Loan Sharks

Northern Italy in the early thirteenth century was a land subdiv­ided into multiple feuding city-states. Among the many remnants of the defunct Roman Empire was a numerical system singularly ill-suited to complex mathematical calculation, let alone the needs of commerce. Nowhere was this more of a

problem than in Pisa, where merchants also had to contend with seven different forms of coinage in circulation. By comparison, economic life in the Eastern world - in the Abassid caliphate or in Sung China - was far more advanced, just as it had been in the time of Charlemagne. T o discover modern finance, Europe needed to import it. In this, a crucial role was played by a young mathematician called Leonardo of Pisa, or Fibonacci. The son of a Pisan customs official based in what is now Bejaia

in Algeria, the young Fibonacci had immersed himself in what he called the 'Indian method' of mathematics, a combination of Indian and Arab insights. His introduction of these ideas was to

revolutionize the way Europeans counted. Nowadays he is best remembered for the Fibonacci sequence of numbers, in which each successive number is the sum of the previous two, and the ratio between a number and its immediate antecedent tends towards a 'golden mean' (around 1618) . It is a pattern that mirrors some of the repeating proper­ ties to be found in the natural world (for example in the fractal geometry of ferns and sea shells). But the Fibonacci sequence was only one of many Eastern mathematical ideas introduced to Europe in his path-breaking book Liber Abaci, 'The Book of

Calculation', which he published in 1 2 0 2 . In it, readers could find fractions explained, as well as the concept of present value (the discounted value today of a future revenue stream).

 Most important of all was Fibonacci's introduction of Hindu-Arabic numerals. He not only gave Europe the decimal system, which makes all kinds of calculation far easier than with Roman numerals; he also showed how it could be applied to commercial bookkeeping, to currency conversions and, crucially, to the cal­ culation of interest. Significantly, many of the examples in the Liber Abaci are made more vivid by being expressed in terms of commodities like hides, peppers, cheese, oil and spices. This

was to be the application of mathematics to making money and, in particular, to lending money. One characteristic example begins:

A man placed 1 0 0 pounds at a certain [merchant's] house for 4 denarii per pound per month interest and he took back each year a payment of 30 pounds. One must compute in each year the 3 0 pounds reduction of capital and the profit on the said 3 0 pounds. It is sought how many years, months, days and hours he will hold money in the house . . .

Italian commercial centres like Fibonacci's home town of Pisa or nearby Florence proved to be fertile soil for such financial seeds. But it was above all Venice, more exposed than the others to Oriental influences, that became Europe's great lending labora­tory. It is not coincidental that the most famous moneylender in Western literature was based in Venice. His story brilliantly illuminates the obstacles that for centuries impeded the transla­tion of Fibonacci's theories into effective financial practice. These

obstacles were not economic, or political. They were cultural. 

Jews, too, were not supposed to lend at interest. But there was a convenient get-out clause in the Old Testament book of Deuteronomy: 'Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.' In other words, a J e w might legitimately lend to a Christian, though not to another J e w . The price of doing so was social exclusion. Jews had been expelled from Spain in 1 4 9 2 . Along with many Portuguese conversos, Jews who were forced to adopt Christ­ianity by a decree of 1 4 9 7 , they sought refuge in the Ottoman Empire. From Constantinople and other Ottoman ports they then established trading relationships with Venice. The Jewish presence in Venice dates from 1509, when Jews living in Mestre sought refuge from the War of the League of Cambrai. At first

the city's government was reluctant to accept the refugees, but it soon became apparent that they might prove a useful source of money and financial services, since they could be taxed as well as borrowed from.

 In 1 5 1 6 the Venetian authorities designated a special area of the city for Jews on the site of an old iron foundry which became known as the ghetto nuovo (getto literally means casting). There they were to be confined every night and on Christian holidays. Those who stayed in Venice for more than two weeks were supposed to wear a yellow O on their backs or a yellow (later scarlet) hat or turban.

 Residence was limited to a stipulated period on the basis of condotte (charters) renewed

every five years. A similar arrangement was reached in 1 5 4 1 with some Jews from Romania, who were accorded the right to live in another enclave, the ghetto vecchio. By 1 5 9 0 there were around 2,500 Jews in Venice. Buildings in the ghetto grew seven storeys high to accommodate the newcomers.

