A New Focus on Usury
What interest is charged for is key
Two members of Congress with decidedly socialist leanings announced this week their plans to introduce bills that would cap interest rates on credit cards and consumer loans at 15 percent. Calling it a “national usury law” the two politicians hope to reduce the amount of interest that consumers pay for loans. What the economic implications of such a bill are is open to debate, but what isn’t debatable is that, despite being dubbed a “usury law,” it fails to address the real issue: usury. This failure stems from a fundamental misunderstanding about what usury is. Most people see it simply as “charging a high rate of interest.” Some see it as a medieval concern that prohibits charging any interest at all. But the truth is more nuanced than that. And until this ignorance is remedied, a major source of economic injustice will go unchecked and legislation like this may actually have the opposite effect.
If usury is not merely charging a high interest rate, then what is it? To address this question, we must make an important distinction regarding the use of material goods. Some goods are fully consumed in their use—food or fuel, for example. Other goods, like a lawn mower or shovel, are not consumed in their use and are considered to be productive goods.
When we borrow goods that are fully consumed, then we must compensate the lender for the product. If I borrow two eggs from a neighbor, it is expected that even though I will eat those two eggs, I will still repay them with two other eggs. But if the neighbor demands a third egg for the use of the two eggs, then he would no longer be just lending me the eggs but charging something for their use. I borrowed two eggs, consumed them but had to pay the “price” of three eggs for consuming them. This obviously is unjust as the borrower has paid more than the product he borrowed is worth. This is where the term usury comes from. Usury means to charge an additional price for the “use” of a consumable good.
On the other hand, there is nothing unjust about paying a fee (or interest) for the use of something like a lawnmower. When you borrow a lawnmower it is not consumed in its use and so you may return it. But it is also morally licit to pay a fee for its use, due to wear and tear and the like. If you borrowed the mower for a landscaping business, the “fee” might also include some of the profit that was made through the use of the mower (this is why it is called a productive good).
It was mentioned in our hypothetical example that it is unjust for the borrower to pay back more eggs than he borrowed. This is not entirely clear until we turn to the economic theory of St. Thomas. He says that every transaction (including borrowing and lending) must be to the mutual advantage of both parties. Neither party should shoulder an unfair portion of the burden. When the transactional burden is greater for one of the parties, this constitutes an offense against commutative justice. But it is not just when someone pays more than something is worth that there is an offense against justice. It can also pertain to the lender bearing an unfair burden of the transaction. The lender should never end up in an inferior position than he would have been had he not made the loan. The man who loans the eggs is no worse off when he isn’t using them and has them returned when he does. But the lawnmower owner should be compensated to make up for damage or loss of profit that he could have made by using the lawnmower as part of his own landscaping business. This compensation is considered to be the interest.
So, then we can say that charging interest is not necessarily a bad thing, but what the interest is charged for matters. All this is relatively clear when you have something like a barter system. But once money enters into the equation, it becomes more difficult to see because money, properly speaking, is a medium of exchange. In other words, it derives its value from what it is exchanged for. This helps to see the distinction between lending and investing. Investment of capital in a business differs from a loan of money in that you are not loaning the money but instead the commodities the money can buy. This in turn entitles the lender to a share in the productive fruits of the venture or to charge a “fee” for their use (since they are part owner of them). Obviously an investor shares in the trade risks and thus can share in the profits or the losses. This mutual sharing in the risk is what separates an investment from a usurious loan.
What the money is used for matters. If the money is used for goods that are consumed in their use, then it would be usury to charge any interest beyond what it costs to make the loan (in other words, no profit). The poor disproportionately suffer the effects of usury. Borrowed money used for consumable goods must be repaid with more than they’re worth.
Despite the Church’s relative silence on the issue of usury, it is still a moral problem that plagues economies throughout the world. It behooves the Church to speak more specifically about how to remedy this evil that is hidden in plain sight. The Father of Modern Economics, John Maynard Keynes, saw the wisdom of the Church’s teaching on usury and interest. He wrote,
“I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together, namely, the rate of interest and the marginal efficiency of capital. For it now seems clear that the disquisitions of the schoolmen were directed towards the elucidation of a formula which should allow the schedule of the marginal efficiency of capital to be high, whilst using rule and custom and the moral law to keep down the rate of interest.” (J.M. Keynes, General Theory)
If Keynes, who was certainly no friend of the Church, can see its wisdom, then perhaps we too might benefit from examining this teaching once again.