Usury Debate - Opening Statement
In order to determine whether or not usury is a sin, we must first answer the question what is usury. This is a difficult task if for no other reason than we have forgotten the purpose of exchange and the aim of justice in various transactions. Indeed, we will no doubt find it necessary in this debate to acknowledge the equivocal meanings of “usury” that each of us employs. Hence it is necessary to begin by looking at the fundamental nature or essence of the act of usury. First and foremost, usury concerns the nature of commutations or contracts. Consequently, the evil of usury is tied to commutative justice or justice in giving and receiving. Now, having worked for 11 years in finance, it is quite clear that there is an innumerable diversity of contracts determined by the multitude of ways that property rights can be structured and exchanged and promised nowadays. To discover in what sort of contracts usury can be found, I will now turn briefly to the Christian tradition.
If we look to the Old and New Testament, we can see the progressive pedagogy of God with respect to usury. In the Pentateuch, God tolerates usury against foreigners but firmly condemns it against one’s neighbors.1 This is not because such a practice is just in itself, but rather to avoid greater evils given the hardness of the hearts of men.2 However, as St. Jerome notes,3 the prophet Ezechiel goes on to condemn all usury, not just that against one’s neighbors, naming it alongside murder, adultery and theft. Ultimately with the coming of Jesus Christ, men are called to the fullness of evangelical perfection. He calls us not only to avoid exacting usury, but to lend hoping nothing in return. That is we are not only not to hope for profit from our lending, but not to hope even the principal returned. This act of lending is meant to help a neighbor in need, seeking his good, and consequently not seeking even the principal if the borrower is in worse shape than at the start.
While Jesus shows us the holiness to which all men are called, the Scriptures do not make it clear what sort of contract usury arises in. We have seen that is comes from loans, but there are many different ways of structuring loans. Fortunately, the Church clarified this as early as the fourth century. St. Ambrose wrote a work against usury called the De Tobia.4 Before becoming bishop of Milan, he studied Roman law and acted as a judicial councilor and provincial governor. Hence, he knew the law of contracts well. With this knowledge, he identifies the Scriptural condemnation of usury with the Roman Law called the loan of mutuum.5 We see this identification of usury with the mutuum in the disciplinary canons of the Council of Nicaea of the same century.6 The Council expels clergy that engage in usury, specifying the mutuum and the “centesimas” that is the legal rate of usury on a mutuum in the Roman Empire at the time.7 This connection is repeated again and again throughout the Christian tradition in Canon Law, the Scholastics, Councils and Pope with the final encyclical on usury from Benedict XIV, Vix Pervenit, fixing the doctrine.8 Usury then has been consistently defined as a profit, any profit, exacted from a mutuum contract.
However, we have to clarify what exactly this mutuum loan is in order to understand why profititing from it is evil. Fortunately, the mutuum is as familiar to us as borrowing a cup of sugar from our neighbor to bake some cookies. In such as case, one has informally contracted a mutuum, however, in order to clarify this further it will be worthwhile to distinguish different types of loans.
We can generally define loans as granting the use of one’s goods to another in order to receive them back later.9 The distinction of loan then follows from the sort of uses that one grants. In the case of a library loan, for example, which in the technical language of Roman Law is a commodatum, the borrower can make use of the book for a time and return the very same book later. Now, the use granted is limited as he is meant to read it, but not sell it or burn it, no matter how awful the author may be. That is the borrower can use it in such a way that he retains possession of it throughout so as to return the same book to the lender. On the other hand, one may borrow food to eat, wine to drink or money to spend. These uses are quite different from the former. When one eats or drinks, one destroys the very thing he has eaten or drunk and consequently is no longer in possession of it. When one spends money or sells any good whatsoever, he separates it from himself losing possession of it as he transfers it to another. These uses where the person loses possession of the good are sometimes called “consuming” uses.10 When such a use is granted, one contracts a mutuum but the very same good itself may not be able to be returned. Hence, the obligation of the debtor in a mutuum is not to return the very same thing lent, but something of the same kind and quality.
