Usury and the Sovereign

December 16, 2012 § 21 Comments

I’ve been having a discussion with Kristor in email about usury, and the subject of government-issued treasury bills has come up. With treasury bills the government borrows fiat dollars from an individual and then pays him back both principal and profitable interest later. There are no specific assets backing those treasury bills, so on its face it looks like usury.

The fact that companies and individuals can issue their own currencies, for example common stock, is part of the picture. It can be confusing though because some ‘tradable instruments’ are denominated in other currencies and some aren’t. When I sell a note to a third party, the principal and interest owed on that note is usually denominated in dollars or some other sovereign currency. But some tradable instruments like common stock are not denominated in another currency: its value is just whatever transactional value it has right now on whatever market trades in it.

If a company decides to issue more shares of stock, that debases the value of all existing shares. But it isn’t usury. The shares of stock are not denominated in some other currency: they are their own currency. In the case of stock you get voting rights and other rights; so it has value. But that value is not denominated in any other currency. If the company borrows its own shares from me and then returns them along with newly issued shares as “interest” on the loan, that isn’t usury. It isn’t that my stock in itself begat more stock: the company issued new stock.

If the sovereign decides to issue more fiat currency, that debases the value of all existing fiat currency. But it isn’t usury. The sovereign agrees to accept his currency as payment for taxes, so it has value. Its value is not denominated in any other currency. When the sovereign borrows fiat dollars from me and returns them later with interest, it isn’t that my dollars begat more dollars: the sovereign has issued new dollars as interest.

In a case of usury, though, no new currency is being created by the issuing entity to pay the “interest”. A usurious transaction is a mutuum (person recourse) loan between two third parties independent of the sovereign who issues the currency. Currency is not in itself capable of creating more currency. Therefore in a mutuum loan (where a borrowing person is on the hook to repay the principal amount in full, independent of a specific and limited recourse to specified contractual assets) the lender is really only entitled, in justice, to return of precisely what was lent and nothing more. On the other hand if a “lender” purchases shares in real assets for production or consumption he can contract for the investment or consumption of those recoverable real assets in an asset-recourse loan, which is not usury.

Interestingly it follows that it is possible for third parties to make usurious loans to each other of (say) company stock. Lending 100 shares to Bob and demanding that he repay me with 110 shares at a later date no matter what, independent of what he does with the shares, would be usury.

Now, it is certainly possible for company management to commit an injustice against shareholders by debasing its stock. It is possible that many government actions w.r.t. currency are unjust under this sort of rubric rather than a rubric of usury. But showing that would take more work.

With his permission, I’ve included the pertinent background exchange with Kristor below the break:

Kristor wrote:

So Treasuries and GO munis are usury, too, right? They are not secured by any real assets. They are secured only by a power, a capacity that now exists (but that might at some point in the future disappear for any number of reasons) to obtain such wealth as will be needed to repay the principal, by expropriating it from citizens (through taxes, eminent domain, what have you). So the government in its promise to make good on its debt is in the same formal relation to its bondholders as I am in my promise to make good on my debt to my credit card issuer. I now have the power to work, or to shunt around other assets to cover my debt, although these powers could disappear overnight. Likewise, the powers of a given government could disappear.

I responded:

I am reluctant to conclude that government-issued debt is usury, because in order to do so I have to assume that the Sovereign’s relationship to currency is the same as everyone else’s. But that is not the case. As a subject of the sovereign I cannot create currency; but currency exists precisely as a creation of the sovereign. It isn’t that the sovereign’s sterile cash produces more cash: it is that the sovereign himself produces more cash.

This is bolstered somewhat by the tradition: the medievals treated sovereign debt as different from ordinary mutuum.

Despite all that I am still somewhat uneasy with the conclusion. But that may be some of my own residual liberalism resisting any ontological difference between subject and sovereign.

Kristor replied:

I suppose it depends on how we construe the sovereign’s relation to the economy. If the economy is the sovereign’s simple (or, indeed, effectual) possession, so that he is entitled to reap from it such goods as he might wish, then the subject’s relation to the currency is essentially different than that of the sovereign (this difference flowing from the essential ontological asymmetry of causal power obtaining between sovereign and subject). But if we construe the sovereign as the mere agent or angel of the subject (the subject per se), then the sovereign’s power is circumscribed by such limits as appertain to the powers proper to his subjects. The subjects cannot devolve to the sovereign any powers they do not in fact possess; and so the sovereign cannot possess any powers not already possessed by his subjects. In that case, a sovereign assertion of sole power to coin currency would seem to be a usurpation.

