The force of finance has increasingly been felt in recent decades. This has especially come to attention with the 2008 Financial Crisis that rapidly swept the world. Among the many financial injustices we see, usury is becoming all the more apparent. The subprime mortgage crash that gave rise to the Financial Crisis undoubtedly involved a great deal of usurious transactions, and today, we are dealing with an ongoing struggle with student loan debt. Fortunately, from the Catholic faith, we have a rich magisterial and intellectual tradition that has something to say about usury and a path forward. However, despite this tradition, usury is often greatly misunderstood to the point that most people, even Catholics, don’t know what usury is or even where to find it.
The ancient understanding of usury goes back to Roman law. It was long understood that usury arose exclusively in the “mutuum” loan contract and involved taking anything more than the principal in return. Indeed, the medieval canonists and theologians went so far as to say that usury can only be found in the mutuum.1 Pope Benedict XIV tells us that the source and origin of usury is in the mutuum contract.2 Now the mutuum may sound rather esoteric and stuffy given its Roman origins, but it is quite familiar to us. In the language of modern finance it is a personally secured loan. This means that you, the borrower, personally promise to repay the loan come what may to the principal. Part of what this means is that the lender can come after you personally in the case of default. This often takes the form of a “deficiency judgment,” where you are legally obligated to repay the remaining principal though liquidating your personal assets or garnishing your wages. This sort of contract is familiar and includes those we find most intuitively problematic—namely, credit cards, student loans, and many home mortgages.3
The logic of the evil of usury comes from understanding property and exchange. For example, in a lease, the lessor grants a property right for the use of the good, called a usufruct, to the lessee. In return, the lessee pays him some price for the use of the good. The leased good, whether an apartment, lawn mower, or whatever else, remains the lessor’s even while the lessee uses it. Thus when he returns it back to the lessor, he receives back what is already his. The rent payment then is the price of the usufruct, the right to use the good, and so there is something of an equal exchange.
When the lender goes further to obligate the borrower to pay more, he is exacting that to which he has no claim, which is a sort of theft.
In contrast, the mutuum is a very different exchange. When the lender gives the good to the borrower, he is handing over not just the use but the whole ownership of the good. This is because the borrower can use it up in some way. This might be something like using a cup of sugar in baking, money in spending, or just some good to sell. Whatever way it is used up, the point is that the borrower can use it in such a way that he loses possession of it. This means that the lender must give him the ownership, because otherwise the borrower could not use or dispose of it in this way. In return, the lender only receives the personal promise of the borrower for the return. When the lender receives back the same kind of good, he receives back all that he had given. When the lender goes further to obligate the borrower to pay more, he is exacting that to which he has no claim, which is a sort of theft.
Now there are many immediate objections to this, especially for us raised with modern economic thinking. What about time value of money, opportunity cost, risk of default, inflation, and so forth? In this small space I cannot address all of these objections to complete satisfaction, but let me at least point out a path forward. First, the Magisterium has occasionally intervened on the question of usury. Innocent XI condemned the following proposition as “at least scandalous and pernicious in practice”:
Since ready cash is more valuable than that to be paid, and since there is no one who does not consider ready cash of greater worth than future cash, a creditor can demand something beyond the principal from the borrower and for this reason be excused from usury.4
This quite explicitly condemns time value of money as an excuse for usury. Time value of money may still be a valuable concept in finance, but it does not allow someone to licitly take more than the principal on a mutuum.
Second is St. Thomas Aquinas’ discussion on usury and specifically something like opportunity cost. He says that a lender cannot take more from the loan, because “he makes no profit from his money: because he must not sell that which he has not yet.”5 Opportunity cost is essentially the profit one could have made had one acted differently; it is a profit that does not exists and, given the lender’s choice, will never exist. For Aquinas this is to charge for what does not exist and so is not licit.
In the case of legal reform, there is perhaps a hopefully simple way forward.
Let us then turn to another sort of loan, the asset secured loan. This debt is guaranteed, not by the borrower himself, but by some specific property. Here too the Magisterium intervened, teaching that the medieval census contract was licit and non-usurious.6 This contract had the appearance of usury because one gave a lump sum of money for a series of future payments. A central difference from the mutuum is that the popes insisted that the debtor could not be pursued for the return of the principal even if the underlying property was “reduced to utter destruction and desolation.” The claim of the lender ended with the property from which he drew his profits.
