the plan for the future

The Doctrine of Usury in the Middle Ages

Author: Simon Smith Kuznets

Taken from: University of Chicago - The Doctrine of Usury in the Middle Ages

By Simon Smith Kuznets, transcribed by Stephanie Lo
An appendix to Simon Kuznets: Cautious Empiricist of the Eastern European Jewish Diaspora

Note: because the document was hand-written, some words are difficult to ambiguous, and are not easily deciphered through cursory research. These are marked with a superscript of “a” (for ambiguous).

I. Introduction

The aim of this essay is to present a clear picture of the medieval thought on the subject of usury. The topic requires an extensive preliminary elucidation. If there is no knowledge of the medieval thought, the preliminary explanation has to prevent us from carrying over the general background of our modern ideas into the different world of Middle Ages. If there is some knowledge of the medieval thought, it is possibly a clear-cut but arbitrary opinion, which should be eliminated. To insure against blundering and misunderstanding, we have therefore, to make clear the subject, to fix its limits and also to survey briefly the general characteristic of the medieval thought, the basic ideas of which the doctrine of usury was a more concrete application.[1]

The first possible misunderstanding is in the word “usury.” Usury now is understood as a practice of credit-bargains with exorbitant charges for the loan-accommodation. The word is associated with a picture of a cruel pawnbroker squeezing ruinous charges out of a honest poor man for the wretched pittance of money loaned. But usury in the Middle Ages was a broader form. Any credit bargain, where any charges were made for the use of money, was called a “usurious deed.” The word itself was derivated from the Latin “usus” – “utor” – which means “use”, and meant charging reward for the use of money. Thus all the modern credit of nations where any interest is charged for the use of money, would be classified in the Middle Ages as “usurious.” Accordingly, the medieval doctrine, translated into our modern language, is the doctrine of interest on loans.

From the explanation of our subject given by the medieval meaning of the word “usury” we are led to the clearing up of what we mean by medieval and Middle Ages. Usually, Middle Ages is defined as the period of the European history, which lies the 5th and the 15th centuries A.D. We cannot, however, take this mechanical definition as a satisfactory indication of limits on our subject. If we take the medieval thought on usury, as a topic for investigation, there must be more reason which would justify it. This reason is given by the fact that all medieval views on the subject have a certain common mark, a common backbone which is characteristic of the medieval doctrine and distinguishes it from the ancient doctrine or the modern one. Different as they are, the views of St. Augustine in the 3rd century and St. Thomas or Gerson in the 13th and 15th centuries, these view all have a common approach, a common treatment and partly a common solution of the social problems before them. The simpl(er) methodological raison d’etre of our topic as a subject for independent organization is the organic unity of all medieval views of usury. This continuous unity of views was a result of a common view of life shared by all students in the Middle Ages. It is therefore our chief point in the preliminary explanation to give a brief summary of the basic ideas of medieval thought. In my title I have intentionally used the word doctrine instead of the more usual term “theory.” Theory means always a scientific system treating a certain subject for the purpose of discovering causal connections between generalized facts. Doctrine, in the literal sense of the word, means any systematic set of views. But usually “doctrine” denotes the systems of views, which are not theories, being built on a principle different from that of discovery of causal, actual relations. Thus, we say that the Nationalist Part of Germany has its doctrine, this being a set of views where all the things are arranged as to their relation to the greatness and power of Germany, this last being the principle upon which the system of views was built. In this sense, the medieval system of views on usury was a doctrine, and not a scientific theory. What the medieval thinkers looked for, investigating the phenomenon of usury, was not the discovery of the actual existing relations of the facts and their causes, but they tried to trace the relation of facts to another principle, which was held by them as preeminent.

What was that supreme principle which was the basis of the medieval system of views? It can be argued, when we conceive the fact that quite all medieval thinkers on social matters, were more or less churchmen. It is a generally accepted fact and we can take it as granted, the more that in our investigation further we shall have the occasion to prove it. Our task now is to see how this fact of all medieval thinkers being teachers of Christian religion or morality, determined their general conception of things.

The first basic idea of the medieval learned was certainly the gist of the moral teaching of the Christian religion. In his social life a man had to act with brotherly love towards his brethren and with full obedience to the church regulations. Every action and event was considered not a value per se, but a subject to investigation and appreciation as to how this fact showed a conformity to the moral Christian principle, or was a condition to a moral action. The purpose of a man in life was to be worthy the external bliss in Heaven. As the present life was something of a vestibule leading to the temple of the eternal life on the other side of reality.

This principle thought out to its logical consequences brought about a renunciation of activity and encouraged hermitism and asceticism. If it were the only principle taken as it is, any worldly, secular activity, and economic activity specially, would be renounced as obstacles to the spending of the present life in contemplative preparation for the future one. But most of the churchmen conceived that the church organization has to work taking in account the actual situation of the real life. This brought about a certain discretion in the appreciation of the first important principle to the actual life. This discretion was a further development of the idea of “natural law” in the social life, idea which was widespread in the Greek and Roman world.

This “natural” idea ran, approximately, as follows: Nature as it is, was created by God and was the gift to the mankind. AS far as the nature is concerned, there is no possibility of sin or cure in it. It is the man who through the sin of his progenitor, Adam, became liable to sin, evil, etc. But even man, as far as the man’s normal nature is concerned, is not evil and not liable to evil. An activity which is concerned with nature and which is undertaken by man not in excess of his natural, normal needs is not evil in itself. It is only when a man succumbs to an over excessive grossness of his material substance, above the normal, natural experiment of it, that he be liable soon to be the victim of the devil. Nature as it is, in man and in the universe, is God’s creation and it is no evil as far as it is kept in the bounds of normal nature. This principle became the basis of all medieval views on the social life, and we shall see later how persistently and unflinchingly these views were formulated and applied to the facts of the economic life.

