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The canon law, the canonists, and the theologians recognized from the beginning that the usury law permitted exceptions. From the recognition of individual exceptions, there arose a theory, and from the theory of exceptions there eventually developed a theory of interest.... In the end, as everyone knows, interest on loans came to be considered the norm, and usury the exception; and the scholastic analysis of usury came to center on the distinction between usury and interest.1
In the discussion up to this point, the term "interest" has not been emphasized. This is actually a technical term, as a standard textbook makes clear:
The prohibition was against usury, "where more is asked than is given." The Latin noun usura means the "use" of anything, in this case the use of borrowed capital; hence, usury was the price paid for the use of money. The Latin verb intereo means "to be lost"; a substantive form interisse [sic] developed into the modern term "interest." Interest was not profit but loss.2
This distinction is very important, because upon it all other arguments and conclusions will be based.
This provides the historical question which must be asked: did the Church condemn the taking of all interest on all loans? A simple reading might lead some to answer the same way the Scriptures and Fathers did, "Absolutely, unequivocally, without exception, all return on a loan was condemned."3 Yet a further reading of the sources gives an unequivocal answer quite the opposite: there existed legitimate titles to payment beyond the principal on a loan. If the former view was actually the Church's teaching, then the Church has reversed its teaching; but if the latter, then we have exceptions to the usury prohibition which become the basis of an authentic development of the concept of interest. Now we can make a deeper examination of the sources.
In analyzing the question of usury, Saint Thomas Aquinas raises and answers this objection:
Obj. 1. Now sometimes a man suffers a loss through lending money. Therefore he may lawfully ask for or even exact something else besides the money lent.
Reply, Obj. 1. A lender may without sin enter into an agreement with the borrower for compensation for the loss he incurs of selling something he ought to have; for this is not to sell the use of money but to avoid a loss.4
This is the principle of emergent loss (damnum emergens) by which a lender could charge, not because of the loan of money itself, but for the economic loss incurred due to the circumstances in which the loan was made. This becomes the basis of a lawful and justified title for the taking of something above the amount lent. These titles are called "extrinsic" because they are separate from the money lent itself; they are only involved in the loan transaction when viewed within the circumstances as a whole.
Both the Scholastic Theologians (who often comment on Lombard's Sentences) and the Canonists (who usually comment on Gratian's Decretals) would come to agreement on this title. It is obviously a matter of justice that one should be compensated for damages resulting from the loan. "The canonists all admit that loss incurred is sufficient title for demanding usury though they add that it is not usura but interesse, compensation for damages accruing."5
Although not developed by Thomas himself, many of his contemporaries would begin to discuss other titles to interest. A second title that was accepted after some debate was another type of loss, lost profit. "Loss occurring (damnum emergens) and profit ceasing (lucrum cessans) are the two great titles to interest, as interest is understood today, a return owed without fault of the debtor."6 If one could have made a profit with one's money instead of loaning it (and can prove it!) then this becomes a legitimate title for interest. If I were going to purchase an orchard, but made the loan instead, the lender might also owe me the profit I lost from not owning the orchard. This title would become much more important as commercial centers and opportunities for investment became prevalent. Much later, it might even come to include the cost of one's labor in making the loan (a just wage for bankers). "In the eyes of the Church, the most important and legitimate one [excuse], held that usury could be considered a salary, a remuneration for labor (stipendium laboris)."7
We should notice that the Church teaching also allowed two types of contracts which were different than loans. The first is what would be called a rental or lease (locatio), for this is the loan of something that is returned itself. The loan (mutuum) involves fungibles (usually involving objects which are consumed such as money or flour) which are repaid with different objects of the same number, weight, and quality. In a rental, the object loaned is a non-fungible, where the same object loaned is the one returned, such as a horse, field, etc. So why can a charge be made for a rental (locatio) and not a loan? In a rental, the person maintains ownership of the property, thus "one may lawfully sell its use while retaining one's ownership of it."8 The owner maintains the risk of loss, plus in some cases there may be deterioration of the object lent which justly deserves remuneration.
