I saw at American Banker an interesting article by Sam Gregg of Acton Institute which is excerpt from his new book For God and Profit: How Banking and Finance Can Serve the Common Good. UK HERE
How Medieval Monks Changed the Face of Banking
Given that he was a member of the famously ascetic Franciscan order with his own reputation for detachment from worldly things, St. Bernardine of Siena (1380-1444) was remarkably insightful about money. [And about certain immoral acts, too. And he wasn’t shy about preaching about them. Also, note that Franciscans are friars, not monks.]
Understandably, most people are surprised to learn that some of the important intellectual developments that first enabled finance to become an engine of growth were made by men like Bernardine who had, for the most part, freely taken vows of poverty.
Like all medieval clergy, Bernardine fiercely opposed usury. [As did the Fathers of the Church.] In a sermon, Bernardine wrote: “Usury concentrates the money of the community in the hands of a few, just as if all the blood in a man’s body ran to his heart and left his other organs depleted.”
Yet the same Bernardine also invested time in explaining why it was legitimate for creditors to charge interest on loans to compensate themselves for relinquishing the opportunity to invest their money elsewhere. [That was not what the Fathers would have approved.] In such circumstances, he believed the lender had a right to be compensated for what amounted to foregone profits.
He wrote: “What in the firm purpose of its owner is ordained to some probable profit has not only the character of mere money or a mere thing, but also beyond this, a certain seminal character of something profitable, which we commonly call capital.”
This title, known as lucrum cessans (profits given up or what we today might call the opportunity cost of liquid funds) reflected the insight that money was not always sterile and could become productive: money could turn into capital.
Franciscans didn’t limit themselves to writing about such issues. From the 14th century onward, they sought to help the needy gain access to credit in the form of loan companies. The first of these lending institutions — more popularly known as montes pietatis — were established by Franciscans and initially funded by donations from wealthy Christians. The montes pietatis lent money to relatively poor people who were unable to access loans from established moneylenders. Borrowers would provide the montes with small items of value as a form of security for the loan’s repayment.
Controversy arose, however, when the montes began charging interest that ranged between 4% and 12%. One of their strongest boosters, another Franciscan, Bernardine of Feltre (1439-1494), insisted that some interest-charging by such institutions was essential if they were to become self-sustaining. Eventually, this became the norm for all Franciscan-established montes. Not surprisingly, they were also eventually accused of engaging in usury.
The montes and their interest-charging practices were, however, vindicated, first by Pope Paul II in 1467 when he approved the original montes in Perugia, [Barbo, an interesting guy. The nephew of Eugene IV, he rose in the ranks quickly. Before his election he promised to give every cardinal a summer villa to beat the heat. He was elected by acclamation at the first ballot.] and then by Pope Leo X in 1515 [Medici… he excommunicated Martin Luther in 1521. So, Popes who are not always models of perfect holiness can do good things! Which would be prefer, I wonder… Popes who are pious, but who do things to damage the Church, or Popes that are crafty and do things to build up the Church.] when he issued the papal bull “Inter multiplicis” also affirming that montes were not engaged in usury.
Subsequently, hundreds of montes emerged throughout Italy, France, Austria, Germany, Flanders and Spain. One of the earliest, the Monte dei Paschi di Siena, was founded in 1472 and still exists today. It is Italy’s third largest bank and employs thousands of people around the world.
Despite papal approval, usury accusations against the montes didn’t disappear. This produced defenses of their interest-charging by scholastic thinkers such as the 16th century Dominican Martín de Azpilcueta (1491-1586). He argued that the interest was, strictly-speaking, a charge for administering the loan rather than a direct payment for the loan. [Another friar]
Many people today look at the way in which Christian thinkers reacted to these developments throughout the medieval and early modern period with some cynicism. [!] More than one person has suggested it amounted to Christians engaging in torturous semantics to help Christianity adjust to widespread economic changes as the world’s first forms of capitalism began taking root in medieval Europe.
To reduce such intellectual development to a crass adjustment to circumstances would be a mistake. Certainly, context is important. But it’s also true that an environment of immense economic change stimulated many Christian scholars from the 11th century onward to rethink the nature of money. Over time, they developed a series of important insights and clarifications — the most significant being a clear distinction between usury and legitimate forms of money-lending.
These writers did not approach these issues as economists. They addressed these questions in the context of moral theology and law.
In short, the ideas that drive modern banking — like the banking profession itself — have a much deeper pedigree than many people realize. That’s not a bad thing to keep in mind in an age when bankers and banking are viewed with much suspicion.
And… let’s all say it together!
ACTON INSTITUTE!
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My 2c, as an economist, by the way:
What people often forget – right up to this very day, as it is one of the main dangers threatening our wealth right now due to the zero and negative interest rate policies, QE and the like – is that interest separates good investments from bad. a good investment can repay the money, with a compensation for the risk associated with it. A bad investment cannot, and thereby destroys capital that could have been productively used, for the benefit of at least someone, and perhaps all. Some people think that throwing away food is nigh-on sinful, but think nothing about throwing away capital – which could employ and feed multitudes.
