Usury FAQ, or, money on the Pill

November 10, 2014 § 116 Comments

[Note: this is a work in progress. I am still on a blog vacation of sorts, just commenting here and there, not planning to resume regular blogging until some time after the new year.  The need for an FAQ perma-post for folks new to the subject of usury came up in a thread at the Orthosphere, though, so I thought I’d at least get it started.]

1) What is Usury?

Usury is lending money for profitable interest.

2) What is “lending”?

“Lending” is a contract where the borrower is personally on the hook for return of the principal amount of the loan to the lender.  This is traditionally called a “mutuum”.

3) Is usury always morally wrong?

Yes. Usury is always morally wrong without exception.

4) What if the interest rate is reasonable?

Usury is always immoral no matter what interest rate is charged.  The idea that usury is only charging “unreasonable” interest is a modern fiction.

5) What is the key difference between a mutuum and other contracts?

With a mutuum, the borrower is on the hook for return of the full amount of the principal, no matter what is done with the money or with other specific assets tied up in the contract.  In the Christian tradition and under the natural law, it is never morally licit to lend money (as a mutuum) and expect a profit in return.

6) What if the borrower is an institution like a government or corporation rather than an individual?

“Lending” to an institution is not a mutuum loan, as long as the lender cannot go after individuals for recovery of the principal.  An institution is a collection of assets and can act as security on nonrecourse debt.

7) I don’t get it.  Why is charging interest on a loan always morally wrong?

St. Thomas Aquinas explains that usurious lending involves selling something which does not exist.  This is very counterintuitive to people indoctrinated in modernity, and yet obvious once you’ve set aside modern relativism about value. Aquinas compares it to attempting to sell wine and the consumption of the wine as two separate things.

Imagine that Bob lends Harry $100, Harry lends Fred $100, and Fred lends Bob $100. They each spend the money on beer, and charge 10% interest in the form of a deferred fee. The contracts attempt to entitle each of them to an additional $10 – for a total of $30. This $30 worth of new financial entitlements on the books is not connected to anything ontologically real. The 2008 financial crisis was the result of a usurious network of real estate loans and ultimately circular insurance-like schemes which created this kind of ‘fake’ wealth.  All usurious lending involves the creation of fake wealth.

8) But economic value is relative, isn’t it?  Isn’t value reducible to whatever people’s preferences happen to be?

No.  For example, a bunch of arsonists getting together and agreeing that burning property is valuable, and acting on that determination by burning property, don’t create economic value: they destroy economic value.

9) What if the loan is secured by collateral?

A mutuum secured by collateral is still usury, because if the collateral is destroyed the lender can still pursue the borrower for return of the principal amount of the loan. If the lender’s recourse is only to the collateral and not to the person of the borrower, it is not a mutuum loan and is not usury.

The difference between a mutuum and other contracts comes strongly into play when the loan goes into default. If the lender can go after the person of the borrower to recover principal, it is a mutuum loan.  If the lender has recourse only to ontologically real assets to recover principal and any profits, the contract is not a mutuum and the prohibition of usury does not apply.

10) Does collateral have to be physical?

No. There are all sorts of ontologically real financial assets which are not physical in nature.  For example, the loyalty and goodwill of regular patients of a dentist is a real asset which, along with the work of the dentist, produces regular income.  Said differently, a dentist’s practice is an ontologically real economic asset.

11) Aren’t lots of non-mutuum contracts unjust?

No doubt many are, but a contract is not usury strictly speaking unless it is a mutuum loan for profitable interest.

12) Why would I ever lend someone money if I can’t charge interest?

Mutuum contracts are only morally licit as charity.  Lending money to someone in need is a good deed.  If and when the borrower gets back on his feet and can afford to repay the loan, he owes the lender his money back as a matter of justice. In the middle ages, the Franciscans lent money to the poor as a way of keeping the poor out of the clutches of usury.

Furthermore, you can “lend” for profit under non-mutuum contracts.  Nonrecourse debt is not usury.

13) Didn’t the Church allow the Franciscans to collect “interest” above and beyond the principal on their mutuum loans to the poor?

