Last month, I got dragged into yet another one of Theso’s or Reinhardt’s quixotic debates about usury. I want to say this once so that I never need to tweet about it again.
- Usury is a sin.
- Usury is accepting interest (i.e., profit) on a secure loan.
- A secure loan is one where, from a legal point of view, the lender assumes no risk; it merely deprives him of the use of his money until he demands repayment.
- For a loan to be risk-free (in the context of the theological concept of usury), all of the following conditions must be met:
- It must be impossible to discharge the debt
- The creditor must have speedy/effective legal recourse in the event of default
- There must be no possibility of the debtor’s assets being inferior to the value of the debt
- There must be no possibility of multiple creditors having conflicting claims on the same assets.
- A loan wherein the lender is exposed to the same economic risks as borrower (for example, if he is to be repaid out of the profits of the business the loan is financing) cannot be usurious.
- (The creditor is in effect a silent partner in the debtor’s enterprise.)
- A loan cannot be usurious if repayment (either of the principal or the interest) is voluntary, or secured only by an asset or some abstract status.
- (A social expectation that a debtor demonstrate gratitude to his creditor with some gift, on top of the original loan, is not usury.)
- (A loan secured by the debtor’s word of honor cannot be usurious if it is not legally enforceable.)
- (But a loan which both parties expect to be enforced by extralegal means – e.g. by a mafia loan shark – is secure, and thus any interest is usury.)
- A loan to a corporation cannot be usurious, unless the debts of the corporation become fully-secured personal debts upon the failure of the corporation.
- (Otherwise, a corporation that fails must have some legal process that discharges its outstanding debts after distributing remaining assets among creditors.)
- A loan to an individual can only be usurious in a jurisdiction where loans are not discharged in personal bankruptcy.
- (If a loan can be discharged in personal bankruptcy, there is ipso facto a risk that the debtor will default.)
The concept of usury is germane primarily in a society where debts could not be discharged. Originally, debt slavery and indentured servitude allowed creditors to actually assume ownership of their debtors, if their other assets were insufficient to cover their debts. The body of the debtor is the ultimate collateral for a debt-free loan. As ancient societies sunk into the usury crisis, some allowed creditors to whip or torture defaulted debtors; this encouraged them to make efforts to repay, and if ultimately the debtor died on the rack, this would at least uphold the principle that debts are undischargeable and debts must be honored.
There is nothing wrong with (literal) debt slavery. There isn’t even anything wrong with corporal punishment for debtors, if the sovereign feels the need for it. But in societies where the entire future life of the debtor stands as security for the loan, the creditor does not take on any real risk — indeed, realistically he stands to profit if his debtor’s misfortunes allow him to acquire the latter’s assets and even his family at distressed prices — and it is unnatural greed for him to demand interest payments on top of that. (Instead of rationing out risk-free loans to those willing to pay the most for them, he should lend to those he judges most deserving or most grateful.)
A lender may well say, “But with this same money, I could expand my business, or found a new one, and make a great deal of money. I won’t lend it out if I have to forgo those profits.” Well then by all means, use the money productively! Buy whatever you need to expand production, and then reap the reward for the risk you’ve taken in order to better serve your neighbors. The prohibition on usury is not merely to punish greed for its own sake, but rather to promote entrepreneurship.
However, the question is remote from our present circumstances because there are no secure loans in American society, so any lending is risky and deciding who will use a (fully dischargeable) loan responsibly is, itself, a form of entrepreneurship.
Hypothetically, I could see the case for indicting the holders of FDIC-insured savings accounts as usurers. Those deposits are as secure as any loan in the history of mankind, backed as they are by the full power of the state, even if the bank that holds the deposit fails; but the “interest” on FDIC-insured accounts is so low, the question becomes trivial.
Theso often argues that federally-insured student loan debt is usurious. Yes, it is nearly impossible to discharge in bankruptcy court; but there are no immediate consequences for simply refusing to pay. Wage garnishment is not structurally equivalent to indentured servitude or a public whipping, even if the debtors lack any honest way to scrabble out of their financial hole. I’m not sure Theso is wrong, but I’m not sure he’s right, either.
(Fundamentally it’s hard for me to think the student debt crisis wrongs debtors when it is so expensive for the taxpayers who are cast in the role of unwilling usurers.)
Many Roman Catholics who doggedly condemn the modern financial system for its usury tie the theological critique of usury to an economic critique of the financial system as whole, lumping usury in with speculation, financial manias, and structural instability. I’ve never read a good critique along these lines. Most papists don’t seem to recognize that the pre-condition for usury is the absolute security of the loan on which usury is charged. A financial system in which usury was possible would have be a very safe one, because every usurious loan would be secured by the entire property, person, and liberty of the debtor. If a financial instrument is risky — and especially if the risk is contagious, meaning that each insolvent firm’s losses can be passed on to its creditors — that implies the liability it creates can be discharged and is not usurious.