A consuming question

January 10, 2016 § 20 Comments

“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”.

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 personally guaranteed loan or mutuum is a loan which is ‘consumed in its use’ — not necessarily in the sense that the proceeds are literally destroyed, but in the sense that once they are used in the manner authorized by the contract they are no longer in the possession of either the borrower or lender.  The lender’s claim is against the personal IOU of the borrower, not confined to some specified property which either the borrower or lender possesses.


The final paragraph has been added to the Usury FAQ, to get the equivalence of ‘personal guarantee’ and ‘consumed in its use’ in defining a mutuum loan out there up front. Plenty of FAQ skimmers seem to miss the fact that a mutuum authorizes the consumption – in the pertinent sense – of the loan proceeds, and that this is precisely why the lender’s claim rests in the personal IOU of the borrower not in any particular property.  I haven’t updated the e-book.

 

§ 20 Responses to A consuming question

  • William Luse says:

    Suppose I borrow a hundred bucks from you with a promise to pay it back in a fortnight. Can you charge me interest as part of the agreement? That is, I will owe you, let’s say, $110 instead of a hundred.

  • Zippy says:

    Bill:
    That is straightforward usury.

  • William Luse says:

    Suppose I just owe you the hundred I borrowed. But when the fortnight is up, I can’t pay it back. I spent it all on an investment that didn’t pan out. What happens next?

  • Zippy says:

    Bill:

    It depends on whether you really can’t or you just won’t. If you are just being a thief, the magistrate may well treat you like a thief.

    We recently talked about the kinds of extrinsic titles (extrinsic meaning ‘not part of the agreement’ – the only sort of title to something over the principal which can licitly arise in a mutuum) when someone breaks an agreement here, here, and (in the comments) here.

    You can also see a citation of Aquinas on the specific point here.

  • Purple Tortoise says:

    Here’s a question I’ve always wondered about. I don’t intend it to be snarky.

    Let’s say the king declares that no contracts are valid unless they are in valued in terms of the currency of the kingdom. Let’s say one unit of currency is called a “buck” and corresponds to a coin with a specified amount of silver. If I understand you correctly, it would be usury to loan out 50 bucks (full-recourse) and require 51 bucks to be paid back a year later.

    But what if the king declares it is his policy over the coming year to collect all silver coins, melt them down, and create 51 new coins for each 50 old coins. The king declares the new coin will be the new definition of the “buck”, though obviously with a decreased amount of silver. If this policy is known ahead of time, would it be usury to loan out 50 “old” bucks at the beginning of the year but require 51 “new” bucks to be paid back at the end of the year?

  • Zippy says:

    Purple Tortoise:
    If it is a morally licit full recourse (mutuum) loan, the lender must have made it in the first place out of charity or friendship. I think if we shift gears into that context these pathological edge cases in casuistry don’t make much sense. If I helped a friend or someone in need by making an unsecured loan, am I being a good friend or benefactor if I insist as a matter of justice, that the borrower is literally a fraud or thief, if he pays me back 50 newbucks?

    Would it be technically usury if the borrower insisted that he really owes me 51? Or 50 and a beer? No to the latter.

    The scenario is designed such that the original fungible unit of property literally doesn’t exist anymore: it has all been literally destroyed. It is actually impossible in the scenario to pay back in kind what was actually borrowed, since nothing of that kind even exists anymore. So some other measure of equity would have to be made. It isn’t obvious that silver weight is the right unit of measure, because (as I have explained before) the value of commodity currencies is not simply the value of the commodity itself. So this starts to look like the ‘just price’ head fake that I discussed here.

    Whether usury under the natural law is technically in play or not in determining precisely what the borrower ought to repay, Luke 6 certainly is:

    [34] And if you lend to them of whom you hope to receive, what thanks are to you? for sinners also lend to sinners, for to receive as much. [35] But love ye your enemies: do good, and lend, hoping for nothing thereby: and your reward shall be great, and you shall be the sons of the Highest; for he is kind to the unthankful, and to the evil.

    I think the casuistry starts to collapse under the weight of charity in those kinds of pathological cases. If this were really an issue of conflict over justice – over what conditions make the borrower into a thief or fraud under the contract – the lender should never have made the loan in the first place. He should have loaned something which was not anticipated to literally cease to exist as a kind of thing, if he were in the first place going to contractually insist on an enforced exact equity from his friend or the unfortunate person to whom he is supposedly showing charity.

