Usury FAQ, or, money on the Pill

November 10, 2014 § 292 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

A few of my usury sources

Some of my usury sources

We exhort you not to listen to those who say that today the issue of usury is present in name only, since gain is almost always obtained from money given to another. How false is this opinion and how far removed from the truth! We can easily understand this if we consider that the nature of one contract differs from the nature of another. – Vix Pervenit

Understanding usury requires an understanding of how the nature of some contracts differs, fundamentally and categorically, from the nature of others. Usury is not a matter of the same kind of contract differing only by ‘excessive interest’. Usurious contracts constitute a kind of contract which is intrinsically immoral by its very nature.  This FAQ is intended to help people understand what usury is – and is not – and answer many of the questions which naturally arise.

[Note: this FAQ is also available in the form of a public domain ebook.  It is also available as a hard copy book.]

  1. What is Usury?
  2. What is “lending”?
  3. Is usury always morally wrong?
  4. What if the interest rate is reasonable?
  5. What is the key difference between a mutuum and other contracts?
  6. What if the borrower is an institution like a government or corporation rather than an individual?
  7. I don’t get it. Why is charging interest on a loan always morally wrong?
  8. But economic value is relative, isn’t it? Isn’t value reducible to whatever people’s preferences happen to be?
  9. What if the loan is secured by collateral?
  10. Does collateral have to be physical?
  11. Aren’t lots of non-mutuum contracts unjust?
  12. Why would I ever lend someone money if I can’t charge interest?
  13. Didn’t the Church allow the Franciscans to collect “interest” above and beyond the principal on their mutuum loans to the poor? What about “extrinsic titles?”
  14. Hasn’t the Church approved charging interest to recover opportunity costs? What about the time value of money?
  15. Shouldn’t an investor be compensated for giving up the opportunity cost of investing his money in something else?
  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?
  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?
  19. Is a corporate bond usury?
  20. Is a car loan usury?
  21. Is a home loan usury?
  22. Are credit cards usury?
  23. Does this mean that I can’t take out a student loan without committing mortal sin?
  24. What is wrong with contracts between consenting adults?
  25. Aren’t all unproductive loans usury? Wasn’t Belloc right when he said that the distinction between usurious and non-usurious loans was that the latter are productive?
  26. Haven’t commerce and currency changed in such a way that usury is no longer much of a concern?
  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?
  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?
  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?
  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?
  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?
  33. Doesn’t St. Paul tell slaves to obey their masters?
  34. Doesn’t the safe harbor of personal bankruptcy imply that modern loans are really non recourse?
  35. What if the mutuum loan is made in wheat, gold, or rental cars rather than fiat dollars?
  36. Wait, does this mean that if I lend out my car and the borrower destroys it, he doesn’t owe me anything?
  37. I see that the Magisterium and Aquinas have actually been clear that lack of explicit recourse to real assets is central to usury: that full-recourse lending for profit is what is defined as the moral problem. But why is that the case?
  38. But you’ve said that intangible or only partly tangible things like patents and operating businesses can be ‘objects’, and thus can be property. So how do I tell the difference between what can be ontologically real property and what can’t?
  39. But wait, can’t a full recourse creditor go after Bob’s estate when he dies?
  40. Doesn’t the Vatican Bank make full recourse loans?
  41. What about that Catholic Encyclopedia article, anyway?
  42. Why do you say that the 2008 financial crisis was founded in usury?
  43. Does this mean that ideally consumers should always pay cash for things like houses and cars?
  44. Suppose I am thinking about agreeing to a financial contract which will produce some interest or other profit for me – say by opening a bank account. How can I be sure that what I am about to do is not usury?
  45. Is it morally licit to charge interest on a full recourse loan just to cover inflation?
  46. What about futures contracts? Are they inherently usurious?
  47. What is the evidence against Aquinas and in favor of the modern view that a reasonable amount of profit on a simple mutuum loan is morally licit?
  48. What about the Fifth Lateran Council’s definition?
  49. Is it acceptable for a merchant to charge penalties for late payment?
  50. John Noonan and other scholars have stated that we can’t grasp the usury doctrine without getting into medieval just price theory. Yet you say that usury doctrine doesn’t depend upon any economic theory or theory of just pricing.  Why do some scholars say that there is a dependence between usury doctrine and medieval theory of just price?
  51. Isn’t it usury or something related to usury when banks ‘create money’ in a system of fractional reserve lending?
  52. I’m still struggling with the whole ‘loan for consumption’ thing.  Why is it that a personal guarantee of repayment is equivalent to a loan for consumption?
  53. Why doesn’t the mutuum borrower owe at least enough interest to compensate for inflation?
  54. Are you suggesting that simply preserving the economic buying power of some property is a kind of gain?
  55. If you make a mutuum loan to a friend in need, shouldn’t that friend try to keep you from losing any economic buying power in the process?
  56. Isn’t criticism of usury just veiled anti-semitism?
  57. This all sounds so complicated, and use of the terms “loan” and “interest” to mean so many different things is confusing. Is there a straightforward way to tell if a simple loan for interest is usury?
  58. Is there something that the government can do about usury without creating a whole bunch of complicated regulations?

1) What is Usury?

Usury is lending money for profitable interest. The term “usury” often specifically refers to the interest itself – interest charged on a mutuum (personally guaranteed by the borrower) loan.

2) What is “lending”?

Lending is an agreement between a lender and a borrower, wherein the lender gives property to the borrower and the borrower pledges to “return it” later. The phrase “return it” might mean returning the actual property which was lent, or it might mean returning some different property – typically the same kind and in the same amount. It is the latter sort of lending which is the context for usury: borrowing money or sugar, not borrowing a lawn mower or hedge trimmer.

In this kind of lending, the loan is a contract wherein the borrower is personally obligated, by his own agreement, to return the principal amount of the loan to the lender at some future time: not a specific object lent, but a specific amount lent. This is traditionally called a “mutuum”.

St. Thomas Aquinas defines a loan as a contract in which “the borrower holds the money at his own risk and is bound to pay it all back”: that is, the lender has recourse to the borrower himself to recover the loaned amount.

Today this kind of loan is called a “full recourse loan”, as contrasted to a “non recourse loan”1.  So usury is charging interest on a full recourse loan.

A full recourse/personally guaranteed/mutuum loan is a loan in which the lender’s claim against the borrower remains even if the borrower ‘consumes’ the proceeds. ‘Consume’ is not meant in the sense that what is lent is literally destroyed (although it might be, if it is for example food); but merely that it can be alienated from the borrower without destroying the borrower’s obligation to the lender. The lender’s claim in the contract is against the personal IOU of the borrower and is not confined to some specified property which either the borrower or lender possesses or which is purchased with the proceeds.

The modern terms ‘loan’ and ‘debt’ can mean different things.  When reading old books and documents on usury it is important to keep in mind that the word ‘loan’ in English translations is almost always a translation of ‘mutuum’ or the like.  It refers specifically to loans secured by the personal guarantee of the borrower, sometimes called a ‘loan for consumption’. Not all modern ‘debt’ or ‘loans’ are secured by the personal guarantee of a borrower or borrowers.

3) Is usury always morally wrong?

Yes. Usury, profit from mutuum loans, 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. Usury is not an “unreasonable” rate of interest: it is any interest whatsoever as a term of agreement in a particular kind of contract, the mutuum loan.

One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully, either to increase one’s fortune, to purchase new estates, or to engage in business transactions. – Vix Pervenit

[Note: in the English translation of Vix Pervenit, the term “loan” is a translation of (forms of) the word “mutuum”].

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

With a mutuum the borrower is personally obligated under the contract to repay the full amount of the principal, no matter what is done with the proceeds or with other specific assets tied up in the contract.

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 not a person: it is a thing – a societas – an objective bundle of transferrable assets or property which can change hands and in which various parties can have various kinds of stake independent of any specific person or persons. So an institution can itself act as security on non recourse 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 anti-realism about property and economic 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.

Another way to see that what is bought-and-sold in a mutuum does not exist is to observe that, under the terms of the contract, it is possible for the lender to fail to recover everything he is entitled to recover under the contract.  Under what are (these days) called non recourse contracts the “lender” is always, by definition, able to recover everything that he is entitled to under the terms of the contract: once the underlying assets have been divvied up there is nowhere else to go to recover his investment, and that is precisely what the parties agreed would be the case.  If the borrower stops making payments on a non recourse home mortgage, for example, the lender forecloses on the house to recover his investment, and is not entitled to any claims extending beyond the house itself. The “lender’s” economic entitlements under the contract are bound to (and bounded by) something that actually exists: the house.

The reason a full recourse lender is sometimes unable to recover what he is owed under the terms of the contract is because what he is owed under the terms of the contract does not exist.

Licit investment – or even purchase for consumption – always involves the purchase or sale of a property interest in (that is, some sort of economic claim upon) some specific property which actually exists.  Usurious contracts pretend to be a property interest in something – in some thing – but the property over which they assert a claim doesn’t actually exist at the time it is “sold”.  If the property actually existed then the borrower would not have to take any action in order to produce or acquire it: if and when the borrower stopped making payments, the lender could simply claim his economic share in the actual property, because the actual property exists.  That is how non recourse “lending” works, as well as all sorts of other non-usurious investment contracts.

The Magisterium makes and clarifies this distinction forcefully (e.g. Question 31, Question 36).

The difference between full recourse (mutuum) contracts and non recourse (societas) contracts is central to the subject of usury; so if it isn’t clear at this point, keep reading.

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?

Interest on 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 under the terms of the contract 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 (under the terms of the contract) 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.

In non recourse (societas) loans a creditor can always collect precisely and entirely what he is entitled to under the contract, because what he is entitled to under the contract always actually exists — if it doesn’t exist as a real asset on the inventory of real assets which secure the loan, then by definition he is not entitled to it, since his recourse is only to those things.  That’s what he agreed to when making the loan — that is the definition of a non recourse loan.

That full recourse (mutuum) creditors are not always able to collect precisely and entirely what they are entitled to under the contract demonstrates Aquinas’ point that usury involves selling what does not exist.

10) Does collateral have to be physical?

No. There are all sorts of ontologically real financial assets or kinds of property which are not strictly or only 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. Dentists commonly sell their practices when they retire, for example.

For a thing to be property it must be possible for that thing to be alienated from any particular owner or possessor, so that a different person can possess it at time B from the person who possessed it at time A. It must be possible for that thing to be possessed, repossessed, bought, sold, or transferred from one owner to another. If it cannot be alienated from some particular person or persons it cannot be ontologically real property in the pertinent sense.

A personal promise to repay cannot be alienated from the person making the promise. When a loan is secured by a personal promise to repay instead of or in addition to alienable property, it is a mutuum loan.

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.

Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made. … There are many different contracts of this kind. In these contracts, if equality is not maintained, whatever is received over and above what is fair is a real injustice. Even though it may not fall under the precise rubric of usury (since all reciprocity, both open and hidden, is absent), restitution is obligated. – Vix Pervenit

[Note: in the English translation of Vix Pervenit, the term “loan” is a translation of (forms of) the word “mutuum”. Interestingly, the word translated as “reciprocity” in the English version is also “mutuum” in the original, so the sentence with the parenthetical can be understood to say “Even though it may not fall under the precise rubric of usury (because these contracts are not, overtly or covertly, mutuum loans), restitution is obligated.”].

This is similar to the situation with contraception and natural family planning.  Just as it is possible to engage in otherwise-licit kinds of sex with a “contraceptive mentality”, it is also possible to enter into otherwise-licit kinds of contracts with a “usurious mentality”.   The kind (species) of contract or sexual act under consideration may not be intrinsically immoral; but the fact that it is not intrinsically immoral does not make it impossible to do moral wrong in the particulars: in intentions or circumstances.  The nature of a particular kind of contract may not be usurious; but it does not follow that the choice to agree to a particular contract of that kind therefore cannot be unjust.

This is exactly as we should expect it to be with a moral doctrine covering a particular species of sin. The moral prohibition of contraception, for example, is not in itself an all-encompassing theory of sexual immorality. Adultery and fornication are sexual sins distinct from contraception, and what is true in the sexual domain is also true in the domain of property: that theft and usury are distinct kinds of sins doesn’t make either particularly ambiguous. Neither the prohibition of theft nor the prohibition of usury constitute Theories of Everything about the moral use of property.

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.  Interest on non recourse 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? What about “extrinsic titles?”

First, it isn’t clear that these loans to the poor were in fact mutuum loans at all (see Question 47).  To the extent the Magisterium has made any formal pronouncements on the matter, as far as I have been able to determine they apply to the non-recourse Mountains of Piety, and to titles which arise from matters entirely extrinsic to the contract such as negligence, theft, or fraud (see Question 49).

There was certainly much discussion of the subject among theologians.

Some medievals argued (with the wide ranging of opinion typical of the human experience) that certain actual costs incurred by 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, under certain circumstances.  Keep in mind that lending to the poor could range from simply handing a needy man money on the street and asking him to return it when he can, to something more institutional and even to agencies sponsored by the sovereign.

Borrowing money from the early 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, it was argued, 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.

In general the distinction between mutuum loans and other kinds of lending was not always clear in these disputations, and many different kinds of extrinsic titles were proposed and debated. The Franciscan credit agencies were precursors to modern pawn shops, making small non recourse loans with property as security rather than making mutuum loans. Also pertinent to understanding the various disputations is that the medievals were not concerned solely with usury strictly speaking, but with fair treatment in general. Modern commenters tend to introduce ambiguity into the understanding of usury specifically when reading medieval disputations, because of this more general concern with things like just pricing (see Question 50).

If Bob was on Skid Row and the Franciscans helped him get back on his feet – he now has the means to repay what he borrowed – then the kind of debt he owes is different in kind from a commercial, property based debt. He owes a debt of gratitude and a debt of justice: the former to those who helped him, and the latter to the poor who are still on Skid Row and now need his help.

If he is ungrateful and stingy and refuses to pay the loan back, even though he has the means to do so, he has committed an injustice. But it isn’t an injustice rooted in property: it is an injustice rooted in charity.

Whether legal action is or is not warranted in such a case was controversial.  The Dominicans thought not and accused the Franciscans of usury, even for attempting to recover the principal in the case of borrowers who could repay but refused, because they sometimes recovered more than just the principal from grateful borrowers. The Pope intervened on the side of the Franciscans with respect to the non-recourse Mountains of Piety, but this obviously does not resolve what kinds of extrinsic titles and licit legal actions might apply in the case of mutuum loans.

The Dominicans were arguing for their interpretation of Aquinas’ view on the involvement of the civil law; but note that all parties nevertheless agreed about the fundamentally different nature of the inherently gratuitous mutuum loan and the licit-for-profit societas or non recourse investment.  A licit mutuum loan does not involve the purchase of a property interest by an investor; it is only ever morally licit as a gratuitous act of friendship.  Here is Aquinas:

Repayment for a favor may be made in two ways. On one way, as a debt of justice; and to such a debt a man may be bound by a fixed contract; and its amount is measured according to the favor received. Wherefore the borrower of money or any such thing the use of which is its consumption [that is, anything which must be returned in kind as opposed to in particular: see Question 35 – Ed.] is not bound to repay more than he received in loan: and consequently it is against justice if he be obliged to pay back more. On another way a man’s obligation to repayment for favor received is based on a debt of friendship, and the nature of this debt depends more on the feeling with which the favor was conferred than on the greatness of the favor itself. This debt does not carry with it a civil obligation, involving a kind of necessity that would exclude the spontaneous nature of such a repayment.

In practice a duly grateful borrower who has become prosperous through the help of charitable loans himself would become a patron of those same efforts which helped him out of poverty.  But this “debt” of gratitude is not a property debt, and by its nature cannot be captured in a fixed rate of interest or other specific monetary amount.  The very act of attempting to convert a debt of gratitude or friendship – above and beyond simply what was actually borrowed – into some definite charge of a specific amount of money, puts the lie to attempts to disclaim usury.

Gratitude or friendship can be truly owed; but gratitude or friendship which can be bought and sold for a specific price is not true gratitude or friendship.

My own understanding of extrinsic titles is that if they involve an entitlement which would not arise anyway without being included in the contract, they cannot be extrinsic to the contract. Certainly titles which arise from theft, fraud, and negligence could arise independent of the contract. But if a particular title has to be included in the contract in order for it to be a legitimate title, it is by definition not an extrinsic title.

14) Hasn’t the Church approved charging interest to recover opportunity costs?  What about the time value of money?

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: see Question 15) from mutuum loans. But although the Magisterium has approved the concept of extrinsic titles generally speaking for some kinds of “loans” to the poor (basically to defend the Franciscans, in their work helping the poor, from the charge of usury), there is no Magisterial proclamation giving a detailed account of which “extrinsic titles” are and are not valid and when they apply.

Furthermore, recovery of “opportunity cost” or the “time value of money” as something in itself has been explicitly condemned by the Magisterium:

[The following proposition is condemned as erroneous:] Since ready cash is more valuable than that to be paid, and since there is no one who does not consider ready cash of greater worth than future cash, a creditor can demand something beyond the principal from the borrower, and for this reason be excused from usury. – Various Errors on Moral Subjects (II), Pope Innocent XI by decree of the Holy Office, March 4, 1679 (Denzinger)

It has also been established that Magisterial silence on a moral or doctrinal question does not constitute approval. Those who insist that the Magisterium has approved the title of lucrum cessans at all, let alone that the proposed title can be interpreted as a license to recover opportunity costs in for-profit mutuum loans as opposed to charitable loans to the poor where there is no intention of recovering even the principal from those who cannot afford it, are simply wrong.  The reason why these folks never produce a Magisterial proclamation to that effect is because it never happened.

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.  When a mutuum lender attempts to sell his “opportunity cost” to a borrower in exchange for interest payments on the loan, the thing that he has attempted to sell does not actually exist. If it actually existed then when the borrower defaults the lender would be able to foreclose and retrieve his property, or the property in which he has purchased a claim.  The fact that he cannot do so demonstrates St. Thomas Aquinas’ point that charging interest on a mutuum loan (usury) involves selling what does not exist.

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

No.  The “future labor of a worker” is a potentiality, not an actuality.  This potentiality inheres in a person, not an asset.  It is morally licit to purchase assets (including assets with potentialities), but it is not morally licit to purchase persons.  The “future labor of a worker” is not an asset or piece of property: it is not something the ownership of which can be transferred from the worker to the lender when the transaction is made, because the future labor of the worker cannot be alienated from the worker himself.

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.

The worker is paid wages for what he, through his own powers, makes actual.

Actualities have their own distinct existence, whereas potentialities inhere in actual things from which they cannot be separated.  It is licit to purchase and sell actual things, whether for consumption or in order to acquire economic potentialities which inhere in actual things.  But it is not licit to purchase persons to acquire economic potentialities which inhere in persons. Attempting to purchase the potentialities of a person is an attempt to purchase an economic share in a person, as opposed to a thing: this is what makes usury fall into the same genus as slavery.

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.  As long as recourse is limited by the contract to the pool of real assets, however it is structured, the arrangement is not usury.

19) Is a corporate bond usury?

No. Investors who lend money to corporations cannot pursue individual shareholders for return of principal. The claims in a corporate bond are claims against property which actually exists in its own right: the corporation.  Corporations are themselves property: they can be bought and sold and their employees – the workers who “farm” the property – sometimes change completely from one set of people to another.  Like a farm, a butcher shop, a farrier business, a hunting ground, etc. a corporation is property which can be alienated from particular persons.

Sale of claims against property – claims bound to specific property and only that specific property – is a sale of something that actually exists. It is still possible for the prices of those claims to be unfair, etc: see Question 11.  But contracts like corporate debt are not usury strictly speaking, as long as they are bounded: as long as they are claims against specific property and do not assert any personal guarantees by specific persons.

See also Question 31.

20) Is a car loan usury?

Almost always.  It is usury unless it is a non recourse loan.

21) Is a home loan usury?

A non recourse 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.  As a matter of intrinsic morality, usury – insisting on interest when making a mutuum loan – is a sin on the part of the lender, not the borrower.

24) What is wrong with contracts between consenting adults?

That is a different but related subject. Contracts are always negotiated in the shadow of the law, which limits what kinds of contracts are enforceable and affects the negotiating positions of the parties. If the government should decline to enforce a contract wherein a person sells himself into slavery, the government should likewise decline to enforce a contract wherein a borrower enslaves himself through usury.

25) Aren’t all unproductive loans usury? Wasn’t Belloc right when he said that the distinction between usurious and non-usurious loans was that the latter are productive?

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.)

This view is based on an erroneous understanding of what is meant by ‘loan for consumption’, assuming that the opposite of a loan for consumption must be a loan for production. This brings in all sorts of intellectual baggage and conflicting views from economic theory which are irrelevant to usury.

The idea that an interest-bearing mutuum loan is not usury when the money is spent productively was condemned in the encyclical Vix Pervenit.  An interest-bearing mutuum loan wherein the borrower invests the proceeds in some productive activity is just as usurious as an interest-bearing mutuum loan wherein the borrower spends the money on wine, women, and song. That the contract is usurious is established by the fact that it is a mutuum charging interest, independent of how the borrower happens to use the proceeds.

Beyond that, “unproductive” non recourse loans are not usury.  If I have equity in my home and I sell some of it to a non recourse “lender” to raise cash for a vacation, that is not usury: I have simply decided to spend some of the capital that I own on a vacation.  (Regimini Universalis: non recourse borrowers “encumber their goods, their houses, their fields, their farms, their possessions, and inheritances”).  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 share of the house that he now owns after I sold it to him. 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. However, even if we postulate that the nature of currency has changed, that does not alter the prohibition of usurious lending, properly understood.

It turns out that the kind of currency used is irrelevant to the issue of usury (Question 35), so various opinions about fiat currency, so-called “hard” currency, and other trading tokens or fungible commodities are entirely distinct from the subject of usury per se. If a contract is usurious it is necessarily usurious in all of those different kinds of currencies. So even if you disagree with me about the nature of currency, our different views on currency do not have any effect on the condemnation of usurious loans denominated in those currencies.

We exhort you not to listen to those who say that today the issue of usury is present in name only, since gain is almost always obtained from money given to another. How false is this opinion and how far removed from the truth! We can easily understand this if we consider that the nature of one contract differs from the nature of another. – Vix Pervenit

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

No. A sovereign guarantee is not the same thing as a personal guarantee. Sovereign debt was treated as something different from full recourse loans by the medievals, and the sovereign differs from individuals in several important ways. Two of the most important are that the sovereign is not a person but, qua sovereign, is an institution; and the sovereign has the power to issue currency.  The sovereign may pay “interest” with tax receipts, but it is no part of the contract that he must do so; so even the notion that government debt intrinsically requires full recourse to taxpayers is wrong. The place to discuss this is in the linked post not here, because it is really off topic from the subject of usury. (Note: see also more recent discussion on related subjects here, here, and here).

It turns out that the kind of currency used is irrelevant to the issue of usury (Question 35), so various opinions about sovereign debt and fiat currency are entirely distinct from the subject of usury per se.

This doesn’t mean that the way our government is acting is wise, prudent, or even somewhere in the vicinity of sane.  It just means that sovereign debt is not usury: it is a categorically different subject.

Many government practices may be not only imprudent but intrinsically immoral, without being usury.  For example I’ve advanced a couple of arguments that property taxes are intrinsically unjust, and neither postulates that property taxes are usury strictly speaking, although the first draws on concepts related to usury.

This is exactly as we should expect it to be with a moral doctrine covering a particular species of sin. The moral prohibition of contraception is not in itself an all-encompassing theory of sexual immorality. Adultery and fornication are sexual sins distinct from contraception, and what is true in the sexual domain is also true in the domain of property: that theft and usury are distinct kinds of sins doesn’t make either particularly ambiguous. Neither the prohibition of theft nor the prohibition of usury constitute Theories of Everything about the moral use of property.  Folks who attempt to turn the moral doctrine on usury into an all-purpose sledgehammer for advancing their own broader economic theories do a disservice both to the doctrine and to their theories. That usury is a particular kind of sin and does not cover all sins in the domain of money and commerce was affirmed in Vix Pervenit (see Question 11).

The main point for present purposes is that issues of fiat currency, taxation, and sovereign debt are distinct from the subject of usury.  Usury by definition is profitable interest charged on a mutuum loan: a freely entered contract between a person (the borrower) and some lender (either a person or an institution), wherein the borrower personally commits to pay back the loan.

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.

