CHAPTER XII
ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST
In his address as President of the American Sociological Society at the annual meeting, Dec. 27, 1913, Professor Albion W. Small denounced "the fallacy of treating capital as though it were an active agent in human processes, and crediting income to the personal representatives of capital, irrespective of their actual share in human service." According to his explicit declaration, his criticism of the modern interest-system was based primarily upon grounds of social utility rather than upon formally ethical considerations.
A German priest has attacked interest from the purely moral viewpoint.[133] In his view the owner of any sort of capital who exacts the return of anything beyond the principal, violates strict justice.[134] The Church, he maintains, has never formally authorised or permitted interest, either on loans or on producing capital. She has merely tolerated it as an irremovable evil.
Is there a satisfactory justification of interest? If there is, does it rest on individual or on social grounds? That is to say: is interest justified immediately and intrinsically by the relations existing between the owner and the user of capital? Or, is rendered morally good owing to its effects upon social welfare? Let us see what light is thrown on these questions by the anti-usury legislation of the Catholic Church.
Attitude of the Church Toward Interest on Loans
During the Middle Ages all interest on loans was forbidden under severe penalties by repeated ordinances of Popes and Councils.[135] Since the end of the seventeenth century the Church has quite generally permitted interest on one or more extrinsic grounds, or "titles." The first of these titles was known as "lucrum cessans," or relinquished gain. It came into existence whenever a person who could have invested his money in a productive object, for example, a house, a farm, or a mercantile enterprise, decided instead to lend the money. In such cases the interest on the loan was regarded as proper compensation for the gain which the owner might have obtained from an investment on his own account. The title created by this situation was called "extrinsic" because it arose out of circumstances external to the essential relations of borrower and lender. Not because of the loan itself, but because the loan prevented the lender from investing his money in a productive enterprise, was interest on the former held to be justified. In other words, interest on the loan was looked upon as merely the fair equivalent of the interest that might have been obtained on the investment.
During the seventeenth, eighteenth, and nineteenth centuries, another title or justification of loan-interest found some favour among Catholic moralists. This was the "praemium legale," or legal rate of interest allowed by civil governments. Wherever the State authorised a definite rate of interest, the lender might, according to these writers, take advantage of it with a clear conscience.
To-day the majority of Catholic authorities on the subject prefer the title of virtual productivity as a justification. Money, they contend, has become virtually productive. It can readily be exchanged for income-bearing or productive property, such as, land, houses, railroads, machinery, and distributive establishments. Hence it has become the economic equivalent of productive capital, and the interest which is received on it through a loan is quite as reasonable as the annual return to the owner of productive capital. Between this theory and the theory connected with "lucrum cessans" the only difference is that the former shifts the justification of interest from the circumstances and rights of the lender to the present nature of the money itself. Not merely the fact that the individual will suffer if, instead of investing his money he loans it without interest, but the fact that money is generally and virtually productive, is the important element in the newer theory. In practice, however, the two explanations or justifications come to substantially the same thing.