In my seminar on Catholic Social Thought (CST) and the Law tonight’s discussion focuses on usury. Why does the Church oppose usury? What is the current teaching on usury? What is usury? Has the Church’s definition of usury and/or its position on usury changed over time? If so, what does that mean for other Church teachings?
Modern American law defines usury using a four factor test: “1) A loan, express or implied. 2) An understanding between the parties that the money loaned must be repaid. 3) In consideration of the loan, a greater rate of interest than is allowed by law is paid or agreed to be paid by the borrower. 4) A corrupt intent to take more than the legal rate for the use of the money loaned.” Kraft v. Mason, 668 So. 2d 679 (Fla. Dist. Ct. App. 1996).
How well does that definition map to CST’s understanding of usury?
Our discussion is bookended by statements from two Popes named Benedict. First, Vix Pervenit (On Usury and Other Dishonest Profit) by Pope Benedict XIV, issued in 1745. Second, Pope Benedict XVI’s Encyclical Letter Caritas in Veritate (Charity in Truth), which was issued in 2009.
Candidly, I find neither to be very helpful at first glance. Benedict XIV, for example, wrote that “it is essential for these people, also, to avoid extremes, which are always evil. For instance, there are some who judge these matters with such severity that they hold any profit derived from money to be illegal and usurious; in contrast to them, there are some so indulgent and so remiss that they hold any gain whatsoever to be free of usury.”
The implication that not all investment profit is usurious is seemingly confirmed by Benedict’s further statement that:
“We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.”
Likewise, Benedict XVI was careful to draw a distinction between microcredit (of which he approved) and usury (which he condemned):
“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.”
But where then is the line between what is licit and what is not? (Or, as one of my students asked, is this ambiguity a feature or a bug?)
In An Essay on Mediaeval Economic Teaching (1920), George O’Brien explains that the origins of CST’s position on usury can be traced far back even into Scripture, but that it was Saint Thomas “Aquinas who really put the teaching on usury upon the new foundation, which was destined to support it for so many hundred years, and which even at the present day appeals to many sympathetic and impartial inquirers.” O’Brien quotes Aquinas at some length:
“… we must observe that there are certain things the use of which consists in their consumption; thus we consume wine when we use it for drink, and we consume wheat when we use it for food. Wherefore in such-like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing is granted the thing itself; and for this reason to lend things of this kind is to transfer the ownership. Accordingly, if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. In like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.
“On the other hand, there are other things the use of which does not consist in their consumption; thus to use a house is to dwell in it, not to destroy it. Wherefore in such things both may be granted; for instance, one man may hand over to another the ownership of his house, while reserving to himself the use of it for a time, or, vice versa, he may grant the use of a house while retaining the ownership. For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate [i.e., “to bring action under civil law to enforce rights in specific property whether corporeal or incorporeal or movable or immovable’] the house from the person to whom he has granted its use, as happens in renting and letting a house.
“But money, according to the philosopher, was invented chiefly for the purpose of exchange; and consequently the proper and principal use of money is its consumption or alienation, whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury; and, just as a man is bound to restore other ill-gotten goods, so he is bound to restore the money which he has taken in usury.”
Aquinas’ analysis rests on the proposition that a loan for consumption—a so-called contract of mutuum in Roman law—is a sale. In turn, Aquinas reasoned, the essential moral and ethical requirement in any sale was “the fixing of a just price.” Because the contract of mutuum “was nothing else than a sale of fungibles,” “the just price in such a contract was the return of fungibles of the same value as those lent.” Finally, a loan of money was deemed to be a loan for consumption of the money. Accordingly, one who lent money was entitled to nothing more than “the return of the same amount of money.” O’Brien thus concludes:
“The scholastic teaching … on the subject was quite plain and unambiguous. Usury, or the payment of a price for the use of a sum lent in addition to the repayment of the sum itself, was in all cases prohibited. The fact that the payment demanded was moderate was irrelevant; there could be no question of the reasonableness of the amount of an essentially unjust payment. Nor was the payment of usury rendered just because the loan was for a productive purpose--in other words, a commercial loan.”
This would seem to render the entire edifice of modern finance morally indefensible. As one of my students noted: “When credit cards, consumer credit, student loans, home mortgages, and car payments run virtually everyone’s lives, who seriously considers what it would mean for the charging of interest to be potentially immoral, at least as usury was understood biblical and in ancient and medieval Church doctrine?”
