Usury and the Language Barrier

March 9, 2010 § 40 Comments

We’ve seen that the terminology used by the Church and St. Thomas Aquinas in discussing usury does not fit very well into our modern way of thinking, perhaps unsurprisingly. My overall thesis, then, is that Hilaire Belloc’s brief catechesis on the subject — that it is usury to make profits on unproductive loans – represents a credible attempt to correct that linguistic impedance mismatch. Belloc may be wrong in part or entire: as a complete non-expert myself I am hardly in a position to pronounce a definitive judgment. But he does seem to be one of the last major Western intellectual figures to take the Church seriously on the subject and attempt to understand the modern condition in light of that teaching.

These are just some of my thoughts on the matter, and shouldn’t be taken as anything more than that. As always, if this is important to you do your own diligence.

Let me try to summarize some of the things we know.

  • We know from Aquinas that the sin of usury consists at bottom in selling what does not exist.
  • We further know from Aquinas that this ‘nonexistence’ often arises from the fact that the use of a thing cannot be separated from the thing itself. Thus it is wrong in that kind of case, a case of consumption rather than investment broadly construed, to charge money for use over and above the thing itself.
  • We know from the encyclical Vix Pervenit that there are transactions which do not fall strictly under the rubric “usury” but which nevertheless are sinful for the same kinds of reasons. (This brings to mind credit default swaps as a “circulating Ponzi scheme,” and Ponzi-genus schemes generally).
  • We know that to the medievals, the term “loan” referred to a borrower taking complete possession of a sum of money and agreeing to return that sum in the future: that a “loan” to the medievals was what we today might refer to as a full-recourse loan. A better term might be a person-recourse loan, since the lender has full recourse to the person in order to recover his principal.
  • We know that financial partnerships where capital is invested in that partnership, and where loss of principal in the assets purchased did not entail an obligation on the part of the “borrower” to come up with the principal, were regarded as perfectly licit by the medievals. (That doesn’t mean that partners were incapable of cheating each other in all sorts of ways, of course: just that such partnerships were not intrinsically immoral in themselves. More on this later). Certain of these kinds of arrangements we might call non-recourse loans. The term is somewhat deceptive, since the lender does have recourse to the assets purchased under the partnership, in order to recover his principal. He just doesn’t have recourse to the person of the borrower. So I’ll call these kinds of loans asset-recourse partnerships, lumping them in with similar arrangements like stock ownership.
  • We know that in the case of person-recourse loans the medievals did come up with some reasons why the borrower might have to pay back more than just the principal. A number of titles were proposed, to varying degrees of controversy, to deal with the fact that lending can sometimes harm the lender: therefore the borrower might be licitly required to make restitution not only for the principal but also for any actual harm to the lender. The Franciscans even ran lending operations for the poor which charged for some of these expenses, as a way of protecting the poor from usurers. But these kinds of titles were carefully constructed to remove all profit motive from person-recourse lending at interest: the mere fact that it might be financially attractive to make a specific loan is a pretty sure sign that these titles, certainly the uncontroversial ones, are being violated. If you lend money to a friend on this basis because he is your friend and he needs a hand, and he pays enough to make sure you don’t actually lose money on the deal, that is fine. But if a bank is lending money on this basis because it has profit motive to do so, the mere fact of that profit motive means these titles are almost certainly violated.
  • We know that according to Aquinas at least, while it is always wrong to lend at usury it is not always wrong to borrow from a professional usurer when the need arises.

So what sorts of things are going on in our economy? That is a big question I can’t hope to answer, but I can touch on a few points.

In what we call “non-recourse” states, a mortgage is secured by the home and only the home. That the home provides a person with a base of operations from which he can live and practice his trade is manifest. That the medievals allowed simply renting a property to live in is also clear. So it seems to me that what we call a non-recourse mortgage is straightforwardly an asset-recourse partnership in my newly invented terminology, and there isn’t anything inherently usurious about them. (Though again, more later).

When a bank lends money to a corporation, in most cases that loan is not secured by a person; it is secured by the assets of the corporation. This also seems to be straightforwardly an asset-recourse partnership.

It seems to me that credit card lending is just straightforward person-recourse lending at interest, and therefore almost certainly usury. (Interestingly, the grace period which obtains with many credit cards might be thought to cast some doubt on this if the notion that the company wants everyone to pay within the grace period were tenable. Perhaps American Express’s annual-fees-not-interest approach escapes opprobrium here).

Car loans as usually constituted are probably usury: the equity is underwater as soon as you drive off the lot and recourse for principal and interest is to the person.

Many loans to small businesses involve personal guarantees: the bank specifically refuses to secure the loan by the assets of the corporation itself, and requires more security. Sometimes the security is equity the person already has in his home, and recourse is limited to such things. While this is a somewhat ambiguous case, I’m inclined to think that limited-recourse personal guarantees do not in themselves make a loan usurious. Full-recourse personal guarantees on a business loan would probably make it usury.

The full-recourse mortgage is formally a person-recourse loan: that is, the terms of the loan involve charging interest and principal to a person. So as a formal matter it would probably be usury. On the other hand, the loan is collateralized by the house itself; and usually it is only in strange circumstances fueled by derivative speculations and such that lenders are crazy enough to demand too small of a down payment and get into an “upside down” situation. So the situation with mortgages is usually not materially usurious, even though the terms of the contracts themselves might be formally usurious. (That doesn’t excuse them; it just seems to be a distinction worth pointing out).

One thing that is as clear as mud is the question of asset-recourse cases where the use of the funds is entirely separated from the collateral. The non-recourse home equity loan for a vacation (if there is such a thing — I have no idea, but it is possible in principle) is a case in point; and it is important in looking at that case to distinguish between intemperance and usury. Usury would be an objective moral wrong on the part of the lender; intemperance on the part of the borrower. Two wrongs don’t make a right of course, but a modest vacation can really refresh a man to get back to work and it isn’t manifestly usury to fund it at interest.