Part of what made the usury doctrine clear to me when I first really began to grasp it (as opposed to – and I was as guilty of this as anyone – superficially dismissing caricatures rooted in anti-realist modernism) is that as an investor and entrepreneur, I see investment contracts involving peronal guarantees of repayment as inherently dysfunctional. If either the investor or the entrepreneur feels the need to throw personal guarantees into the mix in order to get the deal done, that is a major red flag that the proposed capital structure of the investment doesn’t make sense on its own terms. Usually this is because the property risks – the risks of partial or total loss of capital invested – in the investment are high enough to make a simple fixed-interest debt instrument inappropriate. Instead of personal guarantees the structure should be something like a convertible note, with equity upside, or it should be secured by a larger base of existing (though probably illiquid) capital. Basically, someone is trying to consume capital they don’t have and/or shift their own risks – the risks inherent in their own portfolios of property – onto third parties, personally.

Anyway, I haven’t really added anything new to the ancient understanding of usury here. I was just a guy who happened to be standing in the right spot to see what caused the train wreck, and I’m trying to explain what I saw in our common modern language as best I can. Like theft usury often does pay, at least in the short run, and it causes all sorts of damage that impacts different people differently and unfairly. Usury is inherently dysfunctional and morally evil, like theft. It may be mildly interesting sociologically that the Catholic Church was right for millennia about a simple core financial and moral truth that modern people, for all their putative economic and technical sophistication, have gotten completely wrong.

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?

Well, you asked, so I’ll editorialize and give you my personal take.

My answer is 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, despite their attendance of the traditional Latin Mass. Humanae Vitae could easily become the new Vix Pervenit. Contraception apologists have learned from earlier usury apologists and are using the same tactics. 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.

You might think of this as the “hermeneutic of continuity of Hell”.

It should be said though that getting rid of the ecclesiastical penalties for usury was a pastoral judgement call, and I don’t necessarily disagree with it.  For example prior to a declaration by the Holy Office ending the practice on August 31, 1831, it was frequently imposed that a usurer had to make an accounting of all the money he had made through usury and make restitution before he was given sacramental absolution.  This is completely disanalogous to the situation of a divorced and ‘remarried’ person who is objectively committing adultery on an ongoing basis.  The former may be totally repentant and fully committed to sinning no more without having the practical means to do the accounting and make restitution.  The latter by definition is not committed to sinning no more. Material restitution for past wrongs, in short, is an entirely different pastoral subject from the basic sacramental requirement for a firm purpose of amendment.

It was also the case that usury was frequently misunderstood, and many contracts which were not usury were condemned as such by overzealous but financially ignorant people. An analogous case in the context of the sexual revolution would be the ‘rigorists’ who condemn NFP as a form of contraception, and their ‘laxist’ counterparts who make the same claim but conclude from it that therefore contraception is morally licit. Aquinas and the Popes who addressed the issue in bulls and encyclicals may have understood the difference between non recourse (societas) investment and full recourse (mutuum) loans, but many priests at the parish level did not. The spectacle of a penitent, innocent of usury, hounded and denied absolution by an overzealous confessor who doesn’t properly understand the subject, may be a risible fiction now; but that was not always the case.

This was especially confounded by progressive scholastics’ use of a proposed distinction between putatively ‘productive’ interest bearing mutuum loans to businessmen (explicitly condemned in Vix Pervenit, see Question 25) and putatively ‘unproductive’ mutuaa. The argument over ‘productive’ vs ‘unproductive’ mutuum loans snookered the traditionalists by framing the debate in question begging terms, obscuring the essential distinction (the distinction, unlike ‘productive’/’non-productive’, actually found in Magisterial documents on usury such as Cum Onus and Regimini Universalis) between mutuum (full recourse) loans and legitimate non recourse (societas) business investment.

An especially pernicious false-flag argumentative tactic of present day usury apologists is to take the ‘rigorist’ approach as a way of discrediting the doctrine. These will contend for example that the traditional understanding of usury would disallow all census-type contracts involving regular payments of principal and interest (e.g. corporate bonds), not just those census contracts with claims that terminate in persons as opposed to or in addition to actual property.  (See question 31). This ‘false flag’ approach is aided and abetted by useful idiots on the traditionalist or reactionary side who cheer on their ‘rigorist’ arguments.

None of that has any bearing on the objective status of usury as an execrable mortal sin.

Usury would of course be intrinsically immoral even if that did, counterfactually, make industry and commerce impossible or if it were unhealthy in some sense for industry and commerce — just as contraception would remain intrinsically immoral even if the lack of it led inexorably to overpopulation and misery. But the moral prohibition of charging usury does no such thing. Like moral doctrine on contraception it merely prohibits actions which are objectively harmful both to the parties involved and to the common good – even though they do involve a short term ‘payoff’ of sorts, which is why they are tempting. This is why the arguments in favor of laxity on contraception and usury tend to mirror and cross-reference each other (myriad examples can be found simply by Googling various combinations of the terms “usury”, “Catholic”, and “contraception”).

Apologists for contraception have learned the playbook from the apologists for usury: give lip service to the doctrine as an important decorative piece of theology up in the sky; “pastorally” defang it so that in practice it can be ignored on the ground; continue to “dialogue” until the right “pastoral” result is achieved; paint any opposition into a corner as unmerciful, impractical, and disconnected from reality; and assert that this “pastoral” result was a development of doctrine, ignoring the dog that doesn’t bark — the nonexistent teaching documents from the Magisterium representing an actual doctrinal “development”. Do the latter enough times over a long enough period so that everyone starts to accept it as a given, including much of the clergy. Continue to point out various “defects” in the “simplistic” understanding articulated in Magisterial documents, and be sure to reiterate regularly that they are not infallible. Oh, and point out the sexual peccadillos, I mean economic practices, in clergy and the Vatican: because if the Vatican does something in its secular operations or practices that constitutes an infallible proclamation that the practices cannot be immoral, as long as they are the things we want to not be immoral, and anyway it isn’t really immoral but if the Church actually means what it says doctrinally in those defective non-infallible documents then it is being hypocritical. Shout down any alternative description of the situation on that front as excuse-making. Once all that is achieved all remaining objections must be marginalized and ridiculed. Pat the old celibate economically illiterate men in the Holy See on the head for their prior silly immaturity, congratulate the laity for its wisdom about the “facts of life” and the sensus fidelium, and move on.

But it turns out that the prohibition of charging usury is and has ever been a perfectly reasonable limitation on morally licit commerce; a limitation which merely disallows trafficking in human beings as if they were property and thereby creating fake wealth, vested in nonexistent property, which pollutes the real economy.

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?

Yes.  See questions 35 and 36.  An “exception” of sorts applies for cases of theft, fraud, and negligence.  But in these kinds of cases the content of the contract itself is irrelevant: any extrinsic title that the wronged party has to damages in the case of negligence or crime is a title he has no matter what the contract says (see Question 49).

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 secured by the farm as a bundle of assets or property, not by a personal guarantee from the farmer.

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. Licit census contracts must be secured by a ‘fixed, immobile good’ – alienable property – not by a personal guarantee of repayment.

Modern economic theorists have misunderstood this by assuming that ‘money’ is not a ‘fixed, immobile good’, and therefore conclude that usury doctrine depends upon some particular theory of money which at best no longer applies. But in doing so they fail to make the distinction clearly made by Aquinas (see Question 52) and the Magisterium between actual money (or other alienable property) in the possession of the borrower and a mere personal promise, by the borrower, to repay.

It isn’t that ‘money’ (understood equivocally) fails to be a ‘fixed, immobile good’: it is that a personal IOU, a mere personal promise to repay, fails to be a ‘fixed, immobile good’. Actual money in possession (financial securities or other property conventionally used for exchange), or other property securing the loan, can be alienated from the borrower and repossessed if the borrower stops making census payments. Personal IOU’s cannot be alienated from the borrower and repossessed.

Personally guaranteed census contracts were declared to be illicit, 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).

When you own a corporate bond, you own a property interest in the corporation – an objective thing. Corporations are things, generally aggregates of things, and can be owned and sold as property. (If they weren’t things – if they were persons – it would be immoral to own them, trade shares in them, and the like). That’s why it is always possible to foreclose on the corporation and claim your property: because the thing you own actually exists. (That its value may have been reduced to nothing by business misfortune is irrelevant: a house can burn down, but the fact that it can burn down doesn’t mean it is not a thing).

A personally guaranteed note looks, superficially, like the same sort of contract; but it isn’t. It – specifically the personal guarantee – isn’t a property interest in a thing. It attempts to assert a property interest in no thing: nothing. The fact that you cannot foreclose and collect your property demonstrates Aquinas’ point: the thing in which the contract asserts an ownership interest or other claim is no thing at all: nothing. The apples have been eaten, the wine has been drunk, and the borrower has to take action to acquire new, different apples or wine precisely because the thing to which the mutuum lender lays claim does not exist.

A mutuum for interest looks superficially like a census contract against a farmer’s field, as described by John de Lugo and affirmed as morally licit by Pius V. The difference is that there is no field: instead of representing a de-facto buy-leaseback of a claim against a field or other actual property, the personally guaranteed note represents a buy-leaseback of nothing at all.

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. It is possible that moral waffling on chattel slavery kept the door open for usury in many peoples’ minds. Other people might see prison jobs as a kind of ‘slave labor’ and propose that it is immoral to throw people into prison just to get work out of them, even if they are willing to agree to it. But that kind of speculation and casuistry aside, clearly a slave’s future labor cannot, as a matter of objective fact, be alienated from the slave himself.

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.

34) Doesn’t the safe harbor of personal bankruptcy imply that modern loans are really non recourse?

No. Even with the safeguard of personal bankruptcy, a usurious contract is – by its full recourse nature – a purchase of the potentialities of a person. The potentialities of a person are not something which actually exist at the time of purchase. Recall that, in order to “own an economic share” in (or have economic access to) the potentialities of a thing, you must own a share in (or have some sort of property claim against) the actual thing; and it is not morally licit to buy and sell economic shares in persons as if they were property.

Continuing the comparison to slavery (since usury and slavery are in the same moral genus), that a slave might have certain legal remedies in the case of an abusive master, or might under certain conditions have an opportunity to escape his condition, doesn’t make him any less a slave.  He might be in better shape than other slaves who lack those remedies and opportunities; but he is still a slave.

Furthermore, that personal bankruptcy protection is available in cases of extreme financial duress does not change the fact that mutuum contracts require return of what is lent in kind as opposed to in particular (see Question 35): that what is loaned is, in Aquinas’ terms, consumed in its use by the borrower.  The mutuum loan for interest still charges rent for literally no thing, nothing, and is therefore intrinsically unjust. Personal bankruptcy protection therefore does not change the basic nature of a usurious contract.

35) What if the mutuum loan is made in wheat, gold, or rental cars rather than fiat dollars?

Notice that, in a mutuum loan, what is returned to the lender by the borrower- who personally guarantees this return under the contract terms – is not the actual, original things which were borrowed.  Instead what is returned is ‘in kind’ — a mutuum loan of a car would require the borrower to return a brand new car (or any old car) at the end of the contract, not the actual car which was borrowed.  The mutuum inherently treats the currency used as fungible: as a kind of thing where any one unit of currency is interchangeable with any other. Once the borrower has used what was lent under a mutuum loan, he no longer possesses it and cannot return it in particular to the lender. So it doesn’t really matter what was used as the exchange token or currency in the mutuum contract.  If the contract requires the borrower to personally pledge to return in kind rather than in particular it is a mutuum loan, and charging interest is usury.

A personal commitment to return ‘in kind’ is a commitment to return something which doesn’t actually exist as an actual thing: it is just abstractly a ‘thing’ of such and such a kind.  A commitment to return ‘in particular’ is a commitment to return something which does actually exist as an actual thing.  Formally, then, the distinction between currency and property in the context of an investment contract is that currency is returned in kind, while property is returned in particular. The former is the basis of a mutuum; the latter is a necessary (but not sufficient) condition for the formation of a licit societas.

A licit societas can and frequently does create in-kind investment returns when things go according to plan (“From these [non-mutuum] contracts honest gain may be made.” – Vix Pervenit).  But all contractual claims of all parties must terminate in actually existing property, not in claims against persons, in order to avoid usury. That’s why asking the question “what if things don’t go according to plan?” is particularly helpful in distinguishing usurious contracts from non-usurious contracts.

St. Thomas Aquinas refers to objects pledged in kind as objects “consumed in their use”, as distinct from objects pledged in particular. This obviously doesn’t mean that the original gold coins are literally eaten or melted down and destroyed by the borrower (although that could be the case in a mutuum loan of, say, food).  It just means that the original gold coins are no longer in the possession of either the lender or the borrower once the borrower uses them. A mutuum is that kind of agreement: a pledge to return in kind as opposed to in particular.

It is true that the usurer might accidentally receive back some of the very same gold coins (say) that he loaned, as those coins circulate.  But that is purely accidental: what the mutuum contract requires is that the borrower personally guarantee return of the principal in kind, not preserve and return actual real rented or co-owned assets in particular.

36) Wait, does this mean that if I lend out my car and the borrower destroys it, he doesn’t owe me anything?

It depends on the particulars of the contract.  The guiding principle is that contracts with recourse to real, specified assets (and only those real, specified assets) are licit as profit-producing investments. Full recourse contracts are not licit as profit-producing investments.

First, it should be said that matters of theft, vandalism, fraud, negligence and the like are criminal matters and therefore fall outside of what is intrinsic to the contract itself. (See Question 49).

But accidents do happen, so suppose that one did happen and the car was destroyed. Maybe a meteor struck the car and destroyed it. Lets also suppose that this was a commercial rental for profit: the borrower was contracted to pay for the use of the car, it wasn’t just a friendly loan.

If the borrower posted security and/or the purchase of insurance coverage was part of the contract, the security and/or assets of the insurance company will cover the loss.

However, if the contract says that the borrower owes (say) $5000 if the car is destroyed, and that he is personally on the hook to pay interest on the $5000 if he can’t pay it all at once, then that is usury.

Unsecured contracts for profit are problematic in general when they (explicitly or implicitly) assert recourse to particular persons to recover losses. A licit contract should always cover the various contingencies, fully terminating in real, existent assets which secure the contract, in order to avoid usury. If the lender wants $5000 in security to cover the car in case of an accident he should get it as a deposit, a lien on home equity or other property, or as an insurance bond instead of trying to collect it after the fact.

Usury on the borrower’s side frequently involves attempting to spend money or risk other resources that you can’t actually afford based on the assets you actually own. If you can’t afford to post security or pay for an insurance bond, you probably can’t really afford the risk of renting the car.

Here is the Magisterium on the specific question (Pope Callistus III (1455-1458), Usury and Contract for Rent), describing a morally licit contract (full citation here):

But the [lender], 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.

That is, a licit income-producing rental contract (which might or might not be labeled a ‘loan’ in modern language) is non recourse.

37) I see that the Magisterium and Aquinas have actually been clear that lack of explicit recourse to real assets is central to usury: that full-recourse lending for profit is what is defined as the moral problem.  But why is that the case?

Usury involves treating people (subjects) as things (objects), because it involves purchasing “Bob owes me principal and interest” as opposed to purchasing shares in that project there or that bundle of assets there, distinct from particular persons.  The most extreme form of treating persons as property is chattel slavery. (Some authors beg to differ, seeing usury as worse, and the argument has some merit). Usury is in the same moral genus as slavery.

Furthermore, “Bob owes me principal and interest” is not a thing which actually exists. Charging rent for literally nothing, no thing, is intrinsically unjust.

38) But you’ve said that intangible or only partly tangible things like patents and operating businesses can be ‘objects’, and thus can be property.  So how do I tell the difference between what can be ontologically real property and what can’t?

Ontologically real property consists of objects.  (Property in general refers to a relation between owners, subjects, and objects; but what we ordinarily call ‘property’ as a noun are the objects in this relation). Objects can be alienated from persons and possessed or controlled by different people at different times.

Modern economics is very anti-realist: it is under the delusion that economic value is purely subjective, that is, purely a function of human preferences whatever they happen to be.  But economic value is not purely subjective: it has an ineliminable objectivity.  (Modernity in general is characterized by anti-realist materialism).

Objects, very generally speaking, are things which have an existence that is independent of particular persons (subjects).  The contrary of object is subject, so objects are things that exist in their own right independent of persons: things which are not persons and which are capable of being exchanged independent of particular persons.

Non recourse loans represent ownership claims in objects: the specified assets to which the lender has recourse (under the terms of the contract) to recover principal and interest.  Full recourse loans attempt to assert an ownership interest in persons, as opposed to (or in addition to) objects.

Notice that when Bob dies, the ‘value’ of his full recourse debt (qua full recourse) dies with him. The value of any non recourse debt contracts does not die with any particular person, precisely because that value is tied up in the specific objects not in a particular subject (person).  Everything that a non recourse lender is entitled to under the contract can always by definition be recovered (absent theft, fraud, vandalism, or other criminal acts) from objective reality.  Even if the value of the collateral goes to zero, it was specified in the contract that that specific collateral is all the non recourse lender is entitled to recover. That is what the lender agreed to, by the definition of a non recourse contract.

Full recourse lenders frequently fail to fully recover their contractual entitlements precisely because those entitlements are to ‘things’ which are not real.

39) But wait, can’t a full recourse creditor go after Bob’s estate when he dies?

Recourse to particular persons – recourse to Bob – the part that makes the loan full recourse – dies with Bob. The person to whom the contract terms specified recourse (implicitly or explicitly) was Bob, and Bob is now gone from this world. It is (sometimes but not always) true that creditors can go after the deceased’s estate, but that is similar to a situation with a full recourse mortgage.  It isn’t lack of security that makes a loan full recourse: it is full financial recourse to the person independent of named assets that makes a loan full recourse.

In effect, when a person dies his full recourse debt (sometimes) converts to non recourse debt, with his estate as the assets.  But it no longer exists as full recourse debt: there is no longer any particular person that the creditor can pursue for recovery of principal and interest; only assets.

40) Doesn’t the Vatican Bank make full recourse loans?

I don’t think so, but I don’t really know the answer to that question and it isn’t really relevant.

Most institutional borrowing and lending is non recourse, so the point that the Catholic Encyclopedia article on usury makes about ecclesiastical properties is irrelevant to the question of usury. On the other hand I think there were ATM machines in Vatican City when I was there, so there is probably at least close business done with usurers. Almost everyone does close business with usurers in the modern first world.

Stipulating all that though wouldn’t have any bearing on the moral issue.  The Church has been quite explicit not just that silence on a question is not evidence of approval, but that the actual secular practices of the Church have been wrong at times.  See CCC 2298 for example.  The fact that the Church does something institutionally (stipulated, though in this case that is not established) does not constitute moral approval of it.

41) What about that Catholic Encyclopedia article, anyway?

The CE article fails to distinguish between full recourse (mutuum) loans and non recourse (societas) loans; a distinction central to some of the authoritative Magisterial pronouncements on usury (e.g. see Questions 36 and 31) and central to Aquinas’ understanding of a “loan”.  The point it makes about mortgaged ecclesial properties is irrelevant, for example, because the Church is an institution not a person and ecclesial mortgages are not financed via personal loans or loans secured by personal guarantees. The best that can be said is that failure to distinguish between mutuum loans and other kinds of contracts creates ambiguity in the article.

The fact that the CE article attempts to undermine the authority of a papal encyclical (Vix Pervenit), and considers undermining the authority of that encyclical central to its thesis, should also be considered.  Defenders of the article frequently assert without evidence that this article by a group of New York publishers reflects the mind of the Holy See at the time.  The most that can be said about that is that the CE passed the review of Catholic censors under the local ordinary; but that hardly makes the views expressed in it unambiguous, let alone magisterial.

42) Why do you say that the 2008 financial crisis was founded in usury?

The root cause of the 2008 financial crisis was full recourse real estate loans with shaky-to-ludicrous loan-to-value ratios. Without that inventory of bad loans at the bottom of the pyramid the whole ‘real estate bonds with ratings “enhanced” by a self-referential circular network of credit default swaps’ scheme would never have ‘worked’.

Usury was not the only kind of morally fraudulent financial activity involved, however. See this post for my gloss on the circular securitization which was layered on top of the pyramid of usurious loans.

Without enforcement of usurious (that is, full recourse) contracts, sane lenders interested in their own financial survival would not make (non recourse, which would be the only sort enforced by the government) loans with shaky-to-ludicrous loan-to-value ratios.  That wouldn’t solve all of the world’s problems, of course, but it would make it harder to engage in many of the Ponzi-like schemes which arise in highly abstracted financial markets.

The reason usury ‘works’ is because usurers can buy ‘slavery shares’ in individuals (as opposed to property shares in assets); and individuals of little means are tempted into it because selling a part of themselves into slavery makes them feel (and spend) as if they were wealthier than they really are.

43) Does this mean that ideally consumers should always pay cash for things like houses and cars?

Not necessarily. There are probably plenty of times when it makes perfect sense for a “lender” and “borrower” to, say, collaboratively purchase a house or a car together for the borrower to occupy or use.

What it means is that people who cannot come up with enough security (in the form of down payments, insurance bonds, liens on other real assets and the like) would not get a loan for something that they really cannot afford. It means that in general, market forces would keep loan-to-value ratios sane. Without the capacity to pursue borrowers qua persons independent of real assets, lenders and borrowers would have to operate within their own means and would not pollute the common good with fraudulent economic value which does not actually exist.

See this post at the Orthosphere for a more in depth discussion.

44) Suppose I am thinking about agreeing to a financial contract which will produce some interest or other profit for me – say by opening a bank account. How can I be sure that what I am about to do is not usury?

If you can identify specific individuals who are personally liable under the agreement to return your principal and pay you profitable interest, the contract is usury. If you cannot identify any such individuals, the contract is not usury.

Banks themselves do tend to make full recourse (that is, usurious) loans to individuals.  Opening an interest-bearing account is therefore remote material cooperation with evil when that is the case – and it is almost always the case in modern economies. However the interest bearing savings or checking account agreement you make with the bank is not full recourse to any particular person or persons, so it is not itself usurious.  You haven’t done anything intrinsically wrong by opening the account.

I talk more about what bank accounts are and are not in this post.

In fact even vacation loans or loans to buy groceries are not necessarily usurious. It depends on whether the ‘loan’ in question is a mutuum (full recourse) or a societas (non recourse).

45) Is it morally licit to charge interest on a full recourse loan just to cover inflation?

No. The answer is implicit in Question 35 — once you’ve grasped the difference between mutuum and societas it becomes clear that the price of the ‘currency’ most likely will fluctuate all over the place relative to other things, whatever is used as currency. The mutuum might be in wheat or oranges or even computers or cars as opposed to dollars; but that doesn’t change the nature of the contract.

So if it is an interest bearing mutuum it is usury, and the inflation rate (or price fluctuation between commodities or currencies generally) is irrelevant.

In effect what the “just-to-cover-inflation” usurer is attempting to do is enslave the borrower (as opposed to purchasing claims against some actually existing property) as an inflation hedge. All property is subject to entropy, decay, devaluation, theft, political unrest, changes in market conditions or personal circumstances, and other risks. It is fine generally speaking to make investments as a hedge against this, in an effort to preserve wealth; but it is not morally licit to make usurious loans as a hedge against this.

[Some folks have found this approach to the answer confusing, so I answered it again from a slightly different perspective in Question 53]

46) What about futures contracts? Are they usurious?

I could go on and talk about all sorts of different contracts and the practical implications. But the bottom line is that those contracts are generally fine as long as they are ultimately secured by recourse to some inventory of real assets and only that inventory of real assets – if they are non recourse.  Just about any creative structure of contract is possible in theory — as long as real assets are posted as security and the parties agree that all recourse terminates in those real assets.  (This doesn’t mean that any and all creative non recourse contracts are morally licit by necessity: it just means that they are not specifically usurious.  See Question 11).

I’ll give a simple example of a non-usurious futures contract.  (A real example might involve insurance bonds or the like as part of the arbitrage over the real assets tied up in the contract; but I’ll try to make this as simple as it can be to describe it conceptually).

Suppose it is springtime, and Farmer Bob and Investor Bill disagree about whether wheat prices are going to go up or down.  Bill thinks there will be a drought, and Bob thinks the harvest will be big.  Given supply and demand, then, Bill expects high wheat prices in the fall and Bob expects low wheat prices.

So Bob and Bill enter into a non recourse contract under which Bill pays Bob 1000 groats now, and Bob agrees to deliver a ton of wheat to Bill on November 1st.

The contract is non recourse because Bob pledges the actual field on which he plans to grow the wheat as collateral, and Bill agrees that his recourse is limited to foreclosing on that field.  In effect Bill now co-owns the field with Bob, and their mutual business interests – their societas – is limited to that field: a real asset distinct from persons.

