The Sin of Usury

I. Introduction[1]

To the extent that usury is thought of or discussed today it is usually understood as the charging of excessive interest on loans, especially perhaps on a consumer loan as opposed to a business loan. Although the charging of high rates of interest is indeed a real social and political evil, this is not the classical understanding of usury. Rather usury, as that has been discussed for centuries in Catholic theology and condemned again and again by the Church, means the taking of any interest on any type of loan, simply by virtue of the loan contract. The most complete papal treatment of usury is found in the 1745 encyclical of Pope Benedict XIV, Vix Pervenit, the relevant portions of which run,

The nature of the sin called usury has its proper place and origin in a loan contract [in contractu mutui]. 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 owned him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.

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…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….

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.[2]

For most contemporaries this sounds odd and perhaps even contrary to reason, for does not a lender deprive himself of present money, and since he will receive the principal back only later, is it not simply just that he receive something over and above the principal to compensate him for the temporary loss? The short answer to this is No, for unless the creditor can point to some loss he will incur because he made the loan, or to some lost opportunity for gain, the mere fact of having made a loan does not give him the right to receive interest payments. We will look more closely at this below.

II. Historical background

In order to understand the argumentation of Pope Benedict, let us consider more fully the legal and theological framework which theologians and canonists for centuries employed when considering usury. In Roman law the contract known as mutuum governed the loan of something which was necessarily consumed in its use, and therefore the identical object could not be returned to the lender, only something of the same kind and amount.

The subject-matter of the mutuum must consist of things that can be measured, weighed, or numbered, such as wine, corn, or money; that is, things which being consumed can be restored in genere…. From the nature of this contract the obligation is imposed upon the borrower to restore to the lender, not the identical thing loaned, but its equivalent – that is, another thing of the same kind, quality, and value….

With regard to the responsibility for loss, since from the peculiar character of the contract the right of consumption passes to the borrower, the latter is looked upon as the practical owner of the thing loaned, and he therefore holds it entirely at his own risk….[3]

The chief characteristic of the mutuum contract that differentiates it from any other type of loan is that the actual good borrowed is not returned but consumed or used up by the borrower. This is in contrast to the loan or rent of something which will be physically returned, such as a house or a car. In the latter type of loans, the same item that is loaned is returned to the lender, and because it is subject to wear and tear on account of its use by the borrower, compensation is justly due to the lender for this beyond the return of the thing borrowed. But in a contract of mutuum there is no wear and tear on the item loaned and hence compensation for that does not enter into the contract. Any just title to interest must come from another source.

The Catholic Church manifested her opposition to usury beginning during the Patristic period, and gradually the reasoning of her theologians took on a more definite shape. The formulation by St. Thomas Aquinas is the classic and best example of these arguments. His most mature discussion of usury is in the Summa Theologiae II-II, q. 78.[4] I quote from the Respondeo from article 1, which contains his theory in a nutshell.

I answer that to receive usury for money loaned [mutuata] is in itself unjust, because that is sold which does not exist, by which clearly an inequality is constituted which is contrary to justice. For the evidence of which it must be known that there are certain things the use of which is the consumption of those things; as we consume wine by using it for drinking or we consume wheat by using it for food. Whence in such things the use of a thing ought not to be computed separately from the thing itself; but to whomever is granted the use from that fact itself is granted [possession of] the thing; and on account of this in such things through the loan [mutuum] ownership is transferred. If anyone therefore wishes to sell separately the wine, and again wishes to sell the use of the wine, he would sell the same thing twice, or he would sell that which does not exist; whence clearly he would sin by injustice. And by a similar reason he commits injustice who loans [mutuat] wine or wheat seeking to be given two recompenses; one indeed the restitution of an equal amount of the thing, the other, on the other hand, the price of the use which is called usury.

Let us formulate Thomas’ argument in a slightly different way so as to show that it is not unreasonable, and in fact makes perfect sense. Money is certainly the most common example of something loaned at mutuum, but not the only one. As we saw, St. Thomas based his argument on the more general class of consumptible things. And I think that if we look at ordinary consumptibles, such as food or drink, we might be able to look at the question afresh and understand the Church’s doctrine better. Let us consider the following analogy.