II. The opinion on usury of the Church-fathers in the Roman Empire

The Christian church was faced with the problem of usury in the time of Roman Empire, when the Christian religion was in its teens, an idealistic and quite evolutionary creed of an oppressed minority. After all the investigations of the historians it is pretty clear that the economic life of Roman Empire presented a high development of trade, chiefly foreign, of banking and of the system of credit. At any rate, the testimony of the Roman law is clear enough. We shall see further how this same Roman law revived in the 11th century confronted the canonics and scholastics no less even more than it did the Church Fathers of the 3rd century.

It was the third century A.D. when the church-fathers first took up the question of usury. This was the time when the Christian religion formulated its views on the social problems. At the same time appeared St. Augustius book “de Civitas Dei”, in which the relations between church and state were defined. And at the same time the first judgments on usury can be found in sermons and writings.[2]

As it followed clearly from the teaching of Gospel and all the spirit of Christian religion, usury was flatly condemned. Tertullian (160-?) and Cyprian (3rd century) forbid it referring to the Old Testament prohibitions to the Jews to take any interest from their brethren Jews. Lartanz Tius[a] adds to this textual authority the assertion that usury is against the “righteous conscience” (lechts beuristsein[a]), a conception popular among the Roman jurors as the conscience-creator of natural law. Together with the authorities, the clear cut argument is brought out that the loans are made in the satisfaction of a man’s urgent need, and then the moral obligation of a Christian is to lend money gratis. Charging any reward in that case would mean exploitation of the fellow-man’s need.

There is no doubt that these opinions were in decided contradiction to the practice of usury in the real life of that time, and also that they were in discordance with the prevalent views on usury not only among the pagans but among the Christians themselves. As a century later Chrysostom complained, not only the Christian laymen but even the Christian clergy practiced the business of usury and did not consider it bad at all. It is significant that Pope Kallistus (217-22) himself was in his earlier life a banker and it was not counted as an obstacle to his becoming a Pope. It is probable, that the Christians did not consider themselves bound by the authority of the Old Testament. As to the arguments of the Church-fathers, they were no doubt disputed. The traces of these anticondemnation arguments we find in the writings of Chrysostom (345-70 – 407 AD) and St. Jerom (340-2 – 420) when these fathers took up the question of usury.

Their discussions on the subject took the form of supporting the fathers of the 3rd century and of refuting the arguments against condemnation of usury. An argument was stated that usury is in compliance with the civil law, is accepted voluntarily by the debtor and the charges are paid by the latter with thanks. Chrysostom answers that the compliance with the civil law is compatible with committing sin against God; that the readiness of the debtor to pay interest is a result of his urgent need, and not because he wants to; that the thanks are paid to cruelty, what is most unnatural. And this argument against condemnation claimed that the loan is for the debtor a mean of earning money and as many lenders became rich, it is no sin to require charge for a loan. This reason was refuted by the assertion that the productivity of the loan is not that of the money but of God’s benefit, and that if few borrowers became rich, most of them were compelled to take up the rope as a Cast rescue (that means, to hang themselves). On another case, St. Jerome is confronted by the question whether charges are permissible in the case when 1 bushel of wheat is loaned and it, sown, gave a harvest of 10 bushels. St. Jerome plainly dodges the question, answering by a dilemma*. The loan is given either to a poor man or to a rich one. The rich man will not take the loan because he is rich and does not need it. The poor man will take because he is in need of it, and in this case it is the duty of the Christian to accommodate the need of his neighbor without profiting from it. These refutations, especially of the last case, indicated that the condemnation of usury by the church fathers was decided and admitted no exceptions. We should conceive that the Christian religion in that time was only growing, was an ideal which did not come yet to the stage of its realization, when its adherents would have been confronted with the necessity of taking in account the life as it is and not as it should be. Hence this purity and absoluteness of the condemnation.

It is interesting to note that when these views had to be enacted, the real measures taken to exact the prohibition of usury, were far more mild than it could be expected. To be sure, the first council in Elvira (year 306) forbade practicing of usury to any person, threatening even the laymen with excommunication. But already the next two councils, of Arles (314) and Nicaea (325) do not say anything about the laymen, respecting the prohibition of usury-practice only to clergy. All the later councils (except this of Carthage in 419) repeat the prohibition nearly in the same form. On till the end of the 7th century the regulation created by the councils, exclude the laymen from a compulsory prohibition of usury practice, imploring this restriction only on clergy. And in many cases, the regulation seems to overlook the lower clergy pressing the penalty only on the higher church officials.

There are many grounds to suppose that the practice of usury in the real life was yet more unrestricted than on the paper of the councils regulation. As Gregory of Nissa (329-389) relates, in choosing a parson the authorities did not take in account his previous experience in the usury business.[3] One incident illustrates vividly the actual situation. A certain Moor bought merchandise from a Christian to the amount of 400 solidi and as he bought it on credit he gave to the Christian notes for 500 silidi. But the prices fell and the Moor sold the merchandise with a great loss. He returned to the Christian 410 solidi, but as the creditor required the whole 500, he appealed to the Pope, Gregory the Great (540-604. Pope 590-604). The Pope did not find necessary or permissible to order the Christian to withdraw his requirement of the 500 solidi. But he asked the creditor as a Christian not to press whom the Moor as the latter could not return the whole sum. This shows how, while the church-fathers renounced usury from the idealistic height of their teaching, it was freely practiced in the actual life.

