On Usury

Usury does not mean high interest. It means any interest, however low, demanded for an unproductive loan. It is not only immoral [on which account it has been condemned by every moral code-----Pagan-----Mohammedan-----or Catholic] but it is ultimately destructive of society. It has only been the rule of our commerce to take usury since the breakup of Europe following on the Reformation. Usury will destroy our society, but meanwhile there is no escape from it. We are coming near the end of its maleficent action, not through awaking to its evils but because it is reaching the end of its resources. The Great War loans, which are almost entirely usurious, have powerfully accelerated this process. 

The modern world is organized on the principle that money of its nature breeds money. A sum of money lent has, according to our present scheme, a natural right to interest. That principle is false in economics as in morals. It ruined Rome, and it is bringing us to our end.

   Supposing a man comes to you and says: "There is a field next to mine which is a very good building site; if I put up a good little house on it I shall be able to let that house at a net profit-----all rates, taxes and repairs paid-of 
£100 a year. But I have no capital with which to build this house. The field will cost £50 and the house £950. Will you lend me £1,000, so that I can buy the field, put up the house, and enjoy this nice little income?" You would presumably answer, "Where do I come in? You get your £100 a year all right; but you only get it by my aid, and therefore I ought to share in the profits. Let us go fifty-fifty. You take £50 every year as your share for your knowledge of the opportunity and for your trouble, and hand me over the other £50. That will be five percent on my money, and I shall be content."

  This answer, granted that property is a moral right, is a perfectly moral proposition. The borrower accepting that proposition certainly has no grievance. For a long time [theoretically, forever] you could go on drawing five percent on the money you lent, with a conscience at ease.

  Now let us suppose that man comes to you and says: "I know the case of a man in middle age who has been suddenly stricken with a terrible ailment. Medical aid costing £1,000 will save his life, but he will never be able to do any more work. He has an annuity of £100 a year to keep him alive after the operation and subsequent treatment. Will you lend the £I,000? It will be paid back to you on his death, for his life has been insured in a lump payment for the amount of £I,000." You answer: "I will lend £1,000 to save his life, but I shall require of him half his annuity, that is £50 a year, for every year he may live henceforward; and he must scrape along as best he can on the remaining £50 of his annuity." That answer would make you feel a cad if you have any susceptibilities left, and if you have not-----having already become a cad through the action of what the poet has called "the soul's long dues of hardening and decay"-----it would be a caddish action all the same, though you might not be disturbed by it.

   It seems therefore that there are conditions under which you may legitimately and morally lend £1,000 at five percent in perfect security of conscience, and others in which you cannot.

   Now look at the matter from another angle.

   When the American city of Boston was founded, three hundred years ago, a man in London proposing to emigrate thither left gold to the value of £1,000 with a London goldsmith, under a bond that the goldsmith might use the money until he or his heirs should demand it, but with the proviso that five percent on the capital should accrue at compound interest until it was withdrawn. The emigrant did not reappear. The goldsmith's business developed, as so many of them did, into a sort of bank as the seventeenth century wore on. By the beginning of the eighteenth it was a bank in due form, and its successor today is part of one of the great banking concerns of our time. The original deposit has gone on "fructifying," as the phrase goes, with the liability piling up, but no one claiming it.

   At last, in this year 1931, an heir turns up and proves his title. The capital sum into which this modest investment of a thousand pounds at five percent has grown is to be paid over to him under an order of the court. Do you know how much it will come to?-----More than twice the annual revenue of the United States today.

Let us take a less fantastic example, and perhaps it will be more convincing. Supposing a man to have lent £10,000 on mortgage at six percent upon an English gentleman's estate at the beginning of the American War of Independence, in 1776: the said estate to pay £600 a year to the lender. The debt is not pressed. The embarrassed gentleman is allowed to add to the principal the annual payments due, so that the whole sums up at the rate of six percent compound interest.