Interest makes people reluctant to take out loans for ideas that are bad or too risky, channeling the capital to its most productive uses, as they can pay interest. This is a vital function of any economy that needs substantial capital goods – i.e., any economy that moves beyond subsistance farming (which by the way would feed only a fraction of the current world population). Yes, the guys at Goldman Sachs had more of a tinge of the blasphemous about them when they said they were doing Gods work, but this process does enable a society to develop – to point where one can debate how to redistribute wealth, as there’s actually something to redistribute.
Without interest, it all collapses. Good money will be thrown into pink elephants, asset bubbles and Chinese ghost towns. No-one but the guy undertaking the project has even a half-decent chance to estimate reasonably well if it will succeed. If money is free, no-one will make the distinction. Waste and misery ensues. (and please tell the FED and the ECB, by the way).
I believe there’s even a good case to be made for the proposition that interest is one of the crucial mechanisms that lifted us out of the dark ages. Islam is still there, in part because of the same fallacy, equating interest with usury.
Now as a final note, that doesn’t mean something like usury cannot exist. The loan shark who purposely charges an interest rate so high that the only way it can be paid is filling the gap with a new and bigger loan, meanwhile creaming off all money from the borrower, is clearly one and extremely immoral in his actions. The person who lends out money knowing repayment in money isn’t possible and aims for other ways (in the time of the Church Fathers, and beyond, it was possible for a man to sell himself into servitude or outright slavery to redeem his debts) is one too.
But the person, or bank, who lends out money against fair compensation for the risk (and yes, if the risk is high, the interest rate will be too), with decent consideration for the position the borrower is put in, is no usurer – he’s helping to lift his fellow man out of a world where material needs plague him. He’s providing for the old age of people who saved some money for it. He promotes economic activity that, depending on the conditions can help more people through taxes and alms. In other words, he’s doing good.
I think Edward Kane has a good point in his comment below the post:
The article fails to develop the central idea that collecting more than one lends out is still held by Scholastic doctrine to be intrinsically wrong and morally okay only if the amount falls within constraints imposed by five extrinsic titles of which lucrum cessans is only one.
Posted by Edward Kane | Friday, May 06 2016 at 3:59PM ET
Also, Aquinas explicitly says that any kind of compensation for a loan is usury, regardless of whether it is only to recuperate the profit he did not make as a result of making the loan. You can’t “lose” potential money, because it is just that; potential, not actual. See ST II.II. 78.
Gregg says that these Franciscans weren’t engaged in mere semantics, but were instead re-examining the nature of money. Even if that is true, Aquinas is right that requiring a set amount of interest for a loan is to charge for something that doesn’t exist (again, potential money is not actual money).
Another argument used by these Franciscan institutions was that they would not be self-sustaining without the interest. First, this argument is that the end justifies the means, which is patently untrue. Second, one might ask why that institution should be self-sustaining and not be forced to rely on donations as Franciscans themselves generally do.
Actually, the title to interest based on loss of income predates Martín de Azpilcueta by several centuries. It is found in the Ordinary Gloss on Gratian’s Decretum under the titles “lucrum cessens” and “damnum ermergens.” Dr. Navarrus (Azpilueta) was also NOT a Dominican. He was a secular priest.
I vaguely recall reading somewhere that one of the reasons Saint Francis refused to allow his friars to accept money was because he had a strong preference for the bartering system, which monetary exchange was beginning to replace.
Very interesting – thank you!
St. Bernardine’s Feast is only a fortnight away (20 May)! Gustav Schnürer has a lively account of his preaching in the third volume of Kirche und Kultur im Mittelalter, if I’m not mistaken, including attention to “certain immoral acts, too.” (Did he consciously build on St. Peter Damien’s Liber Gornorrhianus (recently translated by Matthew Cullinan Hoffman, as I understand) in this?)
Also the Franciscans used pawn shops as a way to aid the poor and avoid charging interest. According to the Wikipedia entry on pawn brokers, “A pawnbroker can also be a charity. In 1450, Barnaba Manassei, a Franciscan monk, began the Monte di Pietà movement in Perugia, Italy. It provided financial assistance in the form of no-interest loans secured with pawned items. Instead of interest, the Monte di Pietà urged borrowers to make donations to the Church.”
The points highlighted from Mr. Gregg’s article are quite interesting. Especially so is the reason the montes pietatis were established – to provide people of modest means access to needed funds. It appears that one difference that exists between the system as conceived by the Franciscans and the Dominicans and the current model is the growth of extensive unsecured credit. The article points out that some item of value was surrendered by the borrower to the creditor until the loan was repaid. It’s also pretty certain that the borrower was required to state the purpose for which he was borrowing the money.
Contrast that to the current practice of extending unsecured lines of credit for no specific purpose, sometimes in the tens of thousands of dollars, in the form of credit cards. The lenders justify the charging of interest double the amount of the montes on the grounds that risk of nonrepayment justifies it. So the modern practice dispenses with two crucial components of the process required by montes – a stated purpose for the loan and a form of collateral to show good faith. The “no question asked” part of this is probably the more serious as it sets up a circumstance that fosters an attitude that can lead to greed fueled by a form of covetousness – the thoughtless acquisition of material goods not based on my actual need but on the ground that because my neighbors all have certain things I, too, must have them.
