Whatever Happened to Usury?
While the subject of usury used to be a hot topic in moral theology, the Church has not had much to say on the subject over the last couple hundred years. The Catholic Encyclopedia article on Interest ably sums up the current situation:
In our day, she [that is, the Church] permits the general practice of lending at interest, that is to say, she authorizes the impost, without one’s having to enquire if, on lending his money, he has suffered a loss or deprived himself of a gain, provided he demand a moderate interest for the money he lends. This demand is never unjust. Charity alone, not justice, can oblige anyone to make a gratuitous loan (see the replies of the Penitentiary and of the Holy Office since 1830) . . . . In practice, however, as even the answer of the Sacred Penitentiary shows (18 April, 1889), the best course is to conform to the usages established amongst men, precisely as one does with regard to other prices.
Periodically, however, someone will suggest that the Church’s teaching on usury needs to be revitalized. Recently following a link from Darwin’s wife led me to the blog Siris, whose author Brandon has written a number of posts on the subject. Brandon differs from a lot of internet anti-usury warriors I have encountered in the past in that he actually seems to know something about the Church’s teaching on the matter (as opposed to trying to reconstruct a theory of usury from scratch, or simply relying on Belloc’s erroneous treatment of the subject). Brandon’s 2009 post on the legitimate grounds for charging interest (what are called “extrinsic titles” to interest) is quite good as a primer, and my only real objection with Brandon’s treatment is that he doesn’t seem to realize some of the implications of what he writes.
For example, here is Brandon discussing the justification for interest taking known as the “praemium legale”:
Moral theologians and philosophers who were dealing with the problems of the emerging banking industry began to realize that the common good was genuinely improved if you had people who were willing to lend to those who for some reason needed to borrow. Thus lending was to that extent a civic activity that should be encouraged, at least within certain bounds. So it was occasionally suggested that the government, when it saw that lending needed to be encouraged, could allow a certain amount of interest on loans generally in order to provide an incentive for engaging in the risky and occasionally expensive business of lending. Obviously there were some people who thought that this was just giving the store away; but those who proposed it as a legitimate title to interest seem typically to have regarded it as a fairly restricted thing, and it’s easy enough to see why. If you are trying to encourage actual lending, you can’t make the incentive to lenders so great that borrowers no longer want to borrow, however desperate they are. You need to find a level of incentive that won’t be a serious disincentive for borrowers. Since the point of the whole title is to serve the common good, you can’t have an incentive that in general leaves borrowers worse off — for instance, it would be self-defeating from the point of the common good law serves if you gave the lenders an incentive that regularly drove borrowers into bankruptcy and poverty. To be a just exchange, a loan has to leave both lender and borrower better off, allowing, of course, for the fact that sometimes unforeseeable events can make this impossible through no real fault of either the lender or the borrower. The tendency of the loans has to be in some way to the benefit of both parties, because only if your lending system has general tendency to improve everyone’s life can it be said to be conducive to the common good, and it is only to the extent that lending is conducive to the common good that praemium legale can be a title to interest.
We want to allow some profit on lending, as otherwise people won’t want to lend, which will harm the common good. But we don’t want interest charges to be too high, as then people won’t want to borrow, which again will harm the common good. As it happens, economists long ago discovery a method whereby we can ensure that both parties to a transaction will tend to be better off; it’s called voluntary exchange. Let lenders decide what rate of interest to offer and let borrowers decide what rate to accept. Lenders will not offer a rate unless they believe it will be profitable to them, and borrowers will not accept a rate unless they believe it will be beneficial to them. Whatever rate they agree to, therefore, will tend to be mutually beneficial.
But if you accept this, then one needn’t spend a lot of time worrying about whether or not particular particular interest charges are just. The market will weed out excessively high interest charges. Nor do you need to worry about ensuring that lenders make enough profit to incentivize lending. Market forces will ensure that they do. And when you realize that, the Church’s nonchalance about contemporary interest taking makes perfect sense.