   That is not at all an impossible supposition. Do you know what the mortgage-holder could demand of that estate today? Nearly five million pounds a year!

   Neither of these examples could arise in practice because the law forbids such prolonged accumulation, but the very fact that the law has been compelled to do so, is proof that there is something wrong with the current notion everywhere acted upon, that money "earns" a certain rate of interest and has a moral right to it without regard to the way in which the capital is employed.

  For what is common to all these illustrations is the patent fact that interest on a loan may, under some circumstances of time or extent, be a demand for an impossible tribute. It may under some circumstances be a tribute which is not morally due, because it does not represent an extra production of wealth due to the original investment. It is under some circumstances a demand for wealth which is not connected with the produce of the original investment, and the payment of which is therefore not a payment of part profit, but a payment to be made, if possible, out of whatever other wealth the debtor can obtain; and a tribute which, beyond a certain point, cannot even be paid at all, because the wherewithal to pay it is not present in society.

  What are those circumstances? What are the conditions distinguishing a demand for payment of interest which is legitimate in morals from a demand which is illegitimate?

  The distinction lies between a demand for part of the product of a productive loan, which is moral, and the immoral demand for either (1) interest on an unproductive loan, or (2) interest greater than the annual increment in real wealth which a productive loan creates. Such a demand "wears down"-----"eats up"-----"drains dry" the wealth of the borrower, and that is why it is called Usury. A derivation inaccurate in philology, but sound in morals, rightly connects "usura" "usury," with the idea of destroying, "using up," rather than with the original idea of "usus," "a use."

  Usury, then, is a claiming of interest upon an unproductive loan, or of interest greater than the real increment produced by a productive loan. It is the claiming of something to which the lender has no right, as though I should say: "Pay me ten sacks of wheat a year for the rent of these fields" after the fields had been swallowed up by the sea, or after they had fallen to producing annually much less than ten sacks of wheat.

   I must here reluctantly introduce a colloquial meaning of the word "Usury" which confuses thought. People talk of "usurious interest" meaning very high interest. It is obvious how the confusion arose. Very high interest is commonly greater than the real wealth produced even by a productive loan, and to demand it is, in effect, to demand more than the produce of the original loan; but there is nothing in the rate of interest per se which renders such interest usurious. You may demand one hundred percent on a loan and be well within your moral rights.

   For instance, a small claim which was producing 500 ounces of gold a year has a sudden opportunity for producing 200 times as much, 100,000 ounces, if capital the equivalent of only 1,000 ounces can be obtained for development. The lender of that new capital is under no moral obligation to give all the vastly increased profits as a present to the borrower. He can legitimately claim his portion; he might well ask for half the new produce, that is 50,000 ounces per annum, 500 percent on his loan, for that very high interest would only come to half the new wealth produced. To ask for that 500 percent would not be an exaction of tribute from wealth that was not present, nor for wealth that was not created by the capital invested.

   Strictly speaking, then, usury has nothing to do with the amount of interest demanded, but with the point whether there is or is not produced by the capital invested an increment at least equal to the tribute demanded.

 If authority is asked for so obvious a position in morals it may be found in every great moral system sanctioned by the religious and permanent social philosophies adopted by men. Aristotle ¹ forbids it, St. Thomas forbids it. The Mohammedan system of ethics condemns it [and in practice condemns it unintelligently because it forbids many loans that are useful]. ² In particular we have the luminous decision of the Fourth Lateran Council [1215].