III. The doctrine of usury during the dark period

The opinions of the Church-fathers on usury belong properly to the epoch usually indicated as the time of Ancient World, and not of the Middle Ages. But these opinions were the first expression of church-authorities on the subject, and they remained the sole authoritative opinion free the 12th-13th century. Indeed in the period which was the first in the historical period of the M. Ages (I mean the period of 6th – 11th century), there was very little said about usury. The Dark period was also dark in respect of treachery, study, investigation, or argumentation.

It seems impossible for that period to find clearly expressed, written opinions on the matter of usury. If something can be known on that subject, it can be found only in the decrets and regulations issued by the church-councils, Popes and other church-authorities. These documents were collected in the 12th century by the Bolognese monk Gratians, into a body named “Corpus Juris Canonici.” It is from scattered hints and references in these documents that it became possible to clear up the proper “canonic” doctrine of general economics and of the subject of usury.

“Corpus Juris Canonici” begins like the Roman Code of Justinian by the distinction of civil law and natural law, with that difference that the Canonic code calls the civil law “human” and the natural “divine.” In this dualism the Canonic code fully develops the two principles, indicated above as general in the Middle Ages, the principle of subordination to Heaven by moral together with the acception of undisguised nature as the Gods work and gift to the mankind.[4] What concerns us here is, that the Canonic code includes among the several “divine” (or natural) laws the law of community property. The divine law is this which existed in the Paradise till the first sin, when the mankind was in state of uncorrupted nature (“in states incorruptus natural”). It was after the first sin, that the divine law could not be embodied on the earth, and the civil law began to regulate the life of men. The civil law admits private property, but it should be conceived as a sadful digress from the principle of common property of the divine law, as an unavoidable evil which afflicted men as a punishment for the first sin of Adam.

The further application of the dualistic principle was acceptance of land and labor, as the only two possible factors of production. The world of the civil law and secular life was admissible only as far as it was in the strict limit of the natural necessity. Land was a gift of God: therefore agriculture was considered the least evil of the occupation. The artisan worked over the products of nature and applied his labor thus it was also permissible. But trade was dangerous, because it was far from nature, it was in a constant touch with money, and money was the most dangerous of all the objects to deal with.

Money was admitted by the scholastics as a necessary evil. They confessed that money is useful as a medium of exchange, as a measure of value of things. And they accepted it only so far. But if money becomes a source of income, if money will be used not for exchange purposes, but to produce a surplus of money, then it is a decided evil. The production factors are land and labor both given by God. If money becomes a productive factor for itself then it tries to compete with God’s productive factors, and is therefore, undoubtedly, the work of the Devil.

It is clear now, that this condemnation of money as a productive factor is directed against usury in any of its forms. It implied the idea of the “barren” quality of money, idea which was first formula by Aristotle[5] and later became the basic point of the scholastic doctrine of usury. It can not be said that this idea was clear in the minds of the creators of the canonic law. We should constantly have in view that the above cited reasoning was written in no book, was nowhere developed by the churchmen of that period, but is only a patch-up of scattered references, reasons brought out in the decrees prohibiting usury. It does however express adequately what was the popular notion of usury in the minds of the people who tried to appreciate it from the then exclusively prevailing point of view of Christian morals.

We saw that while the Roman Empire yet existed the regulation of usury by the Church councils was far more mild than it was required by the teaching of the fathers. But during the discussed Dark period, the situation changed. The Church became a more powerful body; the Christian religion spread and the Christians formed the majority of population. Accordingly the regulations of the Church assumed new importance and bearing.

During that period arose a difference in relation to usury between the Greek Christian church with its centre in Constantinople and the Latin Christian church with its centre in Rome. The Greek church shared the same condemnation-opinion on usury as it was expressed by the fathers and upheld by the Latin church.[6] But the church authorities in Constantinople found it unnecessary to change the regulation of the old councils, which prohibited usury-practice only to clergy, recommending the ceasing of usury-practice in laymen but imposing punishments in case of the practice was really entertained by a Christian layman. It was evidently in realizing the impossibility of enacting a usury-prohibition, that the church-authorities in the East abstained from declaring a general prohibition. We have a record of the result of an attempt really made. In the 9th-century King Basilius of Macedonia, under the Influence of the Christian religious teaching issued a law prohibiting usury under heavy penalties. The law was a failure. Basilius’s son and successor, King Leo the Wise saw himself compelled to repeal the law. In explaining the reasons of the repeal, Leo the Wise stated that though usury was certainly forbidden by God and thus should not be permitted by civil law, the grossness and avarice of men turns the prohibition null, and brings about disobedience and false swearing. Thus the practice of usury in the Byzantine Empire was all the time regulated by the law of Justinian, which limited the charges to 4% in case the creditor was a nobleman, 8% in case the creditor was a merchant, and 6% in case he was from the common people. If the loan was made for foreign trade the rate was limited to 12%.

The situation in Western Europe was different. In 784 the council of Aachen was proposed to by Carl the Great to prohibit the usury for laymen as well as for clergy.[7] This prohibition was confirmed and this had the clerical power as well as the power of the state. This prohibition, which forbade usury in the extensive realm of the Franken Empire, met evidently disapproval and protest. As a result the next councils of Mainz (813), Reinisa (813), Aachen (816) find it necessary to repeat the prohibition in the most sweeping terms. This enforcement of prohibition with increasing threats for violation is going on till the second half of the 9th century, when evidently the Christian usury was driven out. After 864 there is a gap in the church council’s records on the matter of usury, until the second half of the 11th century when the changed economic condition brought again the problem of usury to the scrutiny of the church authorities.