Yes.  The medievals acknowledged (with the wide ranging of opinion typical of the human experience) that certain actual costs of lending (called “extrinsic titles”) could be recovered from borrowers who could afford to pay those costs, in addition to the principal amount of the loan. Borrowing money from the Franciscan credit agencies was often a way for the down-and-out to get back on their feet, and borrowers would sometimes default anyway — even after getting back on their feet. In addition, various real costs of administering the loans were incurred by the Franciscans, although they themselves lived under vows of poverty. “Extrinsic titles” were allowed because it is unjust to the poor for those who have already benefited from charitable lending to deplete the supply of capital available to lend to those still in need.

14) Hasn’t the Church approved charging interest to recover opportunity costs?

No.  One of the most controversial of the proposed “extrinsic titles” was lucrum cessans, which some interpret as a blanket license to recover opportunity costs (even though opportunity costs are not ontologically real).  But although the Magisterium has approved the concept of extrinsic titles generally speaking for mutuum loans to the poor, there is no Magisterial proclamation giving a detailed account of which “extrinsic titles” are and are not valid.

It has however been established that Magisterial silence on a moral or doctrinal question does not constitute approval.

15) Shouldn’t an investor be compensated for giving up the opportunity cost of investing his money in something else?

No. Opportunity costs are not ontologically real assets.

16) Doesn’t the future labor of a worker constitute a ‘real asset’ against which a loan can be collateralized?


17) Traditionalist scholastics claimed that you can’t sell time; progressive scholastics asserted that the worker’s wages are a counterexample. Weren’t the progressives right?

No. Time is just a convenient proxy for the worker’s actual productivity.  If time itself were a salable asset then the worker would be entitled to compensation even if he stayed home in bed and never came to work.

18) Traditionalist scholastics claimed that you can’t sell risk; progressive scholastics asserted that an insurance bond is a counterexample. Weren’t the progressives right?

No. If risk qua risk were a financially transferrable asset, gamblers would be entitled to a profit.  An insurance bond is just a pooling of financial assets in which one party benefits when things go according to plan, and the other party’s losses are mitigated by financial compensation if things don’t go according to plan.

19) Is a corporate bond usury?

No. Investors who lend money to corporations cannot pursue individual shareholders for return of principal.

20) Is a car loan usury?

Almost always.  It is usury unless it is nonrecourse loan.

21) Is a home loan usury?

A nonrecourse home loan is not usury, because the lender has recourse to the house and the house alone for recovery of principal and interest.  In practice most mortgages allow for a deficiency judgment against the borrower, though, and those mortgages are usurious.

22) Are credit cards usury?

Yes.  All interest-bearing unsecured loans to individuals are usury. Even secured loans are usury if they provide for a deficiency judgment against the borrower in a case of default.

23) Does this mean that I can’t take out a student loan without committing mortal sin?

Here is Aquinas’ answer (ST II-II, Q78, A4):

Accordingly we must also answer to the question in point that it is by no means lawful to induce a man to lend under a condition of usury: yet it is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need. Thus too it is lawful for a man who has fallen among thieves to point out his property to them (which they sin in taking) in order to save his life, after the example of the ten men who said to Ismahel (Jeremiah 41:8): “Kill us not: for we have stores in the field.”

Since borrowing at usury is inherently scandalous, it probably depends on the extent of the need. But you’ve got pretty wide moral discretion to hand over your property to thieves, so you’ve probably got similar prudential latitude here.

24) What is wrong with contracts between consenting adults?

That is a different but related subject.

25) Aren’t all unproductive loans usury?

This is a common misunderstanding of well-intentioned people who would like usury to be taken more seriously as a moral wrong. Usury is actually more clear and straightforward than they propose: all mutuum loans for profitable interest are usury, and other kinds of contracts are not usury.  (That doesn’t mean that other kinds of contracts are morally licit by definition: just that they are not usury.)

Furthermore, “unproductive” nonrecourse loans are not usury.  If I have equity in my home and I sell some of it to a nonrecourse “lender” to raise cash for a vacation, that is not usury.  The lender cannot come after me for recovery of his principal and interest: he can only go after the house that he and I now co-own; and the “interest” I pay is just a rental fee for the part of the house that he owns.  The focus on “productive” versus “nonproductive” arrangements is a distraction from the straightforward nature of usurious contracts, introducing unnecessary complexity and ambiguity.

