Usury! Read Vix pervenit: On Usury and Other Dishonest Profit, by Pope Benedict XIV.
From Traditionalist Magazine
By Levi Russell
How much debt do you owe? Student loans, car loans, home loans, credit cards, and other debt are all very common today. Most of us have at least some debt; it is seemingly unavoidable. Debt can cause serious problems: bankruptcy stays on your credit report for seven years. The financial crisis of 2008 and ensuing recession were caused, in part, by profligate lending to people without jobs or sufficient sources of income. The federal government’s debt continues to grow and student loan debt has exploded in the last ten years.
Is there something inherently immoral about these debts that the government should correct, or is it simply the consequence of free individuals making legitimate choices in the market? In this article I will attempt to convince you that certain types of lending should be barred by law and what the effects of such a policy would likely be.
Usury: A Tragically Forgotten Concept
It is difficult for us in the modern world to imagine a world without lending at interest. Banks survive on their ability to charge more interest than they pay to obtain the funds they lend. However, for much of the past two thousand years, major religions such as Christianity, Judaism, and Islam imposed restrictions on money lending that reflected the moral status of lending in those traditions.
I will use the Catholic definition of usury, as it is the one with which I am most familiar. A thorough FAQ on the subject can be found here, and I strongly encourage the reader to look through it. For the purpose of this article, I will use the definition from the link above:
In order to determine if a simple “loan for interest” is usurious, we need to ask the following:
This is Confusing, Give Me Some Examples!
It is beyond the scope of this article to list all the various types of loans that qualify as usury (the interested reader should email me with any questions), but here are some examples:
What is Wrong With Banning Usurious Lending?
It seems to me that most people’s opposition to banning usurious lending is twofold: (1) they want to be able to borrow money easily, even if it means paying interest, and (2) they believe that whatever two consenting adults agree to is morally acceptable. The first is a practical economic concern and the second is a moral issue. Since I’m an economist, not a moral philosopher, I will stick mostly to the first issue, but I will offer some reasons to support a ban on usury from a moral standpoint.
What Will Happen If We Ban Usury?
The direct result of a ban on usurious lending would be a drastic reduction in consumer credit. No doubt this type of policy would have to be phased in over time to avoid a massive collapse of the financial sector. Such a collapse would likely cause more hardship than it would alleviate.
If it were phased in, one beneficial effect this would have would be an increase in individuals’ time preference. That is, a lack of easily-available credit would likely incentivize most of us to learn to save for large items we want rather than buy them now and pay high interest costs for the pleasure of having them now.
Some might object that people would simply find a way around it, such as secretly borrowing from a wealthy friend or relative at high interest rates to buy expensive consumption items. This is possible, but as long as the method used to circumvent the ban on usury is more costly than the current system, over time people would likely respond to this incentive.
Secondary effects would be a decline in default and bankruptcy among families and more stability in day-to-day life. Those who rely heavily on payday lenders and credit cards regularly would have to build a small savings account to handle emergencies. They would have to rely more on community support when things go very wrong. Such a state of affairs would incentivize more real-world connections among families and foster authentic community. Since people would not have large credit card and other consumption-based debt payments to make, a temporary loss of a job or major illness would not be as financially ruinous as it is now.
Is This Realistic?
Ultimately, the decision to ban usury is a political one. Discussing the potential outcomes of a ban on usurious lending can only go so far; at some point, we have to make a moral claim and attempt to enact it.
Unfortunately I don’t think any proposed ban on usury will be taken up because the interest groups who benefit from usury are too well-connected. A basic insight of Public Choice economics is that relatively small groups of people can capture the political process and turn policy in their favor if the reward is high enough. The costs of said policy amount to a shared burden among such a large number of people that it is difficult for these same people to justify opposing the policy.
Consider an example. Tariffs and quotas on sugar imports to the United States benefit a relatively small group of sugar farmers and processors in the United States. These trade policies increase sugar prices and create a windfall gain to sugar processors and producers. But the cost of the policy, an increase in the price of sugar, is so small for the average sugar buyer that they are not incentivized to organize and oppose the sugar taxes.
So it might be with usury. Though many families would benefit from less risk of default, more stability, and from an increased ability to delay gratification, financial interests stand to gain far more in pecuniary rewards from the current absence of regulation on usury. Though debt is a serious concern for many, the immorality of usurious lending is not a popular notion. We are not likely to see widespread calls for usury regulation or bans until the public becomes aware of the concept of usury.
Is there something inherently immoral about these debts that the government should correct, or is it simply the consequence of free individuals making legitimate choices in the market? In this article I will attempt to convince you that certain types of lending should be barred by law and what the effects of such a policy would likely be.
