Guest Opinion: What's So Bad About Capitalism? Part 1: Usury

Where no wealth is created, no interest can justly be charged

Unwilling to uncover wounds without offering a cure, I propose Distributism.  Being founded upon the social teaching of the Catholic Church and faithful to the historic rejection of usury down through the centuries from Plato and Aristotle to St. Thomas Aquinas and Pope Leo XIII, Distributism does not support the charging of interest on non-productive loans.  Rather, we view capital (together with labor and land) as the means of producing wealth not generating usurious interest payments.

P>EASLEY, SC (Catholic Online) - (Note from Deacon Keith Fournier, Editor in Chief: We are pleased to present another article by Matthew Pelicano. His first, Distributism: Economics Built On Revelation, https://www.catholic.org/business/story.php?id=39782 brought a robust response. Our Mission is to "Inform, Inspire and Ignite". Within that body of teaching called Catholic Social Thought, there are principles for building an authentically human and just society, a culture of life, culture of the person and a civilization of love. The Church does not espouse an economic philosophy. Rather, she proposes the principles which the faithful are invited to use in order to engage in the social mission. We understand that will entail differing viewpoints. We welcome the exchange.)

Capitalism is unsustainable.  In light of the past 18 months worth of dire economic news, this might seem obvious.  However, the repeated attempts to plug the leaks, patch the hull and right the sinking ship of capitalism lead me to conclude that there are many who still believe that the foundations are sound and salvageable.  I disagree.  I contend that capitalism is founded upon shaky economic footings and a failure to recognize and effectively address these foundational flaws will have serious consequences for our country. 

Moral principles alone will not suffice to make the case against capitalism in the broad forum of economic discussion.  We must address economics on its own terms while allowing sound moral principles to enlighten our understanding of man, his dignity and destination. With the next several articles, I hope to demonstrate, in economic and moral terms, many of capitalism's fatal flaws.  In this article we will address the following contention: Capitalism is unsustainable because it is founded upon and employs widespread usury, itself an unsustainable practice.

Merriam-Webster gives the following definition for usury: "an unconscionable or exorbitant rate or amount of interest."  However, this definition is somewhat ambiguous.  After all, who's to say what's "unconscionable or exorbitant?" Clearly, we need a better, more precise definition devoid of ambiguity.  Words such as "unconscionable or exorbitant" only have meaning relative to some norm of propriety and justice.  Justice, being a moral principle, indeed, one of the cardinal virtues, cannot be defined by economics.  Right away we find ourselves in need of a definition guided by moral principles. 

For such a definition we can turn to the Fifth Lateran Council which had this to say: "For that is the real meaning of usury: when, from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense or any risk."  This definition is not only free from ambiguity, it embodies sound economics. How can someone, in fairness and justice, demand profit and gain where no wealth has been produced?  Indeed, how can profit and gain really exist where no wealth has been created?  Regardless of interest rate, then, the practice of usury is economically unsound because it fails to take into account the production of wealth.  If capital produces nothing new in terms of communal or personal wealth, then the charging of interest constitutes the redistribution of the borrower's property to the hands of the lender.  Usury taxes the substance of the borrower rather than the fair share of wealth created in a joint economic venture.  Let's look at an example. 

As a hobbyist, I've developed a knack for brewing beer.  At first, I brewed only for my own consumption. As my friends and family acquired an appreciation for my recipes, I found myself brewing more for others' consumption.  As a result, a friend offers to provide the capital necessary to start our own micro-brewery.  Without his capital, I could not quit my job and devote myself to brewing full-time.  Without my brewing skills, his capital would sit unused and unproductive.  The terms of our agreement are simple: he supplies the $25,000 in start-up costs and I supply the labor and know-how.  In return, we split the profits 50/50.  Should the enterprise be a flop and the beer fail to sell, my friend risks the loss of his capital and I risk the loss of my livelihood.  However, if the venture proves successful and our profits soar to $75,000 annually, then my friend and I each make $37,500 per year and raise a pint to our good fortune and business savvy. 

This seems fair and equitable, even though the terms of our agreement might be further simplified by saying that my friend will charge me a 50% interest rate on all profits.  Fifty percent interest sounds excessive and exorbitant when considered by itself, yet our deal is still fair and equitable.  It all hinges upon the productivity of the loan.  My friend took his share of the produce of his capital combined with my know-how and that makes all the difference.

Let's take a look at another example that illustrates our point. I've fallen on hard times. My business is suffering and I'm unable to make enough to pay my bills and feed my family.  At the end of my wits, I ask my friend for a loan of $360 that would cover my grocery needs for the next month during which, I'm confident, business will return to normal. By definition, this is a non-productive loan, the proceeds of which will be consumed by my family and me.  This is not an investment in a wealth-generating business venture. This is a loan to be consumed (quite literally) in keeping body and soul together for one more month. The terms of our agreement state that I will pay my friend back over the next 12 months at a rate of $30 per month. There is no interest involve; he simply recovers the original loan amount.

