Interest - Historical & Analytical Study in Economics & Modern Ethics

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INTEREST an historical & analytical study in economics & modern ethics by THOMAS F. Divine, S.J., Ph.D., Professor of Economics and Dean of the Robert A. Johnston College of Business Administration, Marquette University

PRESS

•

MILWAUKEE

IMPRIMI POTEST Leo J. Burns, S.J. Praepositus Provincialis Provinciae Wisconsinensis die 4 mensis Martii, 1959

Nihil

OBSTAT

John F. Murphy, S.T.D.,

censor librorum Milwauchiae, die 25 mensis Martii, 1959

IMPRIMATUR

Gulielmus E. Cousins Archiepiscopus Milwauchiensis Milwauchiae, die 6 mensis Aprilis,

1959

TOAN STACK

Library

of Congress

© Copyright, 1959, MARQUETTE Manufactured

Catalogue Number: UNivERsiTy

58-7264

PRESs, Milwaukee,

in the United States of America

Wisconsin

Author's Preface

Tº

by

in

its

at

in

at

of

a

of

of

its

original form, was submitted and approved in Philosophy thesis for the degree Doctor the Uni versity London 1938. Strong hopes were entertained publication England after certain revisions that time for HIS STUDY,

the examiners. But before any such arrangements completed they were rendered impracticable by the could outbreak of World War II.

research studies recently established

University

the the Marquette take cognizance

at

of

Revisions have been made least the more important recent developments ature of the field. Press.

in

publication

in

view

at

series

with

to

of

University for examination

to

to

classroom and reference use, the Marquette the research committee

of

years

a

Following many study was submitted

of

be

suggested

the

liter

of

assistance

one worthy research and who encouragement and director as

this subject

afforded unfailing

of

the selection

as

of

to

in

I

to

of

First, therefore, those whom owe grateful acknowl edgments for assistance making this publication possible are University and the University Press. My sincere Marquette thanks are also due Professor Lionel Robbins who encouraged

whose penetrating

I

of

to

the thesis; and Professor Rosenstein-Rodan insight into the history economic thought

found both stimu

my sentiments

appreciation

to

express

of

also wish

to

I

lating and helpful.

Pro

in

of

of

fessor Walter Froehlich, the Economics faculty our College Administration, of Business for his valuable assistance the

in

to

I

of

in

of

to

of

the manuscript, and Elizabeth Smith, for her persevering preparation the the index. tireless and efforts gratitude which my Superiors The debt owe the

final revision

at

I

express.

Thomas December

University 8,

Marquette

1958

vii

537

F.

to of

of

of

to

Jesus, particularly the late Samuel H. Horine, S.J., who made possible the completion this study the University hereby acknowledge hope adequately London but cannot

Society

Divine, S.J.

Table of Contents

AUTHOR'S

vii

PREFACE

xi

INTRODUCTION

The Ethics of Interest. An Historical Survey of Ancient, Medieval and Modern Thought on the Morality of Interest

PART ONE:

Chapter

The

1

Pre-Christian

Attitude Towards Usury

The Christian Attitude Towards Usury

Chapter 2

from the First to the Twelfth

Chapter

Chapter 4 Chapter 5

PART

Usury from the Twelfth Century

3

The Usury

1

Chapter 2

3

24

to the Sixteenth 36

Controversy from the

Reformation to the Present Day

65

The Usury Controversy from the Reformation to the Present Day (Continued)

96

Two: The

Chapter

Century

l

Economic Theory of Capital and Interest

117

The Concepts of Income, Capital and the Rate of Interest

The

Rate of Interest as Determined Time-Preference ix

119

by 129

Chapter 3

The Rate

of Interest as Determined by Time Preference and Investment Opportunity 146

Chapter 4

The Rate

of Interest as Determined by Time Preference, Investment Opportunity and 167 Liquidity Preference

The Morality of

PART THREE:

Commutative,

Interest as a Problem of

of Distributive and of

187

Social Justice Chapter

I

On the Nature and Kinds of Justice

Chapter

2

The Morality of Commutative

Interest as a Problem

Justice

190

of 199

Chapter 3

Interest as a Problem of Distributive Justice 224

Chapter

Interest as a Problem of Social Justice

INDEX

4

238 247

Introduction

T

as a new attempt to solve an problem. problem old The involves an economic fact and an ethical judgment. It is concerned with an answer to the question: Is the payment of interest for a money loan morally justifiable? The problem is a complex one, the solu component tion of which demands that it be resolved into parts. Simply stated above, involves an answer two distinct questions, each concerned with different aspect the same economic phenomenon. The first concerned the second with what should be. The investiga with what

to

it

is,

is

of

a

is

it

as

its

HIS STUDY MAY BE DESCRIBED

of

to

to of

in

as

in

is

its

it

as

in

as

its

is

of

so

of

of

it

to

in

is,

is

it

to

is

to

a

the first

is

of

necessary prelude the solution the attempting second. Before answer the question, interest morally justifiable, one must first endeavor ascertain what and why and whence arises. On the other hand, interest the second question an important way, complementary the first, that carries through the investigation the same phenomenon from the field economic theory that social policy and (in far all policy necessarily involves judgment) an ethical ethical science. This definitely marks the sphere (or more correctly, the point within the overlapping circles) our investigation. Specialization today manifest the sciences modern technology. Yet there are those who point out that

tion

in

as

its

A.

as

advantages. this method has limitations well Beard, example, approval this Charles for refers with connection to the statement of Buckle “that the science of

it

its

to

to

it

its

at

a

at

of

to

at

its

at

is

periphery where any subject not centre but impinges upon all other sciences.” We should prefer say practical importance that the science lies not center periphery, where impinges upon kindred sciences. but This we believe be especially applicable the social

p.

xt

the social pure

Politics

of

of

the isolation

the advancement of

Beard, The Economic Basis Charles Unwin, Ltd., 1934), 14.

& 1

len

A.

of

To the modern methodology sciences, from the point view

of of

sciences.

(London: George

Al

|

theory, we are inclined to offer no reproach. We are not un aware of the fact that this innovation is quite foreign to the methods of Aristotle and the great Scholastic writers of the Middle Ages who treated economics, politics and ethics in combination, as closely related, in fact inseparable, aspects of the same human problems. We are no less conscious of the fact that they, in dealing, for the most part, with practical problems of the day, were concerned primarily with questions of policy, and points of policy lie on the periphery of two or more contiguous or partially overlapping circles. To that extent, the related sciences within whose sphere a problem lies (of which ethics is necessarily one) are indivisible from each other.

In the field of pure theory, however, we see no valid ob jection to isolating by a process of mental abstraction the eco nomic, let us say, from the social and ethical aspects of human conduct and to entrusting to the specialist the logical, system atic and detailed development of the consequences of the as sumption of economic motivation in the choice of scarce means for the attainment of alternative purposes. Such has been the method adopted, rather implicitly at first, more ex

plicitly, in the

face of considerable opposition,

within

the past

in modern economics. The rapid strides made in the field of pure theory in that time are not surprising in view of the advantages one might expect the method of specialization to yield. Two possible dangers may be pointed out in connection seventy years,

with this method. Either the economist may become so wrapped up in his abstraction as to forget that the phenomena he is studying have other aspects as well (a fault that may be

if

there are others at hand to co ordinate his conclusions and apply them to the problems of practical life), or in applying theory to practice he may tend to be guided solely by economic criteria. Both dangers are, however, extrinsic rather than essential to the system. Neither need cause much concern if to the principle of spe cialization in theory is added the second principle to which we have alluded above: that the practical importance of a the more easily condoned

xii

its

in

of

as

be

of

In

to

of of

in

Its

a

is

-

of

w

or

to at

its

periphery, i.e., center but those sectors contiguous common kindred sciences wherein practical life. lie the problems study “peripheral” present The concerned with such falling with problem. location we have already defined that sector human enquiry common the sciences clarity and scien economics and ethics. the interests developed separately tific precision, the two aspects must science lies not at

in

Is

to

of

before our final conclusions are reached. Only after we have investigated the origin and nature economic interest can we attempt answer the second question: interest morally justifiable? To this extent we are agreement with Böhm he

“It

is

a

to

in

it

us

us

it.

to

of

a

to a

of

appears

to

me that there no bet correct decision on the question good thing, than by getting proper whether interest be knowledge the causes which give rise But we must bring to remember that this connection only entitles gether the results; justify confusing does not the in vestigations.” But with his further conclusion we can agree on neither logical nor moral grounds. “Our knowledge,” he continues, “of the source from which interest springs, gives no grounds whatever for deciding whether interest should be retained or abolished. Whatever be the source from which says: Bawerk when coming way ter

on

–

be a

be

its

a

to is

a

of

purify that source.

On the other hand,

if

to

of

If

of

in

a

a

of

of

to

of

of

of

to

no

if

—

interest comes even that source can trifle muddy right we have decide for abolition unless the ground that the real interests the people would advanced thereby.” Here Böhm-Bawerk abandons the analytical previously proposed for the investigation methods the posteriori moral character interest and reverts an strongly mere expediency. The new standard standard principle doing suggestive the little harm achieve great good, the principle that the end justifies the means. To this principle we can give not even qualified approval. the springs interest are tainted their source, then no amount social welfare that interest may promote can avail these sources are

4.

p.

3

p.

3.

xiii

of

2

A

Eugen Böhm von Bawerk, Capital and Interest; Critical History Eco nomic Theory, trans. William Smart (London, New York: Macmillan and Co., Ibid., 1890),

either morally good or morally indifferent, then interest can be condemned on moral grounds only for the social evils to which it may give rise. In other words, though the end may not justify, it may specify the means. So much for the object and scope of the treatise. The methods employed will be both historical and analytical, ex pository and critical. These will be applied in turn to both aspects of the problem that confronts us, i.e., the theoretical problem of economic interest and the practical problem of the morality of loan interest. Many are the obstacles that lie in our path. For the field of each problem is an extensive one and bristles with difficulties. In no other field of economics, perhaps, has so much been written and with such divergent results. Böhm-Bawerk points out a round dozen of distinct and, in many cases, conflicting theories of the origin and nature of interest. And the primary and secondary sources in the history of moral opinion on usury are well nigh legion. Further difficulties confront us in the choice of an order of procedure. Simplicity might dictate that we follow the logical order: first attacking historically and analytically the economic problem of interest; then applying the concept so derived to the solution of the moral problem; and finally con cluding with a critical survey of the history of moral judgment on usury in the light of our conclusions reached by the pre vious analysis. But in view of the fact that the development of the economic theory of interest is historically an outgrowth of the chronologically antecedent effort to solve the problem of the morality of “contract” or “loan” interest, we believe it preferable to adopt the following order of procedure: (1) an historical survey of ethical teaching on usury from ancient times to the present day; (2) an analytical exposition of the economic theory of interest, proceeding from the more gen eral to the more realistic assumptions of modern economic life; and (3) the application of this economic concept to the solution of the moral problem from the point of view first of commutative and then of distributive and of social justice. In view of the extensive research which has already been done on the historical aspect of our problem, we shall make xiv

no pretence at adding much of value in that field. To such authorities as Ashley, Cunningham, Tawney, Böhm-Bawerk, Neumann, Endemann, Funk, Van Roey, Vermeersch, etc., who have rendered admirable service in collecting and in terpreting the wealth of material in this field, we hasten to acknowledge our indebtedness for the guidance they have af forded. From their interpretations and conclusions, we have not hesitated to disagree when the facts seemed to warrant; and for the substantiation of the facts, recourse has been had when possible to the original sources. The main contribution, then, which this study aims to make to the literature of the borderland of economic and moral science must lie rather on the critical and analytical than on the historical side. It is the quite generally accepted opinion of moralists who write on the subject at the present day (and has been since the later Middle Ages when economic development afforded opportunities of investment in com mercial and industrial enterprises) that contract interest is justified on titles extrinsic to the nature of economic interest. The chief of these titles is the right to compensation for the loss the lender would otherwise suffer in view of the aforesaid of profitable investment. But the question Can interest which goes to the heart of the problem justified on purely intrinsic grounds? From the very nature of economic interest, can an intrinsic title interest on money loan be proved exist? This the question which to

a

So

is

to

to

be

is:

opportunities

in

made upon the problem from this approach. another way, our study To put all this

as

the present analysis must endeavor answer. far the writer knows, no systematic and thorough attack has been

of

to

is

in

of

a

of

concerned problem “value,” special with with reference inter temporal relations. The basis the condemnation loan interest by Aristotle and the Scholastic writers was the prin ciple that an exchange transaction justice demands an equivalence between the goods exchanged. And since money, a

a

in

in

its

a

a

“fung “barren” metal, was considered not durable but “consumption” ible” good whose use was inseparable from exchange, the equivalence consisted return by the bor xv.

rower to the lender of the exact amount of the sum loaned.

of

its

its

in

of

in

to

in

is

as

of

be

to

of

of

of

of

a

to

of

or of

a

of

in

its

Later writers, in attacking the minor premise of this argu ment, came to distinguish between what we might call the capital mere face value or exchange value of money and value, possessor virtue which the secures “command” over other goods. Still others contended that the equivalence weight demanded by justice was an equivalence not external form but of value, which was the relation in which thing stands our need; that present and future sums, though mathematically equivalent, were not equal eco nomic value; that interest, therefore, effected an equivalence service and counter-service. The development this evo lution the concept value with reference the problem capital and interest will elaborated and evaluated proper setting. The writer under no illusions the finality the conclusions reached this treatise. Perhaps the last analy

in

be

to

a

of

in

value may lie more the methods used than the degree results attained. With even that achievement we would be well content. Let this be our apology for reopening question on which we believe that much remains said. sis

JPart One The Ethics of Interest. An Historical Survey of Ancient, Medieval and Modern Thought on the Morality of Interest

The Pre-Christian Attitude Towards Usury

T

our historical survey of the ethics of interest, we shall choose three historical “types” of pre-Christian civilization, those of the Hebrews, the Greeks and the O BEGIN

Romans. Our reasons for this choice are twofold: (1) the relative abundance of material found among the literature and laws of these peoples and (2) the influence which the literature of these nations exerted upon the Christian teach ing on the morality of interest to be reviewed in the chapters that follow.

But first we must dispose of a preliminary point of ter minology, viz., the use of the terms “interest” and “usury.” The original meaning of both these terms differed from pres ent day usage. In Roman law, interest (id quod interest) meant the compensation for damage or loss suffered by the creditor resulting from the debtor's failure to return the loan (itself gratuitous in principle) at the date specified by the contract. This payment of compensation might be agreed upon in the original contract or be made the subject of a lawful claim after the contract had expired. Such was the usage

until

the close

of

the

Middle

Ages.

“Usury” (Latin

usura sometimes also called foenus and in Greek tokos, i.e., “issue” or “produce,” after Aristotle's designation of “breed of barren metal”), on the other hand, signified a payment for 3

The Pre-Christian

4

or

a

as a

as a

of

a

of

a

of of

its

the “use” of money itself. In broader sense, “usury” in charge for the loan any good that fell within the cluded mutuum, i.e., consumption “fungible” class loan mutuum, good. But money loan and was classified of

of

an

by

a

a

or its

of

a

in

of

of

of

a

of

of

in

its

in

of

practice became the most common form this type loan, the term generally expressed popular usage nar Only signification charge money. for the use rower “usury” after the repeal the prohibitions interest (i.e., legal rate, did the above sense) and the establishment present meaning “usury” receive exorbitant charge money charge for loan that exceeds the legal rate. Mean

while the former

of

in

terms future on present goods the same kind. the present section we shall, un a

as

percentage,

its

present

Practically, the two concepts are identical with this difference: that while the present use “interest” generally implies the presence competitive market wherein the rate interest determined, original “usury” the use did not. This presence absence competitive market lies, the writer hopes show interest, Part III, the very core the ethical problem clearly perceived start, and the distinction from the much avoided. fruitless and irrelevant speculation may sometimes stated, for example, that from the point view justification the basis the moral condemnation in terest, the modern concept interest includes both charge money for loan virtue the loan itself (the old con usury) and cept charge virtue some extrinsic title risk, loss incurred gain foregone (the old concept such

original meaning.

in

as

of is

of

a

of

of

in

of

a

in

or

as

of

a

of

of

of

or

of

It

be

is

if

at

of

a

of

of

of to or

is

of

a

of

of

in

and “usury”

its

less otherwise stated, use the term “interest”

in

In

goods

of

pressed

is

of

in

of

a

of

or

a

of

of

of or

of

of

usage has been superseded an extension original concept the “interest” which now means price money any present goods) premium for the loan (or present money deviation from par the price terms premium, money. future The rate interest this ex

in

to

of

interest). But for purposes ethical analysis, this dis tinction becomes unnecessary. For the elements from which spring the “extrinsic titles” were formerly considered the

Attitude Towards Usury

5

of isolated exchanges, e.g., investment opportunity, now enter the determination of the market rate of interest.

case

Our aim in this historical ascertain

in

terest

survey will be twofold: (1) to the views enunciated on the ethical aspect of each particular place or period and (2) to discover,

in

possible, the reasons for the arguments upon which these judgments were based.

as

far

as

I. The Old Testament

and the Prohibition

of Usury among the Jews

In the

of the Old Testament, the accomplishment of our first task is not a difficult one. The pages of the Sacred Books are replete with passages containing either explicit pro hibitions of usury or unmistakable evidence that the practice was detested and roundly condemned. Yet the reasons for application (never this condemnation and the limits of explicitly stated anything like systematic theory) are not as obvious as later moralists would sometimes have us believe.

They must

a

in

its

case

is

of

of

it

of

be

deduced from assumptions based on the cir cumstances, context and nature the prohibitions them selves. Hence not altogether surprising that one should Scripture invoked by adversaries on both find the authority usury sides the later controversies. The texts in the Old Testament which refer either direct be

of

in of

to

to

to

an is as

in

In

in

or

to

to

of

In

of

to

ly or

indirectly interest-taking may the practice con veniently classified under three groups. group the first usury with respect we find explicit prohibitions loans among the strangers who have the poor among the Jews been incorporated the Jewish community and who share rights privileges. their and the second, the prohibition while stated such general terms include all Jews (with poor) definitely specific no reference the limited mem explicit exception being bers the Jewish community,

of

by

of

by of

the stranger who

of

case

of

the

third group contains condemnations

is

without the pale. The avarice and greed, oppressing amassing the riches the poor with usury, confiscating pledges, and praises brotherly generosity and made

The Pre-Christian

6

love and of the lending without interest to one's needy breth Ten.

Before examining these texts, we shall turn again to a point of terminology. The Hebrew words, according to Père Spicq, which have been translated by the Latin usura and foenus are chiefly masah and mesek. The first derived from the verb nasah which signifies in qal to take or demand in terest and in hiſ’il to oppress. The verb corresponding to the second is nasak which means to bite, to oppress, to take interest. Another verb signifying in qal merely to borrow and in hiſ’il to lend is lavah; while from rabah, to increase or multiply, are also derived two other names for interest, mar bit and tarbit, a surplus or increase." The first text of the first group is found in Exod. 22:25. “If thou lend (lavah) money to any of my people that is poor. that dwelleth with thee: thou shalt not be hard upon them as an extortioner (noseh), nor oppress them with usuries (ne sek).” And again we read in Lev. 25:35-38: “If thy brother be impoverished, and weak of hand, and thou receive him as a stranger (ger) and sojourner, and he live with thee, Take not usury (mesek) of him nor more than thou gavest (tarebit): fear thy God, that thy brother may live with thee. Thou shalt not give him thy money upon usury (nesek), nor exact of him any increase of fruits (marebit).” These texts would seem to presuppose the obligation of charity to lend to a brother in need as expressed, for example, in Deut. 15:7-9: “If one of thy brethren that dwelleth within the gates of thy city in the land which the Lord thy God will give thee, come to poverty; thou shalt not harden thy heart, nor close thy hand, But shalt open it to the poor man, thou shalt lend him, that which thou perceivest he hath need of" and again in Ecclus. 29:1-3: “He that showeth mercy, lendeth 1 Cf. Père C. Spicq, O.P., “Renseignements Techniques, à interét” in Saint Thomas d'Aquin, Somme Théologique des Jeunes; Paris: Desclée & Cie, 1935), La Justice, Tome

La Bible

et le prêt

(Editions de la Revue III, p. 444. 2 The English translation is that of the Douay Version, based on the Latin Vulgate and first translated in 1609.