It is difficult for us in the modern world to imagine a world without lending at interest. Banks survive on their ability to charge more interest than they pay to obtain the funds they lend. However, for much of the past two thousand years, major religions such as Christianity, Judaism, and Islam imposed restrictions on money lending that reflected the moral status of lending in those traditions.
I will use the Catholic definition of usury, as it is the one with which I am most familiar. A thorough FAQ on the subject can be found here, and I strongly encourage the reader to look through it. For the purpose of this article, I will use the definition from the link above:
In order to determine if a simple “loan for interest” is usurious, we need to ask the following:
- Is profitable interest charged on the loan?
- Has the borrower posted collateral providing security on the loan? (Note: a corporation or partnership counts as collateral.)
- Is the lender’s recourse for recovery of principal and interest, in a case of default, limited to the named collateral and only the named collateral?
It is beyond the scope of this article to list all the various types of loans that qualify as usury (the interested reader should email me with any questions), but here are some examples:
- An interest-bearing loan to a corporation or partnership for the purposes of acquiring equipment or supplies for the business is not usurious because the owners themselves are not personally liable for the balance of the loan if the business itself cannot provide payment.
- An interest-bearing loan on a car is usurious because the borrower is personally liable for the difference between the balance on the loan and the value of the car. For example, suppose a borrower defaults on a loan for which he still owes $5,000 to the bank. Suppose the car is only worth $4,000 so the lender cannot recover the full $5,000 they are owed. The lender can legally go after the borrower himself for the remaining $1,000.
- A credit card is usurious because it: (1) bears profitable interest, (2) does not have collateral of any kind, and (3) the borrower is 100% personally liable for paying back the interest and principal on the loan. Student loans are similar since they also have no collateral to offset some of the burden. If someone defaults on a student loan, the lender can legally go after the borrower for the full amount!
It seems to me that most people’s opposition to banning usurious lending is twofold: (1) they want to be able to borrow money easily, even if it means paying interest, and (2) they believe that whatever two consenting adults agree to is morally acceptable. The first is a practical economic concern and the second is a moral issue. Since I’m an economist, not a moral philosopher, I will stick mostly to the first issue, but I will offer some reasons to support a ban on usury from a moral standpoint.
The direct result of a ban on usurious lending would be a drastic reduction in consumer credit. No doubt this type of policy would have to be phased in over time to avoid a massive collapse of the financial sector. Such a collapse would likely cause more hardship than it would alleviate.
If it were phased in, one beneficial effect this would have would be an increase in individuals’ time preference. That is, a lack of easily-available credit would likely incentivize most of us to learn to save for large items we want rather than buy them now and pay high interest costs for the pleasure of having them now.
Some might object that people would simply find a way around it, such as secretly borrowing from a wealthy friend or relative at high interest rates to buy expensive consumption items. This is possible, but as long as the method used to circumvent the ban on usury is more costly than the current system, over time people would likely respond to this incentive.
Secondary effects would be a decline in default and bankruptcy among families and more stability in day-to-day life. Those who rely heavily on payday lenders and credit cards regularly would have to build a small savings account to handle emergencies. They would have to rely more on community support when things go very wrong. Such a state of affairs would incentivize more real-world connections among families and foster authentic community. Since people would not have large credit card and other consumption-based debt payments to make, a temporary loss of a job or major illness would not be as financially ruinous as it is now.
Is This Realistic?
Ultimately, the decision to ban usury is a political one. Discussing the potential outcomes of a ban on usurious lending can only go so far; at some point, we have to make a moral claim and attempt to enact it.
Unfortunately I don’t think any proposed ban on usury will be taken up because the interest groups who benefit from usury are too well-connected. A basic insight of Public Choice economics is that relatively small groups of people can capture the political process and turn policy in their favor if the reward is high enough. The costs of said policy amount to a shared burden among such a large number of people that it is difficult for these same people to justify opposing the policy.
Consider an example. Tariffs and quotas on sugar imports to the United States benefit a relatively small group of sugar farmers and processors in the United States. These trade policies increase sugar prices and create a windfall gain to sugar processors and producers. But the cost of the policy, an increase in the price of sugar, is so small for the average sugar buyer that they are not incentivized to organize and oppose the sugar taxes.
So it might be with usury. Though many families would benefit from less risk of default, more stability, and from an increased ability to delay gratification, financial interests stand to gain far more in pecuniary rewards from the current absence of regulation on usury. Though debt is a serious concern for many, the immorality of usurious lending is not a popular notion. We are not likely to see widespread calls for usury regulation or bans until the public becomes aware of the concept of usury.
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