A Time for Reconsidering the Catholic Prohibition of Usury

Not since Noonan have we taken seriously the prohibition against usury, and indeed, not even then, since the point of John T. Noonan’s 1957 work, The Scholastic Analysis of Usury, was to explain the prohibition’s descent into irrelevance.[1] Admittedly, there is something perverse about suggesting a lack of seriousness in a 400-page tome written by the most influential Catholic legal scholar of the twentieth century, but its seriousness lies in its treatment of the prohibition as a historical phenomenon, and not—in the final analysis—as a prohibition one might actually consider following. So much for the traditional teaching—the biblical teaching, long affirmed by the Church—that it is immoral to charge interest on a loan.

The theory of usury has not helped its case. As Noonan notes, to give the intellectual history is to present the arguments against it. We have no theory of usury that is simultaneously coherent and practical. This is unfortunate, because some of our most pressing moral questions at present concern debt. In light of massively indebted younger generations, ought the federal government to forgive student loans, and if so, how much and for whom? Should these loans be made in the first place? Sovereign debt crises loom in the wake of the pandemic response. What lending terms are just? To what extent should lenders and their enforcers go to recoup those debts? Is austerity an expression of justice, or an arbitrary exertion of power on the weak? These are on top of perennial worries about payday lending and the levels of consumer debt on credit cards.

America is not Christendom, but the Church must still speak as teacher and friend. Despite the historic problems, I would like to suggest that the prohibition on usury can help us to think rightly about the role that debt plays in our modern, over-financialized society. To do so, we need a coherent theory, and St. Thomas Aquinas and Hilaire Belloc will be our guides.

Belloc’s creative reconstruction of Aquinas’ position has hitherto been underappreciated, but even he did not grasp the implications of what he had done. In distinguishing between productive and unproductive loans, he provides the intellectual justification for shifting the primary locus of the usury prohibition from the point of lending to the point of forgiveness. By following Aquinas and Belloc, we might hope to avoid the sin of usury, and possibly find it a little easier to say the Lord’s Prayer without glossing over the uncomfortable bits about forgiving debts.

Aquinas on the Problem of Disappearing Money

We begin with St. Thomas. There are indeed many reasons to avoid usury: e.g., that it substitutes a loan for what ought to be an act of charity, or indulges acquisitiveness when we would do better to direct our desires higher. For Aquinas, usury is chiefly a sin against justice, justice being that virtue whereby one consistently wills to render the other her due.[2] Justice operates as a constraint upon the various means I might use to achieve my purposes. It is a constant reminder that my purposes and those of others come to be in the same world, and that I may never trample the rights of others in realizing mine.[3]

More specifically, usury is a sin against commutative justice, which regulates interactions between individuals.[4] It is a cousin to theft, in that it injures a person through their possessions, but differs in one key respect. No one wills a theft, but usury takes place within exchanges that are voluntary, or at least superficially so. The injured party consents under compulsion: she wills the loan in spite of the usury, much as one would part with a finger to save a hand.

For Aquinas, usury consists in the exaction of any remuneration in exchange for a loan. This includes monetary interest payments, but also material goods. It is essentially a question of title: the would-be recipient of payment needs just cause to receive it. In the absence of a legitimate title, no payment can be demanded.

Aquinas offers several arguments against the charging of interest, but the best one is based upon the nature of money as a consumable good. In normal circumstances, a house is not destroyed when it is rented. Indeed a renter who does destroy the property will quickly find herself in court. We can easily separate out the right of use from the right of ownership. Not so with money. Money exists to be spent, and once the money is gone, it is gone. In this regard, money is like grain, wine, or facial tissues: to use is to consume or alienate. Because the use of money cannot be separated from its possession, one cannot sell the right to use money separately from the money itself. The usurer essentially sells something that does not exist (or alternatively, sells the same thing twice), an intrinsically evil act.[5]

A few qualifications are in order. One may not charge for the right to use money, but other titles may give cause for payment in excess of the principal. For instance, if the lender will suffer a loss on account of lending, then, according to the principle of damnum emergens, it is permissible to charge for that loss (q. 78.1 ad. 1). This is in accord with a general principle that in voluntary exchanges, all parties should be indemnified from accidental harm.[6]

Aquinas does not, however, accept the title to compensation on account of lucrum cessans, the loss of profit. For Aquinas, future gains are never guaranteed. Even in the instance of theft, one need only return the money stolen, not any gains obtained through the use of it. (Modern financiers would see the arbitrage opportunity, and it is not hard to envision the emergence of a cottage industry trading in stolen, but eventually to be returned, funds—the Platonic form of Marxist primitive accumulation!—but this is a digression.)

