The just price head fake and “hidden usury”

September 22, 2015 § 10 Comments

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 on 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 in the Usury 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, …’

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