Why Lending Money (at Interest) Is Not Usury in the Modern World

On Monday’s Episode of the Tucker Carlson Show, Carlson interviewed Catholic Bishop Robert Barron, largely to discuss topics related to the election of Pope Leo XIV. Most of the interview is unremarkable for our purposes here at mises.org, but at one point, the discussion touched on the problem of usury and the modern financial economy.

Usury has long been a topic of confusion and imprecision among those interested in learning the history of Western political thought vis-à-vis market economics. It is often presumed that Christianity’s historical prohibition on usury would, if applied consistently, prohibit money lending in exchange for any compensation paid to the lender. We often call this compensation “interest” in modern speech. 

This was indeed the context around the usury discussion as presented on Carlson’s show, and, unfortunately, neither Bishop Barron nor Carlson demonstrated much knowledge of the topic. Barron seemed to assume that the usury question has not been sufficiently addressed in recent centuries, and implied that the topic is now ignored as a result of pressure from capitalists. As we will see, this is not the case. The topic has not been ignored in recent centuries.  Nor does does the prohibition of usury necessary proscribe the collection of compensation for making loans. 

The Barron-Tucker Discussion

Carlson begins the discussion by asking Barron about “loaning money at interest.” Barron responds that “the Church has been against it from time immemorial”—presumably because of the prohibition on usury. He then goes on to say that a non-specified “transition” happened which changed the thinking on the matter. Barron almost immediately sidesteps the issue, however, and goes into a general discussion of market economics. Overall, Barron appears to imply that the “transition” on the topic was some sort of concession to modern industrial capitalism, and Tucker appears to be (rightly) dissatisfied with this explanation.

Barron likely shifted the discussion on this topic because it is an obscure one, and he probably has not read up on the topic lately. Few have. If we do look more closely, there are at least two key points we can make on the topic. The first is that Church thinking on usury clearly does not forbid a lender from receiving compensation for making loans. The second is that this is not a new idea, and it is certainly not any kind of concession in the wake of industrialization or the advent of modern financial markets. Rather, the idea that lenders can be compensated for their loans goes back at least to the Middle Ages. Moreover, there has never been any clear universal, doctrinal prohibition on receiving compensation for lending money. While some regional councils in the first millennium prohibited this for laypeople, the general consensus was against clergy receiving compensation for lending money.

Usury vs. Interest vs. Money Loans vs. Compensation for Lending

The reader may have noticed that I keep using the phrase “compensation for lending money” rather than “loaning at interest.” This is because once one delves into the history of the debate over usury, one quickly finds that there is seemingly endless debate over the proper definitions of terms like money, interest, and usury. This is to be expected when we’re talking about concepts that have changed over more than twenty centuries.

For example, the debate over usury is colored very much by the fact that the understanding of what money is has evolved significantly over time. Two thousand years ago, when the money economy was miniscule, money was assumed to be only a store of value and used overwhelmingly for immediate consumption only. This is why so much ancient thinking about money in this context focuses on the idea that charging interest essentially takes bread out the mouths of the poor. Moreover, since the money economy was so primitive, and there were so few avenues for lending and borrowing money, it was also assumed that lending money inflicted very little opportunity cost on the lender.

These conditions, tied to a specific time and place, are what have us the general view of usury: the act of lending out money but demanding back more than the value of the money in return. In the ancient world, it was thought that this was unfair and exploitive because it was thought that the value of money did not change over time, and doing without money for a time imposed little opportunity cost on the lender. Modern observers of money, of course, will scoff at these assumptions, but it was all far more plausible in, say, the fifth century BC or the first century AD. 

Centuries later, however, writers on usury began to see that money could be used for purposes other than consumption. Consequently, these writers began to think of usury more carefully as interest charged specifically on “non-productive loans.” Money was increasingly lent for productive purposes, like building structures, rather than for simple consumption.

By the Middle Ages, it was admitted that it was abundantly clear that loans were often made in a way that could not possibly be characterized as exploitive. Moreover, as the complexity of the economy grew, it became impossible to maintain that lending money did not involve a significant opportunity cost for the lender.

As a result, it became difficult to argue that morality required that a borrower be able to demand a loan while providing nothing to compensate the lender. By the thirteenth century, Thomas Aquinas described how the lender was giving something up to make loans, and thus basic justice required compensation. Theologian John Finnis summarizes some of the situations where lenders were entitled to compensation:

(1) Share of profits in joint enterprises. If I “lend” my money to a merchant or craftsman on the basis that we are in partnership [societas]…so that I am to share in any overall losses or profits, my entitlement to my dividend of the profits (as well as to the return of my capital if its value has not been lost by the joint enterprise) is just and appropriate.

