Recourse to the Magisterium
June 12, 2017 § 38 Comments
The distinction between recourse contracts and nonrecourse contracts as central to understanding usury – the conclusion that personal loans charging any profit whatsoever are usurious, whereas corporate bonds are not usurious – is obviously something I just pulled out of that wacky traditionalist tinfoil hat I was insanely doffing to the King.
Or maybe not.
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.
And of course it is sheer coincidence that the medieval Popes who were clearest in their condemnation of abortion, contraception, and the like are the very same popes who were clear in their condemnation of usury.
Zippy Catholic 
This appears to be the Latin.
[…] Source: Zippy Catholic […]
The usurer hopes to eliminate the risk he has shouldered by investing in the borrower’s project. He wants to shift his risk of failure onto the person of the borrower. It can’t be done, as is shown by the practical necessity of personal bankruptcy laws. It can’t be done as in, it is ontologically impossible to do it. Eliminating the risk entailed in action of any sort – financial or not – is like drawing a square circle.
Why don’t bankruptcy laws give issuers an out. I can declare bankruptcy and walk away from the loan.
Question 34:
“a personal IOU, a mere personal promise to repay, fails to be a ‘fixed, immobile good’”
From Zippy’s other link.
I keep seeing this whole issue in terms of letting our “yes be yes and our no no.” We are not supposed to swear, to take oaths based on future imaginary events we cannot control. Peter for example denies Christ 3 times as predicted, and yet he does not know he’s going to do this beforehand. So when we make a promise based on a non tangible good, an unfixed variable, we’re being led astray, we’re leaving the bounds of our own authority. We might as well be casting lots.
A corporate bond is more like an investment into a tangible thing.
I appreciate learning that some medieval popes were addressing these very issues.
Notice that in the above citation this clause:
… does not include the caveat “unless the managing partner can afford to do so.”
Commercial contracts for profit – all commercial contracts for profit – secured by personal guarantees, are usurious.
insanitybytes22:
One of my pet peeves in modern entertainment is the constant farrago of promises from characters which they cannot possibly be in a position to make; e.g. “I promise we’ll find your kidnapped daughter, catch the guy who did this, bring back your lost dog, find out what disease is killing you,” etc etc. And I agree that this is related to usury, wherein what secures the contract is a mere promise or IOU rather than specified and itemized property which actually exists.
insanitybytes22:
A humbling thought.
Indeed, who are we to claim the morning when the Sun sets or the dusk at dawn? That’s what adventure consists of, that we don’t own its course, that’s the medieval Catholic sense that traversed the world AMDG. But to Modernity all adventure is reactionary.
“For you formed my inward parts; you knitted me together in my mother’s womb. I praise you, for I am fearfully and wonderfully made. Wonderful are your works; my soul knows it very well. My frame was not hidden from you; when I was being made in secret, intracately woven in the depths of the earth. Your eyes saw my unformed substance; in your book were written, every one of them, the days that were formed for me, when as yet there were none of them.” Ps 139:13-16
This is very related to the questions I was asking myself while reading the recent Josias article on usury: “Why are they missing Zippy’s key distinction, and interpreting a mutuum merely as a loan of consumptibles, instead of a full-recourse loan of consumptibles? But then, what is actually Zippy’s basis/reference for the distinction?”
This blogpost very helpfully answers the latter question. Thanks, Zippy!
I’m still confused about the former, though. Why do so many Catholic defenses of the sinfulness of usury ignore the recourse distinction? Do you happen to have already addressed this issue? If not, it occurred to me it might be a good idea to formulate a response to their article and contact the Josias editors about it. I guess they’d be willing to facilitate a discussion and publish both (and perhaps others’) takes on the subject. However, I can imagine you’re by now rather tired of rehashing your several-years-old material so please consider this just a humble proposal.
(FWIW, my first impression is that your position is much stronger than the Josias author’s, although his reasoning might be more consistent with how the understanding of usury had developed by the 20th century and was ultimately formulated in the 1917 Code of Canon Law.)
