One of the things that Paul Cella laments about the current economic crisis is all of the abstractions. There are certainly a great many abstract and complex structures involved. At the same time we've learned (I only just learned) that Aquinas viewed lending money at interest as morally wrong because it involves, in his view, selling something which does not exist.
We confidently reply (as thoroughgoing capitalist moderns) that contra Aquinas, money has a time value. It turns out upon reflection, though, that while it is true that (contra Aquinas) money has a time value, it is true in an equivocal sense: that is, it is sometimes actually true that money has a time value, and it is sometimes only hypothetically true that money has a time value.
Our reasoning for money having a time value in general goes something like this: If I did not lend my money to Bob (I say hypothetically, ahem) then I could invest it in General Electric Corp bonds (ahem) or a savings account, and draw interest on that money. Therefore if I loan the money to Bob, Bob owes me compensation for the opportunity cost: for the money I could have made if I had, hypothetically, done something different with it.
But as the title of the post indicates, and as is hopefully uncontroversially true, hypotheticals are not real. They don't exist. So if, when I lend my money at interest, I charge that interest based on an opportunity cost, I am charging my "customer" for something which isn't real. And if I am charging my customer for something which isn't real, that is almost certainly unjust.
On the other hand, when I hand over the money to Bob and he invests it in something productive, that is, in an endeavor which produces a profit, that money has an actual time value: it actually, and not merely hypothetically, does produce profits and grow over time. So in that kind of case it is perfectly just for me to expect a share of those profits, whether in the form of a dividend, an equity stake giving me a proportion of the profits, or a fixed interest giving me first claim to a fixed share of the profit.
The Papal Encyclical Vix Pervenit, promulgated on November 1, 1745 by Pope Benedict XIV says:
”But by this [prohibition of lending for interest] it is not at all denied that sometimes there can perhaps occur certain other titles, as they say, together with the contract of lending, and these not at all innate or intrinsic to the nature of a loan, from which there arise a just and entirely legitimate cause of rightly demanding something more above the principal than is due from the loan. Likewise, it is not denied that many times one’s own money can be rightly invested and expended in other contracts of a different nature from the nature of lending, either to secure an annual income for oneself, or also to practice legitimate commerce and business, and thus procure an honest profit.”Now I've mentioned a few times that I am only just starting to look at usury in depth for the first time. So I haven't reached any hard and fast conclusion, where I can say with confidence that I think that such-and-such a model of the moral lending of money is true.
But one thing I do think is that as modern people we might have been a bit too quick to dismiss the wisdom of the ages when it comes to the subject of usury.
Comments (30)
It's nice to know someone of Zippy's thoughtfulness and intellectual rigor is looking into this notion of usury for us. I suspect it will be quite fruitful. Keep it up!
Posted by Chris Floyd | March 4, 2009 11:16 AM
I thought opportunity costs were originally ideas to assist a business to make a decision. It was not a way to decide how to price something. Is it better off to do A and miss opportunity B, or is B too much of an opportunity to pass up? In making an informed decision, I don't just go willy-nilly into decisions without understanding the potential of my investment of time, money, employees, space, etc. Sometimes (probably a lot of the time) a long-term strategy warrants a decision that recognizes an opportunity cost that is greater than the enterprise that is engaged--but the decision is still made with eyes wide open understanding the missed opportunity. It has an element of speculation, sure, but in this context it has some footing in reality.
It seems to me that using it in the non-operational part of the banking industry (that is, on the sales end) is improperly elevating the notion of opportunity cost to the same level as competing customers. A competing customer is a real thing, but a so-called opportunity cost in this context is just a speculation. If they could lend to better customers--wouldn't they just do that? The truth is that the industry relies upon a lot of the small business they get from house purchases and big ticket items for the average man. To bring opportunity cost into it is to stretch the speculative nature of opportunity costs far beyond reason and into the hypothetical. At most the concept should be an assist on whether to lend or not to lend, but it shouldn't be a bogeyman used to trump up the cost of borrowing.
Or so it seems to me.