The reasons for the difference in usury-regulation between East and West can be presented here only in a form of a daring suggestion. It may be explained chiefly by the difference in economic and political conditions. While the wave of the migrating Teutonic tribes swamped Western Europle, the Greek territory remained untouched. While the new inhabitants of Western Europle brought with them their economic system of community life and “natural economy”, the economic conditions in the East though were lower than these of Roman Empire in the 2-3rd centuries[8], presented a developed foreign trade, obsolete principle of private property with class distinctions, developed exchange etc. While in the credit operations in Western Europle take the form only of consumptive credit, which does not justify any interest charges, the credit operations in the East were well developed, were of assistance, at least, to trade and had the benefit of an old, rooted institution. We have, however, to remember that everywhere, both in the East and in the West, the opinions of the churchmen (and they were the only students of the matter, if there were any), present an absolute, condemnation of usury as a contradiction to the “divine law”, as a plague resulting from the corruption and grossness of the sinning man.

IV. The scholastic doctrine of usury. T. Aquinas

The 11th century marked the beginning of an extensive revival process in the economic life of Western Europe. The growth of towns, the development of the handicraft industries, the increase in the bulk of trade, the establishment of markets, fairs etc. brought about profound changes in economic life. The money-system was growing, the credit operations were becoming more and more a socially necessary function, and the relations of buyers and sellers, creditors and debtor grew again as a modern problem before the students – churchmen and the church-authorities.

Together with the revival of economic conditions and, no doubt, a result of it, a revival of the Roman Law took place. It started in Northern Italy to the close of the 11th-century, the centre of this “glossator” movement being the Bolognese school of glossatiors. Shortly after it became so popular that it pushed the theology out of its privileged position as the most popular and usual course of study. It represented an entirely new line of thinking for the medieval student and was in decided contradiction both to Canonic theory and practice. If we conceive that now in the 20th century, the codes of the Continental European countries are based on this Roman Law, and Justinian’s Code is the basic authority for deciding new questions, we can realize how important and contradictory to the general trend of medieval thought was the spread of Roman Law studies.

Renewal of Roman Law, however, had not any profound influence on the treatment of social problems, at least as far as the Medieval philosophy was concerned. The new students and adherents of Roman law accepted the general Christian church view on the existing social problems as given and indisputable. They did not intend to combat the Christian point of view; but they tried to adopt the legal forms and interpretations of economic activity so as to justify it as a reasonable exception from the general church condemnation. They executed new forms and devices for credit bargains, which seemed to justify taxing charges, even under the assumption that usury, that means, taking money for the use of money is impermissible.

But if the glossators did not take up with the principles of the medieval views on usury, there were the churchmen themselves who felt the necessity of revision. After all the opinions of the Church-fathers were not very pertinent, and dodged important sides of the problem for ex. the question of a loan of a measure of wheat growing after a year to 10 measures. The cousins of the Dark period did not add anything to the explanation. Meanwhile, the new development took place, which changed the importance and significance of credit operation, and their service nature too. The glossators reviving the Roman Law created new juridical moulds for the credit operation, legal “title” justifying charges, that required the scrutiny of the Christian religion as to their moral nature. The economic and social revival had to lead necessarily to a revival of thought. And as the Christian church was still the leader of the intellectual movement, this revival of thought took place in the form of the scholastic movement with the words of St. Thomas of Aguinas as its culminating point.

In the writings of St. Thomas (1225-1274) the medieval doctrine of usury was presented in the most final and elaborate shape. The great scholastic was not much interested in the question. But as he wrote an encyclopedia where he tried to formulate the Christian point of view on all the contemporary problems, he could not omit such an important question as this of usury. In his task[9] in discussing the problem he had two purposes: first, to formulate and prove that the condemnation of usury is right and that usury, that means, charging for the use of money, is bad, unjust and unpermissible; second, he had to investigate the existing forms in which charges were actually made, and pass his judgment on the different legal forms of the usurious transactions. In our exposition of St. Thomas’ doctrine we shall follow the above indicated order. We shall first show the general ideas of St. Thomas about usury, and then we shall see how he applied his principles to the actual forms of usury in real life.

We have to mention here that St. Thomas in his proof of the wrongness of usury, faced a harder task than the Church-father and the canonics, his predecessors. The Church-fathers and the canonics were hostile to the principle of private property and looked with suspicion on money and trade. It was easy for them with their idealistic, communistic inclinations to condemn usury aforehand as the using of the abominable principle of private property against Christian morals. St. Thomas accepted private property as a useful institution and he justified trade, as far as it was a source of income for the merchant, an income which secured him a living to the standard of his class. Now suppose, a usurer using his right of private property earned a living through the onerous practice. It was not enough to say that it is against Christian morals. St. Thomas had to prove that this is unjust while trade in the limits of earning a livelihood was just.[10]

The general ideas of St. Thomas about just and unjust, the ideas which determined his method of investigation and discussion were based elusively on the “natural” side of the medieval conception. In his theory of just prices when St. Thomas was solving the problem of the relations between buyers and sellers, and the role of merchant, he defined just price as cost of production + the profit of merchant to cover the latter’s standard livelihood in case the article was brought to the market by the merchant. As the canonics, St. Thomas justified economic activity as far as this process represented a process performed by nature, in cooperation with nature and in the bounds of satisfying the needs of the man’s normal nature. The idea of justice and equality in the sphere of economic life was to be realized by everybody working, performing a natural process and for the satisfaction of the natural needs, shaped into a class standard. Trade was justified on the basis of the productive process of transportation and in the limits of the profits convincing only the merchant’s standard livelihood. It was this measuring stick which St. Thomas applied to usury and found out that usury taken as it is, is unjust.