/

Attitude Towards Usury

7

to his neighbor: and he that is stronger in hand, keepeth the commandment. Lend to thy neighbor in the time of his need, and pay thou thy neighbor again in due time.” What they add is that the lender is to ask no more in return than he has

by

is

it

or

to

is

in

it

in

is

of

as

of

is

to

in

it

In

to

to

it

of

of

of

it

a

in in

In

he

to

to

to is

of

its

its

lent. For to seek profit from the needs of the poor is not to show charity or mercy but to act as an extortioner and an oppressor, to devour (nasak) the needy borrower. All interest, it would seem, (moderate as well as exorbitant) is considered a form of extortion, an offence against charity and mercy, in the case of a loan to a needy brother within the Jewish com munity. And the obligation to lend gratuitously to the poor is extended by the second text in favor of the stranger “within the gates” who, though of non-Jewish origin, has been as similated into the Jewish community, respecting laws and enjoying privileges. The second group texts best illustrated Deut. 23: thy brother money usury 19-21: “Thou shalt not lend stranger (mesek), nor corn, nor any other thing: But the (nokri). To thy brother thou shalt lend that which want eth without usury.” This precept differs from the two pre ceding twofold manner. the first place, more only money generic that (a) includes not but the loan any type commodity and (b) apply would seem not, all members the Jewish community, whether poor interpreted unless “wanteth” mean need and not mere fact, desire. does not seem improbable that only those need would have any desire borrow. But, the second place (and this greater importance an indicator the reasons underlying the prohibition), the precept more spe explicitly excepts from the prohibition loans cific that

In

to

strangers who are not “within the gates.” Such were the foreign nations, e.g., the Egyptians, the Phoenicians, the Ba bylonians and others with whom the Jews entered into com taking interest from the stranger, they mercial relations. following were but the practice that was common within his

The Pre-Christian

8

own country.” But the exception does establish the fact that interest was not held to be intrinsically evil and that the cri terion was rather its social effects than its inherent nature, in other words specific rather than universal.” In addition to these two groups of texts containing the legislative prohibitions of usury, we may bring together in a third group a host of corroborative pronouncements praising the generosity of those who are merciful to the poor and con demning the avarice of those who grow rich on the misfor tunes of their brethren. In spite of the legal prohibition, the taking of usury seems to have become quite prevalent after the return from the Babylonian captivity. To obtain money the borrowers, as we are told in Nehemias, pledged their fields,

with

their vineyards,

their houses and even their children

the result that their fields passed into the possession and

their children into the bondage of their creditors. Whereupon Nehemias, on hearing their complaints, rose up in anger against the nobles and magistrates, asking: “Do you every one exact usury of your brethren?” And “gathering a great as sembly against them” he succeeded in persuading them not only to return the interest and the pledges but even to cancel the debts."

The utterances of the prophets are full of such condemna tions of the oppression of the poor by the avarice of the lender. The Jews are warned by Ezechiel that “he that hath turned away his head from injuring the poor, hath not taken of taking interest seems to have become prevalent in Egypt century B.C. and was still in vogue at the time of the Roman conquest. It is found in Babylonia as early as 2000 B.C. and often attained exorbitant rates until restricted by the code of Hammurabi. Among the Hindus the legal rate varied according to caste, the nature of the commodity lent and 3 The custom

in the seventh

the type of security. 4 One of the blessings promised the Jews as a reward of their faithful ob servance of the Law is that they shall lend to many nations and shall borrow of no man. Cf. Deut. 15:6 and 18:12. 5 Neh. 5. In vs. 2 we find what seems to be the first reference to interest computed as a percentage. “The hundredth part of the money and of the corn, the wine, and the oil, which you are wont to exact of them, give it rather for them.”

9

Attitude Towards Usury

usury and increase” shall live, while he “that giveth upon usury and that taketh an increase” shall not live." Jeremiah seems to mirror the popular attitude towards usury in his lament that though he has neither lent nor borrowed on usury, yet all curse him." The Proverbs assure us that “he that heapeth together riches by usury and loan gathereth

them for him that will be bountiful to the poor.” To Job is imputed by Eliphaz the crime of taking away the pledge of his brethren without cause, of refusing water to the weary and bread to the hungry, of sending widows away empty.” The Psalmist praises the man “that hath not put out his money to usury, nor taken bribes against the innocent.” And in the Messianic Psalm 71 it is prophesied of the Messias that “he shall spare the poor and needy: and he shall save the souls of the poor. He shall redeem their souls from usuries and iniquity: and their names shall be honorable in his

sight.”

As far, then,

one can judge of the ethical foundation of in which interest was held at this period history, of Jewish the condemnation seems to have been based not on any universal principle involving an analysis of the nature of interest itself but on the particular circumstances and exigencies of the times. To lend gratuitously was looked upon as an obligation of fraternal charity, a duty of mercy and generosity which the rich owed to the poor. The lender is always the rich man and the borrower the poor. For the rich man to grow richer still by fattening on the misfortunes of the poor is one of the greatest of abominations. The duty of showing compassion by sharing one's superfluous wealth with the poor may extend even beyond gratuitous lending to as

the general disfavor

in

it.

the return of the pledges and the cancellation of the debt, require i.e., to give rather than lend, if circumstances pro obligations legislative expression And these found the

of

8

9

as

7

Prov. 28:8. Ezek. 18:13 and 17. Jer. 15:10. Pss. 14:5 and 71:13, 14. Cf. also Pss. 108:11 and 111:5.

10

6

of

of

usury, together with such other measures intended for the protection the poor the cancellation all debts

hibition

Job

22:6-9.

The Pre-Christian

10

its

(save those owned by the “stranger”) every seventh year, the original owner every fiftieth year return of all property to be

to

is

of

In

in

of

in

in

of

a

of

certain portion the crops and the precepts that left the fields, the olives the orchards and the grapes vineyards poor, the for the sustenance the the widow, the orphan and the needy stranger. “And there shall be no poor nor beggar among you.”

an

of

in

in In

to

to

of

by

to

of

to

or

of

in

of

to

of

of

of

an

in

of

of

a

as

of of

problem other words, interest was viewed only justice. problem justice, i.e., social The commutative equivalence present for future exchange value ap goods, remained quite untouched. Nor would the task plying the principles justice commutative loans within the Jewish community be, with present day analysis, an easy one, especially anything like view the absence or lender, ganized loan market. On the part the “sacrifice” time-preference seems have played no part the ac lending was hoard cumulation wealth. The alternative ing.” And with the offer good security the borrower the former use than the latter. less risk would be attached

gaining

exchange

a

in

would be

of of of

the terms

a

of

In

to

byof

a

a

community which was predominantly agricultural and which commerce and trading were looked upon with dis favor, there would indeed be some, though hardly great, demand for loans for productive uses. The most common type loan seems have been that for immediate consump poor. any case, the the absence market price, tion matter

(as was most buying and selling

individual bar

is

of

to of

it

of

a

of

to

a

it

15

Cf. Deut., esp. chaps. and 24; Lev. chap. 25. Cf., e.g., Ecclus. 29:13. “Lose thy money for thy brother and thy friend: and hide not under stone to be lost.” 12 11

|

an

as

of

to

a

of

the time), and danger that the strong will take advantage therein lurks exploit the weak. Under circumstances such their position these, from the point view commutative justice, certainly perhaps wiser, form easier, and even social policy practice altogether essay forbid the rather than determining the requirements justice the difficult task

Attitude Towards Usury

11

and of attempting to regulate accordingly the conditions unº der which interest may be taken. That interest was not considered wrong under all cir cumstances, either from the point of view of social or of com mutative justice, seems apparent from the exception of loans to foreigners from the general prohibition. Yet here again the further problem is left untouched respecting the deter mination of the amount or rate of interest which may be considered just.

II. The

Legal and Philosophical Attitude Towards Usury in Greece and Rome A. GREECE

Whether or not the reason is to be found in the geographic and economic character of the two nations (the one being a maritime and commercial people, the latter an agricul tural) the laws of ancient Greece differ radically from those of the Jews with respect to the taking of interest. No where in Grecian law do we find interest prohibited, though the legal regulation of the rate of interest becomes fairly com mon in the later periods. Among the economic and social reforms of the Seisachtheia of Solon, 594 B.C., were included the abolition of the custom of enslaving defaulting debtors then in vogue in Egypt, Greece and Rome and the reduction of the rate of interest which according to Plutarch” was 16 per cent at the time. The object of these reforms seems to have been to afford relief to needy borrowers and to agriculturists status was rendered precarious by the high rates of interest. It has been estimated that in the second and third

whose

centuries B.C. loans on good security in Corcyra brought a return of 24 per cent and that the rate in Athens in the time of the orators varied from 12 to 18 per cent. These high rates are commonly ascribed by economic historians to the risk and

13 Life of Solon, c. 13.

-

The Pre-Christian

12

of capital and to

scarcity

the prevalence of slave labor which

•* , capital.” Yet the practice of taking interest enjoyed no such tol erance from public opinion and from the philosophers of ancient Greece. Both Plato and Aristotle condemn the prac tice and banish it from the communities in which they would establish their ideals of statecraft. The attitude of the com

increased

the return on invested

mon man may be taken as mirrored in the ridicule of Aris tophanes according to whom: though the sea grows no larger by receiving all the rivers, yet the usurer in his insatiable greed desires his silver to grow ever larger and larger as time sweeps

on.”

its

Plato's attitude towards usury resembles that of the Old Testament in that the condemnation in both cases is based

of

in

of

of

or

it

is

in of

its

social consequences rather on the ad hoc consideration of than on any analysis nature. But Plato's condemnation differs from the latter that founded not on any personal obligation charity generosity but on the fact fraternal that by setting one class (the poor borrowers) against another (the rich lenders), the taking interest destroys the peace harmony preserved and that must be the interests the .. .. ..

State.

in

of

a

to

in

is

to

of

In

is

of

of

usury Plato's exposition the alleged evils found Republic eighth The and the Laws. the book the for mer, an attempt made show how the change from olig archy democracy the government state arises. The State becomes infected with an insatiable desire for wealth.

to

of

at

of

by

Rulers, realizing that their power rests on their wealth and spendthrift youth, en the extravagance that they gain courage their prodigality, make them loans interest and buy up their estates. Men good family are brought ruin by this wantonness and extravagance. Their ranks swell. Men who have lost property and citizenship are eager for revolu of

in

S.

I.

14

Leadam, “Interest and Usury” Palgrave's Dictionary Cf. Po litical Economy, ed. Henry Higgs (London: Macmillan and Co., Ltd., 1923), Athens

in

played

in

15

Aristophanes: The Clouds, (1285-95) century B.C.

—

II, 429–436.

the fourth -

Attitude Towards Usury

13

is

—

is,

tion, breathing hatred and vengeance against those who have their property. Yet “the men of business, stopping as they walk, and pretending not even to see those whom they have already ruined, insert their sting — that their money into someone else who not on his guard against them, and re

the parent sum many times over multiplied into family children; and they make drone and pauper abound the State. The evil blazes up like fire; and restricting they will not extinguish either man's use property, by remedy his another one which the compelling the citizens next best and has the advantage look their characters.” The remedy proposed that there shall be general rule “that everyone shall enter into volun tary contracts his own risk, and there will be less scan dalous money-making, and the evils which we were speak ing will be greatly lessened the State.”

to a

a

is

a

.

In

in

of

at

of

a

is

to

to

of

.

.

or

of

it,

by

.

. .

in

so

of

cover

of of

to

an

be

is

a

will be no value else where. The general rule, proposed The Republic, pertain ing borrowing and lending be retained even the deposit money anyone second best state. “No one shall with interest, since permissible does not trust, nor lend pay back either interest refuse entirely for the borrower of

the state, they

in

it

to

to

or

is

to

at

he

is

to

in

legal tender

within

of

to

an

or by

of

to

of

be

to

of

is

be

to

is,

is to

the state be fashioned according the pattern public ownership but private use the Laws, there apportioned for the use land. That the land the remaining individual householders while the common prop erty the state. No opportunity afforded for money-making, no facility granted for making money excess “illiberal trade.” No private person may possess gold silver, but only the coins necessary for daily exchange, which coins are be such nature that, while passing for

principal.”

of

16

of

of

of

money-making, buying borrowing and lending, and selling, the possession The Republic, trans. Benjamin Jowett (Oxford: 1922), Bk. VIII, 555 and severe censure

of

But why this

R.

556. (2

G.

17

Laws, trans. Bury vols., Cambridge: Harvard University Press; Loeb Classical Library, 1952), Bk. V,741 and 742.

The Pre-Christian

14

gold and silver? Plato gives us the answer in the paragraphs that follow. It must be the fundamental purpose of the laws of a state that the citizens be as happy as possible and united in the highest degree of mutual friendship. Happiness and goodness go together. But people cannot be both good and excessively rich. Therefore the very possibility of the latter evil must be removed. Yet to attain this Plato no longer has recourse even to the ascetic communism recommended for the guardians of The Republic. There is to be no division of the spoils. Since those who enter and remain in the State will possess unequal quantities of wealth, there must be un

equal valuations; offices and contributions should be assigned according to these assessed valuations that by a rule of “sym metrical inequality” they may receive offices and honors as “equally” as possible. To this end the citizens of the State must be graded into four classes by the amount of property

There must exist in the State neither excessive poverty nor wealth. The limit of the former will be the value of the domestic allotment and of the latter, two, three or four times the value of the allotment as the State shall decree. The

they possess.

surplus, from whatever source accruing, is to be surrendered to the State.

so

to

is

a

of

In

to

is

of

it

its

In such a State there is no place for “much money-making by means of vulgar trading or usury, or the fattening of gelded beasts, but only such profit as farming offers and yields, and of this only so much as will not drive a man by his money making to neglect the objects for which money exists,” which position protect are “the soul and the body.” Even the city state. For be set back from the sea and rid seaport town. the vulgar trading and commerce

it.

seed

18

of

Ibid., Bk. V, 743.

of

is

of

of

The

of

a

to

soil the auri sacra fames will find little nourish discord will take no root. Harmony and friendly relations will grow apace. Men will realize that the three objects important life the first and most the care the soul, the second the care the body and the third the con

such

Attitude

Towards

Usury

15

cern for money, rightly directed. There will be no distraction or dearth of time for the practice of citizenship, which is an art brooking no rival (especially if that rival is a handicraft art) and requiring much study and wide learning, and for the study of virtue, which is also a full-time occupation. At the risk of violating proportion, we have given this rather detailed picture of the ideal of political existence, the life of “luxury of lettered ease” as a background against which to view that aspect of his teaching which concerns us here: his doctrine on usury. One additional point remains to be recorded before we pass on. Though usury may not be prac ticed for a livelihood, interest may be invoked as a penalty. For even in a world where money-making is ostracized, one

for goods received. Wherefore “whosoever previously has received the work ordered and fails to pay the price within the time agreed shall be bound to pay double the price; and if a year has elapsed although all other monies on loan are barren (i.e., bear no interest), this man shall pay as interest one obol on each drachma for every month of arrears; and actions for these cases shall take place before the tribal courts.” As there were six obols to the drachma, the rate of interest imposed was 200 per cent per annum. From Plato the idealist, a man in whom, to use the phrase Ingram, of “the literary instinct is stronger than the scientific judgment,” we turn to Aristotle the realist, a man of keenly analytical mind in which are combined the powers of accurate observation and of generalization. It is quite clear that Aristotle shared his teacher's views on the social evils of the practice they both condemned. Plato abominated usury as a cause of strife and dissention between citizens of the same community and as a means of exploitation of the needy by the rich. Aristotle insisted upon the necessity of benevolence in human conduct and roundly scored those who made “gain out of their friends” to whom they should may fail to pay

19 Ibid., Bk.

XI, 921

D.

20 John Kells Ingram, A History Black, Ltd., 1923), p. 12.

of Political Economy (London: A. & C.

-

16

The Pre-Christian

show liberality. Sharing a physiocratic view of the nature of productive enterprise, both looked upon commerce and trad ing as for the most part unproductive, mean and vulgar, dis tracting man from higher and more worthy and necessary Occupations, pandering to an unlimited and insatiable desire for wealth rather than providing for the satisfaction of the limited wants of the class to which one belonged. Those who engage in commerce and usurious lending seek money as an end in itself rather than as a means to a higher purpose. This engenders a spirit of avarice which deadens all spiritual sus ceptibilities and renders one incapable of any other than ma terialistic evaluations.” Of all this class of money-makers, the usurer who “lends out small sums at a high rate” is the most contemptible of the lot. He is guilty not only of in justice but, what is more degrading still, of pettiness and illiberality, stooping to the most debasing practices for the sake of

is

of

on

or

its

is of a

its

in

of

of

In

of

to

by

to

of

of

of

of

21

Cf., e.g., Aristotle's caustic description “nouveaux riches” his Rhe toric, Bk. II, chap. 16. “Insolent and haughty, the rich believe that they are your for masters all the wealth the world. They judge you on the size tune, the sole object whose value they have any appreciation. They reduce everything, man included, Voluptuous the vulgar level mere merchandise. impress cheap display, they covet authority and be. and coarse, seeking leadership. brief, they resemble lieve themselves endowed with the powers imbeciles whom chance has favoured.” in

as

so

of

of

&

K.

in

of to

in

at

of

is

a

as in

in

22

Cf. the rather curious passage the Nicomachean Ethics which Aris improper ways” into two totle divides those who “make improper gains classes, the first who operate on large scale, such the tyrant who sacks cities guilty injustice, the second who ply mean and and pillages temples and debasing trades and are branded with illiberality. To the second class belong the brothel-keeper, the dice-sharper, the common thief, the man who steals clothes the bath and the usurer, all whom go far “to make any gain they can any way whatever” and are therefore “reckoned among the illiberal.” improper ways, are seekers For such men “wishing make gains base gain; and all such ways making money are illiberal.” Nicomachean Ethics, Paul, Trench, Trübner Co., Ltd., 1893), trans. Frank H. Peters (London: Bk. IV, Nos. 40-44.

I,

s

gain.”

Yet, unlike his master, Aristotle does not rest content with condemning usury merely for social evils the ground practice virtue, magnanimity that deviation from from character, the attainment which the and uprightness

Attitude Towards Usury

17

it

of

to

as

a

is

it

in

of

of

or

is

of

of

or

by

a

of

to

in

of

I,

in

is

of

he is

10

of

of

a

to

of

it

its

a

of

of

a

as

is a

by

of

a

in

a

of

by its

duty of every citizen. He proceeds by an analysis of the func tion of money and the concept of interest itself to condemn very nature. Perhaps this analytical approach it as unjust of suggested was Plato's phrase “the parent sum many times multiplied over into family children.” At any rate, place money and interest. found Aristotle's theory Animals and trees and plants (his cherished agriculture) are reproducing their kind. provided by nature with powers But money barren thing intended nature serve only exchange. medium Hence usury which, while pro ducing nothing, “makes gain out money itself,” thus dis torting purpose from natural and simulating, the money from money” practice term implies, “the birth contrary justice nature and violation that involves unequal exchange two sums. the this analysis found the Politics, Bk. The setting treating where the first the three chief societal groups: the domestic household, the village and the state. any Here we find the nearest approach Greek thought thing like systematic treatment economic doctrine. Aris distinguishing between household manage totle begins ment (economics) and money-making finance (chrematis tics) which, however, are not entirely distinct, representing partially overlapping rather than completely distinct circles. One the functions household management the care

of

of

in

is

of

of

or

is

of

of

of

the satisfaction wants. But goods means must first be supplied for the attainment these ends. The provision these goods for the satisfaction wants the purpose the natural, necessary first what Aristotle calls the and honor money-making. This form able form finance there

23

The Republic, Bk.

VII,

556.

as

as

to

of

of

in

It

to

is

It

of

household management. the area gen overlapping common the two circles. embraces agriculture, including stock eral all the various forms raising, tillage, planting, the keeping bees, fish, fowls and men, all animals of use well barter and that limited fore an element

The Pre-Christian

18

form of exchange necessary for the satisfaction WantS.

of household

. ..

Besides this “true and proper” art of money-making, there

is a second which is unnatural and which consists of a “kind of exchange which is justly censured.” It embraces three classes of transactions: (1) commerce and trade, both by land and sea; (2) usury; and (3) the giving of service for hire, i.e., employment in the mechanical arts as well as in forms of unskilled labor. It is unnatural because it is concerned not with the satisfaction of household wants, which are limited, but with the amassing of wealth, the desire for which is un limited. . . . Intermediate between these two types of money-making is a third form which is partly natural and partly unnatural, in so far as it is concerned with profitable exchange. This embraces forestry and the extractive industries. What of usury? We have seen that Aristotle classifies it with commerce and the selling of labor and mechanical skill as one of the forms of money-making which is unnatural and reprehensible a mode of exchange whose object is gain and

–

be

to

of

at

To

is

of

of

to

is

of

to

in

it.

not the satisfaction of household wants. Yet there are degrees of guilt within this category of unnatural chrematistic ac quisition. Of the three forms usury is the most deserving of censure. “The most hated sort, and with the greatest rea son, is usury, which makes a gain out of money itself, and not For money was intended used from the natural use of exchange, but not increase interest. And this term usury (tokos, i.e., offspring, produce) which means the birth applied money money from money, the breeding because the offspring resembles the parent. Wherefore money-making this all modes the most unnatural.” of

as a

5, p.

I,

and

5,

10, Nos.

4

I,

by

a

of it

Politics, trans. Benjamin Jowett (Oxford, 1908), Bk. Ibid., Bk. 10, No. 46. 25

24 p.

46.

of

usury “money grounds: was based on the (1) that form making” degrading occupation, distorting the true was seeking gain rather than function economic enterprise sum up, Plato's and Aristotle's condemnation

Towards Usury

Attitude

19

the satisfaction of wants, making of money an end

in itself

and so distracting the citizen from the practice of virtue which (2) that it was a particularly degrading money-making contrary to the liberality and generos form of ity which the rich should practice towards the poor; and (3) that on this account it was inimical to the welfare of the was his first duty;

its

state, destroying peace and concord by setting one class against very the other. To these three Aristotle added: (4) that of

of

all

in

to

of

as

of

was

a

it

justice. violation The high returns from commercial enterprise together capital would seem, with risk and scarcity we have noted, high account for the rates interest this field. But

nature

he

in

to

in

to

of

in

a

—

in

of

of

of

loans this type would fall under Aristotle's exaggerated condemnation the evils commerical enterprise.” These high rates would naturally be reflected, even intensified, loans for consumption and agricultural purposes condi considerable social distress tion which could easily result usury and usurers.” and account for the usual unpopularity analytical argument, say Of Aristotle's we shall have more Part III, pausing here but note that while the present

in

interest.

complete theory

of

of

of

a

-

a

important element

in

an

last

is

a

he of is

of

a

The

of

money, includes his analysis but one function instance i.e., exchange, medium not unaware the existence of the others, i.e., measure value and store value.”

