Interest without usury
The literature on usury shows that the range of analytically acceptable explanations of the existence of interest was limited. Each attempt to give an alternative explanation therefore reveals to the moralist that the income perceived by the lender was only due to his negotiation advantage, and had to be viewed as usurious.
The starting point was the widespread idea that for both the lender and the borrower, a present and a future good are not worth the same. “One harms one’s neighbour”, wrote Thomas Aquinas, “when preventing him from collecting what he legitimately hoped to possess. And then, the compensation should not be founded on equality because a future possession is not worth a present possession” (Summa Theologica, IIa-IIae, q. 62, a. 4, resp. 2; see also his disciple, Giles of Lessines, De Usuris, c.9). This was a way to say that although the legitimacy of interest paid on a loan does not depend on the loan itself, it might depend on the harm generated by the loan. Also, when interest compensates the harm suffered by the lender, the operation is not usurious. Extrinsic titles aim, precisely, at identifying this harm.
The same intertemporal framework of the loan contract opens the path to another issue. It is obvious - both for us today, as it was as for medieval merchants, lawyers or theologians - that several intertemporal operations (credit sale or census, for example) stand as close substitutes for an interest loan. Disregarding the possibility of a compensation for the harm suffered by the lender, this would mean that the strict prohibition of usury might be bypassed through a close substitute for an interest loan. Noticeable efforts were devoted to the attempt to identify the conditions under which an intertemporal operation, giving rise to interest, counts as (or doesn’t count as) a usurious transaction.
Anyway, in both cases (the compensation of harm, or an intertemporal operation generating an income), the practical difficulty is the same: how can we be sure that the income gained by one of the partners of the transaction does not result from his superior power in the negotiation?
Extrinsic titles Exterior to the loan contract and providing reasons for a compensating payment, the so-called “extrinsic titles” might be viewed as attempts to account for the harm suffered by the lender, according to its nature. These extrinsic titles, such as poena conventionalis, damnum emergens or lucrum cessans, existed separately from the mutuum, and gave, for each of them, reasons for the payment received by the lender. A general problem linked to extrinsic titles is that although some of them became widely accepted, the harm often remained unobservable, so that the possibility of a usurious transaction could not be totally avoided. The level of acceptation or refusal of the extrinsic title therefore depended less on the nature of the alleged harm than on the trust or distrust on the effectiveness of this harm.
Designed to protect the creditor from a possible failure of the debtor to repay the loan in time, the poena conventionalis stipulated a daily indemnity in case the expiry date was not respected. Through the damnum emergens, the prejudice to the lender was described as his sacrifice, in terms of consumption, in order to keep his money available for lending. The lucrum cessans widened the perspective to the profitable operations which would have to be given up in order to carry out the loan, so that the prejudice was the sacrifice of a possibility of profit.
The damnum emergens and the lucrum cessans make obvious the working of the harmcompensation mechanism. As Noonan (1957: 116) pointed out, these two titles were not really discussed before the mid-thirteenth century (with the exception of Robert of Courςon, who condemned the lucrum cessans; De Usura: 61-3) since they needed, as a prerequisite, a general agreement about the use of the mutuum for a money loan.