What of the financiers? Aquinas need not expel them from society as Plato exiled the poets and Christ emptied the temple. Though radically opposed to the charging of interest, Aquinas had nothing against the investment of capital. He explicitly allows for the formation of a societas, or partnership. The immediate difference between the loan and partnership is the burden of risk. In a loan, the borrower in principle assumes all risk: whether a business venture succeeds or fails, she owes a return of all of the capital and interest as well. In the partnership, both parties share in the risk and reward. In short, equity financing is permissible; debt financing is forbidden.[7]

This is a matter, not merely of risk, but of relationship. Without doubt, one partner can use, squeeze, or defraud another just the same as a stranger might. In those instances, however, the partnership is a fiction: the partnership, if it ever existed, has already ended, and the visible rupture merely brings to light that reality. Partnership by definition entails a union of interests. In contrast, the lender’s interest may very well run contrary to that of the borrower. An unscrupulous lender would just as readily profit from a borrower’s demise than prompt repayment, as compounding interest and fees snowball to create consistent income. While vicious, doing so would not be contrary to the lending relationship.

The usury prohibition’s long march from Aquinas to today is too much to recount here, but suffice it to say that practice and theory combined in a massive onslaught. We have the rise of the triple contract, in which a loan contract was combined with insurance contracts—all three permissible on their own—to effect, in practice, a loan with interest. At the same time, lucrum cessans became an acceptable title for the charging of interest, an inherent recognition of the productivity of money. Finally, we have a general change in the understanding of balance, and recognition that the value of money (understood in terms of its purchasing power) is in fact fluid. Changes in the supply of and demand for money leads to inflation or deflation, such that observing strict arithmetical equality would not guarantee justice. No wonder, then, Belloc’s lament centuries later: should one challenge usury on moral or economic grounds, “most of the careless and all the foolish will put you into the company of those who think the earth is flat.”[8] Little did he know that flat earth theory would be as popular as it is today.

Belloc’s Innovation

The 1950s killed Hilaire Belloc, but had he survived capitalism’s zenith, the revolutionary spirit of the 1960s could just as easily have done him in. One of the original architects of distributism, the belligerent Belloc would broach nothing but a Third Way. Still, one need not accept the rest of his economic proposals to see that he stands as intellectual heir to Aquinas’ theory of usury, and moreover, that he is the heir who made good, having improved on the efforts of his predecessor.

Such a claim is not without challenge. Noonan dispatches Belloc in a mere page.[9] On his reading, Belloc is a false heir because he relies upon a distinction between production loans and consumption loans that is nowhere to be found in the tradition. Indeed, as Noonan is explicating Aquinas, he rightly points out (in anticipation of this later discussion?): “St. Thomas’ argument covers both so-called consumption-loans to the poor and production-loans to businessmen; for however the money is spent, it will be consumed in the Thomistic sense.”[10] Even worse, the actions Belloc proscribes and permits in accordance with his categories are an apparent inversion of those of the scholastics, who were not all too concerned about public finance.

This raises a key question about what it means to be the heir of a moral tradition. Is it to be found in the moral code (the specific actions permitted or prohibited) or the frameworks used to evaluate them? On Noonan’s account, Belloc comes up lacking in both; nevertheless, I maintain that Belloc does in fact save the framework, if not the code.

First, let us gain clarity on Belloc’s actual position. His precise definition of usury is “a claiming of interest upon an unproductive loan, or of interest greater than the real increment produced by a productive loan.”[11] Charging interest on unproductive loans is forbidden; charging interest proportional to profit is permitted in the case of productive loans. Importantly, contra Noonan, Belloc is not distinguishing between loans for the purpose of production or consumption, but the actual results thereby. Herein lies the distinction: although it is a production-loan, a sunk investment is not a productive loan, no matter how much the borrower and lender wish it to be.

Admittedly, Aquinas never mentioned unproductive loans or productive loans. This does not make Belloc a false heir, however. What Belloc actually offers is both devastatingly simple and profound: a two-pronged reconstruction of Aquinas’ position that allows for investment without removing the import of the usury prohibition. In the first instance, Belloc completely sidesteps the debate concerning the productivity of money, and instead maintains Aquinas’ theory where it can most readily be acknowledged as true. Unproductive loans, without question, are by definition consumed in their use. There is little point in arguing about the fruitfulness of money when, in point of fact, it has been less than fruitful. Interest in these cases is thus proscribed.

What of the other loans, those that are productive? Belloc recasts all of these loans as partnerships. That is, by requiring that the venture be productive in order for a return to be paid, he essentially transforms debt financing into a form of equity financing: the lender is a partner in a common venture, and they rise and fall together. The end result, then, of Belloc’s two-pronged proposal is that loans (in the strictest sense) are forbidden, whereas partnerships are permitted, and indeed encouraged.

On the face of it, Belloc’s creativity seems a waste. It would have been much simpler to admit that Aquinas was wrong about lucrum cessans (lost profit), or—and this amounts to the same thing—that while he may have been right about money in the thirteenth century, he certainly is not correct now. In the modern era, we could maintain that a return is virtually guaranteed (or even literally guaranteed, thanks to the FDIC). Why bother the consciences of the lay faithful, if we can presume fairness in all but the most outrageous of interest rates?