What then does this have to do with usury? Well, the difference in the uses granted in these loans entail different structures of property right and obligations. When the library grants the book to the borrower, it retains ownership of the book. It is for this reason that the borrower cannot sell or destroy the book, because he is not the owner. He only has a right to non-consuming use of the book. For this reason it is possible to exact some rent when a use of this kind is granted. When the lender receives back the book, he receives back the very thing that had always been his, but the use is something apart from this. Consequently, one can engage in an exchange of the use for a price and thus instead of a gratuitous library loan, the lender can rent out the book as we see in textbook rentals.11
This logic falls apart in the case of the mutuum. When the lender grants some “consuming” use to the borrower, he passes full ownership of thing to the borrower. This is necessary, because in order to use up or sell the thing lent, the borrower must be the owner of it, otherwise he would be violating the lender’s rights in using it in this way. Consequently, the lender has no property claim to any specific thing, but a personal claim against the borrower for its return in some way. When the borrower uses up the good, all that is left is the person of the borrower. Here we can see in modern terminology that the mutuum is a “personally secured loan,” which are found in credit cards, student loans and most car and home loans. Now, at the end of the loan, when the borrower returns the thing lent in kind, he returns everything that the lender lent. Here there is no separate use to charge for, because in giving the consuming use the lender gave the whole thing. When he receives the whole thing back, he receives back everything he lent thus satisfying his just claims. Consequently, to exact more is to take something more than he lent, either in trying to charge for the return of his thing twice or to charge for what does not exist, namely the separate use. Thus exacting something more than the return of the principal from a mutuum is unjust and a sin, analogous to theft.
Now there is nothing specifically Christian about this argument and it would hold just as well if you were a 1st century Roman pagan as it does for a 21st century Wall Street trader. The principles of just exchange and property have not changed, even as the descriptions or nomenclature has evolved over that time. However, one implication of this argument is that properly speaking a personally secured loan can only be contracted as an act of charity. That is since one cannot licitly take profit from such a loan, the only proper motivation is for the sake of the borrower himself. This aligns with the teaching of Jesus mentioned earlier that we ought to lend for the sake our neighbor.
However, the immediate objection one hears from economists is that if we do not allow lending at usury, then no one would lend. While this may be true of the abstract homo economicus, it reveals man’s fallen nature rather than the standards of justice. However, as I noted the mutuum is specifically a personally secured loan, that is one where the borrower himself guarantees the return. Now, there are many ways of structuring loans and the alternative would be asset secured or non-recourse loans.12 In these loans, the borrower does not personally secure the debt but rather, it is secured by some specified property. That is if the borrower fails to repay, the lender can exact the return from those assets to fulfill the obligation, but only those assets. This includes the majority of business debt, such as corporate bonds, commercial paper and other loans to limited liability companies. While this lending is not unobjectionable in every case, since it is not personally secured, it is ipso facto not usurious. In these sorts of loans, the lender holds a claim against the assets of the company, at least implicitly, which guarantees his principal. The interest, coupons or rents that the lender receives can be described in various ways depending on the structure of the contract, but they derive or are indexed to some property itself. In contrast, the personally secured loan has no specified property that the loan is connected to which entails that the usurer derives his rent like payments from the person of the borrower himself.
However, what can economics and finance itself tells us about usury. First, I will argue that economics and finance lack the proper categories to reject usury by their own mode of reasoning. However, this also entails that economics and finance cannot show that usury is morally good or licit. They can only show that the usurer prefers or values his usuries or are otherwise pragmatic for some economic or financial ends, rather than being just per se. However, exacting usury does contradict the fundamental axioms that such sciences rest upon, namely exchange and property. The evil of usury arises from the manner in which ownership and different sorts of use can be lent. Consequently, to admit usury in principle is to deny the nature and structure of property. However, apart from the existence and nature of property, economics cannot proceed beyond mere consumption. If we cannot ensure that these things are mine, and thus not to be taken by another, there is no reason for me to accumulate goods for my long term needs as they can merely be taken by another. Moreover, there is also no reason for me to create productive capital, such as a field or dam, because this can be taken and disposed by another.