Thomas Aquinas, despite showing a certain mistrust - chiefly aimed at the lucrum cessans - clearly stated the principles on which they were founded:In his contract with the borrower, the lender may, without any sin, stipulate an indemnity to be paid for the prejudice he suffers while being deprived of what was his possession; this is not to sell the use of money, but to receive a compensation. Besides, the loan may spare the borrower a greater loss than the one to which the lender is exposed. It is thus with his benefit that the first makes up the loss of the second. (Summa Theologica, IIa-IIae, q.78, a.2, ad. 1)
In spite of an earlier and more general acceptance, the poena conventionalis also illustrates the possibilities for manipulation that the extrinsic titles afforded the lender. This could be done in two different ways. First, the duration of the loan might have been so short that the borrower could by no means pay back in time. Naturally, this practice was clearly condemned, but the fault was not that easy to establish. Second, the lender could increase the indemnity mentioned at the beginning of the contract so that it was higher than the loss he suffered because of the non-availability of his money at the expiry date. Some scholastic authors expressed this last argument quite systematically, such as Raymond of Penaforte who claimed that “if the penalty proceeds from a convention, that is from a common agreement between the parties mentioned in the contract, so that at least the fear of this penalty forced payment at the expiry date, there is no usury” (Summa de Casibus Conscientiae, II, par.5; see also Robert of Courςon, De Usura: 65-7). John Duns Scotus, some 60 years later, was even more precise when writing: “An obvious sign that a penalty is not usurious is the following: the merchant prefers to have his money back at the expiry date rather than the day after, accompanied by a penalty” (In Quattuor Libros Sententiarum, Opus oxoniensis, IV, dist.15, q.2, 18).
The principle of an interest that was both analytically and morally acceptable therefore appeared as an outcome of the discussions on the mutuum and the major extrinsic titles. The emphasis laid on the fact that the interest was a compensation for the specific harm suffered by the lender, and not a product of the loan itself, shows that it might be understood as the opportunity cost of the loan. This opportunity cost is the key to the distribution of the surplus of exchange between the lender and the borrower: after the payment of an interest equal to the cost of opportunity of the loan, the respective situations of the lender and of the borrower have improved.
Naturally, this requires the credibility, for the moralist, of the harm alleged by the lender. In case the fear of a mortal sin was not sufficient to move the latter away from a usurious transaction, this might constitute an evident weakness of the system. This explains the importance granted, in the discussions between schoolmen, to the nature of the harm associated with each extrinsic title. For instance, it justifies the quite general mistrust about the lucrum cessans (when compared to the damnum emergens): not because this kind of prejudice was inexistent, but because it concerns, by nature, professional merchants who are always suspected of taking advantage of their superior power of negotiation. This also explains the poor confidence, even during the sixteenth century, in a loan where the interest paid is supposed to compensate an insufficiently specified harm: the late extrinsic title called carentia pecuniae.
Substitutes for an interest loan Whereas the extrinsic titles added something more to the main loan contract, a complementary possibility for a potential lender to draw an income was to replace the interest money loan by another intertemporal operation for which it was a close substitute.
The difficulty of the problem faced by the moralists came from the ability of the merchants to construct such close substitutes: credit sale, anticipated payment, census, societas, triple contract, mohatra, mortgage, foenus nauticum, bank deposit, etc.
The case of the census, which appeared in the thirteenth century, is significant. Initially, it had nothing to do with a loan since it consisted in the sale of a productive good - land, for instance, or cattle - bought with the products of its exploitation. As such, this is a sale, and apparently the only disputed question concerns knowing how many times the annual product had to be paid for a census. However, if the seller of the census had already bought it for cash from his buyer, he clearly becomes the equivalent of a lender receiving interest. As a simple sale, the census would be licit, as Giles of Lessines (De Usuris, c.9) acknowledged. But alternatively, it could also be the basis of a usurious loan, as Robert of Courςon explained (De Usura: 63).The solution for separating usurious from legitimate transactions in the presence of these kinds of substitutes was to find among them a characteristic which allowed such a separation. Property could be viewed as such a characteristic: in the mutuum, the interruption in property made impossible the receipt of an income by the lender; continuous property might, on the contrary, support a claim for such income. However, the institutional arrangements of the transaction can conceal the reality of the ownership. The societas illustrates this point. In Roman law, this is an association between persons who engaged their labour, money or goods in a profitable operation. The income of each member of the societas depends, naturally, on the issue of the operation. Every modality of sharing was allowed. However, in the Middle Ages, this excluded the modality in which one partner would bear the entire responsibility in case of loss. Robert of Courςon expressed this by writing that “every merchant contracting with another for trading must, if he wishes in particular to profit, show that he participates in the danger and expenses which attend all buying and selling” (De Usura: 73).