Finally, even in the case of asset-recourse partnerships it does not follow from any of this that any excuse will do to walk away and screw the bank in a “strategic default”. In fact, even in the case of genuinely usurious loans it isn’t obvious that the promise to pay is trumped by the fact of formally usurious terms or materially usurious conditions. Those are broader subjects and I don’t think jumping to conclusions on them is warranted based on the present discussion. We also haven’t so much as touched on the fair distribution of profits in a partnership, expected behavior of partners, loyalty, and other related subjects.

One additional thought that didn’t have a particular place above: person-recourse default didn’t have the same consequences in medieval times as it does now. Debtor’s prison and bankruptcy are nontrivially different, though both have at times driven people to suicide, and neither should be trivialized. In any event, it isn’t clear how this appeal to consequences could change the intrinsic nature of usury; but I thought it worth a mention.

There are more things in Heaven and Earth than are dreamt of in our philosophy, so this discussion can only touch briefly on matters. Belloc didn’t explain how he arrived at his understanding in his brief essays; he merely told us what it was, assured us that it was founded in the Tradition, and said that whatever the case the modern world was foolish for abandoning the ancient wisdom on usury wholesale. I think that much is true.

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§ 40 Responses to Usury and the Language Barrier

  • Tommy says:

    Great post. Much truth. Careful list of possible loan vehicles.

    But I still don't see calling it not a profit motive when one of the titles justifying an extra charge is to replace the otherwise normal profit the lender would have had on an investment had he invested the money instead. Replacing profit is a profit motive. It is only a “make-whole” charge in a sense so extended as to cast the whole idea of charging anything over and above the actual principal into doubt.

    I am far, far more comfortable (initially, anyway) for a charge based on potential loss of principal for a bad loan. Or, what amounts to the same thing: a charge to spread the risk of loss over many loans instead of all in one. But I don't think this round peg fits precisely into the square hole you notched out:

    to varying degrees of controversy, to deal with the fact that lending can sometimes harm the lender: therefore the borrower might be licitly required to make restitution not only for the principal but also for any actual harm to the lender.

    The problem with putting it this way is that the specific borrower who caused the harm to the lender is rarely in a position to make restitution for the loss. So the loss is made up on other loans by spreading the cost of the risk around. Which means that the actual charge is born by people and for loans which do NOT actually harm the lender, and the charge is really and actually something more than the thing loaned to them . (Unless you want to make borrowing from a business lender into some kind of business venture where the borrower takes on some of the lender's risk and thus becomes an attenuated sort of partner.)

    But the very fact of allowing such an additional charge means that making loans can constitute a business, which makes room for the first title I talked about above, and also for another: that of giving the man sustenance for his personal life so he can continue to operate the business and make loans. But this is profit pure and simple, and I cannot begin to imagine a way of casting such a “title” so that it excludes credit card interest. Or any other interest for that matter.

  • Zippy says:

    But I still don't see calling it not a profit motive when one of the titles justifying an extra charge is to replace the otherwise normal profit the lender would have had on an investment had he invested the money instead.

    Well, I did try to make the distinction clear. To me perhaps it is so clear that I spend too little time discussing it.

    If I sell one of my backhoes and lend the money to Bob, I will incur real losses unless he pays me back more than the principal. As long as I don't charge more than my actual losses, it isn't usury. Modern people try to play a shell game where the “loss” is entailed by pulling money from one usurious loan and putting it into a different one. But I don't think that dog will hunt.

  • zippy says:

    A condition, to be clear, is that I have no reason to sell my backhoe and lend him the money other than that I want to help him. A condition of the liciety of him restoring my lost profit is that I did not make the loan for profit.

  • Tommy says:

    If I sell one of my backhoes and lend the money to Bob, I will incur real losses unless he pays me back more than the principal. As long as I don't charge more than my actual losses, it isn't usury.

    Real losses. Like what? I am trying to imagine here what this refers to.

    One real loss is this: my business relied on the income I was getting from that backhoe, and now I cannot meet my general bills AND pay off the credit card bill each month, so now I incur a credit card interest charge that I wouldn't otherwise have, so Bob should both return the backhoe and pay off the credit card interest for me. That kind of loss? But that is essentially loss of profit in a business venture. So are you saying that effectively my loan to Bob makes him a partner in my business, and he is just making good on his portion of the venture? Hardly seems likely.

    What do I “lose” when I loan Bob my backhoe, and he eventually returns it? I lose the use of it during a time. But if I make him pay for the time he had it and I didn't, then he is renting it, not borrowing it, and my rental fee is a profit.

    Or maybe Bob drives the backhoe off a cliff and it is a total loss. He cannot return the machine, and he cannot afford to replace it – that's why he needed to borrow it to begin with. So while I have a real loss here, I don't have a loss that Bob can make up. And even if he does manage it (going into hock with Shylock, most likely), all that happens is that he returns to me a backhoe, nothing over and above that.

  • Zippy says:

    He cannot return the machine, and he cannot afford to replace it – that's why he needed to borrow it to begin with.

    Right. So, given that it was a person-recourse loan, he remains on the hook for the principal and my actual losses; but any profit beyond that is usury.

    It isn't nearly as difficult as you are trying to make it. As I understand the principle behind the extrinsic titles, a non-usurious loan is a loan you would be reluctant to make and would not make for financial reasons alone, since it does not advance your financial position at all. It is only made for non-financial altruistic reasons, and payment above principal is only licit to the extent of real losses.

    If you want to make the loan because you are motivated by profit, that is in itself a manifestation of a violation of extrinsic titles, again in the case of a person-recourse loan for interest. Unless you have no financial reason to make the loan, it is a usurious loan.

    That is how I understand the principle behind the extrinsic titles. Now, you might disagree that it is the principle behind the extrinsic titles, or you might disagree with it as the principle, and that is one thing. But disagreeing that there is a clear principle here baffles me, because it couldn't be clearer.

  • Tommy says:

    So, given that it was a person-recourse loan, he remains on the hook for the principal and my actual losses;

    Sure. A hook that does me absolutely no good for the foreseeable future. And in 7 years I am required by the jubilee year to forgive the loan. So his “remaining on the hook” personally is pretty much pointless.