The second separate contract is the partnership (societas), a "great and universal form of licit investment in commerce throughout medieval Europe."9 Like the rental, in a partnership the ownership of the money is not transferred to the other party, thus the risk still lies with the investor who Thomas says "may lawfully demand as something belonging to him, part of the profits derived from his money."10 Of course the partner who provided the labor of working to make the profit must be compensated, but the capital comes from the "lending partner" who also should be compensated. The licitness of this partnership would have the advantage of encouraging the investment of idle money instead of the loaning it out at usury.
Something should also be mentioned about the notion of risk. As just seen, risk is a deciding factor for easily determining who owns something. In a loan, the ownership is transferred, and so is the risk; while the lender still has a personal claim for the amount loaned, he does not own it. The borrower must still repay the loan even if the money is lost or stolen, thus the lender shares no risk and no ownership. A renter of a house would not have to rebuild the house if it were destroyed by a natural disaster, so the risk lies with the owner of the house. It would seem that in a secure loan, there is no risk taken by the lender, thus there would be no reason for risk to become an extrinsic title for charging more than the amount of the loan.
The earliest canonists (and some later authors) thus refuse to make any exception to the laws on usury because of risk to the lender. Due to its early proscription in the Decretals of Gregory IX, risk was not accepted as a valid extrinsic title until the year 1645, when the Congregation of the Propaganda allowed for it.11 Although still debated, "the best authors have long since recognized the lawfulness of interest to compensate a lender for the risk of losing his capital."12 It seems risk was first allowed in cases where there was greater risk of non-solvency of the debtor or chance of failure of his enterprise. Then a charge would be justified, not because of any actual loss but because "the lender became in reality a partner in the venture, a stockholder rather than a bondholder."13 Thus, although the risk present in a loan is usually considered an extrinsic title, it is in many ways a form of partnership. (See chapter four on how some now consider money to be capital.)
There are several more extrinsic titles to payment above the principal of the loan debated throughout the Middle Ages. In fact, the canonist Cardinal Hostiensis composed a rhyming mnemonic (in Latin) that lists thirteen exceptions to the usury prohibition which were accepted by most of the scholastic authors.14 One common title was the penalty or fine (poena), which could be charged if the person was late in paying. This also developed into a payment for delay, because the continued non-payment hurt the creditor, becoming another form of damnum emergens or lucrum cessans. However, one still could not make the loan hoping the person would be late, such as setting a date that was impossible to meet. One last possible payment could be if the debtor makes a free gift to the lender in gratitude for the loan. Again, there could be no usurious intention by the lender.
With all of these exceptions, are not the canonists distorting the teaching of the official Church councils? Some say the 12th century canonists avoided the usury prohibition "by gradually narrowing the meaning of usury until for all practical purposes it meant an exorbitant, i.e., an unjust charge, for lending money, which was a serious sin, as it has continued to be down to this present day."15 Such a claim only distorts the development being made by these canonists who saw these exceptions as a matter of justice, not an evasion of the prohibition.