Cheers,
Giuseppe
Giuseppe:
I don’t know. It is clearly present in Pope Sixtus V, in Pope Pius V, and in Aquinas (both de Malo and the Summa Theologica). Furthermore Vix Pervenit makes it very clear that usury consists in the nature of the contract not in the nature of the kind of property “loaned”.
But then again I have a lot of personal experience building and evaluating actual businesses, contracts, capital structures, etc. So it is easy for me to say that it is obvious, whereas it might not be obvious at all to other folks unless someone like me points out exactly where Aquinas and the Magisterium assert the distinction.
Giuseppe,
Why do so many Catholic defenses of the sinfulness of usury ignore the recourse distinction?
Since learning from Zippy Ive been wondering the same. Why are we so susceptible to this particular sin, or at least why did the Enemy choose to attack here? Why do we “want” to be so blind here? For me at least, it puts a lot of reactionary talk of red pills and superheroes in a certain context. And I may be making too much of it but it’s at least interesting – for me – to think about. I’m probably looking for some metanarrative that doesn’t exist, but it’s at least been helpful to me to consider the implications of usury and modernity’s acceptance of it.
Giuseppe:
It may be worth referring to our recent discussion of interpretation of the 1917 code of canon law here.
I think part of it has been the loss of Latin (and Thomistic philosophy which frankly depends on Latin) – see people like Belloc (who is one of the few people writing about usury as something that still happens) get hung up on “consumption” and contrasting it with “production” – but that’s already granting a “Marxist” view of property. See the loss of knowledge when “mutuum” and “societas” both get translated as “loan”.
A more correct distinction would be between the ownership and the use – the word usury has the answer embedded in it.
Wood and TomD:
I suspect that scholastics in particular tend to be susceptible to the “fungible thing” head fake: to thinking of “fungible” as pertaining to the intrinsic nature of the property itself; as opposed to the contract permitting the property lent, whatever it may be, to be treated as fungible. I can easily see this arising from the scholastic habit of thinking about the nature of things: it is easy to miss that the “thing” in question for usury is the contract, not different kinds of property lent under the same contract terms. Nature-of-contract versus nature-of-property-lent is I guess easy to miss despite the emphasis that Aquinas and the Magisterium place on it. This confusion also may arise from Aristotle’s treatment of usury, which was more ambiguous, and which Thomists tend to study for obvious reasons.
Yes it is a big one, in terms of basic errors in thinking about usury.
The tell is that nowhere do Aquinas or the Magisterium ever make a consumption-production distinction. Rather they are quite clear that “loan for consumption” (mutuum) means that the contract allows the property lent, whatever it may be (money or shoes), to be “consumed in its use”, that is, alienated from the borrower’s possession, either by being literally consumed or by being exchanged.
I think most people just aren’t used to thinking much about how contracts are ultimately secured: “the whole matter of security for contracts” (St Francis Xavier). But in the world of startup company financing capital structure and contract security are critically important, and personal IOU’s are financially (forget about morally) cancerous. So it was obvious to me what Aquinas, Sixtus V, Pius V, Benedict XIV, John de Lugo. etc etc were saying. All I had to do was use a highlighter, in effect, to draw attention to it.
In the infamous “triple contract” for example usury arises because the managing partner personally guarantees return of principal to the investor. This only ever confused anyone (well, anyone who didn’t want to be “confused”) because of failure to distinguish between property posted as security (licit insurance bond) and personal guarantees (illicit). The latter obviously violates Sixtus V’s condemnation in the OP (and other Magisterial condemnations).
I wonder if a “top X ways to go wrong when thinking about usury” nosology might make a good supplement to the Usury FAQ.
Wood:
The idea that wealth can be conjured out of nothing, that we can create wealth ex nihilo, is very alluring. Look at the appeal of lotteries, “who wants to be a millionaire” game shows, and other kinds of gambling. Wealth is even more appealing than sex: in fact most people assume that wealth is fungible with sex, and other things besides, so wealth is better than sex. Wealth is a superset of sex: greed consumes lust.