There is then also the fact that private actors can, as a matter of simple fact, create instruments that are amenable to trading for real goods and services. I can (in a non-usurious way) loan you money and then sell my note to Citibank. Thus the sovereign is not *naturally* endowed with the sole power of creating tradable instruments. If he were, then it would simply be impossible in our system of nature for me to loan you money and then trade the note. Thus nature simpliciter does not uniquely endow the sovereign with this power. It would seem then that in simple fact he does not have it uniquely (if we said that he did, would this not be tantamount to saying that the sovereign was the only actor with actual economic power? How perverse would that be, and contrary to fact as we find it?).

It all boils down to whether we view the sovereign’s power as natural – as, i.e., deriving from the natural (and, presumably, Providential) order of things – or as merely conventional, as deriving e.g. from the consent of the governed, or from the adventitious fact of his having succeeded over them in military terms.

If the sovereign’s power over his subjects is natural (i.e., essential, given our order of nature) or adventitious (so that it could never have occurred, except given our order of nature, in which case, having occurred, it is then to that extent validated by the order of nature), then it would seem that Treasuries and GO munis are not usury; for their security depends upon a real power really obtaining right now: i.e., upon a real economic asset of the sovereign. But if the sovereign’s power is derived or devolved from the powers of his subjects, à la Hobbes or Locke, then not – for in that case, sovereign power is vulnerable to revocation at any time, depending only upon the popular will (however expressed) – so that then Treasuries and GO munis are indeed usury.

If we are Lockeans, then, Treasuries would seem to be usury. But if we are traditionalists – which is to say, essentialists – then, not.

My response is integrated into the above blog post.

UPDATE: Kristor expands on the discussion background here.

§ 21 Responses to Usury and the Sovereign

  • tz2026 says:

    If it is a fiat currency, issuing more is theft from all existing holders. They don’t merely demand payment of taxes, they typically call the apparent appreciation of specie a taxable “capital gain”. I can think of no instance of a fiat currency that is inflation and not accompanied by some laws forcing its use as a medium of exchange.

    But assume that the debt is issued in terms of specie (commodity money) or a foreign currency. It either cannot be paid or the promise is in essence to tax or otherwise confiscate the property of the citizens in repayment. Or the contract is simply fraudulent.

    You can see some of this with the GREs like Fannie and Freddie. They aren’t officially government guaranteed, but they will be bailed out. Or worse, all the loans (derivatives) made by the banksters that were bailed out by the taxpayers against their democratically expressed will.

    In a society where there is slavery, if you promise your slave as collateral, is it a person-recourse loan or not?

  • Zippy says:

    tz2026:
    If it is a fiat currency, issuing more is theft from all existing holders.

    I don’t think so. When a corporation issues more stock that dilutes current shareholders; but dilution isn’t per se theft from current shareholders.

    Mind you, there are cases where I think dilution of existing shareholders is fraudulent or unjust for some other reason. But the fact that X debases the currency is not sufficient in itself to establish that X is unjust. As I said in the post, establishing that requires more work.

    I can think of no instance of a fiat currency that is … not accompanied by some laws forcing its use as a medium of exchange.

    But we aren’t forced to use dollars for exchange. I have personally orchestrated very large transactions involving no cash at all.

    The only thing we are literally required to do in cash is pay taxes. And usually (there are exceptions like the AMT, which is probably an unjust tax but is also quite avoidable) taxes are not triggered until assets are converted into cash.

    As a practical matter there is a lot more that we need to do with cash; but that is just because cash is so much more convenient than bartering stocks or whatever when all you are trying to do is buy bread.

    I’ve stated elsewhere and elsewhen that I suspect that property taxes – as opposed to income and transaction taxes – might be a form of theft. I tend toward the position that the sovereign really only has the right to levy taxes when his own currency or other assets are used: certainly it is imprudent to tax outside of those criteria in most cases, and what is imprudent is also morally wrong. So I have some pretty radical ideas about these things. For that matter, my understanding of usury – which I believe to be simply Aquinas’ understanding framed in modern language – is pretty radical.

    But I can’t endorse conceptions of economic justice that I think are wrong, and that includes the idea that dilution of the value of a currency by the issuer of that currency under the terms of its issuance is intrinsically unjust. It isn’t.

    But assume that the debt is issued in terms of specie (commodity money) or a foreign currency.

    Those assumptions address entirely different subjects from the post. US treasuries are issued – and US taxes are levied – in US fiat dollars, not in foreign currencies or commodity contracts.

