Liberalism and Usury

The liberal creed, not very long ago the standard of religious, political, and social orthodoxy in Europe and America, is now held in its entirety by few. During the greater part of the nineteenth century it held undisputed sway. Learned professors taught its dogmas in the universities; critics took them for granted in their estimate of new productions in all the departments of learning; politicians assumed their truth as the basis of the laws which they enacted and the political measures which they adopted. Then sometime after 1870 a change began to set in. The appearance of socialism like a black cloud on the horizon, the open discarding of almost all moral restraint by large and increasing numbers, the frank avowal of hedonism as the only end of human existence, the squalor, the physical and moral hideousness of our large centers of population, all these causes began to produce their effect on thinking minds. Could this be the right road of progress after all? Were the doctrines and ideals which had led to these things founded on truth and in reality? Were the dogmas of liberalism so certain and self-evident after all? To put such questions was to shake the glittering but unstable edifice of liberalism to its foundations. It soon became clear that the imposing structure was for the most part built up of no more solid materials than lath and plaster platitudes, and its occupants began to abandon it in streams. Even those stalwarts who refused to abandon the rickety dogmas of liberalism altogether, found themselves under the necessity of re-interpreting them and accommodating them to the changed conditions of the times.

The present seems a suitable opportunity for studying this remarkable movement in human history. To trace in outline, at least, some of its features will be interesting and not without instruction. I propose in this paper to take the subject of usury.

From time immemorial usury and usurer have been ill-sounding terms. The old civilizations of Babylonia as well as those of Greece and Rome had found it necessary to make usury laws. Philosophers, quietly studying the matter in the dry light of reason, had come to the conclusion that usury was a practice most contrary to nature. The Old and the New Testament condemned it. The Christian Church declared whoever denied that usury is a sin to be a heretic. The civil legislation of all Christian nations agreed in prohibiting and punishing it. But this consensus of opinion among the wisest and the best men who had ever lived was quite sufficient to grate on the liberal mind. The very fact that the doctrine was old, traditional, and universally accepted, made it repugnant to the liberal creed. In his celebrated letters on Usury, Bentham lays down the proposition “ that no man of ripe years and of sound mind, acting freely and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain in the way of obtaining money as he thinks fit: nor (what is a necessary consequence) anybody hindered from supplying him, upon any terms he thinks proper to accede to” (p. 2). In so many chapters of his book Bentham discusses all the reasons that the wit of man ever devised for restraining men’s liberty from agreeing to pay what interest they liked for a money loan. He triumphantly refutes them all. Neither the prevention of the crime of usury, which indeed is only a bad name given to a quite laudable transaction, nor the prevention of prodigality, nor the protection of indigence, nor the protection of simplicity, affords rational grounds for usury laws. According to Bentham such laws are not only ineffectual: they are positively mischievous, inasmuch as they raise the rate of interest and thus increase the difficulties of the borrower. The historical prejudice against usury is readily explained as the fruit of envy and malice, for the spendthrift has ever been the favorite of mankind, if not of fortune, while one who saves and looks after his property has ever been unpopular. The celebrated passage in which Aristotle showed that money is barren is treated by Bentham with light banter and pleasantry. Bentham’s Defence of Usury was published in 1787 and began slowly to produce its effect. By the middle of the next century it had so changed the opinions of lawyers, legislators, and business men, that in the year 1854 the usury laws were abolished in England. Most of the Continental nations quickly followed suit, and the view which

educated men generally took of the question was expressed with fitting conciseness and cocksureness by Lecky in his History of European Morals. He there writes: ‘ When theologians pronounced loans at interest contrary to the law of nature and plainly extortionate, this error obviously arose from a false notion of the uses of money. They believed it to be a sterile thing, and that he who has restored what he had borrowed, has canceled all the benefit he received from the transaction. At the time when the first Christian moralists treated the subject special circumstances had rendered the rate of interest extremely high, and consequently extremely oppressive to the poor, and this fact, no doubt, strengthened the prejudice; but the root of the condemnation of usury was simply an error in political economy. When men came to understand that money is a productive thing, and that the sum lent enables the borrower to create sources of wealth that will continue when the loan has been returned, they perceived that there was no natural injustice in exacting payment for this advantage, and usury either ceased to be assailed, or was assailed only upon the ground of positive commands.”¹

¹ History of European Morals, i., p. 94.