B. ROME

of

of by

of

is

of

The attitude the laws ancient Rome towards interest likewise one of limited tolerance. The Law of the Twelve Tables, 451-450 B.C., which was the first codification exist

it

or

in

26

Aquinas and the later Scholastics, though greatly influenced Aristotle, were more liberal this regard, maintaining that commerce was itself nei purpose for which ther good nor bad, its morality depending on the motive was carried on.

28

for the latter.”

Cf. Nicomachean Ethics, Bk. V.

of

a

of

of

in

r

on

is

in

27

usury: “From the time Thespis As Bentham remarks his defense scarcely an instance downwards there which lender and borrower have appeared the stage without the sympathies the audience being claimed

20

The Pre-Christian

ing

laws and customs, permitted the taking of interest within the maximum legal rate of the unciarium foenus or 1/12 part of the capital.” From this time onward, the legal rate was

gradually reduced until in 347 B.C. it stood at five per cent. The Lex Genucia, 342 B.C., forbade all interest. But, as the law bound only Roman citizens, it was easily evaded by the use of non-Roman intermediaries. The Lex Sempronia, 194 B.C., attempted to remove this evasion. But it was found in capable of enforcement with the result that a maximum legal rate of 12 per cent per annum was again established by the Lex Unciaria of 88 B.C. This rate, known as the centesima usura, i.e., 1/100 part of the capital per month, became by decree of the Roman Senate in 50 B.C. the maximum legal rate in the Roman provinces. The rate remained in opera tion until the promulgation of the code of Justinian, A.D. 533, which introduced further limitations, including a differenti ation of the legal rate according to the status of the borrower. Interest on loans on bottomry (sailing ventures) was limited to 12 per cent; on those to merchants and business enterprisers, eight per cent; on those to persons who were not in business, six per cent and on those to agriculturalists and distinguished personages, four per cent. Compound interest was prohibited, and no claims for the payments of arrears could exceed the capital sum.” The Roman philosophers, content to repeat with approval the condemnation of Plato and Aristotle, add nothing of im portance to the theoretical discussion of the morality of in terest. Cicero

in De Officiis I, xiii, warns his son that the two

occupations most to be avoided as bringing odium upon their undertakers are tax-collecting and money-lending. In the same treatise he quotes with approval the remark of Cato who when asked what he thought was the most profitable em ployment of a landed estate replied, “successful cattle-raising,” but when asked what he thought about money-lending ex 29 Tacitus: Annals, VI, xvi, 3. Though the nature of this unciarium foenus is disputed, it is generally believed not to have exceeded 10 or 12 per cent. Wil 30 Leadam, loc. cit. liam Ramsay, A Manual of Roman Antiquities, p. 420.

Towards Usury

Attitude

21

claimed, “What about murder?” “The borrower,” he con tinues, “asks you for medicine and you give him poison; bread and you offer him a sword; liberty and you condemn

of

in

he

as

in

be a

to

if

12

at

to

of of

a

1)

to

of

12

a

of

of

of

in

its

him to slavery.” Yet, shrewd administrator that he was, Cic ero did not advocate the complete prohibition of interest, limitation within reasonable bounds, and the but only administration his province he insisted, “with the approval the most grasping usurers,” on the observance maxi This, per mum rate cent. mentions one his brought him into difficulties on Atticus (VI, letters certain occasion when, after he had arranged loan from two paid back business men the people Salamis per years, cent, six the lenders demanded 48 per one cent, and Cicero was in mortal fear lest, the lender had is

in it

by

a

a

a

is

is

to

in

or

1)

I,

it

of

his way, would mean the ruin the state. Agriculture, Cato confesses (On that sometimes employ money lending, but more profitable trade very risky and the latter the drawback that the former dishonorable. How much less desirable citizen his ancestors thief, he illustrates from the an considered usurer than

its

as a

is

in

De Beneficiis,

VII,

10.

of

a

heavy burden 82

31

existence

of

of

of

to

be

to

is

of

as

he

of

of he

in

a

of to

in

it it

of is

is

in

by

doubling and the cient laws which punished the thief quadrupling his fine. usurer Aristotle's approach found reflected Plutarch and Seneca who condemn interest on the ground that money barren. To this Seneca adds that involves the selling equivalent time. Like Cato he also considers effects murder.” Yet his Epistles considers the repayment ingratitude and upbraids loan without interest an act sort cur the debtor who, looking upon such benefits rency which he can use without interest, only increases his ob ligations the longer postpones the settlement.” The fact that in Rome, in Greece, this condemnation public opinion usury strongly also entrenched un doubtedly grave social evils attributed the presence usury but with the associated not only with the practice debt, contracted no doubt often

Epistles,

LXXXI,

18.

The Pre-Christian

22

unwisely by the spendthrift and the poor. Petronius, a con temporary of Seneca, puts into the mouth of one of his charac ters: “Dirty usury and the handling of money has caught the people in a double whirlpool and destroyed them. . . . There is no house that is safe and no man that is not mortgaged. In despair they resort to violence; and bloodshed restores the goods squandered by luxury.” This conflict between debtors Cicero notes, one of the causes of the Social War.” Dio Cassius in his History of Rome (IV, 8) states that at one time creditors were allowed by Roman law (though the practice was probably never resorted to) to di vide the body of a defaulting debtor in proportion to the sums he owed them. Yet the general tendency in the history of Roman law was towards an improvement of the position and creditors was,

of

the debtor.

as

Originally

the creditor was allowed to enslave the debtor for defaulting on the principal, though only civil action could be taken against his property for payment of

When creditors tried to press claims to interest un der the form of actions for money lent (i.e., under penalty of servitude), this practice was stopped by the Lex Poetelia of 325 B.C., and finally a law of Julius Caesar permitted the defaulting debtor formally to cede his estate and declare a new financial status, thus laying the foundation of the modern laws of bankruptcy.” Yet the Romans were shrewd enough to see the folly of the extreme view as proposed by Plato and Aristotle, viz., that the state should refuse to enforce contracts of lending which should be made at the contractor's risk. “What is meant,” asks Cicero, “by the liquidation of debts ex cept that you buy a farm with my money — that you gain the farm and I lose the money. There is nothing that upholds credit; and a government more powerfully than can have credit unless the payment debts enforced

by

it

is

of

no

its

interest.

by

law.”36

in

in

A.

30 35

34

33

Satyricon, 119. (Quoted Aloysius Roche “The Classics and Usury,” Tablet, Oct. 23, 1937.) De officiis, II, xxi. Hunter, Roman Law, pp. 652-3. W. Roche, loc. cit.) De Officiis, II, xxiii, xxiv. (Quoted

Attitude

Towards Usury

23

One finds, however, no clear distinction and separate treatment of the twofold aspect of the social problem of in terest, i.e., the evils that may result from high rates of interest on consumption loans to the spendthrift and to the poor and the social benefits that may accrue from lending at even a fairly high rate of interest (which under conditions of an im perfect market may require some legal control) for industrial and commercial purposes. In practice, lenders seem to have taken little heed either of public sentiment or of legal regula tion. “The traffic in money seems to have gone on all through Roman history, and the rate to have fluctuated according to the condition of the market.”

37 Ingram, op. cit., p. 21.

2

First

the

from

to

the

The Christian Attitude Towards Usury Twelfth Century

of

to

in

of

In

to

in

of

of of

3

to

of

in

in

of

as

to

of

of

to

of

of

to

V

X7

attempting ETURN now the more formidable task history teaching trace the Christian on the moral ity Christianity interest from the birth the present day. The present chapter will be devoted an examination the usury Christian attitude towards found the New Testa ment, the writings the Fathers and ecclesiastical the provincial and general conciliar legislation writers and Chap the Church from the first the twelfth century. investigation ter we shall continue our into the later Middle Ages and examine the development the Church's teaching Scholasticism. Finally, on usury with the rise and growth

of is

the last two chapters this section, we shall endeavor trace the various channels into which pre-Reformation thought divided by the economic, social and religious changes the sixteenth century.

in

The New Testament

thee, and from him that would borrow

of

asketh

of

of

of

the New Testament do we find any direct teaching evidence the Christ Himself upon the morality of interest. The exhortation in Matt. 5:42 “Give to him that Nowhere

thee

turn

of

a

in

is

patently repetition and confirmation such parallel injunctions the Old Testament on mercy and com not away”

24

25

passion towards the needy, as Ecclus. 29:2° and Deut. 15:8.”

The reproof administered by the exacting master to the slothful servant in the parable of the talents” (Matt. 25:27 and Luke 19:23)* bears witness to the existence of commercial lending at interest without adverse or favorable comment.” The text of Luke 6:34, 35° has been the subject of con

siderable controversy among commentators. Aquinas, fol lowing the example of many of the Fathers, interprets it as a counsel with respect to the repayment of the loan, but as a precept in so far as it pertains to the payment of interest; and on this interpretation he bases his Scriptural proof of his con demnation of usury." Yet whether it be interpreted as a pre cept or as a counsel in regard to either lending or gratuitous lending, the application of the text cannot be extended be yond the situation envisaged therein, i.e., in the case of loans to the poor. It contains no general pronouncement on the 1“Lend to thy neighbor in the time of his need, and pay thou thy neighbor again in due time.” 2 “If one of thy brethren that dwelleth within the gates of the city . . . come to poverty, thou shalt not harden thy heart nor close thy hand, but shalt

open it to the poor man, thou shalt lend him that which thou perceiveth hath need of.”

he

3 “Thou oughtest therefore to have committed my money to the bankers, and at my coming I should have received my own with usury.” 4 “And why didst thou not give my money into the bank, that at my coming I might have exacted it with usury.” 5 If any conclusions are to be drawn as to the attitude of Christ implied in these parables, we do not see how they can be other than favorable to com merce and lending at interest. For certainly Christ would not compare Himself to a master or hold up for our imitation a servant whose actions were morally reprehensible. The case is hardly parallel with that of the unjust stewart whose sagacity alone is lauded apart from the nature of his conduct which is patently

unjust.

6 “And

if

you lend to them of whom you hope to receive, what thanks are

to you? For sinners also lend to sinners, for to receive as much. But love ye your enemies, do good, and lend, hoping for nothing thereby; and your reward shall be great. . . . Beye therefore merciful, as your Father also is merciful.”

1,

78,

ad

II-II,

a.

Thomas Aquinas, Summa Theologica,

q.

7

St.

This translation is that of the Douay Version which is based on the reading of the Vulgate. In the Revised Version in the place of the nihil inde sperantes of the Vulgate is read nihil desperantes, whence the translation “lend, never despairing, and your reward will be great.” 4m.

26

The Christian Attitude

Towards

Usury

nature or morality of interest from the point of view of com mutative justice. Like the previous texts mentioned, it is an exhortation, a corroboration of the Old Testament injunc tions, to charity and mercy towards those who are in need. To such the rich should lend generously, expecting in return neither interest nor even the principal should the circum stances demand. Of this we find a close parallel in Ecclus. 29:10-14: “Many have refused to lend not out of wickedness, but they were afraid to be defrauded without cause. But yet

towards the poor be thou more hearty, and delay not to shew him mercy. Help the poor because of the commandment:

and send him away not empty handed because of his poverty. Lose thy money for thy brother and thy friend; and hide it * not under a stone to be lost.”

The New Testament throws no light on

the moral

prob

lem of interest beyond the very limited assumptions upon which the few relevant texts we have just quoted are based. On these assumptions (i.e., of lending in subvention of the needs of the poor), the obligations of charity, of generosity and of mercy supersede even the rights of commutative jus tice. Again the latter problem is left untouched. In the only case in which this aspect of the interest problem would stand in the foreground (i.e., in the case of loans for trading and commercial purposes for which there seems to have been something of a competitive market), the practice of lending at interest is mentioned without disapproval — in fact, it would seem, with implicit approval.

The Fathers of the Church As the chief task of the Fathers was to transmit and

in

terpret the content of Apostolic tradition and of the Scrip tures for the rapidly expanding Christian church, it is not surprising that we should find in their teaching on usury little more than a repetition of what is contained in the Old and New Testaments. In fact the majority of their pronounce ments on usury are contained in their homilies and moral sermons in which they explain and apply the precepts of the

from the First to the Twelfth Century

27

its

lie in

Scriptures to personal conduct and denounce the contrary

of

is

its

of

in

in

vices of the day. The evil of usury is considered to origin (or motives) and greed and effects. Its origin Cupidity usurer, the heart the an insatiable desire wealth for its own sake which leads to serious violations of

is

regeneration

of

the love which every Christian owes his neighbor.” remedy

The only

heart, repentance and reparation for

of

or

In

of

by

of

to

the harm that has been done. Its effects are the exploitation despair, and oppression the poor who are driven often cruelty slavery and suicide the the merciless usurer. this brief historical survey, we shall divide the Fathers pre-Nicene Fathers; into: (1) the early (2) the Great centuries; Fathers the fourth and fifth and (3) the later Fathers.”

to

is

St.

a

to

of

it

of

of

the writings

In

the early Fathers, we find only reitera contrary charity the Scriptural precepts that usury poor, any mercy and exact the without intimation Apol that these precepts imply universal prohibition. tions

or

to

of

of

of

of

be

in

of

to

attacking the claims lonius the Montanist prophets prophets they true declares that are guilty serious viola possess gold tion the precept the Lord not silver. They exact money not from the rich but also from paupers, orphans and widows. They adorn their persons with cos metics and rich ornaments; they gamble, and they place their money with the usurer.” St. Clement Alexandria praises to

of

fraternal charity extend not one's own race, but all

of

the case

to

in

as

only, mankind.

of

In

s

-

the obligations the Jewish law, members

the Christian economy,

to a

is is

I

cf.

of

in

de

of

of

of

of

t. 2,

in

to in

to 10

II

of

in

of

of

it

ly

to

to

of

of

to

in is as

in

its

Writers.”

In

9

including also its wider sense, i.e., applied only narrower sense, the term those whose characteristics are orthodoxy and sanctity life addition an tiquity and learning. The age the Fathers may be said cover approximate the first eight centuries though some ecclesiastical historians bring close with the death St. Gregory the Great, A.D. 604. An exception made the case St. Bernard, who, though living the twelfth century, called the “last the Fathers.” For the Scriptural origin the term, Cor. 4:15, 16; Gal. 4:19; Peter 3:4. Migne, Patrologia Graec., col. 478-9. Most the texts this section passages from the writings are be found the excellent collection the usury found Fathers relevant Arthur Vermeersch's Quaestiones Justitia We shall use the term “Fathers”

the “Ecclesiastical

28

The Christian Attitude Towards Usury

the humanity of the Old Testament as exemplified in the pre cept not to take usury of a, brother. Indeed the man who is generous to the poor receives sufficient usury in the gratitude, praise and honor of his fellow men.” One of the points of that Tertullian establishes between the Old and the New Testament is the doctrine on usury, as found in the

agreement

Luke 6:35, interpreting the latter as precept pertaining a even to the return of the loan.” St. Cyprian, Bishop of Carthage, reprimands severely those bishops who, neglecting their pastoral duties, engage in the pursuit of temporal gain, even taking rapacious usury from texts of Ezek. 18:8 and

the poor.” Even more vehement are the denunciations of the Fathers

of

the fourth and fifth centuries against the usury of their

Both the Eastern and the Western Fathers draw upon the full vigor of their oratorical powers in depicting the la mentable state to which the usurer's victim is reduced, con trasting with this the Gospel precepts of charity and mercy. Where in addition to these oratorical denunciations we find day.

anything that approaches philosophical speculation on the morality of interest, it must be borne in mind that the Fathers were concerned with the type of usury characteristic of their times and of which Ausonius could exclaim “velox inopes wsura trucidat.” Among the Grecian Fathers, St. Basil, after enumerating a number of the passages of Scripture which condemn the sin of usury as an act of inhumanity which seeks gain from the misfortunes of the needy and gathers gold from tears and strangles the poor, tries to persuade both the rich and the poor from transacting money loans. “Hear ye rich, how be cause of your inhumanity we must give this counsel even to the poor. . . . He who succors the poor for the sake of the ad Usum Hodiernum Scholastice Disputatae (2nd ed.; Bruges: C. Beyaert, 1904), Quaestio Nona: De Mutuo et Usuris, p. 450 et sq. 11 Stromatum, 1.2, c. 18, Migne, P.G., t. 8, cols. 1023-6. 12 Adversus Marcionem, Lib. IV, c. 17, Migne, Patrologia Lat., t. 2, cols. 398-9.

18 De Lapsis, c. 6, Migne, P.L., t. 4, cols. 470-1.

from the First to the Twelfth Century

Lord both

29

He

gives and lends at interest.

gives because he

in return; he lends because the Lord will reward him magnificently for what he does not receive.” Gregory Nyssa inveighs against the false appearance ruin, seeking beneficence which usury brings the poor reap harvest unsown from the gold and bronze the poor poor man “quae parere non sunt solita,” driving many hang himself despair. Yet the usurer frets the gold keep must stored his house, idle and unfruitful.” Usury already wounded. nothing less strikes again him who brigandage.” St. John Chrysostom contends than form usury which augments that the prohibition the practice both the poverty the borrower and the wealth the lender

he to

is

of

of

of

of

a

of

is

It

in

at

in

a

to

of

to

of

byof

St.

hopes to receive nothing

a

is

It

to

is

as

a

of

to

to

as

of

he

a

in

of

is

or

a

is

to

in

in

and which was forbidden only among the Jews the Old prohibition Law extended universal the New Testa ment. Nothing more vile more cruel than usury which traffics the misfortunes others. bond forged by in justice, snare woven from forced agreements. Are there not, agri enterprise such exclaims, sufficient lawful forms culture, sheep and cattle-raising and manual labor? Yet when men are forbidden amass riches even from lawful occupa open their purses tions and are commanded the poor, robbery which new form avarice the usurer invents disguised munificence. Nor will Chrysostom accept the a

recompense for the sac parting rifice with that for which he can find other uses. For his usury must look only heaven.” Among the Latin writers this period (the fourth and unjust fifth centuries) Lactantius declares that receive

it

is

to

of

to

he

in

defence that the lender may claim

t.

in

t.

to

in

t.

t.

V in

as

in

as

to

to

as

a

in is

17 to

t.

58, col. 556 sq.

et

t.

in

II

in

16 15 14

29, cols. 263-80. Hom. Ps. 14, Migne, P.G., sq. Contra Usurarios, Migne, P.G., 46, cols. 434 Ecclus., Migne, P.G., 44, col. 672. The following sentence Hom. IV from St. Basil furnishes clue the exorbitant rates that were charged give money his day. “What more oppressing than him that has none demand return twice much has been given?” Ibid., col. 266. and Genesim, Migne, P.G., 53, cols. 376-7; Hom. Hom. XLI Mat thaeum, Migne, P.G., Matthaeum, Migne, P.G., 57. cols. 61-2; Hom. LVI

30

The Christian Attitude Towards Usury

more than one has given in loan. But he is speaking again of loans to the poor, usury on which becomes a preying upon the necessities of others. Hence he lists with the divine precepts forbidding theft and the coveting of another's goods the ob ligation to lend, and lend gratuitously, to those in need. St.

Hilary assails the practice of usury because it is a pseudo benefit, a form of spoliation wherein by a loan of idle money one grows richer from the poverty of his brethren.” St. Am brose, after the example of his Grecian contemporaries, the brothers St. Basil and St. Gregory of Nyssa, paints in vivid language the pitiable state to which the poor victim is brought by usury. The money of the usurers (which is pecunia otiosa) he compares to serpents, to the waves of the sea. It is a cause

of universal shipwreck. It has driven many to hang themselves in despair. As Cicero correctly remarked, usury is homicide. There is no difference between foenus and funus, interest and interment. Hence the Jews are permitted to take it only of the foreigners, their enemies. “Ergo ubi jus belli, ibi etiam jus usurae.” Like Plato, Ambrose describes the wiles of the usurer who under the guise of friendship ensnares the new heir and the incautious youth, especially if he is addicted to gambling, until the rich, too, are reduced to poverty by the price of their

is

of

or

is

is

of

to

or

as

of

St.

prodigal dissipations. “Whatever exceeds the amount loaned is usury” whether the loan is of money, of food, of raiment or of any other type of good.” In a letter to Vigilius he insists that the suppression of the vice of usury is part of the func Jerome likewise de tions proper to the episcopal office.” anything more (whether that the receiving fines usury money not) than the amount loaned. But his assumption again that lending the poor. To the rich who have borrowing obligation lending there no motive for Si

et

col. 307. sq.

14. col. 759

Vigilium, Migne, P.L.,

t.

ad

20

Epistola 19,

t. 9,

Migne, P.L.,

19De Tobia, Migne, P.L.,

t.