This shows that, in turn, the claim for property was not enough to ensure its reality, and that beyond its formal existence, a supplementary characteristic of this property was required in order to consider it as able to produce non-usurious income for the owner.
Robert of Courςon,s reference to the participation “in the dangers” accounts for the commonly held idea that risk-taking was this supplementary characteristic. Furthermore, the general principle was stated by Thomas Aquinas as follows:The one committing his money to a merchant or a craftsman by means of some kind of partnership does not transfer the property of his money to him, but it remains his possession; so that at his [the lender’s] risk, the merchant trades or the craftsman works with it; and he can thus licitly seek a part of the profit as coming from his own property. (Summa Theologica, IIa-IIae, q.78, a.2, obj.5)
A significant expression of the role granted to risk for assessing the legitimacy of a transaction was the well-known decretal Naviganti by Pope Gregory IX:
Somebody lending a certain quantity of money to one sailing or going to a fair in order to receive something beyond the capital, for he takes the risk upon himself, is to be thought a usurer. Also the one who gives ten shillings to receive after a certain time the same measure of grain, wine or oil, though it is then worth more, when one really doubts whether it will be worth more or less at the date of delivery, must not, for that, be considered a usurer. Because of this doubt again, the one who sells bread, grain, wine, oil or other commodities so that he receives after a certain period of time more than they are worth then, is excused if, in lack of a forward contract, they would not have been sold. (Decretales, l5, tit. 19, c. 19, Naviganti)
This decretal is highly questionable (see Mc Laughlin 1939: 103-4 or Noonan 1957: 137 ff.). At first glance, it seems to adopt successively two opposite positions concerning the effects of risk: the first sentence condemns the sea loan (foenus nauticum) while the concluding sentences allow a reduction in price in the case of anticipated payment - and an increase in the case of a credit sale - if the future value of the sold commodity is uncertain. The difference in treatment is large enough to have led some commentators to imagine that the condemnation of the foenus nauticum could have proceeded from an error of transcription by the Pope’s secretary, Raymond of Penaforte.
However, a careful examination suggests more consistent interpretations. The first rests on the expression “is to be thought a usurer” (usurarius est censendus). Usury being a sin of intention, this means that, in the foenus nauticum, receiving an income is not in itself usurious, but an external observer will be far from certain that the lender is not overestimating the risk of the operation to disguise a usurious benefit as a legitimate income.
Such a “moral hazard” interpretation of Naviganti was suggested by Goffredus of Trani (see McLaughlin 1939: 103, or Noonan 1957: 139). Besides this, it may also be noticed that the foenus nauticum is not such a simple operation, where only two states of the world can occur - the freight arrives safe and sound or perishes at sea. Actually, if the freight is intact, the merchant will run another risk when selling it. This last risk is not taken into account in the contract between the lender and his borrower. So that, in the event of the ship not sinking, one party has to assume the entire responsibility if a loss occurs. As the possibility of selling overseas is submitted to the advance of capital which belongs to the lender for the duration of the crossing, there is no reason for this ownership to be transferred to the borrower during the second phase of the operation. In spite of its name, the foenus nauticum is clearly not a loan, but rather similar to a kind of partnership (a societas) which allows common ownership of money invested in a presumably profitable operation. This strictly forbids any partner from escaping, at any moment, from the risk of loss.
This shows the utmost importance of risk-bearing as sign of a lender’s continuous property during an intertemporal operation, therefore allowing the payment of a non- usurious income (see, for instance, the cases of venditio sub dubio, where a real doubt concerns a credit sale or an anticipated payment). Nonetheless, this did not nullify the suspicion concerning the lender’s intention, despite the imaginative conditions imposed by some theologians (see, for example, Giles of Lessines for whom the same doubt should exist for both the lender and the borrower, De Usuris, c.9), or the typical medieval solution of the resort to an expert, a wise man, already advocated by William of Auxerre in the Summa Aurea (De Usura, c.3, q.2).