June 15, 2018 § 10 Comments
It is worth emphasizing that personal guarantees on invested capital (usury) are indeed very bad business in entrepreneurship, where capital and labor/expertise come together to produce objectively valuable goods and services. 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); things that they cannot afford without selling themselves into slavery, at prices massively inflated by the ready availability of usurious loans.
June 14, 2018 § 11 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.
June 13, 2018 § 22 Comments
I understand and appreciate the point – the lender merely gets the borrower’s pledge. The borrower gets the thing.
But it is unsatisfying that it is necessary to introduce idiosyncratic usages of very well-defined words. Nobody ever says that a lender “sells” the “loan”. Selling is something quite distinct from lending.
Like many words the English word “loan” is multivocal: it has several distinct meanings. I’ll point out two of them in this post.
In one sense of the term, I loan you my car to drive for a while since your car is in the shop. The term “loan” here means that I retain ownership of my car while you use it: you are obligated to return that actual car to me when you are finished using it. Because you are using my car, it is morally licit for me to make a profit – charge you rent – for your use of my car.
In a different sense of the term, I loan you some flour to bake into bread and eat. The term “loan” here means that you now own that actual flour, and have personally pledged to pay me for it later with different flour. (This is the kind of “loan” which is meant by the Latin term “mutuum“). As a mutuum lender I no longer own that actual flour, you do: I have agreed that you may dispose of that actual flour however you wish. Furthermore, you have not pledged any collateral: you have not sold me an interest in any specific itemized actual property that you do own: all you have given me is a pledge, not ownership of any thing. In virtue of the agreement itself I now own nothing, I simply have your promise that you will pay me for what you have purchased within some agreed time.
So it is morally illicit for me to make a profit on your use of that actual flour: if I attempt to do so I am attempting to charge you rent for the use of something which I do not own. Charging rent for the use of property I do not own is intrinsically unjust. I do not own the flour any longer once I have given it to you under a mutuum: if I did, then when you bake and eat the bread you would be stealing from me, as if you had sold the car that I lent to you in the other example.
If it is always intrinsically immoral to make a profit from this kind of lending, then why would anyone lend in this specific manner? Out of friendship or charity, of course, and in pursuit of the common good.
But it is never morally licit to lend under a mutuum out of financial self interest.
June 11, 2018 § 5 Comments
A usurer attempts to sell some actual property to a “borrower” while retaining the potential for profit which inheres in that actual property.
The borrower in a mutuum owns the actual property he is “lent”, because the mutuum authorizes him to dispose of or consume that actual property as he sees fit: his obligation to the lender is a personal obligation, independent of what happens to that actual property. Once a mutuum has been joined the borrower fully owns the actual property and the lender owns nothing at all: the lender merely has the borrower’s personal pledge of some different unspecified property of the same worth, at some time in the future.
But any potential which inheres in actual property is not separable from that actual property. You can’t sell that wine while retaining that wine’s potential for refreshment. So another way to think about usury is that it represents an attempt to sell property without really selling it. The usurer transfers full ownership of the property to the borrower personally, since the borrower’s obligation under the agreement remains however he disposes of that actual property; and simultaneously the usurer insists on guaranteed actual profits (not even just potential profits!) from property he no longer owns.
It is fair to ask, then, if any profits from a mutuum are immoral why would anyone lend under a mutuum? And the answer is that we should never, categorically, lend under a mutuum in pursuit of financial self interest: mutuum lending is only morally licit as an act of charity or friendship.
June 9, 2018 § 34 Comments
“Loan for consumption” is the way that the Latin term “mutuum” is sometimes translated into English. Any (and all) profits from mutuum contracts are what constitutes usury. Profits on non-mutuum contracts are not usury: such profits may or may not be licit on other grounds, but they are not usury specifically. The great majority of present day business investment is not usurious: usury occurs mainly in lending to consumers, especially in the form of credit cards, student loans, and the like.
I’ve given my own various descriptions of what distinguishes a mutuum from other contracts. A mutuum is secured by the promise of the borrower as opposed to (or in addition to) collateral property. The agreement is that the borrower may consume all of the actual property – that the property lent and any collateral may be fully alienated from the possession of both borrower and lender – and yet the borrower’s obligation to repay remains. The lender has recourse to the borrower himself through his promise, and not merely to an inventory of collateral property, for recovery of what the lender invested. The “asset” securing the loan simply is the promise or personal IOU of the borrower: it literally does not exist as something distinct from the contracting parties themselves. The modern terminology for this distinction is (at least roughly speaking) “non recourse” lending, as distinct from “recourse” lending or lending backed by a personal guarantee.
Citing a blogger with a goofy pseudonym doesn’t really do it for many people though, and understandably so. If someone asks you for a Magisterial citation for what distinguishes mutuum contracts (where profit is immoral) from contracts which may give rise to morally just profits, a helpful one comes from Pope Callistus III (1455-1458), Usury and Contract for Rent, from the Constitution “Regimini universalis” May 6, 1455 (quoted in Denzinger). In this citation Pope Callistus III describes what specifically makes the charge of rent or interest morally licit, that is, non-usurious:
“As guarantee for the payment of the aforesaid revenues and rents [borrowers] mortgage those of the aforesaid houses, lands, fields, farms, possessions, and inheritances that have been expressly named in the relevant contracts. In the favor of the [borrowers] it is added to the contract that in proportion as they have, in whole or in part, returned to the said [lenders] the money just received, they are entirely quit and free of the obligation to pay the revenues and rents corresponding to the sum returned. But the [lenders], on the other hand, even though the said goods, houses, lands, fields, possessions, and inheritances might by the passage of time be reduced to utter destruction and desolation, would not be empowered to recover even in respect of the price paid.”
June 4, 2018 § 13 Comments
Despite its unwieldiness I prefer the phrase “decline to enforce usurious contracts” over the phrase “prohibit usury,” because the latter begs the question1 of authority in favor of usurers.
 As usual I use the phrase “beg the question” in its classical sense, where it means assuming the very thing one sets out to demonstrate. In this case the phrase “prohibit usury” assumes that by default those in authority should enforce usurious contract terms and frames declining to enforce them as “prohibition”.
June 3, 2018 § 22 Comments
If we don’t grasp that love is rooted in truth, all of our attempts at love devolve into the empty and dissonant clanging of cymbals.