Posted by RUs | March 4, 2009 12:44 PM
"On the other hand, when I hand over the money to Bob and he invests it in something productive, that is, in an endeavor which produces a profit, that money has an actual time value: it actually, and not merely hypothetically, does produce profits and grow over time. "
But suppose you and Bob miscalculate the productivity of a venture and he loses all of your money? Is interest collected on that loan usurious?
I think consideration of likely productivity is a great device for evaluating the morality of loans. Look what consumer debt has done to the country!
However, I have a broad conception of productivity.
A car loan, for instance, is economically productive because having a car allows someone to get to work and transport things and people more easily than she would have been able to do without it.
A house loan allows someone to avoid "tossing away" money on rent while building personal equity.
But then I run right back into the consumer debt problem: A consumption loan helps somebody buy, say, food more easily than he could have without the loan. Thus it is marginally economically productive in terms of efficiency. However, the loan also traps the fellow, requiring him to pay 105 percent of the money he no longer has.
Posted by Kevin J Jones | March 4, 2009 12:47 PM
One of the implications of this, if we stipulate its validity, is that, as Belloc claimed, any loan which is unproductive[*] is usurious, no matter what rate of interest is charged. If any interest at all is charged on an unproductive loan, that is usury. Consumer credit has a significant usurious component, then, and not because of the high rates of interest.
But when we look at productive loans it gets interesting, no pun intended. We presume that the borrower is personally on the hook for the principal. (Often this is not the case, but lets stipulate it). Lets make it concrete by thinking about a store: we loaned money to Bob so Bob could open a store, and he is planning to pay off the entire loan, principal and interest, in two years. Suppose Bob decides to sell the store outright after operating it for those two years, and that (to simplify matters) he has taken no income from the store in that time. Every dollar of revenue has been rolled back into the operation of the store during the two years.
Suppose the price he can get for the store is less than the principal amount of the loan. Does he still owe his creditor the remainder of the principal (assuming no agreement to the contrary)? I think that he probably does, though of course there are limits on enforcing the payment of that debt justly. Does he (morally) owe any interest? I would say not, or at least the framework we are discussing here would say not.
Now suppose that the price he can get for the store - the enterprise value - is greater than the principal on the loan, but is less than the principal-plus-interest. Is Bob morally entitled to any of the proceeds from the sale of the store? My inclination is to say that he is not. Does he (as a moral matter) owe the remaining interest on the loan beyond what he gets for the sale of the store? Again, my inclination is to say not. But those are not the only possible answers, and I could easily be persuaded away from my initial inclinations.
[*] I agree that there are unresolved vagueries here in determining what is and is not "productive".
Posted by Zippy | March 4, 2009 1:06 PM
In such cases Mr. Jones, I think the concept of efficient breach comes into play. I would tend to treat a car as a productive asset, but it will work here. Say I buy a car from you and we agree to terms of $20,000 amortized at 5% over 5 years. Each month I pay you, I am compensating in one part for the use and in another part the depreciation (or damage). Say in three years, the car is no longer of productive use to me but I can't sell it for the amount remaining on my debt. My belief is that you should accept return of the vehicle and the debt should be satisfied. (This does not account for fraudlent intent. If I told you I was only going to drive it on weekends and returned it to you with 250,000 miles, you would rightly be entitled to additional compensation.) Likewise with a business venture, all things being equal, a failed venture should not require additional maintenance after it folds. I tend to think however that all unsecured loans are investments rather than real debts. Accounts Payables on the other hand I do belive are real debts.
Posted by M.Z. | March 4, 2009 1:14 PM
Let me start by saying that I try never to be quick about dismissing the wisdom of the ages. Second, I agree that selling something that does not exist is both a bad idea and almost certainly wrong. I would point as the most glaring example of this to the nth-level credit swap market; those both involve goods that are not real and have in large part precipitated the financial crisis. I also deeply distrust economists and their trade.