Now maybe Bob was right, or at least he successfully grew the wheat, and on November 1st he delivers a ton of wheat to Bill.  But maybe Bill was so right that Bob wasn’t able to grow the wheat. The drought destroyed Bob’s crop. In that case Bill and Bob have agreed to foreclose, and Bob will have to sell the field in order to buy a ton of wheat to hand over to Bill.

However, because the contract is non recourse, that is the limit of Bill’s recourse – as agreed by the parties from the beginning, intrinsic to their contract.  If selling the field does not raise enough money to buy the now very expensive wheat, Bill only gets as much as the proceeds will actually buy.  Furthermore, if selling the field itself raises only 800 groats, then Bill only recovers 800 groats — less than the principal amount of his initial investment.  Bill’s recourse – as they agreed from the outset – is bounded by the actual property pledged in the contract.

The bottom line, even if you don’t follow the example, is that the prohibition of usury does not prohibit reasonable investment, including those that involve risking assets you actually own based on how you think things will develop in the market.

What the prohibition of usury forbids is enslaving your fellow man to your expectations, even when he is willing to be so enslaved: it forbids full recourse contracts for profit.

47)  What is the evidence against Aquinas and in favor of the modern view that a reasonable amount of profit on a simple mutuum loan is morally licit?

There are three main pillars of evidence which are cited: (a) changes in Canon Law and pastoral practice; (b) the scholastic concept of “extrinsic titles” on loans more or less approved (or explicitly-not-explicitly denied, more accurately) as a general notion (with no specific ones explicitly approved) by the Magisterium; and (c) Magisterial declaration that the specific practices of the “Mountains of Piety” – medieval credit agencies sponsored by the Church to help the poor by making low interest “loans” – were not usurious and in fact were praiseworthy.

a) The first pillar is changes in Canon Law and pastoral practice. As previously mentioned (Question 29), prior to a declaration by the Holy Office ending the practice on August 31, 1831 it was frequently imposed that a usurer had to make an accounting of all the money he had made through usury and make restitution before he was given sacramental absolution. It was also frequently true that (as is the case now) confessors and laymen did not accurately grasp the usury doctrine; so businessmen who engaged in perfectly licit contracts and transactions were sometimes harassed, denied the sacraments, told to liquidate their estates, and denied Christian burial.

The intervention of the Holy See on the question, through the Holy Office and revision of Canon Law, basically asserted that as long as a penitent was prepared to follow instruction by the Holy See on the question of usury he should be granted absolution and generally left alone. This in effect removed the problem of understanding the nuts and bolts of usury from the purview of confessors (who were frequently financially naive themselves).

That this set of pastoral and legal changes could not even in principle modify doctrine is manifest.

b) The second pillar, extrinsic titles (mentioned briefly in Question 13 and Question 14), are a subject which could – but really need not – take up a whole book in itself. The reason it could take up a lot of discussion is more historical than conceptual: the scholastics spent a good deal of time discussing and debating the subject. The concept of “extrinsic titles” is touched on briefly in Vix Pervenit, which explicitly does not explicitly deny the validity of the concept of extrinsic titles:

By these remarks, however, We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract.

As with just about anything there are a number of ways to interpret this conceptually, because the terms can be understood to mean various different and sometimes incompatible things. For example one way to think about a non recourse “loan” (and you will see some folks discuss it under this kind of framing) is to think of it as a mutuum together with an additional contract. This “add on” contract removes the personal pledge for repayment and replaces it with a pledge to transfer ownership of specific property if the borrower stops making payments: thus we get a non recourse loan. It is from this second, add-on contract, which grants the lender an ownership interest in the collateral and cancels the borrower’s personal obligation to repay, that a just title to profit arises.

However when the terminology is used that way – when the most essential property of a mutuum (Aquinas: “the borrower holds the money at his own risk and is bound to pay it all back”) is removed and replaced by a pledge of actually existing property which fully bounds and terminates the borrower’s obligation – it is editorially more clear to just recognize that what we have is an essentially different kind of contract. These kinds of contracts in fact have their own names: a census (See Question 31) or non recourse mortgage (see the full citation of “Usury and Contract for Rent” from Regimini Universalis), along with explicit approval by the Magisterium as non-usurious when non recourse.

The Magisterium (and Aquinas) make the distinction between full recourse and non recourse contracts central to usury in a number of authoritative proclamations (see Question 31 and Question 36). It is not surprising then that using language which reflects that essential distinction is editorially clarifying, whereas language which ignores the distinction tends to muddy the waters; even in those cases where it can be interpreted in a manner which is technically correct.

That isn’t to suggest that just titles to something above the principal cannot arise in the case of a simple mutuum loan. The specific title of “damnum emergens”, or compensation for actual out-of-pocket lender’s costs or actual damages directly arising from making the loan, was accepted even by the usury hard-liner Aquinas.

The conceptual approval (or non-disapproval) of extrinsic titles generally speaking, combined with explicit Magisterial approval of the specific practices of the “Mountains of Piety” (next up in part (c)), constitute the main progressive Catholic argument in favor of charging profitable interest on a simple mutuum loan.

It is worth pointing out again though that the Magisterium directly condemned charging interest on a mutuum to recover “opportunity cost” or “time value of money” (See Questions 14 and 15). As we will see, when it comes to the third pillar of the progressive case the actual evidence in fact cuts against the idea that making a profit on a simple mutuum loan is ever morally licit for any reason whatsoever.

c) Question 13 touched on the third pillar generally and briefly. The so-called “Mountains of Piety” were an institutional development of efforts to provide credit to the poor to help them escape from dire situations, including usury and other exploitation by greedy lenders. These institutions sometimes loaned money for no fees or interest at all, but of course even a non profit institution has real expenses and someone has to come up with the cash to pay them. So interest was more often than not charged on these “micro credit” or “micro finance” loans to the poor. There was a tremendous clash over whether these particular institutions were or were not themselves guilty of usury. This conflict was settled by the Magisterium:

With the approval of the holy Council (Lateran Council V), we declare and define that the aforesaid “Mountains of piety” established by the civil authorities and thus far approved and confirmed by the authority of the Apostolic See, in which a moderate rate of interest is received exclusively for the expenses of the officials and for other things pertaining to their keeping, as is set forth, for an indemnity of these as far as this matter is concerned, beyond the capital without a profit for these same Mountains, neither offer an species of evil, nor furnish an incentive to sin, nor in any way are condemned, nay rather that such a loan is worthwhile and is to be praised and approved, and least of all to be considered usury. – Leo X, Inter Multiplices, April 28, 1515 (quoted in Denzinger). (Emphasis mine)

Probably the second thing to note, following the direct repudiation of making a profit in this declaration, is that it isn’t clear that the “loans” made by the Mountains were mutuum loans at all. I’ve been critical of the ambiguity and accuracy of the Catholic Encyclopedia on usury (Question 41) because it omits entirely – perhaps its authors were simply ignorant of the requisite documents – the Magisterial distinction (also found in Aquinas) between full recourse and non recourse contracts (Question 31 and Question 36); the article also claims that Vix Pervenit “formally condemns” institutional credit in the Church tied to Church property – which in fact it does not, since the encyclical doesn’t discuss mortgages on Church property at all – suggesting that the Church approves of interest on “loans” (as an ambiguous term) “in practice”.

If the Catholic Encyclopedia has the facts right about the Mountains of Piety though then it is not clear that they made mutuum loans at all. The Mountains operated like modern day pawn shops, taking in existing property as security and making non recourse loans against the property:

The amount of a given loan was equal to two-thirds the value of the object pawned, which, if not redeemed within the stipulated time, was sold at public auction, and if the price obtained for it was greater than the loan with the interest, the surplus was made over to the owner.

Of course as explained in Question 11 of this document, just because a contract does not, in Benedict XIV’s words, “fall under the precise rubric of usury” does not mean it is not exploitative and wrong. The Jewish and Lombard money lenders often required collateral also and charged outrageous amounts of interest. I don’t know what loan-to-value ratios they maintained or if they would always assert deficiency judgments against borrowers, but keep in mind that just because a contract is not technically usury does not mean it is not exploitative and wrong. It is important to understand usury correctly; but too much focus on usury specifically could easily become a distraction from other real injustices.

And that is always something important to acknowledge: that even when a given contract does not “fall under the precise rubric of usury” (Vix Pervenit), “whatever is received over and above what is fair is a real injustice.” (Ibid)

48) What about the Fifth Lateran Council’s definition?

The Fifth Lateran Council at one point defines usury in this way:

[O]ur Lord, according to Luke the evangelist, has bound us by a clear command that we ought not to expect any addition to the capital sum when we grant a [mutuum] loan. For, that is the real meaning of usury: when, from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense or any risk.

This is perfectly consistent with usury as understood throughout this FAQ, in the other Magisterial statements cited (in fact the same council has already been cited in discussing the Mountains of Piety in Question 47), and in Aquinas’ writing on the subject.  In particular a mutuum loan, as Aquinas observes also, is a kind of contract in which the normal risk associated with ownership is born by the borrower. Profit for the lender from a mutuum loan is never morally licit: the borrower has in a literal sense become the owner of what has been lent, because he may do with it as he wills and any risk of loss is his.

Other kinds of contracts – contracts which are not mutuum loans, that is, which are non recourse contracts – may produce licit profits, even at a fixed rate of return, bounded by the pool of property in which the contract is a claim (see Question 31); as affirmed in a number of Magisterial statements cited throughout this FAQ.  But those profits always come in association with the risks inherent in claims against property, without personal guarantees. If the property is lost to natural disaster, etc, and there is no pooling of designated property as insurance, etc, then the investment is lost: no other person is carrying the risk, so profit can be licit under the Fifth Lateran Council definition.  The Fifth Lateran Council definition is not in conflict with Vix Pervenit and the other Magisterial documents cited here affirming the licitness of profit on legitimate non recourse investments.

Confusion often arises because modern people are in the habit of referring to fundamentally different kinds of contracts with the single word “loan.”

49) Is it acceptable for a merchant to charge penalties for late payment?

It is certainly morally acceptable for genuine victims of fraud or theft to be compensated for their actual losses. A buyer of products or services who is able to pay but refuses to pay when those products or services have been received has committed an act of theft or fraud. A buyer who is not able to pay but pretends to be able is likewise committing theft or fraud.

A trickier case is when a merchant extends credit and allows a buyer to pay later. If the ‘buyer’ is an institution and the security on commercial credit is the balance sheet of an institution, this is not a mutuum loan so the usury prohibition does not apply. If the buyer is an individual who is personally guaranteeing payment to the merchant, this is a mutuum loan and the prohibition of usury does apply. This gives rise to two possible cases. In one case the buyer is able to pay on time but refuses. In the other case the buyer has suffered some catastrophe and is unable to pay. The former is theft or fraud; the latter is business misfortune, a risk associated with doing business. If the merchant does not have proper security in place then he should absorb the loss until the buyer is able to pay, and should not insist on any penalty above the amount owed. If the merchant does not want to be exposed to those kinds of losses he can arrange for some kind of security (claims against specified property) or he can require payment on delivery instead of extending credit.

My own tentative view is that theft and fraud should generally involve criminal conviction and penalties of some sort, not merely compensation of the victim at the level of tort, because theft and fraud harm the common good not just the victim. One way they harm the common good is by opening the door to various kinds of ‘hidden usury’ — thief and ‘victim’ in collusion attempt to get around the prohibition of usury, by creating a situation in which the borrower ‘defrauds’ the lender, wink wink, so the borrower owes a penalty in addition to the principal. Collusion in faux-theft in order to produce penalties under the legal system – hidden usury – would simply make both parties guilty.

If this seems severe, consider that stealing a pack of gum is criminal theft, because stealing harms not just the victim but the common good. Categorizing it as criminal does not really say anything about the severity of the offense in a specific case; it merely acknowledges the harm to the common good in addition to the victim, or the defrauding of the sovereign by the parties in collusion. A discussion of crime versus tort is beyond the scope of the present FAQ, but it is sufficient to point out that ‘hidden usury’ in this kind of case involves (assuming a just legal system which declines to enforce usurious contracts) a conspiracy between borrower and lender to falsify an act of fraud so that the legal system will enforce a penalty.

50) John Noonan and other scholars have stated that we can’t grasp the usury doctrine without getting into medieval just price theory. Yet you say that usury doctrine doesn’t depend upon any economic theory or theory of just pricing. Why do some scholars say that there is a dependence between usury doctrine and medieval theory of just price?

The way to figure out whether a contract for gain is usurious or not is to look for contract terms which treat a personal guarantee as if it were property. It is morally licit for an owner to profit from the use of his property, or of property against which he has claims. But a borrower’s promise to repay principal which has been consumed is not property. A mere promise of apples is not itself actually apples. And the historical fact that there used to exist some apples which were consumed or money which was spent is not — the historical fact is not — actual apples or money.

If a mere promise to repay in kind actually were property it could be alienated from the borrower and repossessed by the lender, in case the borrower stopped making payments. Charging rent or levying profits from a mere promise to repay – charging “rent” for “property” which does not exist independent of any particular person – is usury.  The fact that what is owed under a mutuum cannot be recovered from reality, but must by definition be recovered from a person, demonstrates that it does not exist in the pertinent sense required to justify rents or profits.

I’ve said in a number of places (because it is true) that moral doctrine condemning usury does not depend upon any broader economic theory or theory of just pricing, and is in fact compatible with many such theories. On the other hand it is true that usurers would often take advantage of price ambiguities in order to charge what the medievals called “hidden usury”.   It is from this that the myth of interdependence between usury doctrine and medieval just price theory arises.  As seems to occur in many areas of moral theology, if people weren’t trying to get a pass on doing moral wrong on a technicality the issue would never arise in the first place.

Suppose I lend you 100 apples and agree to be repaid in two months time. But instead of asking for repayment in apples, I ask for you to personally guarantee (ahem) repayment of 100 oranges.  Because oranges are worth more than apples when we ink our contract – and this is where just pricing may come into play – this contract involves “hidden usury”.

That this is “hidden usury” is clear once we observe that the terms call for contractual profit to the lender in conjunction with a personal guarantee by the borrower. Personally guaranteed loans (mutuum loans) are only ever morally licit as acts of charity or friendship. They are not morally licit as profit-producing investments, even when the lender might have hypothetically made a profit in some other way had he, counterfactually, chosen to do something different.

This does not in any way impair legitimate investment for gain.  (It also doesn’t give a free moral pass to every contract which is not, strictly speaking, usurious).  The way to avoid entering into usurious contracts (including those involving ‘hidden usury’) is to avoid commercial contract terms calling for personal guarantees of repayment.  The only reason ‘just pricing’ comes into play at all is because the parties are attempting to craft a de-facto usurious contract while avoiding usury on a technicality — on the ambiguity of the relative prices of apples and oranges. This would not be an issue at all if the contracts were nonrecourse, that is, if the contract were not a form of mutuum. But mutuum agreements are never morally licit for gain in the first place. The notion that they are or should be is rooted, as with many errors of the modern age, in metaphysical anti-realism.

For further reading I discuss the structure of (for example) morally licit business debt (like corporate bonds)futures contracts, rental agreements, and insurance bonds elsewhere in this FAQ.

I’ll leave you with this quote from St. Francis Xavier, giving counsel to confessors (emphasis mine):

‘When in the sacred tribunal of penance you have heard all that your penitents have prepared themselves to confess of their sins, do not at once think that all is done, and that you have no further duty to discharge. You must go on further to inquire, and by means of questions to rake out the faults which ought to be known and to be remedied, but which escape the penitents themselves on account of their ignorance.

Ask them what profits they make, how, and whence? what is the system that they follow in barter, in loans, and in the whole matter of security for contracts?

You will generally find that everything is defiled with usurious contracts, …’

51) Isn’t it usury or something related to usury when banks ‘create money’ in a system of fractional reserve lending?

The way the question is posed gets the relationship backwards. When banks make non recourse loans they are securitizing property. It is only when they make usurious loans that they create ‘money’ out of literally nothing (that is, nothing but the personal promises of borrowers to repay). I explain this in more detail in this blog post.

52) I’m still struggling with the whole ‘loan for consumption’ thing.  Why is it that a personal guarantee of repayment is equivalent to a loan for consumption?

In a mutuum, or a more complex contract which includes a mutuum such as a home mortgage which allows for a deficiency judgment against the borrower, the borrower’s obligation to repay remains even if the proceeds and all of the things purchased with the proceeds are consumed.  We tend to think of ‘loan for consumption’ as referring to what kind of thing is lent or what is done with the proceeds, as opposed to what the contract authorizes and requires. But the distinction between a mutuum and other contracts is not in the kind of property which is exchanged or in what the borrower does with the property; it is in the nature of the agreement itself. A mutuum contemplates and provides for consumption or alienation of the property which is lent in return for a personal IOU. Here is Aquinas again:

As the Philosopher says in the Politics, things can have two uses: one specific and primary; the other general and secondary. For example, the specific and primary use of shoes is to wear them, and their secondary use is to exchange them for something else. And conversely, the specific and primary use of money is as a means of exchange, since money was instituted for this purpose, and the secondary use of money can be for anything else, for example, as security or for display.  And exchange is a use consuming, as it were, the substance of the thing exchanged insofar as the exchange alienates the thing from the one who exchanges it.  And so if persons should lend their money to others for use as a means of exchange, which is the specific use of money, and seek a return for this use over and above the principal, this will be contrary to justice.  But if persons lend their money to others for another use in which the money is not consumed, there will be the same consideration as regarding the things that are not consumed in their very use, things that are licitly rented and hired out.  And so if one gives money sealed in a purse to post it as security and then receives recompense, this is not interest-taking, since it involves renting or hiring out, not a contract for a loan.  And the reasoning is the same if a person gives money to another to use it for display, just as, conversely, if one gives shoes to another as a means of exchange and on that account were to seek a recompense over and above the value of the shoes, there would be interest-taking.

— St. Thomas Aquinas, De Malo, Oxford University Press, translated by Brian Davies and Richard Regan.  (Emphasis mine)

53) Why doesn’t the mutuum borrower owe at least enough interest to compensate for inflation?

Lets assume for the sake of argument that charging interest based on counterfactuals (opportunity cost) is morally licit, even though it isn’t: that mutuum lending for interest is justifiable based on counterfactual storytelling about things that might or might not have happened if different choices were made.

It is often said that money now is worth more than money later, and a common argument is that this justifies charging interest on mutuum loans: at least enough interest to compensate for the effects of inflation or currency devaluation.

As is typical of modern anti-realist views of property (see Question 10 for a realist view), this gets things almost exactly backwards. In fact if the argument from counterfactuals or opportunity cost were valid in the first place, what would follow is that the lender should pay interest to the borrower.

Property in itself is always subject to decay. Suppose you lend me fresh peaches, and I personally guarantee to give you the same number of fresh peaches six months from now.

In order to provide you with fresh peaches six months from now I have to take risks and invest more capital and labor. If I just hang on to your peaches and return them to you they will be rotten, because the peaches you lent to me are subject to decay. You should pay me interest, since when I give you fresh peaches in six months you are getting a greater value back than what you gave. I personally guaranteed you fresh peaches in six months, and took all of the risk and labor of providing them upon myself. (Note: Question 46 provides a description of a non-usurious futures contract, that is, a futures contract for profit which is not based on a mutuum loan).

Guaranteed fresh peaches later requires investment, labor, and risk. (Question 48 is pertinent). Peaches in a bucket right now require none of those things. If any interest based on counterfactuals is justifiable at all it should go to the party who takes on the task and the risk of providing fresh peaches in six months: the borrower.

And the same is true of money, or any property. (Matthew 6:19 – “Lay not up to yourselves treasures on earth: where the rust, and moth consume, and where thieves break through and steal.”)  If entropy or decay (for example inflation) justifies charging interest on a mutuum loan at all, the interest it justifies is due to the borrower not the lender; because the borrower is the person who has taken on all of the risk and expense of preserving the lender’s capital.

The borrower should be compensated for the expenses the lender would have incurred if the lender had kept his capital locked (for a fee) in a safe deposit box rather than giving it to the borrower for preservation and safekeeping. If the borrower is providing a service roughly equivalent to a safe deposit box, interest should flow the opposite direction from what the usurer proposes. Safe deposit boxes have to be rented for a reason.

The fallacy in all of this is in the notion that opportunity costs are compensable in mutuum lending in the first place (see Question 14), and the idea that mutuum lending is ever morally licit as a means to economic gain – where wealth preservation is a kind of gain – as opposed to an act of charity or friendship.

But once we grant the premise that opportunity costs are compensable for the sake of argument, the lender should be paying interest to the borrower. The borrower’s story about counterfactual might-have-beens is more in touch with reality than the lender’s story about counterfactual might-have-beens, because preserving and maintaining property against the forces of entropy always requires risk, work, and investment.

54) Are you suggesting that simply preserving the economic buying power of some property is a kind of gain?

Yes.

Modern man is so acclimated to usury that when it comes to wealth, he has convinced himself that the second law of thermodynamics runs backwards. Back here in the real world though property and its buying power deteriorate unless the owner does work himself, invests more property to protect what he has, and/or takes risks with his property in putting it to work as productive capital.

Even the most durable property – a cache of precious metals, say – requires some investment of work, risk, and additional property in order to merely preserve it. To bury a pot of gold takes work. To acquire or rent the land on which it is buried absorbs additional resources, as does protecting that land from prospecting trespassers and thieves. To bury it on someone else’s land which is not owned, rented, or otherwise protected through ongoing expenditure of work or capital is to take a more significant risk. You have to keep track of where it is, make sure that thieves don’t find out where it is, and be ready to retrieve it or just lose it if someone else finds it.

Even when a non recourse insurance bond (Question 18) covering the loss of the property is purchased, this does not eliminate risk: it simply spreads the risk over a larger pool of property, compensating the insurer for renting his property to the insured as security, thereby putting it at risk. If the insurer’s overall losses on all claims are too great then the property he has staked to insure your property will not pay your claim: the well is only so deep. And of course you have to pay for the insurance bond.

It is a commonplace among investment advisors that a wealth preservation strategy involves investing a portfolio in such a way as to maximize the chances that it will preserve its buying power: to take the smallest risk possible with respect to losing buying power. You cannot even preserve the buying power of your property without investing: without doing work, employing your capital in some inherently risky enterprise, and/or taking on other risks. (Other investment strategies include aggressive growth with high risk, and various intermediate strategies in between). Portfolios of property – that is to say, the collection of all of the property that a person owns – do not preserve themselves. Just staying even takes work, investment, and risk. If you don’t swim, you are going to drown. That is the nature of life in the universe in which we live.

One way to understand usury is as the unjust compensation of the lender for work, risk, and investment undertaken by the borrower; because in a mutuum loan the borrower personally pledges to make the lender whole, restoring property equivalent to what was originally given to the borrower, no matter what actually happens to the actual property borrowed.  This is why interest on mutuum loans is intrinsically unjust, and mutuum loans may only be licitly undertaken as a favor to a friend or a person in need, expecting no compensation in return.

55) If you make a mutuum loan to a friend in need, shouldn’t that friend try to keep you from losing any economic buying power in the process?

Suppose your best friend needs wheat and can’t afford to buy any. He doesn’t need paper: he needs wheat. You’ve got some excess wheat you could lend him, but you like the way paper futures (Question 46) look better, and you want a guarantee that you won’t lose any buying power (Question 54) when you are doing your best friend a favor.

So you lend him paper (even though he needs wheat, and is just going to exchange the paper for wheat) just so that, as a formality, the kind of thing he owes you back (Question 35) is paper. Or you tell him that you know he needs wheat and you have plenty to lend, but you like paper futures better so even though you’ll give him wheat you want him to repay the wheat you gave him by doing imaginary wheat-to-paper exchanges (they will be imaginary to avoid transaction fees and taxes) at the point of borrowing and repayment. Because of the excursion into the land of imaginary paper he ends up owing you back more wheat than you lent him on this mutuum loan – usury.

It seems to me that your friendship is as imaginary as the wheat-to-paper exchanges. That is no way to treat a friend in need. The former contract might not be technically usury, while the latter definitely is usury. But this fails to undermine the moral doctrine prohibiting usury, much as the fact that flirting heavily with your secretary is not technically adultery fails to undermine the moral doctrine prohibiting adultery.

And mutuum lending is only morally licit as an act of friendship or charity. It is not morally licit in pursuit of gain. Preservation of market buying power as something guaranteed by someone else is a kind of gain (Question 54).

If your best friend decides to pay you back more wheat than you loaned him out of gratitude, that is a gift from him to you. There isn’t anything wrong with that. It is even true that he owes you gratitude in a sense. But gratitude between friends is not convertible into a specific dollar amount which he can be said to owe you as a financial matter. No true friend is going to quibble, in dollar terms, as to whether his best friend has been grateful enough in the natural exchange of favors which occurs among friends.

