January 21, 2015 § 7 Comments
The usurer says, Care for my property and pay me for the opportunity. Keep it intact. Make good every loss and return to me an increase which you by your energy and effort may produce.
Not only does financial slavery exact more labor for the amount invested, but it is more heartless than chattel bondage. The master had a personal interest in the slave he bought. His health and strength was an object of his care and his death a great loss. There was also often a mutual affection developed, as is sometimes found between a man and his horse or affectionate dog. There was sometimes real unfeigned mutual love. The master had a tender care over his slaves in their sickness and in their decrepit age, and sorrowed at their graves. The slaves were inconsolable in their grief at the death of their master.
The usurer has no personal interest in his slave. He has no care for his health or his life; they are of no interest to him. He may live in a distant state and has no anxiety about those who serve him. Their personal ills give him no concern.
Many faithful, industrial and honest borrowers are unable to return the loan. It is as difficult to retain property as it is to earn it. New inventions, new processes, new methods, new legislation and the changing fashions and customs, often sweep property from the shrewd and careful. “Riches make themselves wings; they fly away.” If for any cause the borrower fails there is scant sympathy from the usurer.
Usury: a Scriptural, Ethical, and Economic View, Calvin Elliott (1902)
January 14, 2015 § 16 Comments
You can download my Usury FAQ as an ebook in either epub or mobi (for Kindle) format. If you find any errors or whatever by all means let me know. I am placing them in the public domain, so feel free to pass them around to whomever you like, and be sure to check out how you can join the Friends of St. Martin de Porres.
January 13, 2015 § 6 Comments
I first became interested in the subject of usury during the 2008-2009 financial crisis. I was primarily an investor at the time, having ‘retired’ some years earlier following an undeservedly successful stint as an entrepreneur during the ‘dot com’ explosion of the 1990’s. I remember investment bankers telling me that business credit was seizing up because nobody could tell what was real. Somewhere around the same time I read St. Thomas Aquinas’ description of usury as selling what does not exist; and I was intrigued by the connection. My response as an investor was to start buying up investments, especially corporate equity, which was on sale at a big discount. My response as a curious individual and blogger was to start collecting old books on the subject and learning about usury.
My background with startup companies certainly colored my understanding of what I was reading. I had been involved with quite a number of small companies and had founded a couple of my own. One was rather ludicrously successful (though of all of the successful dot com entrepreneurs I was clearly the most slow-witted). But most startup companies fail. This is true even during the crazy boom times. Failure is actually the norm, modest success is somewhat rare, and stratospheric success is the outcome for perhaps one of every twenty to fifty high quality startups.
So when you are putting together a small company, making sure that the i’s are dotted and the t’s are crossed on what happens when it fails is just good business. It is never a happy thing when a business experiment fails, but if you’ve done your job right there is no rash of lawsuits and recriminations: you just scuttle the ship, sell off the scrap, everyone gets what they agreed and you move on with life. Messy windups are for amateurs.
As a result of this background, when (for example) Pope Callistus III talks (in funny sounding language) about the liquidation preferences of mortgage holders terminating in the property but not in personally guaranteed notes, he is speaking a language I understand.
Prior to the financial crisis I hadn’t really thought about usury, and therefore held to fairly conventional opinion to the extent I had any view at all. My perspective as a Catholic (without so much as a second thought) was a kind of naive and vague impression that times had changed and money had changed and that the doctrine probably only applied to things like loan sharking. In other words, I more or less trusted the “conservative” narrative, and was certainly not sympathetic to the “progressive” notion that basic doctrines can be tossed out while pretending to retain them.
Imagine my surprise, then, when I found myself in perfect agreement – as best as I can tell – with St. Thomas Aquinas, notorious hard-liner on the subject of usury. Imagine the sense of irony as the straw armies sent against him by generations of the confused and the intransigent fell, as it became clear that – contrary to what we may have been led to believe – the authoritative Magisterial pronouncements on the subject support his view, properly understood, and are not confusing or contradictory themselves. Imagine my surprise – I should not have been surprised – that the simple, elegant, deeply moral wisdom of the Church was right all along.