Suppose we have a small businessman who owns a catering service, catering food and drink, and let us suppose further that any supplies which accompany the food and drink are disposable, plastic forks, paper napkins, etc., so that there is nothing which he provides to his customers which he must reuse and which are thus subject to wear and tear. Now what may he licitly charge his customers for? For the replacement cost of the food and drink and the other disposable supplies. In addition, he may charge each customer for a share of the overhead of his business, such as rent, utilities, his delivery van, wages for any employees, and for a salary for himself, which may be defined as a “return for his labor of organization and direction, and for the risk that he underwent.”[5] But as regards the food and other consumptibles which he provides, it is hard to see how he can charge a customer for more than the amount purchased. If he furnishes 100 bottles of wine, the caterer may charge what it will cost him to replace a similar kind and amount of wine. Anything additional which he charges a customer must come from one of the other titles I just mentioned, costs incident to the running of his business and wages for his employees and for himself.

This last is what is generally called profit, a term that is often used loosely and inexactly. As we see here, Msgr. Ryan reduces it to the proprietor’s labor, plus his entrepreneurial abilities and risk. It is not an open-ended invitation to charge as much as the market will bear, but rather there must exist some title of justification such as Ryan enumerates. Looked at in this way the limiting of the reimbursement for the consumptibles sold seems obvious. Of course the caterer cannot charge for 110 bottles of wine if he delivers only 100. His profit, in reality his salary and compensation for risk, etc., is not gained by expecting more in return than what he supplied of the product, but rather is payed for in its own right.

The application of this to loans of mutuum can easily be seen. Supposing someone in the business of making loans, similar expenses could justly be taken from customers. In the Middle Ages there existed institutions called montes pietatis, lending institutions created to provide an alternative to usurers, sponsored by local governments or the Church. The montes were non-profit institutions, but they charged interest to cover their expenses, including salaries of their staff. But according to Msgr. Ryan’s analysis no business is profit-making in the sense that it can justly seek as wide profits as it can obtain. The owner can seek a fair “return for his labor of organization and direction, and for the risk that he underwent.” Although one cannot calculate such returns with mathematical exactness, neither can one maintain that they have no theoretical limit. And even if one did argue that there should be no limit on such a return for labor, skill and risk, still that is not the same as saying that usury for the lending activity itself may be exacted, for we have seen that the entrepreneur can require only the same amount of the consumptible good as he has provided, “the equality of what is given and returned,” as Benedict XIV taught.[6]

Of course our caterer receives immediate or nearly immediate payment for his expenditure on food and other consumptibles. A loan of money, however, is generally paid back after a period of time, or gradually during such a period. Is not the lender entitled to some compensation on account of this delay? No, for “…the mere time differential by itself does not cause a difference in value. There must be added the possibility of earning a profit in the intervening time period.”[7] That is the meaning of the words of Pope Benedict XIV, that

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.

Historically the chief parallel titles were lucrum cessans and damnum emergens. The former is the loss of opportunity for gain – say an opportunity of becoming a partner in a business venture – which someone might forgo by making a loan, and the latter is some actual damage which he might incur by not having the funds available which he had loaned. But it is crucial to recognize that the mere fact of making a loan does not equate to the right to repayment of more than the principal. Unless the lender will suffer financial harm because he has loaned the funds, or for some other special circumstance, there is nothing in the loan transaction itself that entitles him to any interest payment.

III Application of usury theory to contemporary economies

If it is the case that the “law governing loans consists necessarily in the equality of what is given and returned,” then several questions suggest themselves which we will consider in this last section. In the first place, we have to ask what effect the intrinsic evil of usury should have on the moral conduct of the Christian. Is there anything that Christians should do or avoid in their financial or economic behavior as a result of the sinfulness of usury? Secondly, what meaning does usury have in an economy hopelessly enmeshed in all kinds of interest-bearing transactions as a matter of course and without a thought as to any justifying title? Since even in the Renaissance lawyers found ways around the prohibition of usury by drawing up contracts that authorized repayment of more than the principal under various complex formulas,[8] and theologians could be found who sanctioned these contracts, are we committing the Church to a ridiculous anachronism, a relic of the past? Are we hankering after a silly formalism in order to justify something that it is easier and more honest simply to call interest on a loan?