That said, I don't know that the modern analysis of the question is necessarily wrong, at least in some of its results. If I pay my attorney to establish an LLC for my business, what have I gained in return? Certainly nothing tangible. Anything that I do receive (an interest in a new business entity) I receive from the state---the attorney has simply saved me the trouble of navigating the secretary of state's bureaucracy by myself. I pay him so that I can devote my time to other things; he calculates his fee based in part on what he could make in the same amount of time doing some other task for some other client. The same thing seems to be true in lending: I borrow money to finance an investment so that I can devote my time to tasks other than saving that money all at one time; the lender could put that same money to other uses instead, and he values the service he performs accordingly. The fact that rates on loans are higher than rates on investments appears to be the only way in which the banker can make a profit, to which he is entitled (after all, depositing money with a bank in an interest-bearing account is essentially the same, a loan). I'm not sure that it's accurate to describe the bank's expectancy from investing its money itself as a mere hypothetical. It seems fairer to describe it as a potentiality, at least as long as there are profitable secured investment options such as bonds readily available.
At least, that seems to make sense. Benedict XIV's approach provides an interesting alternative, which might actually work with Anglo-American law, but it would require inserting constructive trust doctrine into every banking transaction . . .
Posted by Paul | March 4, 2009 1:24 PM
Well, as RUs points out, maybe there is a difference between a pure hypothetical and an actual set of actual alternatives. The latter is at least arguably a potentiality in a kind of Aristotlean sense.
Still, we can't know the actual outcomes of those actual alternatives unless and until they actually occur; so it seems like however you slice it, under this framework it is usurious to charge interest to a greater extent than the actual results of the actual productive enterprise. And that still leaves (probably) a great deal of consumer credit out in the usurious cold, again under this framework, and assuming of course that a significant amount of consumer credit finances expenditures which do not in fact produce a profit (above the principal amount of the loan and in excess of the interest charged) for the person doing the spending, but rather destroy his capital. (That it is or is not 'stimulative' to the economy more broadly wouldn't apply, I think, because it is never licit to do evil in order than good may come of it).
Posted by Zippy | March 4, 2009 2:37 PM
If Sam loans money to Sarah for a business that Sarah intends to begin, and the business fails, it does not mean that Sarah did not profit. She profited in ways other than financial. In this case, she gained knowledge -- useful knowledge. She now knows one more thing that does not work. Just because she does does not turn a financial profit does not mean she has not turned a profit in other ways. She is now paying Sam for another kind of profit -- a profit in marketplace wisdom -- and his charging interest for the use of his money is not usury.
Posted by Michael Bauman | March 4, 2009 5:26 PM
Consider paper money (backed by gold). Its value derives from a hypothetical. "If I were to go to the Federal Reserve and demand my gold for this note, they would give it to me." Therefore, the money (or at least its value) isn't "real," in whatever sense of real is meant here (and it's far from clear, at least to me, what sense that is). Even worse must be the case of fiat currency: "This dollar has a value because other people in the near future will act like it has a value." And electronic currency must have even less argument for realness since it is both hypothetical and notional --- it has no physical instantiation.
So, why is it immoral to exchange one unreal thing for another? Better yet, why is it moral to exchange a very real cheeseburger for the unreal money?
And how about promises, are they "real." Can I exchange money (assuming for the moment that it is real), for the promise that Sears will deliver a refrigerator tomorrow? If so, why can't I exchange money for the promise that Wells Fargo will deliver more money to me tomorrow? And, even if one somehow manages to make this distinction, would it be OK for me to give Wells Fargo $1 today in exchange for the promise that they will deliver to me in 1 year an amount of gold which is worth $1.06 today?
Lending at interest can proceed in a barter economy. Is it immoral to exchange 100 oranges now for the promise to deliver 101 oranges next month?
I think lots of work needs to be done on concepts like money and real for Zippy's argument to be persuasive.
Posted by Bill | March 4, 2009 8:24 PM
Michael:
I agree that there are other non-monetary benefits, and that that does complicate matters. I suggested in a thread somewhere that even a trip to Disneyland fulfills a human need, refreshes, and gets one ready to return to work more productive. On the other hand there comes a point where we are effectively tipping the executioner.
It may be that usury in the ordinary sense of illicit loans is just not so much of an issue these days because we don't have debtors prison and because we have bankruptcy law. We may or may not have morally right limits in every case, but we do have some pretty stringent limits on what a creditor can do to a debtor.
Bill:
I agree that a great deal depends on the nature of money. Belloc and Aquinas disagreed on the nature of money, and perhaps both are wrong. Other commenters have suggested that the nature of money has actually changed from medieval times to now. So many questions remain open on the subject.