What follows was originally posted on my blog “Zippy Catholic” in the format of an FAQ (a list of Frequently Asked Questions and their answers). It retains this basic format and the informal, conversational, opinionated style typical of the kind of blogging I do. It is somewhat ad-hoc and redundant, reflecting its genesis and development in many live discussions. It contains some links to external sites (especially my own blog) but I’ve tried to incorporate all of the essential material into the ebook. I do not represent myself as an expert or authority: the references, arguments, and explanations should all be evaluated on their own merits, and it is entirely possible that some proclamation or other of which I am unaware could toss a grenade into my understanding and require rethinking the whole thing. I do believe I have this right, but I’m only human and the Magisterium might come out with something new tomorrow which contradicts the views and understanding expressed. I offer it here as my contribution to what is probably a long overdue discussion among Catholics; a discussion which actually takes usury seriously as a grave and execrable moral wrong, and its prohibition as something which has real implications for how we live as Christians – though perhaps not the implications that you, dear reader, have been led to expect.
Virginia, January 13, 2015
(NOTE: This preface was edited slightly for inclusion in the ebook).
December 11, 2014 § 1 Comment
I did a pretty significant update to the Usury FAQ based on recent discussions at several web sites, adding several questions, revising a few, and improving the format a bit.
And a number of updates on on 12/13 and 12/14. At this point any significant revisions/additions will probably be a result of additional feedback that comes in, rather than me adding things that I am aware of having been left out of the original draft. I think the FAQ has a pretty solid foundation now.
November 10, 2014 § 208 Comments
“Are we not ashamed to pay usury? Not contented within the limits of our own means, we do by giving pledges and entering into contracts, fabricate the yoke of our slavery.” – Plutarch
We exhort you not to listen to those who say that today the issue of usury is present in name only, since gain is almost always obtained from money given to another. How false is this opinion and how far removed from the truth! We can easily understand this if we consider that the nature of one contract differs from the nature of another. – Vix Pervenit
Understanding usury requires an understanding of how the nature of some contracts differs, fundamentally and categorically, from the nature of others. Usury is not a matter of the same kind of contract differing only by ‘excessive interest’. Usurious contracts constitute a kind of contract which is intrinsically immoral by its very nature. This FAQ is intended to help people understand what usury is – and is not – and answer many of the questions which naturally arise.
[Note: this FAQ is also available in the form of a public domain ebook]
- What is Usury?
- What is “lending”?
- Is usury always morally wrong?
- What if the interest rate is reasonable?
- What is the key difference between a mutuum and other contracts?
- What if the borrower is an institution like a government or corporation rather than an individual?
- I don’t get it. Why is charging interest on a loan always morally wrong?
- But economic value is relative, isn’t it? Isn’t value reducible to whatever people’s preferences happen to be?
- What if the loan is secured by collateral?
- Does collateral have to be physical?
- Aren’t lots of non-mutuum contracts unjust?
- Why would I ever lend someone money if I can’t charge interest?
- Didn’t the Church allow the Franciscans to collect “interest” above and beyond the principal on their mutuum loans to the poor?
- Hasn’t the Church approved charging interest to recover opportunity costs? What about the time value of money?
- Shouldn’t an investor be compensated for giving up the opportunity cost of investing his money in something else?
- Doesn’t the future labor of a worker constitute a ‘real asset’ against which a loan can be collateralized?
- Traditionalist scholastics claimed that you can’t sell time; progressive scholastics asserted that the worker’s wages are a counterexample. Weren’t the progressives right?
- Traditionalist scholastics claimed that you can’t sell risk; progressive scholastics asserted that an insurance bond is a counterexample. Weren’t the progressives right?
- Is a corporate bond usury?
- Is a car loan usury?
- Is a home loan usury?
- Are credit cards usury?
- Does this mean that I can’t take out a student loan without committing mortal sin?
- What is wrong with contracts between consenting adults?