    And, what actual losses, if he makes good on the return of the machine? If he returns it, there isn't any loss, and so there is nothing extra to “make good on”. If he doesn't because he can't, the loss is the principal, and I don't get made whole at all.

    You must mean other losses than the object lent. Does that include losses of otherwise normal profits?

    That is how I understand the principle behind the extrinsic titles. Now, you might disagree that it is the principle behind the extrinsic titles, or you might disagree with it as the principle, and that is one thing. But disagreeing that there is a clear principle here baffles me, because it couldn't be clearer.

    I am suggesting that there is a hidden shadow in a title resting in “losses” suffered, if that title provides a basis for an extra charge, especially loss of profit. There is little, if any, substantive distinction between saying (1) ” I was going to earn 1,000 profit on a contract over the next week with this backhoe, but you can use it instead if you make up the 1,000″; and (2) “I normally expect to earn 1,000 profit on any of my backhoes in an average week (some more and some less), but you can use it instead if you pay me the 1,000 I might have expected”; and (3) if I were to buy another backhoe for my team I would normally expect to earn 1,000 a week on it (if I haven't maxed out the market), but I will lend you the money instead if you will make up the 1,000 for the week.”

    If we recognize the latter as a profit motive, then I submit the first and second are also. So, what kind of loss are we talking about to be made whole?

  • zippy says:

    I'm having a difficult time distinguishing between your most recent comment and you simply saying “I'm not listening”.

  • zippy says:

    The various specific titles the scholastics considered, as well as the varying levels of controversy surrounding them, can be researched elsewhere, by the way. It isn't my intention here to discuss them all in depth. All I've tried to do here is suggest the principle from which they are derived: basically, that if it is possible or desirable to make a business out of lending at interest in itself, then that lending at interest is usury. Under that principle all non-usurious personal-recourse loans are necessarily altruistic or non-financially-motivated loans, even when (some or even all) costs are recovered. This is distinct from asset-recourse partnerships, many of which we today also refer to as “loans”.

    I find the fact that usurers successfully vanquished the prohibition of usury from respectable thought about as moving as I find the fact that fornicators have nearly as successfully vanquished the prohibition of contraception from respectable thought.

  • Tommy says:

    I'm not understanding.

    It may not look different from the outside.

  • Zippy says:

    The questions you are asking are not dumb questions: the whole subject was something the scholastics struggled with for centuries, as I understand it. (See this book just as an example).

    A mercy – the notion that it is OK for the borrower to make up for actual losses on the part of an altruistic lender – intended by the scholastics to make altruistic lending less difficult on folks like the Franciscans, has been pushed down the slippery slope to modern usury by just the sort of arguments going on in this thread.

    But the principle behind all those titles is not difficult. If a loan is made for purely altruistic reasons it is OK to have recourse to the person of the borrower for the principal and even for some costs. If a loan is made for the purpose of profit then it is not acceptable to have recourse to the person for the principal and profit; it is only acceptable to have recourse to the assets in which the money was invested, in partnership with the borrower, for recovery of principal and profit.

    Again, it is really not a difficult concept. The mercy of allowing recovery of some actual costs by the lender has been perverted into the modern system of trading one usurious investment for another under a rubric of “opportunity cost”.

    That is my understanding of the matter. How much one agrees is something else, of course. (Heck, how much I agree is something else: any conclusions I have here are still tentative, as far as me personally affirming them as definitely true as moral judgments).

    One might disagree that I have accurately articulated the principles behind the medieval titles for person-recourse loans. (Again, it isn't my purpose here to rehash each one of them and all the debates over them: my purpose is just to articulate the principle behind them). One might disagree with the scholastics on the principle, and one might even disagree that usury is anything anyone ought to worry about morally.

    But arguing that principle X can give rise to a slippery slope doesn't invalidate principle X. And principle X is that only altruistic person-recourse loans are permissible, period. It is not licit to lend, where “lend” is understood as person-recourse for the principal, for profit.

    Asset-recourse is, as I've said many times now, another matter.

  • Zippy says:

    Leo, bishop, servant of the servants of God, with the approval of the sacred council, for an everlasting record. We ought to give first place in our pastoral office, among our many anxious cares, to ensuring that what is healthy, praiseworthy, in keeping with the christian faith, and in harmony with good customs may be not only clarified in our time but also made known to future generations, and that what could offer matter for scandal be totally cut down, wholly uprooted and nowhere permitted to spread, while at the same time permitting those seeds to be planted in the Lord's field and in the vineyard of the Lord of hosts which can spiritually feed the minds of the faithful, once the cockle has been uprooted and the wild olive cut down.

    Nevertheless, they argue, for the compensation of the organisations — that is, to defray the expenses of those employed and of all the things necessarily pertaining to the upkeep of the said organisations — they may lawfully ask and receive, in addition to the capital, a moderate and necessary sum from those deriving benefit from the loan, provided that no profit is made therefrom.

    We wish to make suitable arrangements on this question (in accord with what we have received from on high). We commend the zeal for justice displayed by the former group, which desires to prevent the opening up of the chasm of usury, as well as the love of piety and truth shown by the latter group, which wishes to aid the poor, and indeed the earnestness of both sides. Since, therefore, this whole question appears to concern the peace and tranquility of the whole christian state, we declare and define, with the approval of the sacred council, that the above-mentioned credit organisations, established by states and hitherto approved and confirmed by the authority of the apostolic see, do not introduce any kind of evil or provide any incentive to sin if they receive, in addition to the capital, a moderate sum for their expenses and by way of compensation, provided it is intended exclusively to defray the expenses of those employed and of other things pertaining (as mentioned) to the upkeep of the organisations, and provided that no profit is made therefrom. They ought not, indeed, to be condemned in any way. Rather, such a type of lending is meritorious and should be praised and approved. It certainly should not be considered as usurious; it is lawful to preach the piety and mercy of such organisations to the people, including the indulgences granted for this purpose by the holy apostolic see; and in the future, with the approval of the apostolic see, other similar credit organisations can be established. It would, however, be much more perfect and more holy if such credit organisations were completely gratuitous: that is, if those establishing them provided definite sums with which would be paid, if not the total expenses, then at least half the wages of those employed by the organisations, with the result that the debt of the poor would be lightened thereby. We therefore decree that Christ's faithful ought to be prompted, by a grant of substantial indulgences, to give aid to the poor by providing the sums of which we have spoken, m order to meet the costs of the organisations .