In regard to our first question, the praxis of the Church beginning at least in the first half of the 19th century was to presume that some justifying title to interest probably exists in most cases in the context of a modern finance economy. This point of view was embodied in the (now abrogated) 1917 Code of Canon Law which restated the doctrine of Vix Pervenit while allowing in practice for the taking of interest under other titles.[9] Thus no one can be condemned for taking the legal or customary rate of interest on a loan, provided that that is not excessive. The Church is assuming that parallel titles which justify interest exist in the vast majority of cases, and that even if in some cases they do not, it is better for the sake of consciences to ignore that fact than to attempt the probably hopelessly complex task of disentangling the various elements of the contract.

This does not mean, however, that in today’s economy the question of usury is dead. We should recall that interest on a loan is justified only when some opportunity for legitimate gain is forgone or some loss sustained. The extrinsic titles were never given official approval except as compensation for lost opportunities for investment earnings, and therefore “they can never be advanced as a justification of a general loan system based on motives of profit.”[10] But one can hardly justify taking interest on the ground that one is forgoing another lost opportunity for taking interest! The lost opportunity must be of some other sort, such as a partnership or business expansion. Moreover, while it is certainly correct to point out that today there is usually opportunity for productive investment, and that therefore those who put money out at mutuum but would otherwise invest it are entitled to claim lucrum cessans, this reasoning does not always hold. For in cases of depression or recession “the profit expectations of businessmen are likely to be so low that they would not employ men and machines on new investment projects even if you let them borrow temporarily at a zero interest rate.”[11] In such cases “some savings will follow the sterile path of debt-financed consumption, with eventual repayment at the expense of current consumption.”[12] In other words, in such situations a lack of consumer demand makes spending on productive investment unprofitable, so it is likely that someone putting money out at mutuum is not truly forgoing investment profit, because no profit is to be had for the time being. Thus when there is excess savings with no outlet for profitable use, it is hardly in accord with justice or the common good to reward those who choose to loan by giving them a rate of interest based on a merely hypothetical opportunity cost.

Likewise it also seems hard to justify lucrum cessans for those who have no real intention of making investments, simply because such opportunities are normally available to all. What of ordinary savers who desire to put their money into insured savings accounts at banks or credit unions and who because of inexperience or fear of loss have no desire to invest in business ventures, even to buy shares of stock or mutual funds? They are not undergoing a real loss of investment income on account of their loan of money to the bank, since otherwise they might have simply hidden the money in a mattress. I do not see how the merely theoretical possibility that they could make gains from investments applies to them, since they are too risk averse to do so. Can they licitly claim interest on bank accounts and under what title? I think there is a reason for thinking such interest just, but it is not one of the extrinsic titles that theologians approved. It is the mere fact of inflation. “He who receives a loan of money…is not held to pay back more than he received by the loan”[13] – but with our ability to monitor the level of inflation in an economy, we realize that money simply left alone, as in a mattress, will usually diminish in value. Therefore payment for inflation for money deposited in a bank or credit union seems just.

In the 16th century and thereafter the zeal for economic justice in Catholic Europe began to wane, and lawyers and merchants increasingly sought ways around the usury prohibition, such as the contractus trinus. But if instead of that, men’s souls had been animated by love of God and neighbor, or even fear of judgment, what might have been done – or what could be done now? Let us look briefly at a few financial practices and institutions which Christians might promote on behalf of justice.

The whole Christian doctrine of property with its responsibilities of ownership which the modern world has forgotten is wrapped up in this question of money and the taking of interest thereon. If I am in possession of money, I am in possession of something that is vital to the society in which I live. I, as a Christian, therefore, have very definite responsibilities with respect to the ownership of that money. Christian morality knows of no theory of an unqualified and unconditional ownership of property of any description. Property must be used according to its true end and purpose and in the case of money that true end and purpose is as a means of exchange. Therefore, the wrongful withholding of that money from circulation for the purpose of making a profit by waiting is a misuse of property.[14]

Such a doctrine of money is akin to what Paul VI teaches about property in Populorum progressio.