(2) Recompense or indemnity [interesse] for losses. In making any loan I can levy a charge on the borrower in order to compensate me for whatever expenses I have outlaid or losses I have incurred by making the loan. And the terms of a loan can include a fee or charge which is payable if you fail to repay the principal on time, and is sufficient to compensate me for the losses I am liable to incur if the principal is not repaid on time.

In contrast to an ancient agrarian economy, the developing economy of Aquinas’s time presented many risks and costs for lenders. Thus, potential for serious loss and financial ruin from a deadbeat borrower required some way for defraying the potential for financial misadventure. Finnis also noted that by Aquinas’s time, markets were already beginning to develop a “price” that represented the risk and opportunity cost that accompanied these loans. This “price” would generally today be called an “interest rate.” In any case, we can clearly see in Aquinas’s work that fact that thinking on usury and its applicability had to change to fit changing knowledge about the nature of money and lending. 

Gradually, then, the idea of what was fair and just for both parties in a lender-borrower relationship began to change. For example, the Fifth Lateran Council (1512-1517) stipulated that lenders could morally collect enough compensation to “defray the expenses of those employed and of other things pertaining (as mentioned) to the upkeep of the organisations.” The Council forbade the collection of “excess” compensation in the form of profit, but it was clear that compensation for lending was, in and of itself, not usury. Notably, however, no clear objective was offered for what constituted “excessive” compensation. 

Again, in 1745, Pope Benedict XIV condemns usury, precisely defined, but notes that 

By these remarks, however, We do not deny that at times together with the loan contract certain other titles—which are not at all intrinsic to the contract—may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. (Emphasis added.)

Given all this, it is not at all clear that the development of thinking on usury is some kind of concession to modern industrial capitalism. Collecting compensation for the act of lending money was already established as potentially necessary and beneficial by the thirteenth century, well before the development of industrial capitalism. Thus, the implied historical claims about the “transition” on usury in Barron’s remarks on the Tucker Carlson Show, are questionable.

Rather, one could certainly argue that thinking on this matter has been fairly consistent for at least 800 years.

For an illustration, one might consult the 1917 Catholic Encyclopedia which states:

Is it permitted to lend at interest? Formerly … the Church rigorously condemned the exacting of anything over and above capital, except when, by reason of some special circumstance, the lender was in danger of losing his capital or could not advance his loan of money without exposing himself to a loss or to deprivation of a gain. These special reasons, which authorise the charging of interest, are called extrinsic titles. (Emphasis added.)

We see here simply an extrapolation of Aquinas’s work in the thirteenth century. In part, the underlying thinking here is that fairness and justice requires that neither side exploit the other. To demand loans that place the lender in a risky position without compensation is not fair or just.

The phrase “extrinsic titles” as mentioned in the Encyclopedia entry is also a key to understanding how “compensation for lending money” is properly viewed in this context. For Aquinas, and for many later commentators—including those writing textbooks on the topic—this compensation for the lender was not interest, strictly speaking, because the compensation was not directly tied to the money being lent. That is, in a case where a lender was collecting some sort of indemnification or compensation for risk and potential loss, the “extra” change was not interest strictly speaking. Rather, the compensation was “extrinsic” to the money itself and was, in a way, a type of restitution or insurance to the lender for a risky service provided.

This laborious discussion over precise definitions nonetheless continues in modern books. This can be seen, for example, in Thomas Higgins’ ethics textbook from 1949 in which he states:

When the lender of money suffers no detriment in making a loan, he is entitled to nothing more in justice than the return of the money lent. Should he incur loss because of parting with the money lent, he is entitled to compensation for that reason but not because of the loan itself. This title to redress for loss sustained is extrinsic to the loan. Today, money, or rather its modern equivalent, credit, is truly a capital good capable of producing further wealth. Therefore a person who parts with money on a loan loses a chance for profit, and because money lent today is genuinely risked, money may in good conscience take advantage of legal rates of interest.

Again, we see in Higgins the same themes that show up in Aquinas, and later in Benedict XIV.

This is not to say that the economic theory here is sound. It’s not. Higgins’s description of money as a capital good is just one example of his problematic understanding of money.

Nonetheless, Higgins’s discussion—from the standpoint of ethics and moral theology—on lending, money, and usury helps to illustrate the historical reality of the development of thinking on usury. It is not the case, as the Barron-Tucker discussion implies, that all “lending at interest”—as commonly understood—is usury. Nor is it the case that Christian theologians simply chose to look the other way as a means of pleasing the parties of industrial capitalism. Rather, the development of thinking on usury reflects changes in the nature of money and lending over time. These changes mean views of justice and fairness change as well, and new explanations had to be sought in a world where lending money commonly imposes real costs and risks on the lender.

Courtesy of Mises.org

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