[The Editors' Verdict] The Market Is Circulation

In medieval Western society, interest was a hot-button issue. After Jesus cursed usury in the Bible, Christianity prohibited all financial transactions involving interest. Although moneylending operated by non-Christians was allowed, it was looked down upon. Shylock, a character in Shakespeare's The Merchant of Venice, was a Jew.

Due to strict control by the Church and the secular powers that followed it, lending transactions froze. The result was high interest rates due to a shortage of capital supply and the development of investment methods not classified as usury. One such investment method was joint ventures in trade. Joint investments in spices from the East and precious metals from the New World in the late Middle Ages were risky but highly profitable if successful. Since these were not interest earnings, they were permitted. Antonio’s trade investments in The Merchant of Venice were probably of this type.

When lending money, not only was interest forbidden, but the right to the loan (the promissory note) could not be sold before maturity. To sell before maturity, the principal to be recovered in the future must be discounted. The rate applied then is the interest rate. If the discount rate (interest rate) is applied low, selling the promissory note before maturity would effectively collect interest. For this reason, selling promissory notes before maturity was banned as a means of illicitly collecting interest. Bonds, relatively safe assets, were thoroughly rejected in the Christian world for a very long time.

The first time interest-bearing financial transactions were allowed was in England during the reign of the famous Henry VIII. Henry VIII broke from the Catholic Church and established the Church of England, or the Anglican Church, with the monarch as its head. In 1545, 19 years before Shakespeare was born, the English Parliament enacted the Usury Act, allowing interest payments up to 10% and defining anything above that as usury. England’s interest rate ceiling continued to fall to 8% in 1624, 6% in 1651, and 5% in 1713. It was not until 1854, during the height of the Industrial Revolution, that the Usury Act, which remained a kind of interest rate restriction law, was completely abolished. Strict and complete regulation of usury in Catholic countries continued until the French Revolution in 1789.

This prohibition of bond trading in medieval Western society may not seem unfamiliar to us today. However, if we look around, although it is a matter of degree, such regulations and barriers still exist. When teaching macroeconomics in the classroom, the first thing explained is the circulation of the national economy. Households supply labor and capital to the market. Firms hire labor to produce and invest with borrowed funds. In return, firms pay wages and capital income to households. Households then consume part of their income and supply the rest as savings to the financial market.

This circulation is continuous. If you were to define the economy in one word, it would be circulation. Therefore, if any part of this circulation is blocked, the entire economy inevitably becomes distorted. The series of policies pursued by the Moon Jae-in administration, including income-led growth, failed because they did not recognize the simple fact that the national economy is a circulation. Policies affect not only the targeted market or group but the entire economy through this circulation. Policies hastily made without deeply considering this principle of circulation will, without a doubt, fail. Recently, there has even been talk of a permit system for real estate transactions, which leaves one at a loss for words. This is not the Middle Ages anymore, is it?

Jo Jang-ok, Professor of Economics, Sogang University