"These titles are the notorious 'subterfuges' by which the medieval canonist sought to 'evade' the prohibition of usury."16 Sarcasm aside, notice how the extrinsic titles, the partnership, and the rental are not just a scholastic attempt to avoid the usury prohibition or legitimize the growing economic activity. These are situations where the canonists recognized that legitimate interest may be due simply as a matter of justice. The multiplication of these exceptions was only the result of the changing economic circumstances which added complications to the transaction of a simple loan. "Emergent loss to the lender - cost in any form - is the basic title to interest. All other titles - cessant gain, risk of capital, delay and so on - are but special cases of cost to the lender."17
These titles to interest are very different from usury, for the loan is still essentially a gratuitous act of generosity and mercy where the lender can not hope to make a profit. "The interesse could be claimed only on proof of loss"18 and originally it could only be charged after the expiration of the loan, although later development also allowed it to be contracted for in advance. "Those who deposit or lend can fairly charge for various other factors: costs incurred in making and administering the loan, the risk of non-payment, probable inflation, taxes, the foregoing of other legitimate uses to which the money otherwise would be put, and so on."19
Now that we have examined these exceptions, we are better prepared to ask the question, has the Church changed its teaching on usury? The answer is seen by continuing our historical examination with the encyclical of 1745 by Pope Benedict XIV, the first pope to write encyclicals:
The nature of the sin called usury has its proper place and origin in a loan contract (mutuum). This financial contract between consenting parties demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given. Therefore he contends some gain is owed him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.20
A very strong teaching, consistent with all previously declarations of the Church, but then he continues.
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.21
Those who claims the Church changed it teaching would not be able to find any inconsistency between this teaching and the Scholastic tradition. Benedict XIV condemns usury, but approves legitimate extrinsic titles and partnerships.
In fact, some authors conveniently overlook canon 1543 of the 1917 Code of Canon Law which reads:
If a fungible thing is given to someone in such a way that it becomes his own and is to be returned later on in kind only, no profit may be made by reason of the contract itself; but in lending a fungible thing it is not in itself illicit to contract for legal interest, unless this be manifestly excessive, or even for a higher profit if a just and adequate title be present.22
While also including the modern definition of usury as excessive interest, it would seem this official law of the Church (which was in effect until 1983) still remained faithful to the Church's teaching as properly understood according to the theory of extrinsic titles outlined by the scholastics. In fact, the 1917 Code also provided "that several penalties be imposed on those convicted of usury, which is listed with such crimes as murder, rape, and robbery."23
Of course some might argue that that the development of these exceptions, the extrinsic titles, occurred only in the writings of the scholastics, for the great councils of the Middle Ages (as examined earlier) said nothing of these exceptions. Yet I believe these theologians and canonists were making an authentic interpretation of the Church's teaching. Even someone who says the Church has an evolving theology recognizes that "nowhere in the council documents or scholastic teaching is it stated clearly that interest in itself and under all circumstances is a violation of justice."24
It is based on a careful examination such as this one that Dr. Germain Grisez, a modern author on morals, can answer the question: "Did the condemnation of the taking of interest ever meet the conditions for the infallible exercise of the ordinary magisterium?" "The answer is negative."25 He makes this answer because he recognizes the important distinction between interest and usury, a distinction which he sees present in the teaching of the magisterium: "The sin of usury is not simply the charging of interest on a loan, but the charging of interest on a loan in virtue of the very making of the loan, rather than in virtue of some factor related to the loan which provides a basis for a fair demand for compensation."26
Some will accept these teachings of the scholastics, Benedict XIV and canon law; but then they still object that if the Church's teaching is consistent in allowing these exceptions, why did it condemn banking by refusing absolution to bankers until the nineteenth century? The problem was that one always had to prove that a just and adequate title was present in the loan, or else the loan was assumed usurious. As loans became more and more frequent, it would have become very tedious and in many cases nearly impossible for a banker to prove that loss had occurred. This placed confessors in a quandary and is the reason behind the change in the confessional practice that was allowed by the Vatican in the 1830s. One must recognize that the Church always needs to exercise caution in such matters, and thus it approached the question with great care. The teaching on usury did not change, but the question had to be answered: could extrinsic titles be assumed to exist without proof?