Usury creates the illusion that wealth can be conjured ex nihilo by making an incantation, by speaking a magic spell: the personal IOU.
[…] Discussing usury in a previous post, Wood asks: […]
In the infamous “triple contract” for example usury arises because the managing partner personally guarantees return of principal to the investor. This only ever confused anyone (well, anyone who didn’t want to be “confused”) because of failure to distinguish between property posted as security (licit insurance bond) and personal guarantees (illicit).
Zippy, would you be willing to explain this a little more? I can look up the Triple Contract and see things like this document…
http://www.kingscollege.net/gbrodie/IV%20F%203.html
…that seem to explain the triple contract, but based on that document I don’t understand your statement about the managing partner.
It does seem that a triple contract, using insurance, would not be usury. It also seems that if the guy getting the investment (the managing partner?) is also the source of the insurance policy, that becomes equivalent to recourse to the person, which is what allowed people to say (incorrectly, I’m sure) that a recourse loan isn’t a big deal, since it’s the same thing as a triple contract. Is that what’s going on here?
I suppose that this is actually a reductio of the triple contract — we can know that something’s wrong by this result — rather than something that allows us to make a recourse loan by mental hijinks.
Jake:
Noonan uses the triple contract as his coup de grace IIRC, insisting that it de facto neuters the prohibition of usury. But of course that depends entirely on the nature of the insurance bond. A personally guaranteed insurance bond is illicit; posting actual property as security is fine.
So as usual, denial of the prohibition of usury depends on equivocation between personal guarantees as security versus property as security.
So if you pay me $20 as a premium guaranteeing that your ROI will be at least $100, and I personally guarantee the insurance, that’s illicit; whereas if I set aside $100 and say “This is the money needed to pay if your ROI is zero,” (or this is the cow I would sell to get the $100, or whatever), that’s licit?
Jake:
Right. A personal guarantee is not a licit “insurance bond”. Rent charged against a collection of property, set aside as a contingency if things don’t go according to plans, is licit. See (for example, and in addition to the cite in the OP) here:
“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 [mutuum] loan.”
(Of course, if you game the scenario forward this raises the question of why a managing partner with the resources to fully insure the investor and his profit would bother with an investor in the first place. But it might make sense if, say, the managing partner had illiquid property like farms or estates to post as security which he doesn’t want to sell unless the enterprise fails).
Thanks, that helps.
Insurance companies today use statistical methods to determine how much money they should have in reserve. They don’t set aside specific pots of money/property to pay a premium holder’s claim; the company is “personally liable” for it. If a person did this, personally guaranteeing the insurance payout, it would be illicit. If a company does it, though, the payout is guaranteed by the company, and a company is property. As long as the payouts aren’t personally guaranteed by the officers, it’s still licit. (Whether or not it’s a good idea is another issue, and unrelated to the nature of the insurance contract itself.)
That’s why a triple contract could be licit, but the triple contract supposedly implied by the recourse loan is not licit. It’s not even a triple contract: It could be a simulacrum of a triple contract, but only if you actually did the mental gymnastics to make it appear so, which nobody ever does, so it’s not really even a simulacrum.
I wrote this like it’s a statement, but it’s a question. I’m playing Anti-Jeopardy. 🙂
Jake:
Right, contracts secured only by the [property inventoried on the] balance sheet of an institution are by definition not usurious. That doesn’t imply that they are by definition any particular combination of sane, moral, prudent, etc.
Thanks.
Zippy:
First of all, thanks for your replies.
I believe it would.
It may also be a useful step in the direction I suggested, that is, towards the grasping of the specific causes behind misunderstanding of usury particularly among those arguing for the sinfulness of usury.
Interesting. I considered the basic “fungible” criterion correct, and thought of the recourse distinction as being only subsequent to it, applying within the realm of fungibles. After all, could a contract governing a loan of money require that the exact same notes and coins be returned to the lender?