It is possible for friends to do each other injustice in mutuum lending (Question 49); even to have a falling out and to no longer be friends. Suppose you lent your best friend the wheat, he now has enough to repay you the amount that he borrowed, but he refuses to do so. In that case he is not being a good friend; and he really does owe you back the amount of wheat that he borrowed, as a matter of justice. His refusal to pay it back now that he can is a kind of theft or fraud. You truly are entitled to return of the principal amount, and the falling out of your friendship does not remove that entitlement in justice.

A lender of money by reason of making a loan can in two ways expect a recompense from a borrower, whether in money or praise or service. A lender of money can expect a recompense from a borrower in one way as if the recompense is a debt by reason of a tacit or express obligation. And then the lender illicitly expects any such recompense. A lender of money can expect a recompense from a borrower in a second way as if the recompense is gratuitous and offered without obligation, not as if a debt. And then the lender can licitly expect a recompense from the borrower, as one who does a service for another trusts that the other will in the spirit of friendship return the favor.

[…]

A lender can in two ways incur the loss of something already possessed. The lender incurs loss in one way because the borrower does not return the [amount of] money lent at the specified date, and then the borrower is obliged to pay compensation. The lender incurs loss in a second way when the borrower returns the [amount of] money lent within the specified time, and then the borrower is not obliged to pay compensation, since the lender ought to have taken precautions against loss to self, and the borrower ought not incur loss regarding the lender’s stupidity.

— St. Thomas Aquinas, De Malo, Oxford University Press, translated by Brian Davies and Richard Regan.

None of this makes mutuum lending morally licit as a wealth preservation investment strategy. There are plenty of ways to look after your own property financially: many different kinds of contracts for preserving and growing wealth are morally permissible.

But the security on those contracts must be property, not personal IOU’s.  Otherwise you are unjustly profiting financially from arbitrage over friendship.

56) Isn’t criticism of usury just veiled anti-semitism?

That certain vices have become culturally associated with certain ethnic groups doesn’t turn vice into virtue. The fact that the Irish are (fairly or unfairly) associated with drunkenness doesn’t make sobriety a vice or turn drunkenness into a virtue, nor does it mean that any criticism of drunkenness is anti-Irish. The rhetoric of guilt by association may produce colorful emotions and conversations, but it probably obscures more than it reveals.

Several things may be noteworthy though, at least in terms of characterizing the association and the guilt — to the best of my knowledge, and with all the usual caveats, this being well outside the domain of what I consider substantively pertinent to the basic moral question.

First, the fact that diaspora Jews in Christian lands gravitated toward usury as a profession is as much Christians’ fault as Jews’ fault. The attitude was that Jews were heathens and were going to Hell anyway, so the Christian sovereign’s law actually treated Jews more leniently than it treated Christians. Christians were prohibited from engaging in usury for the sake of their own souls; but Jews were damned anyway so why not let them do what they want?  A libertine approach to the laws that applied to Jews was really a form of cruelty or at best indifference toward them, as is true of libertine legalism in general. Libertine legalism inherently expresses indifference about the good of persons subject to the law, and has had the detrimental effect of encouraging the growth of anti-Christian forces within Christian society over the long term.

Second, the situation illustrates the lie built into ‘libertine’ law in the first place, that is, the incoherence of the notion of the sovereign ‘leaving people alone’ to make whatever sorts of contracts they want to make. Without the Christian sovereign’s enforcement, usurious contracts would have no teeth. To the extent that the Christian sovereign enforced usurious contracts he formally cooperated with them: you can’t enforce contract terms without intending them. So professional usury on the part of Jews was really a partnership between Jews and their Christian enforcers.  James I of Aragon (for example) couldn’t pass and enforce laws collecting up to 20% usury on behalf of Jewish moneylenders without intending the usurious lending in question. Law and law enforcement which “allow” people to sell themselves into slavery is not the passive thing that the question-begging term “allow” suggests.

Third, there were in fact significant non-Jewish tribes or dynasties associated with professional usury, notably the Lombards. As is the case in many high IQ professions Jews were doubtless overrepresented in part simply because, as a group, they have greater intelligence than most of the rest of the bell curve. But it isn’t as if Jews had a monopoly on the particular sin in question.

Certainly in the present age usury is not a “Jewish” thing.  Usury is an “everyone” thing, so pervasive that most people have no idea what it even means.  Usury is so prevalent that it has vanished into the background and become like the air we breathe. This has moral, practical, and economic consequences; and whatever one thinks of the historical, political, and moral situation it is worth actually understanding the subject before making judgments about it.

57) This all sounds so complicated, and use of the terms “loan” and “interest” to mean so many different things is confusing. Is there a straightforward way to tell if a simple loan for interest is usury?

In order to determine if a simple “loan for interest” 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 (as agreed by the contract parties), it is not usury.

If (1) is true and either (2) or (3) are false, it is usury.

58) Is there something that the government can do about usury without creating a whole bunch of complicated regulations?

Certainly.  One straw proposal for a Constitutional amendment to effectively outlaw usury in the United States required eleven words:

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

Like all verbal statements this is subject to interpretation, and various potential interpretive loopholes could be made less plausible using a few more words.  For example the following is a bit more precise:

No government or arbiter shall enforce non-criminal deficiency judgements against individuals in any contract.”

People will always try to find ways around the law, of course.  Gangs and mobsters for example illegally enforce their own extralegal agreements.  But without government endorsement and enforcement usury would be much less pervasive.

 


1. As with just about any term, “non recourse” can be interpreted a number of ways, generally as a cluster of related but sometimes incompatible meanings. I am not attempting here to make my usage conform to some particular legal jurisdiction or what have you – that is entirely irrelevant to understanding what usury is and is not. The way it is used throughout this FAQ is that in a non recourse contract it is not a violation of the contract terms for the ‘borrower’ to stop making payments on the loan, leaving the ‘lender’ to recover whatever he is entitled to recover from the collateral and the collateral alone. The ‘borrower’ has not violated the terms of the contract in this case, by definition: the agreement was that if the borrower stops paying, he is quit of all obligation under the contract. The lender gets to foreclose on the collateral to recover his entitlements and costs, and the lender’s recourse is to the collateral alone. If the collateral is worth more than the loan balance and any actual costs then the excess is due back to the borrower.

If the contract terms say that it is a violation of the contract for the borrower to stop paying and turn the collateral over to the lender, then the loan is a mutuum and any interest charged is usury. The lender may be limited to recovering his principal and interest from the collateral legally, but the borrower is understood to have violated the terms.  This is not a ‘non recourse’ loan the way the term is used throughout this FAQ, though other people in other places may refer to this understanding as ‘non recourse’.

In short, there are (at least) two ways of understanding recourse. In the first way recourse refers to what the various parties to the contract are entitled to in the scenarios covered by the contract.  It answers questions like “who gets what if the borrower stops making payments”, as a matter of what the agreement between the parties itself requires. In the second way, recourse refers to legal remedies under the positive law when someone breaks the agreement. “Recourse” in this second sense is not a part of what is agreed by the parties in the contract itself.  This FAQ uses the term ‘recourse’ in the first sense, to refer to the terms of the contract itself.

This understanding comes from the Magisterium of the Church, not from any modern financial theory or practice. “Non recourse loan” just happens to be the closest term in common use these days capable of carrying the concept, and we are looking at the intrinsic nature of different kinds of contracts in order to understand usury.

As a practical matter, the fact that the borrower is entitled under the contract terms to ‘walk away’ means that it is in the lender’s best interests to make sure that the value of the collateral significantly exceeds the amount loaned.  The lender – on this understanding of a non recourse loan – is taking a property interest in the collateral, and if the value of that property drops below the loan balance the borrower is perfectly within his rights, under the terms of the contract, to walk away and leave the lender holding the property.

§ 292 Responses to Usury FAQ, or, money on the Pill

  • Magus Janus says:

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

    No. For example, 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.”

    So I take it burning gasoline is destroying economic value. Of course, then you have to resort with “well, that’s not like what I meant, I meant burning for its own sake not to further some other economic goal.”

    And what pray tell is said other economic goal? Something consumers value? So the value is inherently subjective to the wants of consumers. If a crowd of consumers is willing to pay to watch a house burn down and pays for it as some form of modern art, then yes that house is fulfilling an economic goal and there is value in burning it down.

    It seems to me you are conflating the epistemological issue of subjective valuation/imputation of value from the marginalists with some form of moral relativity of ultimate ends, which is not correct. We can argue about the ultimate ends valued by consumers and their lack of worth/merit/etc and “value” in a moral sense (pornography/drugs/etc), and we can talk about economic valuation from a strict “calculation” standpoint as in a Graham analysis (fundamental analysis of a company to predict it’s “worth” down the line), but the ultimate derivation of relative prices and economic “value” from subjective expressed desires of consumers seems fairly obvious to me.

    You seem very confused on the issue (possibly semantics is throwing you off) and I think it’s taking down some incorrect paths. What’s more disturbing is your certainty in your error.

  • Zippy says:

    Magus Janus:
    The comprehensive subjectivity of economic value always seems obvious to moderns, who see man and his preferences as the measure of all things. You demonstrate my point in asserting that any contrary proposal – any suggestion that economic value is not entirely and comprehensively subjective – is incomprehensible and ignorant.

  • CJ says:

    I’ll play along. Isn’t the difference that the economic value of gasoline is in its use as a fuel (that is, its combustibility), whereas burning a house destroys its value as a dwelling?

  • jf12 says:

    I agree usury is always morally wrong. One question I have is who gets to calculate “extrinsic titles”.

  • jf12 says:

    re: Aquinas’ point about fictitious value.

    The problem is the second-order valuation of money. Money is already the representation of subjective economic valuation, and is therefore usable in exchange for the use of, or the rent of, something of value (as you called it, something “ontologically real”). To charge extra for the use of money defeats its original purpose of valuation; if it costs you $110 to use $100 for something “ontologically real”, then that something costs $110 not $100.

  • How do you arrive at the conclusion that lending at interest to an institution is inherently non-usurious? Wouldn’t the same rule regarding collateral apply?

    For example, suppose an institution’s assets are entirely liquid, wouldn’t it be usurious to charge interest on money lent to such an institution, since the loan would not be attached to rentable collateral?

  • GK Chesterton says:

    Excellent article. I have to admit I still have mixed feelings on this, but as I’ve read more about the Church’s position on usury they have become less mixed.

  • Zippy says:

    ArkansasReactionary:

    Wouldn’t the same rule regarding collateral apply?

    Yes. Institutional assets (whatever they happen to be) are the collateral, and are where the lender’s rights terminate.

    Consider what happens in a case of default or liquidation. The lender has recourse to the actual assets of the institution only – and not to individuals in an open-ended sense – to recover principal and interest.

    Institutional debt is really (like all licit kinds of monetary investment) a form of equity, what Aquinas called a “kind of society” — partnership in the institutions’s assets — ownership of a particular chunk of the cap table, senior in recovery of principal and interest but without the upside of common stock. Institutional debt is not mutuum. If it were a mutuum we would be able to identify the individuals who are personally on the hook for repayment of principal in full in the event that the value of the institution’s assets went to zero.

  • But is it not necessary that the collateral be illiquid? As an example:

    Say I own a house worth two hundred thousand dollars, and I mortgage if to obtain one hundred thousand dollars from the bank. The bank then has half ownership of the house, and therefore can charge me interest as rent for my use of the part of the house that the bank owns. OTOH, I can’t (in the sense a just banker would not accept it) simply put up another hundred thousand dollars as collateral for the loan, subject to interest, because unlike a house, the ownership and use of money are inseparable.

    It seems that by what you’re saying, this would be licit as long as I designated the hundred thousand dollars a corporation. The effect of this of course, would be that usurious loans could be rendered non-usurious by simply placing an upper limit on the amount of interest that could be charged.

    Note that if it was actually a matter of buying partial ownership, then in the event of the institution’s loss of assets, the amount one was “owed” would decrease proportionately.

  • The Anti-Gnostic says:

    If you want an effective ban on usury, then you need sound money. Of course, that would dry up that seemingly bottomless well of fiat money for government to ladle out to Catholic charities.

  • The Anti-Gnostic says:

    Which, I forgot to add, is probably why you don’t hear Catholic hierarchs talking about usury.

  • Zippy says:

    ArkansasReactionary:

    But is it not necessary that the collateral be illiquid?

    Not at all. Why would it be?

    The effect of [putting up $100K in cash as collateral on a $100K nonrecourse loan] of course, would be that usurious loans could be rendered non-usurious by simply placing an upper limit on the amount of interest that could be charged.

    Unless I misunderstood that it makes no sense. The effective interest rate is zero.

    Note that if it was actually a matter of buying partial ownership, then in the event of the institution’s loss of assets, the amount one was “owed” would decrease proportionately.

    Perhaps you are assuming that every kind of security in the cap table must have the same rights. That isn’t the case. Common stock, various classes of preferred stock, and various classes of debt all have different rights, as per their subscription agreements. I talked about that a little in this post.

  • Zippy says:

    The Anti-Gnostic:

    If you want an effective ban on usury, then you need sound money.

    No you don’t. All you need is for the government to decline to enforce deficiency judgments.

    Though I doubt that you and I agree on the subject of “sound money”, not because I know anything about your views in particular but because I tend to disagree with people who use the term “sound money,” and the like, in general.

  • The Anti-Gnostic says:

    Read the word “effective.” You can pass all the laws you want; if money is fiat, it won’t get lent without interest. So you will have created a huge black market in usurious loans, just like people used to go to loan sharks before we liberalized pawn/title and payday loans. I’m not saying such transactions are moral, just that you’re ban on usury will be effective-so far as is possible-only when you’ve got money that the government can’t depreciate at will. Again though, this would be a serious constraint on a lot of social democratic schemes from which Catholic charities derive a great deal of monetary benefit.

  • Zippy says:

    The Anti-Gnostic:

    You can lecture me to read all you want without changing the fact that you have not asserted a position that is even right enough to be coherently wrong. Getting rid of usury is trivial as a matter of legal formality: have the government decline to enforce deficiency judgments.

    That may not solve every economic problem ever, but it would in fact eliminate usury.

    As for goldbug theories of currency, there are plenty of places other than here where people can trumpet their ignorance about currency. This thread is about usury and common questions which actually pertain to it specifically.

  • The Anti-Gnostic says:

    A deficiency judgment will result whether you’re failing to pay back principal or interest. I’m not sure what you’re on about here.

    Wouldn’t you agree that part of public morality is reducing the incentives to immorality? If money can be devalued by the government at will, lenders will naturally insist on an ‘inflation factor.’ If a dollar today is worth roughly what a dollar will be worth five years from now (when the loan is ‘jubileed’ out), then that incentivizes zero interest.

  • Zippy says:

    The Anti-Gnostic:

    I’m not sure what you’re on about here.

    Clearly. You might start by boning up on nonrecourse debt and full recourse debt, followed by “deficiency judgment” as a vocabulary word.

  • Not at all. Why would it be?

    Because to charge interest on collateral-backed up loan is licit as a form of rent, would you agree? But you can’t rent money.

    Unless I misunderstood that it makes no sense. The effective interest rate is zero.

    You misunderstood. If I create a corporation with one hundred thousand dollars in liquid assets (and no illiquid assets), and then the corporation takes out an interest bearing loan of one hundred thousand dollars, it’s total assets will be two hundred thousand dollars, with one hundred thousand in debt. Yet it will be possible for the debt to increase to the whole value of the corporation. If this arrangement is licit, then it would also be licit for a lender to have the borrower incorporate all his assets and make them collateral against the loan, yet clearly this is not so.

    Perhaps you are assuming that every kind of security in the cap table must have the same rights. That isn’t the case. Common stock, various classes of preferred stock, and various classes of debt all have different rights, as per their subscription agreements. I talked about that a little in this post.

    Preferred stock is, from what I can tell, partially a non-interest-bearing loan against the corporation (this being the principal which must be payed off preferentially), and partially ownership of the corporation. In any case, it would be quite a different matter if in addition to the principal, they also had a preferential right to interest.

  • The Anti-Gnostic says:

    A ‘deficiency judgment’ results when the proceeds from the sale of the collateral are less than the unpaid balance of the loan. This can result whether the principal is lent at 0% or at 10%. That’s why I’m confused as to why you think deficiency judgments per se are related to the interest charged. Can you explain?

  • Zippy says:

    AR:

    Because to charge interest on collateral-backed up loan is licit as a form of rent, would you agree? But you can’t rent money.

    Ah, I see the source of confusion. In Question 25 I gave an example of a loan-for-consumption which was not usury. The reason it was not usury is because it involved selling (and renting back) a portion of an illiquid asset in exchange for cash.

    It would not make any sense to use liquid assets (or cash) as security on a nonrecourse loan for consumption though. You would just use the cash you already have.

    More generally though, investment partnerships can take all sorts of forms without being usurious. (Again that does not imply that all non-usurious contracts are inherently just). If it is a mutuum, you will be able to identify the person or persons by name who are on the hook to repay the principal amount even if all of the value in collateral is exhausted.

  • Zippy says:

    AR:

    Preferred stock is, from what I can tell, partially a non-interest-bearing loan against the corporation (this being the principal which must be payed off preferentially), and partially ownership of the corporation. In any case, it would be quite a different matter if in addition to the principal, they also had a preferential right to interest.

    Preferred shares frequently get principal and a fixed return (“interest”) before converting to common and participating in the equity pie. They often (as “participating preferred”) convert one share of preferred into multiple shares of common.

    More generally, if you can think of an arrangement of rights in a cap table someone has tried it, and it isn’t usury.

    Because a cap table represents claims on the assets of the organization not on individuals.

  • Yet an interest-bearing loan against a corporation without illiquid assets would be effectively equivalent to using money as collateral.

    To be concise let me formulate two objections:

    1. If a borrower incorporated all of his assets, and then used this corporation to obtain a loan, which was interest-bearing, would the creditor be guilty of usury?

    2. Why are you treating legal and natural persons as different in this regard?

  • I would argue that if a person obtains a right to increase simply by having invested his money, independent of the outcome and not as usufruct, then that is usurious.

    P.S. how do you quote in this thread?

  • Zippy says:

    AR:
    I don’t think you’ve thought your own scenario through. That is probably partly my fault because of Question 25, which suggested the possibility of a ‘loophole’ to you in the first place. But there is no loophole.

    But there is a reason that nobody sane would use cash as collateral in order to take out a loan for different cash, and why nobody would lend cash against cash-as-collateral. The cash you already have is completely fungible with the cash you would borrow: like two electrons, there is no way to tell the difference.

    2. Why are you treating legal and natural persons as different in this regard?

    A corporation (or any ‘kind of society’ or partnership) can be liquidated, and ceases to exist once it is liquidated. Real people can’t be (and mustn’t be) liquidated.

  • Zippy says:

    AR:

    I would argue that if a person obtains a right to increase simply by having invested his money, independent of the outcome and not as usufruct, then that is usurious.

    It is hard to say precisely what you mean. Nonrecourse loans against something real that the borrower owns, as in Q25, are no more usurious than selling shares in a house (what the “borrower” does) or renting out (a share of) a house (what the “lender” does).

  • My objection isn’t based on Q25.

    Let me propose an example to demonstrate the point. Suppose that a man had nine hundred dollars. To enter some business venture, he needs one thousand dollars. The result of the venture will either be the gain or the loss of one hundred dollars.

    There are several ways to loan the man a hundred dollars that we would both agree would be moral. A simple loan could be given, whereby the man was bound to repay one hundred dollars regardless of the outcome. Or a partnership could be created, whereby the lender owns one tenth of the partnership, in which case he has the right to one tenth the final amount.

    However, it could also be done so that regardless of the outcome, the lender had the right to be payed one hundred and ten dollars. I would say this is usury, however you would seem to be saying it is not, since it is not general recourse against the person.

    We both agree that usury involves selling that which is not ontologically real. So in this last case, what ontologically real thing is being given to the borrower that justifies the lender receiving the extra ten dollars?

  • Also, in Q25, it is a case of usufruct, the rental of a thing capable of being rented.

  • Zippy says:

    AR:
    I can think of quite a few possible outcomes besides the specific ones you propose, if your scenario is a real scenario.

    And no, if it isn’t a mutuum it isn’t usury.

  • If you are denying that such would be usury, can you specify what ontologically real thing justifies the interest?

  • Zippy says:

    How can I specify what is ontologically real in an artificially constrained unreal scenario?

  • The scenario is possible. So if it happened, what thing in it, which would be ontologically real if the scenario were to occur, would justify the interest?

  • Zippy says:

    AR:

    The scenario is possible.

    No, it really isn’t. A description of a real situation does not contain statements like “The result of the venture will either be the gain or the loss of one hundred dollars.”

  • Then say that the result in very likely to be either the gain or the loss of one hundred dollars. Will you then answer the question?

  • Ed says:

    Is a government bond usury?
    I would say yes. The government usually goes after real persons when it raises tax revenues, part of which are used in the payment of interest (although it also pays interest by issuing new bonds or by selling real assets).

    Am I wrong?

  • Zippy says:

    Ed:
    I explained why sovereign debt is not usury here.

    ArkansasReactionary:
    Your questions – to the extent they have been coherent and have reflected a possible reality – have already been answered multiple times; you just don’t like the answers, apparently, and I’m still not convinced that you fully understand even your own kabuki scenario. When investors pool their ontologically real resources into a ‘kind of society’, those pooled resources are by definition ontologically real and finite. They could choose to divvy those resources up randomly and it still wouldn’t be usury.

    Furthermore, as I’ve said many times now, just because a contract isn’t usury that doesn’t make it automatically morally licit. But if it isn’t a mutuum loan for profitable interest, it isn’t usury. If it is a mutuum loan, you can identify the specific individual(s) who are on the hook qua individual for return of principal, even if the collateral (including those pooled resources just discussed) is destroyed (by act of God, etc).

  • 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.

    This is imho quite manipulative – there are no new $30, they each have, aparat from that entitlement for additional $10, a new liability of $10.

    I think that you should explain what exactly is profitable interest. Because I don’t see any practical difference between e.g. interest 0.1% above and bellow the inflation rate. Also there is interesting problem, that the same interest from two people may be usurious only in one case if one of the lenders has higher expenses connected to lending money, which makes it not profitable for him.

    What are your thoughts on this?
    (also excuse my english please)

  • Zippy,

    When St. Thomas Aquinas discussed usury and the difference between those things for which ownership and use could be sold separately, versus those things the use and ownership of which were inseparable, he didn’t speak of whether the debtor is on the hook for the principle or not, he spoke of whether the thing n question could bear usufruct.

    Now please answer a prior question of mine, could a man offer all that he owned as collateral for an interest-bearing loan? If you’re going to claim that that it would be unreasonable to put up money as collateral for a loan (which does not affect whether or not the creditor would be guilty of usury), a common example would be of someone who had money, but not on hand.

  • Zippy says:

    Pilgrim:

    I think that you should explain what exactly is profitable interest.

    Any amount at all greater than the principal. A low interest rate (even 0.1%) is still usury. It is always morally wrong to charge interest on a mutuum (full recourse) loan, period. If you just accept that, there is no need to read the rest of my comment. The rest of this comment is for those who insist on arguing anyway. Usury is simple to understand and always morally wrong.

    An agreement to lend someone money, where it is understood that he must return the full amount at some point in the future even if (say) what is purchased with the money is destroyed or consumed, must never be made in the pursuit of profit. Ever. Period.

    Also there is interesting problem, that the same interest from two people may be usurious only in one case if one of the lenders has higher expenses connected to lending money, which makes it not profitable for him.

    Two different situations are being conflated here.

    It is never morally licit to ‘make a business’ of mutuum loans. Period. Doesn’t matter if it is a good business or bad, any more than it matters if robbery is good business or bad: it isn’t morally licit, period. All interest rates above zero are usury.

    “Extrinsic titles” only arise (in my understanding) in lending for charity, so the whole subject of extrinsic titles only arises outside the context of a business venture. Lending for charity is a completely different kind of thing from lending for business, and conflating the two has long been a trick employed by usurers and their ‘pastoral’ enablers.

    We are talking about a rare and exceptional situation here being used to cast confusion over what is otherwise quite clear and straightforward. This is similar to, in the middle of a discussion of contraception, raising the issue of whether it is morally licit for a rape victim to ask the rapist to use a condom. That is a legitimate discussion, but sending the discussion down that rat hole is more often than not a distraction intended to cast doubt on the core principle.

    The key is that unless you are a Franciscan monk living under a vow of poverty lending money to the poor, none of the supposed exceptions or complications apply to you, ever. It is always morally wrong to charge interest – any interest – on a full-recourse loan, period.