The basic idea of St. Thomas’ argument is the conception of money as the sterile good. It was first stated by Aristotle and was lurking behind all the opinions of the Church-fathers and canonics. It is now hard for us to conceive this idea in its fullness, because we have a rooted conception of money-capital, interest etc. But the point is that the medieval thinkers did not consider money to be capital, nor conceived they capital as something separate from labor. According to St. Thomas, money is only a medium of exchange. What can you do with a piece of money in your hands: only to give away for another thing. Money taken as the material of which it is made, as the piece of coin serves only as a mean to buy and to sell. In the primitive-naturalistic conception of the Middle Ages money was not a incarnation of purchasing power; of value, of potential economic goods. Money was taken as the material body of the coin, and as such it certainly was sterile. It was used only to facilitate the exchange; it was useful only as long as you could get rid of it in exchange for another good; therefore money taken as it is, was sterile in the eyes of Aristotle and St. Thomas.

This was the idea of sterile money, a conception which was a result of taking money only as the material substance of the circulating coin. It will be made clearer in the second argument of St. Thomas, which was only a logical conclusion of the first. This second argument consisted in dividing the things into perishable and durable. A house was for example a durable thing; butter – a perishable. The consequence of this division for the problem of credit and usury was important. For example, a house could be retained in the ownership of the original owner and in the same time rented for use to another person. In a durable good the use of the good and the ownership of the good were two different and separable things. The ownership of a house can be held by one person, the use of it by another. There was no such possibility in a good like butter. A man could not use butter, the ownership of it being held by another person. The owner of butter could not see the use of it, retaining the ownership rights. But an owner of house could sell the use of it, he himself retaining the right of final ownership.

Money was classified by St. Thomas as belonging to the perishable goods. Really, taking the coin as it is, a man can use the money only by giving it away, by buying something. If A gave B hundred dollars, what can B make with it? He can use it only by buying something, that means, by giving it away, but parting with the hundred dollars. He could not use the money in the same time retaining their ownership. In the same way, A can not sell to B the use of the hundred dollars and in the same time retain the ownership of it.

We see now, how this conception of money is the piece of coin, resulted in two arguments: first that money is not necessarily productive, but is sterile; second, that money is a perishable good and it is impossible to separate the use of money from the ownership of it. It can be easily seen what hearing these two arguments had on the question of usury. When A loans B money, he can not require charges for the use of money because: first, money is sterile and there is no natural source of the surplus-change required; second; in the act of loaning the money, the creditor can not retain his ownership, giving the debtor only the use of it. If the creditor does retain the ownership then he can not require the return of it fully, as the owner of the house can not require the house back from the tenant in exactly the same shape. If the creditor does not retain the ownership, then the loaning of money is actually a sale of it. But according to the doctrine of just price, a seller can not charge for a thing worth 100, 105 pounds.[11] But in a usurious deed, the creditor does both: he transfers the ownership, gets his price (footnote: In the form of the return of the originally loaned amount) for it and besides sells the use of it, exchanging interest. Thus in a usurious deed, the creditor sells the same thing twice: once- the ownership, the second – the use, what is highly unnatural and unjust.

These two grounds: the natural sterility of money which excludes any assumption of a natural source of surplus-charges, hidden potentially in a bump of money; and the perishableness of money, which includes the separation of ownership and use excludes the use as being a subject to special charges above the price of ownership – are the chief arguments of condemnation usury by St. Thomas. The money sold has no functional increase hidden in the coin; other is nothing to sell except the money itself. But may be, says Sat. Thomas, the creditor sells the time (that means, he sells – 100 + 3 months of time). But time is a common property, is unalienable and cannot become private property. Thus this last ground for charges fails also.

These ideas seem strange now. But we should not forget that in the time when this doctrine was formulated, there were no banks, where you could go, deposit your money and get quietly 4% annually. In the unsettled conditions of the 12-13th centuries if you could make a greater profit than now, you were always running a risk of losing all. There was no organized apparatus which would give the possibility of secure investment. It was no doubt socially unjust to loan money, and not participating in the risks require a sure recompensation. And we shall see how, in applying his principles to the actual forms of usury in real life, St. Thomas very sagaciously passed judgments which would be approved even by the most modern homo economicus.[12]

We are now passing over to the second part of St. Thomas’s teaching, where he investigated the legal forms of usurious deeds and accepted or rejected the proposed justification. As it naturally follows, we have to acquaint ourselves aforehand with these legal and canonic forms to be able to understand what H. Thomas was talking about.

The first legal form of making charges for loans grew out in a process of a long development, which should be taken up briefly as it is a subject exceedingly interesting. In the early Middle Ages when the social life of Western Europe was regulated by the barbaric codes of the Teutonic tribes, a default of the debtor in paying his creditor was considered a heavy crime, and in this case the creditor could take the debtor as a slave and to use sell him or use him for his own household in redemption of the lost money. With the general process of cultural development, the codes grew less rigid, and the defaulted debtor instead of becoming a slave, put himself only in the custody of the creditor as a pledge for the final payment of the loan. The further step was instead of the debtor putting himself into custody, sending some of the debtor’s friends or servants into the custody of the creditor as a pledge. All this process of the making the punishment more mild was certainly approved by the Church.

