of his office until he has made satisfaction according to the judgment of his own bishop. (canon 25)

The Council of Vienne made the belief in the right to usury a heresy in 1311, and condemned all secular legislation which allowed it.

Serious suggestions have been made to us that communities in certain places, to the divine displeasure and injury of the neighbour, in violation of both divine and human law, approve of usury. By their statutes, sometimes confirmed by oath, they not only grant that usury may be demanded and paid, but deliberately compel debtors to pay it. By these statutes they impose heavy burdens on those claiming the return of usurious payments, employing also various pretexts and ingenious frauds to hinder the return. We, therefore, wishing to get rid of these pernicious practices, decree with the approval of the sacred council that all the magistrates, captains, rulers, consuls, judges, counsellors or any other officials of these communities who presume in the future to make, write or dictate such statutes, or knowingly decide that usury be paid or, if paid, that it be not fully and freely restored when claimed, incur the sentence of excommunication. They shall also incur the same sentence unless within three months they delete from the books of their communities, if they have the power, statutes of this kind hitherto published, or if they presume to observe in any way these statutes or customs. Furthermore, since money-lenders for the most part enter into usurious contracts so frequently with secrecy and guile that they can be convicted only with difficulty, we decree that they be compelled by ecclesiastical censure to open their account books, when there is question of usury. If indeed someone has fallen into the error of presuming to affirm pertinaciously that the practice of usury is not sinful, we decree that he is to be punished as a heretic; and we strictly enjoin on local ordinaries and inquisitors of heresy to proceed against those they find suspect of such error as they would against those suspected of heresy. (canon 29)

Up to the 16th century, usury was condemned by the Catholic Church, but not really defined. During the Fifth Lateran Council, in the 10th session (in the year 1515), the Council for the first time gave a definition of usury:

For, that is the real meaning of usury: when, from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense or any risk.

The Fifth Lateran Concil, in the same declaration, gave explicit approval of charging interest in the case of Mounts of Piety:

(...) We declare and define, with the approval of the Sacred Council, that the above-mentioned credit organisations, established by states and hitherto approved and confirmed by the authority of the Apostolic See, do not introduce any kind of evil or provide any incentive to sin if they receive, in addition to the capital, a moderate sum for their expenses and by way of compensation, provided it is intended exclusively to defray the expenses of those employed and of other things pertaining (as mentioned) to the upkeep of the organizations, and provided that no profit is made therefrom. They ought not, indeed, to be condemned in any way. Rather, such a type of lending is meritorious and should be praised and approved. It certainly should not be considered as usurious; (...)

Pope Sixtus V condemned the practice of charging interest as "detestable to God and man, damned by the sacred canons, and contrary to Christian charity.

Medieval Theology

The first of the scholastic Christian theologians, Saint Anselm of Canterbury, led the shift in thought that labelled charging interest the same as theft. Previously usury had been seen as a lack of charity.

St. Thomas Aquinas, the leading scholastic theologian of the Roman Catholic Church, argued charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is a medium of exchange, and is used up when it is spent. To charge for the money and for its use (by spending) is therefore to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity for which anyone can charge. In condemning usury Aquinas was much influenced by the recently rediscovered philosophical writings of Aristotle and his desire to assimilate Greek philosophy with Christian theology. Aquinas argued that in the case of usury, as in other aspects of Christian revelation, Christian doctrine is reinforced by Aristotelian natural law rationalism. Aristotle's argument is that interest is unnatural, since money, as a sterile element, cannot naturally reproduce itself. Thus, usury conflicts with natural law just as it offends Christian revelation: see Thought of Thomas Aquinas.

Outlawing usury did not prevent investment, but stipulated that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all, which is usury. St Thomas quotes Aristotle as saying that "to live by usury is exceedingly unnatural". Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) - an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. (Deut 23:19-20) St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as "montes pietatis".

In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral. The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest "to compensate him for profit foregone in investing the money himself." (Rothbard 1995, p. 46) This idea is very similar to opportunity cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena). However, Hostiensis' exceptions, including for lucrum cessans, were never accepted as official by the Roman Catholic Church. 

Pope Benedict XIV's encyclical Vix Pervenit, operating in the pre-industrial mindset, gives the reasons why usury is sinful:

The nature of the sin called usury has its proper place and origin in a loan contract… [which] demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given…, but any gain which exceeds the amount he gave is illicit and usurious.

One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully…

Usury controversies in 15th through 19th century Catholicism

Concerns about usury included the 19th century Rothschild loans to the Holy See and 16th century concerns over abuse of the zinskauf clause. This was problematic because the charging of interest (although not all interest - see above for Fifth Lateran Council) can be argumented to be a violation of doctrine at the time, such as that reflected in the 1745 encyclical Vix pervenit. To prevent any claims of doctrine violation, work-arounds would sometimes be employed. For example, in the 15th century, the Medici Bank lent money to the Vatican, which was lax about repayment. Rather than charging interest, "the Medici overcharged the pope on the silks and brocades, the jewels and other commodities they supplied." However, the 1917 Code of Canon Law switched position and allowed church monies to be used to accrue interest.