We turn then to Judge John T. Noonan’s book A Church that Can and Cannot Change: The Development of Catholic Moral Teaching. According to Wikipedia:
“John Thomas Noonan, Jr. (born October 24, 1926) is a Senior United States federal judge on the United States Court of Appeals for the Ninth Circuit, with chambers in San Francisco, California. … Noonan was the 1984 recipient of the Laetare Medal, awarded annually since 1883 by Notre Dame University in recognition of outstanding service to the Roman Catholic Church through a distinctively Catholic contribution in the recipient's profession. Noonan has served as a consultant for several agencies in the Catholic Church, including Pope Paul VI’s Commission on Problems of the Family, and the U.S. Catholic Conference’s committees on moral values, law and public policy, law and life issues. He also has been director of the National Right to Life Committee.”
There is no doubt that Noonan is a brilliant lawyer and a devout Catholic. Yet, his view of Church history has been controversial. In its review of Noonan’s book, the NY Times wrote:
“Noonan drives home the point that some Catholic moral doctrines have changed radically. History, he concludes, does not support the comforting notion that the church simply elaborates on or expands previous teachings without contradicting them.”
In contrast, Avery Cardinal Dulles warned in a review of Noonan’s book published in First Things “that Noonan manipulates the evidence to make it seem to favor his own preconceived conclusions. For some reason, he is intent on finding ‘discontinuity’ but he fails to establish that the Church has reversed her teaching in any of the four areas he examines.” So we proceed with the proverbial grain of salt close at hand.
Noonan starts by drawing the reader’s attention to the Parable of the Talents. The power of teaching by parables is that the audience accepts the secular analogy as obviously correct. When the master praises the two servants who doubled the sums they had been given and condemns the one who simply buried (unproductively) the sum he had been given, the import was that earning a return by productively investing money was legitimate. Indeed, the point is rammed home when the master tells the bad servant that, at the bare minimum, he should have taken the talent to the moneylenders to be lent out for a return.
Yet, Noonan cautions that there are aspects of the parable that implicate ancient Hebrew teachings on usury. (The Old Testament contains many injunctions against usury. See William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 192 (2012).) In addition, of course, the other famous Gospel passage in which money changers” appear is that in which Jesus drives them from the Temple, which would seem to condemn money lending. Yet, here again, Noonan is cautious, suggesting that “money changers” may not have been bankers.
Instead, Noonan identifies the key Gospel passage as being Luke 6:35:
“…love your enemies and do good to them, and lend expecting nothing back; then your reward will be great and you will be children of the Most High, for he himself is kind to the ungrateful and the wicked.”
The Church’s teaching on usury, Noonan argues, springs from the phrase “expecting nothing back.” The Early Church Fathers saw this passage as a “fulfillment of Mosaic law by way of expansion; the Christians were to love their enemies and to lend without seeking any benefit.” The Fathers thus refused to acknowledge a distinction between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and a creditor taking interest where the borrower used the loan proceeds to buy food to survive.
Personally, I find that distinction a valid one. The Church teaches that there is a preferential option for the poor. The relevant consideration in assessing the morality of lending thus might not be the paying and receiving of interest, but rather the impact of various lending practices on the poor. Put another way, as one of my students argued, the problem is when “a financially stronger party is exploiting a financially weaker or less financially knowledgeable party to an extent which can be said to be morally unjust.” (Note that Benedict XVI’s distinction between usury and beneficial micro-credit might be seen as reflecting this distinction. Note also the discussion below in which Cardinal Dulles embraces this distinction.)
In any case, Noonan argues that during the Middle Ages and continuing right up until the middle of the 1800s the Church’s canon lawyers developed a complex set of rules under which, for example, it was licit for a capitalist to invest money in a partnership (societas) with the expectation of earning a profit.[*] Eventually the exceptions swallowed the rule.
All of which leads us to the $64 question: If Noonan is right about usury, does that mean the entire Magisterium is up for grabs? But that is also a question for a another day.
Returning to the narrower question of usury, Avery Cardinal Dulles does not dispute Noonan’s presentation of “the interplay between moral teaching and the emergence of new economic systems.” but Cardinal Dulles argues that there was no “reversal of the original teaching but rather a nuancing of it.”
“The biblical strictures on usury were evidently motivated by a concern to prevent the rich from exploiting the destitution of the poor. But when capitalists of early modern times began to supply funds for ventures of industry and commerce, the situation became different. Moralists gradually learned to place limits on the ancient prohibition, so as to allow lenders fair compensation for the time and expenses of the banking business, the risks of loss, and the lenders’ inability to use for their own advantage what they had loaned out to others.
“These concessions do not seem to me to be a reversal of the original teaching but rather a nuancing of it. The development, while real, may be seen as homogeneous. In view of the changed economic system the magisterium clarified rather than overturned its previous teaching. Catholic moral teaching, like contemporary criminal law, still condemns usury in the sense of the exaction of unjust or exorbitant interest.”[†]
In this telling, as Woodyard and Marzen note, the key insight was that usury “was not defined as taking interest on a loan, but rather the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.” This definition allowed the development of modern finance once theologians and canon lawyers recognized that “most banks and commercial entities undertook some amount of risk in lending money in the era of Renaissance commerce.”