But the process of pledging men in the custody of the creditor was very expensive because they had to be supported and catered[13] by the debtor. In the same time the men brought nothing profitable to the creditor. Thus when the money economy grew wide and strong, a natural substitution of men-pledges was paying of money for the default. It was for the satisfaction of both parties, and it was approved by the Ecclesiastical Courts as a more mild and human way of transaction. This money payment for the default used to be stipulated in the contract as a provision of forfeiture, which was called “poema conventionalis.” The money payment itself was called “interest” from the Latin “inter” + “est” (“between” + “is”), and indicated that the money had to be paid for the difference “between” the creditor’s circumstances in case he would have received the loan in due time and his situation now in the case when the debtor failed to pay. As the money was due for default, it naturally began to be counted on the duration of the default and as a part of the loaned amount. Thus gradually the interest became proportional to time and in a percentage of the loaned amount.

Attention should be paid to the fact that these interest payment were payment only in the case of debtor’s default, and thus, strictly speaking, were it compliance with the canonic prohibition of making charges for loans. But, nevertheless, even in this case, it had to be proved that there is really a difference “inter-est”, which justifies a payment of money in excess of original amount due. To prove this, the legists of the 12-13th centuries brought out two “title” (legal grounds) for charging interest. These two grounds were “damnum emergens” and “lucrum cessans.”[14]

“Damnum emergens” entitle the creditor to charging interest because he suffered a loss from the default of the debtor. Suppose a case when the creditor planned to repair his house by the money loaned to debtor. He knew that his house is in a bad state and expected after having received the loan back to repair the house. Now the debtor failed to pay in due time, the house remained unrepaired and run-down. This loss resulted from the defaultor of the debtor and thus should recompensated by the interest payment.

It is easy to see that this ground for payment was absolutely admissible from the point of view expressed by St. Thomas and other scholastics. Indeed, the first of them Alesander of Hales (1245) classified these charges as just, and St. Thomas repeats the same. He warns however that it should be investigated whether there was really any loss of the creditor and if it was whether the default of the payment was its cause. They did not give absolute binding power to the “poenas conventionalis,” requiring specific proof of loss.

The other “title” of interest, “lucrum cessans” was based on the case when the creditor by the default of the debtor is prevented from making profit. In our time such provision would justify any default as we are able now to make profits in any time by a sum of money. The clause of “lucrum cessans” was put up by the legists for the general justification of the interest charges in default. But it is clearly evident that the scholastic and St. Thomas could not agree to make this clause an undisputable common ground. “If the creditor could make profit with the money,” said St. Thomas, “he could equally suffer a loss.” Taken as a general rule this clause meant an assumption that money is generally a source of profit. Therefore St. Thomas ruled that for every case it should be proved that by the default of the debtor an actual opportunity of a sure gain was lost by the creditor. This actually invalidated the significance of that provision, because it was difficult to prove that a sure gain could be procured by the loaned money.

This was the relation of St. Thomas and the scholastics to the “titles” of charging interest for default. They rejected any attempt to introduce as general rule legal grounds, which assumed in any form the idea of productivity of money. But they admitted it as a ground in specific cases, where the specific productivity of the money-sum could be proved.

The above discussed legal forms were used only in cases of money loans where no other provision or bargain took place. It was the plain cases of lending money for a certain period of time with the return of the original value. There were, however, other specific forms of credit bargains, very widespread and important, which required the special attention of the scholastics.

The other form of credit bargains, where charges used to be made for the use of money, was the widespread form of partnership called “commenda”. This practice grew out from the cases when a wealthy merchant of the Italian or German town carried on his sea trade not by himself but through his reliable representatives who were called tractator or commendatarius. As these travelling tractators performed the whole business, the merchant himself only being the capital-owner, it became necessary to make the tractator economically interested; accordingly he used to get his reward as a part of the profits of the operations he made. The further step was to find the tractator to the business by making him a partner in it. As the tractator grew rich he had his own capital put into the business, and becoming the chief partner of the enterprise negotiated not with one partner-capitalist but with several, who contributed capital to this business getting for that a part of the profits. Thus this form of partnership grew up, where only one of the partners was the active merchants, while the other or several others only contributed the capital and received for the loan a part of the profit.

This form of capital investment was found already in the late part of the 10th century, but became a very common credit bargain in the 11th and 12th centuries. It was considered so usual and legitimate that in year 1206 the Pope Innocent III issued a decree in which the Ecclesiastical Courts keeping the dowries of orphans according to the wills, were advised to invest this money with some reliable merchant to get the usual gain.

The canonic doctrine was favorable to this form of loans and charges. The reason, which was stated by Thomas Aquina was very simple. As these loans took the form of partnership, the owner of the money, the creditor shared the risks of the enterprise and therefore was entitled to its profits. It was not the case where the creditor sells the money for the promise of the return of the original sum, and besides sells the use of it for a stipulated reward. In the commenda the creditor retained the ownership of the money and in case of failure, could not get his money back. On basis of this reason T. Aquina and all following scholastics approved the commenda, with the provision that (a) the contract of the commend should not stipulate any profit on the borrowed money (b) the contract should not stipulate a general obligation of the borrower to return the original sum. By making these limitations on the commenda contracts the canonic doctrine brought these credit bargains in the bounds of a full partnership and prevented or tried to prevent the further development of commenda into pure credit to business regulators.[15]

But it flourished in the 14th and first half of the 15th centuries.

It seems that this form of credit-bargain did not trouble the scholastics and churchmen at all. The first writer who touched the subject was Laugensteina to the close of the 14th century. But he was a moralist and statesman, and considered this practice only from the social-moral point of view, approving it in case the charges were used for the support of the capital-owner in his old age and disapproving in case the chargers were a means of idle life for the young[16] capital-owners. The first consideration from the point of view of the scholastic principles was in the answer of the Pope Martin the V to a question about the permissibility of rent-charges. He answered that they were permissible if (a) the charges are attached to a “hona stabilia”a; fixed property of the nature which makes it a source of permanent income (b) and the charges must not be above the average rate.