   So far, so good. Next let us note the very interesting development of modern times since the break-up of our common European moral and religious system at the Reformation. After that disaster usury gradually became admitted. It grew to be a general practice sanctioned by the laws, and the payment of it enforced by the civil magistrate. In England it was under the reign of Cecil, in the year 1571, that interest, though limited to ten percent, became legal without regard to the use made of the loan. The birth year of what may be called "Indiscriminate Usury" is 1609, when, under Calvinism, the Bank of Amsterdam started on its great career of stimulating fortunate capacity and ruining the unfortunate. In general the governments which broke away from the unity of Christendom one after the other introduced legalized usury, and thus got a start over the conservative nations which struggled to maintain the old moral code. To the new moral, or rather immoral, ideas thus introduced we owe the rapid development of banking in the "reformed" nations, the financial hold they acquired and maintained for three centuries. Everyone at last fell into line, and today Usury works side by side with legitimate profit, and, confused with it, has become universal throughout what used to be Christian civilization. It is taken for granted that every loan shall bear interest, without inquiring whether it be productive or unproductive. The whole financial side of our civilization is still based on that false conception. [emphasis added]

   A very interesting essay might be written upon the ultimate fruits of such a conception in our own time. Were it ever written a good title for it would be, "The End of the Reign of Usury." For it is becoming pretty clear that the inherent vice of the system under which long ago the Roman Imperial social scheme broke down is beginning to break down our own international financial affairs. With this difference, however: that they broke down from private usury, we from public.

   But that is by the way; to return to our muttons. Usury being a demand for money that is not there [a tribute levied, not upon the produce of capital, but upon a margin beyond that produce, or even upon no produce at all], Usury being therefore, when once it is universally admitted, at first a machine for ultimate draining of all wealth into the hands of lenders and for reducing the rest of the community to economic servitude at last; Usury being at last a system which must break down of its own weight-----when the demand made is greater than all productivity can meet-----why, it may be asked, has it been practiced with success for so long? Why does it seem to be at the root of so vast a progress in production throughout the world?

   That it has been in use successfully for all these generations, ever since it was solidly established in general practice during the seventeenth century, no one can deny. Nor can anyone deny that it has accompanied [and, I think, been largely the cause of] the great modern expansion in production. And here arises one of those apparent contradictions between a plain mathematical truth and the results of its negation in practice, of which experience is full. Persuaded by such appearances [for they are appearances only, and deceptive], most men abandon the abstract consideration and are content with the practical result. It is on this account that even so late in the day as this the mere mention of the word "Usury" and a discussion of its ethics has about it the savor of something ridiculous.

Not so long ago everyone would have told you that to adopt the attitude I am adopting here was to write oneself down a crank. The conclusions to which every clear mind must come in the matter were not even considered, but brushed aside as imperfect notions proper to early and uncritical ages when men had not thought out economics or any other science.

   The increasing, though still small number of educated men who are growing suspicious of such contempt for the immemorial past and for the moral traditions of Christendom will give these objections less weight than they were given a generation ago; but they still have overwhelming weight with the general. If you say today, "Usury is wrong," or even, "Usury is dangerous," or even no more than, "Usury must in the long run break down," all but a very few will, even today, refuse to follow this discussion of the matter. Most of the careless and all the foolish will put you into the company of those who think the earth is flat.

   The error is theirs, not ours; yet their error has, as I have said, solid practical backing; for Usury has worked successfully. Productivity has been vastly increased since Usury took root. The last three hundred years have been centuries of immense expansion, and the leaders of it have been precisely those who first threw Christian morals overboard.

   What is the explanation? The explanation lies in three considerations:
   First, when Usury is universally permitted and enforced, it becomes only part of a general activity for the accumulation of capital with the object of investment. In the days when Usury was illegal and punished, the accumulation of capital for investment was hampered. Incidentally, those days were also days in which the production of wealth upon an increasing scale was not regarded as the end of man. But at any rate, from the purely economic point of view, the ceasing to inquire how capital would be used, the laying it down as a rule that all capital had a right to interest, no matter how it was invested, obviously tended to make accumulation more rapid, and incidentally, to make men keener to ferret out opportunities for productive as well as for unproductive lending.

