It isn’t extrinsic to the contract if you agreed to it in the contract

October 26, 2015 § 12 Comments

Two of the areas which the Usury FAQ / ebook (in its present revision) may not cover adequately for some readers are the concepts of ‘just prices’ and ‘extrinsic titles’.  The reason it does not cover them in any depth is because, once you adequately grasp what usury is and is not, neither subject is directly relevant.  They have however been historically conflated, casting an at least rhetorical pall of ambiguity over the subject for folks lacking an adequate grasp of the concepts involved; so it is worthwhile to at least show why ‘just prices’ and ‘extrinsic titles’ don’t in fact cast any shadow of ambiguity whatsoever over the absolute prohibition of usury.

I recently discussed the ‘just price’ head fake here, and I think that post adequately shows why various theories about ‘just pricing’ don’t introduce 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, beanie babies, or anything else).

Extrinsic titles I haven’t covered in too much depth.  In this post I talked about different senses of ‘owing’, and grasping the multivocity of ‘owing’ is helpful background for understanding extrinsic titles.  That a thief owes the return of stolen money or other goods, even if he already spent that money or consumed those goods, seems pretty clear to well formed moral intuitions.  Furthermore, the thief may have damaged his victim’s estate in ways which go beyond loss of the ‘principal’ amount stolen, in which case he may be justly found by the magistrate to owe more than the ‘principal’.

Notice, though, that what the thief owes back to his victim is extrinsic to any agreements that thief and victim may otherwise have had. A thief does not mutually agree with his victim to steal the victim’s money and then pay it back with damages. Any damages that the thief owes qua thief, again, are extrinsic to any agreements that victim and thief may have apart from the theft.  Damages owed because of theft are by definition extrinsic to agreements between the parties.

It is in this extrinsic sense – and only this extrinsic sense – that just titles to something beyond the principal may arise when mutuum loans are made.  Here is Vix Pervenit:

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. [Emphasis mine]

Recall that mutuum loans are only morally licit in the first place as acts of charity or friendship.  As a matter of justice the borrower and lender may mutually agree that the borrower owes back the principal if and when he is able to pay it.

However, any agreement between the parties for the mutuum borrower to pay interest – for whatever reason – is by definition intrinsic to the contract: usury.  If the mutuum borrower refuses to repay when he is able, that may well give rise to damages in excess of the principal, in the same way that when a thief steals that may well give rise to damages in excess of the principal amount stolen.  When a borrower is able to repay a mutuum loan, has agreed to do so when able, and yet refuses to do so, he has engaged in a kind of theft.

But any damages a thief owes above the principal can not be pre-negotiated and made intrinsic to a contract. The very fact of making it a mutual agreement means that it cannot, by definition, be theft.  Just titles to something above the principal in a mutuum loan cannot, by definition, be part of the contract.

Therefore any mutually agreed entitlement to something above the principal, under any circumstances, in a mutuum loan, is always morally wrong.

§ 12 Responses to It isn’t extrinsic to the contract if you agreed to it in the contract

  • Gabe Ruth says:

    It is striking to see how sensible prohibiting usury is, once you understand what it means. Most people look at our ongoing financial insanity and just shake their heads in wonder at the depth and power of greed. But the church fathers would probably not be surprised at all at how unhinged things can become once usury is allowed. The power of money over the human soul is strong enough without allowing it a kind of demonic fecundity divorced from any created reality.

  • vetdoctor says:

    It isn’t extrinsic to the contract if you agreed But any damages a thief owes above the principal can not be pre-negotiated and made intrinsic to a contract. The very fact of making it a mutual agreement means that it cannot, by definition, be theft.

    You had me right up to this part. So if I inserted into a an agreement that you would pay legal expenses involved in recovering the loan, that would be usury? I thought the Franciscans were allowed certain loan costs.

  • Zippy says:

    vetdoctor:
    You have a right to recover actual costs of enforcement when he breaks the contract without including that right in the contract. Including the extrinsic rights you have when he breaks the contract in the contract itself is a kind of self-contradiction, really: if you wouldn’t have that right without including it in the contract, then it is part of the contract.

    As far as the Franciscans go, I don’t have any direct accounts of what they actually did in their ad-hoc activities before the establishment of the institutional (non recourse) Mountains of Piety. I only have very general characterizations by authors centuries later, and given the general confusion on this subject I can’t really state anything in definite detail. But one thing that is pretty clear is that they didn’t attempt to recover monies from anyone who could not afford it, and it isn’t really clear what was actually incorporated into their agreements — if there was any explicit agreement at all beyond ‘here is the money; pay it back when you can, and when you can please generously support our ongoing efforts with your other unfortunate brothers”.

  • ignacy says:

    What tools does the court (or generally, people who want to somehow address the problem of malicious delays from their customers) have to address the delay of repayment for goods or services?

    Currently it is an established practice (at least in Europe) that some referential interest rate is applied. It is definitely an extrinsic title, as it is almost never a part of the contract. However, it really sounds like introducing usury through some back door.

    The same probably goes to any sort of “costs of recovery” that are in any way dependent on the delay duration. And insisting that these costs should be time-independent will make the demands on restitution of these costs futile – the delaying customers could delay the repayment even more, to earn the benefits of holding someone else’s money. The repayment would have to end in using physical force, instead of economic one.

    But there may be something that I miss. Any thoughts?

  • Zippy says:

    Ignacy:
    It isn’t usury to recover penalties from a thief. Usury involves what is agreed between the parties: it is intrinsic to the contract. If you agree to let him steal from you for a price it isn’t really theft. But if he damages you by stealing you have a just extrinsic title to damages.

  • ignacy says:

    Is it legitimate to charge an interest rate for payments that are overdue, for example when a court orders to do so? As I understand you, it is.

    By the same reasoning, if I include a particular interest rate in the contract just to avoid hassle with courts, knowing that it isn’t far away from what court would order, I do not commit usury, but just preemptively agree for punishment of theft.

    Am I correct? Regardless, I believe it is a good idea to include these sort of questions to FAQ.

  • Zippy says:

    ignacy:

    We talked about this very subject a bit more in the comment thread to this post.

    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.

    Agreed that the Usury FAQ could benefit from a substantial update. Many of the discussions it was intended to catalyze have happened, and have not been incorporated into a new edition.

  • Zippy says:

    I’ve decided to do the expedient thing and just add another question/answer to the on-line version of the FAQ. Thanks for prompting it.

  • ignacy says:

    Thanks for pointing to the other thread, but I think some matters require additional clarifications.
    Regarding

    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.

    Good point. However, I fear that consequently requiring courts whenever a delay requiring compensation is made, the government must explicitly forbid interest rate clauses in full-recourse loans and retail trade contracts instead of merely declining to enforce full recourse contracts.

    Or would it suffice to consider any situation, where potentially usury might be enabled (e.g. “thief” and “victim” cooperate) as secured only by potential thief’s reputation? That way, a “thief”, who would bring forth only the principal amount instead of principal plus agreed fine could not be sued for breach of the contract.

  • Zippy says:

    ignacy:

    That way, a “thief”, who would bring forth only the principal amount instead of principal plus agreed fine could not be sued for breach of the contract.

    Now you are catching on ;).

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