    It is our will that all religious as well as ecclesiastical and secular persons who henceforth dare to preach or argue otherwise by word or in writing, contrary to the sense of the present declaration and sanction, incur the punishment of immediate excommunication, notwithstanding any kind of privilege, things said above, constitutions and orders of the apostolic see, and anything else to the contrary .

  • Tommy says:

    Thanks for the explanation.

    So do you think that the permission to charge for these expenses arises primarily as a kind of mercy, so that lending is easier and thus willingness to lend is broader? Or do you think the permission to charge for losses is fixed in the nature of the commutative justice that automatically governs the exchange?
    Or, to try and reflect the Pope's expression more completely: the permission arises naturally from commutative justice, but a more perfect lending with mercy would gratuitously NOT charge for these expenses.

  • zippy says:

    Well, here is the thing. (Great question by the way).

    If we adopt this principle, then lending of this sort – where the lender has full recourse to the person of the borrower for the principal – is necessarily done as a mercy for the borrower and not for any profit on the part of the lender. Because of that it necessarily has the nature of a gift. And a gift which comes with a commutative requirement in justice to return every last part of it to the giver changes to become something different in nature from a gift. This happens in these kinds of loans right at the break even point, in abstract theory. So it seems to me that insisting on even a perfect break even on the basis of commutative justice, as opposed to minimizing some of the actual losses, changes the nature of what is done: it becomes a gift of nothing, in effect, precisely at break even, which is no gift; and the opposite of a gift, an unjust taking, beyond that point.

    All of which is abstract theory and assumes perfect knowledge. What this means as a practical matter is that when following the spirit of this principle, a person-recourse lender who isn't actually losing something by lending is with virtual certainty violating the principle.

    The Franciscans who ran these medieval credit organizations as a way of helping the poor (so that the poor would not be dependent on usurers) lived in vowed poverty, of course. I think when a banker lives out a vow of poverty that is probably a good sign that his loans are not usurious, even if they involve full recourse to the person of the borrower for the return of principal, and even if some expenses are recouped.

    In short: if a person-recourse loan is a good deal in a material sense for the lender, it is usury.

  • Tommy says:

    Perhaps now I see the way out my problem. It seems to have centered around an equivocal use of terms.

    If a credit organization hires 10 people to manage its loans, and pays them ordinary wages, these wages are simply expenses to the org. These expenses are part of the cost of making the loans as such , and it is within justice to charge the lendee for the cost. If, on the other hand, the org ALSO collects enough to pay the directors a 1% profit over and above expenses, this profit is simply profit as such, not an expense. And no part of justice.

    If, instead of an organization, a well-to-do individual operates the same way in making loans, as a sole operator, he has the same kinds of needs/expenses that the organization’s employees have. He can charge to the loans those expenses. But in sole endeavors, we have 2 different ways of doing this: he can treat himself as an “employee” and pay himself wages sufficient to meet his living expenses, or he can not treat himself as an employee and simply remove from the till as the owner the same amount he would have paid in wages as if he were an employee. In business and tax terms, the former situation results in the business calling the employee wages an expense, and the boss as an individual recipient of wages treats them as “income”, for tax purposes anyway. In the second method, the business treats the payments as a distribution of earnings, and it is handled differently for tax purposes: as profit.

    It hardly seems likely that the distinctions and framework imposed on these cases by relatively arbitrary tax law constitute substantively different fiscal realities, if in both cases the person is taking the same amount to use strictly for personal support, and does so with the same intent either way. So, while one instance it is called an expense and in the other a profit, it is perhaps not necessarily the case that these terms represent the fiscal reality.

    But it clearly would be profit in the sense of St. Thomas’s usage if the sole operator took out of the till amounts well over and above ordinary wages, as it would be equally unjust if the credit organization pays some of its employees wages that are well over and above ordinary wages (even if it continued to call them “wages”). In effect, the justice of charging for expenses hangs on the justice of the expenses being real and just to begin with. It is also true that it is much simpler to see the differences in an organization, where the distinctions between employee expenses and profits is more clear.

    And, I would suggest, that maybe a sole well-to-do individual lender ought to NOT WANT to keep all of his principal intact, but rather gradually to lend less and less because he is using up at least a small part of it as living expense (even if he avoids all other costs). There is nothing written in stone saying that a lender should expect to continue being a lender in perpetuity. If he gradually puts himself out of business as a lender, this is more wholesome for the community and for himself than balancing his expense accounts on a wire's edge.

  • zippy says:

    There is nothing written in stone saying that a lender should expect to continue being a lender in perpetuity. If he gradually puts himself out of business as a lender, this is more wholesome for the community and for himself than balancing his expense accounts on a wire's edge.

    In addition, if his lending enterprise is genuinely altruistic and not motivated by profit, then he can seek benefactors to help defer costs and even expand beneficient lending to more needy individuals. The Pope prescribed generous indulgences for such benefactors, I believe.

    I think a huge part of the slippery slope rests on the transition from charitable gift, to exactly break even, to profiting unjustly. There is a lot of epistemic difficulty, as we've seen, in precisely establishing the break even point. Yet it is precisely at that point that the pertinent transition occurs.

  • William Luse says:

    This has been good stuff, Zippy. You've helped me think about something I'd rather not think about, and for which kind of thinking I have no talent.

  • Tommy says:

    I think a huge part of the slippery slope rests on the transition from charitable gift, to exactly break even, to profiting unjustly.