…private property does not constitute for anyone an absolute and unconditioned right. No one is justified in keeping for his exclusive use what he does not need, when others lack necessities…. If certain landed estates impede the general prosperity because they are extensive, unused or poorly used, or because they bring hardship to peoples or are detrimental to the interests of the country, the common good sometimes demands their expropriation. (nos. 23-24)

Clearly expropriation of funds that are being used merely in idle usury should be a last resort, and normally the law will use financial incentives and penalties to direct such funds toward uses more in accord with the common good. But no Catholic need be afraid to acknowledge that “the public authority, in view of the common good, may specify more accurately what is licit and what is illicit for property owners in the use of their possessions.”[15] A Christian society, then, by outlawing true usury completely, and by forbidding or discouraging the kinds of contracts that during the Renaissance helped undermine the usury prohibition among both theologians and merchants, would seek to direct money toward its proper use. Some form of credit union, akin to the montes, would be adequate for providing financing for non-productive consumer loans. The demand for commercial credit could be satisfied either by merchants diverting funds from investments, and licitly claiming lucrum cessans, or by some form of commercial credit union run by associations of businesses or by occupational groups (guilds).

Catholics should have as lively a sense of the demands of the moral law relative to the economy as they do relative to sexuality or war.

In the Middle Ages, it was taken for granted God’s law applied to the totality of life. The idea of a double standard of morality, with a strict code for private life and a minimum of moral obligation for business and public life, is an innovation based on philosophical and religious individualism of the eighteenth century.[16]

However far we are today from a Christian society or a Christian economy, the goal “to impress the divine law on the affairs of the earthly city” (Gaudium et Spes, no. 43) is always imperative. As with most of Catholic social morality today, our first task is one of education and formation, since very few Catholics are aware of the existence of these doctrines or of their binding character. This may seem of little consequence, but as with all our efforts in this life, this is part of making the world a more perfect offering to the Sacred Heart of Jesus who will one day renew all things in himself.


Notes

[1] The following essay is an abridgment and revision of my article “Is Usury Still a Sin?” in: Communio 36.3 (2009) 447-474.

[2] Denzinger, 2546-50.

[3] William C. Morey, Outlines of Roman Law. (New York : G. P. Putman’s, 2d ed., 1914), 355-56.

[4] See also the De Malo, q. 13, a. 4.

[5] John A. Ryan, Distributive Justice, (New York : Macmillan, 3rd edition, 1942), 176.

[6] Another way of looking at this example which yields the same conclusion is to regard a mutuum of money as a sale. As in the case of the caterer who provides 100 bottles of wine and receives as part of his total payment the price of the 100 bottles, no more and no less, if we look at money loaned as a sale of money we see that the price of $100 is obviously $100. Any other just charges come from the same titles as the caterer had, overhead expenses, wages, etc. For the product provided one can charge only what it is worth, which in the case of money is its face value.

[7] Heinrich Pesch, Lehrbuch der Nationalökonomie/Teaching Guide to Economics, translated by Rupert J. Ederer (Lewiston : Edwin Mellen, c. 2003), vol. 5, book, 2, 200.

[8] For example, the contractus trinus or triple contract, a three-fold contract made between two business partners, the first of whom was the active partner and the second inactive. The first part of the contract stipulated that the first partner manage the enterprise, say a trading voyage, and the second supply some or all of the funding. The second part of a contractus trinus stipulated that the active partner insure the inactive against loss, and by the third part the silent partner paid for this insurance by taking a return which was less than the expected profit of the enterprise, say 4% on his investment, against an expected return of 8%, but which was guaranteed even if the enterprise miscarried.

[9] Canon 1543 of the 1917 Code of Canon Law ran, “If a fungible thing is given to someone in such a way that it becomes his and later is to be returned only in the same kind, no gain can be received by reason of the contract itself; but in the payment of a fungible thing, it is not in itself illicit to contract for the gain allowed by law, unless it is clear that this is excessive, or even for a greater gain, if a just and adequate title be present.” There is no comparable canon in the 1983 Code.

[10] John P. Kelly, Aquinas and Modern Practices of Interest Taking, (Brisbane : Aquinas Press, 1945), 33.

[11] Paul Samuelson, Economics (New York : McGraw-Hill, 9th ed., 1973), 336.

[12] John F. Cronin, Economics and Society (New York : American Book Co., 1939), 131.

[13] Summa Theologiae II-II q. 78 a. 2 ad 2.

[14] Kelly, Aquinas and Modern Practices of Interest Taking, 46-47.

[15] Pius XI, Encyclical Quadragesimo Anno, no. 49.

[16] John F. Cronin, Catholic Social Principles: the Social Teaching of the Catholic Church Applied to American Economic Life (Milwaukee : Bruce, 1950), 43.

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