Economic Injustice Hidden in Plain Sight

The Moneychanger and His Wife, by Quentin Massey.

In the modern mind, the Church’s prohibition on usury falls under her many outdated teachings. Some even use it as proof that the Church can change her teachings. What the Church taught half a millennium ago, before the rise of modern capitalism and the modern banking system, simply no longer applies. It certainly does not help that the modern Magisterium has remained mostly silent about usury. There was an ambiguous mention of usury in the 1917 Code of Canon Law¹ that was removed when the new code was promulgated in 1983. This silence has left many assuming consent, and that Church’s teachings on usury no longer apply.

One recent magisterial mention of usury is noteworthy. In his 2009 encyclical, Caritas en Veritate, Pope Benedict XVI did point out the need to protect “the more vulnerable sectors of the population … should be protected from the risk of usury and from despair. The weakest members of society should be helped to defend themselves against usury, just as poor peoples should be helped to derive real benefit from micro-credit, in order to discourage the exploitation that is possible in these two areas.”² But this fell mostly upon deaf ears because of the ambiguities surrounding usury itself. What is clear from the Pope Emeritus’ statement is that, if the weakest members of society should be helped to defend themselves against usury, then usury itself is something that all need to be defended against. Unfortunately, without a proper understanding of usury, we all become vulnerable to it and any attempt to help the “weakest members” is like the blind leading the blind. This essay will attempt to shed some much needed light on the subject.

As the modern economic systems were in their infancy stage, there was much confusion about the application of the Church’s perennial prohibition on usury. In response to this, Pope Benedict XIV issued the Encyclical, Vix Pervenit. While he did not treat any of the specific issues of the day, he did lay down the principles from which economic man might take his bearings. At the risk of these principles being misunderstood to us moderns, it is necessary first to make some important distinctions.

What is Usury?
Because usury was often associated with interest, the two soon become synonymous. Without making the distinction the prohibition becomes nonsensical, and usury simply becomes charging an inordinately high rate of interest. But the distinction is more nuanced than that.

In addressing the sin of usury in the Summa Theologiae³, St. Thomas makes a very important distinction. He points out that there are two types of goods that can be borrowed/lent. There are those that are consumed with their use, and those that are not (we would call these productive goods). For example, a bottle of wine is consumed with its use, and a plow is not. When someone “borrows” a bottle of wine, to consume the wine is to use it. When the bottle of wine is “borrowed,” ownership of it actually is transferred, and one would not return the same bottle of wine, but instead some other just medium of exchange (money, a similar valued bottle of wine, etc.). In the second case of the plow, one would borrow the plow, and then return it once he was finished with it.

Understanding this distinction between the two types of goods is important because in the first case, to charge for both the bottle of wine, and for them to drink it, is to charge for what is essentially the same thing. This price for a consumable product’s use is called “usury.” On the other hand, because the plow is not consumed by its use, one may both borrow and return the plow. It is also just to charge for its use because of the “cost” to the lender (e.g. wear and tear on the plow, personal loss of not having the plow, transportation costs, etc.).

St. Thomas also adds an important corollary to this by saying that every transaction, including borrowing and lending, must be to the mutual advantage of both parties. This means that neither party should shoulder an unfair portion of the burden. When the transactional burden is greater for one of the parties, then this constitutes an offense against commutative justice.⁴

The point of this corollary is that if paying more for something than it is worth, or selling a thing for less than it is worth, is unjust, then there can be fees associated with borrowing. The lender should never end up in an inferior position than he would have been had he not made the loan. He should be compensated to make up for damage or loss of profit. This is why there has always been a distinction in classic Catholic thought between usury and interest. Usury consists in the “intention of gain” while interest is a compensation for loss.

Finally, we must say a word on interest itself. It has been thought that legitimate interest comes from two sources. With the rise of modern economies, the question of whether licit interest might include not just immediate costs (dammum emergens), but also loss of forgone profits (lucrens cessans) as well was visited. It certainly seems reasonable that if the lender can demonstrate the ability to use the funds in a productive way, then there is nothing inherently unjust about including both under “costs” for the lender.

Money: Consumable or Productive Good
While it may now be clear that usury attached to consumable goods is wrong, one can rightly ask which kind of good money is. After all, the whole argument against usury depends on the assumption that money is not a productive asset. But money is a fixed medium of exchange, and can only be sold (lent) for its fixed price. Owning money means simply that one has the right to use the money to buy something. In other words, ownership and use cannot be separated. Once money is lent, the borrower is now the owner.

Properly understood, one can see that money, by itself, does not produce new wealth, but instead it can be exchanged for an asset that produces new wealth. As a medium of exchange in and of itself, money bears no fruit. This is where the medieval notion of money being sterile comes from.

This obviously leads us to make another important distinction, and that is between lending and investing. As St. Bernadine said, “all usury is profit but not all profit usury.” Investment of capital in a business differs in substance 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 commodities, or charge a “fee” for their use. An investor shares in the trade risks and, thus, can share in the profits. This mutual sharing in the risk is what separates an investment from a usurious loan.