1s.In Ps. 14,

v. 5,

an

more. “Respondeat nobis breviter faenerator misericors: habenti, utique utrum habenti dederit non habentif debuerat, quasi dare non sed dedit non habentif Ergo quare

16, cols. 983-4.

from

31

Twelfth Century

the First to the

present goods

of

of

to

of

of

St.

plus exegit quasi ab habente”. The same definition is used by St. Augustine. The usurer is he who expects to receive more than he has given, whether of money or of corn or of wine or of oil or of anything else.” It is even more cruel to slay the poor by usury than to injure the rich by robbery, and restitution is required in the first case as well as in second.” Leo the Great vehemently condemns the injustice and in solence that form avarice which practices deception under the disguise service one's neighbor, which esteems

of

of

to

by

is

of

of

Apollinaris who exhorts

to

by

of

or

by

of

in

no

he

to

all in at

as

more certain than those the future and gain apart which seeks from humanitarian considerations. He who seeks amass riches the expense others merits eternal punishment.” Hence his letter the Bishops Campania, Pisa and Tuscany, reminds them that they can longer pass over usury either silence this practice the clergy the laity who call themselves Christians.” seeking compensation for damages However, the justice repayment delay recognized by, e.g., Sidonius caused

we

In

-

*:

*

-

juriam.”

.

in

a

debtor settle the debt the son without delay. Otherwise, “si moram patitur quidquid prop ter misericordiam concesserat pie, juste reposcit propter

to us of

of

least two passages

may be

t.

25, cols. 176-7. Ezechielem 18:5, Migne, P.L., Migne, P.L., 36, col. 386. Ps. 36, t.

v. 6,

In In

54, 25 24 23 22 21

Yet

t.

t.

9,

t.

in

58,

t.

3,

26

as

2

c.

t.

Epistola 153, Ad Macedonium, Migne, P.L., 33, cols. 664-5. Migne, P.L., 54, cols. 181-2. Sermo XVII, De Jejunio, and Epistola IV Migne, P.L., Episcopos per Campaniam etc. constitutos, col. 613. Ad Turnum, Migne, P.L., col. 531. Commentarii Leviticum 25:35, Migne, P.G. 87, col. 787. Migne, P.G. 95, cols. 1363-6. Sacra Parallela, tit.

28 27

t.

St. Basil against usurers.”

at

a

to

he

to

in

St.

all

to

to

a

as

of

by

of of

the writings the later Fathers, find for the most part but repetitions what had been said their predeces Procopius usury sors. condemns violation the human ity and generosity which the New Testament commands show men.” John Damascene merely gathers usury gether the texts relevant both the Old and New compendium Testaments which adds the homily

32

The Christian Attitude

Towards Usury

quoted from the writings of this period which would seem to Condone the taking of interest on loans of a commercial na ture. St. Gregory of Tours in his history of the Franks cites without reprehension the case of a bishop who, in behalf of the citizens who were conducting a business enterprise, asked the king for a loan of money which he promised to return “cum legitimis usuris.” But when the citizens had increased their fortunes with the aid of the loan and the money was offered by the bishop to the king, the latter generously de clined to accept it.” And St. Gregory the Great (A.D. 540 604), writing to the subdeacon Athemius, asks him to ap proach “magnificum filium nostrum” who is the creditor of another party and request him, as a Christian and a noble gentleman, to show mercy and kindness rather than severity towards the ruined debtor and be content with a part of the interest promised, assuring him that God will reward him copiously for what he remits to the unfortunate.”

Thus in an age that knew well the evils of wars and famines and all the misfortunes that accompany sudden and sweeping

of

is

of

as a

in

of

of

77, cols. 972-3.

t.

n.

3,

34, Migne, P.L., 71, cols. 266-7. Historia Francorum, Lib. Epistolarum, Lib. IX, epis. 38, ad Anthemium subdiaconatum, Migne,

t. 80 29

P.L.,

its

of

on its

of

in

of

of

of

its

economic and social change, when lending was directed to a very large extent into the only course that might prove socially disastrous, when the profits offered to the favored few by an unusually high rate of time-preference proved exceptionally tempting and when the debtor was left by the law very much at the creditor's mercy, interest on this particular form of lending became a problem of social rather than of commu tative justice. Its condemnation was based upon an analysis origin and effects, rather than essential nature of (i.e., the motive which the seller demands the price and the effects the price on the buyer, rather than the origin price manner which interest determined). Its was avarice and greed the heart the usurer who, heedless charity, mercy, generosity and hu the gospel precepts manity towards one's neighbor and even under the pretence

from the First to the Twelfth Century

33

of rendering service to the borrower, grew rich on the mis fortunes of others. Its effects were disastrous to both the

is

of

or to of

is

of

of

to

to

as

In

in

is

as

as

in

is

it

to

a

of

to

as

of

of

It

its

spendthrift and the poor. It was a snare that entangled, a rope that strangled, a sea that overpowered, a serpent that mortally stung stripped him victim. all his possessions, brought slavery, often drove him him under the yoke suicide refuge from despair. Where the problem commutative touched, practically always with respect justice condi tions such these which money “idle” and unfruitful anything (whether money any and usury defined commodity) other excess the amount advanced the fact, borrower. Vermeersch remarks, the question

a

if

if

of

is

of

moderate rates seems scarcely have presented itself the surprising minds the Fathers for discussion.” Nor this lending with which they were we remember the type we assume the existence of com concerned. For even

of

of

of

type mentioned above, the attitude

in

—

of

by

of

be

of

as

in

of

to

of

by

is

in

petitive market for capital and that the lender entitled justice commutative the rate interest determined the forces this market, this right may circumstances such obligations charity, superseded the foregoing words, humanity mercy, generosity, other social justice.” In the few instances of reference to loans other than of the

its

or

so

in

in

Arthur Vermeersh, “Usury” the Catholic Encyclopedia, XV,235-238. humanity upon which the Fathers insist The virtue much ex of

32 31

by

to

of

its

in

of

is

not that condemna tion but tacit approval. And the populace turn receives reprehension, being exhorted due measure seek borrowing.” livelihood manual labor and not by begging

of a in

to

to

is

to

us

its of

of

of

S.

q.

to

to

or

to

horting the rich lend gratuitously the poor St. Thomas makes an integrat supplementary virtue justice. Cf. Theol., II-II, ing 80, ad 2m, possess which he quotes the definition St. Isidore; “To be humane feeling mercy towards one's fellow men. From this the virtue love and humanity derives name, impelling render mutual assistance one another.” t.

of

to

its

. . .

of

in

a

in

II

83

Cf., e.g., St. Basil, Hom. 29, col. 276. “You Ps. 14, Migne, P.G., you know trade; then work your labor. receive the price Offer your services return for wages. Behold how many methods and oc your earning your living. casions there are For sustenance the ant have hands,

34

the

The Christian Attitude

Towards. Usury

Early Ecclesiastical Legislation The attitude of the Fathers towards usury is reflected in canonical legislation of this period. Until the ninth cen.

tury, if we except a suspected reading of the Council of El vira, the practice of usury is forbidden only to clerics. After that the prohibition is extended to the laity as well. The first instance of a canonical prohibition of usury is found in Canon 20 of the provincial Council of Elvira, in Spain (A.D. 306?). Yet the extent of this condemnation is subject to question. For while the text of this canon as found in Ivo” and in Gratian” merely threatens the clerical usurer with degradation, that of Mansi” adds that the layman also usury is to be ex who pertinaciously continues to practice - - - communicated.” Canon 44 of the Apostolic Canons, the date of which is now ascribed to the middle of the fourth century, decrees that if any bishop or deacon persists in exacting usury from his debtors he will certainly be damned.*

A.D. 314, in which was repre the Western Church, forbade clerics take usury prohibition pain excommunication,” under and the same found the canons of the Council of Laodicea, A.D. 325, Arles, A.D. 443. and the second Council first Council of Arles,

of

of

is

in

of

to

all

The

sented

9.

t. 2,

35

et

t.

37 36 34

of

a

a

in

us

neither begs nor borrows; the bees furnish with the nourishment they possess trade; and you abundance. Yet nature has given them neither hands nor single occupation for the who are men, resourceful animals, cannot you find support life.” Migne, P.L., Decretum, 5,D. XLVII. 161, col. 805. amplissima collectio, Sacrorum Conciliorum mova col. in

is

to

t. p. 2,

39

t. 1,

to

in

38

to

of

in

of of

or

80 of

or in

of

to

of

of

It

be

may usury noted that no reference found either the in Jerusalem, an assembly called structions the Council deal with the issues arising from the contentions the Judaizing brethren, cf., Acts 15:28-30, the Didache Doctrine the Twelve Apostles, an early Christian hand instruction matters faith and morals composed between the years book A.D. and 100. The latter did condemn forced payments loans the poor who were unable meet their obligations. Breisgau: Karl Joseph von Hefele, Conciliengeschichte (Freiburg Herder, 1869-90), 788. Mansi, op. cit., col. 472.

from the First to the Twelfth

Century

35

Canon 17 of the first general Council of Nice, A.D. 325, extended this prohibition of the practice of usury by clerics to the entire Church. But though it declared the taking of usury by laymen to be contrary to the teaching of the Church, it did not place upon them any formal prohibition.” The same prohibition of usury to clerics and the disapproval of lay usurers is found age, A.D. 345.”

in Canon

12

of the first Council of Carth

This disapproval of the practice of usury by laymen be came eventually a definite prohibition in the capitularies of Charlamagne and in the synods and provincial councils of the eighth and ninth centuries.” And in the great general councils of the twelfth century, these prescriptions of the synods and capitularies intended to combat “the insatiable rapacity of usurers” received the approval and authority of the entire Church.*

40 Among the forms of usury mentioned in this canon as forbidden to permitted by clerics was the hemiolia or sescupla, a type of usurae sesquialterius the law of Constantine, whereby the lender for ten bushels of grain given in winter could receive fifteen in time of harvest. 41 Mansi, op. cit., t. 3, col. 149. 42 Cf., e.g., the council of Aix-la-Chapelle, 789; of Paris, 829; of Meaux, 845; of Pavia, 850; of Ticinum, 850; and the capitularies of Charlemagne, 789-806. 43 Favre's comment on the prohibition of usury to laymen under pain of excommunication by the Council of Paris gives an illuminating account of the condition which elicited these prohibitions of the ninth century. “There is no question of any dogmatic definition. The council is merely an echo of the uni versal complaints raised against the usury of this period, whereby in utter dis regard for any considerations of humanity, the poor are reduced to starvation and misery. The usurers, certain of impunity by reason of the succession of civil wars and of Norman invasions, take advantage of these misfortunes to lay hands on the patrimony of their victims. The rate of interest surpasses any thing that one could imagine of infamy and extortion — 100, 200 and even 300 per cent. For a bushel of wheat or a measure of wine, the lenders demand three

or four in return at the time of harvest.” J. Favre, Le Prét é interét dans l'an cienne France (Paris: A. Rousseau, 1900), p. 51. (Quoted by Père Spicq, op. cit., p. 456-7.)

the

by of

this the renewed attention given the interest the twelfth century. The method which the problem

is

the change

the beginning

by

second attacked.

significant

in

is to

period. The first Church the problem

Scholasticism

of of is

FACTS stand out

as

wo

Sixteenth Century

at

The Age

to

Twelfth

of

Usury from

the

3

as

of

be

Yet

to

as

of

of

in

of

a

so

is

of

to

of

is

in

is

of

reason

to

which Ashley inclined attribute phenomena the first these the revival the study Roman law the West.” No doubt there some justification legist for this belief. For the fact that eminent Ac Bologna, 1182-1260, should declare the contract cursius Justinian, usury justifiable his commentary on the Code citing authorities Irnerius and Bulgarus the previous century, could not pass without notice.

The chief

in

of

1,

I,

1

Sir William Ashley, An Introduction Theory, Vol. Pt. No. 17. 36

to

of

in

in

a

more cogent reason would seem the increased activity lending and borrowing accompanying the wide spread economic changes that were progress the twelfth century. “Now almost everywhere,” declared the Third Lateran, 1179, “has the practice usury become Council English Economic History and

37

so notorious that many, giving up other forms traffic

A

in usury

of

business,

though this were a legitimate occupation.” cross section of the economic life of western civilization as

in the ninth century (which may be taken of the Middle Ages) would reveal for the

the beginning most part, a self as

contained agricultural economy crystalized into a hierarchical organization of society. With the beginning of Saracen su premacy in the Mediterranean in the seventh century, the trade and commerce that had survived the dissolution of the

to

by

its

a

of

by

a

its

Roman Empire almost completely disappeared; and with the decline of commerce, vanished also the towns it had nur tured, these yielding their place to the ecclesiastical “cities” and strongly fortified “bourgs” of the early Middle Ages. Thus the closing of the channels of international commerce led also to the disappearance of trade between town and country. former market, became self The great estate, deprived of producing contained economic unit all that was needed By the ninth dependents. the lord and his various grades century, Europe had relapsed into feudal agricultural so

of

a

in

of

of

of

to

its

a

a

it

If

of by

of

system estates bound each other obligations mutual and privileges. the system allowed security. little liberty, did afford for time fair degree And conditions afforded an easy transition from theory practice early Christian ethics economic activity. “What was more natural,” asks Pirenne, “than the reprobation usury, commerce and profit for profit's sake those centuries self-supporting normally when each estate was and constituted little world of its own? And what could have been more ciety characterized

Harduin, Acta Conciliorum,

t. 7,

2

col. 1683.

by

impress

its

deeply did

it

Church's order. But for all that,

so

if

to

to

of

to

to

at

beneficent when we remember that famine alone compelled men borrow from their neighbors and hence would once opened speculation, usury every have the door abuse and monopoly, exploit necessity, the irresistible temptation religious these very abuses had not been condemned morality? Of course theory and practice are miles apart and the monasteries themselves very often transgressed the

-

38

Usury from the Twelfth

spirit upon the world that it took men centuries to grow used to the new practices demanded by the economic revival of the future and to learn to accept as legitimate, without too great a mental reservation, commercial profits, the employ ment of capital, and loans at interest.” ~

This “economic revival”

was not far distant.

At the dawn

ing of the twelfth century, there was already in progress a Commercial revival which Professor Pirenne likens in im portance to the industrial revolution of the nineteenth. The revival was started by two great commercial movements — one from Northern Europe and one from Italy following the re turn of Venice, Pisa and Genoa to power in the Mediter ranean. Once more contact was established by merchants op erating over both maritime and inland routes between the Italian cities and Spain, France, the Low Countries, Germany and England. Agriculture was stimulated and became an ex

port industry. New industries sprang into being to meet the distant demand. Production began to take on an aspect of regional specialization. Local retail markets were over shadowed by gigantic international fairs for wholesale traders. Against the silks, spices and precious metals and stones of the East were exchanged the cloth of Flanders, the wool of Eng land, the metal work of Germany and the wines of Germany and France. In response to the needs of the visiting merchants new towns arose, often as appendages, faubourgs or “ports,” of the old. These were soon fed by an emigration from the country of those for whom there was no place on the manor or of those who wished to escape the restrictions of liberty it imposed. Drawing from this free labor, industries developed in the towns, some supplanting the gynecea in producing for the local demand of the town and rural environment, others specializing in export products. The use of money and credit, never absent in the agrarian economy, naturally came to play a more prominent role in the commercial revival. Pari passu with the growth of capital 3 H. Pirenne, Economic and Social History of Medieval Europe (London: Kegan Paul, 1936), p. 14.

39

in

its

to the Sixteenth Century

of

disguised,

or of

of

in

by

at

of

to

to

of

to

of

ready cash, grew the trade money and need borrowing increased owing both credit. The total the the more abun increased demand for commercial loans and liquid capital dant sources which the borrowers for con sumption had now access. Hence lending interest re vigor appeared full the middle the twelfth century throughout Ages, and continued the Middle sometimes un ism and

or

in

as a

as

societates

(inland

rate on commercial per cent, and 24

16

or

(maritime ventures)

the commendae

undertakings). The usual Commercial loans, Pirenne believes, was between

10

or

of of

by

more often under the form one the “extrinsic permitted legislation, purchase titles” canonical (annuity) land-, houselife-rent investment one

as

to

in

of

to

or

in of

as

or

as

of

to

to

to

— of

of in

it

as

though sometimes high per fell low five rose spite trade, the cent.” Yet, the increased demands liquid capital was still advanced greater part the form consumption loans public authorities individuals princes, members the aristocracy who found their

of

in

to

to

to

of

fixed revenues less and less adequate meet their needs rising prices, the face and churches and abbeys who pre borrowing emergency rather ferred resort times

of

or

to

of

or

50

of

or

their lands. The rates charged on than sell their plate distress-borrowing figures such often reached the exorbitant per even 100 cent. The bankers this period seem have been either de giro bank scendants and successors the earlier campsores

in

and accepted de addition their money-lending profitable commercial activities resorted employment their spare cash. Deposit-banking and com mercial credit such know them today were the products banking was brought later period. The medieval trade highest perfection the Italian bankers who eventually drove even the financiers Northern Europe from the field monopoly banking north the Alps. They and secured to

of

we

Ibid.,

130.

of

bills p.

4

dealt

in

exchange

of

a

of

of

its

by

a

to of

as

of

as a

to

in

or

ers (who dealt international exchange posits on fixed charges) merchants who

and conducted clearing-house

op

40

Usury from the Twelfth

erations at the great fairs which were the “money-market of -Europe.” Compared with them, the Jews (whose operations were confined to pawnbroking) were very small fry indeed. Even in this field, their activities were soon overshadowed by those of the Cahorsines and of the Lombards, the latter often enjoying the rights of privileged monopolists. The usual rate

–

charged

It has been truly pointed out that no such thing a money market, in the proper sense of the term, existed at this period. Every credit operation was, in effect, the sub ject of a contract determined by the particular circumstances, a private agreement between a lender and a borrower. In fact, commercial loans were not yet clearly differentiated from consumption loans.” Clearly, then, the economic changes which accompanied the commercial revival of the eleventh and twelfth centuries perfection. as

of

its

demanded a broader approach to the problem of the morality of interest than that of the Patristic period. Such an approach general synthesis was attempted by Scholasticism in

of

a

to

it

proceeded Christian moral and dogmatic theology which erect upon basis rational philosophy. Our chief task it

p.

5

of

6

p.

1928),

of

seems, were exempted The fairs, from the canonical prohibition usury. Pirenne, op.cit., 139. Cf. also Richard Ehrenberg, Capital and Finance the Age the Renaissance, trans. H. M. Lucas (London: Jonathan Cape,

in

º'

at the Lombard money-tables for loans on pledges was about 45 per cent. Thus in the Middle Ages we find something that resembles the beginning of a money and capital market, but they were still in a very rudimentary and primitive state. Borrowing and lending operations were still dominated rather by per sonal and individual relationships than by the impersonal forces of an organized and competitive market. “Save in the great Italian cities,” concludes Pirenne, “where the governing institutions of the financial markets and the banks of the future were already beginning to take shape, their (credit and the trade in money) vigor was greater than their technical

54.

to the Sixteenth Century

41

its

in this chapter will be to examine

of

of

of

a

of ofof a

es

o,

to

of

this period were the addition commercial loans CO borrowing for consumption and the tendency towards the development market for money and capital, i.e., the tablishment market rate interest. The first demanded

of

ing

its

by

method and the results question usury. achieved the The two elements which entered into the nature of lend analysis

(12

a

to

of

by

of

an extension the concept interest beyond that envisaged early Christian teaching and the moral evaluation such concept that would apply all debtor-creditor relationshi This was indeed the task which the Scholastics undertook of

of to

of

to

and the social consequences the loan that the intrinsics lending and borrowing. The results attained nature by the analysis tended keep the criterion that sphere. usury good nature, analysis For the had shown that was only consequences; would be condemned for its evil morally indifferent, then justification condemnation entirely (apart question would rest from the motives) on its

of

or

its

if

it

if

by

to

in

of




#!--—

2

#

-3|

/

Z / /

—

Z

—

ION2 —

|

—l:HAN, |O

—

|

|

|

|

|

|

|

|

|

|

|

|

| |

|

|

|

B

Income This Year

|

M”

X

Fig. 1

shall measure next year's income on the vertical axis and this Thus the point P will rep position resent the of an individual with a title to OB units of income this year and OA units of income next year. By shifting this point, the position corresponding to any possible year's income on the horizontal.

combination of definite amounts of income this year and

in

137

by Time-Preference

come next year may be marked on the diagram. All points representing an equal amount of income this year and next year would lie along the dotted line

10

of

units

11

of

to

present income units the cost each case from his income next year.

10

in

at

at

by

us

of P

at

crements

subtracted

is it.

OE. Small incomes of O, this character would be found close to and large ones would be found close to E. The positions of all those whose income next year exceeds present income will lie to the left of (above) this line; the P's of all those whose income this year is greater than that of next year will be to the right of (below) per suppose that the market rate Let interest position cent. Our individual whose income we have estab borrowing can, this rate, add successive in lished This will

cessively increments

of

to

to he

to

to

cause his income position slide downwards and the right by lending, successively may, P1, P2, Pa, etc. Or add suc at

any number

of

expressed

to

to

interest will

MM', connecting smaller

or by of

same rate

be

This

of

or

to

of

by

l

l

units his future income the reducing present cost his income 10. This will cause points P', his income position shift upward and the left P", P!" etc. Connecting these points we get the straight line, interest, MM'. market line, representing the market rate

of

a

larger amount

45

of

is

If

exchange

of

an of

(implying

degrees

of

present income and income one year hence, would steeper than zero rate interest. the slope

of

a

amounts express

45

of

A

at 45

of

of

of

or to

O

of

to

to

larger income lines parallel positions the same proportions (i.e., approaching closer E). The actual rate interest may be measured by slope the deviation the the market line from an angle degrees on the horizontal axis. market line meeting OX equal degrees, i.e., representing exchanges an angle

future of

of

is

is

if

a

of

present income) the rate income for smaller amount positive; interest the slope less steep, the rate interest negative.

