Usury and the Free Market

What is usury?

I don’t know much about Islam, which is why I rarely comment on it. In fact, I know little about any religion other than Christianity, and I already have my hands full with that one. But I do know that there are some things I admire about Muslims: their dedication to modesty, their insistence on patriarchy, their honoring of Mary, and their beliefs concerning usury.

Those who devour usury will not stand except as stands one whom the devil by his touch has driven to madness. That is because they say: Trade is like usury: but Allah has permitted trade and forbidden usury…. Allah will deprive usury of all blessing, but will give increase for deeds of charity, for He loves not any ungrateful sinner…. O you who believe, fear Allah and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His messenger, but if you repent you shall have your capital sums; deal not unjustly, and you shall not be dealt with unjustly. And if the debtor is in difficulty, grant him time til it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew.[Surah al Baqarah, verse 275-280].

This is more severe and absolute than the Catholic view, but follows the same general line that it is uncharitable to make money off of interest, especially from the consumptive borrowing of the poor. Remember that the Church doesn’t believe that morality is something purely ephemeral, but that evidence of the rightness of Christian teaching on practical matters (which matches closely with the practical teachings of all other patriarchal religions) is available through the study of nature and history (i.e. Natural Law).

If we see things crumbling down around us, it is right to consider, “What have we done wrong?” and to recognize that wrong as sin. Over time, the spread of sinful behavior tends to degrade the entire society and destroy its prosperity. If usury is destroying our financial system, then it is only sensible to note that usury is sinful and that sin tends to beget destruction, and that it is therefore evidence of our foolishness and general immorality that we are all so surprised at our current state.

The subject of usury was brought to my attention by a reader named John, in an article concerning the morality of libertarianism. Although the entire passionate screed is worth reading, here is the relevant excerpt:

And to be blunt, whatever this thing is that is called capitalism is based upon sin, as it’s foundation is constructed wholly upon usury. Yes, look it up. It is a sin in both “Testaments.”… Why is it that usury, a practice that was for 1600-plus years universally condemned in Christendom now not considered a sin even though the phraseology in the Bible stands unchanged? Instead of observing and holding steadfast to Godly commands, we now instead engage in a semantic dance of when the point of “usury” is reached. Is it when interest rates reach 12% or 22%, or is it 30%? This is idiocy, and no different that arguing that a little bit of adultery isn’t really a sin and being just a little bit pregnant out of wedlock isn’t really a sin either. With the acceptance of usury as the norm, everyone becomes a “Cafeteria Catholic” whether they admit to it or not. Everyone is just going along to get along; history and the Law of God ignored.What has this history to do with “libertarians” and other presumed selfish jerks? It is a rare Catholic who has bothered themselves to read Pope Leo XIII 1881 encyclical “Rerum Novarum” [Editor: I've read it before.] and the follow-up encyclical published in 1931,”Quadragesimo Anno”, penned by Pope Pius XI [Editor: I've read it now.]. These two works addressed the question of “usury” as well as the rapacious behavior of the original “Robber Barons” and the ravages upon the social order as a result of the Industrial Revolution.

This is an interesting premise, jives with my own general views on the subject, and goes some way to revealing an underlying cause of our societal delay. But before I agree whole-heartedly, I would like to examine the Church’s expressed opinion on the subject, and gather a bit more reputable evidence.

So what does the Church say?

From the National Catholic Register:

The Catechism of the Catholic Church, in the 1990s, put usury into a dire context.

Catechism No. 2269: “The acceptance by human society of murderous famines, without efforts to remedy them, is a scandalous injustice and a grave offense. Those whose usurious and avaricious dealings lead to the hunger and death of their brethren in the human family indirectly commit homicide, which is imputable to them.”

But it seems that usury is no longer condemned only at the famine level.

The Compendium of the Social Doctrine of the Church quotes John Paul II from a Feb. 3, 2004, general catechesis. There, the Pope calls for a commitment “not to practice usury — a plague that is a disgraceful reality even in our days that can place a stronghold on the lives of many people.”
The Compendium of the Catechism of the Catholic Church, promulgated at the beginning of Benedict’s pontificate, seems to broaden the sense of usury even more. One of the answers to the question (508) “What is forbidden by the seventh commandment?” is:

“Also forbidden is tax evasion or business fraud; willfully damaging private or public property; usury; corruption; the private abuse of common goods; work deliberately done poorly; and waste.”