- Aren’t all unproductive loans usury? Wasn’t Belloc right when he said that the distinction between usurious and non-usurious loans was that the latter are productive?
- Haven’t commerce and currency changed in such a way that usury is no longer much of a concern?
- Isn’t the government the biggest violator of them all?
- Who the heck are you to be lecturing us all on usury, anyway?
- I know that usury was traditionally considered an execrable mortal sin. But didn’t the Church change canon law and pastoral practice to remove the penalties and stigma associated with usury? Haven’t most Catholic theologians accepted that the world has moved on from the time when the prohibition of usury made sense?
- If the sovereign should decline to enforce usurious contracts, doesn’t it follow that the sovereign should decline to enforce any contract of exchange whatsoever which empowers one party to pursue a deficiency judgment against the other party personally, independent of any real assets posted as security?
- I really don’t get it. Why again do you say that fixed-income investments in (e.g.) corporations (corporate bonds) are not usury?
- In question 16 you say that the value of future labor is not a real asset which can be used as collateral on a for-profit loan. But wasn’t it relatively common before the modern era for people to be sold into slavery to pay off a debt?
- Doesn’t St. Paul tell slaves to obey their masters?
- Doesn’t the safe harbor of personal bankruptcy imply that modern loans are really non recourse?
- What if the mutuum loan is made in wheat, gold, or rental cars rather than fiat dollars?
- Wait, does this mean that if I lend out my car and the borrower destroys it, he doesn’t owe me anything?
- I see that the Magisterium and Aquinas have actually been clear that lack of explicit recourse to real assets is central to usury: that full-recourse lending for profit is what is defined as the moral problem. But why is that the case?
- But you’ve said that intangible or only partly tangible things like patents and operating businesses can be ‘objects’, and thus can be property. So how do I tell the difference between what can be ontologically real property and what can’t?
- But wait, can’t a full recourse creditor go after Bob’s estate when he dies?
- Doesn’t the Vatican Bank make full recourse loans?
- What about that Catholic Encyclopedia article, anyway?
- Why do you say that the 2008 financial crisis was founded in usury?
- Does this mean that ideally consumers should always pay cash for things like houses and cars?
- Suppose I am thinking about agreeing to a financial contract which will produce some interest or other profit for me – say by opening a bank account. How can I be sure that what I am about to do is not usury?
- Is it morally licit to charge interest on a full recourse loan just to cover inflation?
- What about futures contracts? Are they inherently usurious?
- What is the evidence against Aquinas and in favor of the modern view that a reasonable amount of profit on a simple mutuum loan is morally licit?
January 1, 2013 § 6 Comments
“Are we not ashamed to pay usury? Not contented within the limits of our own means, we do by giving pledges and entering into contracts, fabricate the yoke of our slavery.” – Plutarch
In applying the Simple Usury Test it becomes obvious that the critical distinction between usurious lending and non-usurious lending is collateral. If the loan is secured by specified tradable collateral and only that specified tradable collateral, with no further moral or legal obligation beyond surrender of that collateral on the part of the borrower to repay principal or interest, it is not usury. This naturally shifts the focus to what constitutes legitimate tradable collateral, and commenter Antonym points out that in the past the custom of selling onesself into slavery to pay off a debt was common practice. If it is not intrinsically immoral to sell onesself into slavery, even in the most desperate of circumstances, it seems to follow that no lending contracts are usury.
An economic libertine has no principled way to oppose the practice of selling onesself into slavery, because for an economic libertine the essence of the justice of a contract is mutual consent: if the contract is mutually consensual that is sufficient for it to be “permitted”, that is, enforced by the police, courts, bully pulpit and guns of the government. So it is perfectly natural for economic libertines to fail to see what is unjust about usury.
I would suggest (perhaps counterintuitively) that it is not intrinsically immoral to sell onesself into slavery in desperate circumstances; but at the same time, it is intrinsically immoral for a lender to take usury on a loan. The reason is because the person who commits the intrinsically unjust act is the one who purchases and takes possession of the chattel slave (whether from the enslaved himself or from someone else). In the case of usury the person who commits the intrinsically unjust act is the lender who takes usury on the loan, not the borrower who acts out of desperation. The act of the borrower is asymmetrical to the act of the lender, as the act of the victim is always asymmetrical to the act of the criminal.