The market line,

is

year.

It

of

to

however, merely shows how an individual positions on his income map, ex possible can move various pressing different combinations income this year and next

something rigid, objective, impersonal, common

The Rate of Interest

138

as

to all who lend or borrow in the same market.

Determined

To

ascertain

whether and to what point the individual will move we must know his indifference lines as well. The indifference lines, representing individual rates of time-preference at various in come positions, are, unlike the market lines, subjective, per sonal, varying with the character of the individual and the nature of his income position. Figure 2 illustrates such an in

Y

O

|

2

I

I

B

3

X

Fig. 2

difference line drawn through the income position P. Let us suppose that an individual with this income combination is willing to borrow 10 units today at a cost of thirteen units from next year's income. His income position thus shifts down to P. A willingness to borrow a second 10 units at the price of 12 units from next year's income, a third 10 at the price of 11 units, a fourth 10 only at the price of 10, etc., will be repre

139

by Time-Preference

sented by the new income positions, P., Ps, etc. We may fur ther suppose that at his present income position (P) he is will ing to lend 10 units now in return for 14 units next year, a second 10 for 17 units next year and so forth as represented by the income positions P', P," and so forth. Connecting these

45

to

P.

So

or

of

is

of

of

If

at

if

is

of

or

is

at

of

of

by

is

is

of its

points we get the indifference line II". The slope of the tan gent to this indifference line drawn at any point will repre sent the rate of individual impatience or preference for present income at that income position. If the angle made by the tan steeper than degrees, gent at intersection with OX impatience negative. the rate comparing the slope the tangent the in Hence any point with the slope difference line the market line (which the same for all points), we shall know whether an lend that income position. the individual will borrow greater tangent slope the than that the market line, the individual will borrow; the slope less than that the mar ket line, he will lend. But what will determine the limits borrowing? his lending far we have been considering only one indifference line drawn through the actual assumed income position This of

is

it

In P.

is a

as

at

of

line represents various income combinations all which have the same total utility the combination All the po sitions on this line have equal significance. other words, matter of indifference to the individual whether he at

I".

a

curve farther from

O

a

income on

to

I*

an

on

utility than those indifference O) and will prefer any position on one he

curve nearer

to

and future greater total

on I*

to a

on

to

to

be

to

a

of

present

possess

he I*

to

as

a

at

a

O

E.

a

to

at

or

one point on the line another. We may draw another indifference line intersecting OE point nearer point and third intersecting OE above, the individual will be In the same manner nearer indifferent all positions on the second indifference line and all positions on the third indifference line But position any will not indifferent on one indifference position on any other. He will prefer any line relative position II' any position (since the combinations

140

The Rate of Interest

as

Determined

In like manner the entire surface of the income map may be considered as covered with potential-indifference

on II".

curves after the manner of elevation lines on a geographical map. The positions on the curves farther from O will be pre ferred to those on curves nearer to O.”

Figure curves.

such a group of potential indifference must be noted that these lines, unlike the market

3 represents

It

lines, will not be parallel to each other. For, even considering

Y

X

O

Fig. 3

to in

of

—

as

O. be

as

to

O

Using the third dimension, the increasing total utility would slope increasing elevation one moved outwards from in

sented

by a

3

of

is

of

its

for simplicity's sake the personal factor as constant, the degree (and even possibly the sign) of impatience will vary with the size and the time-shape of the income-stream corresponding to the various combinations of present income and income a year hence on the same and on different curves. As one moves out from O along the equal-combination line OE, the tangent point intersection with OE be of the indifference line at comes less and less steep. This means that the individual rate impatience actually from near infinity decreasing vicinity possibly the zero one approaches nearer repre

by Time-Preference

141

E. In like manner, the slope of the curves becomes steeper as we move upward and to the left, and flatter as we go down ward (along any curve) and to the right. The rate of im patience increases as we move upward on the income map and to the left; it decreases as we move downward and to the right.” Having before us these two sets of lines superimposed on an individual's income map, we are now in a position to know whether the individual will lend or borrow, given a definite Combination of present and future income, and to what extent. In Figure 4 we shall take point P, representing a combina tion of OB amount of this year's income and

OA amount of

Y

A.

5 q) >$: Qu

Z

qu 8 8 E

O

Income This Year

B

B’

-

M

X

Fig. 4 4 Thus, as Fisher points out, the supposition that one will always prefer income this year to an equal amount of income next year is too narrow to apply to all points on the income map. It expresses the conditions we would expect to find corresponding to the income combinations to the left of OE, the more

so the closer we approach OY. But at the income positions in the lower right hand corner where the curves flatten out, i.e., where present income increases both absolutely and relatively to future income, the rate of impatience may fall to zero, or even be negative in the case of perishable goods. Whether or not the market rate will be anything but positive will depend, as we shall see later, on the relative “pull” of the forces to the left and to the right of OE.

142

The Rate of Interest

Determined

as

is

of

by

at

of

its

next year's income. Through this point we shall draw the market line MM'. Examining the indifference line at P we slope find that it intersects the market line and that steeper the point intersection than that the market line. This means that the individual will borrow. He does

by

as

is

it

is

of

of

of Q

to

be

to

of at be

he

of

to

is

of

of

is

to

a

to

at

of

to

of

so

moving down the market line, exchanging successive re ductions titles income next year for successive additions income this year the market rate interest. At each step higher higher he crosses and indifference curve until finally tangential. Here he reaches one which the market line time-preference are the market rate and his own final rate identical. This for him the point maximum advantage. go farther, the market rate would be higher than Were he impatience his own rate shown his next indifference (point stop short tangency), his own line. Were rate would be above the market rate, and there would still equilibrium gained. Q, then, advantage the point which trading ceases, and reached by exchanging AA'

P'

at

be

a

of

of

the first problem with this chapter, viz., the determina

the discussion

in

This concludes

Q,

to

he

in of

be

a

of at

P,

to

If

of

present income. future income for BB" we assume the individual's income position instead of he now becomes lender instead of borrower (the slope his indifference curve being less steep than that repeated but the market line), and the same process will the reverse direction. For now shifts his income position upward along the market line tangency, the point instead of downward.

of

of

of

it

is

to

a

as

of

of

of

of

a

is

of

is

of

to

of

of

a

of

which we were concerned individual equilibrium, given market rate in tion impatience. terest and different rates individual We must now turn our second objective, the investigation how the equilibrium market rate interest itself determined. question not This individual but market equilibrium. point community whole, the From the view the operation cause and effect relative the individual rates impatience and the market rate just the re interest verse of what we have found to be in the case of the indi

by Time-Preference

143

vidual. In the case of the individual, given his initial degree of time-preference, it is the market rate of interest that de termines the nature and extent of his borrowing and lending and his final or equilibrium rate of impatience. But for the community as a whole it is the aggregate of the individual rates of time-preference that determines the equilibrium mar ket rate of interest at any point of time. As in the case of gen eral price theory, for the market rate of interest (price of

of future income) to be the equilib just rium rate it must be sufficient to equalize supply and demand, i.e., the amount of present income offered and the amount desired at that price. If the market rate is above the equilibrium rate, more will be offered than will actually be taken at that price; if the market rate is below the equilibrium rate, more will be wanted than will actually be offered. Hence for every given set of conditions of individual rates of im patience, there will exist theoretically a definite market rate whereby the demand will just clear the supply. Once this rate is attained in practice, whether on the assumption of trial and error or of perfect knowledge, it will persist as long as the data remain unaltered. The market will be in equilibrium. There will be no tendency to change. Hence the equilibrium market rate of interest is equal to the “degree of impatience upon which the whole community may concur in order that the market of loans may be exactly cleared.” It “registers in the market the common marginal present income

in

terms

rate of preference for present

over future income as deter mined by the supply and demand of present and future in Come.”

To return to our geometrical presentation, this degree of impatience upon which the community concurs will depend on the relative strength of the “pulls” to the right and to the left of OE. If the forces on the side of higher impatience in crease, the resultant will be a higher equilibrium market rate limit the increased demand for present income to the available supply, and vice versa, if the shift of P's is down

necessary to

5 Fisher, op. cit., pp. 120-121.

144

The Rate of Interest

as

Determined

wards and to the right on the income map of the community. (In this case we are considering the P's not as various possible

income positions of the same individual, but as the actual come positions of different members of the community.)

in

Theoretically, then, there is nothing in the nature of the geometric problem as we have presented it that would neces sitate the market rate of interest being positive rather than zero. Assuming the personal factor as constant (i.e., the in difference of all the members of the community is identical), this will depend on the nature of the dispersion of the initial P's of the individual members of the community about the line OE on the indifference map of the community, i.e., on the size and time-shape of the individual income-streams. It will depend also, as we have seen, on the personal characteristics of the various members of the community. Herein lie the conflicting subjective forces of desire to enjoy present income and desire to provide for the future wants of oneself or of others. But the discussion of the chief reason why the equilib rium rate of interest is likely to be positive (i.e., the nature of the objective factor, investment opportunity, that helps to determine the market rate of interest) must be left to the more complete and realistic approach to the interest problem to be found in the next chapter. We may now summarize the conclusions reached the determination of the rate of interest on the specific ing assumptions of this chapter.

as to

limit

SUMMARY

perfectly competitive market, a certainty of knowledge as regards the future and a fixed rigid ity of individual income-streams capable of modification only by lending and borrowing (purchase and sale of present and future income), the following conclusions may be drawn as to the process whereby the equilibrium market rate of interest is determined.

On

1.

the assumptions

The

as between

of

a

degree of preference

two points of time,

of an individual for income by the tangents

as represented

by Time-Preference

145

to the various points on the lines of his indifference map, will depend upon the size and time-structure of his income-stream (which effect may be further modified by the personal factor). 2. Given these individual rates of preference, correspond ing to the different income positions of various individuals, and a fixed market rate of interest, and assuming all individu als to be desirous of deriving the maximum advantage from the use

rate, each individual will modify his by lending or borrowing up to the point at

of this market

income-stream

which his final rate of time-preference is equal to the market rate, i.e., to the point where the tangent to the indifference curve at his new income position coincides with the market line. This point of maximum advantage is the point of in dividual equilibrium. 3. The market rate of interest is itself the resultant of the operation of the

individual rates of time-preference. For market equilibrium it is necessary that the market rate be just sufficient to clear the market, i.e., to limit the demand for present income to the supply forthcoming at that rate. 4. The total amount of income repaid next year will

ex

ceed the total amount of income lent this year by the market times the principal (income lent). In other words, the present value of loans, at the time of lending, is equal to the present value (discounted future value) of re

rate

of interest

payments.

3 The Rate of Interest as Determined by Time-Preference and Investment Opportunity

W

E MUST now bring our analysis of the determination of the rate

of interest

a step nearer to reality by dropping

the assumption that the size of individual income-streams is fixed and unalterable and that their time-shape can be modi fied only by lending and borrowing.

new assumption can convert present income into

On our

that the income-recipient capital by investment either in old or in new resources in a variety of ways, the individual may alter either the size or the time-shape of his original income stream by recourse to these optional employments of capital. This recourse to alternative employments of capital will be further facilitated by the existence of a loan market. Thus we introduce a new element into the analysis of the determination of the rate of interest, that of the productivity of capital or investment opportunity. Our method of procedure will be: (1) to determine the conditions of individual and market equilibrium in the very general case of individual income-recipients confronted by their own rates of time-preference, a market rate of interest and opportunities of investment measured by rate of return over cost and (2) to investigate

in

greater detail the nature

1 Fisher's “rate of return over cost” which we use in this chapter is identical with John Maynard Keynes’ “marginal efficiency of capital” as Keynes points out in The General Theory of Employment, Interest and Money (New York: 146

147

of investment opportunity by removing successively the sim plifying assumptions of inalienability, permanence and non augmentability of resources of the static theory of production. Let us go back to the example of our pioneer settlers of Chapter 2. They now cease to be pensioners and will derive their income hereafter from working their land. One of these settlers whom we shall choose

dition to his land

for a

case

study

possesses

500 units of present income.

This

in ad he may

distribute between (1) expenditure for consumption during the coming year and (2) the cultivation of his land. But there is no loan market in which he can borrow more present income for investment if desired. Figure

1

the various possibilities of modifying as between the present and one year hence.

represents

income-stream

of of

a

to

one point corresponding the assumption income-stream, we now have whole series p.

Instead rigidity

of of

Fig.

1

L

O

X

L't

Y

will

be

of

p.

of

as

of

in

of

Harcourt, Brace and Company, 1936), 140. (Cf. also his “The Theory the Monetary Experience (ed. Gayer), Interest” Lessons 145. Both price and price level changes. concepts imply such monetary considerations liquidity-preference Special monetary considerations arising from the concept

Rate

reserved for the next chapter.

148

Interest Rate

as

Determined by Time-Preference

of

of

a

at

L,

of

to

of

to

be

of

In

be

it,

points representing the various income situations correspond ing to the choice of different technical combinations in the cultivation of land. Income this year is measured along OL and income next year along OL". The line LL" we shall as sume to represent the limit or boundary of maximum returns afforded by the given technical conditions of production. Rep resenting the technical optimum positions relative to any points within this line will separate the eligible from the in eligible investment opportunities and may called the in vestment opportunity curve. view the presence the fixed factor, land, the curve will convex the origin, rep resenting decreasing rates return over cost on each suc By moving upward and cessive unit investment. the left along this line from the investor may increase his income decreasing rate by successive investments next year

in

he

of

60

is

of

is

to

is

to

L.

L

to

as

is

of

50

of

of

so

80

of

a

of

of

of

a

50 of

to

us

of

50

of

1.

L

of

2

a

of

2.

of

to

of

a

or

of

be

of

this year's income. equi At what point on the opportunity line will his present income will the individual librium? How much trading with nature for larger exchange by investment year amount income next and how much will he retain for his own consumption? To answer this we must revert our Chapter map indifference Figure represents normal system indifference curves superimposed upon the production opportunity curve Moving upward from Figure along his investment op portunity curve our settler finds that from the investment the first units this year's income he will receive, let say, returns the value 100 units next year, rate return per cost; 100 cent over from the investment the second units, rate per cent; from the third, per return cent; from the fourth, 40 per cent and on. But while the decreasing with each successive investment rate return units, the slope growing his indifference curves they cut these successive points on the more and more steep curve. Thus he will continue by successive investments tangent move up his curve the point where that line equilibrium, an indifference curve. That his position units

149

and Investment Opportunity

i.e., the point at which his marginal rate of return over cost

(investment) is equal to his marginal rate of time-preference. This is his position of maximum advantage. For were he to

Y

L'

X Fig. 2

stop short of this point his rate of return from investment

or

a

us

of

by

of

to

by

of

of

by

In

it.

would be in excess of his rate of time-preference and vice versa this particular case, our settler were he to go beyond investing will have reached the equilibrium position (P) present income and retaining 300 for this year's 200 units consumption. Thus, assuming given technical conditions production lending represented the LL' curve and no recourse bor rowing, the extent an individual's investment will be de termined his time-preference, i.e., the shape his indif Now, let drop the second assumption and ference curves. assume that our settler has access to loan market. the

his own present resources.

individual He finds

can invest at

only out

of

Under our first assumption,

his

dis

150

Interest Rate

as

Determined by Time-Preference

posal only a one-way shift, i.e., along the opportunity curve to the point of tangency with an indifference curve. But with

to a loan market he can shift in two directions, along his opportunity curve and along the market line. If the market rate of interest is below the rate of return at which

access

he has to cease investing under our first assumption, i.e., point P or 40 per cent, he will continue to invest by borrowing

money until a new position of equilibrium is reached. Where will this new position be? Figure 3 is a graphic representation of the process by

which the new equilibrium is reached. Let us suppose our settler to be at point O (which corresponds to point P of Figure 2) on his opportunity curve. Since the slope of the tangent to the opportunity curve at this point is steeper than the slope of the M line (market rate of interest) which we have superimposed upon the investment-opportunity and indifference curves of Figure 2, the rate of return on further investment in his land is greater than the market rate of interest. Hence it will be profitable to invest more of this

and Investment Opportunity

151

in his land, remembering that he

can adjust his income to present needs by borrowing at a lower rate than that of the profit from his investments. He will there fore move up along his LL' curve by additional investments until he reaches the point P. Here the market line is tan gential to the LL' line, i.e., the rate of interest and the rate of return from investment are equal. To invest more would be to lose, not to gain. But at this new income position P, with AB of present income and AG of future income, the indifference curve running through this point is steeper than the M line. His rate of impatience is higher than the market rate of interest. This means that the individual will borrow

year's income

of interest, moving down the M line until point he reaches the Q where the M line is tangential to an other indifference curve. Here he is in equilibrium with AD

at the market rate

of present income and AE of future income. At this point his rate of time-preference is equal to the market rate of interest, which is in turn the same as the rate of return from invest Given the data of investment opportunity and of in dividual time-preference and the market rate of interest, the individual will be in equilibrium at that income position where the rate of return from investment, the market rate of interest and his own rate of time-preference are identical. Let us note the difference between the new position of equilibrium Q and the original income position O (which was the point of equilibrium barring access to the capital mar ket) and the process by which the former was reached. Start ing with AC of present income and AF of future income, the individual finds it possible and profitable to invest the amount BC of present income in return for FG of future income, know ing that he can borrow at a rate of interest lower than the rate of return on the amount BC which, together with AB, he con ments.

sidered the maximum desirable amount of present income at position O. But having reached the position P, he now finds it desirable actually to borrow more than BC. The amount he borrows is BD, BC of which he uses to replace the sum in vested CB (from which he could not have parted without the

152

Interest Rate

as

Determined by Time-Preference

loan) and CD of which he uses further to increase his con sumption. In common parlance the first of these two sums, BC, is known as a productive loan; the second, CD, is known as a con sumption loan. Yet it must be noted that it is not the loan itself which is productive, but the investment which makes it possible. A shift along the market line adds nothing either to the present worth of an individual or to the total wealth of the community. It is merely a “gain of convenience,” an exchange of goods of the same present value, e.g., of 100 units today for the discounted value of, say, 105 units next year.

But a shift along the opportunity line does, within specified limits, increase both the value of capital and the total income of the community. What is of importance is the fact that the loan makes possible the capital investment. The period of waiting between investment and the maturing of the final product need entail no sacrifice on the part of the investor. The abstinence, if there be any, is shifted to the “capitalist” who advances the necessary loans. Thus capital, as Professor Fisher indicates, involves command over income without which one could not subsist during the period of waiting. With access to present available income, one can invest in an income-stream that is rising in the future. The capitalist may or may not

be the actual investor. In the latter case, the com mand over income is transferred by the capitalist to the in vestor or entrepreneur in consideration of a price, i.e., the market rate of interest. To induce the payment of this price, the prospects of the rate of return on the investment must be at least equal to this market rate.

The problem of determining the equilibrium market rate of interest is similar to the corresponding problem in the pre vious chapter except that to the rate of time-preference is added a new variable, investment opportunity. From the point of view of the individual, the market rate of interest deter mines his choice of investment option, i.e., the one of all eligible options with the highest present value computed at that rate. But from the point of view of the community, the

and Investment Opportunity

153

market rate of interest will itself depend on the eligible op tions open to individuals on the one hand and on their rates of time-preference on the other. In equilibrium, the market rate of interest must be such as just to clear the market of the supply of savings offered at that rate. Supply must equal de mand at a given price. If the price is too high more will be offered than taken. If too low, more will be demanded than offered. These opposing forces of investment opportunity and time-preference may be found operative either on the side of demand or of supply. In equilibrium, the market rate of in terest will be that price at which the marginal increment of supply offered is just equal to the marginal investment taken. These are the general principles of individual and market equilibrium. We must now analyze the nature of these eligible options offered by investment opportunity in old or new re sources under various conditions. In this, our method will again be one of successive approximation wherein, beginning with the assumptions of the static theory of production, we shall remove in turn those of alienability, non-augmentability and permanence of resources.

Transferable, but Non-Augmentable and Permanent Resources

The assumption that

resources

are permanent and

non

augmentable is practically the same as that of the rigidity of income-streams postulated in the preceding chapter, with this exception: that the income streams of individuals are now constant. Their size only and not their time-shape can be al tered by investment. This will be effected by saving or not saving, i.e., by exchanging Command over the services of re

for command over resources themselves (and there fore over their future services) or vice versa. And the value of resources will be equal to their discounted marginal pro ductivities.

sources

In this purely static society, there can be no net saving or non-saving by society. At some price, individuals will be in duced to hold just as many resources as there are in existence.

154

Interest Rate

as

Determined

by Time-Preference

This price will be determined by the rate of interest which, in turn, will depend only on the subjective factor of time preference. That this rate of time-preference will be positive follows from the assumption of transferability of resources. For if time-preference were zero, i.e., if the future services of resources were not discounted, the value of each unit of re source, however small, would be infinite.