The scholastics of the 15th century took up this form[17] for full investigation. They approved it but as in the case of “commenda.” They introduced limitations to the freedom of the contract so as to secure a just relation of creditor and debtor. These limitations were the following: first, the creditor has no right to require his capital back; second, the debtor has the right of redemption if he wants it; third, the charges should not be above the average rate; fourth, the charges should be attached to a property which by its nature is a source of permanent income. It is easy to see, that by these limitations they made the transaction absolutely just from the principle of St. Thomas. They did not permit the creditor to enforce an obligation on the debtor to return the original sum; and they stipulated that the charges should be attached to a productive property, where therefore the argument of money-sterility did not work.

A general characteristic of the relation of the scholastic doctrine to the credit forms of the 12-14th century can now be given. As a general rule, charging interest for use of money was unjust because money in principle was sterile, and it being a perishable good its use could not be separated from its ownership. But this general principle did not mean that every case where any reward was given for a loan should be condemned as unjust usury. They investigated the usual forms of the credit bargains. If they found that it formed an exception from their general premises, they admitted the exception, approved of the bargain and only tied to prevent, the exception to be treated as general justification of usurious bargains. They found that rent charges are an exception from sterility of money; so they fixed the exception attaching it to “bona stabilia” and prevented from any undue explanation by making the debtor irresponsible for the return of the original. They admitted “lucrum cessans” and “damnum emergens” only as exceptions and subject for every time for specific investigation. They accepted “commenda” but tried to prevent it from becoming a shield for really usurious deeds by fixing the necessity of the creditor’s participation in the risk, which can incur not only absence of profits but also loss of original sum loaned.

After all the scholastics were not blind followers of a principle. Their principle seems to be fallacious; but we are living in a different world. The scholastic doctrine was formulated in the time where the consumptive credit was still prevalent over the productive one; when money was more a store of value and medium of exchange than a potential capital. Labor and land were still the chief factors of production. The mistake of the scholastic consisted only in the fact that they did not know that the forms they admit as exception were going to invalidate entirely the principle of sterility and perishability of money, and the conception of it as a circulating piece of metal. But their doctrine was true for their own day. It was a primitive, naturalistic conception with the slight tincture of Christianity in it, a conception of moral nature and natural morals, which should govern the actions of man and prevent one of using the humans social institutions for the purpose of oppressing another. It was a doctrine of natural economics where men were considered as equal moral and natural units.

V. The fall of the Doctrine. Second half of the 15th, 16th centuries

The medieval doctrine of usury reached its culminating point in St. Thomas’s writings and the writing of his immediate followers of the 14th century. But the developing life of the impending new period of history pressed hard upon this doctrine, and to the close of 15th century and in 16th century, brought about a fall of doctrine. There was no restatement of the principle. But the relation of the scholastics to the practice of usury in the real life show that the principle of sterility and perishability of money was not the leading one. We can not find an open refutation of the principle, but investigating the opinions of the late scholastics on the forms of usury we shall see that it was entirely incompatible with the acception of T. Aquinas’ doctrine.

To begin with the interest-form of taking reward for loans began to grow and form an exceptional treatment with specific proof. The clause of “damnum emergens” remained unused because to prove a loss or even to speak about that was possible only in exceptional cases. But the title of “lucrum cessans” in prevented gain assumed more and more general importance. Already in the 14th century many scholastics ruled that in case the creditor was a merchant the title of “lucrum cessans” could be accepted without any proof. This decision became final in the 15th century through the influence of the great jurist Paul Castro (1441). Further the term “merchant” was expanded so as to cover any person who pursued business where money could be invested profitably.

The final blow to the old view on interest-payment was dealt by the establishment of “montas fictatis.” These were small banks established by the Francisians to provide loan-accomodation for the poor and thus to free them from the clutches of greedy private usury. The social necessity of these institutions was undoubted. The first was established in Griefo in 1463, the second in Perygia[18] in 1467 with the Pope’s approval. In 1575 the Lateran Council approved the Moutas Pictatis. But these institutions to cover the expenses of carrying on the business and attracting necessary capital, were compelled to make slight charges from the borrowing. Now these charges had no basis; none even of the old titles: it was neither commenda, nor rent-charges, nor interest, because the charges were made not for default. This experience certainly turned considerably the tide in the scholastic views on interest and usury.

We saw above how the “lucrum cessans” expanded to the extent of a general ground of payment in case of default. The influence of montes pietatis worked towards the elimination of default as ground necessary for charging interest. It came however very late. First Navarriesa (1586) the Catholic moralist expressed his opinion for the elimination of delay. But it became a general opinion only in the beginning of 17th century, when Scarcia (1618) in his treatise of Commercial Law admitted that interest could be charged from the date of concluding the transaction. This treatise received the Papal approval and was a popular authority for the Churchmen.

The same process of expansion from a specific case or kind of cases to a legal form which meant a general permissibility of charging for the use of money, occurred with the “commenda” cases. It is clear, that in the contracts of commenda, where the creditor assumed risk for his capital and profits, these charges made were much higher than in the cases where the debtor guaranteed the full return of the original sum. As the business grew more nice[19] and steady, the merchant-debtor found that it was more profitable for him to guarantee to the creditor the full return of the original loan and agree to pay sure interest on a low rate. The escape from the prohibition to stipulate in the contract sure profits and return of full original sum was made through the legal device of “triple contract.”

