The great relaxation of moral and legal restrictions and prohibitions against trade that permeated the canonists and Romanists in the Middle Ages, unfortunately did not apply to the stern prohibitions levelled against usury. Modern people think of ‘usury’ as very high interest rates charged on a loan, but this was by no means the meaning until recent times. Classically ‘usury’ means any rate whatsoever charged on a loan, no matter how low. The prohibition of usury was a prohibition against any interest charge on a loan.
With one exception, no one in the ancient world – whether in Greece, China, India or Mesopotamia – prohibited interest. That exception was the Hebrews who, in an expression of narrow tribal morality, permitted charging interest to non-Jews but prohibited it among Jews.
The fierce medieval Christian assault on usury is decidedly odd. For one thing, there is nothing in the Gospels or the early Fathers, despite their hostility to trade, that can be construed as urging the prohibition of usury. In fact, the parable of the talents in Matthew (25:14–30) can easily be taken as approval for earning interest on commercial loans. The campaign against usury begins with the first Church council, in Nicaea in 325, which itself prohibited only the clergy from charging interest on a loan. But the Nicene council grabbed on to one phrase of Psalm 14 in the Old Testament, ‘Lord, who shall dwell in thy tabernacle? He that hath not put out his money to usury’, and this was to become the favourite – and virtually the only – biblical text against usury during the Middle Ages. The Nicene injunctions were repeated in later fourth century councils at Elvira in Spain and at Carthage, and then in the fifth century Pope Leo I extended the prohibition to the laity as well, condemning lay usurers as indulging in turpe lurcum. Several local councils in Gaul in the seventh century repeated Leo's denunciation, as did Pope Adrian and several English church synods in the eighth century.
But the prohibition of all usury enters secular legislation for the first time in the all-embracing totalitarian regime of the Emperor Charlemagne. At the fateful imperial synod of Aachen in 789, Charlemagne prohibited usury to everyone in his realm, lay and cleric alike. The prohibition was renewed and elaborated in the later council at Nijmegen in 806, where usury is defined for the first time, as an exchange where ‘more is demanded back than what is given’. So that, from the time of Charlemagne, usury was intensely held to be a special and particularly malevolent form of turpe lucrum, and attempts to relax this ban were fiercely resisted. The sweeping definition, ‘more demanded than what is given’, was repeated intact by canonists from the tenth century Regino of Prum through Ivo of Chartres to Gratian.
But oddly, though the hostility towards usury continued and was indeed greatly strengthened among the canonists, the explicit basis for the antagonism changed considerably. During the first centuries of the Christian era, usury was shameful as a form of avarice or lack of charity; it was not yet considered a vicious sin against justice. As commerce began to revive and flourish in eleventh century Europe, indeed, denouncing interest-taking as a form of lack of charity began to be considered wide of the mark, since charity had little to do with commercial loans. It was the Italian monk St Anselm of Canterbury (1033–1109) who first shifted the ground of attack to rail against usury as ‘theft’. This new doctrine was developed by St Anselm's disciple Anselm of Lucca, a fellow Italian and native of a city with a burgeoning textile industry. In his collection of canons, made about 1066, Anselm of Lucca explicitly condemned usury as theft and a sin against the Seventh Commandment, and demanded restitution of usuries to the borrower as ‘stolen goods’. This expansion of ‘theft’ to a voluntary contract where no coercion was used was surely bizarre, and yet this outrageous new concept caught hold and was repeated by Hugh of St Victor (1096–1141) and by the collections of Ivo of Chartres.
In 1139, the second lateran council of the Church explicitly prohibited usury to all men, laity as well as clergy, and held all usurers to be infamous. The council vaguely declared that the Old and New Testaments mandated such a prohibition, but gave no explicit reference. Nine years later, Pope Eugene III moved against the common practice of monasteries charging interest on mortgages.
Finally, the canon law reached mature form with the Decretum of Gratian. Gratian hammers away against usury with whatever weapons he can find from Psalm 14 to the new view that usury is theft and therefore requires restitution. Expounding on the strict prohibition of usury, Gratian extended it to the loan of goods as well as money, so long as anything is demanded beyond the principal, and he expressly declared that, in such a case, the ‘just price’ was not the common market price but zero, i.e. the exact equivalent of the goods or money lent.
The great decretalist Pope Alexander III might have been inclined towards a free market in other areas, but on the usury question he merely deepened and extended the ban, applying the condemnation to charging higher prices for credit than for cash sales. This practice was denounced as implicit usury. even though it was not explicitly interest on a loan. The third lateran council, presided over by Pope Alexander III in 1179, condemned usury, and excommunicated and denied Christian burial to all manifest usurers. The next pope, Urban III (1185–87), in his decretal Consoluit, dredged up a previously unused citation from Jesus, ‘Lend freely, hoping nothing thereby’ (Luke 6: 35), which from then on became the centrepiece of the theological condemnation of usury as a mortal sin; and not only that: even the very hope of obtaining usury was supposed to be a virtually equivalent sin.
