Mowing the bread
June 14, 2018 § 13 Comments
Can you licitly contract with a borrower, “I will give you this sack of flour for a sack of the same size plus one dollar, payable tomorrow?”
No you cannot, at least not simply, because this is usury: you are demanding a personal guarantee of more than one sack of flour tomorrow, as payment for exactly one sack of flour today.
What you could licitly do is buy equity in the borrower’s lawn mower for one sack of flour. You could then rent your share of his lawn mower back to him until he redeems it by giving you one sack of flour, or, barring that, the lawn mower.
Of course if a piano falls on the lawn mower you both now co-own, you lose what you invested (in addition to being out the profits). As co-owner of the lawn mower you share in any risks to that lawn mower.
You could buy an insurance bond from Joe against falling pianos, with some of your mower rent proceeds, secured by the product of Joe’s wheat field. But perhaps there would be a drought, etc.
All of which is to say that if the contract is a mutuum, any contractual profit is usury. But if the contract is not a mutuum and in no way contains a mutuum (hidden or otherwise), contractual profits are not usury.
Zippy Catholic 
Suppose I lend you a bag the cheapest Wal-Mart flour but in return I demand a bag of high quality flour (e.g. King Arthur’s), Is this usury? The return is in kind, but there is difference in quality. On the flip side, reverse the positions of lender and borrower. Does the borrower justly return the principal with a cheaper or lower quality flour?
What if someone lends a (long term) treasury bond or even a stock (as in short and long contracts without a premium for the sake of the argument)? How much is the lender owed at the loan expiration date (presumably before the bond expiration date) if the contract is to be non usurious?
It seems the lender still shares the risk of the bond/stock if he is entitled only to the delivery of the same instruments at expiration date.
The way I see it a sack of flour is a stock in Flour Inc. and the price o flour may sky rocket or tank at expiration date.
Paying low quality flour in exchange for high quality flour is a form of cheating, and is inconsistent with the gratitude that the mutuum borrower owes his friend who lent to him. If it is the best he can do though his friend will see it as more than sufficient.
The fact that mutuum lending is only ever licit as friendship or charity makes pseudoproblems out of much of the associated casuistry.
Ed:
It is hard to say for sure from a brief blog comment, but I get the impression that you are failing to carefully distinguish between actual things and abstract kinds of things: that is, you are failing to distinguish between reality and make believe.
This reinforces my impression.
“The fact that mutuum lending is only ever licit as friendship or charity…”
I take that as the central point. Being miserly with a licit mutuum is perverse.
[…] Source: Zippy Catholic […]
To me, the key to your excellent book Usury was realism. The licit business deals all involved committing real things to the dangers of the future in return for profit (where “real things” could include partnership or company shares). The bad stuff involved taking a mere commitment from a human being to return more later, in exchange for a favor done to that human being. Thus, at least as imagined, it gets profit with no substance or risk.
The absence of realism in the bad stuff makes it susceptible to Ponzi-like towers reaching to the imaginative sky, with more and more people piling on and waving air tickets with the assurance of striking it rich. This is what toppled in 2008. Worse yet is when the system “works,” and someone who operates in the world of reality must shoulder heavier and heavier burdens – a situation I described in a cartoon screen-play I wrote in 2010 called “The Accelerating Slave.”
This is a point Zippy has made before in other places, but I think it’s good to make again: not only is usury sinful, but like all other sins it’s also bad. In this case, I mean bad business sense.
Consider: a man comes to you asking for a loan so that he may buy a ship in order to trade among the Spice Islands.You have a choice; you can lend through usury or in a licit manner.
In securing the non-usurious loan, you agree with him that you will loan him the money for the ship, but that until he pays off the agreed loan amount (plus interest etc.) you own the ship and he merely operates it. If his trade goes bad, well, you still have the ship you can hire out to another merchant.
Alternatively, with a usurious loan you have his personal letter of faith and credit. This is all well and good on your balance books unless the trade goes bad – and what then? You can demand your money in as loud and insistent a manner as you like, but it simply isn’t there. True, with the support of the sovereign you may be able to strip him of all his other assets, reclaim the ship, and sell him into slavery to make up the imagined difference, but that is all expensive, laborious, and uncertain, and the central point to this is that your books won’t balance properly. You were counting money that wasn’t there as if it were, and that can involve you in all manner of difficulties.
