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Roman Catholic Saint Thomas Aquinas claims in his Summa Theologica that it is unlawful to lend money at interest, because it involves “selling that which does not exist.” The full argument can be found here, and if you are not familiar with it, please read it before you continue with this post.

The gist of St. Thomas’s argument is simple: When you lend someone money, you grant him the use of your money on the agreement that he will pay you back later. St. Thomas claims that in those things “the use of which consists in their consumption,” “the use of the thing must not be reckoned apart from the thing itself…” Furthermore, he claims, to charge for the use of the money, and at the same time to demand the return of the money, is to charge for the use without transferring the ownership, thus reckoning the use of the thing apart from the thing itself, which is unjust. St. Thomas makes this point by the following example:

Accordingly if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. On like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.

My objection to St. Thomas’s argument on this point is that he overlooks time preference. I could probably object on several other grounds, but this seems to me the most interesting one, as it raises broader questions about the growth of human knowledge over time and the reliability of the Roman Catholic Magisterium.

Time preference is pretty much exactly what it sounds like; ceteris paribus, a good X now is preferable to that same good X later, and thus has a greater economic value.

What the usurer is doing, and what St. Thomas seems to have overlooked, is trading money now for money later. Because money now has a greater value than money later, it is just to demand that the money paid “back” later be of a greater amount than the money paid to the borrower now, in order to compensate for the lost value inherent in giving money now and receiving the same amount of money back later.

Now, here’s the kicker: economic value is subjective, that is, it varies from person to person. The market value is objective, but the market value is merely an aggregation of subjective personal valuations. This vintage Star Trek lunchbox, for instance, is practically worthless to me except inasmuch as I could  sell it, whereas to someone else, it would seem it’s worth at least $89.00.

The same principle holds with respect to time preference and its associated discount rates. Not everyone has the same discount rate. The borrower’s discount rate is higher than the lender’s; that is, for him, the ratio of the value of a hundred dollars now to the value of a hundred dollars later is higher than it is to the lender. That’s why both benefit; when one adjusts for time preference, the borrower and the lender both come out ahead.

To illustrate what I mean, let’s use the example of Bob and Leonard. Bob is the borrower and Leonard is the lender.

Now, Bob has a discount rate of 20% per year; that is, to Bob, $100 a year from now is equal in value to $80 now. Leonard, however, has a discount rate of only 10% per year; that is, to Leonard, $100 a year from now is equal in value to $90 right now.

This being the case, we can derive formulas for calculating the value of some number N dollars a year from now in terms of dollars today for Bob and dollars today for Leonard.

We will use V[t-B] for value in today’s dollars to Bob, and V[t-L] for value in today’s dollars to Leonard.

S[v] will refer to the number of dollars a year from now whose value is to be calculated.

Those formulas, then, are:

V[t-B] = S[v] X .8, that is, a dollar a year from now is worth $0.80 in today’s money for Bob.

V[t-L] = S[v] X .9, that is, a dollar a year from now is worth $0.90 in today’s money for Leonard.

(The mathematically inclined will note at this point that if we raise .8 (in the first formula) and .9 (in the second) to some power x, we can calculate the value for each person, in today’s money, of any number of dollars any number of years in the future, which may prove useful at some point, but is not necessary in this post.)

Now, take the average of these two discount rates, 15% per year. We will assume that this is the interest on the loan Leonard makes to Bob. Let us further assume that the loan is to be paid in full in precisely one year, and that it is for $100. Then, Bob receives $100 now and pays Leonard $115 in one year.

Calculating the value, then, to Bob, the $100 now is a gain, and is worth $100. So far, Bob is $100 ahead.

Score so far:

Bob: +$100

Leonard: -$100

However, Bob must pay Leonard back. Remembering to account for the discount rate, we compute the value to Bob of the money paid back to Leonard in terms of today’s dollars: $115 X .8 = $92. That’s Bob’s loss, and must be subtracted from his score.

Score so far:

Bob: +$8

Leonard: -$100

We must now account for the fact that Leonard receives $115 from Bob at the end of the year. Taking account of Leonard’s discount rate, we compute the value of Bob’s repayment in today’s dollars: $115 X .9 = $103.50. We then add that to Leonard’s current score, and we have the end result.

Final Score:

Bob: +$8

Leonard: +$3.50

Remarkably, both borrower and lender wind up richer than when they started, once time preference is accounted for. St. Thomas would have us believe that Bob is a victim here, but he appears to have profited.

On the contrary, He that suffers injury does not sin, according to the Philosopher (Ethic. v, 11), wherefore justice is not a mean between two vices, as stated in the same book (ch. 5). Now ausurer sins by doing an injury to the person who borrows from him under a condition of usury. Therefore he that accepts a loan under a condition of usury does not sin.

How can we say that Bob has suffered injury when he in fact ends this trade better off than when he started? And if we cannot say that, does not St. Thomas’s argument for the unlawfulness of usury fail?

Based on the content of this blog and the makeup of my Twitter following, I strongly suspect there’ll be a Thomist reading this at some point. So I consider this post, rather than an attempt at a knockout blow, as an invitation to discussion. If you agree with St. Thomas and feel up to the task of refuting me, please do so. It’s a challenge, not an attack.

See you in the comments section.