Simple usury test
December 30, 2012 § 25 Comments
I’ve contended that usury is quite a bit simpler a subject than it is usually understood to be, and that preventing most of it as a practical matter would be rather straightforward. What I haven’t done though is give you a simple test to check to see if a given proposed lending contract is usurious. I intend to do that here.
In order to determine if a proposed contract is usurious, we need to ask the following:
- Is profitable interest charged on the loan?
- Has the borrower posted collateral providing security on the loan? (Note: a corporation or partnership counts as collateral).
- Is the lender’s recourse for recovery of principal and interest, in a case of default, limited to the named collateral and only the named collateral?
If all three of these are true, it is not usury. If (1) is true and either (2) or (3) are false, it is usury.
Zippy Catholic 
You don’t define “profitable”. There are many loans which would merely be break-even, but you would then allow me to enslave or worse upon default simply because I did not ask to get back more than was loaned, but it might be very profitable loaning to fools under such conditions.
There is other mischief to be had. The partnership or corporation cannot repay the loan, but declares a dividend stripping the last of the cash of the company to the directors/owners/stockholders, so makes the collateral worthless.
Can the “collateral” be the person’s life, liberty, or something like one of their kidneys?
My view:
Any mutuum that keeps the borrower personally on the hook for return of principal must be done for charitable reasons only. Going after a borrower under those conditions would only occur if the borrower had a major change of fortune and refused to pay back the principal so it could be used for further charitable lending. Chasing down borrowers genuinely unable to repay would be immoral. A licit mutuum is always in some sense more a gift than a loan.
Collateral can be any transferable property. Life and liberty are not transferable property.
Stripping the corporation of cash before settlement is theft or fraud, and cash so stripped could be licitly recovered as theft or fraud.
Interesting is that in the old testament liberty used to be “collateral” as people could enter slavery to repay debt – what do you think of that?
antonym:
I think usury and slavery are closely related.
Zippy:
sorry, but that seems like quite lame answer to statement that liberty is according to Bible “transferable property”…
How so? I think there has been legitimate development of doctrine on slavery, and I suspect that part of the reason usury has gotten the traction it has is because slavery was considered socially acceptable, even in Christendom, for so long. We reap what we sow.
Zippy:
I guess that it’s quite pointless to discuss it if you consider all slavery same regardless if that slave became slave voluntarily…
I do consider chattel slavery to be a moral wrong, yes. And you are right that if persons could licitly be fungible property they could also be collateral on a loan, and that this would undermine the condemnation of usury. So I think you’ve made a useful contribution to the discussion in bringing this out.
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@antonym: My understanding of OT slavery-in-payment-for-debt (as distinguished from POW slavery) is that it was 1) limited to the period between the debt and the Jubilee Sabbath; and 2) limited to the labor of the person, rather than a whole ownership of the person.
I haven’t done a complete study of the topic, so I’m open to correction on either of these points.
In other words, OT debt-slavery (as I understand it) was putting one’s labor, rather than one’s person, as collateral. This is not necessarily to argue that it is justifiable under our current understanding of slavery, but it does make a difference, I think. I’m not sure whether labor would fall under “transferable property,” as Zippy understands it.
It also explains why distributists speak of “wage-slavery” – which seems to them to be a close cousin of debt-slavery.
Robert King:
I’m not sure whether labor would fall under “transferable property,” as Zippy understands it.
I think future labor is definitely not transferable property. Existing work product is something the wage earner has transferred to the employer in exchange for wages. If the wage earner is given an advance on his wages and cannot do the work, he owes the advance – the principal amount – back to the employer and no more, unless the contract was secured by collateral and had other terms that were ultimately limited to seizure of the collateral by the employer.
There were a number of medieval objections to usury in the form of “you can’t sell X because X does not exist” that Noonan documents as having been shot down. But having read the putative shooting down I have become convinced that the arguments were sound and the counterarguments were leveled against straw men.
“You can’t sell time” and “you can’t sell risk” were two of the big ones. Supposedly a wage earner refutes the former and an insurance bond refutes the latter. But they don’t. A wage earner isn’t paid for time-qua-time, he is paid for specific productive work — time is merely a convenient proxy that we use. Similarly the insurance bond isn’t a matter of sale of risk-qua-risk; it is (when licit) a pooling of real assets to make possible adverse events less of a disaster for individual participants.
As I wrote at the Orthosphere, if risk qua risk were an ontologically real asset then gamblers would be entitled to profit. If time qua time were an ontologically real asset then slackers would be entitled to wages.
So, technically, what a wage-earner is paid for is not his time or his labor, but the product of his labor? I think I agree, but I want to clarify.
This is a little subtle to construe in terms of some “service” jobs: a receptionist, e.g., is paid to be available to answer the phone. A security guard is paid to be available to stop breaches. A cashier (I was a night-shift cashier during college, and got a lot of reading done) is paid to be available to complete sales transactions.
In such cases, payment is owed regardless of the work “produced,” based simply on the time spent “on duty.” I suppose one’s very presence, being the act of presenting an opportunity (or warning) to the public, is a kind of work product. Thus even the “down time” – so long as one’s public presence is not compromised, say, by sleeping – achieves the work product for which one is paid in such positions.
I realize this is a tangent to your main topic. Thank you for helping me think through these economic issues!
“… the insurance bond isn’t a matter of sale of risk-qua-risk; it is (when licit) a pooling of real assets to make possible adverse events less of a disaster for individual participants.”
Yes. When you buy insurance, the risk you insure doesn’t magically disappear from your “ontological ledger” and shift over to that of your insurer. It stays with you. Insurance doesn’t modify the distribution of risk at all, it just provides financial mitigation of ontological hazards that end up eventuating. E.g., buying fire insurance doesn’t by itself reduce your risk of suffering a fire.
Interestingly, it is a principle of underwriting that one should not over-insure, because it will expose the insured to moral hazard, and expose the insurer to financial hazard. You never want the financial benefit of insurance to be so generous that it provides an incentive to incur an ontological loss. Now this is exactly analogous to the principle of underwriting collateralized debt, that the loan to value ratio should never exceed about 80%, because that would expose the borrower to moral hazard. As we saw in the run-up to 2008.
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So …and I might not be understanding correctly…but is most college loan lending usury then?
Yes. It’s unsecured which is no small part of the reason why it’s exempted from bankruptcy laws. They found that there was no incentive other than personal honesty for students to not declare bankruptcy after graduation.
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