26) Haven’t commerce and currency changed in such a way that usury is no longer much of a concern?

No. Usury and the creation of faux-wealth through usurious contracts is a pervasive problem in modern economies, and the nature of currency has not changed.

27) Isn’t the government the biggest violator of them all?


28) Who the heck are you to be lecturing us all on usury, anyway?

I’m just some guy. I have an MBA, I’ve started and run a few small companies, and I have quite a bit of experience as an investor.  I became interested in usury in 2008 during the financial crisis, and was surprised to find myself in perfect agreement (as best as I can tell) with St. Thomas Aquinas on the subject.  I’ve read every single Magisterial statement on the subject in Denzinger, everything I could find by Aquinas, a number of old books, some academic papers, and a bunch of stuff on the web.  I think I have it right, but I’m not some high-falutin authority.

29) I know that usury was traditionally considered an execrable mortal sin. But didn’t the Church change canon law and pastoral practice to remove the penalties and stigma associated with usury?  Haven’t most Catholic theologians accepted that the world has moved on from the time when the prohibition of usury made sense?

Yes. The progressive tactic of divorcing doctrine from pastoral and juridical practice is not a new Vatican II innovation targeted specifically at matters of sex and marriage. Earlier progressives were “successful” in leaving the doctrine on usury formally intact, as a kind of decoration that makes no important demands on anyone. Humanae Vitae could easily become the new Vix Pervenit.  Progressives think that money is inherently fecund and that sex isn’t inherently fecund.

Acceptance of usury and contraception are both products of denying that things have an objective nature independent of human preferences. Centuries of ‘pastoral’ acceptance and indoctrination of economic relativism paved the way for other expressions of moral relativism.

30) If the sovereign should decline to enforce usurious contracts, doesn’t it follow that the sovereign should decline to enforce any contract of exchange whatsoever which empowers one party to pursue a deficiency judgment against the other party personally, independent of any real assets posted as security?

Quite possibly the answer is yes.

31) I really don’t get it.  Why again do you say that fixed-income investments in (e.g.) corporations (corporate bonds) are not usury?

A (non-usurious) corporate bond is not secured by any personal guarantees: it is only secured by the corporation itself, which is an asset (something which can be owned and sold) not a person or persons.  A corporate bond is a kind of contract which used to be called a census. An example of a census is an investor paying for seed and supplies for a farmer in exchange for a fixed quota of the farm’s expected output, converted into a regular cash payment.  This is morally licit as long as it is guaranteed by the farm as a bundle of assets, not by the farmer personally.

Pope Pius V declared in the bull Cum Onus (January 19, 1569) that the difference between a licit census and usury was that in a licit census, the income and principal were guaranteed by the assets – the farm - and not personally guaranteed by the farmer.  Personally guaranteed census contracts were declared to be usury, as were census contracts where redemption of the principal could be forced by the buyer (“lender”) before the term of the census contract expired, as were census contracts which could not be redeemed at any time by the seller (“borrower”).

John de Lugo explains that the correct concept of the census is that:

… part of the usufruct of the field on which the census is constituted is bought.  Then, … by another contract, which is implicitly contained in the very constitution of a real census, it is agreed by the parties that, for the hope of the fruit which the buyer has from that usufruct, the seller binds himself to pay such an annual payment of money; — and in this way the prior contract is reduced to the obligation of paying only an annual sum, by which the seller redeems the partial usufruct of the field which he had sold; the field itself, however, remaining really obliged in the manner of a pledge for the payment of the promised money …

(Noonan, The Scholastic Analysis of Usury, Oxford University Press, 1957).

32) In question 16 you say that the value of future labor is not a real asset which can be used as collateral on a for-profit loan.  But wasn’t it relatively common before the modern era for people to be sold into slavery to pay off a debt?

Yes.  Both are true.

33) Doesn’t St. Paul tell slaves to obey their masters?

Yes, though that probably doesn’t have the implications that modern people presume it to have.  The language may not mean what they think it means, the relation between master and slave is (like the relation between usurer and borrower) morally asymmetrical, moral doctrine actually does develop as we gain a deeper understanding of eternal truths and encounter new situations, modern people generally have a distorted concept of property, and we also tend to view any sort of subjection to authority as dehumanizing.