  • Zippy says:

    Sneaky scenario by the way; well done.

  • Purple Tortoise says:

    Thanks for the response, Zippy. I actually didn’t intend to be sneaky, and I have no disagreement with your comments about charity. My purpose in setting up the scenario was instead to explore currency as a store of value.

    My desire is to preserve the purchasing power of my saved money, as much as can be done so in an uncertain world. The central bank, however, thinks the economy is better off when people buy stuff now rather than later, so they artificially create inflation to erode purchasing power and thereby induce people to spend before their money loses value. In fact, some mainstream economists have even expressed a desire to destroy some percentage of physical and electronic currency out of people’s hands as an inducement to spend now.

    One means of preserving value is to buy assets that will rise in value with the artificial inflation, but that is inconvenient and involves transactions costs and additional risk. And it is not really an option to use assets as an alternative currency because if that ever became useful, it would be outlawed so as to keep people in the governmental currency system.

    What I want is to save 50 bucks and have 50 bucks worth of purchasing power at end of the year. So would it be usury to deposit money in a bank with an interest rate that matched inflation?

    (I apologize if this is a stupid question — I have not read through all of your material and usury and am not Roman Catholic).

  • Purple Tortoise says:

    Oops, I see in your FAQ #44 that getting interest on a bank account is usually not usury. Never mind.

  • Zippy says:

    Purple Tortoise:

    Right, there are all sorts of ways – an embarrassment of ways – to invest money non-usuriously as a hedge against inflation or against whatever dangers and forces of entropy loom in any particular person’s economic theory. Bank accounts and certificates of deposit are two of the most obvious. If someone thinks that gold is a better store of value than dollars or claims against the balance sheets of banks, nobody is preventing him from buying gold with his excess wealth. If he has no excess wealth to invest then he isn’t holding onto cash long enough for debasement/inflation/etc to matter in the first place.

    None of that is an excuse for deliberate debasement of currency, of course. But in the absence of a metaphysically realist economic theory or at least financial accounting system which accurately describes reality — and to the best of my knowledge, a metaphysically realist economic theory does not exist, nor even a metaphysically realist accounting system — it is really impossible to say much about whether what is going on is in fact even accurately described as debasement, let alone what moral implications would follow.

  • Zippy says:

    Purple Tortoise:

    In fact, some mainstream economists have even expressed a desire to destroy some percentage of physical and electronic currency out of people’s hands as an inducement to spend now.

    I think expiring currency might actually be a good idea — not because it would encourage people to “spend”[1] or unload cash, but because it would encourage people to hold property other than currency. Also it would be interesting because it might (depending on how it was done) highlight the fact that bank deposits are not really currency, but rather an option which entitles the owner to currency on demand backed by the bank’s balance sheet.

    A big part of the modern anti-realist economic edifice is the ‘money supply’, and money supply numbers in current economic theory conflate unlike securities with each other. In particular they conflate public securities issued by the sovereign, backed by his tax power and the marketplaces in which it operates, with private securities issued by banks, backed by their balance sheets.

    [1] “Spend” of course might mean immediate consumption, or it might mean purchase of durable but depreciating goods, or it might mean investment. In itself it just means that the owner of cash or deposits exchanges the cash or deposits for something else.

  • King Richard says:

    You should try looking at it from my side of the exchequer!
    What currencies should I accept? Which to exclude? What value do I use for taxation? Should I issue my own currency? If I do issue a currency, what shall it be based on?
    Being king is complicated.

  • Purple Tortoise says:

    Thanks for your response, Zippy. I think you offer the perspective of an elite. My concern is not only with our present-day American experience but the world at large and in history. Your proposed approach is tilted too much against the poorer classes. People have a need to store value against future hard times, and historically this has usually occurred through accumulation of currency (coins in a box). The poorer classes typically don’t have easy access to convenient assets in which to preserve wealth, so debasement of currency and other forms of financial repression hurt the less wealthy worst.

    You say, “nobody is preventing him from buying gold with his excess wealth”. Well, as a matter of historical fact, the U.S. government did outlaw private possession of gold for several decades. The point being that governments engaging in financial repression try to prevent people from using other assets as a substitute currency. And pushing people out of currency and into assets can create bubbles and economic instability. This may benefit the elite, but it is detrimental to the poorer classes.

