Inflation Issues in Jewish Law
Rabbi Dr. Aaron Levine

Inflationary times often create an incentive for market participants to substitute barter transactions for cash transactions. Commodity loans calling for payment in kind instead of a cash payment guarantee for the lender that the same purchasing power he gave up in making the loan will be restored to him when repayment is made.

Out of fear that the market value of the commodity may increase at the time of repayment, the Sages prohibited commodity loans in kind (se'ah be'se'ah). Such a transaction violates the rabbinic extension of ribit law, called avak ribit. ⁷ The prohibited agreement places the creditor at a disadvantage: Should the commodity appreciate at the time of repayment, the debt may not be discharged by means of payment in kind. Instead, a cash payment is required, with the debtor's obligation set equal to the value the commodity had at the time the loan was entered into. Depreciation of the commodity, on the other hand, disallows a cash payment. Here, payment must be made in kind.

Legitimacy is, however, given to a commodity loan when repayment is to be made in cash based on the market value of the commodities at the time the loan was entered into. Since the commodity serves here merely as the medium of the loan and the debtor's obligation is fixed in cash, the possible appreciation in the value of the commodity at the time of repayment is immaterial. ⁸

Since the se'ah bese'ah transaction is prohibited only by dint of avak ribit law, the Sages suspended their interdict under certain conditions.

One qualifying circumstance occurs when the debtor is in possession of the commodity he borrows at the time the loan was entered into (yesh lo). To illustrate, suppose the loan consisted of a ton of wheat and the debtor had this amount of wheat in his possession at the time he entered into the or loan. Given the above correspondence, the amount of wheat the borrower has is regarded as if it were given immediately to the lender as payment at the time the loan was entered into. Any appreciation of the commodity subsequent to the loan is therefore regarded as having occurred while the commodity was in the domain of the lender. ⁹

The yesh lo point of leniency in se'ah bese'ah law extends even to the instance where the amount of the commodity in the debtor's possession at the time of the loan amounts to only a small portion of the commodity loan. Since the se'ah bese'ah interdict is only prohibited by dint of avak ribit law, the yesh lo loophole is valid even when its rationale is not entirely applicable. ¹⁰

When a se'ah bese'ah transaction is legitimized by means of the yesh lo mechanism, both parties must be aware that the debtor has some amount of the loan commodity at the time the transaction was entered into and that this circumstance is what halachically validates their agreement. Nevertheless, ignoranace on the part of the parties of these facts does not disallow the debtor to return the loan commodity, even if it appreciated in value. ¹¹

Under the yesh lo circumstance the transaction may call for the commodity to be repaid at such time when it is expected to appreciate in value. This clause, according to R. Shabbetai b. Meir ha-Kohen (), is valid even when the contract disallows early payment. ¹²

Another circumstance that may suspend the se'ah bese'ah interdict obtains when the commodity involved trades at a definite market price (yaza ha-sha'ar). ¹³ With repayment in kind possible at any time, the borrower is regarded as being capable of discharging his debt by making the requisite commodity purchase before it appreciates above its value at the time of the loan. ¹⁴ Rambam et alia legitimize the above mechanism even when the borrower lacks the necessary cash to make the commodity purchase. Though lacking cash the borrower is regarded as capable of securing the necessary commodity purchase by means of establishing a line of credit.¹⁵

The yaza ha-sha'ar mechanism is subject to several restrictions. Calling for the commodity loan to be repaid at a particular time is, according to Rambam, prohibited. Such a stipulation indicates an expectation on the part of the lender of price appreciation at the specified date. ¹⁶ Disputing this position, R. Abraham b. David of Posquires () et alia legitimize the yaza ha-sha'ar mechanism even if the lender sets a date for repayment. ¹⁷

A variation of the specified date of repayment case occurs when the se'ah bese'ah transaction disallows early repayment. Since early repayment cannot be made, the borrower cannot be regarded as capable of making repayment before the commodity appreicates in value. The transaction is hence prohibited. ¹⁸

Another restriction for the yaza ha-sha'ar mechanism, according to Rambam, is that it is invalid when either the lender or the borrower is unaware that the loan commodity is traded at a definite price when they entered into their se'ah bese'ah transaction.¹⁹ Unawareness creates a presumption of intention to make repayment at such time that the commodity will appreciate in value.²⁰ Apparently equating the rationale of the yaza hasha'ar mechanism with the yesh lo method, R. Asher b. Jehiel () legitimizes the former procedure even if one or both of the parties was unaware that the loan commodity was traded at a definite price.²¹

Taking a stringent view in this matter, R. David b. Samuel ha-Levi () rules in accordance with Rambam. ²²

Requiring parties to a se'ah bese'ah arrangement legitimized by means of the yaza hasha'ar mechanism to be aware of the market price at the time they enter into their agreement, the Shach does not prohibit repayment in kind with an appreciated commodity in the absence of the awareness condition. ²³

Adavancing a middle ground view in this matter is R. Jonathan Eibschutz. Requiring the awareness condition, he does not prohibit repayment in kind with the appreciated commodity in the absence of this condition unless the ignorant party was the lender.²⁴

Still another restriction the se'ah bese'ah transaction is subject to is that it must be structured in a manner that it would not be regarded as "near to profit and far from loss" from the standpoint of the lender. The following ruling of R. Isaac b. Sheshet Perfet () provides a case in point: A sold several measures of wheat on credit to a Jewish community, with the option of demanding at the due date either a payment in kind or a cash payment equal to the value of the wheat at the time of the sale. Since such an arrangement hedges for the seller against the possibility of price depreciation of the commodity, the stipulation violates avak ribit law. The se'ah bese'ah arrangement is legitimized only when the lender is willing to absorb the risk of commodity depreciation. When he is unwilling to do so the arrangement amounts to "near to profit and far from loss." ²⁵

Currency may also be subject to the se'ah bese'ah interdict. This occurs when the currency involved is not the economy's main ciruculating medium of exchange. Providing a case in point is R. Yohanan's prohibition against a loan transaction calling for A to lend B a gold dinar and to be repaid in kind at a latter date. Given that silver coins were in his time the main circulating medium of exchange, a loan in kind consisting of a gold dinar must be treated in the same vein as a se'ah bese'ah transaction. ²⁶

Currency loans taking on the legal character of commodity loans may nevertheless be arranged so as not to violate avak ribit law. Use of the mechanisms described above accomplishes this end. ²⁷

Proceeding from the above discussion is the legitimacy of denominating loans in a foreign currency. This technique is frequently employed as an inflation hedge when the lender fears that during the term of the loan the domestic currency will depreciate in value more than the foreign currency. Since foreign currency is not the main medium of exchange of a country, it must legally be treated as a form of perot (commodity) and hences subject to the se'ah bese'ah interdict. Nonetheless, given that foreign exchange today is freely traded in a well-organized market and, in addition, the borrower can obtain the foreign exchange in question, both the yaza hasha'ar and yesh lo mechanisms readily apply.