Usury and the Sovereign
December 16, 2012 § 30 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:
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 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.
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.