    This is way tl;dr, but “extrinsic titles” to compensation above the actual loan amount arise from the following kind of scenario:

    Suppose the Franciscans lend Homeless Bob $1000. They also incur additional costs, because they have to employ Bookeeper Betty to keep track of their finances.

    Suppose Homeless Bob stays homeless and destitute despite their help, and cannot pay them back. The Franciscans are not going to pursue Homeless Bob for either principal or costs incurred. They write off the loan.

    Suppose Homeless Bob gets back on his feet and becomes a baker with a successful business. The Franciscans ask Homeless Bob to pay back what he borrowed, so that they can continue to lend to people in desperate need.

    If Homeless Bob is a good person, he pays back the principal. He probably also makes a donation above and beyond the principal amount out of simple gratitude, and becomes a patron of the Franciscans for as long as his bakery business remains successful.

    If Homeless Bob is a jackass, the Franciscans might have to get a bill collector or the magistrate involved to recover the principal amount of the money they lent to No-Longer-Homeless Bob. In addition to the principal, they might be entitled to actual costs – a portion of Bookeeper Betty’s salary and the costs of hiring the collection agency, for example. These are ‘extrinsic titles’. These additional costs are not ‘profitable interest’, they are just titles which arise from the Franciscans’ charitable lending activity, and they (really the poor they serve) are entitled to compensation from No-Longer-Homeless Bob for those costs in addition to the principal amount of the loan.

    Now, here is the point: mutuum loans are only ever morally licit as charity, and the nuts and bolts of different scenarios in charitable lending have been used to confuse everyone about usury.

    But usury is not complicated. It is always morally wrong to charge interest on a mutuum loan, period, finit. That’s all you really need to know, 99.99% of the time. Everything else is sound and fury from economic liberals, doing what liberals do in general in an attempt to distract you from that fact that charging interest on a full recourse loan as a binding business agreement is always morally wrong.

  • Zippy says:

    AR:
    Perhaps if you are unwilling to listen to me, you might be willing to listen to the Magisterium.

  • Zippy,

    I’m not talking about interest-bearing loans backed up by illiquid collateral, which is what Pope Callistus II was talking about.

    I’m addressing your assertion that lending at interest to a corporation is inherently non-usurious.

    Now please answer a prior question of mine, could a man offer all that he owned as collateral for an interest-bearing loan? If you’re going to claim that that it would be unreasonable to put up money as collateral for a loan (which does not affect whether or not the creditor would be guilty of usury), a common example would be of someone who had money, but not on hand.

  • Zippy says:

    AR:

    I’m addressing your assertion that lending at interest to a corporation is inherently non-usurious.

    No you aren’t. If you were actually addressing my claim, you would be able to point out precisely who is personally on the hook for return of the principal amount of the (nonrecourse) loan to the lender. You would be able to tell me precisely who has personally borrowed the money and owes the principal amount back to the lender.

    But because it is a nonrecourse loan – it is not a mutuum – you can’t do that, by definition.

    Usury is a funny topic. I always end up encountering two sorts of people. One sort wants usury to be a medieval relic, a decorative bit of doctrine that has no real effect on anyone. The other sort wants everything that they object to economically to be usury by definition, to give themselves a cudgel they can use to further their own economic agenda.

    But usury is and always has been quite simple. Usury is charging interest, any interest, on mutuum (full recourse) loans. Usury is always morally wrong, and by the same token usury does not encompass all possible ways of doing moral wrong economically.

  • Zippy,

    I’m rejecting your premise that a specific natural person needs to have plenary liability for an interest-bearing loan for it to be usury.

    According to Aquinas, usury is the sale of the use of money apart from the ownership of money. Restricting, while not abolishing, the ability of a creditor to charge extra for the time the debt was owed, does not make it non-usurious.

    The other sort wants everything that they object to economically to be usury by definition

    Straw man

  • Zippy says:

    AR:

    I’m rejecting your premise that a specific natural person needs to have plenary liability for an interest-bearing loan for it to be usury.

    That’s just a fancy pants way of saying “I can’t actually identify the borrower, but I still insist that it is a mutuum.”

    You really shouldn’t pretend to speak for Aquinas. Here he is affirming that investment in a corporate enterprise is not usury:

    He who lends money transfers the ownership of the money to the borrower. Hence the borrower holds the money at his own risk and is bound to pay it all back: wherefore the lender must not exact more. On the other hand he that entrusts his money to a merchant or craftsman so as to form a kind of society, does not transfer the ownership of his money to them, for it remains his, so that at his risk the merchant speculates with it, or the craftsman uses it for his craft, and consequently he may lawfully demand as something belonging to him, part of the profits derived from his money.

  • As Aquinas notes, a person so investing incurs risk, such that if the merchant loses money, the amount the investor is entitled to is reduced.

    In the case of a loan whereby the full amount of the principal is due back regardless of the outcome of the investment, it is usurious to charge interest on the loan, as Aquinas notes.

    Can you show where Aquinas ever references collateral as justifying interest simply because it is collateral and not because it can bear usufruct?

  • Zippy says:

    AR:

    In the case of a loan whereby the full amount of the principal is due back regardless of the outcome of the investment

    There you go again, substituting a mind game for reality. In what universe is there no risk in investing in a corporation? In what universe does a corporate bond pay out “regardless of the outcome of the investment?” In what universe is there no risk in investing in any real ontological assets at all? In what universe is any nonrecourse loan risk free?

    Really, AR, stop it. You are taking up far too much space in this thread on a subject you clearly don’t understand, which makes the thread unreadable to anyone actually interested in the subject.

  • Of course it’s always possible for something to go wrong and for a default to occur. That doesn’t contradict what I said about what a person would be owed.

    Are you forbidding further discussion of this in this thread?

  • Zippy says:

    AR:

    Of course it’s always possible for something to go wrong and for a default to occur. That doesn’t contradict what I said about what a person would be owed.

    Yes it does. “It’s always possible for something to go wrong…” means that you acknowledge the presence of risk of loss in the investment. If the corporation goes bankrupt, bondholders have nobody to go after to recover principal: just the remaining assets of the corporation, whatever they happen to be. At the same time you propose in your mind-game scenario that in the case of corporate bonds “the full amount of the principal is due back [to the investor] regardless of the outcome of the investment“. (Emphasis mine).

    Those statements cannot both be true. The second one is in fact not true, at all, for nonrecourse loans of any sort, including corporate bonds.

    I’m not forbidding anyone from saying something coherent; but as far as I can tell your whole line of discussion here is incoherent noise cluttering up the thread, and it is getting tedious.

  • Lydia says:

    I recently learned (I never knew this when I was actually renting an apartment) that if you default on a lease agreement the landlord can sue you personally for the whole of the rest of the rent for the lease period–a year, for example. You can try to defend yourself by saying that the rental property was dangerous or that you were forced to leave for some other reason that violated the lease contract, but if you can’t support that, you will be on the hook for the whole rent. This seems very “person-recourse” to me, but I admit that I am having trouble seeing it as a loan the landlord makes. Perhaps it is, however: Could we say that the tenant is functionally borrowing the rent for the entire year and paying it back in installments?

    This may be an attempt to shoehorn this sort of thing into the usury category, but it struck me that there were some resemblances. The landlord really holds all the cards, and it is usually not possible simply to forfeit earnest money or a deposit and be done with it. They can come after the tenant personally for the whole.

  • Zippy,

    It is possible for the corporation to lose money, while still not being bankrupt, and thus able to repay the debt with interest. Thus lending money to a corporation is not risk taking in the same way as buying partial ownership of the corporation.

    Moreover, the argument that charging interest is justified because of the risk of the corporation going bankrupt, would also allow charging interest on a loan to a natural person, since it is possible that said person could go bankrupt and the debt thus be absolved. Of course in both cases the interest would actually be unjustified, since it is not licit to charge someone for the possibility that something bad could (past tense) have happened.

  • DrBill says:

    It’s interesting that there is no question 3) What is money? Unless that question has an exotic answer, I don’t see how a ban on usury can do much.

    I get out my Citibank-OJ card at the restaurant. The waiter brings me the paper to sign. On the back, it says that Citibank will deliver to me 1 frozen concentrated orange juice contract, delivery in a month and I agree to deliver to it 1.4 FCOJ contracts, delivery in 13 months, in twelve months. Furthermore, a second contract on the same paper obliges my agent to immediately convert the FCOJ contract to cash and pay the restaurant. Twelve months later, I send a payment to my agent who uses it to satisfy my obligation to Citibank—i.e. to buy 1.4 FCOJ contracts for delivery in a month and deliver them to Citibank. Nobody pledges any assets. If I don’t perform, Citibank can sue me and win.

    Usury? There is no money involved in my contract with Citibank.

  • Zippy says:

    AR:

    Thus lending money to a corporation is not risk taking in the same way as buying partial ownership of the corporation.

    So what? Different partners in a venture have carried different kinds of risk since time immemorial without anyone confusing cap table structure with usury. You are basically back to arguing that the existence of different kinds of security are tantamount to usury. The medievals were not nearly so financially illiterate as that.

  • Zippy says:

    DrBill:

    Unless that question has an exotic answer, I don’t see how a ban on usury can do much.

    I find that contention puzzling every time someone raises it. If refusing to enforce full recourse debt contracts would have no effect then why do full recourse debt contracts even exist?

  • Zippy says:

    (FWIW I do discuss the question “what is money” in this post and others.)

  • Suppose I create a corporation and put a dollar into it. Suppose you then put a dollar into it. Then the corporation does nothing. How would it not be usurious for you to claim at some point in the future that you had the right to receive the whole two dollars simply because you invested a dollar in the corporation?

  • Zippy says:

    AR:
    It is because of the pink unicorn dust.

  • So you can’t answer the question?

  • Zippy says:

    Fantasy meets counter fantasy, since the discussion is unmoored from the actual reality of corporate bonds. Unicorn dust wins.

  • There was no fantasy in my comments.

  • Zippy says:

    Lydia:

    This may be an attempt to shoehorn this sort of thing into the usury category, but it struck me that there were some resemblances.

    A lease agreement with recourse to the person of the renter isn’t usury strictly speaking, but you are right that it is similar, precisely inasmuch as it is a full-recourse contract.

    The scholastics were very ‘ontological’ in their approach to contracts, as opposed to semantic. That someone used the terms “loan” and “interest” for a contract didn’t matter: what mattered was the intrinsic nature of the contract. So what exactly is the ontic difference between a full-recourse lease and a full-recourse mortgage?

    I guess the main difference is whether or not a buy-out of equity is part of the contract. The renter really doesn’t have any property interest in the apartment and is not accumulating a property interest.

    The owner is not selling something which does not exist to the renter, because the renter in fact does receive the use of the property. One factor might be whether the renter is or is not permitted to sublet the property, and what happens if he can’t get a new tenant to pay the full rent (say the market has changed). In that case the marginal difference between the new rent and the original does appear to represent an attempt by the owner to profit from what does not exist.

    So I think you may be on to something insmuch as a full-recourse lease is, like usury, an attempt to ‘lock in’ a profit and make it someone else’s problem to produce that profit no matter what happens to the ontologically real assets.

  • Zippy says:

    I wrote:

    So I think you may be on to something insmuch as a full-recourse lease is, like usury, an attempt to ‘lock in’ a profit and make it someone else’s problem to produce that profit no matter what happens to the ontologically real assets.

    An important caveat (and what appears to have sent ArkansasReactionary off the rails into fantasy land) is that there is nothing wrong with investors having different goals. Some investors want more of a sure thing with less upside; other investors are willing to take bigger risks with a bigger upside. There isn’t anything wrong with these kinds of investors pooling their resources into a business venture with a non-uniform capital structure including nonrecourse debt (bonds) for the risk averse and equity for the risk takers.

    Someone who buys into the notion that there is something usurious about a non-uniform capital structure has conceded the progressive critique (Question 18 in the OP) without realizing it.

    Low risk investment returns are not usury. It becomes usury when the lender insists on personal guarantees from the borrower no matter what happens to the pooled assets of the business venture.

  • CJ says:

    Zippy,

    Are you familiar with Karl Denninger’s “One Dollar of Capital” proposal? Basically, he would require banks to keep cash reserves equal to the balance of outstanding unsecured loans. For collateralized loans, the bank would be required to mark the asset to market and acquire cash to cover the difference if the loan is upside down.

    While I’m sure such a regulation is firmly outside the Overton Window, it seems that it would facilitate non-usurious lending, as the bank would be required to self-insure against the risk of default.

  • Zippy says:

    CJ:
    It isn’t an unreasonable proposal in terms of keeping banks solvent, but the unsecured loans would still be usurious. Rather like contraception as a way to keep fornication more “safe”.

  • CJ says:

    Zippy, gotcha. What I meant was that in a regime where usury was already illegal, ODoC might keep the lending wheels turning because banks would be protected against the risks of lending, even though they wouldn’t be able to offload those risks onto the borrower.

  • Zippy says:

    CJ:
    It does make a kind of sense in the context of collateralized loans, inasmuch as it would encourage banks to lend with reasonable loan-to-value ratios just to avoid having to “add in” their own “in house” collateral for undercapitalized assets.

    But this probably would be a rare situation if usurious contracts were never enforced. Think about it: a rational borrower holding underwater assets would just walk away instead of making more payments. So getting rid of usury should all by itself solve the problem of banks lending when they shouldn’t, or lending more than they should (that is, with too small a down payment), even just from a practical solvency standpoint.

    The chaste don’t need contraception.

  • DrBill says:

    I find that contention puzzling every time someone raises it. If refusing to enforce full recourse debt contracts would have no effect then why do full recourse debt contracts even exist?

    Because lenders like to get their money. So much so that if you get rid of full recourse debt contracts but leave in place other full recourse contracts, they will likely strike contracts as similar to the unenforceable ones as possible. To, like, get their money.

    Your turn. Is the situation I described usurious or not?

  • Zippy says:

    DrBill writes:

    It’s interesting that there is no question 3) What is money? Unless that question has an exotic answer, I don’t see how a ban on usury can do much.

    I replied:

    I find that contention puzzling every time someone raises it. If refusing to enforce full recourse debt contracts would have no effect then why do full recourse debt contracts even exist?

    DrBill writes:

    Because lenders like to get their money. So much so that if you get rid of full recourse debt contracts but leave in place other full recourse contracts, they will likely strike contracts as similar to the unenforceable ones as possible. To, like, get their money.
    Your turn. Is the situation I described usurious or not?

    I have no idea what you are talking about. You said that if the government stops enforcing usurious contracts that would have no effect, and followed up with an imaginary scenario of some sort that I couldn’t make sense of. But I don’t have to make sense of the imaginary scenario to observe that if usurious contracts make no difference that leaves us with the puzzle of why they exist at all.

  • jf12 says:

    re: “It becomes usury when the lender insists on personal guarantees from the borrower” + “If risk qua risk were a financially transferrable asset, gamblers would be entitled to a profit.”

    Usury is the means by which the rich profit from the poor’s needs. Undoubtedly the insistence of such profit makes the rich *less* likely to lend to the poor, as is also evident in the lending paradox (i.e. “we will only approve a loan if you don’t need a loan”).

  • Zippy says:

    DrBill:

    Some days I am a little slower than others.

    If the question is “what if people try to use unsecured futures contracts or some other currency to weasel around the problem”, I gave an answer of sorts to that here.

    I think you raise a good point though that enforcing any full-recourse contracts – enforcing deficiency judgments in any contract whatsoever, whether labeled ‘debt’ or not – probably opens the door to de-facto usury. That means that my first formulation in this post works, but that the word “debt” needs to be removed from the second one because some nominalist will lawyer up and claim that his particular byzantine formulation isn’t ‘debt’.

    I’m still pondering how Lydia’s full-recourse apartment lease fits in here. But I’m not shy about concluding that no profit-producing full-recourse contracts whatsoever are morally licit.

  • jf12 says:

    re: full recourse apartment lease. Keep in mind that the lawsuit will also include legal expenses.

    The renter isn’t borrowing the rent money, the renter is borrowing the use of the apartment.

  • Zippy says:

    Added Q30 to the FAQ. Thanks DrBill.

  • Ita Scripta Est says:

    I think Cato defines it pretty well:

    Someone asked him: Quid est fenerare?

    Cato responded: Quid est occidere?

    Translated: what is lending at interest?

    Cato: What is murder?

  • Mike T says:

    From your first points, it appears to be morally licit to have a full recourse loan that has no profit motive behind it. For example, loaning money to a poor person and then when he refuses to repay, asset stripping what he has.

    I’m curious, is it morally licit to apply a theoretical interest rate wherein interest is compounded as a separate line item that is ordinarily not billed to the borrower and applied only when the borrower refuses to make good on a 0% interest loan?

  • Zippy says:

    Mike T:
    The answer to the first question is yes. A loan by definition is owed back to the lender, and if you have the assets to repay the loan and have agreed to do so, you should do so as a matter of justice.

    The answer to the second question is also a qualified yes. If the borrower is able to repay the loan and refuses, and this refusal causes financial damage to the lender, the lender is entitled in justice to compensation for any actual loss. In addition the sovereign may assess a punitive penalty because when borrowers refuse to pay what they owe – when they are able to do so – this also constitutes an attack on the common good.

  • Zippy says:

    Another way to look at it is to observe that refusal to pay back a loan that you are able to pay back is a form of theft or fraud (think of a neighbor who borrows your lawn mower and refuses to return it), so the wheels of justice move into the criminal domain.

  • jf12 says:

    re: “the lender is entitled in justice to compensation for any actual loss. In addition the sovereign may assess a punitive penalty” + “observe that refusal to pay back a loan that you are able to pay back is a form of theft or fraud”

    True, which seems to make the practice of charging interest to be a form of assessing a penalty, in essence punishing the poor for needing the money.

  • DrBill says:

    You’re welcome. The answer had to be either that the efficiency of modern finance makes attempts to avoid usury pointless or that attempts to avoid usury would require quite wide refusals to enforce contracts.

  • Zippy says:

    DrBill:

    The answer had to be either that the efficiency of modern finance makes attempts to avoid usury pointless or that attempts to avoid usury would require quite wide refusals to enforce contracts.

    The latter seems quite clear to me, which is why I proposed just declining to enforce deficiency judgments in general. Every enforceable contract makes its contingencies explicit in terms of ontologically real assets or is unenforceable.

    On the other hand, folks of a ‘distributist’ bent frequently seem to think that all sorts of reasonable and legitimate transactions are usury — basically anything other than a perfectly uniform capital structure.

    I suppose it is also worth pointing out that, even if there were significant difficulty enforcing a no-usury principle (because e.g. of financial ‘creativity’ in working around enforcement), that does not call into question the moral principle. There are all sorts of grave moral wrongs that do not have straightforward legal solutions.

    In the case of usury I think the moral principle really just is what it has always been straightforwardly understood to be: full-recourse lending for profitable interest. As with many moral questions folks are always trying to find ‘creative’ ways to do what they want anyway, but usually at bottom the moral issue itself isn’t hard to understand.

  • Mark Citadel says:

    This was a really enlightening read. I hadn’t considered the morality of usury before, but this makes me think.

    What about changing value over time? If I loan someone ten ingots of gold in March and over the course of a year, the price of gold plummets, should I still expect ten ingots back, or the equivalent value at the time of the loan in March? This could become very complicated.

  • Mark,

    If you had instead chose not to lend the ten gold ingots, would their value be any different?

  • jf12 says:

    If you thought yourself to be laying up treasures in heaven, would that be worth giving up squeezing extra percentage points out of some poor slob?

  • Scott W. says:

    I watch Pawn Stars. Most people just sell their stuff directly to the pawn shop, but occasionally some wants to truly pawn an item. The shop takes the item, loans money to the item’s owner for a period of time, after which the owner either pays back the loan with interest and retrieves his item, or he doesn’t pay and the shop keeps the item and puts it up for sale. As far as I can tell, the shop only has recourse to recoup the money by selling the item. If that’s the case, is it non-usurious?

  • Zippy says:

    Scott W:
    Not usury. It is the same basic kind of arrangement as a nonrecourse home equity loan, except that the equity interest accrues to the “lender” over time rather than the “borrower”. Presumably the payments should adjust to reflect the direction of equity flow.

    Mind you, it is entirely possible for the terms to be unjust on an otherwise categorically licit arrangement. (This is always true: it is always possible for intentions and circumstances to make an otherwise just arrangement unjust).

    But that kind of contract is not intrinsically usurious. Price gouging is a species of moral wrong, but it isn’t usury specifically. Usury specifically is full recourse lending for profitable interest. Usury is like contraception; price gouging is like using NFP to rule out children for no good reason. Both are morally wrong, but the former is intrinsically wrong, whereas the latter is wrong because of intentions and circumstances.

    ArkansasReactionary’s question to Mark Citadel about the gold gets right to the distinction between ontologically real value and faux value. If you lease someone a new car he is supposed to return that actual car, in reasonable working condition. You mustn’t both insist that he return a brand new car at the end of the term and charge a lease payment on that actual car at the same time. That’s why all full recourse contracts – contracts which charge interest and simultaneously require return of ‘brand new in kind’ property as opposed to the actual property – are usury: because profitable full-recourse lending is always divorced from reality.

    We are so indoctrinated into perceiving economic value as purely relative and abstract, totally unconnected from the ontologically real, that we don’t even know how to think about usury anymore. Our capacity to reason morally in the economic domain has been destroyed by subjective relativism.

    It is no wonder that the minions of Hell are making a similar ‘pastoral’ assault in the sexual domain, leaving doctrine formally intact as a decoration while emptying it ‘pastorally’ of all meaning.

  • Mike T says:

    Speaking of price gouging, one of the things that amazes me is how the Catholic Church hasn’t focused its ire on the practice in the US medical industry, since it’s a major reason why health care is often too expensive for the working and middle classes. Karl Denninger of the Market Ticker likes to write about a snake antivenom that costs $100 to make in Mexico and is often sold for as much as $30k in US hospitals.

    (During Hurricane Sandy, the New England politicians were threatening to ruin people’s lives for charging a 100-200% markup on personal generators [an increase of a few thousand dollars for a non-essential luxury], but they turn a blind eye toward price gouging that’s often a 500-1000% or more mark up in hospitals when the patient is in distress and has no ability to negotiate a fair price)

  • jf12 says:

    I’m reasonably certain that, in the Old Testament anyway, usury was not only profitable interest on money alone, but on “any thing that is lent upon usury” (Deut 23:19). Moreover the immorality of usury and price gouging i.e. “unjust gain” (Prov 28:8) seem to be the same immorality.

  • Zippy says:

    All immorality is “the same,” depending on the level of abstraction. Every evil is a disorder in relation to the truth about the good, and every moral evil is the deliberate choice, by a moral agent, of something disordered in relation to the truth about the good.

    But to erase the distinction between intrinsically immoral acts/contracts and those which are immoral because of intentions or circumstances destroys the possibility of objective standards of morality, as St. John Paul II explains in Veritatis Splendour.

    It is true though that dollars are not the only kind of currency. A currency is anything fungible used in exchange. See DrBill’s example of orange juice above, and my own previous comment where I explained how even treating cars as currency (as opposed to assets) in a lease situation can be usury.

    What modern folks have the hardest time grokking is the connection between things-treated-as-currencies and full-recourse contracts. But the Church has understood this since well before the existence of modern finance.

    Aquinas by the way did recognize that gold coins could be licitly rented — if what was rented was the actual particular gold coins, which themselves had to be returned – the actual same coins – to the lender. He suggested that someone might want to display those gold coins, for example, and that because those actual gold coins had to be returned to the owner at the end of the lease it was licit for the owner to charge rent.

    Aquinas actually understood currency specifically and economics generally much better than almost all modern people, as far as I can tell.

  • Zippy says:

    Of course if you were renting gold coins for display and stopped paying the rent, the owner would just come and take them back. Because the actual gold coins which you are renting are still there.

    “If you have anything wherewith to pay, why do you not relieve your immediate difficulties out of these resources? If you are insolvent, you are only trying to cure ill with ill.” – St. Basil

    Assets. Usury is and always has been about divorcing financial recourse from ontologically real assets: about selling what does not exist.

    What do they teach kids in schools these days?

  • Mike T says:

    Wouldn’t credit cards be non-usurious if the recourse were tied to the real assets owned by the borrower? The recourse would be “assets of equivalent value or their liquidated value.”

  • Zippy says:

    Mike T:
    “Whatever your assets happen to be” as collateral is just a full recourse loan. A licit nonrecourse loan is always de-facto the purchase of an ownership stake in specific assets. If those specific assets are not named specifically, it is just usury with a heavy dose of rationalization.