It is true though that, at least in my understanding of the moral theology, rejection of chattel slavery and of usury are closely connected.

The intimate asymmetrical dance of usury, slavery, and economic libertinism

January 1, 2013 § 6 Comments

“Are we not ashamed to pay usury? Not contented within the limits of our own means, we do by giving pledges and entering into contracts, fabricate the yoke of our slavery.” – Plutarch

In applying the Simple Usury Test it becomes obvious that the critical distinction between usurious lending and non-usurious lending is collateral. If the loan is secured by specified tradable collateral and only that specified tradable collateral, with no further moral or legal obligation beyond surrender of that collateral on the part of the borrower to repay principal or interest, it is not usury. This naturally shifts the focus to what constitutes legitimate tradable collateral, and commenter Antonym points out that in the past the custom of selling onesself into slavery to pay off a debt was common practice. If it is not intrinsically immoral to sell onesself into slavery, even in the most desperate of circumstances, it seems to follow that no lending contracts are usury.

An economic libertine has no principled way to oppose the practice of selling onesself into slavery, because for an economic libertine the essence of the justice of a contract is mutual consent: if the contract is mutually consensual that is sufficient for it to be “permitted”, that is, enforced by the police, courts, bully pulpit and guns of the government. So it is perfectly natural for economic libertines to fail to see what is unjust about usury.

I would suggest (perhaps counterintuitively) that it is not intrinsically immoral to sell onesself into slavery in desperate circumstances; but at the same time, it is intrinsically immoral for a lender to take usury on a loan. The reason is because the person who commits the intrinsically unjust act is the one who purchases and takes possession[1] of the chattel slave (whether from the enslaved himself or from someone else). In the case of usury the person who commits the intrinsically unjust act is the lender who takes usury on the loan, not the borrower who acts out of desperation. The act of the borrower is asymmetrical to the act of the lender, as the act of the victim is always asymmetrical to the act of the criminal.

Now, this is not a blanket permission slip to sell onesself into slavery nor to borrow from a usurer on a whim. It is merely a conclusion that neither action is intrinsically immoral, and therefore may be justifiable in some circumstances under some rubric of material cooperation with evil. The work involved in justifying a particular act of material cooperation with evil – or concluding that it is not justified – always depends on the particular circumstances.

St. Thomas Aquinas gives us his view of the matter (ST II-II, Q78, A4):

I answer that, It is by no means lawful to induce a man to sin, yet it is lawful to make use of another’s sin for a good end, since even God uses all sin for some good, since He draws some good from every evil as stated in the Enchiridion (xi). Hence when Publicola asked whether it were lawful to make use of an oath taken by a man swearing by false gods (which is a manifest sin, for he gives Divine honor to them) Augustine (Ep. xlvii) answered that he who uses, not for a bad but for a good purpose, the oath of a man that swears by false gods, is a party, not to his sin of swearing by demons, but to his good compact whereby he kept his word. If however he were to induce him to swear by false gods, he would sin.

Accordingly we must also answer to the question in point that it is by no means lawful to induce a man to lend under a condition of usury: yet it is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need. Thus too it is lawful for a man who has fallen among thieves to point out his property to them (which they sin in taking) in order to save his life, after the example of the ten men who said to Ismahel (Jeremiah 41:8): “Kill us not: for we have stores in the field.”

[1] Someone who purchases a slave in order to gain his freedom is clearly doing something categorically different, since the purchaser does not ‘take possession’ of the ‘slave’ in the pertinent sense.

Simple usury test

December 30, 2012 § 19 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:

  1. Is profitable interest charged on the loan?
  2. Has the borrower posted collateral providing security on the loan?  (Note: a corporation or partnership counts as collateral).
  3. 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.

Usury for dummies

December 18, 2012 § 6 Comments

Like many subjects, usury makes for some rather 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 took me eleven words:

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

If you don’t like that one, here is an alternative:

All debt contracts in the United States shall be nonrecourse.