With that, of course, though from other causes, went the increase of men's powers over nature, the curve of which rose more and more steeply, and perhaps is still rising-----though there are signs of fatigue and of interference with that process from causes other than economic, in spite of the rapid accumulation of further scientific knowledge and of its economic application.
   This increase in our powers over nature is the second reason why the false action of Usury has been masked for so long. The economic evil of Usury stimulated and accompanied great economic advantage of accumulation for Production, and this legitimate use of money had its opportunity given it by a flood of geographical discovery and new achievements in Physical Science.
   The third reason why Usury has not yet worked out its full ill effect is that it has long been automatically checked by repeated breakdowns which wiped out usurious claims. Capital unproductively lent failed to receive its tribute and had to be written off. It is true that Usury on such capital is commonly the last thing to be written off; ³ but written off it is continually, and this intermittent pruning of the unearned tribute has prevented the real character of that tribute from appearing in its full force.

    The nineteenth century in particular, and still more the beginning of the twentieth century, is crowded with examples of these breakdowns-----myriads of them. Money is invested in a particular enterprise. The enterprise does not fulfill expectations. Though the money no longer earns legitimate interest, debentures are raised, the guaranteed interest on which is strictly Usury. For some time this interest is paid, but over and over again you find that at last even the debenture interest cannot be paid. The whole concern lapses, and the usurious tribute can no longer be exacted. You may see the process at work today in many departments of the textile industry. The mill gets into difficulties; a loan is raised from the bank; interest is promised on the loan, though there is no surplus wealth over and above the cost of production. The interest is met from outside sources; but the process cannot go on forever, and there comes a time when the bank has to write the loan off as a bad debt. As the bank is making money out of other successful and profitable investments it continues to flourish, it continues to make money, its total income increases, and that part which it has lost through the breakdown of Usury is hidden in the general productive scheme; the usurious character of certain receipts is not distinguished from the legitimate character of the majority. But whenever a society shows signs of economic decay, the real nature of Usury, thus submerged and hidden in prosperous times, necessarily appears above the surface.

  Mr. Orage many years ago, writing in his paper, The New Age, gave in this connection one of the numerous vivid illustrations of the affair, with that genius of his for exposition which ought to have made him famous. He took the example of an oasis of date-palms in the desert, the water-supply of which is got at by very primitive means. There comes a financier who lends money for development. The capital is productively used; artesian wells are sunk; the water-supply is largely increased; a better organization of the date-cultivation is begun; the produce of the oasis rapidly grows from year to year; the profits legitimately demanded by the financier are a part of the total extra annual wealth, the presence of which has been due to his enterprise. All are well-to-do; everything flourishes.

  Then, whether through fatigue, or through war or pestilence, or variations in the external market, or some calamity of climate, things begin to go wrong. The annual wealth produced by the oasis declines. But the interest on the money lent must still be paid. As the cultivators get more and more embarrassed they borrow in order to pay that interest, and there comes a time of "overlap," during which, paradoxically enough, the banker appears to be more and more prosperous, though the community which supplies him is getting less and less so. But it is mere arithmetic that the process must come to an end. There will arrive a moment after which the cultivator can no longer find the money to pay the interest, which has long since ceased to be morally due. Mere coercion under an all-powerful police system has got the last penny out of him. The "overlap" between real prosperity and apparent-----merely financial or paper-----prosperity ceases; and the temporary wealth enjoyed by the lender comes to an end, as had previously come to an end the real prosperity of the borrower.

   In other words, great banking prosperity in any particular period may be, and commonly is, the proof of all-round prosperity in that period; but it is not necessarily nor always so. The one is not an inevitable adjunct of the other.
   To these general conclusions there is another objection which anyone reasonably well acquainted with history will at once make:
   
