The Third Pillar: How Markets and the State are Leaving Communities Behind. Raghuram Rajan

stability of the community when it banned usury and exploitative market transactions. And it did use some of the wealth it accumulated to provide charity to the destitute.

      The Intellectual Support for the Ban on Usury

      The Church could appeal to a long line of thinkers, past and present, for support for the ban on usury. The Greek philosopher Aristotle, who was being rediscovered in this period, was firmly against interest on loans. He saw the production of goods to satisfy physical wants such as food and clothing as useful economic activity. Farming, the raising of livestock, and manufacturing were all productive. In contrast, trade, which simply exchanged goods for one another; hire, which lent out goods for money; and usury, which lent out money for money, produced nothing that satisfied physical wants. Of the three, ‘The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from its natural use of it. For money was intended to be used in exchange, but not to increase at interest.’17

      St Augustine, a guiding light of the early Church, similarly warned about the three sins of fallen men: the lust for power, sexual lust, and the lust for money. Of these, he was most ambivalent about the lust for power, which if accompanied by a sense of civic duty and honor, could protect the community against external attack.18 He also discussed in his startlingly frank Confessions how his private desires such as sex – as a young man, he was sexually active, and later, he lived with a mistress who bore him a son – came in the way of his relationship with God. Here too he seemed to be ambiguous, if not understanding. About the lust for money, though, he was clear in his condemnation.

      Drawing on such sources, Church scholars in the Middle Ages concluded that trade or enterprise was necessary but perilous to the soul. The businessman could always be tempted to hanker after excess profit by charging more than the just price – the price that provided adequate income for the seller to maintain his station in life. This constituted avarice, a deadly sin. Working hard to enhance profits was clearly not in accordance with medieval thinking. Worse still was finance, which ‘if not immoral, was at best sordid, at worst disreputable.’19 These strongly Aristotelian attitudes, which still dominate many societies today, reflected a suspicion of the middleman. They were thought to make money not by adding intrinsic value to the traded item, but by moving goods or money to areas of shortage, or even, many believed, by creating the shortage in the first place.

      WHY THE CHURCH BECAME MORE TOLERANT OF USURY

      Important developments eventually moderated Church hostility toward business and finance in Europe. The Black Death, a plague more deadly than any before in Europe’s recorded history, did much to shake the distribution of income and social structures. There were now relatively fewer poor to protect. Moreover, commercial activity also picked up; the development of new military technologies led to larger states, and therefore larger, safer, internal markets. There was consequently more opportunity to trade. Lending to businesses to finance trade increased. With the state also demanding loans to finance its larger spending, lending did not seem so exploitative – it was no longer primarily consumption loans to the poor untutored peasant but rather loans to financially sophisticated borrowers (as the modern parlance goes). Furthermore, it was less important for the Church to protect the borrower as more of the wealthy competed to lend. Also, the Church itself became an important usurer as it lent out the enormous wealth it had accumulated following the Papal Revolution.

      Eventually, the Church’s wealth made it a target for the state. As critics attacked the Church during the Protestant Reformation, monarchs seized an opportunity to cut the Church down to size, and it was rarely a factor in governance again.

      The Black Death

      In October 1347, twelve Genoese trading ships docked at the Sicilian port of Messina after a long journey through the Black Sea. Many of the sailors on board were dead, covered with black boils that gave the illness its name, the Black Death. The Sicilian authorities ordered the ‘death ships’ out of the harbor, but it was too late. Over the next five years, and over the course of subsequent recurrences, the bubonic plague pandemic would wipe out an estimated third of Europe’s population.

      The humanitarian catastrophe had a thin silver lining. The lucky peasantry that survived the Black Death now could farm much larger land holdings, could concentrate on better land, and were thus significantly richer. For instance, in 1341 in the English village of Stoughton, 52 per cent of landholdings were eleven acres or less. By 1477, only 16 per cent were that size, with 58 per cent of holdings larger than thirty acres.20 With many in the community becoming more prosperous, life became less precarious, and the need for emergency consumption loans and Church charity diminished.

      The poor were still around, albeit fewer in number. Fortunately, with more people possessing surplus resources, competition to lend to those in adversity increased. With vast tracts of now-untilled land as well as commercial opportunities in towns beckoning the poor, the extremes in bargaining power that might have led to debt bondage no longer prevailed. Indeed, across much of Western Europe, the Black Death precipitated the end of serfdom.21 Greater prosperity and competition to lend that prosperity now diminished the old rationales for prohibiting usury.

      As we will see throughout the book, natural or economic catastrophes and technological progress are the big drivers of societal change. After the Black Death, technological progress took over. Francis Bacon, the seventeenth-century courtier and philosopher, saw gunpowder, printing, and the compass as the three greatest inventions known to man.22 Their arrival in the West played a part in the expansion of markets, and the further weakening of the feudal community as well as the Catholic Church. They also heralded the rise of the nation-state, a key player in our narrative.

      CANNONS AND INTERNAL COMMERCE

      In feudal Europe around the turn of the first millennium, all that it seemed to take to create a self-sufficient political entity – it would be too much to call this a state – were fortified walls and a retinue of armed men. Indeed, often the first use of the independent taxation authority a town received was to build a strong wall – a policy that still appeals to some of our politicians.23 In the fourteenth century, by some counts there were over one thousand separate political entities in Europe.24 Each entity levied its own duties, taxes, and tolls, especially on goods crossing its borders, which increased the cost of transporting goods over long distances. These were just the legal impediments to commercial traffic; entrepreneurial lords could indulge in their own banditry, while sea captains could engage in piracy. If you drive alongside the Rhine near Frankfurt today, you will see the castles of the original robber barons at regular intervals, though today they only relieve tourists of their money, and in a far more civilised way than in the past. All these impediments ensured that the size of the market any producer could safely and profitably access was quite small – often only within the borders of the little political entity he resided in.

      The cannon changed everything. The Chinese invented gunpowder, but it was the Europeans who fully discovered and developed its destructive potential. At the battle of Crecy in 1346, English bowmen used small bombards, which, primed with gunpowder, shot little iron balls to frighten enemy horses.25 A hundred years later, massive siege cannons could demolish even the strongest fortifications. Techniques of fortifying changed in response, so the net effect of the cannon was to increase both the cost of attack and of defense.

      Military techniques also changed. Cannonballs and musket fire could slaughter charging armored knights on horseback. However, muskets took time to reload, which meant an experienced musketeer even in the beginning of the seventeenth century could shoot a round only once every two minutes.26 Against a cavalry charge, this meant essentially only one shot between the enemy coming into range and the commencement of hand-to-hand combat. The tactical solution was to have