Usury and the Sovereign

December 16, 2012 § 22 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:

« Read the rest of this entry »

Usury and the fundamental option

December 1, 2012 § 6 Comments

Fundamental option moral theories, which separate a person’s inner orientation or intentions from his objective concrete chosen behaviours, have been condemned by the Magisterium as heretical, to wit:

distinction thus comes to be introduced between the fundamental option and deliberate choices of a concrete kind of behaviour. In some authors this division tends to become a separation, when they expressly limit moral “good” and “evil” to the transcendental dimension proper to the fundamental option, and describe as “right” or “wrong” the choices of particular “innerworldly” kinds of behaviour: those, in other words, concerning man’s relationship with himself, with others and with the material world. There thus appears to be established within human acting a clear disjunction between two levels of morality: on the one hand the order of good and evil, which is dependent on the will, and on the other hand specific kinds of behaviour, which are judged to be morally right or wrong only on the basis of a technical calculation of the proportion between the “premoral” or “physical” goods and evils which actually result from the action. This is pushed to the point where a concrete kind of behaviour, even one freely chosen, comes to be considered as a merely physical process, and not according to the criteria proper to a human act. The conclusion to which this eventually leads is that the properly moral assessment of the person is reserved to his fundamental option, prescinding in whole or in part from his choice of particular actions, of concrete kinds of behaviour.

A similar disconnection between concrete reality and an imaginary inner world is made in economics when it comes to usury.  It should come as no surprise that justifications for usury ultimately rest on an appeal to imaginary unreality: St. Thomas Aquinas after all tells us that what is morally wrong about usury is that it involves selling what does not exist.

Usury is when profitable interest is charged for the use of money -qua- money, independent of what the borrower does with the money and without reference to the purchase and rental of actual real assets from which principal may be recovered.

One reason usury is proposed to be morally licit – that is, one of the arguments against the Church’s teaching that usury is morally wrong – is that people have a preference for money now as opposed to money later.  In a purely interior way, without reference to any specific choice or behaviour (does this sound familiar?), value is created by the mere fact that the lender would, all other things equal, prefer to keep his money rather than lend it out.  His mere preference creates value out of nothing, which translates into a moral obligation on the part of the borrower to produce for him a profit.

I don’t have a theory of real economic value that can answer whatever questions people may raise about it.  But I do know that a theory of value which proposes it to arise from the mere preferences of individuals independent of concrete actions cannot be right.

This of course does not deal with all of the various arguments about usury over the past 500 years or so.  But I do think that arguments which rest on a preference theory of value can be dispensed with, because preference theories of value are not fully in touch with reality.

Usury Coda

April 5, 2010 § 12 Comments

So, after the last year or so of looking into the matter I think I understand what the moral species usury is.

Contrary to my expectations I find myself largely in agreement with St. Thomas Aquinas on the subject, assuming I understand him correctly. I fully expected to disagree with Aquinas when I first started reading about usury during the financial crisis of 2008; but that has turned out not to be the case. I think Aquinas was right: that to at least some extent the folks who think they disagree with him, who think that history has gone against his view, are disagreeing with a caricature. The one place where my view may differ slightly from his is in my understanding of altruistic lending, and just titles to actual costs which may arise in the case of altruistic lending. But even so that distinction makes no difference whatsoever in evaluating present-day commercial activities, since commercial activities by definition are not altruistic. (Curiously the distinction between a credit union and a commercial bank may make all the difference between Heaven and Hell).

I do not view changes in circumstances or changes in the nature of money as at all pertinent to the question. I view Belloc’s summary as substantially correct but incomplete.

Usury consists in lending money to a person, with recourse to the person for return of principal and profitable interest on the loan. It is always and without exception morally wrong to do this.

Non-usurious lending for profit consists in lending money to a person or organization, with recourse to specified assets and only those specified assets for return of principal, charging rent for the use of the portion of those assets represented by the loan, where the borrower has the option to pay off the principal and be quit of all obligation to pay interest. Non-usurious lending for profit, in short, involves mutual ownership of some specific asset or assets, where one party pays the other for the use of the other’s share of those assets, not for the use of money: in a case of default the lender can recover his principal from the assets only, not the borrower. There isn’t anything morally wrong with non-usurious lending for profit, and most business lending falls into this category.

Non-usurious altruistic lending consists of lending money to a person, with recourse to the person for return of principal and possibly also some actual costs incurred by the lender, provided that no profit motive is involved in making the loan. If there is any profit motive involved in making this kind of loan, it is usury. Therefore by definition it is not a business which can be justly entered into for profit.