Posted by Zippy | March 4, 2009 9:33 PM
Convenient that Zippy mentions the trip to Disneyland, as I was just about to announce my intentions to see whether my credit union's management is still soliciting people to use lines of credit for vacations. I hope to bring it up at the shareholder's meeting.
Back to the consumption topic, it is important to recognize how dependent on these loans some of us have become. If some people didn't have credit cards they need to buy food, they would have to rely upon family, friends and the larger community for their supplies.
But such community bonds are significantly weakened. It is hard to say how much usurious consumption is a cause of this and how much is a reaction to this.
Perhaps we've lost the (admittedly conflict-ridden) ability to loan to and to ask for loans from our neighbors because we depend on the credit companies.
Have you noticed how many stores now offer special credit cards to their customers? Best Buy and even a local grocery store chain have them.
I hope to discover how profitable these credit card offers are for these stores and whether they will be significantly affected as the supposed credit card bubble pops.
I trust their credit companies are isolated from the rest of their business, but the tumult could still be ahead.
Posted by Kevin J Jones | March 4, 2009 10:17 PM
Zippy,
Since as you yourself admit, this isn't a matter you've studied up on, why not do so now? If you did, I think you'd find that the Church does allow the charging of interest based on opportunity costs.
Surely you, of all people, should recognize that relying on your own speculations rather that hundreds of years of Catholic tradition is probably not a good idea.
Posted by Blackadder | March 4, 2009 10:52 PM
On the question of whether money or contracts exist in a more concrete way than foregone opportunities, it may help clarify things a bit to revisit RUs' comment about (paraphrasing into Aristotlean language) the difference between genuine potentialities and hypotheticals. An actual contract, that is, a promise, backed up by actual resources to carry out that promise, is a different kind of thing from a foregone opportunity which we decided not to pursue. The former exists at least as an Aristotlean potentiality: the resources are there and ready or underway, the commitment to realize in actuality is made. The latter doesn't exist at all: it is something we might have done and decided definitely not to do. It may once have been an Aristotlean potentiality, but it is no longer. Once we have loaned our money to Bob, the potentiality of using that money to buy GE bonds no longer exists at all; in much the same way that once we have drunk the bottle of wine, the potentiality to sell it to someone else no longer exists at all.
So maybe when Thomas, the quintessential Aristotlean, says "doesn't exist", what he means is "doesn't exist as either an actuality or as a potentiality". And hypotheticals of the sort represented by an opportunity cost do not exist as either an actuality or a potentiality. The only thing which exists as either potentiality or actuality once we've transferred the money to the productive enterprise BobCo, is BobCo and its deployment of that capital.
Posted by Zippy | March 4, 2009 11:08 PM
Blackadder:
I already answered your identical post on my personal blog. Here is my copy/pasted answer from there:
If you are going to claim that the Church teaches that charging interest specifically based on opportunity costs is permissible, why not show specifically where the Church teaches that? If you know that, why not pass on the reference rather than suggesting that I find it?Right now I'm mainly looking at Belloc, Aquinas, and everything Magisterial indexed in Denzinger under "usury". Denzinger indexes Magisterial sources up to Pius XII. If you have other Magisterial sources specifically addressing usury that you want to add to the pile, maybe something post Pius XII of which I am unaware saying that charging interest based on opportunity costs is not usury, I'm certainly interested in seeing them. I am also interested in the ideas that various commenters are expressing. And I will of course continue to explore the subject matter as my other interests, time, and resources permit.
Posted by Zippy | March 4, 2009 11:13 PM
Michael Bauman: This is a little scary for where it could lead, but I'll just say that Sarah didn't borrow the money to profit in her knowledge, nor did Sam (likely) lend it to her for that reason. Surely that is significant. If it isn't, could not Sarah simply reply "My interest payment to you is of the same kind as the profit I gained"?
Although I suppose the agreement could stipulate the cost of the "lesson." But in that case, would it not be better understood as purchasing business school lessons rather than gaining interest on principal of the loan?