Throughout the sixteenth century, the position of the Venetian Jews remained conditional and vulnerable. In 1 5 3 7 , when war broke out between Venice and the Ottoman Empire, the Venetian

Senate ordered the sequestration of the property of 'Turks, Jews and other Turkish subjects'. Another war from 1 5 7 0 to 1 5 7 3 led to the arrest of all Jews and the seizure of their property, though they were freed and had their assets returned after peace had been restored.

 T o avoid a repetition of this experience, the Jews petitioned the Venetian government to be allowed to remain free during any future war. They were fortunate to be represented by Daniel Rodriga, a Jewish merchant of Spanish origin who proved to be a highly effective negotiator. The charter he succeeded in

obtaining in 1589 granted all Jews the status of Venetian subjects, permitted them to engage in the Levant trade - a valuable privi­lege - and allowed them to practise their religion openly. Never­ theless, important restrictions remained. They were not allowed to join guilds or to engage in retail trade, hence restricting them to financial services, and their privileges were subject to revo­cation at eighteen months' notice. As citizens, Jews now stood more chance of success than Shylock in the Venetian law courts.

In 1 6 2 3 , for example, Leon Voltera sued Antonio dalla Donna, who had stood security for a knight who had borrowed certain items from Voltera and then vanished. In 1 6 3 6 - 7 , however, a scandal involving the bribery of judges, in which some Jews were implicated, seems once again to have raised the threat of expulsion.

Though fictional, the story of Shylock is therefore not entirely removed from Venetian reality. Indeed, Shakespeare's play quite accurately illustrates three important points about early modern money-lending: the power of lenders to charge extortionate inter­est rates when credit markets are in their infancy; the importance of law courts in resolving financial disputes without recourse to violence; but above all the vulnerability of minority creditors to a backlash by hostile debtors who belong to the ethnic majority. 

For in the end, of course, Shylock is thwarted. Although the court recognizes his right to insist on his bond - to claim his pound of flesh - the law also prohibits him from shedding Antonio's blood.

And, because he is an alien, the law requires the loss of his goods and life for plotting the death of a Christian. He escapes only by submitting to baptism. Everyone lives happily ever after - except

Shylock.

Loan sharks, like the poor on whom they prey, are always with us. They thrive in East Africa, for example. But there is no need to travel to the developing world to understand the workings of primitive money-lending. According to a 2007 report by the Department of Trade and Industry, approximately 165,000 households in the U K use illegal moneylenders, borrowing in aggregate up to £40 million a year, but repaying three times that amount. T o see just why one-man moneylenders are nearly always unpopular, regardless of their ethnicity, all you need do is pay a visit to my home town, Glasgow. The deprived housing estates of the city's East End have long been fertile breeding grounds for loan sharks. In districts like Shettleston, where my grandparents lived, there are steel shutters over the windows of

derelict tenements and sectarian graffiti on the bus shelters. Once, Shettleston's economic life revolved around the pay packets of the workers employed at Boyd's ironworks. N o w it revolves around the benefit payments made into the Post Office accounts of the unemployed. Male life expectancy in Shettleston is around 64, thirteen years less than the U K average and the same as in Pakistan, which means that a newborn boy there typically will not live long enough to collect his state pension.

The arrest of a loan shark: Gerard Law is led away by police

officers of Glasgow's Illegal Money-Lending Unit

It is easy to condemn loan sharks as immoral and, indeed, criminal. Gerard Law was sentenced to ten months in prison for his behaviour. Yet we need to try to understand the economic rationale for what he did. First, he was able to take advantage of the fact that no mainstream financial institution would  extend credit to the Shettleston unemployed. Second, Law had to be rapacious and ruthless precisely because the members of his small clientele were in fact very likely to default on their loans. The

fundamental difficulty with being a loan shark is that the business is too small-scale and risky to allow low interest rates. But the high rates make defaults so much more likely that only intimi­dation ensures that people keep paying. So how did moneylenders learn to overcome the fundamental conflict: if they were too generous, they made no money; if they were too hard-nosed, like Gerard Law, people eventually called in the police?

The answer is by growing big - and growing powerful.