This page is inspired by ZippyCatholic’s Usury FAQ. I make no claim that this presentation is better in content, but I hope to develop something more systematic and clear than Zippy’s treatment as I found Zippy’s FAQ to be both difficult to understand and navigate. This will be a page that develops over time and is therefore under construction and open to revision and correction.
Topics of Concern:
- Economic Value
- The Nature of Property
- The Nature of Contracts
- Justice In Exchange
- The Nature of Lending
- The Mutuum Contract
- The Injustice of Usury
- Various Objections and Responses
The Nature of Contract:
A contract is materially defined by some property. It is on the basis of some property that there is the possibility of a contract at all. In this sense, a home loan differs from a car loan, because of the property involved in the contract, but this is only a material difference. A contract is formally defined by the terms of contract, that is the nature of the exchange. A contract of sale differs from a contract of rental in that in the sale exchange ownership is being transferred while in the case of a rental use is being transferred but ownership is maintained.
Justice in Exchange:
Justice in an exchange is maintained by the equality of value of the things exchanged. We see this in that no man exchanges for something the value of which he thinks is less than is charged or a man does not charge less than a thing is worth.
However, there are diverse things that are exchanged. A man must need to know how many shoes a house is worth in order to exchange. There must be one measure that measures all of these thing, which according to the Philosopher, is need or demand. Currency then is used a measure of demand and is used by convention as a means of exchange.
Hence, a exchange is just when the value of the things as measured by demand or currency is equal.
The Nature of Lending:
The most fundamental meaning of lending is that something is given with the expectation of its return. An lending contract involves the transfer of the use of something while the lender maintains ownership with the expectation that the particular thing loaned is returned.
Charging for the thing lent is justified by the charging for the actual use of the thing, which is separable from the thing itself. If a chainsaw is loaned, then the ownership of the chainsaw is still claimed by the lender, but the borrower takes possession of the chainsaw and uses it. The rent charged on the loan is based upon the simultaneous claim of ownership on the chainsaw and the use of it by another. It is on the basis of ownership that the lender receives payments against the use of the thing which is the basis for the requirement of payment.
The Mutuum Loan:
The mutuum loan is called a loan only metaphorically. Such a loan considers property as consumable or alienable from the possessor. In this case the use and being of a thing cannot be separated. As Angelic Doctor notes, wine when used is consumed and alienated from the user. This sort of alienation is possible for any property, as any property can be exchanged which is a sort of alienation from the owner.
The mutuum loan then is a matter of formal difference between loans. Materially one can consider a contract concerning a silver goblet. However, a silver goblet can be consider either as a goblet or as silver and currency. This difference concerns a formal difference between contracts, which concerns what is exchanged and how.
When a contract formally concerns the silver goblet as goblet, then the contract considers the thing as separable from its use. The contract then is the transfer of the use of thing while maintaining the ownership of the things with the expectation of the return of the particular thing. On the other hand, if the contract considers the silver goblet as silver and hence currency, then the contract differs formally in that it transfers not only use but ownership of the thing with the expectation of a return in kind.
However, thus far we have only consider the loan as concerns the lender, i.e. what is given and what is expected in return. The mutuum loan is the second sort of loan where the loan considers the thing as consumable. We must further consider the nature of the claim against the borrower.
In the case of some loans of this sort, such as a corporate bond, there is a claim against the actual property of firm. The rent that is charged is in virtue of this claim against some actual property. In this sort of loan, something consumable is transferred in its use and being in return for a claim against the actual property, which involves not only a return of the principle but above and beyond that for the use of the actual property used against which the lender has a claim.
A mutuum loan involves a claim against an actual person rather than some property. This concerns a formal difference between the sort of corporate loan that terminates in actual property and a loan that terminates in a person. In loaning something consumable to a person, the ownership of the thing is transferred with the expectation of a return in kind. There is a claim against the person for the return of principal, but there is no further property against which a claim can be made. It is this lack of some additional property in a mutuum loan that is the foundation of the injustice of usury.
The Injustice of Usury
As noted the injustice of usury concerns essentially a mutuum loan which materially concerns property as consumable and formally concerns a loan obligation against a person. In this sort of loan, the ownership of thing is transferred to the person with the expectation of a return in kind, since the thing when used is consumed.
As we noted, the justice of an exchanged is maintained by the equality of value the things exchanged. In the case of the mutuum loan, the justice is maintained by the return of the principal in the same amount. This is because ownership is transferred and the value of the thing is the same as the value of a thing the same in kind (e.g. $100 has the same value as $100). Beyond this, there is no reason to charge interest or rent, because there is no actual property against which the lender has a claim to charge rent against.
As the Angelic Doctor says, the injustice of usury is either double charging or charging for something that does not exist. The difference between these is in that they consider the thing loaned in itself and in its use. Usury considered as a double charging is in transferring the ownership the usurer charges for the value of the thing twice in that the value of the thing is returned and something additional is also returned. This is charging for the thing and then charging for it again.
The second mode of injustice is considering the sale of something that does not exist. Typically rent on a thing is based upon the use of the thing which actually exists. However, the usurer charges not only for the thing exchanged but in addition attempts to charge rent on the thing which no longer exists. Since the property in usury is not separable from its use, the thing and its use cannot be separated. Hence, while these two modes are logically distinct, they are actually one and constitute a single injustice, namely usury.
I. Extrinsic titles have effectively eliminated the injustice of usury.
Extrinsic titles by their very nature are claims that go beyond the contract itself. The injustice of usury involves intrinsic titles, that is claims that are part of the contract itself. What extrinsic title are morally licit is worth some attention but does not extinguish the injustice of usury itself.