The advantage of Belloc’s position is three-fold. On the one hand, lucrum cessans denies or at least masks the motivation at the core of the act. One does not lend begrudgingly, taking interest as a way to offset the losses one will face, but rather in pursuit of a return. Belloc can account for that—the legitimate “loan” is understood to be an investment.

Further, the use of lucrum cessans as a title is viciously circular. The fact that I can command a return is what permits me to demand one, and the rate that I can charge is what justifies the rate that I do charge. (We make an exception for payday lenders, because no one likes them, and we prefer that all excessive fees go to respectable banks.) For Belloc, there is no circularity: the gain on investment justifies the payment.

Finally, we have the key difference between Belloc and advocates of lucrum cessans: the answer to the question of what happens with unproductive loans. According to lucrum cessans, an unfortunate borrower must pay not only the loan but also the return. This is a matter of strict commutative justice, but such is not always possible, for, as Belloc notes, usury “‘wears down’—‘ eats up’—‘drains dry’ the wealth of the borrower.”[12] Belloc avoids the unfortunate situation of granting someone the moral license to impoverish her neighbor.

Admittedly, the limits of lucrum cessans have not yet been plumbed. Commutative justice is subordinate to general justice, even as property is ordered to the common good. We might do well to recover these limits, but doing so would draw the proponent of lucrum cessans into Belloc’s theory by a backdoor—lucrum cessans would be an actionable title in the instance of productive loans, but not unproductive ones. At that point, why not simply agree with Belloc?

Usury and Debt Forgiveness

Belloc struggles with putting his theory into practice. Or rather, he maintains that his teaching is only practical if you restructure the whole of society, which is—to put it mildly—a challenge. For Belloc, “[n]othing immediate can be done” because “the whole system of investment renders inquiry about the productive or unproductive quality of an investment normally impossible.”[13] Belloc is addressing banking and our inability to determine where those funds are going, and he is correct that our complex systems often mask our complicity while often making it unavoidable. Still, if Belloc had understood the implications of his categories, he could have seen that the right application was practical even now: namely, first and foremost, as a way of thinking about the forgiveness of debts.

In the words of his supposed objector, Belloc hits upon an important truth: “It is impossible to draw the line between the productive and the unproductive loan.”[14] At least, such is true at the point of lending. A loan that appears to be for consumption could turn out to be incredibly productive, whereas a loan that is intended to be productive could (and all too often does) fail in its intentions. Belloc contests this, because he is intent upon preserving the need for the prohibition on usury, but this is unfortunate. Granting the reality of limited knowledge of effects opens up the question of what to do when that knowledge is attained.

Consider this proposal for using the distinction between productive and unproductive loans as a guide for debt forgiveness. Productive loans, uncontroversially, are entitled to a fair return. Contra Belloc, however, we should presume that loans are productive without evidence to the contrary. Meanwhile, in the instance of unproductive loans, no return on the principal may be permitted. Typically, it will take some time to determine that a loan has been unproductive, during which time payments will have been made. In that instance, all payments should be treated as counting toward principal, with the loan forgiven once the principal has been repaid. Most problematic debts would be addressed through these measures, though there is a case for forgiving even the principal when it becomes too much of a burden. Such practices would avoid the real threat of debt slavery.

In truth, we already have measures in bankruptcy law to prevent this. Yet, a person or entity has to be substantially ruined before being able to take advantage of bankruptcy, and even then, there are debts that cannot be discharged (here’s looking at you, Sallie Mae). The proposal I suggest would come with stronger limits, and it would also rearrange the priority of creditors. When it comes to the vast burden of student loan debt, we might simply ask whether those loans have been productive, and forgive accordingly. So, too, with Greece, or Spain, or whomever will suffer the next sovereign debt crisis.

We already think this way, to some degree. Consider the Paycheck Protection Program. The program was designed to provide businesses with the wherewithal to maintain employees despite the stoppage of vast sectors of the economy overnight due to the Coronavirus. That is, the loans were designed to be spent unproductively, paying workers who, according to the logic of business, should have been laid off. After satisfying the criteria, the loans would be forgiven.

The case is somewhat unique, in that it involves the forgiveness of the principal as well as interest—a necessity because a business has no incentive to take on the burden of the principal for someone else to consume—but it is revelatory of our moral intuitions. Forgiving these loans seems just to the extent that the loan is unproductive. If the money is productive, then the state is giving money away to people already making money, a threat to distributive justice. As it turns out—to great public outcry—plenty of profitable businesses did apply for these loans. As a result, in the second round, the SBA is requiring these businesses to demonstrate actual losses.

Extending this logic more broadly may run contrary to some people’s sense of duty. What of the moral responsibilities of the borrower? To be sure, those responsibilities exist, and we must be vigilant about the threat of moral hazard. Still, these responsibilities also exist in a world that we do not control, as the events of the last year have made more than evident. Sickness can come out of nowhere; government regulations can change overnight. GameStop (NYSE:GME) rises and falls on the just and the unjust alike. Let us recognize this common risk and take up the prohibition on usury, using it to unwind unproductive loans and thereby set our neighbors free.