    Here’s an empirical case. The Chinese government caps interest rates on bank savings so that they are lower than the inflation rate. It’s effectively a transfer of wealth from the middle classes to the state-owned enterprises that get artificially cheap loans. So the middle class savers instead seek some other assets in which to preserve wealth, such as vacant apartments, copper piled up the backyard, or the stock market. But these aren’t investments that generate wealth; they are simply speculative assets bought in hope that they can be sold for more than they were purchased. I don’t think this makes the nation as a whole better off, though it does benefit the elites.

  • Zippy says:

    Purple Tortoise:
    Some might consider the “perspective of an elite” thing an ad hominem. It is also false, having spent half my adult life living from paycheck to paycheck.

    And again, none of what I have written is an apology for particular government policies. All I’ve pointed out is that, whatever government officials happen to think they are doing, an accurate accounting of what they are in fact doing is not possible — because the accounting methods which would be required don’t exist.

  • Purple Tortoise says:

    I suppose it might be an ad hominem if elite were synonymous with never experiencing financial deprivation. But I intended it to mean someone who understands how the system works and is able to use that knowledge for personal benefit. I’ve known entrepreneurs born into the elite who nevertheless lived an impoverished lifestyle for a time while getting their businesses off the ground. Though not born into it, I myself have grown to become a member of my own sort of elite, and I need to remind myself that not everyone knows what I know. Anyway, you seem to be a pretty financially sophisticated fellow, and I was only pointing out that you can’t expect everyone to be that way.

  • Zippy says:

    Purple Tortoise:

    Fair enough: if the point is that government should behave justly toward the financially unsophisticated that is certainly true. However, in my view two things are required in order to have a picture of the situation which is adequate enough to avoid reaching disordered conclusions.

    First, we should acknowledge that the omnipresence of usury has made Everyman, elite in the sense you raise or otherwise, feel entitled to hold property while (1) not actually understanding the things they own and yet (2) remaining protected from risk and entropy by usurious contracts. Part of what makes usury appealing is that understanding the risks of ownership and fighting off the forces of entropy become someone else’s problem. It isn’t just elites who have to get this purged out of them. In fact the sense of entitlement – entitled to remain ignorant and have other people bear risk and fight off entropy – in Everyman is far worse than it is in more sophisticated elites.

    Second, while it is true that government policy should treat everyone justly, at this point we don’t even know – can’t possibly know – what that would look like when it comes to managing government securities like fiat (or other) currency. I’ve outlined in various places why that is the case and how a realist economic theory would be fundamentally different from all modern economic theories, whether Keynesian, Austrian, or what have you.

  • Zippy says:

    Still another factor is that modernity treats everyone as radically autonomous individuals. Managing generational property should be a function of an authoritative, patriarchal family and clan. Isolation of individuals and family-fragments is part of what creates the ‘retired ignorant granny widow versus sophisticated megacorp-megagovernment’ dynamic.

  • Purple Tortoise says:

    Thanks for the response, Zippy.

    I don’t know enough to say where I stand with respect to metaphysical realism. I will also admit that I don’t have a firm idea on what an optimal economic policy would look like. But I do wonder if all this intervention and “managing” of the economy is doing more harm than good — like going to a blood-letting doctor when ill rather than merely resting at home. And while I won’t claim to know how to govern the economy with perfect justice, I do suspect the more the government attempts to “manage” the economy, the more opportunity that provides for insiders to unjustly manage to their own benefit.

  • Zippy says:

    Purple Tortoise:

    But I do wonder if all this intervention and “managing” of the economy is doing more harm than good — like going to a blood-letting doctor when ill rather than merely resting at home. And while I won’t claim to know how to govern the economy with perfect justice, I do suspect the more the government attempts to “manage” the economy, the more opportunity that provides for insiders to unjustly manage to their own benefit.

    Agreed on both counts. Though I would express the former point more strongly: I am not merely suspicious that the folks who think they are driving the Big Machine don’t know what they are doing. I am quite firmly convinced that they cannot possibly know what they are doing.

    This tends to put me at odds with some of their critics, simply because many of the criticisms presume that the critics know what they are talking about. I can say with a great deal of certainty that at least all reasonably mainstream economic theories are a farrago of nonsense: critic and criticized alike are simply not in a position to know the things they claim to know.

    What we are witnessing when we see modern economic debate is a food fight in the asylum.

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