I think we (or at least I) now have enough of an understanding to be able to look at the terms of many or most specific loans and say definitely whether those loans are or are not usurious. Unfortunately, a great many modern credit instruments – credit cards come immediately to mind, but that is just the most obvious in a vast sea of consumer credit instruments – seem to be both formally (in their contractual terms) and materially (in what actually occurs over the course of the loan) usurious.

There are other unjust acts which involve selling what doesn’t exist; this post specifically addresses the species usury, not those other generic acts. Acts of government in issuing currency and that sort of thing are outside the scope of these conclusions. And of course it is eminently possible that I’ll have to modify this view in light of some new information or argument of which I am currently unaware. But there is enough now in my view to warrant this definite conclusion, including definite criteria based on Magisterial sources for determining when the sin of usury specifically is being committed.

Asset-recourse loans are not usury

April 3, 2010 § 23 Comments

Pope Callistus III (1455-1458), Usury and Contract for Rent, from the Constitution “Regimini universalis” May 6, 1455 (quoted in Denzinger):

A petition recently addressed to us proposed the following matter: For a very long time, and with nothing in memory running to the contrary, in various parts of Germany, for the common advantage of society, there has been implanted among the inhabitants of those parts and maintained up to this time through constant observance, a certain custom. By this custom, these inhabitants — or, at least, those among them, who in the light of their condition and indemnities, seemed likely to profit from the arrangement — encumber their goods, their houses, their fields, their farms, their possessions, and inheritances, selling the revenues or annual rents in marks, or florins, or groats (according as this or that coin is current in those particular regions), and for each mark, florin, or groat in question, from those who have bought these coins, whether as revenues or as rents, have been in the habit of receiving a certain price appropriately fixed as to size according to the character of the particular circumstances, in conformity with the agreements made in respect of the relevant properties between themselves and the buyers. As guarantee for the payment of the aforeseaid revenues and rents they mortgage those of the aforesaid houses, lands, fields, farms, possessions, and inheritances that have been expressly named in the relevant contracts. In the favor of the sellers it is added to the contract that in proportion as they have, in whole or in part, returned to the said buyers the money just received, they are entirely quit and free of the obligation to pay the revenues and rents corresponding to the sum returned. But the buyers, on the other hand, even though the said goods, houses, lands, fields, possessions, and inheritances might by the passage of time be reduced to utter destruction and desolation, would not be empowered to recover even in respect of the price paid. [Note: precisely what I have termed an asset-recourse loan, as distinguished from person-recourse loans. — Z]

Now, by some a certain doubt and hesitation is entertained as to whether contracts of this kind are to be considered licit. Consequently, certain debtors, pretending these contracts would be usurious, seek to find thereby an occasion for the nonpayment of revenues and rents owed by them in this way… We therefore, … in order to remove every doubt springing from these hesitations, by our Apostolic authority, do declare by these present letters that the aforesaid contracts are licit and in agreement with law, and that said sellers, yielding all opposition, are effectively bound to the payment of the rents and revenues in conformity with the terms of the said contracts. [Ellipses in original.]

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.

Usury, or Burning Down the House

March 8, 2010 § 14 Comments

Usury, St. Thomas Aquinas tells us, consists in selling what doesn’t exist. He uses the example of wine: to sell the use of the wine separately from the wine itself would be illicit, since the wine itself cannot be separated from its use.

St. Thomas contrasts this with a house. A house is something which can be “rented out”: that is, its use can be separated from the thing itself. Wine cannot be rented; it can only be consumed.
Now, St. Thomas had a certain understanding of the nature of money. He was under the impression that it was impossible to “rent” money: that the use of money could not be separated from the money itself. History has born out that this is not true of money though: that like a house, money can sometimes be put to use and then returned. In such a case, paying for the privilege of the use of money is not usury.
Let us note, however, that there is more than one kind of thing one can do with a house. It is true that it is possible to use a house without consuming it, by living in it and keeping it maintained. It is equally possible, however, to consume a house: to burn it down for entertainment, for example. And inasmuch as the use of a house consists in its consumption, its use cannot be separated from the thing itself.
The same, naturally, is true of money. When its use consists in its consumption, charging interest for a loan of money is requiring payment for what does not exist, and therefore, following St. Thomas, is contrary to justice.

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