Luther was against usury according to Gustaf Wingren in Luther on Vocation because the lender’s “position is quite like that of the monk: entire security for himself without the least labor (therefore no place for faith) and without regard for his neighbor (no place for love).”
“Any person who does not know what insecurity is does not know what faith is.” And a lender “avoids insecurity by demanding a fixed interest on a given date (with the threat that otherwise he will deprive the borrower of his property which he has put up as collateral).” While the borrower ”stands ceaselessly under the power of God amid a thousand dangers; death, sickness, water, fire, storm, hail, thunder, rain, wild beasts, and evil men,” the lender does not need to “himself, by his own toil, try to make his money productive” as the borrower needs to.
Let’s break this down.
(This is tangential to all the discussion about vocation, I know, but as a business lawyer who represents lenders and borrowers in large infrastructure projects, I find this claim intriguing. Is that too nerdy? Probably.)
In modern parlance, one might say Luther is against fully secured (but not necessarily un- or partially- secured) lending because the lender’s security comes from having collateral whose value is not less than the loan.
Luther even has a proposal: “that the lender receive interest, not on the principal of the loan but on the profit it earns from the borrower….” This way, “if catastrophe befall the borrower, the lender will receive nothing,” “shares the insecurity and is thereby driven to faith while he enters into real fellowship with” the borrower and is “thus brought closer to a right relationship with both God and his neighbor.”
Fascinating. Again, in modern parlance, Luther would rather that an investor provide equity, not debt (that is sufficiently collateralized) because that gives room for faith in God and fellowship with the borrower. (Does this rationale hold up in modern situations where the lender is a large bank in the form of a corporation rather than a rich individual and the borrower is a limited liability entity rather than a poor farmer, for instance?)
Economists sometimes say allowing deduction of interest (paid to lenders) but not dividends (paid to equity holders) from gross income to arrive at taxable income is distortionary, artificially making debt more valuable as source of capital. Who knew this critique was Lutheran in origin? 🙂