Where Interest Comes From

In 1980, in Florida, Sonny Black, a capo in the Bonanno family, was talking with Joe Pistone, whom he took for one of his own, about how to set up in a new place: take bets, lend money. As Pistone tells it, Sonny asked how much he’d need to get going with the shylocks. Pistone said twenty-five thousand or so to start. And Sonny asked what any banker in his place would have asked: what were the rates around here?

By rates, Pistone explains, Sonny meant the interest at which the local loan sharks lent. The answer he got: five per cent at most, it all depends on the client and the amount.

It all depends on the client and the amount. You won’t define an interest rate any shorter than that. Professors write fat books. A loan shark in Florida managed it in one sentence.

What Interest Is Made Of

Interest is what money costs over time. You hand over money today and get it back tomorrow. For that “tomorrow” you’re owed a payment. And the payment is made up of several parts.

The first part is time itself. Money today is better than money in a year: you can buy something with it now, invest it, put it to work. Give it up, and you want to be rewarded.

The second is inflation. Prices go up over the year, and your dollar buys less. The lender wants back not just the sum but what the sum could buy.

The third is risk. The borrower may not pay back. The more the lender risks, the more he wants for it. That’s why a reliable client borrows cheaper than a risky one. “It all depends on the client.”

And the fourth, which people usually forget, is not knowing. The lender doesn’t really understand who he’s lending to? Then he builds his fear into the rate. Gambetta writes about the south of Italy in the nineteenth century, where moneylenders were everywhere and held the region back: high interest, among other things, shows that the borrower isn’t trusted—neither to be able to pay back, nor to want to. Dear money is the symptom. The disease is distrust.

Why Nobody Lends to the Illegal Trade

Gambetta again, drawing on the economist Peter Reuter, explains why illegal firms can almost never borrow on a big scale. Nobody will lend them serious money, and there are three reasons. They keep no accounts, because they’re afraid of the prosecutor, so there’s no way of keeping track of them. They can’t offer sound collateral. And the money has to be lent to a man rather than a firm, and whether a man can pay depends too much on his personal fate.

This holds not only for the Mafia. Keep accounts, put up collateral, set up a proper company—and the interest falls. Not because the bank loves paperwork. Every piece of paper tells the bank a little more about you. Angry that the bank wants yet another certificate? Remember: that certificate knocks down your rate.

Murderous Interest

Moneylending is as old as money. And so are the attempts to ban it.

For centuries the Church held that taking interest was a sin. In 1179 the Third Lateran Council decreed that usurers be refused communion and Christian burial. In 1311 the Council of Vienne declared it heresy even to believe that taking interest was allowed.

People didn’t stop needing money because of that. The need simply went underground. The poor borrowed as before, only now from those who feared neither Church nor law, and at rates that included the risk of getting caught. They banned interest—and it got dearer.

And then the Church made a stroke of genius. In 1462 in Perugia, Franciscan friars opened the first city pawnshop, a “mountain of mercy”. The poor were given small loans against pledged goods and charged a moderate fee, announced in advance. To lead people away from the usurers, the Church opened a credit shop of its own. An honest one. In 1515 the Fifth Lateran Council acknowledged that such pawnshops could charge a moderate fee to cover their costs. Interest was back. Under another name.

Who Lends to the Poor

The loan shark always turns up where the bank can’t see the borrower.

Dickie writes that in America at the turn of the century the Italian padrone bosses who found work for immigrants lent the poorest of them money for the steamship ticket and then took it out of their wages, with hefty interest on top. Gallucci, “the King of Little Italy”, was, according to Dash, one of the biggest moneylenders in the neighbourhood. Would an American bank lend money to an illiterate Sicilian peasant with no papers and no English? Not one would have. The padrone did. He knew where the man would be working and could take his cut straight from the pay packet.

We’ve already seen the other side of the same coin in Naples. The Camorra lends to underground factories at two to four per cent, because officially those factories don’t exist and the bank can’t see them. There, the clan knows the borrower and can make him pay, so it lends cheap. Here, the padrone knows the borrower and docks the debt from his wages, so he lends dear: the immigrant owes him his job as well. What the loan shark really sells is what he knows about the borrower and what he can do to him. The rate just shows how few places the borrower has left to turn.

The Don’s Surcharge

Don Vincenzo never called himself a lender. But he was one. The restaurants paid us for oil once a week. Anyone who wanted to pay once a month could, only with a surcharge. And the Don set each one his own surcharge.

An old restaurant that had paid on the dot for twenty years got its month almost without a surcharge. A new one we didn’t know paid more, and the surcharge came down only once it had paid properly for six months. And one restaurant the Don refused credit altogether, even though it paid punctually. I asked him why. The Don said: “He has three creditors, and each one thinks he’s the only one.” He had found that out from the wine supplier.

That was when I understood that the Don worked out interest the same way as the loan shark in Florida: by client and by amount. Only he didn’t threaten, he listened: Signora Lucia kept a notebook, the wine supplier brought gossip. Those we knew paid less. Those we knew too little about paid more.

The Bottom Line

They charge you more than others? Ask yourself what they don’t know about you.