Side benefits of outlawing usury

Being an authoritarian, I’m always excited by the prospect of outlawing something, and my “give tyranny a chance” posts tend to generate some of the best discussions.  I’ve been impressed by Proph’s threepart  post on why we should abolish usury.  More recently, Alte has taken up the call.  The reasons they give are the most important ones:  it preys on the poor, encourages living outside one’s means, and destabilizes the economy.

Louis de Bonald made some important arguments against the toleration of usury two centuries ago.  (You can read his essays related to the subject in The True and Only Wealth of Nations.)  His main concern was to preserve France’s agrarian character.  He thought money-lending was leading the industrial urban sector to dominance, which would have profoundly negative practical and even spiritual effects for his country.  Practically, he was convinced that industry was inherently unstable and dangerously sensitive to changes in demand in faraway places; would have children in good times that they couldn’t support in bad.  Culturally, he worried about what would happen when few people had direct contact with nature, so that when things go wrong they would blame “the system” rather than fortune and seek redress from the State rather than God.  Bonald was uncharacteristically moderate (for him) in his demands:  a restriction on interest to the average annual returns from holding the same amount of money in farmland, to level the field for the latter investment.  He made the classical distinction between lending money for consumption, for which there should be no right to charge interest, and investment in a productive venture, in which case one can legitimately claim one’s share in the profits.

Not being an expert in economics, and having spoken before about the perils of opining from ignorance, I will leave the question of what best promotes the common wealth to others.  There are some side-benefits to abolishing usury that appeal to me.

  1. It wouldn’t be as easy to dismiss ancient and medieval beliefs, or current Christian ones, with comments like “Well, you know the Church also used to condemn usury too, and now everybody realizes how silly that was.”
  2. It would moralize economic life.  Morality doesn’t get real for most people until they are faced with concrete prohibitions.  Vague exhortations to consider the common good don’t do much for us when in the fever of temptation.  Imagine if Catholic sexual morality just consisted of a Kantian imperative not to “use” a person as a “mere” means.  In practice, this wouldn’t influence us much, would it?  We need something solid.

6 Responses

  1. You are right to say that one should not opine from ignorance, but, when opining on usury, ignorance of economics should prevent one from opining only on the economic consequences of usury (or its abolition). A corollary to this is that knowledge of the economic consequences of usury does not automatically confer a license to opine on its moral and social consequences.

    Restrictions on usury have the effect of denying credit to high-risk borrowers. Their basic purpose was to prevent peasants from posting everything they owned as security for a loan, and then loosing their land in default. The reason to prevent this was that it produced a landless, lawless mob, and that this mob was anti-semitic. No doubt the economy of Europe would have grown faster if credit was available to high-risk peasants, but it would have had an even greater problem with landless, lawless mobs and anti-semitism.

    The modern social situation is rather different, but I think there are still good reasons to restrict payday loans, pawn shops, reverse financing of automobiles, and other forms of credit to high risk borrowers. The basic moral problem is that one party to the transaction is desperate, and probably rather stupid, and the other party is not. If we eliminate this sort of financing, however, we must have alternative means for desperate men to get through a liquidity crisis.

  2. Hi JMSmith,

    Proph (who has a right to opine since he seems to know a lot about economics) does propose an alternative means. He basically says that the State (preferably the local government) should take over the loaning process, since without usury it could only exist as a public service.

    I’ve read of several instances in medieval/counter-Reformation Europe where the Church established operations to offer loans to poor people at low interest so that they wouldn’t be preyed upon by the Jews. I’ve read that in Spanish Mexico, the Church was on paper a part-owner of just about everything, because everyone who borrowed did so through the Church. Hence the perception of her great “wealth”.

  3. Bonald, I am interested in your take on distributism.

  4. Right; that lending which is absolutely essential to the economy (as well as those other functions that banks perform) should be done through and as public utilities. That’s just good policy, even if you don’t want to abolish usury (and I should credit Yves Smith at Naked Capitalism for the idea of running the banks in that fashion). We already backstop them with massive sovereign reserves; we may as well have them administered and controlled directly by the state.

  5. As a Catholic jurist, the question of usury is of more than academic interest to me and I have devoted some study to the question.

    The last major papal pronouncement on the subject was by Benedict XIV (one of the greatest canonists to sit on the throne of St Peter – Prospero Lambertini) in the Encyclical Vix Pervenit of 1 November 1745.

    Having reaffirmed the traditional teaching that no gain may be made from a loan, but there may exist extrinsic titles to interest, he says “Concerning the specific contract which caused these new controversies, We decide nothing for the present; We also shall not decide now about the other contracts in which the theologians and canonists lack agreement” – Would that his successors had always shown similar prudence on controversial matters.

    He adds, “And if a dispute should arise, when some contract is discussed, let no insults be hurled at those who hold the contrary opinion; nor let it be asserted that it must be severely censured, particularly if it does not lack the support of reason and of men of reputation. Indeed clamorous outcries and accusations break the chain of Christian love and give offense and scandal to the people” – A salutary caution on more questions than that of usury.

    He cautions that “those who desire to keep themselves free and untouched by the contamination of usury and to give their money to another in such a manner that they may receive only legitimate gain should be admonished to make a contract beforehand. In the contract they should explain the conditions and what gain they expect from their money. This will not only greatly help to avoid concern and anxiety, but will also confirm the contract in the external forum. This approach also closes the door on controversies, which have arisen more than once, since it clarifies whether the money, which has been loaned without apparent interest, may actually contain concealed usury” – There speaks the lawyer.

    He ends with a rebuke to those who say that today the issue of usury is present in name only, since gain is almost always obtained from money given to another. How false is this opinion and how far removed from the truth! We can easily understand this if we consider that the nature of one contract differs from the nature of another.”

    If I may venture to summarise – there are no rules, only principles; each case has to be examined on the merits. That, I suggest, is why the Holy See has not revisited the question.

  6. Hi Svar,

    I’m sympathetic to the distributists’ concerns, but I’m not sure if their solutions are workable. I fear that a population of six billion can’t be supported on local, home production-based economies. On the other hand, if one thinks of distributism as a set of aspirations rather than policies, then I would get on board with that. We should preserve local control and family independence to the extent possible.

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