On Usury and Other Dishonest Profits
For the record, usury is not capitalism.
This is from Vix Pervenit (Pope Benedict XIV – 1745):
I. The nature of the sin called usury has its proper place and origin in a loan contract. This financial contract between consenting parties demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given. Therefore he contends some gain is owed him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.
II. One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully, either to increase one’s fortune, to purchase new estates, or to engage in business transactions. The law governing loans consists necessarily in the equality of what is given and returned; once the equality has been established, whoever demands more than that violates the terms of the loan. Therefore if one receives interest, he must make restitution according to the commutative bond of justice; its function in human contracts is to assure equality for each one. This law is to be observed in a holy manner. If not observed exactly, reparation must be made.
III. By these remarks, however, We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.
While the Holy Father’s bull on this issue is worded elliptically, the issue is not difficult. The talk of parallel contracts refers to a practice, meant to avoid technical violation of laws against usury, where the interest was written up in a separate contract parallel to the contract for the principle. The holding that parallel contracts are lawful when part of legitimate trade, hence not a return above what one has received, applies to interest payments. In such a case, charging for interest is legitimate, not usury.
The legal question then becomes whether a parallel contract, or interest, is a return to compensate for a cost or loss. The Church holding forbids getting a benefit if no benefit is given in return; getting a benefit to compensate for a cost is legitimate.
This is true for opportunity costs as well. If you lend money to let me buy stock (which I will use to earn money to pay you back) you cannot at the same time use the same money to buy stock (and use it to earn money). It is fair to ask me to compensate you for that lost opportunity to make money.
But, in the ancient world, money was for consumer purchases almost exclusively. The idea of partial ownership in a joint stock corporation, buying tools or materials or hiring factory hands as an investment was unheard of. There was, in other words, no opportunities in the ancient world, hence no opportunity costs.
What the Church teaching officially condemns are loaning money at interest not for investment, or, in other words, consumer buying on credit, loan sharking, and the like. Investing money in stock is not condemned.
The Church teaches what she has always taught, viz., that usury is wicked.
During the Middle Ages, when joint stock companies were new, some scholars and lawyers wrongly thought all loans that charged interest were included in the definition of usury. The Church, following the logic of Aquinas and Aristotle, clarified this to say only nonproductive loans were usury.
So, to me, it looks plain that the Church betrays no earlier teaching, but merely clarified a subtle point. A loan where there is risk of nonrepayment by an debtor using the money to invest falls into the category allowed by the Church: he suffers a loss for which compensation is entitled.
Pope Benedict addressed this in his encyclical Vix Pervenit (November 1, 1745):
“…entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. For these types of contracts honest gain may be made.”
In short, the Church teaching has not changed. But the nature of money has changed: in the ancient world, money horded produced no value, because there was no opportunity to invest, and so to charge for its use was not a just repayment for a lost opportunity cost.
Now, when every farmer has a 405K account, to lend money to another to invest is to remove an investment opportunity in oneself, for which it is not unjust to exact compensation.
This is a bit of a pet peeve with me, because even loyal Catholics, even scholars, claim the Church has no official position on the matter, or claim that she reversed her former position, and now allows usury, when, in the ancient world, following Aristotle, she forbade it.
About John C Wright
John C. Wright is a practicing philosopher, a retired attorney, newspaperman, and newspaper editor, and a published author of science fiction. Once a Houyhnhnm, he was expelled from the august ranks of purely rational beings when he fell in love; but retains an honorary title.