Now, this is not a blanket permission slip to sell onesself into slavery nor to borrow from a usurer on a whim. It is merely a conclusion that neither action is intrinsically immoral, and therefore may be justifiable in some circumstances under some rubric of material cooperation with evil. The work involved in justifying a particular act of material cooperation with evil – or concluding that it is not justified – always depends on the particular circumstances.
St. Thomas Aquinas gives us his view of the matter (ST II-II, Q78, A4):
I answer that, It is by no means lawful to induce a man to sin, yet it is lawful to make use of another’s sin for a good end, since even God uses all sin for some good, since He draws some good from every evil as stated in the Enchiridion (xi). Hence when Publicola asked whether it were lawful to make use of an oath taken by a man swearing by false gods (which is a manifest sin, for he gives Divine honor to them) Augustine (Ep. xlvii) answered that he who uses, not for a bad but for a good purpose, the oath of a man that swears by false gods, is a party, not to his sin of swearing by demons, but to his good compact whereby he kept his word. If however he were to induce him to swear by false gods, he would sin.
Accordingly we must also answer to the question in point that it is by no means lawful to induce a man to lend under a condition of usury: yet it is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need. Thus too it is lawful for a man who has fallen among thieves to point out his property to them (which they sin in taking) in order to save his life, after the example of the ten men who said to Ismahel (Jeremiah 41:8): “Kill us not: for we have stores in the field.”
 Someone who purchases a slave in order to gain his freedom is clearly doing something categorically different, since the purchaser does not ‘take possession’ of the ‘slave’ in the pertinent sense.
December 30, 2012 § 19 Comments
I’ve contended that usury is quite a bit simpler a subject than it is usually understood to be, and that preventing most of it as a practical matter would be rather straightforward. What I haven’t done though is give you a simple test to check to see if a given proposed lending contract is usurious. I intend to do that here.
In order to determine if a proposed contract is usurious, we need to ask the following:
- Is profitable interest charged on the loan?
- Has the borrower posted collateral providing security on the loan? (Note: a corporation or partnership counts as collateral).
- Is the lender’s recourse for recovery of principal and interest, in a case of default, limited to the named collateral and only the named collateral?
If all three of these are true, it is not usury. If (1) is true and either (2) or (3) are false, it is usury.
December 18, 2012 § 6 Comments
Like many subjects, usury makes for some rather complex discussion. At bottom though I think it is a simple enough concept. In fact in the comments below I drafted a proposed Constitutional amendment that would wipe out legally sanctioned usury. It took me eleven words:
No government or arbiter shall enforce deficiency judgements in any contract.
If you don’t like that one, here is an alternative:
All debt contracts in the United States shall be nonrecourse.
December 16, 2012 § 30 Comments
I’ve been having a discussion with Kristor in email about usury, and the subject of government-issued treasury bills has come up. With treasury bills the government borrows fiat dollars from an individual and then pays him back both principal and profitable interest later. There are no specific assets backing those treasury bills, so on its face it looks like usury.
The fact that companies and individuals can issue their own currencies, for example common stock, is part of the picture. It can be confusing though because some ‘tradable instruments’ are denominated in other currencies and some aren’t. When I sell a note to a third party, the principal and interest owed on that note is usually denominated in dollars or some other sovereign currency. But some tradable instruments like common stock are not denominated in another currency: its value is just whatever transactional value it has right now on whatever market trades in it.
If a company decides to issue more shares of stock, that debases the value of all existing shares. But it isn’t usury. The shares of stock are not denominated in some other currency: they are their own currency. In the case of stock you get voting rights and other rights; so it has value. But that value is not denominated in any other currency. If the company borrows its own shares from me and then returns them along with newly issued shares as “interest” on the loan, that isn’t usury. It isn’t that my stock in itself begat more stock: the company issued new stock.