However strange it would be, it is not impossible. You therefore seem to be right in saying that “fungible” doesn’t pertain to a nature in an absolute sense — even if it could in a weaker, relative sense, based on what is usually the case. Your point still stands, though, as this can be identified as a source of confusion.
Giuseppe:
Aquinas was familiar with doing precisely that:
Giuseppe continues:
Aquinas again:
…
(As I’ve said, my task when it comes to usury seems to be just to take a highlighter to Aquinas and the Magisterium).
Giuseppe, one last thought:
Another barrier — I discuss this in Question 29 of the Usury FAQ — is that people arguing for the sinfulness of usury specifically often seem to want to turn the condemnation of usury specifically into an endorsement of their wider economic views, or into a hammer which can be used against every economic position with which they disagree.
In other words there are all sorts of non recourse (and therefore non usurious) financial activities these folks want to condemn (and which in some cases may well be worthy of condemnation). An (correct) understanding of usury which fails to condemn these things leaves them unsatisfied. Examples: fiat currencies, stock trading, government ‘debt’, bank lending, etc etc.
[…] confirmed by checking Magisterial sources, such as Vix Pervenit (cited above) and others (see here and here, for […]
Zippy:
Very amusing and strikingly relevant highlighting!
I can easily imagine that is the case quite often.
But there are also not a few people with no ax to grind in this regard who in spite of their best efforts simply fail to take the recourse distinction into account.
The misconception seems to have got embedded, in a way, in the Catholic (low-t) tradition itself. I guess a certain ultramontanist tendency is be blamed: if the Pope, the Bishops and even the Canon Law (recall the usury canon has been altogether dropped from the current 1973 Code) don’t judge it sinful (at least not explicitly/forcefully enough), who am I to judge? Kind of similar to what we’ve been observing with Amoris laetitia; I’m recalling you have already pointed out this connection.
Or, possibly even in parallel, some influential Scholastic (perhaps already becoming less so) theologians could (not necessarily consciously) spread a deficient understanding of the sin, which then became mainstream. There was certainly an incentive for that, with liberal capitalism becoming all the rage in major Catholic countries. Could Leo XIII’s policy of ralliement facilitate this process, of being more inclined to accept the world’s theses?
Giuseppe:
There is always a danger of over enthusiastic ecumenism producing a watered-down, caricature understanding of doctrine. Whatever the case I have no doubt whatsoever that the prevailing understanding of usury is a terrible caricature of the actual doctrine.
[…] Recourse (or “full recourse“) means that when some property is transferred into an individual’s (or group’s) possession, that individual (or group) personally guarantees to return, not the actual property, but some property with equivalent use. In short, recourse means that what secures contractual performance is a personal guarantee to restore the equivalent of what was borrowed. […]
[…] As with most attempts to turn the moral prohibition of usury into a decorative accessory which doesn’t actually prohibit any well defined objective behaviors, the part you aren’t supposed to notice is the whole matter of security for contracts. In this case the fact that insurance bonds (understood equivocally) were accepted as morally licit is supposed to make Noonan’s readers fail to notice the difference between actual property staked as security and a personal IOU. […]
[…] Noonan explains (absent any disapproval on Noonan’s part) the way progressive ‘pastoral accommodation‘ works when he discusses Pope Sixtus V’s decisive, arguably infallible proclamation of the categorical illicitness of any profit from recourse contracts: […]
[…] And he reinforces the fact that theological opinions of whatever vintage should not be confused with the authentic Magisterium of the Church: […]
[…] comment thread was an interesting exercise in schooling ideological free marketers on the actual medieval understanding of usury, as opposed to strawmen crafted through extremely selective […]
[…] Penance and thus to admit to Holy Communion a person who, while bound to observe the Church’s categorical and infallible condemnation of usury, deliberately and unrepentantly contracts for profits from a mutuum loan. Can the […]