Let's change the terms to include interest and see what happens.  Instead of just recovering the original amount of $360, my friend demands 10% for his trouble.  At the end of the 12 month period, I must pay him an additional $36.  This amounts to a transfer of $36 of my wealth, my livelihood, and my substance to my friend's pockets.  This would be usurious.  Despite the comparatively low interest rate involved (10%), the loan was simply consumed and did not create any additional wealth that would justify my friend charging me interest.

This definition of usury - the charging of interest on a non-productive loan - was adopted by the Distributists of the 1920s and 1930s, most notably G.K. Chesterton and Hilaire Belloc. In his Essay On Ususry, Belloc had this to say: "[Interest on a loan] may under some circumstances be a tribute which is not morally due, because it does not represent an extra production of wealth due to the original investment.and the payment of which is therefore not a payment of part profit, but a payment to be made, if possible, out of whatever other wealth the debtor can obtain; and a tribute which, beyond a certain point, cannot even be paid at all, because the wherewithal to pay it is not present in society."

What Belloc meant was that compound interest has a tendency to compound out of all proportion to reality.  Unless interest payments are tied to wealth creation, compounding interest quickly outstrips the wealth needed to cover it.  This is where we find ourselves today.  When the "wherewithal to pay [usurious interest] is not present in society," the result is personal and corporate loan defaults, foreclosures, bankruptcies, financial collapse and an economy in crisis.  "When, from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense or any risk," when interest is charged on loans which produce no wealth, then eventually society will lack the "wherewithal to pay" and not even multi-billion dollar bailouts can right the ship.  This seems obvious and yet capitalism ignores it in favor of the erroneous notion that the "wonders of compound interest" can produce limitless wealth in a finite world.  Because of its dependence upon and widespread employment of non-productive interest, capitalism is unsustainable.

How dependent is capitalism upon usury? 

Commercial lenders take into account many different criteria when considering a loan application: the applicant's income; credit history; ability to recover the loan amount from collateral in the event of default; the soundness of the business plan; the length of time in business; historical profitability; etc.  The lender will assess these criteria and make a decision based upon their "risk appetite."  But if the business venture should fail, the borrower is still held responsible to repay the loan plus interest.  Even though no wealth was produced and any repayment that takes place must come from the borrower's livelihood, substance, or other sources, the expectation is that repayment plus interest be made.

Perhaps the most obvious example of non-productive, usurious lending is credit card debt.  The 2010 US Census showed that Americans have over $886 billion in credit card debt and it's expected to hit $1.2 trillion in 2011. Individual credit card holders carry a balance of $5,100 on average and this is expected to hit $6,500 by the end 2011 (www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics) .  Where does all this debt originate?  According to CardData.com, Americans charged $51 billion worth of fast food to their credit cards in 2006, up from $33.2 billion in 2005.  As Americans we are paying interest on non-productive and, in many cases, revolving loans at an average interest rate in the mid-teens (http://www.indexcreditcards.com/credit-card-rates-monitor/).  This is the very definition of usury and it powers our consumerist, capitalist economy.

The cause of our current economic crisis which includes such complicated investment instruments as credit default swaps (CDSs), collateralized debt obligations (CDOs), and structured investment vehicles (SIVs)  compounded by irresponsible borrowing and aggressive or predatory lending all add up to the realization that capitalism has spawned a frenzied desire to reap where we have not sown.  Easy credit in the form of credit cards inhibits the ability of the lender to know whether capital is used productively or non-productively.  As a result, the expectation is that interest will be charged on all lines and loans, productive or not. The charging of interest on non-productive loans and the taking of profit where no wealth was created capital is unsustainable and capitalism sits squarely and precariously upon its shoulders. 

Unwilling to uncover wounds without offering a cure, I propose Distributism.  Being founded upon the social teaching of the Catholic Church and faithful to the historic rejection of usury down through the centuries from Plato and Aristotle to St. Thomas Aquinas and Pope Leo XIII, Distributism does not support the charging of interest on non-productive loans. Rather, we view capital (together with labor and land) as the means of producing wealth not generating usurious interest payments.  Where no wealth is created, no interest can justly be charged.  Moreover, where no wealth is created, the means to pay interest are lacking.  Any system which ignores this fact fails to recognize reality and is, therefore, unsustainable.

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Matthew Pelicano is the founder of the Distributist Exchange (www.DistributistExchange.com) and owner of Augray Sorn, a web design and content management company.  He has over 12 years experience working in management within the financial and technology industries. He lives in upstate South Carolina with his wife, Jennette, and their three children.

The Distributive Exchange (www.DistributistExchange.com) is a virtual marketplace enabling a network of skilled craftsmen, service-providers, family-owned companies, worker-owned cooperatives and small businesses to provide their products and services to a wider clientele.  The Distributist Exchange exists to bring together those who subscribe to the principles of subsidiarity and Distributism for the furthering of these principles in the most practical of ways: the facilitation of commerce for the support of the family and the good of our nation. 

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