If the sovereign decides to issue more fiat currency, that debases the value of all existing fiat currency. But it isn’t usury. The sovereign agrees to accept his currency as payment for taxes, so it has value. Its value is not denominated in any other currency. When the sovereign borrows fiat dollars from me and returns them later with interest, it isn’t that my dollars begat more dollars: the sovereign has issued new dollars as interest.
In a case of usury, though, no new currency is being created by the issuing entity to pay the “interest”. A usurious transaction is a mutuum (person recourse) loan between two third parties independent of the sovereign who issues the currency. Currency is not in itself capable of creating more currency. Therefore in a mutuum loan (where a borrowing person is on the hook to repay the principal amount in full, independent of a specific and limited recourse to specified contractual assets) the lender is really only entitled, in justice, to return of precisely what was lent and nothing more. On the other hand if a “lender” purchases shares in real assets for production or consumption he can contract for the investment or consumption of those recoverable real assets in an asset-recourse loan, which is not usury.
Interestingly it follows that it is possible for third parties to make usurious loans to each other of (say) company stock. Lending 100 shares to Bob and demanding that he repay me with 110 shares at a later date no matter what, independent of what he does with the shares, would be usury.
Now, it is certainly possible for company management to commit an injustice against shareholders by debasing its stock. It is possible that many government actions w.r.t. currency are unjust under this sort of rubric rather than a rubric of usury. But showing that would take more work.
With his permission, I’ve included the pertinent background exchange with Kristor below the break:
December 1, 2012 § 6 Comments
Fundamental option moral theories, which separate a person’s inner orientation or intentions from his objective concrete chosen behaviours, have been condemned by the Magisterium as heretical, to wit:
A distinction thus comes to be introduced between the fundamental option and deliberate choices of a concrete kind of behaviour. In some authors this division tends to become a separation, when they expressly limit moral “good” and “evil” to the transcendental dimension proper to the fundamental option, and describe as “right” or “wrong” the choices of particular “innerworldly” kinds of behaviour: those, in other words, concerning man’s relationship with himself, with others and with the material world. There thus appears to be established within human acting a clear disjunction between two levels of morality: on the one hand the order of good and evil, which is dependent on the will, and on the other hand specific kinds of behaviour, which are judged to be morally right or wrong only on the basis of a technical calculation of the proportion between the “premoral” or “physical” goods and evils which actually result from the action. This is pushed to the point where a concrete kind of behaviour, even one freely chosen, comes to be considered as a merely physical process, and not according to the criteria proper to a human act. The conclusion to which this eventually leads is that the properly moral assessment of the person is reserved to his fundamental option, prescinding in whole or in part from his choice of particular actions, of concrete kinds of behaviour.
A similar disconnection between concrete reality and an imaginary inner world is made in economics when it comes to usury. It should come as no surprise that justifications for usury ultimately rest on an appeal to imaginary unreality: St. Thomas Aquinas after all tells us that what is morally wrong about usury is that it involves selling what does not exist.
Usury is when profitable interest is charged for the use of money -qua- money, independent of what the borrower does with the money and without reference to the purchase and rental of actual real assets from which principal may be recovered.
One reason usury is proposed to be morally licit – that is, one of the arguments against the Church’s teaching that usury is morally wrong – is that people have a preference for money now as opposed to money later. In a purely interior way, without reference to any specific choice or behaviour (does this sound familiar?), value is created by the mere fact that the lender would, all other things equal, prefer to keep his money rather than lend it out. His mere preference creates value out of nothing, which translates into a moral obligation on the part of the borrower to produce for him a profit.
I don’t have a theory of real economic value that can answer whatever questions people may raise about it. But I do know that a theory of value which proposes it to arise from the mere preferences of individuals independent of concrete actions cannot be right.
This of course does not deal with all of the various arguments about usury over the past 500 years or so. But I do think that arguments which rest on a preference theory of value can be dispensed with, because preference theories of value are not fully in touch with reality.