It may be remarked in passing that if the sterility of money is an error, it was an error which was not shared by theologians alone. Philosophers, statesmen, lawyers, and the great bulk of mankind in general, were all on the same side. Lecky had no right to single out the theologians for his condemnation. But the reference to political economy is of most interest to us at present. “The root of the condemnation of usury,” says Lecky, without a shadow of doubt on the matter, “was simply an error in political economy.” Like a good liberal, Lecky invokes the dogmas of political economy; anything which is contrary to them cannot be sound. However, since Lecky wrote, this particular dogma of the political economy which was then in vogue has been exposed to many a rude shock from several different quarters. The historical school of political economists, represented in England by such men as Professor Ashley and Dr. Cunningham, has pointed out that, although the modern conditions of industry and trade may make it perfectly reasonable to charge and receive interest on a loan of money, it does not follow that it would be reasonable under all conditions. On this point it will be of interest to quote the words of the present Lecturer in Economic History in the University of Oxford:

With our modern knowledge and experience [writes Mr. L. L. Price], we think it foolish and mischievous to prescribe a legal maximum rate of interest, beyond which no one may legally lend or borrow. We argue that the effect of such a law is not to prevent the needy man from borrowing at a higher rate, but to make him pay still more, to compensate the lender for the risk which he runs of being detected by the law, and losing both interest and principal. We point to the means by which such laws could be evaded, and we contend that it is better to leave matters to the ordinary market influences, making stringent provisions, and devoting our efforts to the enforcement of these provisions against violence and fraud. And so we pass an unqualified condemnation upon the usury laws.

But if with such an historical economist as Dr.

Cunningham in his Growth of English Industry and Commerce, or Professor Ashley, in his Economic History, we shift our standpoint, and go back in imagination to the state of medieval society, and supply the circumstances of historical fact amid which these laws were enacted, we begin to qualify our condemnation. We see that there was no such opportunity for the investment of capital as there is now, and that the possessor of a large sum of money could scarcely apply it to any productive enterprise or use it himself in such a way as to realize a profit. If then he lent it, and the security were good, and the money repaid, he rendered a service to another man, but himself sustained no loss. Nor was it the prosperous who would borrow, but the poor in distress, to relieve whom was the Christian duty of the rich. To ask then for more than the simple repayment of loans appeared to be extortion, and plainly immoral.²

² Political Economy in England, p. 131; ed. 1907.

This is very different from the tone of Lecky. The outlook of the Oxford Professor is wider, and consequently his judgment is more tolerant. But an attentive consideration of the facts will show us how well founded this tolerant judgment is, and enable us to be still more tolerant. Although, of course, money existed in the Middle Ages, it was comparatively scarce and formed but a small portion of the national wealth. Landed property was by far the most important form of wealth; personalty, which now far exceeds realty in value, was then almost a negligible quantity. Municipal law regulated the succession to landed estate and imposed on it the chief part of the public burdens of the state. Personalty was too insignificant to attract the attention of the revenue officers of the crown, and of the civil lawyer, and accordingly it fell under the jurisdiction of the Church. This seems to be the explanation of the remarkable dichotomy which is observable still between the English law of realty and of personalty. But money was not only scarce in the Middle Ages; its functions were restricted to providing a measure of value and a ready means of exchange. As yet it scarcely existed as capital, capital being taken to mean a stock of money which can be readily applied to different productive enterprises which offer an opportunity for gain. Especially in the country parts a natural economy still prevailed in England in the thirteenth century. The population was fixed to the soil and obtained a livelihood from the produce of the small holdings which it held of the lord, or from rations distributed by him in consideration of services rendered. The great households lived on the produce of their estates, and when the produce of one estate was exhausted they moved to another. Even in the towns trade was fettered by all sorts of laws, customs, and regulations. It was organized in gilds subject to strict prescriptions as to the conduct of business and as to the number of journeymen and apprentices who might be employed. The master-workman had indeed his necessary stock of implements, but the material on which he worked was often supplied by his customers. The board, lodging, training, which his apprentices received in the master’s house, and their hopes of succeeding to the business in due time, almost dispensed with the need of capital for wages. Machinery, of course, which

3 W. Cunningham, Growth of English Industry, I., p. 244 (1905).

brought about the industrial revolution a century ago, was still in the womb of the future. As Dr. Cunningham writes: “In dealing with the Christendom of earlier ages we have found it unnecessary to take account of capital, for, as we understand the term in modern times, it hardly existed at all. In the fourteenth and fifteenth centuries we may notice it emerging from obscurity, and beginning to occupy one point of vantage after another, until it came to be a great political power in the State.”⁴

⁴ Western Civilization, ii., p. 162 (1900).