    Trading commodities or commodity contracts is a different scenario from lending or investing currency. Commodities aren’t currency, though the two have often been entangled with each other for historical reasons. Even Aquinas understood that commodities aren’t currency: commodities have intrinsic value, and Aquinas recognized that the essence of currency is as a medium of exchange. We have the responsibility to understand that too: if we are going to use currency, it is our responsibility to understand what we are doing so that we can act justly.

    Trading in foreign currencies is basically a third-party situation, so when King Bob and King Fred transact in King Dave’s currency they are constrained by the same limitations as the rest of us: any person-recourse mutuum between Bob and Fred in Davebucks must not include usury, that is, a charge of profitable interest. Only King Dave can actually create new Davebucks.

  • [...] Zippy Catholic has been interested in usury for some time now, and I have learned a lot about it from talking to him about it over the last few years. We’ve been having a colloquy over the last few days about whether government bonds constitute usury, which he has put up over at his site (here). [...]

  • Kristor says:

    Your argument seems to be that the sovereign does now have the power to issue currency that he can use to pay interest on his note. So he is not selling something that is not actual.

    How is this different from his power to tax, that he likewise does now actually have? I’m pretty sure there is no moral difference between these two powers. Whether the sovereign taxes or coins to obtain the currency with which to pay interest, seems to me to make no difference.
    In my message to you just prior to your posting of this entry, I raised the question of whether the sovereign exercises these powers naturally and in himself, or as the steward (angel, agent, executive, what have you) of the people. That question is, to whom do these powers properly belong: the sovereign directly, or to the people, and thus to the sovereign indirectly, by delegation?

    But while this question is interesting, I do not now think it relevant to the question whether the issuance of Treasury obligations is usury. The powers to tax and to coin do actually exist, inhere in human social existence, and do not expire. A people may tax itself. Banks or individuals or corporations may issue currency, so that this power is actually quite dispersed (de facto, if not de jure). Whether a sovereign gets into the loop of transactions or not seems to me to make no difference to the moral structure of the case.

    The only such sovereign debt that I can now construe as possibly usurious would be notes sold by one people to another. The selling nation might possibly vanish, and with it, all its powers to tax or coin. This sort of thing does in fact happen, and there is in finance even a special term for the risk of it: country risk. If the Lenape nation had borrowed from the Dutch instead of selling Manhattan to them, the note would in retrospect appear to have been usurious.

  • Zippy says:

    Kristor:
    How is this different from his power to tax, that he likewise does now actually have? I’m pretty sure there is no moral difference between these two powers.

    I don’t know what I think of the differences. It is true that the issuance of new currency is kind of like a “tax” on everyone holding existing currency. But there is a difference between issuing new stock and forcing shareholders to relinquish existing shares.

    The government has the power to issue new currency at any time[*]. I’m not sure the power to tax has quite the same immediacy: security against it is more like a security against future earnings, which is fine if it is an equity but is not licit as a mutuum with guaranteed return of principal in addition to profitable interest.

    It is definitely possible to do injustice to an existing shareholder by issuing more shares. Cram downs are not intrinsically just, such that there is some moral license to do them willy-nilly for any reason whatsoever. I strongly suspect that a lot of what present-day governments do which causes dilution of currency is morally wrong. But it is important not to confuse categories, and I don’t think that things like cram downs fall under the species usury. Burning down someone’s house destroys value unjustly, but it isn’t usury.

    Still, I don’t think people realize how naturally constrained the government’s powers with respect to currency would be if it wasn’t in the business of actively enforcing usurious contracts.

    The selling nation might possibly vanish, and with it, all its powers to tax or coin.

    True, but in that case the ‘asset’ securing the loan is simply the nation’s capacity to create its own currency. The fact that it may disappear, with no recourse even to recover principal, means that it isn’t usury (I suggest, with not necessarily the firmest of conviction).

    So on this line of thinking it is only usury when the institution which creates the currency is not the institution paying profitable interest denominated in its own currency. If the institution which creates the currency is paying profitable interest denominated in that currency, which it has the power to create more of at will, it is not usury.

    [*] There are really three levels here: actualities, potentialities, and opportunity costs. Potentialities[**] are real in a sense, and I need to flesh that out, in connection to usury, in another post. Opportunity costs – the usual knee-jerk “time value of money” justification for usury – are not real at all, even as a potentiality: a foregone opportunity is just an imaginary story about an alternate reality which does not exist and which definitely never will exist, precisely because it has been foregone. To demand payment for the “value” in a foregone opportunity is to demand payment for literally nothing: for non-being.

    [**] I think future revenues produced by the power to tax are a potentiality, not an actuality, but T-bills are also not “person recourse”: like corporate equity they cease to exist if the institution which issues them ceases to exist, and are therefore ultimately secured by assets not persons.