The Father of Modern Economics, John Maynard Keynes, saw how necessary the distinction between investments and loans is. He is quoted as saying:

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.⁵

Vix Pervenit
Despite the fact that Pope Benedict XIV penned Vix Pervenit nearly 270 years ago, it still remains valid in its condemnation of usury. In light of what was said above, we can now understand the terms in the Pope’s condemnation of usury:

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.⁶

Here he calls usury the desire of the creditor to give more than he has given. As discussed above, this giving can include the initial loan, as well as any costs associated with it. One should not make a profit from a loan.

The Common Good and Distributive Justice
Above, it was mentioned that usury was an offense against commutative justice (considering it on an individual transaction level), but it should also be examined from the perspective of distributive justice because of the profound effect it has on the community as a whole. It acts as a wealth redistributor in the sense that it takes money from those who need it, and gives it to those who already have it. One of the harshest condemnations of usury came from St. Anthony of Padua when he found his city to be overcome by usury. Recognizing the social ills brought about by usury, he gave a series of sermons in which he compared usurers to the Devil himself, who is an “exactor who once offered the coin of sin to the first parent, and now ceaselessly demands daily repayment with usury. They seize the goods of the poor, orphans and widows and chew them up and swallow them. They spread their nets to catch the great and small, rich and poor.”⁷ One can only wonder what he would say today.

In a culture that is completely consumer driven, usury is ubiquitous. So much so that to turn away from it now could have profound effects. Take for instance the Credit Card industry. It is usurious at its roots. They charge a fee (presumably related to their cost of lending) to the seller (usually 3%) when a credit card is used. They then charge interest to the consumer (usually in the neighborhood of 10%-20%, sometimes more) in order to turn a profit on their lending. But because their presence allows more consumption, we tolerate the usury, and even turn a blind eye.

Another area is the Home Mortgage market. Again, there is a mixture of legitimate interest and usury in this industry. Most mortgage companies will charge fees upfront, referring to them as “Origination Fees,” in order to cover their cost in lending. Above that, everything else is usury.

First of all, the borrower almost always pays significantly more than the just price—meaning the price of the home at the time of payoff, even if one added in costs associated with lending. A typical home mortgage is really the bank purchasing the property, and then reselling it to the buyer at a higher price paid at a future date. This total price is usually well above the actual market value.

A second aspect relates to the banks claiming lucrens cessans for money that could have been invested in something else. This might be a legitimate cost, but not in the United States. With the fractional reserve lending practiced by the banks, the money that they lend does not actually exist. They artificially create the money to supply the loan, and then once it is paid off, it ceases to exist. Therefore, banks can neither claim lucrens cessans for money that otherwise would not have existed, nor a loss due to inflation, because but for the loan, the money would not have existed, and upon repayment it ceases to exist.⁸

What the Church Can Do
If even someone like Keynes, who certainly was no friend of the Church, can recognize the wisdom behind the Church’s teaching on usury, then perhaps the Church ought to take seriously her role to help form consciences for the common good. Being a “Third World Pope,” the Holy Father Francis has spoken much about economic injustice throughout the world. Yet, he has spoken very little about usury, except to call it a “dramatic scourge in our society (that) harms the inviolable dignity of the human person.”⁹ While this is a clear condemnation of the practice of usury, there is still the problem of an overall lack of understanding of what it is. When he was secretary, Cardinal Bertone, of the Congregation for the Doctrine of the Faith, had said that: “It seems opportune to publish a new encyclical on the subject of usury and, on the use of money in general.”

In his latest social encyclical, Laudato Si’, the Holy Father spoke of the “grave problem” of a lack of housing for all members of society, and offers some solutions.¹⁰ But unless one of the main causes is rooted out, namely that a basic need such as shelter has become an opportunity for an upward wealth redistribution, then any solution is little more than a Band-Aid.

Likewise, many of the environmental problems that he mentioned are a result of over-consumption, especially in the First World. Imagine the change in unnecessary consumption if there were a change in the amount of available consumer credit, which would most surely come about if usury were removed from the picture.

Obviously, usury is not the cause of all our social ills, nor would changes in its practice solve the world’s problems, but it is a serious source of injustice that affects both First and Third World countries. If what St. Thomas says, namely that a in a society where unjust exchange transactions dominate, eventually all exchange will cease,¹¹ then the Church, in her concern for the common good, ought to be making her explanations of this injustice more widely known.

Perhaps, this is more of a sign of the current disunity in the Church, but a moral consensus about the issue of usury, in and of itself, can have a tremendous impact. A number of large Wall Street banks have begun to offer Sharia compliant banking as a concession to Islamic teaching on usury.¹² While there are some differences in the Muslim understanding of usury, they are still forbidden from charging riba (usury), or profit on loans. There is no reason that the Church should not expect similar results if she were to make a unified effort to fight this unjust practice.