But if the functions of money in the Middle Ages were almost confined to furnishing a measure of value and a medium of exchange, if it hardly at all, or only by way of exception, existed as capital, the only valid reason for exacting interest on a loan of money was necessarily something extrinsic to the loan itself. If risk was incurred by lending the money, or if there were loss to the lender because he was obliged to withdraw money from a profitable enterprise in order to make the loan, the lender of money was of course justified in exacting interest for his loan. He was not bound to benefit his neighbor with loss to himself, except when an alms was due out of charity; it was only right, and acknowledged as such by everybody, that the borrower should recoup the lender for any loss that the latter incurred by making the loan. But if the lender incurred no such loss, if the money would lie idle and useless in its owner’s coffers unless it were lent, and if it was as safe or safer in the hands of the borrower and sure to be restored at the time agreed upon, then there was no ground for demanding interest on a loan. The money would be borrowed to discharge a debt, to pay a contribution levied by the overlord, to pay a fine, or perhaps to purchase wine or some other article of luxury; the borrower made nothing by it: the only functions of money as yet were its uses as a measure of value and a medium of exchange. It passed out of the hands of the borrower in fulfilling these functions; he derived no profit from its use; it was what canonists called it, a fungible, a good consumed as far as its then owner was concerned in the very first use of it. There is no ground for charging interest here. The price of a good which is consumed in the first use of it is the price of that use. Professor Cassel writes: “ All economic goods may be divided into two categories, those which satisfy our wants in being consumed at once, and those which afford a series of useful services before they are worn out. Food is an instance of the former category, houses of the second. This line of subdivision is one of the most fundamental in economic science. The price paid for an article of immediate consumption is of course the same as the price paid for the use of this article. This is not so in the case of an article belonging to the second category. The price paid for the single useful service it affords is one thing; the price paid for the article itself is quite another thing.”⁵

⁵ The Nature and Necessity of Interest, p.

Inasmuch then as money in the Middle Ages was not yet a form of capital (an instrument for the production of wealth) ; inasmuch as its only functions, speaking generally, were to serve as a measure of value and a medium of exchange, and no profit was as a rule made on a money loan by the borrower, the Church was quite right in teaching that in these circumstances there was no justification for taking interest on a loan of money ; that to do so was to commit the sin of usury.

86 (1908).

But, it may be said, the Church’s action in this matter put a restriction on trade and hindered the development of commerce. In reply to this common objection it may be said that it was not the Church which imposed the restriction, but natural justice and fair dealing. Justice and fair dealing are sometimes a restriction on trade nowadays, but nobody thinks of blaming the magistrate for requiring the rules of justice and fair dealing to be observed by traders.

Beyond this it may be doubted whether the laws against usury were in fact any great restraint on trade. Trade was then in the hands of special gilds, or companies, largely confined to towns and occasional fairs, and hemmed in on all side by laws, customs, and jealously guarded privileges. Ordinary people had no loose capital to employ in trade, and if they had had it, gentlemen would never have demeaned themselves so far as to become hucksters for gain. Any one who had capital and had the necessary status in the appropriate gild of his town would find no difficulty in employing his capital by entering into partnership with others in some mercantile enterprise, or employing an agent to trade for him, or embarking in trade on his own account. The Church made no difficulty about profit being gained in trade if only the trade were honest. It may then be safely asserted that the usury laws imposed no undue restrictions on trade.