II. The medieval arguments while true are no longer applicable. The economic situation has changed in such a way that money is truly capital. (Cronin, “Science of Ethics: Vol II”)
As noted above a contract may be considered formally with respect to the terms of the agreement and materially with respect the property exchanged. The nature of money is only materially related to a contract and as noted formally different contracts may consider the same thing in different respects, namely either as consumable or not. Hence, whether or not money can be treated as capital does not effect the injustice of usury. Thus, even if money may be treated as capital, this does not change the economic situation in a way relevant to the injustice of usury.
III. The Magisterium of the Catholic Church did not error in condemning charging interest on loans, rather it applied correct moral principals to a different economic situation.
In order for this argument to follow, one would need to demonstrate what economic situation was being implicitly presumed. However, the condemnation of usury in Vix Pervenit presupposes only the nature of contracts, which is a fundamental presupposition of all economics. If there are mutuum loans against which interest is charged, this is usury and condemned by the Magisterium.
In addition, the Magisterium explicitly and knowingly makes condemnations that it holds to apply to all times and places, i.e. all situations. The condemnation against usury is of this sort.
Moreover, we may consider the reductio ad absurdem of the argument. The basis of the argument is that the Magisterial authority implicitly and unknowing presupposed some situation which is no longer the present situation. Upon this basis the whole Magisterial authority on morals would be undermined as applying to some other situation and just authority is not currently applicable. The very words of Christ in the Scripture could be ignored on this basis, though his explicit intention is that they apply universally.
IV. Ready money is more valuable then future money, hence one can charge for a loan on money. This is also called the “time value of money.”
Time value of money is something of a misnomer as it is typically used. In economic theory, the “time value of money” refers to the return one would receive not from money, but from the investment in which the money is placed. With this investment, works “farm” the capital to produce additional value which the investor receives as a return.
That the time value of money does not refer to money as such may seen in that money need not be exchanged for some capital. Indeed, such investments differs formally from the case of a mutuum loan. The investment entitles the investor to certain return based on the earnings of the firm. The mutuum loan entitles the loaner to the return of the principal. There is no capital being “farmed” which the loaner has a claim against to receive more than he received.
Moreover, as the Philosopher taught, in an exchange justice is had by the value of what is exchanged being equal. Now in any exchange, one cannot exchange ready money for future money, as future money does not exist. One can exchange today ready money for the promise of return of that money, or a piece of property, or whatever may be exchange of equal value. It may be that a person perceives that money today would be more useful to him than money in the future, but this is a consideration of his motive to engage in a loan. However, this does provide a ground for charging interest in itself.
V. Opportunity cost is the harm done by foregoing some option. Mutuum lending has an opportunity cost in foregoing the use of the property to some profitable end. Therefore, charging on a mutuum loan is justified by this cost.
Opportunity cost is a species of the passion of sorrow, where there is a present evil rested in. This sorrow may be consider with respect to the object, the present evil, and with respect to the subject, the one resting in it.
The object consists in a privation, a option foregone. Moreover, this option foregone is not only a privation, that is something lacking, but it is a counterfactual. It is a option foregone that cannot be recovered. In these senses, the opportunity cost does not exist. Since, it does not exist it cannot be exchanged or charged for.
The subject of the sorrow of opportunity cost does experience a real sorrow and suffering. However, this real sorrow cannot be alienated from the subject in such a way that it would be property and therefore exchangeable. It therefore cannot be exchanged or charged for.
Therefore, opportunity cost cannot be a justification for any charge whatsoever, whether on a mutuum loan or not. To charge for an opportunity cost is to charge for something that does not exist or something that is not property.
However, opportunity cost may be considered as the justification for a charge, that is the reason for an exchange, or as the justification for the amount of a charge, that is the reason for how much is exchanged. As noted above, opportunity cost cannot justify a charge because it does not exist as real property that can be exchanged. However, as also noted above, the measure in exchange is demand. Opportunity cost is a certain measure of demand or need in that it considers what is lost and what is needed to compensate for that loss. As such, opportunity cost justifies the valuation of something exchanged, but cannot justify an exchange itself.
VI. Scripture tells us that usury is exclusively lending at interest to the poor and lending at a excessive rate. This sort of usury is prohibited, but not charging of interest on any mutuum loan.
Truth is one as God is one and truth cannot contradict itself. God who can neither deceive nor be deceived is the source of all truth. Therefore, the truth known by reason alone and the truth known by faith cannot contradict as they proceed from the same source and cannot contradict one another. The above doctrine of usury is known with certainty from indubitable principles. Therefore, the doctrine of usury above cannot contradict the revelation of Scripture as proceeding from God.
Now consider the term in Scripture that is translated as “usury.” If the original term means exclusively lending at interest to the poor, then the term of “usury” used in the above doctrine and the term used in Scripture are equivocal. It may be that this term is used as they are analogous because the poor are the most vulnerable to the injustice of usury. The term in Scripture may then be a species of usury but is not the definition of usury.
Further, there is no contradiction between the prohibition against charging interest as known by faith in Scripture (if this is a correct understanding) and the prohibition against usury known by reason in the doctrine above. A prohibition against charging interest against loans to the poor does not exclude an additional prohibition against usury as discussed above.
VII. It may be granted that the time value of money refers to money as invested. However, inflation refers to money as such. Justice in exchange is had through an equality of things exchanged. In a loan, money is received latter for money had to day. Presuming some inflation, the money received is less valuable than the money given. Hence, charging interest at least at the rate of actual inflation is needed to maintain justice.
The error is found in the second premise. In a mutuum money is not exchanged for future money, which does not exist as noted above, but for the promise of a return of the principal. The value of this promise may decrease or increase with shifts in inflation, but this in itself does not provide justification for charging interest. Indeed, this is accidental to the contract itself which is at the essence of usury. What is given is return and this establishes justice. To charge interest in such a contract would amount to usury.