  • Zippy says:

    If the above is right, maybe we can coin the term “sovereign usury”. Sovereign usury is what happens when foreign money is lent, contractually full-recourse, to some sovereign with guaranteed return of principal and profitable interest. Foreign money means money that the borrowing sovereign does not issue himself: it is currency issued by some other entity. A sovereign-usury mutuum is not person recourse, it is sovereign recourse: recourse for return of principal and profitable interest is to the borrowing sovereign existentially, with no specific assets as the limited security.

    On that understanding the Greek debt denominated in Euros (for example) is sovereign usury. Really the unified currency scheme of the EU has created a whole network of sovereign usury.

  • Kristor says:

    It would seem then that GO municipals are sovereign usury, while Treasuries are not.

  • Zippy says:

    Kristor:
    It would seem then that GO municipals are sovereign usury, while Treasuries are not.

    Yes, that’s right. To be fair, whether sovereign usury is intrinsically unjust or not remains an open question I guess; but my gut says it is, thus the name I chose for that particular species of contract.

  • Kristor says:

    So here’s a basic question: is usury blamewothy to the seller (i.e., the borrower), or the buyer (lender), or both?

  • Zippy says:

    My understanding is that the medieval magisterium pretty clearly exonerated the borrower and blamed the usurer in cases of necessity. So borrowing from a userer cannot be intrinsically evil. It is clearly cooperation with evil though, so I expect it has to be analysed as such under the principle of double effect.

  • Kristor says:

    So it is the buyer of the GO muni who is chiefly to blame for lending the city money usuriously, while the city that sells it is blameworthy only derivatively, as cooperating in evil?

    I’m not challenging you, just trying to follow the bouncing ball.

  • Zippy says:

    The interest-charging lender is the userer, yes. Whether sovereign usury is in fact usury is an unanswered question though.

  • Zippy says:

    Part of what this does mean is that the folks claiming that the government engages in usury when it borrows just don’t know what they are talking about. Usury is an injustice perpetrated by the lender, not the borrower.

  • Cane Caldo says:

    Part of what this does mean is that the folks claiming that the government engages in usury when it borrows just don’t know what they are talking about. Usury is an injustice perpetrated by the lender, not the borrower.

    Okay, but so what? Who can know these things? I can follow what you write on usury when I put my mind’s back into it. Otherwise, it is really too much work to be worth it. It seems to me that the cleverer a person is in skirting the line of usury, the more likely he is, in fact, usurious. The compiling of laws–whether state or personal–become the gears of a demonic machine whether we like it or not.

    The the best advice is still, “Neither a borrower nor a lender be.”

    ~Cane “Odious Fundie” Caldo

  • Zippy says:

    It isn’t that complicated.

    Never borrow unless you are borrowing against something you already own or which is purchased or created by the proceeds, and is the only security on the loan.

    Never lend unless you know precisely what assets you will recover – and nothing more – in default.

  • Zippy says:

    All (legalized) usury could be eliminated with a very simple rule. Call this Zippy’s Constitutional Amendment Abolishing Usury. It reads:

    No government or arbiter shall enforce deficiency judgements in any contract.

    Then watch all the userers squirm.

  • Cane Caldo says:

    Never borrow unless you are borrowing against something you already own or which is purchased or created by the proceeds, and is the only security on the loan.

    Never lend unless you know precisely what assets you will recover – and nothing more – in default.

    I think you are overestimating the abilities of common folks. The fact is that financiers can utterly snow even a well-meaning fool like myself into believing that we are following your simple-sounding rule.

    Your multitude of posts (very appreciated, by the way) gives the lie to the notion that sussing our usury is simple. No one goes to a financial institution and says, “I’d like to participate in usury.” We’re all assured that such-and-such collateral and profits and whatnot are completely appropriate and decent; we’re assured that this is how good business is done, and that such collateral and such profits really–when you think about it–belong to us anyways.

  • Kristor says:

    “No government or arbiter shall enforce deficiency judgements in any contract.

    Then watch all the userers squirm.”

    And they so would, no? This would translate due diligence into an altogether different and more rigorous realm, and prevent a lot of diseconomic deals.

  • [...] complex discussion.  At bottom though I think it is a simple enough concept.  In fact in the comments below I drafted a proposed Constitutional amendment that would wipe out legally sanctioned usury.  It [...]

  • [...] the sovereign’s currency has credibility as a medium of exchange precisely because it is the currency that he will accept as payment for taxes.  We engage in all sorts of [...]

  • […] few days about whether government bonds constitute usury, which he has put up over at his site (here). The basic thing to understand about usury, at least as St. Thomas approaches it, is that usury is […]

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