    I think this is true. But it is not an easy one to escape. If a neighbor comes and asks me for loan and I am pretty sure I cannot afford the loss / expense built into a gratuitous loan like he would prefer, then I would legitimately say “sorry, I cannot afford it, I cannot bear the loss.” But if he then says OK, so I won't expect you to bear the loss, I'll make it up to you by covering your costs”, I am back to square one of trying to figure out where to set that amount: does it include the inflationary effect on the value of money? Etc. In other words, if my intent was never to enter into the loan to begin with because I cannot afford the gratuitous gift involved, his willingness to change the terms so that the transaction becomes one of strict equal exchange (because that strict equal exchange is far better for him than no transaction at all), then I am still stuck trying to understand just where that equality lies when aspects of it are difficult to measure.

  • zippy says:

    As long as what you are doing is doing him a favor, as opposed to making a loan for profit, what you are concerned over is just how much you can afford to give. But of course many moral questions involve this kind of line drawing problem; and the unscrupulous will always leverage that to their perceived advantage. I myself am unmoved by questions of how close we can come to sinning while just barely avoiding sin. The disposition which proposes that question is often a disordered disposition. As Pope John Paul II taught, avoiding evil is just the bare minimum requirement. We also must do good, and while there is a lower bound beneath which the commandments are broken there is no upper bound to Christian love of God and neighbor.

  • Anonymous says:

    It's a good thing to remember that we live in a completely different economical environment. Medieval and older thoughts about economy were based on commodity money, not fiat money. It's also healthy to remember that a simple concept such as time preference was, AFAIK, only introduced in late 19th century. By time preference I mean the fact that everybody preffers to have anything now than next month. With technological advance and production growth, commodity money gains value in relation to goods. That value over time may or may not equalize with the value of time preference, but they tended do counterbalance one another at least to some extent. Nowaday our whole economical system is made to force consumption and that is made by constant devaluing the fiat money, so there's no incentive to saving it. The time preference is nowadays counted up front in such a way that you're actually losing one month of profit if you don't use your credit card. It's very hard to apply old economical thought to our present reality without thinking about such differences. Sorry for any grammar/spelling mistake.

  • Anonymous says:

    If the difference was not clear in that last post, I'll elaborate a little more. With commodity money, the value of it tended to be stable or growing over time. With our fiat money of today you have to profit to at least keep its value. I think this is the where the great sin is. The great majority of people in the world can barely keep the value of their money. The banks eat all growth based on technology and time.

  • zippy says:

    In some of the old threads at What's Wrong with the World someone, I think Lydia McGrew, suggested that fiat money is a form of the genus-of-usury – selling what doesn't exist – on the part of the government.

    It is an interesting suggestion.

    But it seems to me that if anything fiat money, as distinct from commodity-backed money, falls even harder to the scholastic contention that money in itself is infecund. In the case of commodity-backed money, the money is really nothing: it simply represents ownership of the commodity and what is being traded is really the commodity. It is just easier to ship titles around than the commodity itself.

    These days gold is at least sometimes a fecund commodity: we build productive machines out of it, for example. Fiat money, on the other hand, is just what the scholastics said of money in general: it is nothing but a medium of exchange, never fecund in itself but only fecund inasmuch as it is exchanged for something actually valuable.

    But I do agree that fiat money throws an interesting wrinkle into the discussion.

    Even with commodity-backed money banks (let alone the government) can create “money” out of nothing: by issuing you a note the bank agrees to honor your checks, and in return it holds you personally responsible to pay the loan; but it doesn't have to actually pay anyone anything until someone cashes one of your checks. By changing reserve requirements the government places (and removes) limits on how much money banks can create in this way. The reason money is created out of nothing is precisely because the lender has recourse to your person for the principal and interest, no matter what you do with the money.

    If the money had to be put into something real, which is to say that the bank's recourse was only to that real thing for principal and interest, this process of creating money out of nothing would not take place in the same manner.

  • Chris Floyd says:

    Zippy — Not only have you helped us understand the wisdom of the medieval thinkers, but my instincts say that you have begun to wield a sword here that could cut many of the pernicious knots of modern economic thinking. I'm not qualified to say for sure, but in any case, your tenacious and careful research and your clarity in this post particularly is extremely valuable. Keep up the good work!

  • Panurge says:

    I'll adopt the name of Panurge so another person can comment as anonymous and we don't become a mysterious being of two persons… :)

    I'll add beforehand that my concepts and basic knowledge of economy are based on Mises' Human Action and my amateurish understanding of it.

    The value of money as such is in relation to goods. It's based the quantity/desirability of goods in relation to the quantity/(desirability of saving medium) of money. Gold has value per se, but if gold is used as medium, its value will be added, like: commodity value + medium value. Both commodity and medium value are in relation to is avaiability/quantity x demand and in relation to other goods demand/avaiability. The prices/value system is a imensely complex composition. Medium value is no infecund, I think, because it provides the service of facilitating trade a great deal.

    What I wanted to point in the difference of commodity/fiat money is something more simple, nevertheless. Using commodity money, money quantity is determined by the production/mining of that commodity and also by the international flux of goods/money. The production of all other goods tend to be growing faster than the mining of gold, because of technology and production increase faster for basic comsumption goods. So the prices of food and clothing, for example, tend to decrease over time while the value of the gold money is increasing, because it is in relation to all goods. The incentive here is clearly for saving money or investing in production.

    In our fiat money system, money is created in a pace designed to keep prices almost stable, increasing slowly. Money is therefore slowly devaluing. The incentive here is in consumption.

    There's a missing value here, that is 'secretly' going to banks, government and first borrowers (i.e. corporations) that can borrow it before it affects the system with price rises. Inflation used to mean the expansion of the money supply. It was known that such expansion increased the prices of goods and was known as a 'hidden' taxation. Nowadays such expansion is part of the system and only the increase in prices is called 'inflation'. The word inflation used to refer to the cause, but now it refers to the effect, and only as the the part of the effect that is beyond the 'stable price'.

    When people put their money in the bank, they're lending it to the bank. What most people get for their lending is only keeping the value of their money stable in relation to this inflation (the new concept).