It can be proposed that the Catholic Church has not, since the beginning of the Industrial Revolution, changed its interpretation of practical matters of interest but that it only fails to enforce the rules, perhaps out of the fear of a greater evil. Yet, this view fails to take into account the very practical consequences of an explosion of innovation and commerce, necessitating soul-searching in all social participants. 

The Roman Catholic Church has always condemned usury, but in modern times, with the rise of capitalism, the previous assumptions about the very nature of money got challenged, and the Catholic Church had to update its understanding of what constitutes usury to also include the new reality. Thus, the Church refers, among other things, to the fact Mosaic Law doesn't ban all interest taking (proving interest-taking is not an inherently immoral act, same principle as with homicide), as well as the fact that we can now do more with money then just spend it. There are today many opportunities for investment, risk taking and commerce in general where just 200 years ago there were very few options. In the days of St. Aquinas, one had the options of either spending or hoarding the money. Today, (almost) anyone can either spend, hoard, invest, speculate or lend to businesses or persons. Because of this, as the old Catholic Encyclopedia put it, "Since the possession of an object is generally useful, I may require the price of that general utility, even when the object is of no use to me."

Jesuit philosopher Joseph Rickaby, writing at the beginning of the 20th century, put the development of economy in relation to usury this way:

In great cities commerce rapidly ripened, and was well on towards maturity five centuries ago. Then the conditions that render interest lawful, and mark if off from usury, readily came to obtain. But those centres were isolated. (...) Here you might have a great city, Hamburg or Genoa, an early type of commercial enterprise, and, fifty miles inland, society was in infancy, and the great city was as part of another world. Hence the same transaction, as described by the letter of the law, might mean lawful interest in the city, and usury out in the country - the two were so disconnected.

He further gave the following view of the development of Catholic practice:

In such a situation the legislator has to choose between forbidding interest here and allowing usury there; between restraining speculation and licensing oppression. The mediaeval legislator chose the former alternative. Church and State together enacted a number of laws to restrain the taking of interest, laws that, like the clothes of infancy, are not to be scorned as absurd restrictions, merely because they are inapplicable now, and would not fit the modern growth of nations. At this day the State has repealed those laws, and the Church has officially signified that she no longer insists on them. Still she maintains dogmatically that there is such a sin as usury, and what it is, as defined in the Fifth Council of Lateran.

Islam

Interest of any kind is forbidden in Islam. As such, specialized codes of banking have developed to cater to investors wishing to obey Qur'anic law.

The following quotations are English translations from the Qur'an:

Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)

God condemns usury, and blesses charities. God dislikes every sinning disbeliever. Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)

O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-'Imran 3:130)

And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)

The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)

The attitude of Muhammad to usury is articulated in his Last Sermon:

O People, just as you regard this month, this day, this city as Sacred, so regard the life and property of every Muslim as a sacred trust. Return the goods entrusted to you to their rightful owners. Hurt no one so that no one may hurt you. Remember that you will indeed meet your LORD, and that HE will indeed reckon your deeds. ALLAH has forbidden you to take usury, therefore all usurious obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer any inequity. Allah has Judged that there shall be no usury and that all the usury due to Abbas ibn 'Abd'al Muttalib (Prophet's uncle) shall henceforth be waived...

In literature

In The Divine Comedy, Dante places the usurers in the inner ring of the seventh circle of hell. 

Interest on loans, and the contrasting views on the morality of that practice held by Jews and Christians, is central to the plot of Shakespeare's play "The Merchant of Venice". Antonio is the merchant of the title, a Christian, who is forced by circumstance to borrow money from Shylock, a Jew. Shylock customarily charges interest on loans, seeing it as good business, while Antonio does not, viewing it as morally wrong. When Antonio defaults on his loan, Shylock famously demands the agreed upon penalty: a measured quantity of muscle from Antonio's chest. This is the source of the metaphorical phrase "a pound of flesh" often used to describe the dear price of a loan or business transaction. Shakespeare's play is a vivid portrait of the competing views of loans and use of interest, as well as the cultural strife between Jews and Christians that overlaps it.

By the 18th century, usury was more often treated as a metaphor than a crime in itself, so Jeremy Bentham's Defense of Usury was not as shocking as it would have appeared two centuries earlier.

In Honoré de Balzac's 1830 novel Gobseck, the title character, who is a usurer, is described as both "petty and great—a miser and a philosopher..." The character Daniel Quilp in The Old Curiosity Shop by Charles Dickens is a usurer. 

In the early 20th century Ezra Pound's anti-usury poetry was not primarily based on the moral injustice of interest payments but on the fact that excess capital was no longer devoted to artistic patronage, as it could now be used for capitalist business investment.

