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.