Exchange of present impossible. services for resources would be Hence, in a static state in which resources are permanent but non-augmentable and transferable (which means that the

must have a finite value if the transfer is made by there must be a positive rate of interest, the exist ence of which is explained by time-preference alone. With a positive rate of interest, saving must also be positive. But there can be no net saving on the part of the community as a whole. resources

exchange),

Resources

Transferable,

Augmentable and Permanent Dropping the second assumption of non-augmentability, we now assume that the services of resources can be used for the production of new resources as well as for the production

of services for consumption.” This assumption introduces the element of rate of return on new investment. In this society, since resources are permanent, there will be no intermediate goods; there will be only resources, in which will be included all durable goods and final products, i.e., consumption services or goods, all of whose services are consumed over a very brief period of time. Let us first consider what will determine the profitability of production of a single unit of resource. This will depend upon the rate of return over cost or the rate at which present income can be converted into future income. The rate of re 2 This assumption, that new resources same

resources

classical

alone.

theory,

are produced by the services of the as produce consumption goods, is broader than that of the viz: that

new resources

are produced by the services of labor

155

and Investment Opportunity

single unit of a new resource will be the relation marginal productivity and production. between cost produc Assuming that production takes no time, the cost tion new unit resource will depend upon the prices present resources, i.e., upon their marginal productivity alternative employments. The marginal productivity the new unit will depend upon the amount that resource al produced ready existence. The new unit resource will turn on

of

If

not inferior

be

the rate

of

return

to

if

the rate erence.

is

of

of

in

of

of

in of

of

a

of

of

its

its

a

time pref

we assume that production takes time and that the

con

of is

is

of

at

of

given, then interest struction period the unit resource must be added to the cost of construction of the new resource for the time that the services are invested. As the rate of return that which the future services are discounted, the factor

of

be

of

its

a

of

be

to

expected

of

time must equal the discounted value the services rendered. The present value unit re equival equal production source will cost which will ent to its discounted future services. of

point

at

of

of

of

in

production merely complicates, without changing, time the nature the problem. By dividing the construction period into very small intervals and adding the rate interest to the value of services invested in each of these intervals, we any obtain the accumulated value services invested, which

is

of

a

or

in

by a

a

of

is

of

if

of

of

In

a

or

be

of

be

us

of

now assume that the construction period the quan varied, though i.e., prices new resource can that and tities services are given, the period investment un known. The production period may varied by using fewer longer period services for more services for shorter period. production this case, the minimum cost maxi mum rate return over cost can be determined only the given. At any rate rate interest interest given cer

Let

a

of

of

of

of

be

of

a

in

be

given time, the problem can tain society solved equations, one for each construction period. The rate series production can thus return for each mode determined length any for level interest and that construction period maximum. will be chosen which makes the rate of return

156

This

Interest Rate

as

Determined

by Time-Preference

gives the investment the maximum present

value.

In

the optimum length of the investment period will vary inversely with a rise or fall in the rate of interest. The rather complicated method of determining the opti mum length of the mode of construction can be simplified if the rate of interest is not very high and the period of construc tion not very long. Comparing the total construction costs with the expected rate of return at a given rate of interest, one can deduce with a fair degree of accuracy the period which represents the optimum rate of return over cost or marginal efficiency of capital. The rate of return on a single resource can vary: (1) with general,

the amount of the resource, which determines the expected marginal productivity and (2) with the rate of production of the resource, according to which cost will vary. So far we have been considering the rate of return on in vestment in a new unit of only one type of resource. If new

investment is made in units of different types of resources, production will be so distributed as to equalize the marginal rates of return on all modes of investment. Will the marginal rate of return on all resources fall with the increase in the rate of investment? This will depend in the long run on whether or not all resources are freely augmentable. If we assume that there is but one scarce factor which is augmentable and homo geneous and that the final product is likewise homogeneous, e.g., if wheat is the only final product and the only scarce factor of production, then the rate of return will be constant for all amounts of investment and independent of the rate of capital accumulation and investment. The average rate of return will equal the marginal rate of return. The amount of wheat har vested each year will depend only on the amount sown. If the whole of income is reinvested each year, this income will increase at a given rate of return which represents the maxi mum rate of growth. The whole of income will accrue to the owners of the scarce factor. But if after a certain point land becomes scarce, then the marginal rate of return will fall below the average, and this difference will go to landlords in the form

and Investment Opportunity

157

of rent. This difference between the average and marginal rates of return will now determine the division of the product landlords and capitalists. Hence we find that the marginal rate of return on the augmentable factor falls as the result of the emergence of another scarce but non-augmentable factor. If the marginal rate of return falls to zero, the land lords take all the product. however, we assume that non-homogeneous but aug

If,

between

in

by

of

if

of

of

of

of

of

of

if

to

is at of

of

a

of

in

mentable factors are combined the production homo return, which geneous product, then the maximum rate also represents the maximum rate which the system would grow consumption fell zero, determined the opti pro mum combination the services these resources ducing the final product and each other. To take Mr. Kaldor's example two scarce but augmentable factors, machines and slaves, being combined for the production bread and (to gether with the services bread) for the production each other, diminishing we assume the operation the law

production

in

cost

of

of

services

its

of

marginal productivity

to

of

is

of

machines, returns and know the production functions problem uniquely slaves and bread, the determined.” Start ing with any given ratio amounts slaves and machines, we can derive the rate of return on each from the ratio of its is

of

of

is

is

is

be

to in

If

of

higher on the one than terms bread. the rate return on the other, investment the resource whose present value higher will pushed the point where the rate return equal. This on both resources the optimum proportion

it

be

of

p.

3

Nicholas Kaldor, “The Recent Controversy on the Theory Econometrica, (July, 1937), 228 sq.

of

of

of

to

at

society the willingness save this given growth rate, but net savings will affect only the rate the

of

will depend on

by

of

of

of

a

is

as

of

which maximizes the rate return on investment for society achieved, whole. Once this rate of return alone will assumption determine the rate interest. Hence under stationary technique and resources (all which are aug mentable), the rate capital interest will unaffected accumulation and decumulation. The rate of accumulation

Capital,”

158

Interest Rate

Determined by Time-Preference

as

The rate of interest represents the maximum rate of growth which would be achieved only if consumption were zero and all services of resources were devoted to the produc tion of new resources. Now let us assume that one of the resources becomes in

system.

mere cost

of

the total absolute income rise, the relative proportion income going

of

level

duction. Though

to of

wages reach the subsistence

or

until

to

its

alienable, e.g., by the abolition of slavery. There will no longer be any force in operation keeping the rate of return on both resources equal. The results will be limited by two ex treme cases. If the supply of labor is of the Malthusian type, marginal productivity falls zero, i.e., it will expand until

repro

capitalists will

will

capitalists

of

an

by

of

to

of

If, is

at

to

fall. Yet relatively more will go each capitalist than pre viously. Average income per head will be lower this tech nically less optimum position. There excess labor relative the quantity machines. on the other hand, labor remains constant and the quantity machines increases capital accumulation, labor will gain and the capitalists will be the losers. The rate of return on machines will fall

of

to

is

is is

to

as

In

of

of of

to

is

to

to

of

If

capital accumulation continues and that on labor will rise. marginal productivity such an extent that the machines brought down zero, i.e., falls the level maintenance costs, the entire surplus will go labor. The first case that Ricardo, and the second case the stationary state that Professor Schumpeter. the real world, Mr. Kaldor observes, there little reason believe that the economic

long

as

as

of

is

of

If

of

of

to

will be drawn either extreme stationariness.” consump we drop the assumption that only one type tion good produced, the rate return will remain the same, independent relative preferences for consumers' goods,

system

costs are constant,

i.e., all resources are augmentable.

230,

n.

Kaldor, op. cit.,

p.

4

is

in

to

if

of

But all resources are not augmentable, the rate return will depend on relative preferences the extent that augmentable and non-augmentable resources enter different proportions into their production. As the augmentable resource in 46.

and Investment Opportunity

159 its

or

In

or

in

by

of

of

is

of

as

or

of

to

of

in

by

its

go

as

or

of

its

marginal productivity will fall. But cost may fall rise according the services the augmentable non-augmentable factor production. into the real produced world which machines are the services both labor, their costs may either rise machines and fall relative their marginal productivity according the one the other the factors the more important. Hence, assuming full employment resources and the augmentable and non-augmentable factors, the existence rate of interest and the rate of investment will be determined creased,

at

of

of

the short run the demand curve for investment and the supply curve any savings. The supply curve savings level of income will be derived from the indifference curves

it

at

is

a

of

of

as

of

is

it

a

of

if

the rate

of

If

Chapter

2.

in

as

time-preference positive, zero, the curve will cut the axis positively; will begin origin. The curve will rise until certain maxi the point reached, and then mum will become negatively inclined. supply savings Since the the level will become larger family income rises, we can draw these curves, one for each level of income. As an increase of income makes little seen

of

a

at

Y

or

savings

as

at

to

interest, the curves will low rate near the same point on the axis and broaden out income increases. (See Figure 4.) The demand curve for investment will be determined

difference begin

of

of

as

as

of

of

of

to

as

of

to

or of

of

of

of

as

to

a is

to

as

to

in

to

of

a

of to

as

in

or

of

by the marginal productivity capital the rate return over cost. Though, we have noted, this rate may rise lowering marginal costs with adjustments response investment, the rate the longer run the whole de still augmentable mand curve will shift the left the number goods increases relative the non-augmentable. But the falling, supply moving demand curve the curve will also be the right result the rise income that follows the augmentable resources. Hence increase the rate in falls, may terest the rate investment either increase de crease according the shape the new supply curve. But the demand curve falls farther and farther the left, thus approaching the point convergence the supply curves,

160

Interest Rate

the rate of investment interest.”

in

Because

-

as

Determined by Time-Preference

will fall with

a

fall in

the rate of

the real world the investment demand curve

is more elastic at the point of equilibrium than the supply curve of savings, we may say that the rate of interest is determined by the demand for savings. But in the

in

the short

run

long run, the rate of interest will depend on the rate of time

Y

O Fig. 4

X

preference and will be determined where the rate of return is adjusted to this rate. Resources

Transferable,

Augmentable and Non-Permanent Assuming full employment of resources and subjective certainty as to future events and prices, the preceding analysis of the determination of the rate of interest furnishes at this 5 A technical improvement which increases the marginal efficiency of capi tal will cause the demand curve to shift to the right. The supply curves may shift either to the right or to the left with a change in the subjective factors of the community. which determine the time-preference

and Investment Opportunity

161

level of abstraction a general theory of capital and interest that is quite generally accepted by economists. Most differ ences of opinion start when one drops the assumption that all augmentable resources are permanent. The problem of non-permanence of resources is not im portant under assumptions of a stationary or expanding econ omy. For under static assumptions, planning is always done as though the investment were to be permanent. This is true a fortiori of a progressive society in which the net rate of capital accumulations is positive. The removal of the as sumption of permanence of resources would make a difference if such a society became decumulating. A desire to disinvest would shift the whole family of supply curves to the left raising the rate of time-preference above the rate of return over cost. This would result in a liquidation of capital if resources were non-permanent. But if resources were permanent, no such liquidation could take place. There could be no decumula tion by society as a whole. Hence the problem of non-perma nence of resources becomes that of a decumulating society. But as most societies today are accumulating rather than de

of

as

of

of

as a

be as

of

is

of

a

as

all

cumulating, this aspect of the problem is not of great practical importance. A rise in the rate of time-preference will mean merely a slower rate of accumulation. But another problem arises once we assume that resources may be non-permanent, viz: that of the maintenance of capital capital resources are permanent, the concept intact. If homogeneous factor production distinct from other types many factors factors not applicable. There are production quantity resources, there are and the each given for the system resource will whole independently of its value. a

to

If

as

of

will likewise

change

response

to

resources

in

concrete form

of

as

as

as

if

resources are non-permanent, their physical identity long yield they continue will be maintained only high return the rate interest. tastes change, the

But

of

its

of

capital will disappear and an the new demand. One form place. This transformation other take the physical

162

Interest Rate

character

of resources creates the need for some fundamental

as

by Time-Preference

Determined

measure whereby we may judge of the maintenance, decumu lation or growth of capital as a homogeneous factor of produc tlOn.

Though

many attempts have been made, no very precise instrument has yet been devised for the measurement of capi tal as a homogeneous entity in the real world. Nor is it al together certain that a high degree of precision is required for the purpose that such measurement

of

in

of

in

by

of

of

A

of

a

of

its

would serve either in the theory of capital and interest or in that of the trade cycle. The accuracy of the methods of measurement so far proposed is limited to the particular cases to which they apply. Much of the recent controversy in capital and interest theory has been concerned with unearthing and determining the limits of the assumptions upon which particular models are constructed. To the writers of the Classical school, capital consisted of the subsistence or wages fund of goods advanced to labor. The period of investment was assumed to be constant. Labor supply was fixed the short was the only scarce factor, and run. Prices commodities were function only the quantity change embodied labor. the ratios levels profits left relative prices undisturbed. The wages and of

of

of

in

as a

of

of

of an

of

as

to

of

to

of

or

of

wages was determined the ratio the wages fund the quantity laborers. Profits, the difference between selling price the products and cost (the wages fund), went waiting. The rate profit, the capitalists the reward i.e., interest, depended on the level wages. But rise capital accumulation, i.e., increase the wages fund,

rate

of

of

in

to

at

be

of

a

in

wages, increased saving could must necessarily raise the rate only result fall the rate interest. Hence the rate wages depends ultimately on time-preference interest and which determines the point which there will no net saving (additional increments the wages fund)." Capital, In

of

is

time-preference.

The only

ones

to

of

output equals the rate

of

at

6

capital. This Ricardo's short-run theory the long run, popula tion will increase with increased accumulations until wages reach the sub profit from the expanding sistence level the point where the falling rate benefit

from the

and Investment Opportunity

163

–

then, can be measured in units of labor the value of which upon wages. depend the level of real will Böhm-Bawerk departs from the theory of capital of the Classical school by dropping the assumption that the period of production is constant. Assuming that wages are a constant (not determined by the subsistence fund) and that the product of a given quantity of labor can be increased by lengthening the period for which it is invested, an increase in the wages fund will now cause such a lengthening of the period of in vestment instead of raising wages. The length of the period of production will depend on the ratio of the wages fund (a variable) and the rate of wages (a constant). But Böhm Bawerk fails to prove that there will necessarily be such a correlation between the size of the wages fund and the length of the period of production. In the first place, there is no satisfactory explanation of how the rate of interest will be de termined. With a given rate of interest, the optimum length of the period of investment can be deduced. But if the rate by marginal productivity of interest is to be determined the of waiting and not by time-preference, how can this variable be determined if the period of investment and the total prod uct are both variable and how can the period of investment vary if the rate of wages is constant? And why should the rate of wages remain constant in the presence of capital accumula tion if capitalists are competing against one another for the of labor? To these questions, Wicksell replies that the size of the wages fund will determine the rate of wages, and given the rate of wages, the prices of consumption goods and the rate of growth of the product, the rate of interest, length of invest ment period and total product can be deduced. For every given rate of wages, there will be an investment period that maximizes the rate of return over cost, and this will determine Measuring the length of the period of the rate of interest. production on OX as in Figure 5 and the value of the product

services

increased output able factor.

will

be the owners of land which is now the only non-augment

164

Interest Rate

as

Determined by Time-Preference

and wages on OY and assuming the rate of wages to be given, the period of production which maximizes the rate of return over cost is that corresponding to the point where a straight line (the slope of which represents the rate of interest) drawn from W is tangential to the total product curve. This point determines the period of investment, the rate of interest and the total product the present value of which is equal to wages invested per unit of product. If the rate of wages falls,

–

Y P

# w

W

W’

R

P.

/

P&

wr

R’

O

X Fig. 5

the investment period

will become shorter and the rate of interest higher and vice versa. Thus capital becomes a magnitude of two dimensions, labor and time. It is measured by embodied units of waiting, remaining intact if the quantity of embodied units of waiting remains the same. Interest is a simple function of time (on the objective or productivity side) and is determined by the marginal productivity of waiting. The theory is logically consistent and offers an accurate measure of capital as a homogeneous entity under conditions

and Investment Opportunity

its

of

of

is

It

assumptions.

by

to

inapplicability

on the ground the more complex conditions the real its

that correspond to

165

its

of

is

or

of

or

a

to

of

as

of

of on

of

as

if

to

it

world that has been assailed critics. Their chief ob you jections theory assume not one scarce the are: (1) that and non-augmentable factor the Austrians do but more than one, e.g., labor and land, the rate interest will depend not period the investment alone but on the relative scarcity well; (2) that once you pass from the two scarce factors point input-point output, wherein one finds the simple case simple time-lag between input and output, the more com plicated cases point input-continuous output, continuous input-point output, continuous input-continuous output, no longer unambiguous and that the the investment period determining Austrian method the average investment

in

or

at

is

a

by

to

of

is

it

in

of

as a

of

in

to of

is

it

in

to

of

as

of

by

of

to

in to in

to

it

in

of is

in

of

of

or

it

is

in if

of

in

period these more complicated cases gives accurate results only the rate interest near zero; (3) that the capital continually cases which renewed but never re impossible placed, separate the contributions of vari constructing the Capital labor invested either ous units keeping repair and good assign each definite period investment; and (4) that complex the more cases circularity capitalistic production, i.e., when capital goods are produced not the services labor alone but capital well, impossible goods the services find the any single good. average period investment labor homogeneous Hence the attempt measure capital quantity period production terms the breaks down applied when the more complicated cases the real world. Yet these efforts have not been without fruit. Wick for example, furnishes useful apparatus for ascertaining the changes capitalistic produc degree the expected under given conditions. Under tion that may non-full-employment, expansion conditions invest widening ment should take the form the capitalistic of

of

a

of

of

an

be

of

in

a

sell's analysis,

of

of

to

a

of

in

increase

unemployed But once the reserve wages begins rise, any further and the rate deepening investment would result the of

used

up

of

labor

is

production.

process

166

capitalistic process, i.e., in an increase in the degree of round of production. This deepening of the structure of production might be effected either (1) by decreasing the amount of labor used per unit of equipment or (2) by increas ing the durability of materials or equipment or (3) by in creasing the degree of automation of production, i.e., by re placing more simple by more complex equipment which uses less co-operating labor." This approximate index of the degree of roundaboutness of capitalistic production, useful for the theory of capital and more particularly for that of the trade

aboutness

cycle, is as satisfactory

for the measurement

7 Kaldor, op. cit., p. 231.

an instrument

of capital

as has yet been devised

as a homogeneous

entity.

4 The Rate of Interest as Determined by Time-Preference, Investment Opportunity

and Liquidity-Preference

T

HE conclusions established in the previous section re garding the determination of the rate of interest rested upon assumptions still far removed from the conditions of real life. These assumptions were: (1) a perfectly competitive market; (2) perfect foresight, or certainty as to future prices and incomes; and (3) the absence of any special monetary factors or considerations in the determination of the rate of interest.

as

Our preliminary conclusions may be briefly summarized follows: (1) the existence of interest may be explained

either by time-preference for present goods over future goods or by investment opportunity as measured by the rate of return over costs; and (2) the actual level of interest must be such that (a) from the indifference-curve approach, the individual rate of time-preference is equal to the market rate of interest and the marginal rate of return over cost and (b) from the total demand and supply analysis, the investment demand for savings must be such as just to clear the market of the supply at that price. Assuming this supply to be sensitive to the rate of interest within a given range, we may say that the rate of interest is established at the point of equilibrium between the two opposing forces of impatience to spend present income 167

168

Interest Rate

as

Determined by Time-Preference,

and opportunity (from investment) to increase one's income by postponing enjoyment till the future. To bring the theory into closer contact with reality, we

third assumptions and so approxi dynamic mate the conditions of real life. Let us begin by removing the second assumption, i.e., per fect foresight. The first important consequence to be noted in connection with the introduction of the element of un must remove the second and

certainty of the future is a diversification of the actual rates of interest. There will now be not one interest rate but many. Assuming risks, a higher rate of interest will be necessary to attract long-term lending than short-term lending. And this tendency will be the stronger the greater is the possibility of the short-term rate rising in the future. The possibility of loss not only of interest but of invested capital will account for at least the greater part of the difference in yield between stocks and bonds. Risks plus operating costs will give rise to difference in interest payments on bank deposits in the form of demand-, time- and savings-accounts. The assumption of uncertainty will also modify in certain ways the operation of the factors determining the rate of in terest as surveyed in the previous section. On the side of de a

mand for savings, risks in connection with future returns (whether from reinvestment or new investment attracted by a possible expansion of demand, inventions and new processes) or lack of sufficient security or personal credit on the part of the small borrower (either for production or consumption) may limit the willingness or ability of the borrowers to take credit, i.e., cause a shift of the demand curve for savings to the left. Uncertainty may also affect either the shape or the move ments of the supply curve for savings by operating upon the factors of accumulation and decumulation. Uncertainty of life, tending to increase time-preference for the present, op erates in favor of decumulation or of decreased accumulation.