One of the chief differences between the Middle Ages and modern times is that money has become capital in the interval. Some would say that this is the fundamental difference between the Middle Ages and our own times, and the cause of all other differences. No precise date can be assigned for the beginning of the capitalistic age. As Dr. Cunningham says: “It would be still more hopeless to try to treat the intervention of capital as an event which happened at a particular epoch, or a stride which was taken within a given period. It is a tendency which has been spreading with more or less rapidity for centuries, first in one trade and then in another, in progressive countries. We cannot date such a transformation even in one land; for though we find traces of capitalism so soon as natural economy was ceasing to be dominant in any department of English life, its influence in reorganizing the staple industry of this country was still being strenuously opposed at the beginning of the present [nineteenth] century.”⁶

⁶ Western Civilization, p. 168.

Whenever the change took place, money is certainly capital now, and one of its principal forms. Any one who has saved a sum of money finds no difficulty nowadays in employing it productively, innumerable investments of all sorts compete for the money of the capitalist, and little or nothing can be done without its aid. The whole world lies helpless in the toils of Moneybags, as the socialist bitterly complains.

Will the fact that in the conditions of modern life money has become capital serve to explain and justify the taking of interest on a loan of money? The socialists angrily deny it. They maintain that Aristotle and the Christian Church were perfectly right when they condemned interest and usury as contrary to nature. Money, they say, is always and essentially barren. All wealth is produced by labor, as Adam Smith, Ricardo, and the classical school of economists, taught. The classical school of economists, however, wrote in favor of the moneyed classes, and they carefully abstained from drawing the obvious conclusion from this fundamental principle of modern socialism. If labor produces all wealth, then all wealth is the fruit of labor and belongs to the laborer by natural justice. The laborer indeed needs capital, and to get it he is obliged to have recourse to the capitalist, who takes the opportunity to rob him of a portion of the fruit of his toil. The capitalist as such does not work; the money which he lends produces nothing; all the produce is due to labor. The capitalist would obtain all that is due to him if his loan without interest were paid back to him at the time agreed upon. The laborer produces more than is absolutely necessary for his support by working long hours and exhausting his strength; he thus produces surplus value; but instead of enjoying all the fruit of his labor himself, as in justice he should do, he is compelled to hand over the surplus value to the capitalist to pay interest on his loan. The capitalist then is nothing better than a robber of the worst type; he lives on the plunder of the poor.

Anti-socialists have no difficulty in showing that this reasoning is utterly fallacious. The fundamental principle that labor is the only source of wealth is false. Labor is indeed one of the sources of wealth; but it is not the only nor the chief source. Those commodities which can be produced in any quantity at will by common labor do indeed tend to gravitate in value toward the cost of the labor which produced them; but beyond this it is impossible to go with the labor principle. Land, mines of all sorts, forests, diamonds and precious stones, works of art, scarce objects of value, patent goods, have a value altogether out of proportion to any labor that may have been spent on them and independent of it. Even in those goods which to some extent illustrate the partial truth of the labor principle, the price is seldom an exact equivalent of the cost of the labor bestowed on them. The fluctuations of supply and demand are constantly tending to disturb the equilibrium.

Machines and other products of inventive genius are not merely crystallized labor, as Marx and the socialists contend. They are means by which the forces of nature are subdued and harnessed and made to labor for the benefit of man, multiplying the fruits of his toil twentyfold or a hundredfold. The work done by a steam-engine on the railway is not merely the reproduction of the labor bestowed on its manufacture plus the labor of the engine-driver and the stoker: the steam-engine is an instrument by means of which the energy stored up in coal and steam is captured and made to work in the service of man.

As Mr. Mallock says, it is not merely crystallized labor; it is crystallized mechanics, crystallized science, and crystallized inventive genius, working with the forces of nature.

Although the socialist reasoning is unsound and fails utterly on its constructive side, it has served to discredit the classical political economy from which source it derived its fundamental principle. Furthermore it has compelled anti-socialists to examine more deeply into the grounds of interest with a view to its explanation and justification. It has been ‘found that it is by no means an easy task to explain how capital produces interest, and to justify that interest. Böhm-Bawerk, the celebrated Austrian economist, after many years of study, wrote two books on the problem — Capital and Interest and The Positive Theory of Capital. The first is an exhaustive history and criticism of the numerous and varied theories that have been advanced in explanation of the matter, and the second contains a lengthy exposition of his own view. After an interesting historical account of the canonist doctrine on usury, Böhm-Bawerk discusses the modern theories, grouped under four heads: the Productivity, Use, Abstention, and Labor or Exploitation theories. We have already seen something on the last head; a word must now be said on the others.