It was perfectly lawful for A after he loaned money to B on the usual conditions of a lawful contract of commenda, to go to C and by paying to C a certain amount to insure for himself a return of the capital + certain stipulated profits. Now, if it was lawful for A to secure return of capital at a certain rate of interest through two person B and C, why should it be unlawful to make both bargains with one and the same person, say B? Thus A could loan to B money, then pay to the same B insurance-charges and receive from B the guarantee of the return of capital + interest. This contract was called “triple contract” and was a device through which a creditor received interest without participating in any risks.

This triple contract which was an evident violation of all the scholastic principles in regards to usury, was however approved by the scholastics of late 15th and early 16th centuries. Clavasiona (d. 1476), a popular theologian, whose book was the textbook of all preachers and confessors, saw no fault in this kind of contract. Biel, a theologian professor (d. 1495), also approved it. And Dr. Eck of Ingolstadt became famous through his open vindication of these credit-bargains.

The rent-charges underwent a more or less analogous process for change. As we remember, the scholastics limited them to the cases where the charges are attached to “bona stabilia,” which gave a “census realis”, t.m. profited property with a real, permanent income. In the process of expansion, the rent charges were permitted in cases of any property, not only fixed but even “spiritual.” As in modern times estimating property we take not only the fixed value but the so-called “going value” of a concern. Thus in the 15-16 centuries the basis which could be a ground for changes was expanded to any value, any property of a person (“census persondis”). This movement of expansion began in 1452 when Pope Nicolas the V permitted rent-charges in Aragon and Sicily on the basis of “census personalis.” If it was permissible in these two countries, it could be permitted in others two. And the scholastics admit the general permissibility of rent-charges of “census personalis” basis. Thought it was again prohibited in 1586, the time of Catholic reaction, the prohibition came too late. Besides, this form of credit bargains shrinked in its importance, because the interest and triple contract forms gave a large and easy possibility for investing capital and receiving profit without much trouble.

We see now in what consisted the new turn of the medieval doctrine on usury. The cases which were considered before exceptions from the rule now received a general, unlimited approval, which strictly speaking excluded any acception of the former scholastic principles as valid. But in spite of that these principles were not repealed. It created, no doubt, an ambiguous situation in the views on usury at the close of the 15th and during the whole 16th centuries. And to understand what during that time was the relation between the old but unrepealed principles and the new general approval of usurious practice, we have now to acquaint ourselves with an illuminating historic fact.

In 1553, Albert V the King of Bavaria, issued a new civil code, where charging for the use of money was generally permitted, if it did not exceed 5% which was considered the average rate. This example was followed by other three Protestant States, Saxony (1572), Mecklenburg (1572), and Brandenburg (1573). But when William, Albert’s successor, occupied the throne, he with his strong Catholic inclinations fell in doubt about the morality of this permission of usury, and after seeking in vain a decided answer from the native theologians and scholastics, laid the question in 1580 before the Pope Gregory XIII. The question was whether it was permissible for A to charge a regular rate of interest from B, the persons contracting being any persons and the use of money loaned being unspecified.

The answer was that such bargain was usurious and unpermissible, because the use of money could not be subject for charges. But this did not mean general prohibition of charging the average rate of interest. The bargain would be permissible if it would take one of the three forms approved by the scholastics. It should be either rent charges (on clusus realis in / ersondlis)a, or it should be a triple contract, or it should be legitimate interest on basis of “lucrum cessans / generally assumed). Accordingly William repealed the law and in 1588 issued a new law where usury was generally prohibited, but these three forms of credit bargains were permitted.

Now this answer may seem to us a splitting of hair twist north and northwest. But it was a practical difference to the church between permitting usury generally in any form, and admitting only certain forms. A general permission of usury meant allowing the problem[20] entirely from the control of the church. But usury practiced in certain approved forms was practically and logistically subject to a control by the church, which could find in this and that particular case the circumstances are forming an exception from the generally assumed “burum cersans”a or “census personalis” or “triple contract.”

This shows us clearly the relations between the scholastic principles and the late practice. What before was exception, now became a rule; what was before a rule now became an exception. The principle was unrepealed because it was the basis of the church-regulation of usury. The church acknowledged that the cases of interest, rent-charges, commenda could be treated as general grounds of usury; but the old principle of sterility and perishability of money still worked, though limited to cases of exception, and this was the reason why the Church could not admit the general permissibility of usury in any form. A repeal of the principle would have meant the full acception of an opposite doctrine: that the money is productive and durable. This could not be admitted, and the old scholastic doctrine remained untouched, though in the practical application it shrinked down to a cover a kind of exceptions, which limits the general rule.

This was the last phase of the medieval doctrine or usury. It began in the 3rd century as an idealistic, sweeping condemnation of usury of any kind, in any case. And the idealistic purity of the condemnation was accompanied by prohibition of usury [to] the clergy. During the Dark[21] period, usury was not discussed or investigated, but the views of the Chruch-fathers found full realization in the legislation of Western duroya, where usury was prohibited absolutely. With the rise of new economic conditions, the restatement and proof of the principles concerning this problem, became necessary and in writings of T. Aquinas and his followers of the 14th century the medieval doctrine of usury formed the fullest expression. In the same time, the forms of usury in real life were investigated and admitted as specific exceptions from the rule. But the further development of economic life pressed towards full recognition and though the principles of the doctrine remained unrepealed, their importance shrunk to this of an exception, and in consideration of practical forms of usury, the old exception were admitted as generally valid and just.