Posted by Albert | March 4, 2009 11:51 PM
Albert:
Ah, perhaps that is the key to unlocking the interest paid on the loan for the trip to Disneyland: the interest paid is owed in the currency of the profit actually received, so the lender can rightly negotiate interest in the form of a share of the roller coaster rides, perhaps a ticket to go along with the family on the vacation, but not in cash. Only the principal must be repaid in cash. :-)Posted by Zippy | March 5, 2009 12:11 AM
Albert,
By borrowing money from Sam at interest, Sarah bought a chance at success. If she succeeds or if she fails has nothing to do with whether or not Sam's interest rate, to which she agreed, is usurious.
Posted by Michael Bauman | March 5, 2009 9:59 AM
Albert,
On a related point, Sarah cannot say to Sam after the fact that she will pay him in the same manner as she profited. They both agreed to a contract that stipulated the kind, the amount, and the timing of the repayment. If she were to do as you suggest, she, not Sam, would be doing evil.
Posted by Michael Bauman | March 5, 2009 10:09 AM
Michael:
I agree that one should not go back on one's word, and in general one should not put onesself in a position where one must or is tempted to go back on one's word. The issue here though is not what was the actual contract between Sarah and Sam; but rather what kinds of contract between Sarah and Sam would and would not be morally licit. We are standing here before they have actually done anything attempting to evaluate what kinds of contracts would be usurious under the Aquinas/Belloc/Benedict synthesis. (A further question, of course, is whether the A/B/B synthesis accurately represents what is in fact usurious and therefore morally wrong).Posted by Zippy | March 5, 2009 10:24 AM
Zippy,
What do you "hypothesize" (wink) might be immoral in the Sam/Sarah contract? Short of coercion or deceit, which we did not stipulate, I don't see a problem. Paying for the use of someone else's money is not evil; nor is loaning it at interest.
FWIW, I have always thought that usury applied to the level of interest charged, not to interest charged for loans that were somehow ill-conceived, though not immoral. Exorbitant interest is usury. How to determine "exorbitant" with care and precision is probably beyond us, so I am happy to let each person sort it out individually. They know better than I do their resources, their needs, their abilities, their conditions, their prospects, and their desires. Apart from knowing those and other things, it would be enormously difficult to identify the exact parameters of "exorbitant" -- even for A/B/B,
But a risky deal is not a usurious or immoral deal. Indeed, most lenders shy away from lending money on risky deals -- when the government isn't requiring them to make stupid loans.
Best,
MB
Posted by Michael Bauman | March 5, 2009 12:42 PM
My one possibly interesting comment on all of this is that if interest is immoral on the grounds given here connected to metaphysics and things that don't exist, it would seem that similar arguments would be able to be constructed against fiat money, roughly on the grounds that one is pretending that one can make something real out of nothing when one is in fact not making anything real at all.
Posted by Lydia | March 5, 2009 12:50 PM
Michael:
Well, theories about if and when it is immoral to do so is precisely what the discussion is about. (Signing on to a particular theory is something else - I haven't done that, at this point, and wouldn't do so on a complex subject I've not thought about or researched for longer than a week or so). Belloc, for example, clearly held that charging interest on an unproductive loan, a loan intended for consumption, was immoral. He also said that his understanding was rooted in the Christian tradition, and that does seem to be the case. I haven't personally signed up to his understanding, but I do tend to be skeptical of the notion that as long as everyone consents, that in itself necessarily and sufficiently makes every borrowing contract morally acceptable.I agree that "risky" and "usurious" aren't the same thing, even in Belloc's view.
Posted by Zippy | March 5, 2009 12:56 PM
Lydia:
I agree, and the thought had crossed my mind at one point when a commenter mentioned (I think on my personal blog) that (some take the view that) money in modern times is not ontologically what it used to be. By the same token it could probably also be argued that fiat money represents a real Aristotlean potentiality, albiet an economic one, whereas a foregone opportunity does not. Once an opportunity has been foregone it doesn't exist at all, even as a potentiality: I can't buy a carton of milk with a foregone opportunity, but they will still hand one over for my fiat money.More generally, if this kind of argument works it might work against interest on some kinds of loans, fiat money, both, or neither.
Posted by Zippy | March 5, 2009 1:05 PM
"I can't buy a carton of milk with a foregone opportunity. . ."
