What Is Lending

1. A word demonized for thousands of years

What is lending?

First of all, the word has been demonized for thousands of years. Few people are willing to study it seriously, and most of those who do are in academia, so ordinary people know very little about what lending really is.

The first thing to say is this: lending will not only exist forever, it is bound to arise.

2. Means of production and productive ability are both wildly unequal

Start with the means of production. They are spread unevenly — think of the 80/20 rule associated with the Italian economist Pareto: 20% of the world's people hold 80% of its wealth.

Then look at productive ability. It isn't just physical strength; brainpower, management, sales and marketing are all productive abilities too. And they are spread just as unevenly. Some people can run several trillion-dollar companies at once, like Elon Musk; others can't finish a simple price quote in a day.

Productive ability is wildly unequal.

3. With money in hand, you have only three choices

Every business model needs productive ability matched with the means of production. Musk, for example, may need enormous amounts of capital, while most people don't need much at all.

So if you hold means of production — money — you face three choices:

Leave it idle. That's a waste.
Put it to work yourself. Then it depends on whether your own productive ability is strong enough. If you can beat the competition, great; if you lose, it ends badly. We see startups succeed and fail every day.
Lend it out, let someone else produce with it, and take a share of the profit — in other words, interest.

The third choice is lending.

4. Lending has always been the most profitable business

The earliest person in recorded Chinese history known to have grown rich from lending was a man called Wuyan, who made a huge fortune from it.

Sima Qian's Records of the Grand Historian tells the story. During the Rebellion of the Seven States under Emperor Jing of Han, the nobles in Chang'an had to join the campaign and needed to borrow money to equip themselves. The moneylenders, seeing that the war in the east could still go either way, all refused. Only Wuyan put up a thousand pieces of gold. Three months later the rebellion was crushed, and within a year Wuyan's interest had multiplied tenfold, making him as rich as anyone in the land within the passes. If you have time, the original is worth reading.

5. The biggest lenders in history

Who were the biggest lenders in history? If I didn't tell you, you'd never guess.

Holy men and churches — the people who built temples and ran them.

Closer to our time, there's Jing'an Temple in Shanghai, a gleaming golden temple long rumored to be "as rich as a nation." And there's the Shaolin Temple, whose abbot had so much money he ended up behind bars: in 2025, Shi Yongxin was investigated for allegedly misappropriating and embezzling temple assets, and was later formally arrested.

Further back were China's ancient monasteries. In the Northern and Southern Dynasties, the Northern Wei set up "sangha grain," collected in good years and lent out in famine years. Monasteries ran pawnshops, taking goods as collateral for cash — China's earliest pawnshops were in temples. By the time of Emperor Wu of Liang there were already "inexhaustible treasuries," and in the Tang dynasty the inexhaustible treasury of Huadu Monastery in Chang'an became so famous, and so rich, that Emperor Xuanzong ordered it shut down. By the Song and Yuan, monastery "longevity treasuries" charged 2 to 3 percent a month. Buddhism preaches compassion, but when it came to lending, it didn't hold back.

Further still, there's the church in Europe. It preached against charging interest, yet monasteries lent money against land; the Knights Templar went further and lent to the kings of Europe, becoming one of the earliest "banks."

One more thing: the church forbade ordinary Christians from lending at interest, but someone still had to lend, and the job fell to the Jews. Their protector was the king. Jews were treated as "servants of the royal treasury": in normal times they were left to lend and earn interest, and whenever the king was short of money he taxed them. In times of unrest, the Jews were attacked and their property seized; once things settled and money ran short again, they were sent back to lending. In 1290 England expelled all its Jews, and the debts owed to them passed straight to the king. Rather than calling the Jews the lenders, it's more accurate to call them the king's sponge — soaked full, then wrung dry.

Seen from this angle, Marx said that capital comes into the world "dripping from head to foot, from every pore, with blood and dirt." In a sense, that's a fairly accurate insight.

6. Why lending was so bloody

But historically, lending really was bloody, because lending has some hard problems.

Historically, lending came in two kinds: secured lending and credit lending.

Interest arises for two reasons: opportunity cost and the cost of trust. Secured lending, backed by collateral, can bring the cost of trust down to zero and charge only for opportunity cost, which is why secured loans usually carry lower interest.

But the cost of trust can be unlimited — the borrower can simply default — while the interest you can charge cannot be unlimited. You can't charge 200%, can you? That isn't lending, that's robbery, and nobody would borrow from you anyway. So with credit lending, you usually can't lend out very much.

In ancient times, with weak economies and weak laws, what could you do? Only collect by force. Why did officials in remote regions dare to lend money on the side? What gave them the nerve? They were the local authority.

So lending has always been very bloody in history. That's also why people won't even study this business — there's a psychological barrier.

7. If you can't repay, the root is productivity

Think about it: interest generally reflects the overall productive efficiency of society. If you borrow to consume, of course you can't pay it back. But if you borrow to produce, as long as you beat the average, you will basically make money.

Right? Even if interest is as high as 20%, as long as my productivity far exceeds that — say 50% — then no matter how much I borrow, I come out ahead. So when people find interest unbearable and can't repay, the root cause is their own productive ability.

In ancient times, when productivity was still very low, borrowing was almost always a tragedy. That's why private usury has always been so bloody.

8. A great business that no one could make big or lasting

So why did no one in history make lending big enough, or make it last long enough? Because of all the difficulties we just discussed:

Secured lending: you can't find enough people willing to put up collateral, and you couldn't manage that much property anyway.
Credit lending: interest has to be high, you can lend only a little, default risk is high, and risk is hard to manage.

So throughout history lending has always been a great business, yet very few people managed to profit from it over the long run, generation after generation.

So who changed all this? You'd never guess. Not a sociologist, not a financier, not an economist — but Newton.

Ha ha ha ha. In the next post, we'll talk about Newton.