    Even if people keep their money value in pace with goods value, the bank is profiting a hidden value related to the growth in production and technology advances that used to be directly added to commodity money.

    In the days of gold money, we can think that the time preference value included in the lending (what was charged by the profit or usury) could be paid by the natural evaluation of the gold money. I'll pay you the same amount in three months, but in three months that money may be worth more goods. Of course, this was not necessarily so, but you get my point.

  • Panurge says:

    What is called profit in lending must be nowadays related to real value instead of nominal value. If I pay you 10 dollars for 10 dollars you're losing at least the inflation. In the old days if I paid you 10 gold coins for 10 gold coins, you could be profiting the deflation.

    As I understand it, there were no distinction about real/nominal value in those old speculations.

    I must say, after all that, that there is a case and good arguments for the inflation system of fiat money. The problem is the tentation is very strong, and frequently submitted to, to abuse the power given to banks and government. There are huge incentives for both banks and governments to push inflation to the limits, and that is what constantly lead us to crisis where the only remedy they can concieve is increase inflation and there you go. Austrian economists have long ago pointed out tha this system is like alcoholism. You have to increase the causes as paliatives for its effects.

    I guess I went a little offtopic. My apologies.

  • zippy says:

    Medium value is not infecund, I think, because it provides the service of facilitating trade a great deal.

    That is, I think, an intriguing element in the conceptual space: that is, liquidity and value may not be linearly independent, and really the whole point of money is liquidity. Commodity-backed money is just titles to the commodity used (the titles) in exchange precisely because it is easier to pass those titles around than it is to pass (say) pallets of gold around. Which is to say, money is more liquid than gold, by design.

    In our fiat money system, money is created in a pace designed to keep prices almost stable, increasing slowly. Money is therefore slowly devaluing. The incentive here is in consumption.

    I'm not sure I agree with that. I can tell you that my own incentive, as an investor, in the face of potential inflation, is to hold equity in real businesses; because whatever happens to the exchange medium those businesses have real value. When currency risk is hedged it is even better – another advantage for big over small, I'm afraid. Stock in a corporation is its own kind of currency, and I always advise entrepreneurs to manage their own currency-as-a-product in addition to their tangible products. Not to the point of distraction, mind you: but it is a real part of the circumstances which affect the business.

    Even if people keep their money value in pace with goods value, the bank is profiting a hidden value related to the growth in production and technology advances that used to be directly added to commodity money.

    Well, again, I don't see it quite that way. The bank profits because it has a larger base of capital than depositors, which brings along a whole bunch of advantages — advantages which the bank arbitrages for profit. (Note that this would be true even for a bank that made strictly non-usurious loans as usury is understood in this post: that is, it is true even if the bank only makes asset-recourse loans).

    The finance-and-operating geek in me always gets grouchy when I start to read economic theory applied to particular kinds of institutions like this, because I know from experience that it doesn't really work that way. Ochkam's Razor tells us not to make our theories more complex than is necessary, perhaps, but reality is in fact more complex than many peoples' theories allow.

    I'll pay you the same amount in three months, but in three months that money may be worth more goods. Of course, this was not necessarily so, but you get my point.

    Yes, I do understand the point about “saving” the exchange medium. If I put on my medieval hat, though, I suppose I might claim that when you save the exchange medium you aren't saving anything real. If you want to save, you need to buy real assets — for example, stock or similar interest in real partnerships doing real work creating real profits, or at least something with actual value like bushels of corn or bags of gold. Arbitrage on the time “value” of an exchange medium is arbitrage on nothing: so the worst userers in the world are perhaps not the banks which make productive loans to businesses and homeowners, but the George Soros' of the world.

    As usual, I don't know that I find this fully convincing myself — but I think at least that there is enough substance to it to cast doubt upon our usual dismissal of the medievals as hopelessly naive about money. They may have understood money as an objective matter just as well as we do; and as a moral matter, much better.

    I guess I went a little offtopic. My apologies.

    No problem, all interesting additions to the discussion, which I'll have to do more thinking on.

  • Panurge says:

    I meant the inflation system put the incentive on consumption as opposed to the commodity-backed system where the tendency was deflation or increase in real value of money and you could just put it under the matress and be profiting real value. Of course now you need to invest in equity or you'll see your savings srinking.

    The present design was concieved as a mean to reduce the incentive to save, or at least complicate it to most people. Most people, at least in my country, put their money on those simple investments that are barely keeping the real value (i.e. counterbalancing inflation). To have any profit in real value you have to go beyond those simple investments and take risks, think about what you're doing and understand a thing or two.

    The thing about banks and fiat money and the contemporary inflation system is that credit expansion is coordinated to go a long way beyond what was possible before fiat money and central bank coordination. Everytime banks expand (inflate was the old term) the money supply, they're profitting the consequential inflation (in nowadays terminology). This is because they can use this money before it spreads into the economy chain, creating new demands, and consequently leading to price raises. First borrowers (government and corportaions mostly) will also have the benefit of using that new money before the economy can adjust to the new amount of money, with new demands and higher prices. This is now a continuous process. The common people struggle to deal with inflation on one side, while the big players are causing and profiting from the same inflation.

    Now think about how much credit has grown on the last hundred years and how much the dollar was devalued on those same hundred years.

    I think both the banks and George Soros are doing a necessary service of finding out where capital is most needed. That's what profit is about. By capital needed I mean needed for the satisfaction of the desires of the masses. The bigger profit is usually where the desires are less satisfied.

    I think both banks and George Soros are doing bad business when they are allowed and encouraged and backed-up by government to push inflation to the limits and profit its hidden tax.

    Besides this profiting the inflation tax, there's also the problem that continuous inflation leads do bad investiment, and so we have crisis. But that's a longer story.

  • Zippy says:

    … where the tendency was deflation or increase in real value of money and you could just put it under the matress and be profiting real value.

    Well, OK. Part of the problem is that we are getting into macroeconomics to some extent here, and it is a subject about which I am hopelessly ignorant. (It isn't that folks – including some of my professors in college – haven't tried to educate me on the subject here and there; it is just that I can't make much sense of it and don't have an overarching theory of it, and I tend to be skeptical of overarching theories of it).

