Catholics and “Usury”: A Tragic History

This piece is paired with another view of usury from a distributist perspective, also running today.

What makes “social teaching” different from the faith-and-morals magisterium of the Catholic Church? Most of the latter was settled early in Church history, with developments coming over time as subtle elaborations and careful applications of eternal truths.

Social teaching (including economics) is different. It has gone through many upheavals and changes throughout Church history, even complete reversals, many of which parallel historical developments.

One of the most pronounced cases in point concerns the lending at interest. It was condemned from the earliest years of the faith, but this condemnation ended in the 16th century, liberalized in law by the 18th century, and is today not even an issue. It is hardly talked about at all apart from perfunctory warnings against usury (and what the difference between interest and usury is precisely has never been spelled out).

As even the 1912 Catholic Encyclopedia said: the Church “permits the general practice of lending at interest, that is to say, she authorizes the impost, without one’s having to enquire if, on lending his money, he has suffered a loss or deprived himself of a gain, provided he demand a moderate interest for the money he lends.”

This view amounts to a complete reversal of a view that prevailed from the Patristic age until the high middle ages. During all these years, the Church stood squarely against the institution of interest – as opposed as Islam is or even more so. This only began to change with the development of sophisticated monetary institutions in the high middle ages. These allowed theologians to consider the topic more carefully and come to realize that interest is no different from any price on the market – something to be freely negotiated by the parties involved and reflecting the changing conditions of supply and demand.

One of the earliest statements against interest comes from the Council of Nicea, which sought to crack down on avaricious practices among the clergy, among which was lending money at a profit. The Council condemned this and other attempts at “dishonourable gain.”

It was surely a wise teaching, necessary to stop corruption, but there was a slight problem. The Council broadened its mandate beyond the priesthood and implied that the practice was universally wrong. It added scriptural proof from the Psalmist that interest itself was immoral. “He that hath not put out his money to usury [interest], nor taken bribes against the innocent: He that doth these things shall not be moved for ever.” The implication was that the rule pertaining to clergy really reflected a general social principle.

And thus began a long tragic history of the Catholic Church’s 1000-year war against interest and the money-lending profession. And it is a strange war indeed, one undertaken with little to no substantive basis from scripture (the above hardly suffices). Attacking lenders as heretics contradicts normal commercial dealings. It even contradicts Jesus’s own parable of the talents, which presumes and praises the existence of money lenders and condemns the failure to give them idle money as profligacy itself.

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.

And truly, the Church never objected to this sort of deal. After all, on what possible grounds could one object? It is mutually beneficial in every way. No one is ripped off. All is transparent. One could even say that society is far better off this way. The alternative is that one person be without food and the other person holds an idle resource. Better to achieve a great degree of social harmony with this kind of deal than to settle with the inferior alternative.

The introduction of money to the story changes nothing of moral substance. This is because money is nothing but a proxy for goods. It is the most valuable good in society, something acquired not to consume but to hold and trade for other goods. Money also serves an important book keeping function: you can’t often add and subtract bartered items (and cow, an apple, and an iPad can’t aggregated) but you can manipulate figures in monetary terms.

But for some reason that is unknown, people’s brains go haywire when the subject of money comes up. They presume that something evil must be going on because the exchanges get complicated and well developed. How is it that people can get rich not by making things but merely by arbitraging between the present and the future? Isn’t there something morally suspect about this practice?

Before the high Middle Ages, it was uncommon for most people to have any money at all. Most peasants worked for food, and traded the wares that they may for good directly. Economies were local and financial institutions were available only to the very rich and powerful. Handling money was not a common experience for most people. It might have appeared that the buying and selling of money itself was the sole province of the sinful.

From a Catholic angle, there is an additional issue that concerns a difficult topic: Jews. They tended to be the money lenders. This posed a problem in a time of intense religious and sectarian concern. In fact, you often find this issue appearing in Church legislation in the middle ages: all kinds of prohibitions and leniencies name the Jews in particular.

Later in the Middle Ages, starting in the 15th century, economies began to change dramatically. Feudalism was giving rise to capitalism, money and finance were becoming a growing part of everyday life, and the buying and lending of money was less the exception than the rule in a commercial life that was reaching an ever wider swath of the population.

Catholics themselves became big players in the emerging world of high finance, particularly with the banking family of Jacob Fugger, which had taken over the role of economic dominance from the Medici family that traded mainly in politics. The Fuggers specialized in lending and collecting, and doing it at the behest of Papal states – which strikes me as non-problematic in every way,  but which also seemed to confront a problem from the point of view of social teaching.

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.

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. 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. Summenhart didn’t go all the way to license interest but he said that if neither then borrower nor the lender thought of it as such, it was permitted. Thus was interest reduced to state of mind rather than an objective fact. This represented great progress in Church teaching.

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.

Since those times, there has been no real debate in the Church on this question. Yes, usury continues to be warned against, though no one makes the attempt any more to distinguish between interest and usury. They were once considered synonymous; today they are distinguished as a reflection of a continuing bias against lenders who would seem to display more avarice than charity in their work. But in practice, there is no clear difference. What’s more, even seemingly usurious loan rates serve a social function: the higher the rate of interest, the more saving is encouraged and borrowing discouraged.

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. They demonstrate a wonderful capacity of the Church to learn and grow with the times as regard its social teaching. It should not be a surprise to observe subtle changes even from one papacy to the next, e.g., it has struck many people that John Paul II was friendlier toward market institutions that Benedict XVI.

I don’t find this even slightly puzzling. Economics is a science, one very late to develop in the history of ideas. It is not doctrine and it is not morals, subjects on which the Church pronounces infallibly. Economics is not the primary domain of Church competence in any case, and sometimes the line that separate economic theory from faith and morals can become blurry indeed. If nothing else, this history should instill a bit of humility on the part of Church teachers, and a cautionary point as regards economics and other sciences.