This

effect may be counteracted, partially at least, by any

measure which prolongs the normal expectation of life or by the desire to look beyond the span of one's own life and make

Investment Opportunity

and Liquidity-Preference

169

of

or

to it

of

the form

of

of

accumulated savings

in

a

be

is

of

of

of to

to

to

to

by

or

its

provision for others. Uncertainty as to income may shift time preference in either direction according as the uncertainty is connected with income in the very near or more remote future. But uncertainty will influence the supply curve of savings not only by effect upon accumulation decumulation but affecting willingness part also the with savings once they willingness are accumulated. This lend will depend some extent upon conditions which we have already referred, certainty viz., length duration the loan and degree But, and this repayment. greater significance, will “liquidity-preference” also function desire hold idle of

cash balances. monetary con special This necessitates the introduction siderations into the determination of the rate of interest.

at

of

in

its

of

a

of

it

of

its

in

of

a

of

of

of

a

at

to

of

of

a

as

It

to a

of

or of

a

of

Money now fulfills the role not merely numeraire (unit exchange but also account) medium store “representative” merely value. ceases have value. There high degree money demand for money view arises liquidity offers “saleability” and the advantages the uncertainty. Money acquires own, face future value qua money. Those who have accumulated savings may pre them, interest, hold least portion the sacrifice fer

of to

of

a

a

of

in

of

or

of

in

the form “idle balances” either against possible future possible losses chances more profitable investment op portunities the future. money” adds This introduction the “misbehavior previously the factors we have considered new element which account must be taken as co-determinant of the rate of

in

interest. Savings (from income earned the previous period) may now differ from investment (in the next period) either

according idle balances are The rate of interest must balance the as

or

by positive negative diminished or increased.

excess,

the preference

hold

it in

must

be

invest

liquid form.

it,

to

spend income and opportunity to

to

of

in

of

of

investment opportunity not only against the at consumption but also against the advan greater tractions liquid form. To impatience holding one's savings tages

advantage

added

170

Interest Rate

as

Determined

by Time-Preference,

So much, indeed, has Keynes been impressed by the im portance of the liquidity-function that he has chosen to make it the most important factor in his theory of interest." Yet the role of liquidity-preference plays no solitary part in the de termination of the rate of interest. It affords but one of the

margins that the rate of interest must keep in proper balance. Assuming liquidity-preference, the supply of savings is no longer identical with the supply of loans or of credit.” Yet there is a relationship between the two. If the planned supply of savings is used entirely for lending (including “real” in vestment), i.e., if net liquidity-preference is zero, then planned supply of savings and planned supply of credit are equal. But, on the other hand, the planned supply of savings may exceed the planned supply of credit by the planned demand for hoards or “idle” cash balances, and the planned supply of credit may exceed the planned supply of savings by the amount of loanable funds which reach the credit market from such “inflationary” sources

as net dishoarding (by individuals and firms), increase in the supply of money by the monetary au thority and a change in the lending policy of the banks.

Supply price now becomes the price not of savings but of credit, and the rate of interest is determined by the intersection of the supply and demand curves for capital, credit or loan able funds. A study of the determination of the rate of interest, therefore, resolves itself into an investigation of the content and shape of these curves. In the course of this examination we shall consider: (1) the nature and probable shapes of these curves of demand and supply of credit, the intersection of which will determine the equilibrium rate of interest at any given point of time and (2) the possible movements of the rate of interest as a result of shifts in these curves of demand and supply over successive intervals or periods of time. To ob viate the necessity of a separate treatment of the short-term 1 Keynes, The General Theory, etc. Cf. also “Alternative Theories of the Rate of Interest,” Economic Journal, XLVII (June, 1937), 241-252. 2 We shall use the term “saving” to denote the act or process and “savings” to denote the end-result of the process, i.e., amount saved.

Investment Opportunity

and Liquidity-Preference

171

and long-term rates of interest, we shall adopt Haberler's sim plification of considering the market rate of interest as a properly weighted average of the various long-term and short term and intermediate rates.”

The Rate of Interest at

a

Point

or Over

A Short Period of Time Let us imagine ourselves stationed at a point of time which marks the close of one and the beginning of another period of short duration. The community is now in possession of a certain total of money income earned in the previous period and available for expeditures in the interval to follow." On the basis of certain expectations as to prices and incomes in the present and succeeding periods, certain consumption and savings plans will be drawn up. Likewise on the basis of cer tain profit expectations (founded in turn on calculations of present and future income levels, relative demands and rates of wages and interest), investments will be planned for the

period about to ensue. But there is nothing in this state of affairs either to necessitate the equality of planned savings for the period to come and realized savings from the period just past or to prevent planned savings from exceeding or fall ing short of planned investment in virtue of the inflationary or deflationary sources mentioned above. 3 Gottfried Haberler, Prosperity and Depression tions, 1937, 1939, 1941), p.201.

(Geneva:

League of

Na

* Looking back ex-post over the previous period, aggregate “saving” and “investment” must necessarily be equal in the sense that, total expenditure and income being equal, the excess of total expediture over expenditure on con sumption goods must necessarily be equal to the excess of total income over income earned in making consumption goods or, to put it in another way, the excess of aggregate income over expenditure on consumption goods (saving) must necessarily equal expenditure on other than consumption goods (invest ment). But this is a mere tautology which tells us nothing ex-ante as to the relationship between the amount of planned savings from the income now available for expenditure over the subsequent period and the amount of in vestment planned for the same period — the only aspect of the savings invest ment relationship which has a direct bearing on the determination of the mar ket rate of interest.

172

Interest Rate

by Time-Preference,

Determined

as

In virtue of

these investment and savings plans (as modi fied by the desire to hold or relinquish cash balances), there will be found certain degrees of willingness to lend on the part of one section of the community and certain degrees of

willingness to borrow on the other. These prospective lenders and borrowers will appear on the supply side and the demand side of the market for loans of investible funds. Connecting the points which represent the total willingness to lend at various rates of interest, we get the total supply curve of loans at this point of time. In the same manner, we may derive Upon the shapes (elasti the total demand curve for loans. depend cities) of these curves will the point of their inter section which establishes the market rate of interest and the actual amount of borrowing and lending. What, then, can be said of the possible shapes of these curves?" These curves or schedules of demand and supply of loan able funds may conceivably be represented as exhibiting vari ous degrees of elasticity both at a point of time and over suc

The shape of the curves at any moment of time will depend on the assumptions we make as to conditions and factors which determine their elasticities. cessive intervals.

THE DEMAND SIDE

The curve of total demand for loanable funds will close relationship to the curve expressing

expectations

bear a

of

the

marginal rates of return over cost from various investment opportunities." If we (1) exclude from the demand side bor if,

5 We shall use the terms “credit,” “loans” and “investible funds” as synon

made

Gross investment will include net investment plus reinvestment requirements. gross investment replacement placement falls short

re re

cessity

of

as

or

of

to

of

in

as

or

Thus for example, individual entrepreneurs firms invest their own loanable funds their own enterprises they will be considered ad vancing credit themselves without the usual procedure formal contract. They will appear on both sides the loan market. This will obviate the ne ymous.

loans

credit and investible funds

If

of

or

6

p.

the distinction between by Haberler, op. cit., 192.

ment.

a

of

of

in

to

if

is

quirements, net investment negative and we are faced with negative de mand for loans we choose work with the concept net investment. To gross invest avoid this inconvenience, we shall use investment the sense

Investment Opportunity

and Liquidity-Preference

173

of of

or to

to

demand for loanable funds may shift

in

This curve right

of

its

rowing for Consumption and (2) assume the risks of invest ment to be borne by the lenders, the two curves become iden tical. The marginal rate of profit (or return over cost) as here understood need not be identical with the “marginal productivity of waiting” conceived as a functional relation ship between the existing amount of real capital, measured in terms of an average period for the roundaboutness of pro duction, and technical productivity. the

response

of

to

of

to

a

as

by

to

of

as

it

at

of

in

to

the left over successive intervals time confidence, the appearance new inventions expectations and improved technical processes and changes prices. any future incomes and But moment we may sloping right, corresponding represent downward the diminshing rates return from successive amounts in production opportunity expressed vestment curve con vex the origin. changes

THE SUPPLY

The supply

SIDE

as

of

of

any moment

of

to

to

is

If

at

loanable funds (demand for claims) forth time may, we have seen, arise from two chief sources: (1) gross savings and (2) inflationary sources. the amount actually put on and taken off the mar equal ket the supply from the first source, then planned planned investment and the velocity savings are equal coming

or

or

be

of

or

or

of

if

of of

circulation (MV) remains constant, but the total bor rowings either falls short gross exceeds the amount savings, then planned investment will differ from planned hoarding dishoarding) and the savings (by the amount deflationary inflationary respectively. effect on MV will to

Gross savings include new net savings and amortization replacement re quotas. Amortization quotas correspond

quirements on the demand side."

Supply from inflationary

of

is

of

a

of

as a of

7

be a

“Amortization will usually ... continuous process (for the individual production usually dis firm), whereas the replacement durable means whole, both processes are more continuous continuous. For the economy time, and run parallel. During any period number firms use their

174

Interest Rate

as

Determined by Time-Preference,

sources may be due to: (1) an increase in the quantity of money by the central authority; (2) an increased willingness of the banking system to extend credit; or (3) dishoarding by

in

dividuals and firms. Assuming the first two of these to remain constant, the shape of our total supply curve of credit will de pend upon the inter-relationship between willingness to save and liquidity preference (both set off against the propensity to consume) and their reaction to such other variables rate of interest and level of income.

as the

“The psychological time-preferences of an individual,” contends Lord Keynes, “require two distinct sets of decisions to carry them out completely. The first is concerned with . . .

the propensity to consume, which determines for each in dividual how much of his income he will consume and how much he will reserve in some form of command over future

consumption.

But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings.” This will depend on the “degree of his liquidity preference . . . given by a schedule of the amounts of his resources

... which

in different

he will wish to retain sets of circumstances.”

in the form of

money

statement of the problem is based on the assumption that savings are independent of the rate of interest. They are

This

but the resultant of the operation of the “propensity to con sume” which stands in a fixed relationship to the level of in comes, viz., decreasing as incomes rise. Yet, even on what we believe to be the more realistic assumption of a certain sen sitivity of saving to the rate of interest, viz., over the higher

liquidity-prefer important in co-determining

ranges of interest rates offered, the factor of

still be considered as the supply schedule of loanable funds. For, according to the

ence must

amortization quotas to accumulate balances or to repay loans, thus adding to the supply of investible funds on the market, while others draw on their bal ances or borrow from the market in order to replace their equipment.” Haberler, op. cit., p. 196. 8 Keynes, The General Theory, etc., p. 168.

Investment Opportunity

and Liquidity-Preference

175

magnitude of that function, the amount of credit offered over the lower range of interest rates may fall short of savings by the amount of hoarding (holding of cash balances), as it may exceed them over the higher range by the amount of with drawals from existing hoards. Hence Lord Keynes' criticism of the Classical theories of the rate of interest for stressing the first of the two constituents of psychological time-preference mentioned above, to the neglect of the other, appears funda mentally sound.” But Lord Keynes in his “endeavor to repair” this neglect would seem to go to the opposite extreme. For, in making savings a mere complement of the “propensity to consume” which stands in a fixed relationship to the level of income, Keynes in his turn denies to the first of the “two con

of

to

or to

to

or

to

be

is,

stituents” of time-preference any direct part in the determina tion of interest which becomes merely “the reward for parting with liquidity” or “the price of hoards.” Resuming the trend of our analysis, the liquidity-prefer ence function will determine the proportion in which indi viduals and firms are willing to hold their accumulated and currently planned savings in the form of cash and of interest bearing claims. The desire to hold cash balances (demand for money) may be attributed to three chief motives, desig nated by Lord Keynes as the “transactions motive,” the “pre cautionary motive” and the “speculative motive.” That bridge time discrepancies between cash may held: (1) expenditure between costs income and (income-motive) pro incurred and receipts from sales (business-motive); (2) vide for unforeseen expenditure requirements take ad vantage unforeseen purchase opportunities; and (3) await

in

of

to

in

of

of

an expected rise the rate interest the future. The de depend mand arising from the first motive may be assumed upon (vary the same direction as) the level income and

of

of

of

its

at

of

at

9

as

This charge, Professor Ohlin establishes along more general lines, may also be laid the door the conventional price and distribution theory the theory money and business cycles. “Neo-classical” school though not Savings and Invest Bertil Ohlin, “Some Notes on the Stockholm Theory ments, Part II,” Economic Journal, XLVII (June, 1937), 229 sq.

176

Interest Rate

-

as

Determined

by Time-Preference,

the state of economic activity. The demand induced by the second motive would seem to be responsive to changes both in the level of income and of the rate of interest, at least in the higher ranges. But the holding of cash dictated by the third motive will depend (at any given level of income) directly upon the magnitude of the rate of interest, decreasing as it rises and increasing as it falls. the demand for liquidity function of the rate of interest and an increas ing function of total income (or that the interest-elasticity of this demand is negative and the income-elasticity positive), the relation between the demand for cash balances and the

On this general assumption that

is a decreasing

rate of interest at different levels of income may be represented as in Figure 1. As the level of income rises, either more cash will be held at the same rate of interest or the same amount of cash at higher rates

of interest. The shift upward of the curve liquidity-preference of Y with a rise in the income level will depend on the magnitude of the income-elasticity of the de mand for liquidity. Alternately, the relation of this liquidity function to all the variations in the rate of interest and levels of total income

Cash Held Fig. 1

Investment Opportunity

and Liquidity-Preference

177

may be represented by the “isoliquidity” curve of Figure 2. Assuming the quantity of money to be given, this curve which represents positions of indifference or unchanged demand for liquidity will be upward sloping and convex downwards. In the limiting cases, however, in which (1) the income-elasticity is zero (or the interest-elasticity is infinite, i.e., the Keynesian assumption) or (2) the interest-elasticity is zero (the classical assumption), the curve M becomes a horizontal or vertical straight line.”

LY

>

O

Li+ O

Fig. 2

The elasticity of the supply curve of savings will, as pre viously noted, depend on our assumptions concerning the re lation of savings to the level of total income and to the rate of

interest.

Let

us start by assuming that the willingness to save is

in

dependent of the rate of interest but is a function of the level of income. Savings then will stand in a definite relationship 10 Cf. Oskar Lange, “The Rate of Interest and the Optimum Propensity to Consume,” Economica, (February, 1938), pp. 12-33.

178

Interest Rate

as

Determined

by Time-Preference,

to the level of income at any moment of time.” As income rises, savings will also rise “pari” vel “impari passu.” This re

lationship between income and willingness to save is expressed by Line R in Figure 3. If savings increase in a constant ratio with increase in income, R will be a straight line. If savings in

O

* Fig. 3

Y

in an increasing proportion, R will

describe a rising Figure 4 is the alternative representation of this as sumption with the axes reversed. Let us now suppose, as in Figure 5, that, at the moment of time we have selected, the amount of savings is given as de termined by the willingness to save (independent of the rate of interest) corresponding to the income level Y. What will be the relation of this quantity of savings OS to the amount of loanable funds offered in the market? Assuming that the crease curve.

liquidity function corresponding to this level of income is that expressed by Y in Figure 1, the desire for liquidity in preference to the holding of claims will begin at three per cent 11 Actually they will also depend upon the expectations of future income. But to avoid this complication we shall assume that income is expected to re main constant.

Investment Opportunity

and

Liquidity-Preference

Y 1

Y.

2^

Yº

O

S

Fig. 4

and increase

179

1||

as the rate

of interest falls. The amount of sav

ings OS offered on the loan market will then be described by a curve sloping downward to the left beginning at three per cent and cutting the vertical axis at, let us say, two per cent. The market rate of interest (equalizing the supply and de mand for loans at that price) will be determined by the point

S Fig. 5

Savings

180

Interest Rate

as

Determined by Time-Preference,

of intersection of the investment-demand curve and this sav ings-liquidity curve. If the point of intersection corresponds to three per cent, as in Figure 5, saving and investment are equal. But, if the demand curve were to lie to the left of DI, then savings would exceed investment by the amount of the horizontal displacement between the intersection of the sup ply and demand curves for loanable funds and OS.” On the other hand, we may assume that at interest rates higher than three per cent, the supply of loanable funds will expand from inflationary sources beyond the total of accumulated savings. Then, if the demand curve lies to the right of DI, investment will exceed savings by the horizontal displacement between OS and the intersection of the demand curve and the supply curve of loanable funds, LF.

Let

us now assume that the willingness to lend is a

vari

Y

3 2

I

Z

r | |

|

|

O

|

S

Scivings Fig

6

12 Erik Lundberg, Studies in the Theory of Economic Expansion (London: P. S. King & Son, Ltd., 1937), p. 39 sq.

Investment Opportunity

and Liquidity-Preference

181

able function not only of the level of income, but also of the rate of interest. To determine what is likely to be the most realistic representation of this relationship is a more difficult task. It is not easy to ascertain what will be the total effect of opposite reactions of different individuals to changes in the interest rates. Yet we believe the curve YS in Figure 6 to rep resent a fairly safe deviation from YS in Figure 5, in which the amount of savings was determined only by the level of income and independently of the rate of interest. The shape of this

curve is based on the assumptions that: (1) below a certain rate of interest, viz., three per cent, the incentive to decumula tion or spending will cause the amount of savings to contract with a fall in the rate of interest; (2) below a certain lesser rate of interest, viz., two per cent, the amount of savings called forth will be due only to motives independent of the rate of interest; and (3) above the rate of three percent, savings will expand in response to a rise in interest until the curve again becomes inelastic, even, if a sufficiently high rate of interest is reached, negatively inclined. With a rise in the income level, this curve will be shifted to the right as in Figure 4. What will be the relation of this new supply curve of sav ings to the supply curve of investible funds, and what part will it play in determining the market rate of interest? Assuming liquidity-preference to be the same as in Figure 5, we must again insert our backward sloping curve from that part of the savings curve corresponding to three per cent and then draw our investment demand curve for loans. If this curve DI in

in such a way that the resulting mar ket rate of interest is three per cent or above, then savings will equal investment and will be identical with the supply of loanable funds (supposing there is no increment of offer above three per cent from inflationary sources). But if the demand curve intersects the curve of supply of loanable funds YL at a point which establishes the market rate of interest below three per cent, then the amount loaned and the amount in vested will fall short of the amount saved by the magnitude of the horizontal displacement between the point of intersection tersects the savings curve

182

Interest Rate

as

Determined by Time-Preference,

by

of

interest proposed Lord Keynes makes the rate of interest function of but two variables, viz., liquidity-preference and the quantity money the one found within, the other determined from without the eco money conjunction with nomic system. The quantity liquidity-preference determines, given circumstances, the actual rate interest which the “reward for parting with liquidity,” which “equates the demand and supply hoards.” Thus there but one-way relationship between a

is

of

is

—

of

in

of

in

—

of

a

The alternative theory

of

to

to

of

to

is,

and the dotted savings curve. This divergence is smaller than in Figure 5. If we assume, however, that there will be no saving (as Cas sel believes) below a certain rate of interest, let us say two per cent and that the elasticity of the supply curve of savings cor responds with that of liquidity-preference (that that in be invested), then, whatever the come will be saved only demand for capital, the market rate interest will establish equality between savings, loanable funds and investment. This correspond would seem the assumptions the Classical school.

is

to

of

by

is

of

of

the rate interest on the one hand and savings and invest interest will determine savings ment on the other. The rate and investment (investment directly and savings indirectly) completely insulated by liquidity-preference from any but savings and investment. Given the quantity influence willing money which the banking system release, the rate of interest will be determined at that level at which the

of

of

of

to

willing money. The rate hold that amount production and, there interest will determine the volume fore, total income. Savings will be the difference between is

public

of

total income and that part income spent on consumption This difference will be determined by the propensity consume which function the level income only. Investment, i.e., new investments, will equal the difference production and the costs producing between total costs 13

Keynes,

But since the volume

The General Theory,

etc., pp. 167-8.

of

of

consumption goods.

of

of

a

of

is

to

goods.

production and

Investment Opportunity

and

Liquidity-Preference

183

income are equal, savings and investment are likewise by defi nition equal. If in the economic system the values of these variables, i.e., quantity of money; liquidity-preference; pro pensity to consume; and marginal efficiency of capital, cor respond to those obtained from the solution of the equations expressing their interrelationships, the system will be in equi librium and the expectations of entrepreneurs will be fulfilled. This theory, we believe, supplements the traditional theory in an important way by emphasizing the role of the liquidity function. Both can be fitted into a more comprehensive ex planation of the rate of interest. Yet Keynes' assumptions ap pear too narrow to support what might merit the title of a general theory. The assumption, for example, that the pro pensity to consume (and, therefore, saving) is a function of the level of income only is hardly a realistic one. For though we might expect the elasticity of demand for consumption goods to vary inversely with a rise or fall of total income, still, at any given level of income, the amount of saving as deter mined at the margin will not be independent of the rate of interest. It is to this margin that we must look for the relevant that determine the total supply of and demand for investible funds at any point of time — decisions as to the ap portioning of income between spending, lending and keeping hoarded at different rates of interest on the part of the income recipient and decisions as to the profitability of borrowing at various rates of interest on the part of the entrepreneur. Even though a rise or fall in the level of income over the sub decisions

period may cause actualities to differ from anticipa tions, it is upon expectations that decisions which rule the rate of interest at any point of time will be made. Another objection to Lord Keynes' theory as a general theory of interest arises from the nature of his assumptions as to the shape of his liquidity-preference function. Liquidity preference may be conceived as a function either of income

sequent

or of the rate of interest or of both. It may manifest either a negative interest-elasticity or a positive income-elasticity or both in combination.