"You tell us" [says the objector] "that in other times when the Faith was universally held-----times which you perhaps think healthier, but which were certainly much less wealthy and had to deal with, not only a simpler, but a much smaller population-----Usury was forbidden. That is quite true. But when you go on to argue that there is therefore an essential difference between that time and our time, or rather the recent past which you call 'the reign of Usury,' a different ethic prevailing now from what prevailed then, you are wrong. You are confusing that which is forbidden with that which is not done. It is true that the moral code of Christendom in Catholic times forbade Usury and punished it; even as late as the Provinciales of Pascal men felt moral indignation against Usury, and right on to the end of the eighteenth century the punishment for Usury continued to play a part in the courts of justice and appeared in the codes of law wherever the Church had power. But in point of fact Usury has always existed, because it always must. It is impossible to draw the line between the productive and the unproductive loan. The money which I lend a sick man may so put him to rights as to make him productive again, and may therefore be regarded as indirectly a productive loan, though unproductive in original intention. The money borrowed by a spendthrift for his pleasures may, on his death, immediately after, before he has had time to waste it, pass to a thrifty heir who invests it productively. Such considerations have always worked strongly upon men's minds. That is why you find Usury plentifully existing in times and societies where it was morally condemned.

  "Further, even were it possible [which surely as a rule it is not] to draw an exact line between the productive and the unproductive loan, there are all sorts of ways of evading the prohibition to take interest upon an unproductive one: to evade the duty of discovering whether the loan be productive or no. For instance, the Catholic governments, quite as much as the Protestant, issued what the French called 'Rentes'-----promises made by government to pay annual incomes. Henry IV of France, after his conversion, was especially active in this form of borrowing. Philip II of Spain, the very champion of Catholicism, sank up to his neck in embarrassment due to borrowing at high interest-----borrowing, by a pretty irony, from the very people who were destroying his revenue. A government going to war-----that is, about to spend money in an activity commonly unproductive-----begged financiers to buy of it annual claims upon the revenue; and there is no difference at all between that and the modern habit of issuing a government loan. Then there was the obvious method of signing a bond for money and receiving less than the sum mentioned in the bond. Thomas Cromwell, of pious memory, was a zealot in this practice, at a time when the full Catholic morals about Usury were still taken for granted. Much earlier, in the true Middle Ages, princes were perpetually borrowing for their wars-----principally from the newly arisen Italian banking system; and earlier still, when Usury was the exceptional, but chartered and legal privilege of the Jews and a source of immense revenue to the Christian princes under whom they lived, the practice was openly admitted. Usury therefore has always gone on in human society. It always will go on; discussions upon it are academic and futile."

  To this I answer that plain reasoning upon practical matters is never futile. If I say that an over-consumption of alcohol is bad for the human frame, especially in age, it is no answer to give me examples of topers who have to ninety. The evil effect of over-drinking is there, demonstrable and, to any honest mind, unquestioned. It is a mere question of experiment and experience and the use of reason applied to the same. Where true conclusions are apparently contradicted by experience they are so contradicted by other forces which do not make the truth any the less true. [emphasis added]

  So with this truth about Usury. As long as its impoverishing effects are masked or counter-balanced by stronger forces at work, they are neglected. But they are in existence all the same, and always active. To know that a truth is there, even when it is hidden, is of great practical use; such knowledge is a thing to be kept in reserve for action when the critical hour comes in which it must be applied.

   Next it should be pointed out that there is all the difference in the world between a system in which an immoral principle is admitted and one in which, though the immorality is practiced, the principle is denied.  There is, and presumably always will be, plenty of adultery, murder, swindling, and the rest, present in society; but the society in which the rights of property are admitted, in which marriage is sacred and to which the taking of human life is abhorrent, is very different from one where the sexes are promiscuous, or where Communism prevails, or where killing for private revenge or whim is an accepted pastime. To murder a bore, to run off with your neighbor's wife, even to pick a man's pocket, are still in our society abnormalities: abnormalities which we old-fashioned people ascribe to the Fall of Man, but which the most exuberant Pelagian will at least not deny to take place. There is all the difference in the world between a society in which such lapses continue, or are even tolerated, and one in which they are called good. [emphasis added]