Kudos to Phil_NL for an insightful reply. I’ll add one more point about the legitimate charging of interest.
Phil is absolutely correct that interest is a signaling device that prevents resources being wasted. In addition, however, it is a matter of just compensation to those who are thrifty. The thrifty are those who, instead of consuming all they can as soon as they can, use their resources to invest in goods and activities that result in greater future production. That’s called growth. It would be unjust not to compensate those who have given up something today so that more can be available tomorrow. Interest is the way we make that compensation.
As an extension of this, we can see the danger of “payday” loans, and in fact much of consumer credit. The danger comes from the fact that borrowing resources in this setting so often is not for the sake of investing for the future but in order for the borrower to consume more today without providing or enhancing productivity that can pay back the loan with interest.
Zippy Catholic has written extensively about this topic, and what he wrote is well worth reading. See https://zippycatholic.wordpress.com/2014/11/10/usury-faq-or-money-on-the-pill/. This document is based on the writings of Aquinas and the papal encyclical Vix Prevenit.
Whether an interest-bearing loan is usurious depends upon what recourse the lender has in the event of nonpayment. If the lender only has recourse to collateral, it is not usury. This is why the montes were not guilty of the sin of usury; as the article states, “Borrowers would provide the montes with small items of value as a form of security for the loan’s repayment.” By extension, home mortgage lenders and pawnshops are not necessarily engaged in usury either.
If, on the other hand, the lender has recourse to the borrower, any interest charged constitutes usury. Credit card lending, for example, would constitute usury on the part of the lender. This is quite sensible when you think about it for a moment. Usurious lenders, by charging person-recourse interest, have the ability to charge arbitrarily large sums of money to borrowers given a sufficient time horizon. Secured credit limits the possibility of such abuses.
gf2a:
That website is excellent, thank you for linking. He actually argues against the most important points in Gregg’s argument. For example, he explicitly rejects the idea that either the nature of money or our understanding of it has changed, and that interest is allowable to compensate for lost opportunity cost, and he provides Magisterial and Thomistic sources. While the institutions discussed in the OP were not guilty of usury, it was because they were non-recourse loans, not because of the reasons Gregg provided.
Thanks again, that article helped me a lot.
I think the problem comes when interest is taken on a non-productive loan. In other words, if my capital produces an increase, I have a right to a share in that increase. But if there is no increase to share, obviously I can not have it. If interest is taken as a matter of course on non-productive loans, it means that the economy is locked into a spiral of endless growth. Endless growth on a finite planet does not work so well.
For instance; a house in a decaying city where property values are declining. Not only are property values declining, but, unless the owner puts their equity into it, the house itself will fall apart. So, by the end of 30 years, the house is worth less then when it was bought. However, the bank has received their full repayment, AND all the interest, while the owner is left with less value then they started with. There is no increase in real wealth here. Money is a symbol of wealth. Where is the wealth this increase must represent? Thus the endless, unreal spiral of an increasing monetary economy, while the production of real wealth does not keep up.
I should like to see more from the author about what constituted the difference between usury and legitimate interest without having to buy the book. Some folks here have provided their own distinctions based on the writing of another author, but that’s not necessarily what Gregg says.
[Dear Father, if you are concerned about having a bunch of books sitting around after you read them, get a Kindle! HERE This has really helped me to read more.]
Especially as there is no eBook available yet.
Everyone please read Zippy’s usury FAQ. Then y’all might enjoy his views on liberalism as well.
@ Gilbert Fritz,
By focusing primarily on the potential for increased wealth, your example of the homeowner who takes a loan to buy a house leaves out an essential component, the social good of stability. Home ownership (as opposed to renting) fosters communities in which people have ties to each other (A thirty-year mortgage is a strong deterrent to upping stakes every year or two, the average duration of a residential lease). This stability would also act to arrest the decline, which in many cases is the result of the evil and discredited practice of “red-lining” that wrote off entire neighborhoods (primarily inhabited by the poor and by minorities) as unworthy of investment because little or no profit could be had there.
As to the question of “real wealth” – Our Lord has the definitive answer: “Do not store up treasures for yourself on earth, where moth and woodworm destroy them and thieves can break in and steal. But store up treasures for yourself in heaven, where neither moth nor woodworm destroys them and thieves cannot break in and steal. For wherever your treasure is, there will your heart be too.” (Mt. 6:19-21).
There is nothing wrong in having possessions so that one may live securely, provide for a family and have resources to cover unforeseen emergencies and for one’s old age. Sadly, there are many voices in society that tempt us beyond this with the siren’s call of pride, covetousness and avarice (“Show your superior taste by buying luxury car X” or “Display your moral superiority by buying (equally expensive) non-polluting car Y”, for example) against which we must always guard.
That’s what the excerpt is about, pawnbroking. “Montes pietatis” is the Italian colloquialism for “pawn shops.” I find it mildly disingenuous for the author to have referred to them as “loan companies.” The whole point of pawnbrokering was that it was better than merely lending money. I don’t understand why the author shies away from the term.
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