So pervasive was the canonist obsession with usury that Gratian, his predecessors and his successors, largely worked out their theories of sale, profit, or just price in terms of whether or not any particular transaction fell under the dread rubric of ‘usury’. Thus, late twelfth century decretists like Simon of Bosignano in 1179 and the great Huguccio in 1188, maintained the strict prohibition of any interest charged on a loan as usury, while allowing the renting of a good or buying cheap in order to sell dear as not being cases of usury. Huguccio's tortured moral distinction maintained that a commodatum – a rental contract that transferred only the use of a good – was somehow morally very different from a mutuum – a pure loan where ownership was transferred for a time. Charging for a lease, a commodatum was all right because the owner retains ownership and charges for the use of his own good; but somehow it becomes sinful when a lender charges for the use of a good which he no longer (temporarily) owns. Profits on trade, too, could be legitimate and lawful as a reward for risk, but interest on a loan – where the risk is borne by the borrower and not the lender – was always usury.
The later decretalists, attempting to combat practices of merchants in disguising usury in various contracts, pressed on to condemn such contracts as ‘implicit usury’, provided, as we have seen in treatment of sales contracts, that there is no uncertainty on the future price in the minds of buyer and seller. The early thirteenth century canonist Alanus Anglicus declared that if there was uncertainty in such a contract, and buyer and seller stood equal chance to gain or lose, usury did not exist. Providing the first real, if small, loophole in the sweeping prohibition against usury, Anglicus explained that this form of implicit usury could exist only in the mind and could not be subject to legal enforcement. This uncertainty loophole was widened slightly in the Decretals of Gregory IX.
On the other hand, the canonists persisted in cracking down on evasions of the usury ban which the market kept creatively inventing. Contracts providing for deferred payment on a sale were treated with suspicion, and very high prices in such a contract were taken by the canonists to prove intent to commit usury beyond a reasonable doubt. The Decretals also went so far as to condemn creditors charging interest for loans to travelling merchants, even though the canonists realized that the interest was a direct compensation for risks. Although canonists after Innocent IV began to talk of risks justifying profits, so that a profit on risky investments was considered perfectly justified, any interest on a pure loan (or mutuum) was condemned as usury despite reasonably mitigating circumstances.
The usury prohibition was the tragic flaw in the economic views of medieval jurists and theologians. The prohibition was economically irrational, depriving marginal borrowers and high credit risks of any borrowed capital whatever. It had no groundwork in natural law and virtually none in Old or New Testament teachings. And yet it was clung to fiercely throughout the Middle Ages, so that jurists and theologians had to engage in ingenious and artful twists in reasoning in order to make exceptions from the prohibition and to accommodate the growing practice of lending money and charging interest on a loan. And yet the medievalists, especially the later philosophers and theologians, had a fascinating and important point: for what was the moral or economic justification for interest on a pure loan? As we will see, medieval scholastics came to understand full well the economic and moral justifications for almost every aspect of interest charges: as an implicit profit on risk, as an opportunity foregone for making profits on investments, and many others. But why is there still interest charged on a simple, riskless, non-opportunity-foregone loan? That answer was not to come fully until the Austrian School of the late nineteenth century. Where the scholastics were gravely lacking was in not realizing that if interest was paid as well as charged voluntarily, that in itself is sufficient moral justification. And further that there must have been an economic explanation, even though economic science had not yet discovered it.
The first systematic breach in the usury prohibition came with the last of the thirteenth century canonists, Cardinal Hostiensis. In addition to having been a distinguished law professor, Hostiensis was a worldly cosmopolite, having been the ambassador of Henry III to his friend Pope Innocent IV. First Hostiensis reverted to the old milder tradition that usury is uncharitable, but not a sin against justice. Then he listed no less than 13 instances in which the usury prohibition could be broken and interest charged on a loan. One is as surety required by the guarantor of a loan; another that a seller may charge a higher price for a good sold on credit than for cash, provided that there is uncertainty (as indeed there always is) about the future price of the commodity. Another important exception allowed a creditor to write a penalty clause into a loan so that the debtor would have to pay a penalty above the principal if he did not repay on the date due. This of course paved the way for covert agreement on both sides to delay payment so as to allow the ‘penalty’. Another exception was that the creditor might charge for labour which he undertook in making the particular loan.
These were all some form of penalty or special payment. But, in addition, Hostiensis provided the first path-breaking argument for charging a rate of interest on a loan from the very beginning, a charge that does not involve delay or guarantees. This is lucrum cessans (profit ceasing), a legitimate interest charge by the creditor to compensate him for profit foregone in investing the money himself. In short, lucrum cessans anticipated the Austrian concept of opportunity cost, of income foregone, and applied it to the charging of interest. Unfortunately, however, Cardinal Hostiensis's use of lucrum cessans was limited to non-habitual lenders who lend money out of charity to a debtor. Thus lenders could not be in the business of charging money on a loan, even on the ground of lucrum cessans.
Another exception made by Hostiensis also provided an open channel for the charging of interest on loans. He allowed the debtor to give a free gift to the creditor, so long as the ‘gift’ was not required by the creditor. But in that case debtors, in particular Florentine bankers who received deposits, felt obliged to make ‘gifts’ to their depositors, else the depositors would shift their funds to competitors who habitually made such ‘gifts’. The making of a fake gift became an important mechanism in allowing the de facto charging of interest.