   Man stands on two legs; but he can lean on one or on the other. Thus [to take an example I develop in another essay] society in the department of law must insist both upon justice and upon order; and undoubtedly in any civilized society justice tends to be sacrificed to order. But there is all the difference in the world between the atmosphere and character of a society in which injustice is held more abominable than disorder and one in which disorder is held more abominable than injustice. Two parts of one chemical element to four parts of another will give you a certain product. Change the proportions, and quite a different product appears. A society in which Usury, though practiced, is held immoral [not wholly, I admit, to the advantage of economic development] is quite a different thing from a society where Usury is held to be moral. A society in which the lender assumes it to be his moral duty to examine the object of a loan before he considers its profit to himself is different from a society in which he is not expected to do so. A world in which interest upon the unprofitable loan is detested and the Usurer is a villain is quite another society from one in which men have ceased to ask whether a loan be profitable or unprofitable; and this again is a different society from one such as ours, where interest on any loan is demanded as a sort of sacred moral right with which the productivity or lack of productivity of the loan has nothing to do.

  Well, then, since to every evil there should be a remedy, what should we say about Usury today? Since I am boasting that this discussion is practical, what about practice?

  Let us suppose our opponent convinced; let him make reply: "I agree that Usury is an evil. What is more, I am inclined to agree that we are beginning to feel its evil effects throughout the world today at long last-----principally through the enormous example of the great war loans. What then are we to do about it all?"

   To this I answer in my turn that nothing immediate can be done. You cannot pullout a vital part of any existing social structure. The whole world today reposes upon banking, the whole system of investment renders inquiry about the productive or unproductive quality of an investment normally impossible.

  There are especial private cases where you can judge the distinction clearly, and in those cases good men tend to act upon it [as in the case of loans to individuals of our private acquaintance], for the human conscience is at work all the time, even in the most corrupt and complex of societies. But in nine hundred and ninety-nine cases out of a thousand the distinction is impossible. A man is at pains to save. He must use his savings under a system where interest without examination is normal and all the infinite details of a world-wide system of production, distribution, and exchange have so long been based on the acceptation of Usury-----as well as on the much larger calculation of legitimate profit-----that the two can no more be divided in practice today than can the mixed colors in a dyer's vat. If I go off for six months and leave money on deposit at my bank I can hardly ask what the bank is going to do with the money; and if I did they could not tell me. No one could say how much of it goes to feeding beasts on a fur farm in Canada; how much to a young man who is getting an overdraft on his securities and spending it in riotous living; how much to the development of a useful mine in the Andes. What sane man would hesitate to put his regular little self-denials into savings certificates, or his modest £1000 into a War Loan-----that crying instance of Usury? The system must go on till we break, and even the word "break" is inaccurate. If history is any guide, the true word should rather be "decay." Pleasing thought.

   I did well to call this book Essays of a Catholic and not Catholic Essays. For if it became a matter of Catholic discipline that men should not today touch that unclean thing, the interest-bearing unproductive loan, discipline would stand self- condemned. The ecclesiastical order could not be obeyed. If by such an analysis as I am here engaged in I were to involve any of my fellow Catholics in the peculiar conclusions reached, I should be doing a very bad turn, not only to the common sense of my fellows, but to their sense of humor as well.

1. When I was first stammering out my elements as a boy at Oxford, a learned professor assured us in his lecture that the text of Aristotle must have become corrupt, because he could never have said so silly a thing as to call usury wrong. What St. Thomas called it I will wager he never knew.
2. I found in Tunis three years ago that the Mohammedan olive planter wanting to raise a loan for the development of his estate could not get the money from his fellow Mohammedans, but had to borrow from Europeans. 
3. Witness the continued interest still paid on bank overdrafts by our failing industries. Another excellent example of the writing off of usurious interest is the scaling down of the French and Italian debts to America. 

Taken from ESSAYS OF A CATHOLIC, TAN Books, originally published in 1931.

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