Loans and currency

keeping within the guidelines of the Laws of Ribis

Introduction

In order to understand the issues at hand, we must first introduce certain basic principles of hilchos ribis.

Ribis that is prohibited min haTorah is generally referred to as “ribis ketzutzah,” meaning that the interest was set at the time the loan was initiated or extended (Shulchan Aruch HaRav, Laws of Ribis par. 4). However, in order to safeguard against violating ribis min haTorah, Chazal extended these prohibitions to certain other transactions and loans. There are many forms that are included in this category, but one in particular is applicable to the issue at hand:

Seah B’seah (Measure for a Measure)— Although lending out goods for repayment in kind is perfectly permissible according to Torah law (since the lender is receiving the same quantity of goods that he lent out), Chazal forbade such transactions. The reason for this prohibition is that if the price of the goods has appreciated by the time of repayment, the lender will profit from the transaction. For example, if someone lent 1000 ounces of silver when it was trading at 10 dollars an ounce, and was repaid in kind when it was valued at 12 dollars an ounce, the lender will have earned two thousand dollars from the transaction, despite the fact that he received the same weight of silver he initially lent. Although the profit was a result of a price fluctuation, and the price was just as likely to decrease, nevertheless Chazal prohibited such a loan.

Currency or Commodity

In the times of the Gemara, currency in most countries consisted of gold, silver, and copper coins. These coins, even if minted in the same country, constantly fluctuated in their relative values. For example, the exchange rate of copper coins to silver coins would vary on a regular basis. The question that arose was which coins were considered currency — the gold coins, the silver coins, or the copper coins? The Gemara tells us that silver coins were the most stable and therefore they were considered currency whereas the gold and copper coins were considered fruit/goods in relation to silver coins.

The Halacha (see Shulchan Aruch HaRav par. 33) is that the prohibition of seah b’seah does not apply to local currency: If a person in Australia borrows one hundred AUD dollars, he may repay the same hundred dollars even if there was deflation and the purchasing power of the money increased by the time of repayment because the prohibition of Seah B’seah only applies to items defined as “peiros” (literally, fruits), i.e., goods. Local currency on the other hand is treated in halacha as having a fixed value. Therefore, when prices increase, we view the increase as a change in the value of the peiros/goods, and not as a decrease in the value of the currency. By this definition, a lender who receives the same amount of local currency he lent out is not considered to have made any profit from the transaction. On the other hand, if the person lent out foreign currency with the stipulation that he be repaid the same amount in that currency, the principle of Se'ah B’se'ah would apply, and the transaction would only be permitted if the borrower already possessed some of this currency that he is about to borrow, even if this amount is minimal (ibid par. 30). [An additional allowance for Seah B’seah of “peiros” is where a universal price exists allowing the borrower to easily replace the material before the price appreciates. This leniency would not apply in cases of currency transactions because prices vary between banks. Additionally, since the banks charge a conversion fee, the lender would have to cover the cost of the conversion.]

(For greater detail and sources in Shulchan Aruch HaRav, please see below in Hebrew.)

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