  • Zippy,

    In your opinion, would it be usury if the designated assets were “all of the assets possessed by the borrower at the time of the contract”?

  • Zippy says:

    AR:
    It would not be usury if there was a specific inventory or balance sheet. It is in general morally licit for people to sell what they own, and for others to buy it.

    Note though that if the borrower acquires any new assets after the loan contract (say by earning wages) those new assets will not be part of the asset pool explicitly securing the loan. If the contract “sweeps in” all of the person’s newly acquired assets as they are acquired it is usury.

    If however it is a loan to a corporation or other legally delimited non-person asset pool then new assets acquired by that corporation may act as security on the loan. In some cases they don’t though — when “new money” comes in it frequently trumps “old money” in the capital structure, all of which is perfectly licit as long as recourse is limited to the asset pool (the corporation’s balance sheet) and does not break the firewall via “personal guarantees” by individuals.

  • And could you explain (or link to an explanation) why limiting the assets subject to recovery is inherently non-usurious?

  • Zippy says:

    AR:

    I’ve explained this already. Purchasing a property interest in specific ontologically real assets is not usury – however one wants to label the contract – because it is not a loan at all, strictly speaking. Purchases and rents are not the same kind of contracts as a loan. Labels do not dictate ontology: nominalism is false.

    Usury is full recourse lending – which means lending to a person, who agrees qua person to pay back the loan regardless of what is done with the proceeds – for profitable interest.

    Purchase and lease-back of a property interest in specific defined real existent assets is not a loan at all, strictly speaking, even though nonrecourse contracts are sometimes labeled “loans”.

  • But why do you say that giving money to a corporation is inherently “not a loan”?

  • Zippy says:

    AR:

    But why do you say that [purchasing securities from] a corporation is inherently “not a loan”?

    Because it isn’t a loan.

    I’ll try this one more time. If you still have questions after this, I suggest attempting to state the reasons I have given in your own words. Once you can restate the reasons I have given accurately, the answer to your question should be obvious.

    You aren’t lending money to a person or persons when you buy corporate stock, bonds, or other securities. Someone might think that that is what he is doing, but that just means he misunderstands the nature of his own purchase.

    When you buy corporate stock or bonds, you are purchasing a property interest in the balance sheet (assets) and operations of the corporation. You are not entering into a contract with a person or persons who agree to pay you back. If you were, you could identify the person or persons to whom you have recourse to recover your “loan”. The reason you can’t identify which persons specifically have to pay you back is because nobody specifically has to pay you back: that is, it isn’t really a “loan” in the strict sense.

    Corporate bonds are, like bank deposits or shares in a credit union, a kind of ownership interest in the balance sheet (assets) and business operations of the corporation. They are not loans to persons: it is impossible to identify particular individuals who are obligated to pay the “loan” back, because there are no particular individuals who are obligated to pay the “loan” back. Corporate securities like stocks and bonds are not “loans” in the sense pertinent to usury[1]. Corporate securities like stocks and bonds define who gets paid what[2] – out of the balance sheet (assets) and corporate operations – under various business scenarios: they do not represent a right to collect anything whatsoever from specific persons.

    [1] The exception, already noted, is when principals/founders in the corporation make personal guarantees to repay a note independent of the corporate balance sheet. This is sometimes done (though probably not as frequently as inexperienced people think) with small private companies; but it is basically never done outside of that context.

    [2] They also define who has what decision authority over assets and operations. For example, stockholders typically (though not always) have voting rights for the board of directors, while bondholders (typically) do not.

  • You are saying that because a specific natural person is not on the hook for the whole value, it is not a loan, properly speaking.

    On what do you base this? Is there a source you can give me showing that the scholastics held that position (e.g. a declaration that usury could not be committed against the Church, a guild, etc.)?

  • Zippy says:

    AR:

    You are saying that because a specific natural person is not on the hook for the whole value, it is not a loan, properly speaking.

    If you aren’t lending to an actual someone who is obligated to repay the full amount of the loan it is not a loan, properly speaking, as far as usury as a moral category is concerned. Correct.

    On what do you base this?

    See Question 28. And here. Plus any number of things already said/cited upthread. Not to mention right reason.

  • Zippy says:

    Any Catholic who thinks that purchasing asset-backed nonrecourse securities (like corporate bonds) is usury should study this AD 1455 pronouncement by the Magisterium carefully, it seems to me.

    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, …

    I don’t have a comprehensive bibliography to hand out — y’all get what you pay for, and this is a blog not an academic paper or book — but even the available short online citations make the answer to this particular question clear, for those willing to read it carefully.

  • Can you cite anything by Aquinas or any other scholastic, to the effect that lending to a business is inherently “not lending”?

  • Zippy says:

    AR:

    Can you cite anything by Aquinas or any other scholastic, to the effect that lending to a business is inherently “not lending”?

    I already have, upthread, without even cracking Noonan. Can you stop repeating questions as if they had not already been answered?

  • Regimini universalis deals with the case of renting specified illiquid collateral.

    Can you cite anything supporting your view that lending to a business is inherently non-usurious?

  • […] FAQ on usury. Related: Against usury and […]

  • And Aquinas specified in the previous post you just linked to that he was speaking of cases where the investor’s money was risked. Not all transactions with a company involve such risk*.

    *Of course the risk of default is present, but I’d argue that if the amount owed by the company is not by contract to decrease in any circumstance, the threat of the whole company defaulting is accidental to the transaction.

  • Zippy says:

    AR:

    I’d argue that if the amount owed by the company is not by contract to decrease in any circumstance, the threat of the whole company defaulting is accidental to the transaction.

    You can assert that, but that puts you on the wrong side of most theologians and pretty much every actual Magisterial pronouncement on the issue.

    Furthermore, nonrecourse contracts by definition allow for the loss of principal and income, when things don’t go according to plan – when the value of the collateral assets is lost or depleted. That is precisely what makes them nonrecourse.

  • Zippy,

    In the quote from John Lugo, it is a case of renting the part of the farm which the investor owns.

    Let me try to summarize your reasoning to the best of my understanding:

    1. It is licit to rent goods capable of producing usufruct.

    2. Therefore, it is licit to partially own, and rent the partial ownership of goods capable of producing usufruct.

    3. Therefore, charging interest on loans backed up by collateral capable of producing usufruct is not usury.

    4. A corporation is capable of producing usufruct.

    5. Therefore, charging interest on a loan to a corporation is not usury.

    I agree with 1-3, but I do not see that 4 is true. While a farm, or a house, for example, is capable of producing usufruct, I do not see why a corporation is considered so capable. Since a corporation’s assets are usually a mix of liquid and illiquid assets.

  • Zippy,

    Also note that there are two ways to calculate interest.

    For instance:

    100->110->120 etc.

    or

    100->110->121 etc.

    To state my position precisely, I would argue that if the total value of the debt becomes equal to the corporation’s illiquid assets, to continue using the second method is usurious. As an example, if there were a debt of 100 dollars, and the corporation’s total illiquid assets were 121 dollars, then either

    100->110->120->130 etc.

    or

    100->110->121->133.1->145.2 etc.

    would be non-usurious, but

    100->110->121->133.1->146.41 etc.

    would be usurious.

  • Admittedly after considering it, I could see that if the total amount of a corporation’s interest-bearing debt exceeded the value of it’s illiquid assets, but no individual debt did, that such would be more along the lines of fraud, rather than usury.

  • Zippy says:

    AR:

    Let me try to summarize your reasoning to the best of my understanding:

    1. It is licit to rent goods capable of producing usufruct.

    Your summary is wrong right out of the gate. It is licit to rent out ontologically real assets, period. I’ve mentioned Aquinas’ example of renting gold coins for display, for example, which he affirms to be morally licit.

    Admittedly after considering it, I could see that if the total amount of a corporation’s interest-bearing debt exceeded the value of it’s illiquid assets, but no individual debt did, that such would be more along the lines of fraud, rather than usury.

    You may be neglecting the ontologically real value of the operating business, which in many cases far exceeds the value of tangible assets. See question 10. Physicalists often confuse what is real with what is tangible — it is one of those subtle mistakes of modernity which we have to guard against.

    In any case, it is only fraud if it involves someone doing something wrong. Your unreal gedankenexperiment upthread of a “corporation which does nothing” is like the farmer who takes the investor’s money but then fails to work the farm. In such a case his business partner – the census holder – is entitled to recoup his investment and promised income by foreclosing on the untilled field. A bondholder who does not receive his census payments is likewise entitled to recoup his principal and promised income by ‘foreclosing’ on the corporate assets.

    It isn’t usury unless it is full-recourse (person-recourse) lending for profitable interest. As I’ve said quite a few times, that doesn’t make every other economic act or contract automatically morally licit. Fraud, theft, and sloth are not usury; but they are still moral wrongs.

    If it isn’t full recourse lending for profitable interest, though, it isn’t usury.

  • Zippy says:

    We do in this our perpetual decree, reprobate and condemn all contracts, pacts, and conventions whatever, to be celebrated in the future, whereby it will be provided on the part of persons putting into company money, animals, or any other things whatever, that if, even by mere accidence, any injury, loss, or damage, follow, the very principal, or capital be always safe and restored [fully by] the managing partner … Fellowships of this nature … are to be entered into honestly, sincerely and with good faith, with fair and just conditions, … so that the managing partner be not [personally] obligated to pay as gain a certain sum, or quantity, free, as aforesaid, from all risk or danger; nor to restore the capital, if, by any casualty, it should perish. But if the capital, at the dissolution of the partnership, be extant, let it be restored to him, who had contributed it to the company, unless it is to be shared with the manager, or otherwise distributed, according to law, between the contractors. … — Pope Sixtus V, Detestabilis avarita ingluvies, 1586, cited in Usury, Funds, and Banks by Rev. Jeremiah O’Callaghan, 1834

    Emphasis and [annotation] mine.

    When you read the Tradition through the lens of actual Magisterial proclamations usury becomes quite simple to understand, not at all unreasonable or restrictive on legitimate human enterprise, and — what led me to post this FAQ in the first place — a clear example of the ‘pastoral’ modern strategy of Hell comprehensively triumphant before Vatican II was ever convened.

    Of course present day progressive Catholics obfuscate what sexual sin actually and manifestly entails, give formal lip service to decorative moral doctrine, and pursue a strategy of ‘pastorally’ eliminating all actual consequences of that doctrine. That strategy has been working quite decisively for modernist Progressives since before Angelo Giuseppe Roncalli was a twinkle in his father’s eye.

  • jf12 says:

    re: Sixtus V’s definitions.

    Great teaching. I like the fact that it is clear that an investor cannot demand personal guarantees of gain without risk, and further that a manager cannot offer such guarantees.

  • Zippy says:

    jf12:
    The key insight, I believe, as emphasized by the popes during that era, is that “without risk” means “terminating in an open ended claim on a person or persons, as opposed to claims to a real and well-defined currently existent collection of perishable assets”.

    Speculators gonna speculate, and widows and retirees are gonna look for reliable income. That’s all well and good. But when all property claims terminate in real, well-defined, perishable assets, usury is impossible.

  • jf12 says:

    It was the king of Sodom that said “Give me the persons, and take the goods to thyself.” We have some idea why he preferred persons to well-defined perishable assets, but presumably the overarching reason is that the persons could be forced into service.

    An open-ended claim enslaves a person, making him a servant of mammon.

  • Robert Brockman says:

    Zippy, another way to look at this issue is to consider the concept of the “natural rate of interest,” essentially the equilibrium interest rate at zero inflation. This interest rate is a measure of the impatience of the lenders — how much more a dollar today is worth than a dollar in the future.

    To entities with an infinite time horizon, e.g. God, angels, immortal souls, etc., impatience is irrational. Thus lending markets in which creatures who truly understood that they had immortal souls were allowed to compete would have the natural rate of interest driven down to zero. (This is why the Franciscans charged zero percent.)

    Thus humans engaging in usury are demonstrating that they don’t really understand that they are fundamentally eternal, and are thus in error.

    🙂

  • MarcusD says:

    @Zippy

    OT: Do you discuss the phrase “outside the Church there is no salvation” somewhere on your blog? If not, what is your take on it?

    Thanks.

  • Zippy says:

    MarcusD:
    I haven’t, that I recall.

    Here is JPII:

    “Although the Church gladly acknowledges whatever is true and holy in the religious traditions of Buddhism, Hinduism and Islam as a reflection of that truth which enlightens all people, this does not lessen her duty and resolve to proclaim without fail Jesus Christ who is ‘the way, and the truth and the life.’…The fact that the followers of other religions can receive God’s grace and be saved by Christ apart from the ordinary means which he has established does not thereby cancel the call to faith and baptism which God wills for all people.”100 Indeed Christ himself “while expressly insisting on the need for faith and baptism, at the same time confirmed the need for the Church, into which people enter through Baptism as through a door.”

  • First Time Commenter says:

    How does the possibility of personal bankruptcy impact your analysis? The recourse isn’t quite so full as all that, if you will.

  • Zippy says:

    First Time Commenter:

    How does the possibility of personal bankruptcy impact your analysis? The recourse isn’t quite so full as all that, if you will.

    Bankruptcy is a way for the positive law to in effect say “Those who are too poor to pay usury will not be forced to pay it. Those who cannot afford to pay the usury and go into default will not be imprisoned or enslaved.”

    That doesn’t change a usurious contract into a non-usurious contract.

    Here is the Magisterium (in Vix Pervenit):

    One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully, either to increase one’s fortune, to purchase new estates, or to engage in business transactions.

    That last point reinforces what I have been saying (Question 25) — that it is a category mistake to focus on whether or not a “loan” is productive, as (e.g.) Belloc and distributists who take their lead from him do. Any “loan” for interest is usury, and it is only by semantic confusion that we don’t understand which kinds of contracts are “loans” and which are not “loans”.

    If the contract produces passive income (any passive income) but does not represent an otherwise nonrecourse property interest in ontologically real currently existent assets, it is usury.

  • CJ says:

    Zippy,

    I assume that the prohibition on usury doesn’t preclude an action against the borrower for negligence or malfeasance. For example, if you loaned out your gold coins for an exhibit and the borrower leaves the gallery unlocked, sends the security guards home, and tells Freddie the Fence how valuable they are, you can sue him if they come up missing, right?

  • Zippy says:

    CJ:
    Right: recovering property – and being compensated for losses – from a thief or from someone who has committed fraud is not usury.

  • jf12 says:

    Since shortselling is based not merely on forecasting but literally on selling that which you do not own, it is not based on anything “ontologically real”. It is this aspect, I think, that made the 2008 crisis from the “usurious network of real estate loans” so unreal.

  • Zippy says:

    jf12:
    Short selling is an interesting case. In short selling (for those who are not familiar) you borrow shares and then sell the borrowed shares. You agree to return the same number of shares to the lender at a later date. If the share price goes down you can buy the replacement shares at a lower price than you sold the original borrowed ones, so you make money. If the share price goes up, you lose money on the transaction.

    You are required to return to the lender only exactly the number of shares that you actually borrowed, so the borrowing of the shares (themselves a property interest in the company) is not in itself usury. You aren’t selling what does not exist, because you cannot short sell without borrowing the shares first – you have to actually have the shares in order to sell them. Furthermore, it is not a risk free or personally guaranteed transaction — quite the opposite.

    All of that tends toward the conclusion that short selling is not related to usury nor is it morally wrong.

    Now, it is true that the lender of the shares (not the short seller, but the original owner of the shares which were sold) has full recourse to the borrower for return of the ‘principal’ – the exact number of shares lent. So that part does have the character of a mutuum loan (when the short seller is an individual). If the share-lender were entitled to profit on that mutuum loan then that could be usury on the part of the lender of the shares (though not the short seller himself). The shares are acting as a ‘medium of exchange’ or currency to be returned in-kind as opposed to as actual particulars — so again, it is probably a mutuum. I don’t really know the nuts and bolts of how the lending-of-shares side works, though I think that shares subject to options, collars, and such are often available for borrowing as a part of brokerage and margin account agreements; also shares which collateralize loans are frequently available to be borrowed, since they cannot be sold by the current owner until the loan is paid off; and margin accounts can go ‘full recourse’ in some situations.

    So there may be usury entangled with short selling as actual practice, much as usury is entangled with most of modern finance. But conceptually I think it is possible in principle for short selling to be free of usury.

  • jf12 says:

    re: “But conceptually I think it is possible in principle for short selling to be free of usury.”

    Yes, but what about the ontological unreality of it? You previously mentioned “All usurious lending involves the creation of fake wealth.” I think if shortselling is not necessarily usurious, then it is an example of creating fake wealth that can be free of usury.

  • Zippy says:

    jf12:
    I don’t think you can find the “fake wealth” in short selling unless all equity trades – and therefore equity – is fake wealth. But that can’t be right, since equity just is an ownership interest in the purest sense of the term.

    Short selling is a kind of salvage operation or arbitrage — resting ultimately in ontologically real assets.

  • jf12 says:

    re: finding fake wealth.

    Usury’s fake wealth is borrowed from the future; shortselling’s fake wealth is borrowed from the past.

  • Vickie says:

    The “Catholic Encyclopedia” under its section on usury states that “Vix Pervenit” is not magisterial because it was only issued to Rome, not the universal church. From my quick read, it seems also to hold that the early fathers did not have modern understanding of economic science.

    So the issue for non-economists, even if we want to do the correct thing, how do we sort this out?

  • Zippy says:

    Vickie:
    The Catholic Encyclopedia itself has the same level of authority as Wikipedia. Which is to say, it has no greater authority than you and I.

    Vix Pervenit is Magisterial, but not infallible. In order to be infallible a Magisterial proclamation has to be (among other things) addressed to the universal Church.

    However, as a matter of natural law usury is (like chastity) actually very simple to understand. As with chastity, people work very hard to not understand it, frequently invoking ‘edge cases’ casuistically in order to undermine the central precept.

    So the issue for non-economists, even if we want to do the correct thing, how do we sort this out?

    Don’t make full recourse loans, unless you are doing it as a favor / as charity. If you do make a charitable loan – if any person owes you something returned in kind as opposed to in particular, especially money – don’t charge interest.

  • Scott W. says:

    I haven’t had a chance to read it yet, but Crisis has an article on Usury this morning: http://www.crisismagazine.com/2014/church-change-doctrine-usury

  • Zippy says:

    Scott,
    It appears to be the typical “the nature of money changed” tripe, as usual completely absent any magisterial citation to that effect. It sets a great example for progressives who want to understand how to get their way on (e.g.) contraception and sodomy and simultaneously claim the high ground.

  • Zippy says:

    What is especially maddening about articles like that is the dripping condescension towards our ancestors — who correctly and unequivocally condemned usury as always, intrinsically, execrably immoral — in statements like this:

    It slowly became clear that money, at least in certain settings, is fertile, and has what economists call a “time value.” If I lend my neighbor $1,000 for a year, I forgo the opportunity to invest the money in some wealth-creating enterprise for a year, while you gain the same opportunity. That’s worth something.

    What a pack of pernicious lies that is.

    Money is not fertile. Money does not have a time value, because it does not have any ontologically real value at all qua money. As Aquinas understood and modern people pretend not to understand, money is a medium of exchange – any medium of exchange.

    Ontologically real assets can be used productively, and can also be consumed; but money is not and never has been an ontologically real asset. Furthermore, anything lent which must be returned ‘in kind’ by a person who is on the hook for it, as opposed to ‘in particular’ as a well defined bundle of ontologically real assets, is being used as ‘money’ in the pertinent sense — a medium of exchange, not an asset.

    But (protests the defender of modern usury in a fit of incomprehension) our poor benighted ancestors just didn’t understand! And anyway, things have changed!.

    Yes they did. No they haven’t.

    One can easily imagine the ways in which the ‘unitive purpose of sex’ will be employed in similar ‘Catholic’ arguments, in the future progressive global Sodom, wherein serial temporarily-‘monogamous’ fornication and buggery will be pastorally blessed because of their ‘unitive dimension’; a ‘unitive dimension’ that our poor benighted ancestors just didn’t fully appreciate.

  • Marissa says:

    Zippy, do you really think that’s going to happen? That the Church’s understanding of sexual immorality will go the way of usury?

  • Zippy says:

    Marissa:

    It certainly could. Progressivism in the Church has waged a war on objective standards for centuries, since long before Vatican II, by dropping discussion of doctrine and taking a lenient “pastoral” approach to practice. The notion that economic value is not purely a function of human preferences is incomprehensible to moderns. Today’s “conservatives” are among the most vehement defenders of yesterday’s morally relativist progressive revolution.

    The sexual revolution is just the same sort of relativist attack, involving a different subject matter. Usurers and their apologists have already overwhelmed the field; sodomites are just, uh, bringing up the rear.

  • […] interesting posts on the topic come Zippy Catholic and Jay Richards at Crisis […]

  • Zippy says:

    There is discussion of this post taking place at Creative Minority Report, FYI, in addition to the comments of the Crisis article Scott linked.

  • CJ says:

    Zippy – will you be posting anything about the torture report?

  • Zippy says:

    CJ:
    It is unlikely that I’ll post any new entries before the new year; and I haven’t informed myself on this new report enough to say anything interesting.

  • Not your ordinary Bozo says:

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

    Zippy,

    Would it be “lending” and usury if the contract was very primitive and did not spell out “personally on the hook” for the principal?

    John: “Can you lend me $20 until tomorrow?

    Bill: “Sure, as long as you pay me $21.

    Nobody has put the contract on a “personally liable” basis.

    Let’s assume, also that the society itself is similarly primitive and has not established standards for recourse. Like the Isrealites 3 days out from Egypt.

    Would it be usury merely because Bill is charging rent for the use of the money?

  • Peter Blood says:

    I am a member of a credit union. It’s “not for profit”, yet it offers loans that have interest. Is it morally licit (that is, non-usurious) for the credit union to do this, if, say, the interest money were being used to fund the operation of the credit union?

  • Zippy says:

    Peter Blood:

    Is it morally licit (that is, non-usurious) for the credit union to do this …

    Not full recourse loans, in my understanding, no. Non recourse loans are fine.

    That does not make it intrinsically immoral to have deposits at a credit union though. Doing business with usurers is material cooperation with evil, but bank (or credit union) deposits are not themselves usury, as I explained in this post.

    A rigorist might argue that the material cooperation is not justified, I guess, but that is inherently a judgment call involving an evaluation of proportionate reasons, etc.

  • […] did a pretty significant update to the Usury FAQ based on recent discussions at several web sites, adding several questions, revising a few, and […]

  • vetdoctor says:

    Money is not fertile. Money does not have a time value, because it does not have any ontologically real value at all qua money. As Aquinas understood and modern people pretend not to understand, money is a medium of exchange – any medium of exchange.

    Funny, as I try to grasp this I find myself thinking back to an old Heinlein novel. The main character owns the bank that prints the money and while talking to someone casually burns some large denomination bills to prove his point. He simply notes the serial number and later prints new bills to replace those. Nothing is lost. You can’t do that with anything ontologically real.

    Do I have it right?

  • vetdoctor says:

    Further, do I have it right that if I loan you $100 with repayment expected Tuesday and extract the promise that you will return $50 under any conditions, that is usury? (even with the negative interest)

    If you loan me $100 with the promise I will pay you back by Tuesday or I will give you my Lamborghini- this is probably immoral but not usury?

  • Zippy says:

    vetdoctor:

    if I loan you $100 with repayment expected Tuesday and extract the promise that you will return $50 under any conditions, that is usury? (even with the negative interest)

    No — basically you have given me $50 and made an (interest free) mutuum loan for another $50.

    Remember, mutuum lending is not immoral in itself. What is immoral is charging interest on a mutuum loan.

    And giving gifts is morally licit in general (although even then it has to be done responsibly). A gift is by definition not a contract, because the giver is not entitled in justice to anything specific in return: that is what makes it a gift.

    If you loan me $100 with the promise I will pay you back by Tuesday or I will give you my Lamborghini- this is probably immoral but not usury?

    Right: it isn’t usury because it is a non recourse loan. However, it is unquestionably a kind of price gouging. As I suggest in question 11, the category ‘usury’ does not exhaust all possible immoral contracts.

  • peppermint says:

    if a loan doesn’t have collateral, the borrower is the collateral. The argument needs to be whether someone foolish enough to borrow under those conditions would be better off enslaved.

  • Mark says:

    In your excellent dispute with Crisis Magazine, I saw mention of “what money is,” but no real acknowledgement that, in today’s fraudulent fractional reserve banking system, money is debt, a mere “fiat” ledger entry. What “extrinsic title” can be honestly justified on a mere ledger entry made by the cabal who profit sinfully (and massively) from it? A “Federal Reserve Note” is no golden ducat. How can any practicing Catholic justify the taking of any profit on such fraud layered upon fraud?

