Usury!

There! I've said it. I know it's not supposed to be said. I know it's an outmoded, even medieval word, a relic of clerical meddling in economic science. And yet, the shamans may be ahead of the scientists on this one.

First, what is usury? It is not, as some suppose, charging interest on a loan. Rather, it is charging interest on a non-productive loan. What does that mean? Well, we can lend money for production or for consumption; we can lend money to start a business (or expand one) or to finance current consumption, such as buying a hamburger (which is now commonly put on plastic.)

When money is lent for a productive enterprise, the lender is entitled to a share of the rewards, since he also shares in the risk. The loan will then be liquidated by the success of the enterprise, or will be written off with the failure of the enterprise. But in either case there will be no additional burdens, hence no “usury,” that is, no “using up” the stock of society.

But if the loan produces nothing, then nothing can be charged for the loan, or else it is a simply wealth transfer rather than real growth. The scholastics also recognized the right to receive compensation for certain “externalities” of money, namely for risk and the loss of the use of the money. But beyond these legitimate claims, usury is simply a transfer of wealth from one class to another that produces nothing of itself: It is wealth without work. This is especially true of consumer loans. They are merely a claim against future earnings without contributing to those earnings. An economy that depends on consumer lending to fuel consumption is in fact merely borrowing from consumption in future periods.

Usury, aside from its character as avarice, as the desire for wealth without work, has troublesome practical consequences as well. On the one hand, it “covers up” problems in the distribution system, that is, with the wage system. If we did not inject massive amounts of consumer credit, there would be a massive failure of demand and the problems of inadequate pay would become apparent to all. As it is, these problems are hidden and will remain so until the ponzi-scheme collapses (as it must), as it does in depressions. On the other hand, usury detracts from the amount of capital available for productive investments; the absurdly high rates of interest make investment in production less attractive than investments in financing consumption.


Perhaps the last well-known economist to take usury seriously was John M. Keynes, who said:

Provisions against usury are amongst the most ancient economic practices of which we have record. The destruction of the inducement to invest by an excessive liquidity preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds…I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together... (The General Theory, 351-52)


The standard economic theory treats all interest as just another form of profit. But this is incorrect. Indeed, it would be like calling the funds from a bank robbery profit; in a narrow sense they are, since they represent an excess of income over outflow. But interest and profit serve different ends. It is legitimate to think of interest as profit only when it is a participation in profits; but when it merely finances current consumption, then it is that greatest of social evils, wealth without work, growing rich without adding anything useful to society.


10 comments:

Kevin Monday, July 16, 2007 at 9:33:00 AM CDT  

The high rates on such as credit cards represents compensation to the credit company for the high risk of default, in addition to the opportunity cost of not investing their money elsewhere.

But you say both of these are legitimate, so what is the problem??

Kevin Monday, July 16, 2007 at 11:24:00 AM CDT  

By the way, an interest-free consumption loan would be what real economists call an arbitage opportunity. Ever heard of that phrase?

After all, there really couldn't be a law stopping people who already have the money from taking out such a loan. They could simply use the money they already have to invest in a low risk investment, such as treasury bills or short term corporate bonds. The loan meanwhile pays for what they would otherwise have spent their own money on. They end up being richer by having essentially taken the investment income that should have belonged to the lender! If lending rates don't react to this situation, one could essentially snowball it into almost unlimited proft. So much for usury....

John Médaille Monday, July 16, 2007 at 7:43:00 PM CDT  

If credit card interest only covered opportunity cost and losses, they would not be profitable, or at least no more profitable than just putting your money in the bank. But in fact, they are highly profitable; in fact, most of the profits of banks now come from credit cards. There is more here than just loss coverage and opportunity cost; there are huge profits.

And there is arbitrage (as there is with all bank loans); low interest deposits are lent out for super high-interest loans. Now, there is nothing wrong with arbitrage per se; that's what we normally do when borrowing for an investment, since we are betting that the investment will return more than the cost of the loan (the interest and fees).

But there is something very wrong with attempting to live on the tab, and there is something bizarrely wrong with an economy that attempts to borrow its way to wealth. What will not work for a person will work even worse for a nation. The notion that you can spend yourself into prosperity is the very definition of "fool's paradise."

Kevin Tuesday, July 17, 2007 at 8:23:00 AM CDT  

Well I never said they weren't profitable. There is a natural relationship between risk and reward. Perhaps you've heard of the efficient frontier? You can google it.

Lend your money to someone you don't know, and you're as likely to lose it as not! If there wasn't the possibility of profit beyond "money in the bank", there wouldn't be credit cards at all.

So again, what's the problem? You say, "usury is simply a transfer of wealth from one class to another that produces nothing of itself". What does class have to do with it. If you think being a credit card lender is such a great deal, buy stock in one! Your big profits will be badly eaten up by having to pay your share of the cost of running such an operation. People that can successfuly manage banks do not come cheap.