Nevertheless, usury is not just immoral but it is economically unstable and financially bad business. The fundamental nature of usurious debt is that it is ultimately secured by a person. Now debts may be partially secured by some collateral, but when the assets do not cover the whole principal the lender can pursue the borrower’s personal assets and wages, then it is ultimately a personally guaranteed loan. Now, when personal guarantees enter such contracts, it is usually because there is some issue with the capital structure that the assets can’t guarantee the principal and interest on their own.
A further issue is the consideration of proper risk management and economic stability. When banks are required to underwrite loans that are fully secured by assets rather than including personal guarantees, they are strongly incentivized to ensure the quality and valuation of those assets. A self-interested bank will be more likely to maintain healthy underwriting standards and loan to value ratios, because the collateral is all that he has to fall back onto. The reverse of this was what we saw in the 2008 financial crisis as most of the home loans were personally secured. Apart from the serious fraud, loan to value ratio often exceeded 100% and underwriting standards dissolved. This created a dangerous environment, where when borrowers can’t pay en masse collateral value collapse, loans go underwater and the financial system becomes endangered and the economy with it.
Moreover, we have empirical evidence as to the advantages of non-usurious lending. After the 2008 financial crisis, the economic recovery depended in part on whether a jurisdiction was strongly non-recourse or personally secured. In Europe where loans were generally personal secured, they saw a slower recovery relative to the United States’ relatively non-recourse regime.13 Even in the United States, those states with non-recourse law, which effectively exclude usurious home loans, saw faster recovery than states with personally secured loans. The reason for this is that after the crash in personally secured regimes, consumers remained obligated to repay the principal. This reduced the aggregate consumption in the economy as more income had to be allocated to repaying the loans leading to a slower recovery. On the other hand, those non-recourse regimes saw a harder crash but a faster recovery as consumers could more quickly return to pre-crisis levels of consumption. The possibility of the harder crash is a warning to lenders to be more prudent with their lending, maintain higher underwriting standards if for nothing other than their self preservation.
Thus, from the perspective of ethics, usury is contrary to justice and a sin, abhorred by God and men for millennia. However, from the economic and financial perspective it is bad business. Personal guarantees are a sign that there is already a problem with the lending structure, but also such guarantees can hinder the recovery of an economy after a crisis. Thus, while economics and finance lack the categories to exclude usurious loans outright, they can still judge them to be generally imprudent.
1 Deut 23:19-20
2 ST II-II, q. 78, a. 1, ad. 2
3 Robert P. Maloney, “The Teaching of the Fathers on Usury: An Historical Study on the Development of Christian Thinking,” Vigiliae Christianae vol 27, 242.
4 St. Ambrose of Milan, De Tobia, https://babel.hathitrust.org/cgi/pt?id=uc1.$b109460&seq=5
5 Ibid. 14.49
6 https://www.documentacatholicaomnia.eu/04z/z_0325-0325__Concilium_Nicaenum_I__Documenta__LT.doc.html – Tabulas ex Mansi administrator ipse exquisivit
7 https://definitions.lsd.law/centesima
8 http://www.domus-ecclesiae.de/magisterium/vix-pervenit.html
9 Summa Theologiae II-II, q. 61, a. 3, co.
10 ST II-II, q. 78, a. 1, co. De Malo q. 13, a. 4, co & ad. 15.
11Quodlibet III. q. 7, a. 2, co.
12 https://www.investopedia.com/ask/answers/08/nonrecourse-loan-vs-recourse-loan.asp
13https://academic.oup.com/restud/article-abstract/91/2/1039/7160878