In many respects this is similar to modern business debt. Most corporate bonds are completely guaranteed by the property of the company. In the case of default, the company’s goods can be liquidated to pay off the remaining debt. However, once that is gone, the creditors had no further claims and must accept their losses in a risky investment.
Another magisterial intervention was the case of the Montes Pietatis. These were charitable institutions often run by Franciscans that offered loans at low rates secured by some pawn.7 These were fully guaranteed by the pawn, so that if the borrower defaulted then the pawned goods could be sold to cover the principal. The Fifth Lateran Council approved these pawn shops taking “something moderate” to cover expenses without a profit.8 Since these loans were asset secured, this approval of “something moderate” is consistent with prior teaching mentioned above.
This brings us to the practical question of what can be done today about usury. Benedict XVI called for a renewal and reformation of the practice of the Montes Pietatis to meet modern circumstances.9 The main concerns are to protect the initial capital so that the institution can continue to run while avoiding usurious practices. The St. Vincent de Paul Society of North Texas has been attempting this by working with banks to obtain low interest loans for borrowers, especially those caught in predatory loans. By securing the loans with their own assets and co-signing the contract, they are asset secured and therefore not usurious. The Society works closely with borrowers to help limit the cases of default and develop budgeting and financial practices.
Another method is simply to offer interest-free loans. This requires special effort and has historically been unsuccessful, but it is possible, as shown by the work of International Association of Jewish Free Loans. The IAJFL claims that most agencies they work with have a repayment rate of 97 percent or greater. With rates this high, a lender can provide interest free with minimal loss of capital and only a moderate need for additional influx of capital or perhaps recovering something through investment income. This can also be attractive to potential donors, because their charitable donations go not only to assist one person or family but a series of people over potentially long periods.
In the case of student loans for universities, there may be options in addition to the above. Universities could offer trade schools in addition to their current curriculum. This would provide students with professional skills that they could use while in school and start to generate an income. This could provide a means for paying for tuition and other expenses while in school, limiting the total debt burden while receiving a liberal education. The College of St. Joseph the Worker is attempting this practice now in Steubenville, OH.
In the case of legal reform, there is perhaps a hopefully simple way forward. If the loan is unsecured by a specific property, then any profit on the loan is illegal. The lender can still recover his principal in the case of default, but anything beyond recovery of the principal and defined expenses is illegal. Apart from this, the government can refuse to enforce deficiency judgments. If the loan is secured by some property, then that is the end of the lender’s claim, and the government can refuse to extend that by pursuing the borrower’s property. This has the benefit of encouraging the lender to properly secure the loan, because if his claims end with the property he has a strong incentive to ensure it is sufficient.
Given the magisterial teaching on usury, we know it is still present with us today. Indeed, we see it in those forms of debt we find most intuitively problematic. However, there are ways to respond to this as the Franciscans did in the 15th century. Through non-usurious means, we can reduce the evil of usury and evangelize the culture, witnessing to the dignity of the person of the borrower and that not all economic exchange needs to be a matter of profit.
1 McLaughlin, T.P. “The Teaching of the Canonists on Usury (XII, XIII, and XIV Centuries)” Mediaeval Studies vol 1, Pontifical Institute of Mediaeval Studies: Toronto, Canada (1939), 100. Dempsey, Bernard W., Interest and Usury, Dennis Dobson LTD: London (1948), 170.
2 Denzinger, Heinrich, Enchiridion symbolorum definitionum et declarationum de rebus fidei et morum, ed. Robert Fastiggi, 43rd ed., Ignatius Press: San Francisco (2010), no. 2546.
3 Mortgages can either be full or non-recourse, which means either the lender can pursue the borrower for a deficiency or the lender’s claim ends with property. The full recourse loan is ultimately guaranteed by the borrower even if partially secured by the home.
4 Denzinger, no. 2141.
5 Summa Theologiae II-II, q. 78, a. 2, ad. 1. De Malo q. 13, a. 4, obj. 14.
6 Denzinger, 1355-1357
7 McCall, Brian, The Church and the Usurers: Unprofitable Lending for the Modern Economy, Sapientia Press: Ave Maria, FL (2013), 75-78.
8 Denzinger, no. 1444.
9 Caritas in Veritate, 65. Unfortunately, the Latin Benedict uses is “Montibus Pietatis,” which is poorly translated to “pawnbroking.”