In fact I’d go so far as to say that our current state of widespread usurious lending only appears to make sense in a centrally-coordinated economy that’s generating a massive number of relatively permanent and well-paid sinecures (which we generally call ‘white-collar jobs’), because this both provides long-term income security to lenders through their clients and makes bankruptcy a worse fate than debtor’s prison, since it effectively locks you out of the sinecure-mill.
Rhetocrates:
It is worth emphasizing that personal guarantees on invested capital (usury) are indeed very bad business in entrepreneurship. Personal guarantees are a huge red flag that the contracts and capital structure are dysfunctional and should be re-worked before a deal is inked, or that perhaps the deal is no good at all on any terms. It is a naive and foolish business practice to give capital to a business partner under a regime of personal guarantees.
Usury is great business though when the objective is to sell things to consumers (e.g. college degrees in grievance studies fueled by five dollar lattes) that they cannot afford at massively inflated prices.
I’ve found the following modification of the flour-mower illustration useful to understand why usury is absurd, even if you don’t know Thomas Aquinas from Thomas Edison.
Scenario the first: You sell a sack of flour to your friend for the price of one lawn mower. In the same transaction, you also give him an irrevocable option to purchase the mower from you at any time for the price of one sack of flour. Titles to real things have been exchanged, but no value has shifted between you and your friend. The bottom lines of your balance sheets remain the same. In the next step, you sell the use of your mower to your friend for one dollar per day. As soon as he gives you (the owner of the mower) the mower to you, he is no longer obligated to give you a dollar per day. Your transaction is complete. He can do anything he likes with the option to purchase the lawn mower for one sack of flour. The three things that come to mind are exercising it, not exercising it, or selling it to someone else.
The crucial element here is that the lawn mower exists, and is something that can be rented. It can be used to produce value.
Scenario the second: In an unsecured transaction, you sell a sack of flour to your friend for his promise to pay you a sack of flour. Again, no value has shifted between you and your friend. You can carry that promise as an asset on your books, and your friend should carry it as a liability. The bottom lines of your balance sheets remain the same. But unlike a mower, that promise cannot be rented. You can transfer it to a third-party for value but there is no way to rent it to anyone. Your friend cannot have the enjoyment of the promise the way he can enjoy the lawn mower. Unlike a lawn mower, which produces things of value (mowed lawns), the promise to pay a sack of flour produces nothing. Attempting to charge a dollar per day for the use of something that cannot be used is absurd. You’re selling nothing and expecting to be paid something.
fontesmustgo:
That is an excellent phrasing.
Scenario the second: In an unsecured transaction, you sell a sack of flour to your friend for his promise to pay you a sack of flour. Again, no value has shifted between you and your friend. You can carry that promise as an asset on your books, and your friend should carry it as a liability.
That’s true. But to be perfectly clear, you should not carry it on your books as if it’s value were the same nor the equal or equivalent of actually having one sack of flour. The promise can fail to be met, he could die before he can satisfy the promise.
Here is an interesting result of the usury discussion. Suppose your “friend” is the sort that borrows things and forgets to return them until they are broken, rusted, or otherwise useless. Then he returns them. He does this so often that he loses your friendship. Now he comes to you and asks to borrow your lawnmower. You will no longer lend to him out of friendship, so you say no to a a straight, simple mutuum loan of it. He presses you: he really needs to borrow it, just for one day. Suppose that the going rate for rent on a lawnmower is $30 per day at the rental store and the cost of the (new) mower is $300. You agree to the following: you will sell him the lawnmower for $350, but provide you have the option to buy it back from him tomorrow at the pre-set price of $300.
I think there is no usury here. There is no lending. There is indeed a profit motive, but that’s because there will be no borrowing based on friendship. The $50 extra is not a fee for the use of the lawnmower, because the neighbor will own it outright if he agrees to the terms. It is a (well padded) fee for your being willing to take on the inconvenience of going off to buy another new lawnmower, when you have a perfectly good one today. And an incentive to him to make sure the lawnmower is in good condition tomorrow, if he wants to get $300 for it. Since you are not obliged to exercise the option, he really is buying the lawnmower, not borrowing or renting it.
pilgrim:
If you have an option to “buy back” the mower then you have not fully relinquished ownership: the mower is an asset owned by the societas constituted by you, your friend, and the contract.
I agree that there is no mutuum (and therefore no usury), since the contract involves no personal guarantees.