[The Editors' Verdict] The Trap of Populism

In medieval Europe, where Christianity was the foundation of both mind and life, the usury doctrine was strict. Any type of interest or charge on lending money was prohibited. The usury doctrine is based on the Mosaic Law. As seen in Luke 6:34-35, there are also verses in the New Testament that forbid interest, attributed to the words of Jesus.

The formalization of the usury doctrine is known to have begun during the reign of Roman Emperor Constantine the Great. The Council of Nicaea, convened by him, is famous for establishing the doctrine of the Trinity, but it is also known for mandating priests to uphold the usury doctrine based on biblical teachings.

The extension of the usury doctrine to ordinary believers is said to have occurred during the time of Charlemagne, the first emperor of the Holy Roman Empire. Of course, it was not applied to non-Christians. For example, Jewish interest transactions were permitted, and some scholars argue that the reason Jews were particularly skilled in finance is due to this circumstance. The usury doctrine significantly constrained the economy, society, and politics of Europe until the French Revolution and had a profound impact on the development of financial systems and institutions.

Since interest could not be charged when lending money, it was natural that those who desperately needed funds often could not borrow. The emergence of loopholes was also inevitable. For example, there was a method where 80 pounds were lent, but the contract stated that 100 pounds were lent. In international transactions, a higher exchange rate was sometimes used as a workaround to compensate for interest.

In the Middle Ages, if the money was not repaid within the deadline, a penalty was imposed. This was called poena or mora. Sometimes, such rules were exploited by deliberately delaying repayment and paying the penalty in the form of hidden interest. However, all of these were subject to dispute. Therefore, the usury doctrine was undoubtedly a system that greatly increased transaction costs.

The basic premise of the usury doctrine is that interest is exploitation and unearned income. Even now, there are many in this country who view interest from that perspective, but modern economics provides many reasons why interest must be paid. In particular, finance functions to efficiently allocate saved capital. And in this process, interest plays an above all important price function.

If interest rates are distorted, capital is used in the wrong places. At that time, the economy deteriorates invisibly. What do you think was the reason for the collapse of communist countries led by the Soviet Union? In short, it was because there was no price function to efficiently allocate resources. Political interference in interest rates, or more broadly in finance, distorts the resource allocation function and invisibly and gradually leads to national ruin.

Populism in the Republic of Korea is at a dangerous level. It is said that Gyeonggi Province Governor Lee Jae-myung advocated for a basic loan right last month. He argued that interest rates should be capped at 10%, illegal private loans invalidated, and a system guaranteeing long-term low-interest loans is absolutely necessary. His claim is that there should be a welfare-oriented loan system where the state bears up to 10% of losses from some defaults so that anyone can receive long-term low-interest loans.

This is an utterly ignorant claim. It is a proposal to use finance as a welfare policy, but no country that has implemented such a policy has not failed. Venezuela today is exactly such a case. The trap of populism has begun to engulf the country. Why do people not understand that when trust in finance collapses, the national economy falls into ruin?

Jo Jang-ok, Professor of Economics, Sogang University