  • Zippy says:

    Mark:
    You might find this post and this post interesting, not to mention questions 27 and 35 in the FAQ above.

  • Zippy says:

    NYOB:
    (I fished your comment out of the SPAM folder)

    Would it be “lending” and usury if the contract was very primitive and did not spell out “personally on the hook” for the principal?

    Many contracts are not explicit at all. I go into that some more here. Even the most explicit of contracts are not comprehensively explicit, and are entered into in a context.

    On its face, the arrangement between John and Bill certainly looks like usury.

  • Zippy says:

    peppermint:
    Even if an argument were made that usurers and their clients frequently deserve each other, it is still the case that their activities pollute the economy and the common good with faux wealth, moral turpitude, and a generally bad example.

    And in any case, because the sovereign is the enforcer of contract terms he formally cooperates with those terms.

    So there is really no justification for the sovereign to enforce usurious contracts.

  • Xopher Halftongue says:

    Zippy says:
    “So there is really no justification for the sovereign to enforce usurious contracts.”

    Then the loan shark becomes the “sovereign”.

  • Zippy says:

    Xopher Halftongue:

    Then the loan shark becomes the “sovereign”.

    Is that the ‘get rid of pimps by putting the State behind prostitution’ strategy I see there?

    I prefer the more straightforward approach to law and order, myself, over the concept of the state becoming an uber-criminal kingpin and encouraging crime in order to fight it. Enough usurers and pimps lined up in pillories and we won’t have to worry so much about either.

  • Thucydides says:

    Zippy,

    I’m surprised I can’t seem to find your answer to this question, but maybe I just suck at looking. Does the inflation rate have anything to do with this? Is it usury to charge “interest” on a mutuum to the exact extent of the real inflation rate?

    I.e., I loan $5000 to a friend for 5 years in a full recourse loan. The contract specifies that in 5 years, my friend must pay me the face amount of the loan plus an amount corresponding to the real, exact inflation rate over that 5 year period.

    Is that “interest” actually interest?

  • Zippy says:

    Thucydides:

    The answer is implicit in Question 35 — once you’ve grasped the difference between mutuum and societas it becomes clear that the price of the ‘currency’ most likely will fluctuate all over the place relative to other things, whatever is used as currency. The mutuum might be in wheat or oranges as opposed to dollars. But that doesn’t change the nature of the contract.

    So yes, if it is an interest bearing mutuum it is usury, and the inflation rate (or price fluctuation between commodities/currencies generally) is irrelevant.

    One thing I did not discuss is how this affects (say) futures contracts. Actually I could go on and talk about all sorts of different contracts and the practical implications. But the bottom line is that those contracts are generally fine as long as they are ultimately secured by recourse to some inventory of real assets and only that inventory of real assets – if they are non recourse.

  • fontesmustgo says:

    I understand the recourse/non-recourse distinction when it comes to corporations, but I’m having some trouble with your reference to Aquinas in #7. You write:

    Aquinas explains that usurious lending involves selling something which does not exist. … 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.

    Okay. But change the participants to Bob Co., Harry Corp., and Fred Inc. Aren’t the participants still engaged in “selling something which does not exist”? If they are not, why not? If so, then “selling something which does not exist” cannot be the basis for why usury is wrong.

  • Zippy says:

    I added not one but two questions to the FAQ to address Thucydides’ question.

  • Thucydides says:

    Zippy, I’m afraid I don’t understand. You say that money is nothing in itself and is solely a medium of exchange. You say that in a mutuum, what is expected in return in something “in kind,” not something “in particular.” It seems like those premises would make inflation relevant to what is and is not actually interest.

    5000 2013-dollars are *not* in kind with 5000 2008-dollars. In fact, 5409.98 2013-dollars are in kind with 5000 2008-dollars, based on the real inflation rate over that period. If I only recover 5000 dollars, I am actually recovering *less* than the original principle amount, since money is nothing in itself and is just a stand-in for buying power. Why am I only entitled to recover *less* than the original principle?

    Or to put it another way: If I’m in a country with a high inflation rate, I am entitled to recover far less than the original principle amount (in terms of real buying power) on a 5 year mutuum. But if I am in a country with no inflation rate, I am entitled to recover the full original principle amount (in terms of real buying power) on a 5 year mutuum. I don’t understand how that makes sense.

    And your position on opportunity cost doesn’t apply here, since I was careful to specify that the amount recovered is based on the real inflation rate, only determined at the end of the loan. It’s based on a fact about the past, rather than an unreal guess about the future.

    You say that the medium of exchange could be oranges or baseball cards, and they might fluctuate all over the place relative to other things. But I don’t understand why that’s relevant. As long as they’re being used as *currency* and not *property*, and I expect to recover my principle “in kind” rather than “in particular,” it seems like I should be able to recover the exact amount of *real buying power* that I paid out.

    Finally, let me turn the argument around for a second, and ask about an economy which is experiencing severe *deflation* for some reason. Ignoring the broad economic effects of deflation, how does it relate to a mutuum? Let’s say I lend my friend $5000 for 5 years in such an economy, and then at the end of the 5 years, I expect the full $5000 back. Is that usury? If not, why not? Am I not actually recovering *more* real buying power than I paid out 5 years ago?

    Finally, let me beg your indulgence and assure you that I am asking these questions in good faith. I am sincerely trying to understand your explanation of usury as it relates to inflation.

  • Zippy says:

    fontesmustgo:

    Aren’t the participants still engaged in “selling something which does not exist”?

    No, because those claims represent cap table claims on whatever the assets defined by the limits of the corporations (the societas) happen to be. They do not represent open ended claims on things not yet actually produced by persons.

    (This is exactly why the price of corporate bonds sometimes ‘break the buck’ and drop below their face value, when a company is in trouble).

  • Zippy says:

    Thucydides:

    You say that money is nothing in itself and is solely a medium of exchange.

    Right, and that is true even when the money borrowed is gold, wheat, rental cars, or any other treated-as-fungible token with or without intrinsic value. The reason is precisely because – in a mutuum – the borrower is not required to return that gold: he is required to return whatever gold he can come up with.

    And the phrase “whatever gold he can come up with” does not refer to something actually real.

  • fontesmustgo says:

    Thanks for the quick reply.

    They do not represent open ended claims on things not yet actually produced by persons.

    Suppose I lend New Corp., a recent startup, $10,000, which exceeds the meager assets held by the corporation because I’m stupid and I believe in their idea. The terms of the note specify repayment in one year, with interest.

    At that point, don’t I have a claim on things not actually produced? Oh, sure, if the corporation goes bust tomorrow I only can touch whatever assets they have, but at present I have a claim on assets not yet produced. Usury?

  • Zippy says:

    Also, in exchange, it is foolish to hold on to the worthless token called ‘dollars’ for an longer than is necessary. That’s why the line on corporate balance sheets which says “cash and cash equivalents” is almost always real but highly liquid assets, not actual dollars. Cash by itself is literally infecund: it sits there doing nothing.

  • fontesmustgo says:

    That’s why the line on corporate balance sheets which says “cash and cash equivalents” is almost always real but highly liquid assets, not actual dollars.

    I don’t think “real” is the word you want to use there.

  • Thucydides says:

    Zippy, I’m afraid I still don’t really understand. Maybe I can make the question much simpler: why is the nominal amount or face value of the currency the thing that is relevant, rather than the real buying power of the currency?

  • Zippy says:

    fontesmustgo:

    At that point, don’t I have a claim on things not actually produced? Oh, sure, if the corporation goes bust tomorrow I only can touch whatever assets they have, but at present I have a claim on assets not yet produced. Usury?

    Not usury. See questions 16 and 34-37. Shares in a business venture always (unless it is a case of fraud or accidental stupidity) involve what the investors believe to be potentialities, else it would not be something worth buying as an investment. But what you actually buy is the actual assets of the business. You own the potentiality in virtue of your property interest in the assets of the business, delimited by the corporate entity (societas).

    Usury involves an attempt to purchase the potentialities of a person, which can only be actually owned by owning an actual property interest in the actual person.

    That’s why usury and slavery are in the same genus.

  • Zippy says:

    Thucydides:

    rather than the real buying power of the currency?

    There is no ‘real buying power of the currency’, because – again – in the mutuum loan, ‘the currency’ owed by the borrower to the lender does not exist as an identifiable, real, particular asset. When you say ‘the currency’ the referent of what you say literally does not exist after a mutuum transaction, by the nature of a mutuum transaction, especially once the borrower has spent the loan.

    Keep in mind that mutuum loans are never morally licit as a for profit contract, precisely because they involve the purchase and sale of what does not exist for commercial gain.

  • Zippy says:

    fontesmustgo:

    I don’t think “real” is the word you want to use there.

    Why not? As long as they represent contractual claims on things, not persons, they are ‘real things’ in the pertinent sense.

  • fontesmustgo says:

    So now money is ontologically real?

  • Zippy says:

    fontesmustgo:

    So now money is ontologically real?

    Money market funds, bank deposits, and the like are not cash. They are property interests in a business (that’s why money market funds “broke the buck” in 2008): ownership of a slot in the cap table of an operating business.

    Actual cash – cash sitting in a mattress – does not earn interest.

    You might find this post helpful.

  • fontesmustgo says:

    But what you actually buy is the actual assets of the business.

    A bond is not an asset purchase. It shares some properties with an asset purchase, just as an apple shares some properties with an orange.

    Usury and slavery are the same because the sovereign can force the debtor to perform labor to satisfy the interest on the debt.

  • Zippy says:

    fontesmustgo:

    A bond is not an asset purchase.

    Of course it is. It represent a contractual claim on real assets, and can itself be (and frequently is) bought and sold.

    the sovereign can force the debtor to perform labor to satisfy the interest on the debt

    … unless the sovereign declines to do so, which is precisely what the sovereign should do.

  • fontesmustgo says:

    I’m sorry, I’m not clear on whether you think that cash is ontologically real. Yes or no?

  • fontesmustgo says:

    It represent a contractual claim on real assets

    A bond gives you access to collateral in case of default. A bond does not give you the power to direct the operations of the business, or a share of the profits. An apple comes from a tree, can be consumed, and tastes sweet, but it’s not an orange.

  • Zippy says:

    fontesmustgo:

    I’m sorry, I’m not clear on whether you think that cash is ontologically real. Yes or no?

    Where and how is the term being used, specifically? The dirt in Hobbiton is not ontologically real, but the dirt in Virginia is ontologically real.

    Furthermore, I’ve shown repeatedly in the above FAQ and comments how disputes over whether cash is “real” or has “real value” or not is irrelevant to the question of usury charged on mutuum loans.

    I can play whack-a-mole all day with imprecise terms, but I can’t clarify things unless folks actually want them clarified.

  • Thucydides says:

    Zippy, so I make my $5000, 5 year mutuum to my friend in 2008. I give him currency, which he then spends. That currency is now gone, and doesn’t exist anymore.

    2013 rolls around. My friend now owes me a different chunk of currency which is *in kind* with the currency I gave him 5 years ago. Correct?

    Here’s where I get confused. Why are 5000 2013-dollars considered to be *in kind* with 5000 2008-dollars? The 5000 2013-dollars represent *less* buying power, so it seems like they are not *in kind* with the 2008-dollars.

    Actually, your less formal comment at the end of your last response has helped me a little, I think. It seems to me that charging interest on a mutuum to cover inflation is usury because mutua exist only to help those in need. It is not acceptable to use those in need to get a guaranteed way of covering inflation. After all, if I just let my money sit there, I won’t be covering inflation. So interest to cover inflation is still interest. Whether I’m making money just to make up for what the government has taken from me in the form of inflation, or making money on top of that, I’m still making money via a claim on the poor.

    But I still don’t understand how this fits into the *in kind* idea, because I don’t understand in what sense 5000 2013-dollars are *in kind* with 5000 2008-dollars, when the 2013-dollars have *less buying power* than the 2008-dollars had back in 2008.

  • Zippy says:

    A bond does not give you the power to direct the operations of the business.

    Neither do many kinds of common and preferred stock, or limited partnership shares. Are they also not property – economic objects distinct from persons with particular owners – in your view?

  • fontesmustgo says:

    I can play whack-a-mole all day with imprecise terms

    Calm down there, Sport. I’m in agreement with almost everything you’ve written, including the essential point that loaning money to individuals with interest is illicit. I just think that you’re running into problems when you base the propriety of loans to corporations on whether something “real” is being exchanged. So yes, if you’re going to start tossing terms like “real” around, your audience should know whether you’re using that term narrowly or loosely.

    You wouldn’t need to whack-a-mole your own imprecise terms if you used precise terms. You said that “cash equivalents” – not actual dollars – are real. Well, is cash ontologically real or isn’t it? If it’s not – as you seem to indicate – then a claim on cash held by a corporation cannot be real. A claim to a thing that is not real is not a real claim.

  • Zippy says:

    Thucydides:

    Zippy, so I make my $5000, 5 year mutuum to my friend in 2008. I give him currency, which he then spends. That currency is now gone, and doesn’t exist anymore.

    2013 rolls around. My friend now owes me a different chunk of currency which is *in kind* with the currency I gave him 5 years ago. Correct?

    The key word is “gives”. Mutuum lending is never morally licit as a commercial transaction. It is only licit as a kind of gift. He might give you more than $5000, but if your mutual understanding is that he owes you more, that is usury.

    Suppose you gave him six bags of wheat instead. Five years later, the price of wheat has gone way up. Does he “owe” you six bags? Less? More? Does he adjust how many bags he owes you to some calculated inflation rate based on some basket of commodities other than wheat?

    You are trying to treat “inflation” as some absolute against which these things can be measured, rather than an abstract economic number with no real relation to you or your friend’s assets. But it isn’t. If you want to licitly ‘index’ the loan against something, you have to buy something from him and use that real thing as the index.

    And again, thinking of mutuum lending in terms of people “owing” each other things contractually is problematic in general.

    “Giving” and “owing” in mutuum necessarily (when it is morally licit) has the character of gift, not what we think of as commercial transactions. If you want to make a commercial transaction out of it, pay $5K for some equity in his house and have him rent that bit of his house back from you.

  • Zippy says:

    fontesmustgo:

    I just think that you’re running into problems when you base the propriety of loans to corporations on whether something “real” is being exchanged. So yes, if you’re going to start tossing terms like “real” around, your audience should know whether you’re using that term narrowly or loosely.

    OK, then why don’t you quote something I actually said and point out precisely what you think is problematic about it, in the context in which I said it. Sport.

  • Thucydides says:

    Zippy, thank you for your clarifications. I’m not sure I understand, but I think I’ve reached the point where I need to reflect further rather than argue further.

  • Zippy says:

    fontesmustgo:

    You said that “cash equivalents” – not actual dollars – are real. Well, is cash ontologically real or isn’t it?

    Cash and “cash equivalents” are not the same kind of thing, else they wouldn’t need different names on the balance sheet.

    But I’m having a hard time seeing the relevance of your whole line of questioning.

    Suppose that both cash and cash equivalents are ontologically real objects. Whether fiat cash has ontologically real value (which is distinct from the question of whether it is an ontologically real object) is irrelevant.

    The cash is sitting there in a vault, doing nothing. The cash equivalent is a highly liquid property interest in an operating business and produces income.

    What is difficult about understanding that distinction, and what does your whole line of questioning have to do with anything?

  • fontesmustgo says:

    I’ve done that already and you breezed passed it. You won’t answer the simple question of whether or not cash is ontologically real.

    You seem to think I’m looking for some sort of loophole here. I’m not. In fact, I’m mostly concerned that in some circumstances, loans to corporations may be illicit. And you seem to hinge the inquiry in substantial part on whether what is being exchanged is “real.”

    I’m trying to unpack the distinction between what is “real” and what is not. So: cash, is it real or isn’t it?

  • Zippy says:

    Thucydides:

    It seems to me that charging interest on a mutuum to cover inflation is usury because mutua exist only to help those in need. It is not acceptable to use those in need to get a guaranteed way of covering inflation.

    Right, or to use your friend’s friendship for that. I think you’ve got it, actually, and sometimes the more technical approach can obscure things.

  • fontesmustgo says:

    Suppose that both cash and cash equivalents are ontologically real objects.

    I’m not going to “suppose” anything because I’m not interested in playing with hypotheticals. Is cash ontologically real?

  • Zippy says:

    fontesmustgo:

    I’m mostly concerned that in some circumstances, loans to corporations may be illicit

    There is no question that they can sometimes be illicit. See Q11, Q24, and Q25.

    But they are not usury.

    I’m trying to unpack the distinction between what is “real” and what is not. So: cash, is it real or isn’t it?

    You are going to have to do better than that. Cash is “real” in some senses and not in others, but you’d have to show how that is relevant to .. well, to anything at all, but especially to some claim or other that I’ve actually made.

  • Zippy says:

    fontesmustgo:

    Is cash ontologically real?

    Do the work. Assume both that it is, and that it isn’t, in whatever sense you mean it, and show how that affects some actual argument I’ve made.

    Or don’t. But it is your job to show the relevance of your line of questioning, not mine.

  • fontesmustgo says:

    With pleasure. Let’s look at your #7:

    “St. Thomas Aquinas explains that usurious lending involves selling something which does not exist.”

    If selling something which does not exist is illicit, then whether cash is “real” matters — even in transactions with entities that are not natural persons.

  • Zippy says:

    fontesmustgo:

    With pleasure. Let’s look at your #7:

    “St. Thomas Aquinas explains that usurious lending involves selling something which does not exist.”

    If selling something which does not exist is illicit, then whether cash is “real” matters — even in transactions with entities that are not natural persons.

    The thing-for-which-interest-is-charged is what Aquinas says is not real. Neither he nor I say that cash is not real. It is gain from cash-in-itself that is not real: when cash sits in a bag on the shelf, it does not reproduce.

    So your line of questioning, as I suspected, is directed at a straw man.

    Things purchased with cash – assets – do sometimes produce gain, or can be consumed for that matter.

    That is why the distinction between buying a property interest in assets (a societas) and making a full recourse loan (mutuum) is the essential distinction.

  • fontesmustgo says:

    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.

    Cash is either real or it isn’t. So, either:

    (i) Cash is real, and the new financial entitlements on the books are connected to something real: cash.

    (ii) Cash is NOT real, and the new financial entitlements on the books are NOT connected to something real.

    So if the problem with this transaction is that the interest is not connected to anything ontologically real, then that problem remains even when the three players are corporations.

  • Zippy says:

    fontesmustgo:

    So if the problem with this transaction is that the interest is not connected to anything ontologically real, then that problem remains even when the three players are corporations.

    I already addressed this when I first answered your question in this comment. The word ‘entitlement’ means something different when applied to a pile of assets as opposed to a person. An entitlement to a defined share in a pile of assets isn’t the same kind of thing as an open ended entitlement to $1000 from a person.

  • Zippy says:

    Discussion continues at CAEI.

  • fontesmustgo says:

    I already addressed this when I first answered your question in this comment.

    And so we’re back here. Entirely circular, with no actual information. Great.

  • Zippy says:

    fontesmustgo:

    And so we’re back here. Entirely circular, with no actual information. Great.

    If you can’t understand the difference between being entitled to a well defined share in a pile of property (which exists) and being entitled to an abstract sum of money or bushel of wheat (which doesn’t exist – the person has to come up with it somehow) from a person, then I probably can’t help clarify things further.

    Can you understand the difference between owning a farm and owning a slave? Instead of thinking about it in terms of ‘real-unreal’, you can think about it in terms of ‘object-subject’. The farm is a real object, and it is morally licit to own it and benefit from its potentialities as the owner. The slave is not a real object in the pertinent sense, he is a subject — and certainly his potentialities, the things he might do, are not real (that is, actual): it is not licit to own him and thereby attain ‘access’ to his (not yet actual) potentialities.

    Same goes for when we are talking about shares of ownership, as opposed to owning the whole object-or-person outright.

  • William Luse says:

    So if the problem with this transaction is that the interest is not connected to anything ontologically real…

    I think Zippy’s saying that the interest cannot be connected to anything, whether real or not, because the interest is itself not real.

  • Zippy says:

    Bill:

    I think Zippy’s saying that the interest cannot be connected to anything, whether real or not, because the interest is itself not real.

    Right: the interest on a full recourse loan is a contractual claim to something which does not exist.

    When all of the parties are institutional with no recourse to individuals, all contracts necessarily terminate in whatever real assets are on the balance sheets of those institutions. That doesn’t prevent stupidity, or fraud-through-obscurity, or any number of other inanities and insanities.

    But it does prevent usury. A corporation by its very nature cannot make a personal guarantee, because a corporation is not a person: it is property.

  • William Luse says:

    A corporation by its very nature cannot make a personal guarantee, because a corporation is not a person: it is property.

    Does this vitiate a corporation’s claim to have a moral allegiance to a set of principles, e.g. the Hobby Lobby case, wherein it was treated effectively by the court as a person?

  • Zippy says:

    Bill:
    I think that labeling property a “legal person” is a pernicious lie. If it were a person it would be intrinsically immoral to own it, buy and sell shares of it, etc.

    Conflating persons and property does specifically provide propaganda cover for usury. “Human resources” is another favorite. The more subjects and objects can be conflated, the more difficult it is for folks to grasp why usury involves trade in what does not exist.

    None of that vitiates against the owners, managers, and workers who “farm” the property having moral allegiance to a set of principles though.

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  • […] Question 34 of the Usury FAQ addresses the issue of personal bankruptcy.  Doubters of the contemporary relevance of the moral prohibition of usury frequently suggest that in the context of modern personal bankruptcy protections, usury is no longer immoral because the borrower has a legal escape hatch in cases of real duress.  The argument typically suggests that personal bankruptcy protections in the positive law modify the contract such that the lender doesn’t truly have full recourse to the person of the borrower for recovery of (in kind) principal and profitable interest. […]

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  • Zeb says:

    Thank you for this fascinating and eye-opening article and discussion. Your lengthy exchange with ArkansasReactinoary was very helpful and it was only in the last few posts that I understood why his objections didn’t work, so I’m glad neither of you gave up the debate early.

    I’m unclear whether the essential immorality of usury is that it gives one person an ownership interest in another person, or whether it is because it allows one person to sell to anther something does doesn’t exist (yet). If it is the former, then I don’t see why a mutuum loan without interest is not also usury. If the borrower is on the hook until he has paid off the lender, doesn’t the lender effectively own the borrower until the load is paid back even if there is not interest. If it is the latter, then would it be usury to prepay for services?

  • Todd Lewis says:

    You say in response to question 10:

    “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.”

    You say in response to question 16:

    “No. The “future labor of a worker” is a potentiality, not an actuality. This potentiality inheres in a person, not an asset. It is morally licit to purchase assets (including assets with potentialities), but it is not morally licit to purchase persons. The “future labor of a worker” is not an asset or piece of property: it is not something the ownership of which can be transferred from the worker to the lender when the transaction is made, because the future labor of the worker cannot be alienated from the worker himself.”

    There seems to be a contradiction, for in the latter case you stated that future labor is not an asset, but then in the former continued patronage of dentist is. The problem is future patronage like future labor does not ontologically exist. It seems that you have to say either (1) future patronage and future labor are not real assets or (2) that future patronage AND future labor are real assets. Furthermore when someone was sold into debt bondage to pay of a debt he is using his future labor to pay a debt, would you consider that wrong? If not how does that not show another contradiction.

  • Zeb says:

    If I may, in the case of the dentist if the dentist defaults on a loan with interest, the lender can take the practice or a portion of its sale value to satisfy the loan plus interest. The lender has effectively bought a portion of the practice and is renting it back to the dentist until the loan is paid off. The value of the practice may have been estimated based on future business but the loan was actually secured on the practice as it stands today.

    In the case of the worker there is no ‘practice’ or other entity for the lender to take ownership of in the case of default. The debt sticks to the person himself. Perhaps if John Doe created “John Doe’s General Labor LLC” and took out a loan, and in case of default the lender takes ownership of “John Doe General Labor LLC” and John Doe is free to go, then that would not be usury as the author here construes it.

  • Zippy says:

    Dentists retire and sell (the alienable part of) their practices all the time. Mine just did, in fact. Operating businesses (farms, hunting grounds, tax preparation practices, factories, stores, etc etc) are in general (1) property which can be alienated from its owners and (2) not reduceable to tangible objects and tangible objects alone.

    Unsecured debt (as for example when a thief is held to return the equivalent of what he stole; and see Q11, Q13-15 and Q47) is not in itself usury. It is usury to contract for profit (interest) on full recourse debt (mutuum loans).

    (Whether particular kinds of not-usury are or are not immoral is a separate question).