What then are we to make of Benedict VXI’s seeming revival of the condemnation of usury? Woodyard and Marzen argue that Benedict’s major point in fact was that:
“… in today's modern economic world, regulation of the financial industry is essential to protect the weakest and most vulnerable in society. It is, in essence, a reaffirmation of contemporary Catholic teaching of the preferential option for the poor, which dictates that the greatest of care must be taken for the most vulnerable in society.”
Note, however, that this does not mean one must embrace Elizabeth Warren’s view of financial regulation. Recall that, insofar as prudential judgments about the economy are concerned, Pope John Paul II emphasized that the “church has no models to present.” (Centesimus Annus ¶ 13) As the Catechism (¶ 899) thus teaches, the Church especially encourages lay initiative “when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life.” There thus is a space in which those of us who are both Christians and fans of free markets may work to develop regulatory schemes that optimally protect the poor and stimulate economic growth and vitality.
I thus do not read Caritas in Veritate as changing our understanding of usury as being focused on excessive interest rates, especially “the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.”
The problem in operationalizing that insight, of course, is the difficulty of determining what is an “excessive” rate:
“When contracts appear to have very high price terms, a court could determine only with great difficulty whether the high price is due to market power or fluctuations in the costs of inputs. A high interest rate, for example, could result from the creditor's judgment about the risk of default posed by a particular debtor, and generally courts should defer to such judgments. A determination that the creditor has market power requires an evaluation of the structure of the market, a notoriously difficult enterprise usually reserved for antitrust litigation. A seller or creditor with temporary market power as a result of a patent, or some innovation that other market participants have not had a chance to imitate, should (arguably) be permitted to reap above-market returns, for that is how innovation is encouraged in a market economy.
“When contracts appear to have harsh nonprice terms, there is another reason for thinking that these terms are unobjectionable. Even if the seller or creditor has market power, it has the right incentive to supply the terms that parties desire. For example, a debtor might be willing to consent to a harsh remedial term in return for a low interest rate.”
Eric A. Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 Yale L.J. 829, 843 (2003).
Given that reality, as one of my students asked, “What can be gained by continuing to talk about usury and how it should influence individual moral decisions, even when it will only have a marginal influence on the broader society?” His answer was that “it may lead individuals as Christians to approach their business affairs with more a grain of salt, shattering what is all too often a complacency with which Christians engage in the affairs of the world and the assumptions the demands of justice do not conflict with our behaviors as workers, business people, and consumers in a capitalist economy.” He also noted that “A return to a traditional understanding on usury might provide an impetus to restore Catholic charitable civic institutions, which can provide a more Christian alternative to the corrupt institutions of a secular society.” Indeed.
[*] One of my students argued that:
The principal practical difference between a loan and an investment into a capitalist venture is the parties who are likely to be involved in such transactions. The parties making and receiving the investment are almost certainly to be relatively sophisticated businessman with some degree of financial literacy. Additionally, those investing in a business or seeking an investment are more likely to have the financial means so that the loss of an investment will not result in abject poverty.
If find that a plausible justification for the distinction, but I am not sure that that is how the Church justified the difference. In the passage from Aquinas quoted above, for example, we see a distinction being drawn between a loan—which is regarded as a transfer of ownership of the money in question—and a temporary lease of a house—in which ownership does not change hands. “For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate the house from the person to whom he has granted its use, as happens in renting and letting a house.”
[†] This understanding of usury as the “exaction of … exorbinant interest” may also be reflected in Pope Leo XIII’s condemnation of “Rapacious usury” in Rerum Novarum (1891). As has been noted elsewhere, “To condemn ‘rapacious usury’ is perhaps to indicate that there may be usury that is not ‘rapacious.’ Perhaps, given new economic conditions, there could be interest rates on loans that are not motivated by greed or excess.” The same commentator further notes that:
Leo XIII gives a clearer idea later on in the encyclical about what he might mean by rapacious usury: "The rich must religiously refrain from cutting down the workman's earnings… by usurious dealing." In this paragraph, he lays down the principle that makes usury evil. He writes, "To make one's profit out of the need of another, is condemned by all laws, human and divine.” He makes clear that rich employers must refrain from "usurious dealing" against their poor workers "because the poor man is weak and unprotected, and because his slender means should be sacred in proportion to their scantiness." Usury, then, is an evil because it deprives the poor of even the little they have earned – thus keeping them poor and beholden to their creditors. The poor must be given aid and opportunity to overcome their poverty, not loans designed to keep them bereft even of the little they could otherwise accumulate. The Church always opposed usury due to its tendency to oppress the poor.
Pope Leo XIII thus appears to be articulating a version of the distinction I advanced above between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and, for example, a creditor taking interest where the borrower used the loan proceeds to buy food to survive.