Obviously the answer today is a resounding "yes." But it was only slowly over time that this considerable and widespread change in the economic system occurred. With the development of a widespread capital market, investment opportunities became more numerous, and the title of lost profit, "lucrum cessans, became a general fact of life in the early modern world."27 As modern economists would say, there is an "opportunity cost" of loaning out one's money, for which one deserves just remuneration. "The scholastics teach that the divine and natural prohibition of usury is only of profit taken without just title on a loan contract, and they are able to find a multiplicity of titles and contracts by which profit may be received."28 Thus Father Dempsey concludes that the scholastics would have also agreed that we can assume the existence of extrinsic titles:
The Scholastic position may be summarized by saying that a loan which brought no antecedent loss or sacrifice to the lender could not be the foundation of a title to interest to that lender. If the loss emergent upon that loan because of forfeited benefit or opportunity was a personal loss to the lender he could charge for it. If such an emergent loss was prevalent in the economic community in which that person lived, he might also make a charge for that loss, even though he did not personally suffer a specific loss; for in these circumstances that would be the common price of this "privation of money."29
This chapter has developed the Church's teaching on usury with a careful examination, seeing that there were exceptions to the absolute prohibition. This becomes the basis for saying that the Church's teaching in the twentieth century is still consistent with that of the middle ages. Even Noonan must admit this: "Formally it can be argued that the old usury rule, narrowly construed, still stands: namely, that no profit on a loan may be taken without a just title to that profit."30
The only change that occurred was the development of additional extrinsic titles over time; and the fact that at one time extrinsic titles had to be proven, and now they can be assumed to exist. This is a very strong argument for an authentic development of the usury teaching.
However, others today have raised a much different question. Could our economic society have changed so much that the very nature of loans and money themselves have changed? Is our economy so radically different that the usury teaching no longer applies to us? The next chapter must examine whether the modern economic changes have actually made the scholastic's economic theory on usury obsolete.
1 Noonan, Usury, 100.
2 Homer and Sylla, 73.
3 Noonan, Usury, 57.
4 Thomas Aquinas, The Summa Theologica of St. Thomas Aquinas, trans. Fathers of the English Dominican Province, (New York: Benzinger Brothers, 1947), II-II, q. 78, a. 2.
5 McLauglin, 145.
6 Noonan, Usury, 115.
7 Le Goff, 73.
8 Aquinas, II-II, q. 78, a. 1, r. 6. Remember that usury is a charge for the use of money. When a loan is made, the ownership of the money passes to the borrower, and the lender cannot legitimately charge (usury) for something he does not own.
9 Noonan, Usury, 133.
10 Aquinas, II-II, q. 78, a. 2, r. 5. Unfortunately, Thomas did not foresee the infamous "triple contract," a form of riskless partnership which would "cause one of the fiercest theological controversies of history." Cleary, 82.
11 Cleary, 117. Cf. McLauglin, 147.
12 Father Arthur Vermeersch, S.J. "Usury," The Catholic Encyclopedia 15 (New York: Robert Appleton Co., Inc., 1913), 236.
13 Divine, Interest, 56.
14 Cf. McLauglin, 125.
15 Habiger, 75.
16 Dempsey, Interest,171.
17 Rev. B. W. Dempsey, S.J., "Money, Price and Credit" The Summa Theologica of St. Thomas Aquinas vol 3 (New York: Benzinger Brothers, Inc., 1948), 3374.
18 Divine, Interest, 53.
19 Grisez, Living, 834.
20 Pope Benedict XIV, Vix Pervenit (1 November 1745), 3.I; [ONLINE]. Available from http://www.ewtn.com/library/ENCYC/B14VIXPE.TXT [accessed 19 April 1997].
21 Ibid., 3.III, 3-4.
22 Codex Juris Canonici (1917), c. 1543; quoted in Divine, Interest, 115, and Habiger, 78.
23 Divine, Interest, 116, referring to Codex Juris Canonici (1917) canon 2354. Cf. Habiger, 78.
24 Unsworth, 16.
25 Grisez, Principles, 893.
26 Ibid., 894.
27 Ederer, 14.
28 Noonan, Usury, 375.
29 Dempsey, Interest, 189.
30 Noonan, "Development," 663.
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