    There are all sorts of ways to try to develop a moral intuition of why usury is morally wrong. I’ve provided several in the FAQ; another is to realize that since unsecured debt can only ever licitly arise through misfortune or wrongdoing, usury attempts to add to the misfortune of others for one’s own profit — usury (the interest itself) is literally profiting by adding on to another’s misfortune or wrongdoing.

    But understanding why usury is wrong morally is a matter of appealing to folks’ moral intuitions in various ways, and is distinct from understanding what usury is. I don’t expect to convince everyone (any more or less than my posts on other moral subjects universally convince folks about those subjects).

    My goal here is to help interested parties come to understand what the RC doctrine on usury is, to show that (contra the ‘progressive’ narrative) it has not changed, to show (contra the ‘conservative’ narrative) its independence of economic theories and conditions, to answer some frequently asked questions about the subject which naturally arise once someone actually understands the doctrine (whether or not he agrees that usury is always immoral), and to provide a few different perspectives on why usury is immoral. That seems quite ambitious enough.

  • […] everyone pretty much already knows everything.  But then Free Northerner had some trouble reading Zippy on the topic of usury, because Zippy is a […]

  • […] wandered into the domain of currencies, bank deposits, commodities, and the like, despite the irrelevance of theories about those kinds of things to the usury doctrine.  My final comment on that (orthogonal to usury) subject is here.  Note again that (even though […]

  • […] Lots of folks have suggested that fiat currency and fractional reserve banking create fake economic value out of nothing and are therefore, if not usury strictly speaking, somewhere in the moral vicinity of usury.  So far when this has come up in discussion it has turned out that critics of both don’t really understand either.  The former are options issued by the government which allow the bearer to settle tax liabilities; the ‘created money’ in the latter are options against the balance sheets of banks, denominated in the former.  There is nothing usurious going on and no creation of fake wealth except to the extent that the balance sheets of banks carry usurious (as opposed to nonrecourse) loans.  This should be at least mildly familiar territory to anyone who has read and understood the Usury FAQ. […]

  • Don says:

    Zippy:

    Is a non-recourse loan from a financial institution to an individual, accruing interest, usurious if the loan is secured by the borrower’s deposit account at the institution? Would the deposit account be considered property?

  • Zippy says:

    Don,

    In my understanding that kind of loan would not – in itself – be a usurious contract, strictly speaking.

    Deposits are property claims against the balance sheet of the bank (the inventory of all of the bank’s own claims against various properties), and therefore can certainly act as collateral in a non recourse (and therefore not usurious) loan contract. (The scenario raises the question of why the borrower would bother to take a loan rather than just liquidating the deposits, assuming they are demand deposits; but that is a practical financial question not a question of the intrinsic morality or immorality of a kind of contract).

    Deposits are not in themselves, qua contract with the bank, open ended claims against individuals (mutuum loans). In fact if the bank itself makes no usurious (“recourse to a person,” charging interest) loans then usury is not entangled with the situation at all.

    That doesn’t make deposits entirely unproblematic, mind you, because many/most present day banking institutions do in fact make usurious loans to individuals. Therefore some of the “assets” on their balance sheets are usurious loans, so holding bank deposits at all (whether or not used as collateral on a non recourse loan) generally involves material cooperation with evil. (It isn’t formal cooperation with evil unless the depositor in some way formally assents to the bank’s usurious lending practices).

    The situation is similar to (say) owning shares in the Marriott corporation. One of Marriott’s lines of business (a not insignificant one) is the distribution of pornography to hotel guests, so owning Marriott stock does involve material cooperation with evil. Owning Marriott stock is therefore not straightforwardly or simply licit, since material cooperation with evil is never straightforwardly or simply licit as such. But it also is not always and necessarily morally wrong in itself, that is, intrinsically evil.

    Tl;dr — the loan contract structure you proposed is not intrinsically or necessarily usurious, because the contract itself involves no necessary and formal assent to usurious terms in other contracts and is not in itself a “person recourse” loan for interest. As always, the conclusion that that general category of contract is not in itself and strictly speaking usurious doesn’t mean that contracts of that sort are always – or in some particular case – morally licit.

  • […] there is one thing that writing and debating the Usury FAQ has demonstrated, it is the pervasiveness with which people use the same words to mean very […]

  • […] Usury is, in its essence, very simple (really much simpler than contraception/NFP): if you lend (money or anything else) and expect the thing lent to be used up by the borrower and paid back (secured by his personal guarantee) in kind at some later date, you may not contract for any gain whatsoever on that loan without committing the execrable sin of usury. […]

  • […] months time. But instead of asking for repayment in apples, I ask for you to personally guarantee (ahem) repayment of 100 oranges.  Because oranges are worth more than apples when we ink our contract […]

  • Jack Adder says:

    Excellent explanation of the topic, thank you for taking the time to educate us. I don’t understand your answer in #23, though, asking if the taking of student loans are mortal sins. The answer given by St. Thomas seems to leave it to a matter of conscience whether or not to engage in usury. Is that the entire point? That usury, while scandalous is not necessarily always sinful to the point of death (unless you forced someone into it)? I don’t get the connection St Thomas makes to falling in with thieves and pointing out your property to them – can you explain the relation to the answer in a little more detail for this dunderhead, please?

  • Zippy says:

    Jack Adder:

    Aquinas points out (with the Church) that the sin of usury consists specifically in the mutuum lender charging interest. Just as there isn’t anything intrinsically immoral in being the victim of a thief, there isn’t anything intrinsically immoral in being the victim of the professional usurer’s sin. Presumably the borrower would be happy to accept the loan for no interest, and would not entice someone otherwise not disposed to lend at usury, etc.

    However, just because it is not intrinsically immoral to be the victim of a thief, liar, murderer, or usurer, that isn’t a blanket permission slip to cooperate in their sin. One has to have serious reasons for material cooperation with evil, and it is never morally licit to formally cooperate. It is not a sin to be the victim of a murderer, say to save the life of a friend. But it is a sin to will that the murderer kill you, as in for example euthanasia.

    So in a way I am avoiding the specific question of student loans, other than to point out that borrowing at usury is not intrinsically immoral. Lending for usury is. That places borrowing into the domain of prudence and, as ever in the domain of prudence, the answer in any particular case depends on the particular facts and circumstances of that case: how urgent is the need, how scandalous is it that other people know and assume the borrower approves of charging interest, etc.

  • Jack Adder says:

    Zippy –

    Thank you for responding and for clearing up my question, you answered it fully.

    This is all very interesting and there’s probably a thousand rabbit trails one could follow down from the main topic. Keep up the great work on this site. I’m a new reader and I’m enjoying tremendously.

    Sincerely,
    Jack

  • […] ambiguity into the absolute prohibition of charging interest on mutuum loans (mutuum loans of anything whatsoever — fiat money, ‘hard currency’, gold, sugar, cars, lawn mowers, glass beads, […]

  • […] Notice that nowhere in this basic capital structure has any person made a personal guarantee of repayment. […]

  • […] not have been achieved without centuries of preceding indoctrination in economic anti-realism, with usury at its center. Combined with a moderate liberalism riddled with plenty of unprincipled […]

  • […] in darkness, a haze where little can be seen. For the most part, most people don’t even know what usury means anymore. Most people think that authority is the problem. But every new person who learns, who […]

  • […] Lots of folks will tell you that fractional reserve banking ‘creates money’.  When I was getting my MBA this was taught as if it were some sort of anti-realist magic, the conjuring of wealth out of nothing, the creation of money through a trick of math. But the reason it looked like anti-realist magic was because of the presumption of usury. […]

  • […] I have stressed repeatedly, the specific category of usury does not exhaust all possible immoral contracts.  And although declining to enforce usurious […]

  • […] And I go into great detail on the Church’s condemnation of usury here. […]

  • Scott W. says:

    I’ve been wondering about the parable of the unforgiving servant: https://en.wikipedia.org/wiki/Parable_of_the_Unforgiving_Servant

    Even though interest is not mentioned the money owed to the unforgiving servant, it seems usurious in that he has recourse to the man by having him tossed into prison, or as in modern slang, “taking it out of his ass”. Am I off base?

  • Zippy says:

    Scott:
    There are all sorts of different kinds of ‘debt’, and acceptance of usury depends in many cases upon conflating them. But for pretty much any kind of ‘debt’ I’d propose that there is always a threshold of sorts past which forgiveness of the debt becomes obligatory as a matter of Christian charity.

  • […] simplify matters, you can think of a bank – in the absence of usury – as a big pooling of claims against property.  When a bank loan against property is made, […]

  • […] can mean a claim against some actual pool of property, or it can mean the securitization through usury of nothing but a promise made by a borrower to personally repay. Said sightly differently an entry […]

  • […] non-usurious note or interest-bearing bond entitles you to census payments against property and liquidation value of that property up to the principal amount of the […]

  • […] intellectualist doctrinal rule-following I am guilty of on this blog involves my condemnations of usury and torture.  Close behind that is the way I am such a stickler for the just war doctrine, and how […]

  • […] They confuse us about usury […]

  • […] Zippy Catholic (lots of posts on usury, but start here: Usury FAQ, or money on The Pill) […]

  • […] Usury is an example I have written about quite a bit: the ignorant, often unconscious contempt heaped upon Aquinas and the medieval Magisterium on the subject is ironic in the extreme.  Aquinas and the Medieval magisterium had a far clearer and healthier understanding of financing business ventures than any of the modern financial anti-realists; financial anti-realists who literally cannot tell or pretend to be unable to tell the difference, whose economic theories actively and malevolently suppress clear understanding of the difference, between property – which can be alienated from a person, possessed, repossessed, bought, traded, and sold, and the use of which may thus be sold for profit (as “rent”, “interest”, etc) – and personal IOU’s, which cannot be alienated from the person who makes the promise and do not exist as actual property ontologically distinct from the person who makes the promise. Centuries of contemptuous arrogance on the part of new generations, directed against ancestors who are not here to refute the armies of ludicrous straw men, has made these new generations – has made us – so stupid that we cannot see or refuse to see what is obvious right in front of our faces. […]

  • […] in selectively enforcing mostly involuntary contract terms on debt slaves. Economic freedom means turning people into property. A scientific approach to economics means treating economic value as if it were nothing but the […]

  • […] “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”. […]

  • […] intentions imply different behaviors, and vice versa.  That is why things like contraception and usury are and shall be judged based on objective standards: the notion of ‘subjectifying’ […]

  • […] micromanaged hive, along with the relentless destruction of all virtue. Awareness of even the most basic virtue and vice is flushed down the memory hole, and evil becomes the new […]

  • semioticanimal says:

    The argument from inflation, as I’ll call it, seems to confuse what is actually exchanged. It insists that the value of what is given is equal to the value of what is returned. What is returned is returned at some future date when the value has changed. Thus as a matter of justice, it seems the difference should be added.
    However, what is exchanged is not something today for something future, for the something future does not exist. What is exchanged is something of value today for the the promise of return “in kind,” as you mention, at some future date. The promise references some future return, but exists today. The value of these is equal in the exchange. Thus charging over the principal amount to usury.
    Does this sound about right?

  • […] added Question 48 to the Usury FAQ.  A number of times folks have cited the First Lateran Council as casting doubt […]

  • […] 49) Is it acceptable for a merchant to charge penalties for late payment? […]

  • […] made a few more revisions to the Usury FAQ, adding questions 50 and 51.  The ebook has not been updated, and I don’t know if or when I […]

  • […] I explain what fiat money is here and here. I explain why fiat dollars are (counterintuitively) more transparent and honest than gold backed dollars here. I explain why currency debasement is immoral here. I explain that banks only ‘create money’ because of usury here, where I include an explanation of why non-usurious bank loans do not involve ‘creation of money.’ And I explain what usury is and is not here. […]

  • […] is typical of modern anti-realist views of property (see Question 10 for a realist view), this gets things almost exactly backwards. In fact if the argument from […]

  • […] when a non recourse insurance bond covering the loss of the property is purchased, this does not eliminate risk: it simply spreads the […]

  • […] he needs wheat. You’ve got some excess wheat you could lend him, but you like the way paper futures look better, and you want a guarantee that you won’t lose any buying power when you are […]

  • wiseguy says:

    Sorry if it’s already been covered, but quick question: are full recourse, interest-free loans usurious?

    An example would be a 0% interest auto loan offered to encourage the purchase of a particular car.

    On the one hand, the lender would have no ontologically real assets to recover in case of default.

    On the other hand, the lender is not, at least directly, profiting from said loan.

    Your thoughts?

  • Zippy says:

    wiseguy:
    Questions 54 and 55 are pertinent. In my understanding a zero-interest car loan as an enticement to buy is not usury strictly speaking, but it is nevertheless outside the bounds of morally licit mutuum lending — in much the same way that, say, a married man intensely and seriously flirting with his secretary may not be adultery strictly speaking but is nevertheless outside the bounds of chastity. Mutuum lending is only morally licit in the first place as an act of charity or friendship. If economic self interest is involved, the contract should terminate in property not in personal guarantees (as e.g. Pope Pius V affirmed in Cum Onus, which I talk about in Question 31).

    [FYI – I made minor updates to this comment to make it more clear and to include the links.]

  • wiseguy says:

    Thanks.

    So usury is a certain type of morally objectionable mutuum lending, and a zero (or negative) interest loan for commercial purposes, while not usurious, is another type of morally objectionable mutuum.

    Right?

  • […] the ebook form of the Usury FAQ, this time with the addition of a PDF format to make sharing it by email or what have you easier. […]

  • Anyone says:

    This was a good exercise of thought. I’m a Muslim and I thank you for it. God bless you.

  • […] If you invest, save, or enter into contracts to preserve your wealth, never require someone to personally guarantee that you won’t lose all that you invested to […]

  • I like the catechism Q&A format of your “catechism against usury.” It contains Vix Pervenit in Latin! Where’d you find that?

    You also mention (in that bookshelf picture ☺) some books on usury I’d never heard of. Have you read Fr. Dempsey’s Interest & Usury? John Horvat cited it several times in his excellent, collaborative work Return to Order, which was the first economics book I’d ever read, a year ago.

    Also, one criticism: You seem to use “capital” as synonymous with “money.” Capital ≠ money. Capital is a productive, ontologically real good; money is, as Aristotle et al. say, sterile. This distinction is important because those who support usury argue that money is capital (i.e., that money is productive).

    Lastly, this is related to #27 (and, indirectly, #35):
    Bishop Nicole Oresme (1320-1382) wrote, in the first monetary treatise, that inflation caused by tampering with money’s value, as in fractional reserve banking, is worse than usury:

    The usurer has lent his money to one who takes it of his own free will, and can then enjoy the use of it and relieve his own necessity with it, and what he repays in excess of the principal is determined by free contract between the parties. But a prince, by unnecessary change in the coinage, plainly takes the money of his subjects against their will, because he forbids the older money to pass current, though it is better, and anyone would prefer it to the bad; and then unnecessarily and without any possible advantage to his subjects, he will give them back worse money. . . . In so far then as he receives more money than he gives, against and beyond the natural use of money, such gain is equivalent to usury; but is worse than usury because it is less voluntary and more against the will of his subjects, incapable of profiting them, and utterly unnecessary. And since the usurer’s interest is not so excessive, or so generally injurious to the many, as this impost, levied tyrannically and fraudulently, against the interest and against the will of the whole community, I doubt whether it should not rather be termed robbery with violence or fraudulent extortion.

    This seems to go against what you said in #27.

    (Also, your #5 is related to Bp. Oresme’s theory of the “subjective value of money;” that money has no intrinsic value.)

  • Zippy says:

    sententiaedeo:

    It contains Vix Pervenit in Latin! Where’d you find that?

    It is on the web here.

    Also, one criticism: You seem to use “capital” as synonymous with “money.” Capital ≠ money. Capital is a productive, ontologically real good; money is, as Aristotle et al. say, sterile.

    Two things.

    First, usury is a species of contract: a mutuum loan for interest. It doesn’t depend upon what kind of property is lent, nor upon what the borrower happens to do with the proceeds of the loan. Vix Pervenit: “We can easily understand this if we consider that the nature of one contract differs from the nature of another.”

    We had another discussion of this – the fact that what distinguishes usury from not-usury is the nature of the contract not the property which is lent – in the comments to this post.

    So all that matters is that money can be possessed as property. The attempt to distinguish between “productive” and “non-productive” loans is a category mistake: see question 25.

    Second, although the kind of property lent in a usurious loan does not alter the nature of the contract – and thus discussions of the nature of money and other property is actually irrelevant to determining whether a contract is or is not usurious per se – I do have posts here that help clarify what kind of thing money is and is not.

    We’ve actually discussed the subject quite a bit, but two main recent posts are here and here.

    Bishop Nicole Oresme (1320-1382) wrote, in the first monetary treatise, that inflation caused by tampering with money’s value, as in fractional reserve banking, is worse than usury: …

    Again this is a bit off-topic from usury per se, but I have my own somewhat different critique of currency debasement without good reason, my own take on gold backed currency versus fiat as well as my explanation of fractional reserve banking describing what it is and why there is nothing particularly bad about it in the absence of usury.

    That various people contemporary and ancestral dispute these matters is not directly pertinent to the subject of usury though. Usurious contracts are a species of contract. It doesn’t really matter what kind of property is lent to the borrower, it only matters that it is an interest-bearing ‘loan for consumption’ (see question 52): that is, an interest-bearing loan in which the borrower is personally obligated under the contract to repay the amount of property lent plus interest, not to return the actual property lent or actual property posted as security plus rent.

  • Thanks for the helpful replies

    A few more questions (some or all of which you might have discussed elsewhere on your blog):

    1. St. Thomas says usury is to sell what doesn’t exist. This appears to be a broader definition than yours, that usury is collecting interest on mutuum loans.

    (a) Is selling what doesn’t exist identically the same as usury?
    or
    (b) Are there non-usurious ways to sell what doesn’t exist?

    If (a), then how does selling what doesn’t exist constitute a mutuum loan?
    If (b), what are some examples of non-usurious ways to sell what doesn’t exist?

    2. How is a service offered an ontologically real, salable thing? Isn’t selling a service to sell what doesn’t exist?

    3. What sort of contract is a digital rights management (DRM) license agreement? They seem usurious because they charge for the use and re-use of a (seemingly) owned product, as though the product’s use were separate from the product itself.

    4. Is selling intellectual property (IP) or copyright usury? IP is not “ontologically real,” so it seems that selling it is to sell what doesn’t exist.
    (an aside: according to U.S. law, violating copyright is not theft; cf. Kinsella’s Against Intellectual Property.)

  • Zippy says:

    sententiaedeo:

    As far as I know Aquinas says that usury specifically is a species of selling-what-does-not-exist generically. At least I have never seen him cited as saying that all acts of selling-what-does-not-exist are specifically usury.

    If I sell you a condominium in Belize, and you go to Belize and discover that the condominium I sold you does not exist, I have not committed usury specifically; although I have indeed sold what does not exist.

    I talk about another example in this post.

    I talk about labor – which is one kind of service – in Question 17.

    We discussed intellectual property in the comments of this post. I don’t have strong views on the moral status of intellectual property, which appears to be a licensing of particular activities in the sovereign’s marketplaces (more on the sovereign’s marketplaces here). But patents and such certainly are alienable from any particular owner, so there is not any sort of hidden mutuum which would bring usury into the picture specifically.

  • […] about intellectual property.  Modern understandings of property and commerce are so perverse, immoral, and unreal that it seems rather likely that at least some of what IP law sanctions, asserts, and […]

  • […] on loans … pay no attention to the fact that usury is any contractual profit at all on mutuum loans, and that even unjust interest charged on non recourse loans is not usury strictly speaking.  The […]

  • […] of course someone who has familiarized himself with what usury is and is not knows that loans to the bank or deposit accounts are not mutuum loans in the first place.  Loans […]

  • […] way of saying that money has no nature – and therefore charging a ‘reasonable’ amount of contractual profit on a mutuum loan is acceptable in most circumstances today), — rather than rejecting progressive error they […]

  • […] It was interesting to discover though that sedevacantist arguments seem to draw heavily on the Jesuit School of Salamanca: the same “Georgetown of the Middle Ages” that (arguably) brought us Jesuit economic anti-realism  and waffliness on usury. […]

  • ignacy says:

    56) Can a borrower’s reputation be a valid collateral?

    I assume that the answer is yes, it is a valid collateral – assuming that the loan is structured in a way that when the borrower defaults, only the principal is subject to any litigation, but the borrower is expelled from, say, a credit union or merchant association.

  • Zippy says:

    ignacy:

    No. A borrower’s reputation is not alienable property and therefore cannot be collateral on nonrecourse debt: his reputation cannot be repossessed from him and sold to a third party when he stops paying rent (“interest”).

    A loan secured by the borrower’s reputation as opposed to collateral property is a loan secured by his personal commitment to repay: it is a mutuum loan, and therefore any profitable interest whatsoever is usury.

  • Zippy says:

    (Furthermore, charging a man rent – interest – for nothing but the preservation of his own reputation is obviously unjust).

  • […] by Samuel Gregg of the Acton Institute in the hopes of receiving a fair hearing on the subject of usury, you will unfortunately be […]

  • […] this gets things almost exactly backward. What took time was the relentless effort to obscure the specific difference between mutuum loans and other contracts beneath a fog of anti-realist obfuscation and […]

  • […] of references to property with actual property often serves the interests (no pun intended) of usurers and other financial hucksters, so it is no surprise that this conflation is fostered by ‘the […]

  • […] I explain in the Usury FAQ and elsewhere, a worker is owed wages not simply for time elapsed but for what he, through his own […]

  • […] a usurious loan, the lender’s claim is not against property or only property: it is against your […]

  • […] What you will find is that prices – the relative trading ratios of different goods and services – are not static.  And you will find that ethically preserving your property requires work, expense, and risk. […]

  • […] any moral doctrine of the Church is simple and infallible, it is the condemnation of usury.  Moral doctrine on sexuality is actually more complex and nuanced than moral doctrine on […]

  • […] (actual property or third party securities) to a creditor.  (Institutional ‘owing’ isn’t like personal debt: it is an impairment of the balance sheet of the […]

  • […] Centuries of rampant usury has doubtless contributed to a mass illusion wherein many folks can’t tell the difference between actual bread and a promise of bread, and it is an especially modern error to conflate medium and message. At the end of the day what […]

  • […] They pray every Saturday for their Messiah, a man who will help them bring world peace through usury¹, so that all of the Goyim become willing slaves to the Jewish race.  Pointing this out proves […]

  • […] Human beings and possessions were understood to be different things, with the notable – but at least clearly delineated – exception of economic chattel slavery, not to be confused with prison. […]

  • […] This contrasts with my position on usury, to which I have not really added any original thought.  My work on usury specifically (except […]

  • […] shovel made of mithril), but in preparation for this ‘third edition’ I’ve added Question 56, “Isn’t criticism of usury just veiled […]

  • […] Question 49 of the Usury FAQ I discuss whether a merchant may licitly charge an individual[1] penalties for late payment on […]

  • […] A good sovereign will decline to enforce usurious contracts, and will reserve the authority to – if prudentially necessary – punish those who attempt to craft usurious contracts. […]

  • […] when subjective valuations do not correspond to objective value. This can happen in any number of ways, but many will involve certain errors in knowledge concerning the object. Supposing a thing to […]

  • […] And he shall make all, both little and great, rich and poor, freemen and bondmen, to have a character in their right hand, or on their foreheads. [17] And that no man might buy or […]

  • […] 57) This all sounds so complicated, and use of the terms “loan” and “interest” to mean so many different things is confusing. Is there a simple way to tell if a loan for interest is usury? […]

  • ignacy says:

    The laws in some countries explicitly state that all mortgage credit is full recourse, thus making any home loan formally usurious even if materially they are not. There are practically no possibilities to obtain a non-usurious loan as a person. Generally speaking, what sort of things should be taken into account when considering loans that are formally usurious and materially are not?

    Or, more precisely, does it seem licit to ask for such a loan for the bank, not in the circumstances of dire needs but for the purpose of living in a more convenient home, when such a loan makes home arrangements decisively cheaper than renting?

  • Zippy says:

    ignacy:

    I get asked similar questions with some regularity, and the truth is that my judgement is no more authoritative than yours on that sort of question. I’m not being coy, I really can’t say what others should do prudentially in this or that circumstance. We know that borrowing from a usurer is not intrinsically immoral: it is usurious lending which is intrinsically immoral, in every circumstance. And we have Aquinas’ answer cited in Question 23. Finally, we know that “prudential judgement” is not equivalent to “go ahead and do it, it can’t possibly be wrong”.

    But beyond those general parameters I personally have no special insight.

  • ignacy says:

    Zippy, thanks for your thoughts!

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