But you can. The money you would have invested in the opportunity you declined is now available for milk.
Posted by Michael Bauman | March 5, 2009 2:06 PM
Michael:
No no, I can't. If I invested my money in BobCo rather than in GE bonds, the investment in GE bonds is a "foregone opportunity" in the sense meant in this discussion. If I still have the money the opportunity to buy GE bonds is not foregone, but is still a genuine potentiality. So no, I can't buy a carton of milk with a foregone opportunity. If it is a foregone opportunity I already spent/invested the money on something else.To say that Bob should pay me for my foregone opportunity (goes the argument) is to say that Bob should pay me for something which doesn't exist. What does exist is any profits actually produced by BobCo. I am justly entitled to a share of the profits actually produced by BobCo, but I am not entitled to compensation for foregone opportunities any more than I am entitled to a usage fee for wine I already drank. Or at least that is the Aquinas/Belloc/Benedict argument, as I understand it.
Posted by Zippy | March 5, 2009 2:23 PM
If you invest in Bobco you are not foregoing opportunity. You are taking advantage of a different opportunity. If you forgo opportunity altogether, you have money for your milk.
Posted by Michael Bauman | March 5, 2009 2:51 PM
Michael:
The words "any specific" placed before the word "opportunity" would change your statement to be false. You are in fact foregoing all other opportunities beside investment in BobCo, and we generally refer to those foregone opportunities as "opportunity costs". And no, you can't buy a carton of milk with a "foregone opportunity" understood in this way -- because it doesn't exist.Since what exists after investing in BobCo is just the investment in BobCo, and not any of those other foregone opportunities, it is (under this theory) unjust to charge interest as anything other than a share of the actual profits from BobCo. (A fixed rate isn't a problem, but if that fixed rate exceeds actual profits it is unjust). Furthermore, if "BobCo" refers to something other than a productive investment which produces real profits - as it would in the case of a loan to be used for consumption rather than investment - it is unjust to charge any interest at all, under this theory.
Fiddling with semantics completely changes the argument (e.g. changing "a specific opportunity" to "opportunity in general"). If we are going to discuss the actual argument rather than a straw man we have to, among other things, get the semantics right.
Posted by Zippy | March 5, 2009 4:19 PM
Zippy,
I fully agree about the semantics, which is why I dissent from your argument
Posted by Michael Bauman | March 5, 2009 4:35 PM
Michael:
First of all, I am not making an argument here. I am trying to accurately express an argument; an argument which I have not signed onto myself as a true representation of the morality of lending.Secondly, I have no idea what you mean by this latest comment. If you agree with me that the semantics changes the argument, don't we have to express the actual argument (that is, where the argument refers to specific opportunities not opportunity in general don't we need to express it that way) rather than a straw man before we can decide whether we agree with it or not?
Posted by Zippy | March 5, 2009 4:42 PM
re: epistemology and economics, Zippy, there's a century or more theory on the shelf in the ivory towers, (e.g. mises.org[slash]epofe.asp most of which I'm not privy to since I'm neither matriculated or employed by same) but from what I can glean indirectly from learned articles on the net, our dear Jesuit Fr. Bernard W. Dempsey's "Interest and Usury"(*) comes down hard on fractional reserves and fiat currency as "institutional usury" mainly because the economic agent's free will has been usurped by the tyranny of relativism see p 193 in section "The Cultural and Spiritual Legacy of Fiat Inflation" of The Ethics of Money Production online at mises.org[slash]books[slash]moneyproduction.pdf
Can one speak of personal morality under China's one-child policy? Can one speak of liberty under the Fed's inflationary serfdom? Please, I'd really like to hear a conservative defense of the systemic risk we are facing, and how it got this way without a wimper of warning from our bishops....?
Bernard Dempsey, Interest and Usury (Washington, D.C.: American
Council of Public Affairs, 1943), p. 207. Dempsey analyzes this phenomenon
by distinguishing two forms of “emergent loss” (one of the extrinsic
grounds on which interest is licit): “antecedent” and “consequent”
emergent loss. (The closest copy to me can be found at St Charles Borromeo Seminary see http://www.worldcat.org/oclc/1188927
Posted by Clare Krishan | March 5, 2009 5:17 PM