Kevin Tuesday, July 17, 2007 at 8:28:00 AM CDT  

I don't know how you just jumped from talking about interest on non-productive loans to talking about a nation borrowing its way to wealth, etc. I understand that people with more credit card debt than they ought to have are fun, easy targets, but lets try to stay on topic.

Kevin Tuesday, July 17, 2007 at 9:26:00 AM CDT  

Lets examine another of your claims: The "ponzi scheme" of credit card debt "must" collapse and produce a depression. Why is this? Do economists know that this imminent collapse is coming? When is it coming? Are bankers unaware? If they are not unaware, why is it that they continue to lend out their hard earned money, since they are likely to loose it?

Lex injusta non obligat Tuesday, July 17, 2007 at 9:58:00 AM CDT  

Would the blog moderators consider the notion of 'arrears' as usury? To the point, since we are looking at things under the rubric of Catholicism, especially the social teaching of the Church, what are we to make of 'arrears' for child support? Beyond the duties outlined in Canon 1136, what are we to say when the state defines the sole relation between a parent and a child as strictly legal and pecuniary? This contravenes the Natural Law for the very notion of law presupposes morality. With 'arrears' in child support and child support in general (that is sponsored and enforced by the state) most often the father essentially becomes a wage-slave with no actionable rights over the children he is forced to support. If the economy has a downturn or the man becomes physically unable to do the work or earn the monies he once did, the state, through the false priesthood of the judiciary, oftentimes refuses to lower the arbitrary standard set forth at the time of marital separation or divorce. Now I do not wish to discuss the evils of divorce, for it is self-evident and had not the father of divorce (whether you call him Henry the VIII, Martin Luther or Satan) set himself against the divine institution of marriage, the evils we discuss here, relating to the social and necessarily moral teachings of the Church, would be a non sequitur. However, since we must deal with the evils engendered by divorce, it seems to me that since the state has inserted itself in marriage, a prerogative beyond its charter and purview and has established the primary and foundational relations (legal or otherwise) between family members and between parents and children, I would assert that to fall behind in child support payments and to never have to monies or debt expunged, a moral evil.

This is a touchy topic to some but the more mundane facts are these:
1. The monies taken from the father to 'support' the child do not wholly go to the child. A percentage of the monies support and fund the bureaucracy which suppresses him and separates him from his child(ren).

2. There is no oversight or reciprocal responsibility for the mother or custodial parent to show that in fact what monies are extorted from the father actually go to the child or for the needs of the child.

3. Every dime successfully collected by the state is met by a monies given from the federal government to the state. Thus, it is no wonder that 10% or less of father's ever get custody of their children because the judges, whether statal or federal, are in collusion and will not bite the hand that funds them. It is much like the abortion industry and planned parenthood that forces sex-ed upon impressionable minds and then when they are teenagers they become impregnated only to go to their local planned parenthood to abort the child. It is a vicious and morally evil circle.

4. During the Reconstruction period after the civil war, there were 'debtor's prisons' where people were held in bondage and extracted labor until their debt or 'arrears' was expunged. This was banned by the anti-peonage laws in the United States Code 42 USC Section 1994. Oddly, it does not seem to apply to parents who fall into 'arrears'. What I mean to say that since the family courts are surrounded by secrecy and are 'civil' in nature, the judges are free to ignore or enforce what law they wish. It is totally capricious and the only way to combat this usurpation of Natural Law is to have large coffers of money---which most fathers do not have during the course of a divorce.

Finally, I would like to hear the opinions of the moderators for this site in relation to the aforementioned details but I think it is safe to say that not only are these economic evils spawned from divorce but also from the whole capitalistic mentality. The Church in America, which I find weak and wanting---though I am loyal, has even recognized the fundamental injustice of state child support regulations. See the following link for details:

http://www.catholiccharitiesusa.org/news/content_displays.cfm?fuseaction=display_document&id=980&location=3

Lex injusta non obligat Tuesday, July 17, 2007 at 10:02:00 AM CDT  

rest of the link:

lays.cfm?fuseaction=display_document&id=980&location=3

Lex injusta non obligat Tuesday, July 17, 2007 at 10:04:00 AM CDT  

Sorry, the last post left off the last part of the address which happens to be the number:

3

John Médaille Sunday, July 29, 2007 at 1:10:00 PM CDT  

Dear Lex,

I think there are all sorts of difficulties arising from divorce, although I am not convinced that the can be discussed under the rubric of usury.

Certainly fathers need to provide for their children, even children who are under the care of the mother. Divorce, among other problems, makes this a messy problem and involves the state even further into the private affairs of the family. I don't have a solution for this, other than to limit divorce itself.

John

Post a Comment

  © Blogger template Werd by Ourblogtemplates.com 2009

Back to TOP