Usury law

Usury and the law

Magna Carta commands, "If any one has taken anything, whether much or little, by way of loan from Jews, and if he dies before that debt is paid, the debt shall not carry usury so long as the heir is under age, from whomsoever he may hold. And if that debt falls into our hands, we will take only the principal contained in the note."

 

"When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not." (William Blackstone's Commentaries on the Laws of England).

Canada

Canada's Criminal Code limits the interest rate to 60% per year. The law is broadly written and Canada's courts have often intervened to remove ambiguity.

Japan

Japan has various laws restricting interest rates. Under civil law, the maximum interest rate is between 15% and 20% per year depending upon the principal amount (larger amounts having a lower maximum rate). Interest in excess of 20% is subject to criminal penalties (the criminal law maximum was 29.2% until it was lowered by legislation in 2010). Default interest on late payments may be charged at up to 1.46 times the ordinary maximum (i.e., 21.9% to 29.2%), while pawn shops may charge interest of up to 9% per month (i.e., 108% per year, however, if the loan extends more than the normal short-term pawn shop loan, the 9% per month rate compounded can make the annual rate in excess of 180%, before then most of these transaction would result in any goods pawned being forfeited).

United States

Usury laws are state laws that specify the maximum legal interest rate at which loans can be made. In the United States, the primary legal power to regulate usury rests primarily with the states. Each U.S. state has its own statute that dictates how much interest can be charged before it is considered usurious or unlawful.

If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the unlawfully high interest, and some states will apply all payments made on the debt to the principal balance. In some states, such as New York, usurious loans are voided ab initio.

The making of usurious loans is often called loan sharking. That term is sometimes also applied to the practice of making consumer loans without a license in jurisdictions that requires lenders to be licensed.

Federal regulation

On a federal level, Congress has never attempted to federally regulate interest rates on purely private transactions, but on the basis of past U.S. Supreme Court decisions, arguably the U.S. Congress might have the power to do so under the interstate commerce clause of Article I of the Constitution.

Congress imposed a federal criminal penalty for unlawful interest rates through the Racketeer Influenced and Corrupt Organizations Act (RICO Statute), and its definition of "unlawful debt", which makes it a potential federal felony to lend money at an interest rate more than twice the local state usury rate and then try to collect that debt.

It is a federal offense to use violence or threats to collect usurious interest (or any other sort).

Separate federal rules apply to most banks. The U.S. Supreme Court held unanimously in the 1978 case, Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.

In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among the Act's provisions, it exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. Combined with the Marquette decision that applied to National Banks, this effectively overrode all state and local usury laws. The 1968 Truth in Lending Act does not regulate rates, except for some mortgages, but requires uniform or standardized disclosure of costs and charges.

In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees and, therefore, states could not regulate fees.

Some members of Congress have tried to create a federal usury statute that would limit the maximum allowable interest rate, but the measures have not progressed. In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama. The act provides for a Consumer Financial Protection Bureau to regulate some credit practices but has no interest rate limit.

Texas

State law in Texas also includes a provision for contracting for, charging, or receiving charges exceeding twice the amount authorized (A/K/A "double usury"). A person who violates this provision is liable to the obligor as an additional penalty for all principal or principal balance, as well as interest or time price differential. A person who is liable is also liable for reasonable attorney's fees incurred by the obligor. 

Avoidance mechanisms and interest-free lending

Islamic banking

In a partnership or joint venture where money is lent, the creditor only provides the capital yet is guaranteed a fixed amount of profit. The debtor, however, puts in time and effort, but is made to bear the risk of loss. Muslim scholars argue that such practice is unjust. As an alternative to usury, Islam strongly encourages charity and direct investment in which the creditor shares whatever profit or loss the business may incur (in modern terms, this amounts to an equity stake in the business).

Interest-free banks

The JAK members bank is a usury-free saving and loaning system.

Interest-free micro-lending

Growth of the Internet internationally has enabled both business micro-lending through sites such as Kickstarter as well as through global micro-lending charities where lenders make small sums of money available on zero-interest terms. Persons lending money to on-line micro-lending charity Kiva for example do not get paid any interest, although the end users to whom the loans are made may be charged interest by Kiva's partners in the country where the loan is used.

Non-recourse mortgages

A non-recourse loan is secured by the value of property (usually real estate) owned by the debtor. However, unlike other loans, which oblige the debtor to repay the amount borrowed, a non-recourse loan is fully satisfied merely by the transfer of the property to the creditor, even if the property has declined in value and is worth less than the amount borrowed. When such a loan is created, the creditor bears the risk that the property will decline sharply in value (in which case the creditor is repaid with property worth less than the amount borrowed), and the debtor does not bear the risk of decrease in property value (because the debtor is guaranteed the right to use the property, regardless of value, to satisfy the debt.)

Zinskauf

Zinskauf was used as an avoidance mechanism in the Middle Ages.