Pope Benedict XVI underlined the word usury in his commentary on the Psalms on Nov. 2, 2005, later that year.

“The heart of this fidelity to the divine word consists in a fundamental choice of charity towards the poor and needy: ‘The good man takes pity and lends … Open-handed, he gives to the poor” (vv. 5, 9). The person of faith, then, is generous; respecting the biblical norms, he offers help to his brother in need, asking nothing in return (Deuteronomy 15: 7-11), and without falling into the shame of usury, which destroys the lives of the poor.’”

In Rerum Novarum, we have the following:

In any case we clearly see, and on this there is general agreement, that some opportune remedy must be found quickly for the misery and wretchedness pressing so unjustly on the majority of the working class: for the ancient workingmen’s guilds were abolished in the last century, and no other protective organization took their place. Public institutions and the laws set aside the ancient religion.Hence, by degrees it has come to pass that working men have been surrendered, isolated and helpless, to the hardheartedness of employers and the greed of unchecked competition. The mischief has been increased by rapacious usury, which, although more than once condemned by the Church, is nevertheless, under a different guise, but with like injustice, still practiced by covetous and grasping men. To this must be added that the hiring of labor and the conduct of trade are concentrated in the hands of comparatively few; so that a small number of very rich men have been able to lay upon the teeming masses of the laboring poor a yoke little better than that of slavery itself.

In Quadragesimo Anno, we read:

104. Accordingly, when directing Our special attention to the changes which the capitalist economic system has undergone since Leo’s time, We have in mind the good not only of those who dwell in regions given over to “capital” and industry, but of all mankind.
105. In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.
106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.
107. This concentration of power and might, the characteristic mark, as it were, of contemporary economic life, is the fruit that the unlimited freedom of struggle among competitors has of its own nature produced, and which lets only the strongest survive; and this is often the same as saying, those who fight the most violently, those who give least heed to their conscience.
108. This accumulation of might and of power generates in turn three kinds of conflict. First, there is the struggle for economic supremacy itself; then there is the bitter fight to gain supremacy over the State in order to use in economic struggles its resources and authority; finally there is conflict between States themselves, not only because countries employ their power and shape their policies to promote every economic advantage of their citizens, but also because they seek to decide political controversies that arise among nations through the use of their economic supremacy and strength.
109. The ultimate consequences of the individualist spirit in economic life are those which you yourselves, Venerable Brethren and Beloved Children, see and deplore: Free competition has destroyed itself; economic dictatorship has supplanted the free market; unbridled ambition for power has likewise succeeded greed for gain; all economic life has become tragically hard, inexorable, and cruel. To these are to be added the grave evils that have resulted from an intermingling and shameful confusion of the functions and duties of public authority with those of the economic sphere – such as, one of the worst, the virtual degradation of the majesty of the State, which although it ought to sit on high like a queen and supreme arbitress, free from all partiality and intent upon the one common good and justice, is become a slave, surrendered and delivered to the passions and greed of men. And as to international relations, two different streams have issued from the one fountain-head: On the one hand, economic nationalism or even economic imperialism; on the other, a no less deadly and accursed internationalism of finance or international imperialism whose country is where profit is.

To the critics of Catholic economic teachings

The timeless truth and contemporary applicability of both of these excerpts immediately jumped up and smacked me in the face. These men obviously knew what they were talking about, all principled objections to the contrary. They were not talking about “pie in the sky” or “wouldn’t it be nice if everything were perfect and our economic ideas always lead to ideal results”. They were discussing the real positive and negative outcomes of modern economic concepts that they saw around them, and the need to balance all aspects of Christian economic and social teachings when crafting economic policies.

They saw that leaving people to die in the streets from hunger led to much needless suffering and eventually to war. Desperate people do desperate things, and they were aware that part of a state’s defense of its citizens includes their protection from the desperation of their neighbors, and the minimal provision of the citizenry (who contribute to the general system through their consumption taxes, production of labor, participation in government, and willingness to aid in the defense of the country, among other things).

No, private charity was not sufficient to prevent severe, mass deprivation. A more well-designed system of private charity might do a better job. Remember, neither encyclical states that welfare is superior to charity, merely that the state should step in to protect the general welfare of its citizens when charity has failed. So the goal should be to create a charity network that is less prone to failure, and which protects all of the citizenry. But such a system is a topic for a separate post, as it is not within the scope of this article.

