The war against interest was a war against basic economic logic. Present goods are more valuable than future goods, so it makes sense that the person who wants something earlier rather than later, but doesn’t have the money now, is likely to pay a premium. Further, lending is always risky so it makes sense that there should be a reward attached to undertaking that risk. Finally, money that is lent out is not otherwise employed by the owner and therefore there is an opportunity cost that will be paid and compensation for this sought. For all these reasons and many more, interest is a normal part of peaceful commercial society.
To understand this, it is helpful to consider the case of barter in a desperately poor society. Let’s say you have two chickens but only need one. A fellow comes along and wants the other one but has no money. He offers a potato – a pretty shabby deal overall for straight one-for-one trade. But, even so, you want him to have the chicken and you aren’t currently in need, so you propose a deal. He can have it if he gives you some eggs from the chicken for a period of one month. After that, he can have the chicken.
You are happy. He is happy. Everyone wins. But why the egg premium? He wanted the chicken now and you didn’t need it now. So he pays to feed his more urgent need, and you are glad to relinquish control of your chicken provided there is a stream of income coming out of it. This is the way interest works in a barter economy. True, there is no money involved but the principle is the same as that which is considered a normal part of commercial life today.
No, the real rationale for the eggs during a month premium is this:
- the eggs are the price for the chicken.
- "your" rationale for accepting that price despite being able to just keep the chicken and get the eggs anyway is that that way you don't have to feed it. You get rid of a responsibility earlier.
And the transaction is a sale, not a loan. And it is only just if the just price of the chicken corresponds somewhat to the just price of the eggs.
AND, if it had been a loan, there would still have been a great difference between lending some restaurant owner or baker a few chicken for a month in return for some of the eggs and then getting the chicken back and lending him a sum of money for a month and both getting paid for keeping it a month and getting the sum paid back is this: money is not fruitful.
The introduction of money to the story changes nothing of moral substance. This is because money is nothing but a proxy for goods.
Because it is a proxy, it is consumed while using it.
It is comparable to an egg, not to a chicken.
You can lend a chicken, get it back and get some eggs for it. Because the chicken is a living useful tool, not an object of direct consumtion.
But you cannot lend eggs, get them back later and get paid even more eggs than you lent while waiting. Therefore not money either.
It was the neo-Thomists who started the process unraveling traditional teaching and cleared the path for the full legitimization of interest. The first great strides were made by Conrad Summenhart (1465-1511), the chair of theology at Tubingen. He began to make exceptions to the strict doctrine. He wrote that money itself is fruitful, a good that can be bought and sold like any other.
It can be bought and sold, precisely like objects of consumption. But it is not fruitful like livestock or tools.
Tubingen has since had some theological troubles.
When a money holder lends, he is giving up something that would be otherwise profitable, so he should be compensated for his loss, same as any merchant.
That compensation does take place in the future.
By getting the money back.
It can even take place in the present, by getting an IOU. In that case the IOU can be used as money and someone else will be getting the money back when the loan is up.
There is a severe equivocation here, a man giving up money now in order to have it a year later is treated as if he had been a lifetime owner of a sum of money while giving up a year's use of that sum. No. As soon as anyone uses money, he ceases to own it. So, what he is giving up is not a year's actual continual use of it, as with a chicken, but a series of potential occasions during a year to use the money momentarily. In return he gets a new series of occasions to use it (or parts of it) momentarily after the year, of which he would have definitely deprived himself if he had actually kept the money that year and used it on the last day concerned, or if he had used it even earlier than that.
Moreover, Summerhart said, it is helpful to think of the money paid in exchange for lending services as a different good from the money itself – that is, possibly, as a gift given to the lender as a sign of appreciation.
St Thomas insists that gifts given by receiver of a favour to appreciate it, as gifts, must be voluntary and when the favour is money, non-monetary.
The next and final step in the liberalization of interest was taken by Thomas De Vio, Cardinal Cajetan (1468-1534). He was the leading Catholic theologian of his day, a favorite of the Pope, and a defender of Catholicism against Martin Luther. His writings represented the most sophisticated of his time as regards economics. He completely endorsed Summenhart’s teaching and took it a step further to say that any loan contract was legitimate if both the borrower and the lender agreed to it in anticipation of some economic benefit. He carefully took apart St. Thomas’s own writings on the topic and demonstrated that it was perfectly just for the lender who is giving up use of his property to charge a service fee in exchange.
Service fee is one thing.
Council of Lateran, the Vth, had endorsed precisly a service fee or processing fee.
BUT, I would like to have the details about Cajetan.
What Lateran V says* is, if where usury is legal, in order to give poorer investors an alternative to loan sharks, a municipality offers loans that do not charge that interest, it can charge as great an interest as is absolutely needed for keeping up the bureaus processing the transactions, giving a moderate wage to the clerks that process it, but it would do much better to charge interest for only half the processing cost (wages to clerks, keeping localities clean) and to pay the other half out of municipal either taxation or income from municipal property.
So, it would be surprising if a private owner lending someone property were to have the right to a processing fee, since that private owner would hardly need a processing clerk, would hardly be in the business of doing mainly that type of transaction.
Post offices are ideal bank keepers in so far as they can pay processing of loans partly on gain from post mail.
John Noonan’s book on the scholastic doctrine on usury chronicles all these changes with incredible precision, and provided the source text that other scholars of economic doctrine such as Murray Rothbard have used in their own writings.
I wonder if the book has not quoted one thing or two out of context. Like quoting Cajetan's objections instead of his later own solution to problem. This is an aspect of scholastic writings that is sometimes missed. I have heard that someone of Vienna school did that about free price imposition rather than price regulations - and he quoted from a Jesuit of Salamanca who, after detailing all arguments for free price imposition, actually decides against and for price regulations being at least licit and in cases of too wild pricing meritorious from the side of the state.
I will ask Thomas Storck or John Médaille about it.
Hans Georg Lundahl
Nanterre University Library
St Isidor of Sevilla
* Read it, don't just take my word for it:
En lengua romance en Antimodernism y de mis caminaciones : Lateranense V Concilii Sessio X
If you can't read Latin, learn, so you won't have to take my word for it next time!