The production of wealth, or of economic goods, or of those material conveniences which meet our wants and have an exchange value, is commonly said to be the result of the action of three factors — land, capital, and labor. The produce is due to the activity of these three factors, and so it is only equitable that a share in the distribution of the product should fall to each. Rent thus goes to land; wages to labor; and interest to capital. That this happens in fact is of course a matter of daily experience; but according to Böhm-Bawerk it does not explain the phenomenon of surplus value. The natural fertility of land aided by labor certainly produces economic goods; a share of the produce therefore is in justice due to the owner of the land and to the laborer. But what does money used as capital produce? Even if it aids in the production of goods, it does not follow from this that it produces values, much less surplus value, and the emergence of surplus value is the phenomenon to be explained. Whatever value the product has is due, says the Productivity theory, to the factors of production. Two parts are due respectively to land and to labor; the third is due to capital. But all the value that there is in this third portion of the product was already in the capital when it was applied to production. The productivity of capital then cannot explain the emergence of surplus value in the shape of interest on capital.

The Use theory is a modification of the Productivity theory, and it asserts that interest is due to the use of capital. This theory fails to recognize the great economic fact, insisted on by the Schoolmen, and the foundation of the canonist doctrine on usury. Capital has no use beyond its consumption. When the borrower has paid for its consumption or use, he has paid for the capital; and when he has paid for the capital, or stock of money, he has paid also for its use. Böhm-Bawerk is fully conscious that the prejudices of most modern economists are against him in this matter. “It is indeed,” he says, “essentially the same question as was in dispute centuries ago between the canonists and the defenders of loan interest. The canonists maintained that property in a thing includes all the uses that can be made of it; there can, therefore, be no separate use which stands outside the article and can be transferred in the loan along with it. The defenders of loan interest maintained that there was such an independent use. And Salmasius and his followers managed to support their views with such effectual arguments that the public opinion of the scientific world soon fell in with theirs, and that to-day we have but a smile for the ‘shortsighted pedantry’ of these old canonists. Now fully conscious that I am laying myself open to the charge of eccentricity, I maintain that the much-decried doctrine of the canonists was, all the same, right to this extent — that the independent use of capital, which was the object in dispute, had no existence in reality. And I trust to succeed in proving that the judgment of the former courts in this literary process, however unanimously given, was in fact wrong.’ 7 Böhm-Bawerk goes to the roots of the question and shows conclusively the truth of his contention that the scholastics on this point were certainly in the right. The Abstention theory, worked out by Senior and others, looks upon interest as the reward of abstaining from the immediate consumption of one’s wealth. Capital is the fruit of saving; to save I must abstain 1 Capital and Interest, p. 215.

from immediate enjoyment; this abstention deserves compensation, which it receives in the form of interest on the capital devoted to production. Lassalle and the socialists poured ridicule on the idea of the abstinence of the capitalist. The idea of a Rothschild or a Carnegie, who cannot consume their wealth with the best intention in the world to do so, and who yet deserve reward for their abstinence, was too ridiculous in socialists’ eyes. Böhm-Bawerk, however, prefers this theory to any of the others, and indeed it is closely allied to his own. That in brief consists in this. The problem of interest is a problem of value, and value depends upon facts of psychology, upon the wants and estimates of men who desire the satisfaction of those wants; but it is part of man’s nature to esteem future goods less than present goods of the same sort and quality; so that $100 possessed at present is equal in value to $105 a year hence. Therefore in charging five per cent. interest on the loan of $100 for one year the lender is merely demanding an equivalent in value for his loan. Böhm-Bawerk’s criticism has had a great effect on modern economic thought; but his own view has not met with anything like general acceptance. Objections to it have been raised on the ground that it is by no means new as Böhm-Bawerk seems to suppose, and that it explains nothing. Granted that in common estimation $100 of cash in hand is worth $105 to be paid a year hence, what reason can be assigned for this common estimation? It does not seem to be an ultimate fact of human nature. A bird in the hand is ordinarily indeed worth two in the bush; but this is because of the uncertainty whether the two in the bush will ever be in the hand. If the birds were securely fixed in the bush by quicklime so that they could be taken at pleasure, two birds in the bush would be worth two in the hand, perhaps even more under certain circumstances. Similarly it is the element of uncertainty, or present need, or a good opportunity for immediate and profitable investment, which makes $100 in possession worth $105 a year hence. If these elements are excluded it is quite conceivable that in certain circumstances common estimation would consider $99 to be paid a year hence a fair equivalent for $100 of present money. The possibility of the rate of interest sinking below zero, and the depositor having to pay the banker for keeping his money safely for him, is recognized by economists of standing. Böhm-Bawerk, with other economists of the Austrian school, adopted the theory of marginal utility to settle the value of commodities. In substance the theory amounts to this. Prices of commodities depend on subjective valuations of buyers and sellers from first to last. A cobbler, for example, has made a number of pairs of shoes, of which some are for sale. What will be the price per pair? He wants some for his own use and for the use of his family; the subjective value of the pairs of shoes necessary to supply these wants will be very high. A change of shoes is desirable; but still a second pair will not have such subjective value as the first pair has. Then in descending scale of subjective value a third pair may be desirable to supply the place of one nearly worn out, and so on to the last pair, the pair that the cobbler