What we must remember is that economics is a scientific field where the correctness of the theory must be confirmed through proofs and experimentation. If the experiment fails again and again, the theory and/or the experiment (i.e. the application of the theory) needs to be recalibrated. While there is much historical and natural evidence of the wisdom of core libertarian economic concepts, like any other economic theory it was created by man and is therefore incomplete and incorrect. There are weaknesses to the theory, as there are to any other (distributivism included).

Reader Leon noted:

As to the encyclicals mentioned by John above, neither was ex cathedra. This is probably why some Catholic Libertarians, while agreeing with much of what is said in the “Rights and Duties of Capital and Labor” still have mixed views on usury, what counts as usury, and whether “upper” limits can even be imposed, let alone established without some form of abuse and violent force being used. As the Papacy continues to look to the Bible, they will see more on how things work in the world and revise. Pope Leo XIII was great but he was not the final or only say.

This is true, but rather irrelevant. Although encyclicals aren’t necessarily morally binding (as in, disagreeing with them is not sinful), they are morally authoritative. That means that they contain truths about Catholicism that should be taken seriously into account when crafting policy, making decisions, or forming opinions.

The fact that Quadragesimo Anno was written right before the outbreak of WWII should all give us a moment’s pause. Do not assume that libertarianism wasn’t tried, but that it was tried and its internal flaws — however slight — led to the eventual decay of its results. This is the natural progression of any economic or political system because no such system is flawless. What both of these Popes described was this natural decay. That is not because they are “socialists” or “heretical”, but because they were believing their own lying eyes. Libertarianism eventually decays because a completely free market will eventually be overrun by the most despicable and immoral participants, who care little for the protection of future prosperity and who will go to any length to accomplish their present goals. To bring us back to today’s topic, usury is one of the reasons that libertarianism tends to decay, so a libertarian who is sincere in wanting the success of his community will take that into account and not dismiss these Popes’ concerns outright.

Here’s what a Distributivist, John C. Médaille, has to say about usury. In his excellent book, entitled Toward a Truly Free Market (which I am reading, and which will be quoted liberally on this blog in the future), he says the following:

Despite the fact that Keynesian transfers now consume a huge portion of the federal and state budgets, these transfers have been, for some years now, insufficient to balance supply and demand, and for some time now the economy has depended chiefly on the third method, usury or consumer credit.

Here we must distinguish between lending for investment and usury. Investment means giving money to firms and entrepreneurs in order to expand production and increase the wealth of society. In this case, interest is merely the investor’s participation in the profits; it is the “wage” of the capital supplied, and the one who supplies it is entitled in justice to that wage. Usury, on the other hand, is lending money at interest to increase consumption. Nothing is added to the wealth of society, however much may be added to the wealth of the lender. Since nothing is produced, there is no valid claim to profit. Interest payments in this case merely constitute a transfer of wealth from the borrower to the lender, but no net increase in the social stock of wealth. In fact, wealth is actually “used up” in this process without making a contribution to production, hence the name “usury”

This is the plastic economy, an economy based on credit cards. To the extent that an economy depends on consumer credit, it is, quite literally, a house of cards, and will be as unstable as those structures usually are. In fact, usury is the most destructive way of increasing demand. Usury actually delays the problem, postpones the crisis to a future period. This is because a borrowed dollar used to increase demand today must be paid back tomorrow and hence will decrease demand in a future period by that same dollar — plus interest. This requires more borrowing, which of course only makes the problem worse. Eventually, the system falls of its own weight, as credit is extended to an increasingly weakened consumer, and a credit crisis results.

I think his differentiation between usury and investment make sense, and point to a “third way” that all Christian could support with a clear conscience. But this is still rather vague, and doesn’t really provide us with a concrete guideline to follow, in matters of interest-morality.

What does Christian finance look like?

The topic of usury was again triggered at breakfast today, by an article in the Financial Times concerning Islamic finance. That got me thinking some more, and wondering… what would Christian-flavored finance be like?

Small, local banks? Credit unions? Even the Vatican Bank issues credit cards. Is that allowed by tradition? Are they allowed if they charge a fee, but not interest? If interest, how high is allowed? What about mortgages, which have caused the purchase price of homes to balloon? What about the bond market? Is promising to pay interest on a bond a form of debtor-determined usury?

Perhaps we should all give this some more thought. I am certainly thinking now.

(This is a repeat. I will be reviewing the rest of the book next week.)

Posted in: Book Review, Economics and Politics