How Do We Recognize Usury?

A brief excursus on a deceptively simple question

First of all, apologies for the long delay in posting; this has not been a great year for my writing routine, for a number of personal and psychic reasons. I may continue with the main numbered series at some point, but since I’m still wrestling with some of the research, I’ve decided to post some scattered thoughts on another foundational aspect of my research programme.

What, exactly was prohibited by medieval authorities under the name “usury?” This is a harder question to answer than one might first suspect. I know many of my readers are familiar with the problem space laid out by philosophical archaeology or political theology, but may not be especially conversant in the conceptual terminology associated with the study of money and finance. These readers might be surprised to learn that the reader who comes to this blog intimately familiar with existing histories of money and finance may not be much better off.

Historical writing that touches on the prohibition of usury has long been marked by confusion and disagreement over the question of what ‘counts’ as usury—a confusion that mirrors the failure to find consensus that characterizes the theological debates on which it is largely based. The nature of this confusion is perhaps best illustrated by the tendency among historians to treat almost all profit-bearing financial instruments of the period as if they amounted to attempts to circumvent the ban or to conceal the pursuit of usury in disguised contractual forms. In recent decades, for example, it has become something of a commonplace to introduce two of the most important instruments of the later Middle Ages—annuities and bills of exchange—by alluding to the mysterious character of the fact that they did not fall afoul of the prohibition. Often, historians will go so far as to describe both instruments as officially sanctioned forms of usury—differentiated from contracts explicitly understood to be usurious solely by the church’s willingness to look the other way. It is impossible to understand what was meant by the claim that usury can be defined as a ‘sale of time’ without understanding why it was that the very theologians who argued for this definition were also the ones who insisted that neither annuities nor exchange banking fell under its ambit. Clearly, some disambiguation is in order.

When taking up the question of usury, theologians and sermonists took their point of departure from canon law—more specifically, from Gratian’s Decretum. Crucially, the Decretum ties its technical definition of usury to a specific class of financial contract: the mutuum, or consumption loan. As treated by Roman civil law, mutua are loans specifically involving fungibles, or goods intended to be consumed in use—goods like wheat, barley, or money. A mutuum thus differs from a locatio, or ‘lease’ in respect of the fact that what is returned by the borrower is not the specific kernels of grain or the specific coins initially handed over by the lender, as these were borrowed in order to be eaten or spent. Instead, what is expected in return is a replacement of the same kind, grade, and amount—wheat for wheat, barley for barley, silver for silver. Strictly speaking, then, usura occurs when one party lends money to another in a mutuum and seeks “more than was given” or “anything above and beyond the principal” in return.

Because it depends so essentially on the character of a loan, one of the most common ways to gloss this definition in a way that renders it intelligible to modern audiences is to describe it as a ban on interest. This characterization, however, is complicated by the fact that the English word ‘interest’ translates a Latin word—interesse—that enters into the scholastic discussion of usury precisely to pick out fees a lender could legally charge a borrower over and above the principal. “Interest,” in other words, enters into the medieval lexicon precisely to pick out fees that are, by definition, non-usurious. Because of this, medieval and modern ‘interest’ are false cognates. What medieval lawyers and theologians called ‘interest’ we would more readily refer to as ‘late fees;’ they were distinguished from usury by the fact that they were not expected by the lender as part of the normal course of repayment, but would arise only if a borrower failed to repay the principal by an agreed-upon date. Precisely because of this distinction, then, it is tempting to suggest that just as what they called ‘interest,’ we call ‘late fees,’ they gave the name ‘usury’ to what we call ‘interest.’ But insofar as ‘interest,’ in our contemporary financial lexicon, has become a term that can refer to any price paid for the use of money, this is simply not the case—at least, not quite. What was prohibited under the name usury would certainly fall under the umbrella of what we refer to as interest, but it covers only a subset of what we call by that name today.

In a forthcoming chapter for an edited collection, (sorry I can’t link it here, as it’s not out yet!) Colin Drumm points out that in order to understand why ‘interest’ is too broad a term to translate ‘usury,’ we need to register one of the most glaring differences between medieval monetary institutions and our own—namely, the fact that the former recognized a legally defined distinction between ‘money’ and ‘credit.’

For us, of course, this is a distinction that does not make much of a difference. Contemporary financial institutions are arranged so as to guarantee the truth of the claim that credit is money. Indeed, this arrangement has been so successful that in recent decades, it has become fashionable to insist that the claim that credit is money is, in fact, reversible—that money is, most basically, a form of credit. David Graeber’s Debt: The First 5,000 Years and Christine Desan’s Making Money: Coin, Currency, and the Coming of Capitalism, two of the most widely-read histories of money written in the last two decades, both argue that money in general—not just bonds and bank deposits—can be understood as essentially a form of IOU. Money, in other words, is always and everywhere reducible to ‘inside’ or ‘endogenous’ money, an asset that corresponds to a liability on someone else’s books. At the periphery, money can be created by banks and other private actors, as accounting assets balanced by liabilities that net to zero. Both writers argue that this kind of peripheral money creation, however, is made possible by the fact that these debts are denominated in a unit of account issued by a stakeholder or political center—in contemporary terms, the state. The state, on this story, issues its unit of account to private actors in recognition of services rendered to it. This unit is accepted and valued by others because it represents a corresponding liability on the part of the state—prototypically, the state’s liability to accept this same unit and extinguish its citizens’ obligations when taxes come due. If this is correct, then it implies that money itself is, on some level, a credit instrument, because it represents a liability on the part of the center. It also implies, as a corollary, that any profit drawn from a purely financial transaction can be rewritten as a form of interest, at least in the last analysis.

The advantage of this approach—which has crystallized over the last several decades into a loose family of heterodox economic schools collectively referred to as ‘neochartalism’—is that it explains many features of modern economies that competing approaches tend instead to ignore or wish away. But while what Drumm has called the “stakeholder myth” may be true enough as a description of our own institutional order, it cannot, as he notes, offer a compelling account of the institutions that dominated the medieval monetary landscape—namely, the exchange fair, the monte, and the mint. This is because the shape of each of these institutions was determined in large part by the legal definition of money in terms of coined gold and silver accounted by weight. In the medieval Mediterranean world, in other words, ‘money’ paradigmatically referred to ‘outside’ or ‘exogenous’ monies, which is to say that it referred to assets whose existence do not imply the existence of a matching liability on anyone else’s books. As Drumm points out, this is a crucial feature of medieval money, because liabilities incurred by the center—prototypically, a king, a duke, or a prince—did not pass for money as the state’s do today. They could not plausibly do so for the simple reason that few assets could be riskier than the liabilities of debtors who possess the power to repudiate their debts at little cost to themselves. For us, living in a world remade by the rise of the modern state and its central banking regime, the distinction between money and credit appears to be a distinction without a difference. But for medieval writers, the difference could not have been more pronounced.

As a result, while medieval theologians, like modern historians, were concerned to uncover examples of contracts entered into in fraudem usurarum or “in trickery of usuries,” they did so armed with a principle that enabled them to distinguish much more clearly than ourselves between consumption loans—even concealed ones—and credit, investment, or finance more generally. And so it is not quite correct to say that “[t]o reject the notion of earnings on time,” as Jacques Le Goff once wrote, “…is not merely to attack the principle of interest but to destroy the very possibility of credit.” What was prohibited under the name usury was, in fact, much more limited, even if its precise boundaries remained open for debate. In order to understand what medieval writers might have meant when they denied that time is money, we would thus not only have to take note of this medieval distinction between money and credit; we would have to take stock of the political and institutional arrangements that enabled its dissolution.