could most easily do without. The utility of this last pair of shoes is the marginal utility, and according to the theory which we are discussing, it settles the subjective valuation of a pair of shoes for the cobbler, so that he will sell a pair at that price if he cannot get a higher, but he will not take a lower. Similarly, a buyer of shoes has his scale of subjective valuations, and he will not give more than the maximum among them. Market prices are the equilibrium established between the opposing desires of buyers and sellers, and they are fixed by competition somewhere between the highest valuations of the buyers and the lowest of the sellers. This theory of prices is being attacked in England, France, and Germany, as unreal and as not agreeing with facts, as well as for being too subjective and too individualistic. Many writers who are not socialists maintain that exchange value supposes a constituted society of men, and that it is the social estimate of society which is the cause and the measure of exchange value. This is precisely the doctrine of the common estimation, the standard of prices according to the Scholastics, rediscovered by modern economists.

The whole situation is one of great interest for the theologian. He sees that not only England, but Austria, Germany, and other Continental nations have reverted to usury laws in less than fifty years after they had discarded them; some main elements in what we may call the political economy of the Catholic Church are being brought back with honor from the ignominious exile into which they had been thrust by the liberal school. The dogmas of that school are decried and reprobated not only by socialists, but by the most accredited economists. Will the canonist doctrine on usury come to be generally recognized again as true? We have no hesitation in saying that there is every prospect of it, that in fact this is largely the case already, but that ignorance of what the real canonist doctrine was prevents the general recognition of the fact. The substance of the canonist doctrine on usury consisted in the assertion that per se it is against justice to demand a price for a money loan over and above the restitution of the loan itself. In the matter of money it is not possible to distinguish the price of the substance of a loan and the price of its use, as it is possible to distinguish the price of a house and the price of a lease of the same house. While insisting on this the canonists readily admitted that there were certain extrinsic titles for exacting interest on a loan of money. In other words, they taught that circumstances may justify interest on a loan which in other circumstances would be unjust. This is quite a common opinion among recent economists, and it has been adopted and developed by such an authority as the American economist F. A. Walker. Modern capitalism seems to be such a circumstance. Nowadays a man may readily borrow $5000 without anything passing between lender and borrower besides a piece of paper. With this loan the borrower can easily purchase land, machinery, shares in commercial or industrial companies, or other agents of production where the distinction between the value of the substance of the good and the value of its use and product is quite valid and

legitimate. Money thus used is capital, and it represents, and is in modern times readily exchangeable for, all sorts of productive goods. Money then used as capital is virtually productive, and for all practical purposes it may be looked upon as a productive good itself. As Professor Cassel says: “The most important achievement hitherto obtained by the discussion, which has been going on for so many centuries, is that the question, For what is interest paid? may now be regarded as definitely settled. It is stated, once for all, that interest is the price paid for an independent and elementary factor of production which may be called either waiting or use of capital, according to the point of view from which it is looked at.”5 If this be conceded, and I think that in the circumstances of the modern capitalistic world we need have no difficulty in conceding it, the question of usury is settled for the theologian.

8 Nature and Necessity of Interest, p. 67.