    If I put on my medieval hat again, I'd probably suggest that “profits” made by keeping commodity-backed money in a mattress – or short selling fiat money, which seems to be what you are attributing to banks – are false profits: they are in a very real sense “stealing” from others since they drain the overall pool of wealth without producing anything of value. Like a scam where you take a nickel from each of 100 million people the difference is hardly noticeable on the scale of individual acts; but that doesn't make it “not stealing”.

    One interesting implication here, assuming this background, is that fiat money would actually be better in theory given that the goal of monetary policy is to keep overall or average prices constant. Constant prices would mean that money is indeed a fair medium of exchange, whereas with price as a moving target we have the problem of “stealing from the common pot” via inflation or deflation. With a commodity-backed currency liquidity is artificially limited by the availability of that commodity, which one would expect to distort price: there isn't enough currency to use as exchange for all available wealth, only as much as is bound up in that commodity. Fiat currency doesn't suffer from this artificial liquidity problem: it literally represents “all the wealth out there”.

    Yet as you suggest, the temptations which come with the power to regulate fiat currency are enormous.

    Anyway, thanks for giving me more to think about.

  • Panurge says:

    I don't know what kind of macro you had in class, but if it's keynesian, I'm arguing against it somehow. I'm thinking straight microeconomics translated to the big picture.

    My point is that it's not natural to have stable prices. And that's because of (1) technology and scale gains make it natural for prices to fall because prodution costs fall, and (2) the expansion of money supply necessary to keep prices somehow stable comes with a hidden tax.

    Also, there's no such thing as not enough commodity if you're using commodity backed bank-notes (i.e. paper money). The difference is that the notes used would represent less commodity as prices fall.

    I think it's fairer to have falling prices because of (1) prodution costs tend to fall, and (2) it enables anyone to profit by saving, even the most simple people.

    Our reality is that most people savings are barely above the inflation while big economical players are profiting a hidden tax on the expansion of credit.

    If prices were falling, as they used to in the beginning of british capitalism till WWI, a dollar saved by your grandfather would be plenty of money for you today. I think that's fair, it's no ponzi scheme.

    If a poor father would save one dollar now for his grandchildren, using the kind of savings poor people use in my country, targeted by inflation, in 50 years his grandchildren would buy the same candy they can buy now, and maybe less.

  • Zippy says:

    Well, the more I hear the theory the less I like it. There isn't anything “fair” about a dollar increasing in purchasing power over time without it being invested in anything. That is the opposite of “fair”: it takes away purchasing power from those investing and working right now, and gives it to the person hiding his dollars in a mattress.

    When “savings” is a synonym for “investment” it is fair that purchasing power increases with time, as that investment produces real profits. But when “savings” literally means money in a mattress with an expectation of increasing purchasing power there isn't anything fair about it.

  • Panurge says:

    I can see your point. Money in the matress is money 'out of economy'. But you're looking at the wrong side, data venia.

    I used this example because it was how it worked when banks were not avaiable or understandable to everybody. Even when simple people begun (began? sorry again) to understand it, it was not reliable because a lot of banks were expanding their credit beyong sustainable measure and then they would brake. That is one of the arguments for todays coordinated expansion (inflation).

    Nowadays banks take care of everybodyes money. The big, huge, difference is that your money in the bank would really grow (till before WWII and the new system), and earn profits for everybody (if your bank was reliable). Today most people are only keeping the value of the savings/investment without any real gain in real value. Like if you have money for a magazine today, you'll have money for the same magazine in ten years.

    Every producer knows (for the last 150 years) that production costs are falling and so are prices. Why doesn't your purchase power grow when prodution costs are falling?

    Because it's confiscated by inflation. And that's not even usury. That's plain stealing.

  • Panurge says:

    What I'm trying to show you is a thing created between WWI and WWII.

    For thousand of years, the world used commodity money or commodity-backed bank notes. This system had this feature that EVEN money not invested TENDED to grow in value.

    What we have today is that you need to know a thing or to about economics to be anywhere above the systematic money devaluation.

    That just ruins it for most people.

    I know economics. I'm having a good time with the world crisis and so is every big player. I'm doing 3% a month. The simple people are, I'm sorry to say that, being stealed constantly since the end of WWII because of the inflation policy.

    I can adjust myself to that, but MOST PEOPLE just can't. And that's sad, I think, this stealing the ignorant.

  • Clare Krishan says:

    Not so sure about how medieval the analysis is – the juridical status of European financial instruments was derived from Roman (ie Canon) law, until the Anglo-Saxons at the Reformation chose to redefine terms linguistically based on a faulty philosophy of property rights (aka the labor theory of value).

    Spanish scholar Jesus Huerta de Soto as parsed the history of the licitness of various contracts of deposit with financial brokers, what Zippy (and Belloc) refer to is the modern usage NOT the medieval/lex romana usage.

    “If the money had to be put into something real, which is to say that the bank's recourse was only to that real thing for principal and interest, this process of creating money out of nothing would not take place in the same manner.”

    In 1822 British law codified the content of current accounts denominated in Pounds Sterling held by a bank to be LOANS – ie the transfer of the claim to the real asset (ounces of Gold) went over to the banker, the account “owner” owns only a claim on the account's claim not the actual funds… this is VERY different from Canon/European legal traditions…

    QE (quantitative easing) of FIAT legal tender is actually a form of counterfeiting, aka embezzlement (a simple sin against the seventh commandment, its not as complicated as usury). The notion of legal tender is a more modern concept than simple specie or money (ie medievals used many monies, gold & silver coins from wherever they travelled and traded), limiting the material used to exchange value is an exercise in naked State power, aka despotism. Only under fractional reserve banking is the kind of modern institutional usury that Zippy attempts to characterize possible, and the relationship of a real material commodity to its catallactic value or “price” is distorted, giving rise to inflation in the money supply (and a concommitant dilution of purchasing power of the units in new larger pool, depriving those in possession prior to the influx) whereby the monies minted first have greatest purchasing power (enrich those whose accounts are “credited” with these funds) and lose pp as they enter circulation in commerce, impoverishing those with the least access (those who savings are in “old” minted monies). This was the critique Fr. Dempsey penned in 1948 in his work “Interest and Usury” reviewed here by Raymond de Roover
    [] or as the Remnant reported here:
    “As the pre-eminent theologian and economist, Father Bernard Dempsey pointed out in the mid twentieth century, these banks are worse than the usurers of the past so clearly condemned by the likes of St. Thomas Aquinas and St. Bernardino of Sienna. For at least in the Middle Ages, the usurers did really lend actual real money.”(my emphasis)
    The State's inflationary monetary powers are the true evil, the banking crisis – as unpleasant as it is – merely the symptom.

  • Clare Krishan says:

    May I recommend Zippy read the Spaniard's treatise and revisit his “medieval” terminology (ie discover the proper historical Latin juridical terms for the kinds of financial transactions such as demand deposits that the medievals debated rather than the novel metaphysical terms Zippy has coined here)

    see “Money, Bank Credit, and Economic Cycles” [pdf here: ]

    and any discussion of medieval commerce must be familiar with the arguments of Nicholas Oresme, a Bishop contemporaneous to canonical events concerning French monarchs and their fraudulent debasements of money, see

    Jorg Huelsman's “The Ethics of Money Production” [SCRIBD here: []

    Theft is now public policy, its no longer simply a matter of personal conduct with one's material goods aka money and usury. Ponzi schemes are the order of the day, from Social Security “trust funds” full of Treasury IOUs to Federal Reserve Notes (aka the greenback or US dollar). For the metaphysicians in the house, the “mechanistic Quantity Theory of Money is not a causal relation but a tautology” [see]

  • Zippy says:

    Thanks for the various reading suggestions.

    This post though is about usury, it isn't about fiat money versus commodity-backed money. If I get to the point where I think I have something interesting to say about that subject I may post on it. But in the meantime the notion that fiat money is the root of all evil is a hobby horse I'm not ready to jump on, and it at least appears to me to be a distraction from the central subject matter of the post.

  • Clare Krishan says:

    Central point being selling of material “non-existence” right? Well Fr. Dempsey saw FIAT legal tender as just such –
    In the fiat money system of fractional reserve banking of modern times, the banks lend money that doesn’t even exist. That is right, they charge interest for the use of money by consumers that the bank does not even possess. We all know the child’s fairy tale of the emperor’s new clothes. This would be like charging someone for borrowing imaginary clothes. This is because bank’s can lend 9 times the amount of deposits they place in a federal reserve bank. So if a bank has only $1,000 of money, it can lend $9,000. Where does the extra $8,000 come from? The bank just invents it out of thin air by typing the numbers in a computer and saying the money is now in the borrower’s bank account.

    The Remnant again: “This led Father Dempsey to observe in the 1930s that the individual sin of usury had become a societal institutional sin of usury. If it is unjust to charge a profit for the use of real money; it is obviously unjust to charge for the use of money that people do not even own.”

    US Treasury obligations aren't “real” in any sense: they're a form of indentiture bondage similar to slavery, thwarting the liberty necessary for any discussion of moral theology. By all means avoid 'hobby horses' of others but be aware of your own: illusory ideologies (aka dictatorship of relativism).

  • zippy says:

    Well Fr. Dempsey saw FIAT legal tender as just such…

    And again, that is nice, but not a hobby horse I've been convinced to mount.

    As far as I can tell Aquinas believed money, as merely a medium of exchange, to be nothing in itself. That description matches fiat money even better than it matches commodity-backed money, as far as I can tell, and therefore does not affect the discussion about specific usurious contracts at all, again as far as I can tell. And my post, again – yet again – is not about various peoples' obsessions with fiat money versus commodity-backed money, at all. It is about usury.

    Various peoples' obsessions with fiat money versus commodity-backed money isn't something I'm prepared to take a position on. However, a position I do take is that those obsessions are only of peripheral relevance at best to the present post, since the present post addresses usury as such no matter what medium of exchange is employed.

  • zippy says:

    And by the way, I already described what I see as the significance of fractional reserve banking to the subject of the post in a previous comment. Note that this significance applies whether or not the medium of exchange is commodity-backed.

    What makes “money out of nothing” in fractional reserve banking seems to me to be the fact that the loan has recourse to persons rather than assets for recovery of principal. If the bank has to pay whenever checks are cashed, and its recourse for principal is only to what is actually bought with those checks, then money is not created out of nothing.

    Note that this has absolutely nothing to do with whether the currency in question is or is not backed by a commodity. Aquinas was wiser than many who followed him, it seems to me.

  • tz2026 says:

    I do not know why this post appeared as new on my RSS feed, but I see a few things unaddressed.

    Time value of money. $100 a month from now is less valuable than $100 today. That is the basis of interest. If I loan something to you at zero-risk, and know I will be paid back, why do it? Only if I get $101, $102 or more back.

    Risk. No one knows what might happen, and something might happen to you. If I make 10 loans, and one of the 10 fails because the debtor dies or becomes disabled, etc, I lose all the money. I can only make 9 loans in a second round. Ought I not be able to insure that each round I will at least break-even?

    Time value was missed by the Medieval Spanish Scholastics but they got close. In some cases charity might cause me to make the loan without interest, but in cases where it is not charity? If I keep my gold in my mattress I’m all but guaranteed to have it a year from now, but if I give it to you…?

  • Zippy says:

    I made some formatting changes to fix the post up. That must have triggered an RSS event. The importing process from Blogger to WordPress was far from perfect, though at least pretty much everything made it here.

    I don’t agree that the scholastics – or at least Aquinas – misunderstood the time value of money. I think that modern people have come to misunderstand it. I’ll put my comments in a new post which will pingback to here.

  • [...] I fully understand what is meant by the “time value of money,” it is deceptive semantics because money has no intrinsic value at all.  Money is merely a [...]

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