Upon

the nature of these two elasticities

184

Interest Rate

as

Determined by Time-Preference,

will depend

the reaction of the rate of interest to changes in the marginal efficiency of investment and in the propensity

to Consume. The greater is the income-elasticity and the smaller the interest-elasticity of the demand for cash-balances, the greater will be this reaction of the rate of interest to changes in investment and consumption decisions via the level of income. The traditional theory assumed that the de mand for liquidity was a function of the level of income alone. This assumption means that the rate of interest is determined only by saving and investment. But if either the income elasticity is zero or the interest-elasticity infinite, then the rate of interest cannot react through the level of income to changes in consumption and investment, but only to changes in the quantity of money. The demand for liquidity becomes a function of the rate of interest only, which is Lord Keynes' conclusion. As he admits the dependence of liquidity-pref erence upon income, he must assume the interest-elasticity to be infinite. Between these two extreme cases lie a variety of

it

as

a

is

of

of

of

to

as is

of a

of

of

of

to

to

of

a

is

of

to

it

a

–

it

it it,

possibilities which must be included in a general theory.” In reality, liquidity-preference would seem to operate as a determinant of the rate of interest over a definite range only. Once that range is passed, Lord Keynes' rate of interest hovers, wraithlike, without visible support or, as Mr. Robertson has though the organ which secretes put has been amputated, “grin without yet somehow exists cat.” But even operative, over the range within which would be misleading (given the quan say that liquidity-preference tity money) the sole variable which the rate interest say that the price function rubber depends only spend on the price tires. For, assuming that the incentive consumption propensity on makes the save variable not only the level income but also the rate interest and

II,”

Cf. Lange, op. cit., pp. 12-32. D. H. Robertson, “Alternative Theories of the Rate

Economic Journal,

XLVII

(September,

1937), 433.

of

of

15 14

of

demand for liquidity, the rate interest will preserve the margins, keeping hoarded, keeping i.e., balance between three Interest, Part

Investment Opportunity

185

and Liquidity-Preference

and decumulation. It is a resultant of three forces, each of which requires an explanation in the theory of in terest: (1) the propensity to consume one's income; (2) the op liquid portunity to invest and (3) the desire hold

in

it

to

it;

invested

form.”

is

of

is

a

of

of

of

to

of

as

in

of

developments Hence much the dynamic theory upon Keynes' interest owe insistence the importance the liquidity function, his theory scarcely more de interest serving general theory than the title that the

of

of

to

of

to to

a

of

as

in

in

of

of

in

of

is

it

to

so

severely criticizes.” We believe Classical writers whom he importance gives due place that, while what Keynes' contribution, the more comprehensive analysis the supply interest terms demand and loanable rate adopted funds this chapter (and championed by Profes sors Ohlin, Haberler, Robertson, Lundberg and others) has all the advantages more general theory which, refusing operations limit itself the one particular market, under

of

a

at

of

of

In

a

establish direct link between savings, invest takes also ment and the whole economic process.” our own analysis, we have been concerned only with point the determination the rate interest time.

&

S. to

of

is

of

a

of

of

of

as a a

to

in

of to

is

is

18

of

in

of

of

is

a

it it

it

to

to

of

R.

17

J.

in

&

p.

of

to

of in

of

in

of

p.

in

P.

of

of

16

“These three forces, the production convenience and security, the production commodities, and direct consumption, are rival each other.” Applied Economics King Son, (London: Arthur Cecil Pigou, Essays Ltd., 1923), 101. “The quantity resources which (an individual) holds just and only money will be such that the unit money which the form just worth while holding this form yields him return convenience and security equal the yield satisfaction derived from the marginal unit spent on consumables, and equal also the net rate interest.” Frederick Lavington, Co., Ltd., 1921), The English Capital Market (London: Methuen 30. Hicks, “Mr. Keynes and the ‘Classics,’” Econometrica, (April, (Quoted 1937), pp. 147-159. liquidity-preference are Mr. Robertson's concessions the role significance the following: (1) the causation short-term limited fluctuations; (2) may set limit the practical fall the long-term rate interest, though not certain that this limit might not be below that already decumulation; and (3) though significant ingredient set by the attractions large-scale fluctuations, its importance the story secular obstacle unproven. Robertson, op. cit., pp. 433-435. the growth wealth Bertil Ohlin, “Alternative Theories of the Rate of Interest, Part I,” Economic Journal,

XLVII

(September,

1937), 427.

186

To extend rate

the analysis to the study of the movements of the we should have to examine the time

of interest over time,

sequences that would follow from the introduction

of changes in the data either from within or from without the pricing system. This might be done either by a continuation of the graphical method which would give us the positions of equi librium at successive intervals of time or by the use of a system of simultaneous equations expressing the inter-relations of the variables that enter into the determination of equilibrium. This system would contain four equations: (1) one for the

liquidity-preference balances

function, relating the amount of cash to the rate of interest and to the level of income,

viz., M = L (i,Y); (2) one for the consumption function, re lating expenditure on consumption to the level of income and to the rate of interest, viz., C = f(Y,i); (3) one for the invest ment function, relating the amount of investment to the rate of interest and to expenditure on consumption, viz., I = F (i,C); and (4) one expressing the identity between total in come and expenditure on consumption plus investment (from which it follows that savings and investment are equal ex-post but not necessarily ex-ante), viz., Y = C+I. The nature of the reactions to any given change under any given circum stances will depend on the concrete shape of the functions as stated in general terms in these equations. Thus, for example, a change in the propensity to consume or in the marginal efficiency of investment will affect the rate of interest through the level of income and the

liquidity function. Yet

to ascertain the extent to which liquidity-preference, propensity to con sume and the marginal efficiency of investment will cooperate

to determine the rate of interest, we must know the income and interest-elasticity of the demand for liquidity.”

19 Lange, op. cit., pp. 12-18.

JPart Three The Morality of Interest as a Problem of Commutative, of Distributive and of Social Justice

of

the

Nature and Kinds

OF

On

Justice

of

a

of

I

to

present HE OBJECT PART OF THIS STUDY was brief the attitude moralists toward loan historical survey

II

of

to

of

of

is

of

of

In

of

of

in

interest the course the gradual evolution economic and present social institutions into their forms. Part we brought the tools economic analysis bear upon the solu tion the problem the nature interest and how the rate of interest determined. In this third and final section clusions

as

to

of

predecessors our own con the judgments to the moral character of interest as defined in

we must add

Part II. to

of

of

to

189

its

of

of

of

of

justice and the manner the nature different types human relationships.

to to

pertaining plication

to

of

to

to

it

Is

or

in

or

of

as

of

of

in

of

the moral problem interest we shall justice seek the application the principles the previously defined and ex economic concept interest plained. The question “Is interest moral?” resolves itself into the query “Is interest just?” Does the taking interest pre destroy the “just,” the “mean,” the “equal” serve social prejudicial relations? beneficial the individual and the social good? Before attempting answer these questions, we shall devote the present chapter some preliminary points terminology and the definition fundamental concepts

The solution

ap

On the Nature

190

its

be

The Nature of Justice to in

“a

of

as

to

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of is

as a

by

In

a

as

“a

“a is

to it,

by

it

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in

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a

as

Justice in broadest sense may understood the virtue, habit, moral state. According first place this interpretation, defined Aristotle moral state such doing what consequence capacity that men have the it”;' just, and actually do Augustine, and wish St. everyone his due”;” by St. Thomas virtue which renders Aquinas, habit whereby man renders each one his perpetual due constant and will.” all these instances, justice defined mental state, of

in

In

a

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of

is

in of it

In

be

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a

mind (or more exactly “will”) virtue which just. subjective, i.e., men are said this sense in just actions. But this herent human beings, the subjects subjective aspect justice implies turn some objective rule or criterion of which the mental state but reflection habit

to

to

—

is

or

to

of

of

or

of

be

as to a

is

be

it

to

judged. and according which this objective principle sense, justice may defined rule conduct which obliges all men (under penalty moral and/or phy give respect the rights others all sical sanctions) singly collectively) their fellow men (taken what their

of

are

be

Of this objective justice, certain characteristics noted. the first place, from the point view

to

due.

of

in

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by

in

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to

or

be to

to

to

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the sub other-regarding not self-regarding. regulates the conduct individuals not with respect themselves but Accepting terminology, their relations others. this one can just unjust not be said himself except meta phorical sense." Justice, then, necessarily connotes social life

ject,

&

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1

Co.), Bk. Nicomachean Ethics, trans. Chase (London: Dutton De Civitate Dei, Lib. XIX, chap. XXI. 101. Theol., II-II, 58, This definition, like that St. Augustine, perpetua voluntas based on that the Roman jurists: “justitia est constans Jure, 10. jus suum unicuique tribuens,” Dig. Justitia found, for example, This metaphorical use the term “justice” may justification” and “justification the theological phrases “process faith” when one speaks the just man he whose irascible and appetitive facul Theol., II-II, 58, ties are completely under the control the rational. Cf. consisting The fact that Plato, strangely enough, defined justice V,

and Kinds of Justice

191

conduct

as

is

of

Again justice rule

an

of

be

in

of

its

and social relationships. In this sense, we speak of duties as correlatives of rights. Though justice does not define the rights of man, it imposes upon his fellow men the obligation and the duty of respecting those rights once they are known. By thus protecting rights, justice fulfills function main taining order society. Without this order, neither indi capable vidual security nor social progress would attain Inent. objective standard and imperative

necessarily impartial, neutral, independent

in of

a

in

of

of

of

of in

as a

or

its

to

as be a

in

in

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of

–

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a

in

as a

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of

sentiment, sympathy and fellow-feeling. equality This illustrated the Romans' personification justice pair blind-fold goddess balanced scales held aloft one hand, sword clasped the other. This impartial judge persons. All claims are ad no respecter judicated on the basis equality equality persons the case those essential rights wherein all men are equal things, (of value for value, “quid pro quo”) the case those rights wherein men are not equal. Justice, then, taking the concept broadest signifi regulate, either subjectively cance, may said virtue objectively norm, the conduct individuals their social desire, preference,

or

of

to

to

of

of

as

be

of

or

of

it

be

to

an

to

equality persons relations according the principle things. For just action must preserve the “equal,” the “mean” (between excess and defect)." But the nature the “equal” “mean” will depend upon the particular type social relationship. These relations between human beings may classified follows: (1) those the individual the community; (2) those community individual; the the

or

to

of

of

to

and (3) those the individual other individuals. Accord ing justice: this division we may distinguish three kinds social; distributive; legal (1) (2) and (3) commutative. of

of

to

as

of

this harmonious and well-regulated activity all the faculties the soul Was probably due, Sidgwick believes, the analogy which his analysis the soul led him to draw between the faculties of the soul and the different classes

p.

V,

5

p.

of

of

a

in

political society. Cf. Henry Sidgwick, Outlines the History Ethics for English Readers (London, New York: Macmillan and Co., 1892), chap. II, 45. III, Aristotle, Nicomachean Ethics (trans. Chase), Bk. 107.

On

102

the Nature

GENERAL, LEGAL OR SOCIAL JUSTICE has been called a particular or a general virtue

its

Justice cording

object

ac

is

is

of

or of

as the attainment the individual the social good. As the social good attained chiefly through

of

of

in

of

the enactment and observance law the community, the justice commonly type has been given the title latter

of

as

so

of

virtue but

is

part

of

all

a

of

not

a

this sense

is

“Justice

in

of

of

of

is

a

it

a

in

a

is

in

so

of

to

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in

he

its

to

In

by

of

in

of

of to

if

at

of

of

It

to

in

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“legal” justice. Legal justice governs the conduct individuals (whether subjects rulers) their relations the community. im poses upon individuals and groups the obligation contri buting their due share (even, necessary, the cost sub ordinating their own individual interest those the com mon welfare) towards the maintenance order and the at security community progress tainment and the which just, they are members." this sense, we mean Aristotle produce and preserve hap says, “those things which are apt ingredients for the social community.” piness and “This justice,” adds, “is fact perfect Virtue, yet not simply but exercised towards one's neighbor: and for this reason justice thought oftentimes be the best the virtues, and “neither Hesper nor the Morning-star worthy our admiration': proverbial saying we express the same: 'All virtue and justice comprehended.’” Hence legal justice has been called general rather than particular virtue, for not concerned with any particular type human conduct but rather embraces the practice virtue demanded the members well-ordered community. co-extensive

in

is

of

is

it

6

of

The actual determination the boundaries the “community” an other problem, and an increasingly difficult one modern society. For while on the one hand the bonds between individual and community become more and more tenuous as we move out from the local unit to the international

p.

ea

V, I,

I,

of

a

of at

to

a

of

as

of

to

if

7 8

as of

of

to

organization, on the other hand the welfare the individual has come de pend more and more upon the peace and prosperity large. Cer the world tainly the principles legal justice apply society states members nations not individuals members world community. Nicomachean Ethics (trans. Chase), Bk. 103. (justitia) virtutis splendor Ibid. Cf. also Cicero: De Officiis, vii: “In est maximus.”

and Kinds of Justice

193

with virtue; . . . it is the same really, but the point of view is not the same: in so far as it has respect to one's neighbor it is Justice, in so far as it is such and such a moral state it is simply aspect of all the particular virtues good Sidgwick chooses to translate by relative to the social “Uprightness” which “may be taken to stand for the whole of virtue, considered in social aspect.” previously We have stated that the term “legal” was given justice type Aristotle this view intimate con nection with the observance law. Yet legal justice broader positive legislation. Rulers scope than mere observance legal justice which requires that themselves are the subject positive law fulfill certain definite functions, i.e., define and protect the rights individual members and promote the gen community.” law, how eral welfare the Yet no system complete, comprehend obligations ever can all the which citizen may owe the community. For example, the services expected the community the members certain profes ordinarily requirements sions transcend the mere law. Again, the use the ballot and the presentation one's self, qualified, candidate for public office are not matters legal obligation. Yet both may become, under certain condi its

of

if

as a

of

of

of

of

of

of

by

to

a

of

of

of

of

in

of

is

of

in

of

to

by

its

virtue.” This common

in

of

is

to

of

a

q.

5. of

as

so

is

in of in

to

is a

6.

of

it is a.

q. as

so

of

of

as

is

to

in

11

of

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of p.

S.

10 of

to

in

of

9

p.

Aristotle, Nicomachean Ethics (trans. Chase), 104. One may even go self-regarding virtues, may further and say that the acts all virtue, even pertain legal justice far the good the part conducive the wel Theol., II-II, 58, fare the whole. Sidgwick, op. cit., 65. This common aspect all virtues yields St. higher virtue which “ordinat actus omnium vir Thomas the concept tutum ad bonum commune.” Thus legal justice differs essence from the particular virtues much the immediate object the former the directing their ac common good. Yet embraces all the particular virtues tivities beyond their immediate ends an ulterior purpose. The statement really the same but conceptually different from Aristotle that legal justice explained on the ground that the term “legal justice" may be all virtue applied any virtue far directed by this higher virtue the Theol., II-II, 58, common good. The difference matter rather practical importance. speculative interest than How legislation will actually accomplish this second task definite concrete cases much more difficult decide. The discussion this question involves such important problems the economic functions the state.

On

194

the Nature

tions, obligations of legal justice. Hence legal justice embraces what Aristotle calls the “natural” and the “conventional” what is just by nature or by ordinance.” The latter is known from positive enactment; the former, from “right reason,” or what later philosophers call the “natural law.” In recent times, the term “legal justice” has been practical ly superseded by that of “social justice.” In view of the ap plication of this type of justice beyond the limited range of mere legal observance (comprehending not only what is but

–

what should be), the new terminology seems far more appro priate. We shall therefore adopt it in our discussion of interest as a problem of that type of justice which governs the relations of individuals and groups to the community and the object of which is the promotion of the common welfare.” JUSTICE

AS A PARTICULAR VIRTUE

is

of

in

is

a

is

in

of

of

by its

Social justice, as we have seen, is a general virtue embrac ing within scope the practice all the particular virtues society. Among these particular demanded the welfare virtues, justice more restricted sense whose immediate object not the common but the individual good. This vir equality concerned with the maintenance human tue p.

a

of

of

is

its of

by

of In

of

by

in

13 12

V,

VII, Nicomachean Ethics (trans. Chase), Bk. 117. Finally, particular case, justice view the peculiar circumstance may actually be violated the strict application the written law which Equity necessarily universal. such cases justice requires the application of

is

a

it

to

of

F.

is

a

a

to

in

in

its

or

as

be

to

of

of

“a

as

it

p.

in

or

it

of

in

14

p.

“a

is

which correction Law where Law defective reason univer sality.” Nicomachean Ethics (trans. Chase), 127. We shall not enter here into the controversy which has taken place recent decades regarding the exact nature the concept social justice. Some authors, denying that synonomous with legal justice, impute either Drummond, S.J., for more narrow broader meaning. Rev. William example, his recently published Social Justice (Milwaukee: Bruce Publishing Company, 1955, justice, distinct from special species 55) defines commutative, legal and distributative, which requires that material goods, even privately owned, shall serve the common use all men.” This definition we syno consider much too narrow. But whether we define social justice application nomous with legal justice restrict the socio-economic order will not affect our conclusions the remaining chapters which we are deal ing with problem. socio-economic

and Kinds of Justice

195

relations.” The nature of this equality will differ according as the relationship in question is between the community and its members or between one individual and another. In the first case, this justice is called distributive; in the second, commu tative justice. Distributive Justice Distributive justice is that species of particular justice “which is concerned in the distributions of honor, or wealth, or such other things as are to be shared among the members of the social community.” Yet the equality enjoined by dis tributive justice is not an arithmetical equality, but an equal ity of ratios, of geometrical proportion. The value of the dis tributed shares must be in proportion to the contributions or merit of the individuals to whom they are distributed. This involves at least four terms, two representing the beneficiaries and two the benefits distributed. If the share “a” stands in the same ratio to the worth of individual “A” as share “b" to individual “B,” then the shares will stand in the same ratio to each other as the respective worth of the individuals, and dis tributive justice will be observed. Hence an equal distribu tion of benefits to men with unequal claims would be as much a violation of justice as an unequal distribution among those with equal claims. “In fact,” observes Aristotle, “this is the very source of all the quarrelling and wrangling in the world, when either they who are equal have and get rewarded to them things not equal, or being not equal those things which are

equal.” In our

present form of society characterized by private ownership of by far the greater portion of the wealth of the community, the problem of a just distribution of common property does not assume any considerable size. The problem is that of the distribution of private property and income in 15 Thus the Just, says Aristotle, has been divided into “the lawful and the equal.” And St. John Chrysostom in like manner distinguishes between justice as a universal virtue and as a particular virtue contrary to avarice. Hom. 15 in Matt., chap. 5, v. 6. 16 Aristotle, Nicomachean Ethics (trans. Chase), p. 106. 17 Ibid., Bk. V, III, p. 107.

On

196 society.

On what

the Nature

basis are the merits or claims of the

indi

vidual members or classes to be decided? This problem is as much debated today as it was in the days of Aristotle who re marks that, though all agree that the just distribution ought to be according to some rate, they are not in agreement upon the basis of the rate, the democrats standing for freedom, the oli garchs for wealth, others for nobleness of birth and the aristo cratic party for virtue. Among the proposals made today as canons of just distribution we find such diverse criteria as equality, needs, efforts, sacrifice, productivity and scarcity. We venture to propose that within the framework of the pro duction-distribution system the rule of just distribution should be that of the value of services rendered; that outside of this framework, it should be the principle of need qualified by the provisions that individual initiative and responsibility be not thereby discouraged.” From this would follow an important corollary as to the economic function of government, viz., the adoption of such a policy as will (1) guarantee to all equality of opportunity in contributing to the national dividend and (2) assure to each a share in that dividend in accordance with the value of his contribution. It is one of the virtues of the

competitive system that the value of such contributions will lie beyond the influence of any individual or group of con tributors. It will depend upon the operation of impartial operative throughout the entire community, and not forces upon the restrictionist measures of individual or group in terest or the fallible judgment and autocratic will of an eco nomic dictator.”

Within

the scope of distributive justice fall also such

portant government functions as: (1) the conferring of lic offices, honors and benefits and (2) the imposition of

im

pub pub

18 It appears worthy of note in this connection that in the countries in which Socialism has been tried, though the motto “from each according to his ability, to each according to his needs” is professed to be the ultimate objective, the principle actually adopted has been “from each according to his ability, to each according to his services.” 19 The principle of needs would apply to those who, through no fault of their own, were incapable of contributing anything to the national dividend.

and Kinds of Justice

197

lic burdens. Appointments to offices of

non-political charac ter should obviously be made on the basis of ability to fill the office. Public honors and benefits should be awarded in pro portion to public merits or services. Chief of the public burdens is that of taxation. In the case of direct and tangible beneficial services received from the community, taxation should certainly be in proportion to benefits received. But to meet the expenses of government incurred in affording protection and providing public serv ices to the community as a whole, and from which the indi vidual may derive no direct, tangible and easily measurable benefit, distributive justice would seem to require that taxa tion be levied in proportion to ability to sustain the burden; otherwise men would be treated as equal in a way in which they are not equal. This “faculty” theory of taxation under lies the first of Adam Smith's four canons of taxation. a

Commutative Justice Commutative justice is the second type of particular jus tice and governs the relations between men as individuals. It

of

of

in

in

It

a

is

of

to

in

its

immediate object but differs from social justice not only in this important regard: that while social justice governs the relations an individual the community which he him justice part, regulates self commutative the transactions between entirely distinct individuals. differs from dis tributive justice that the equality demanded the case of

is

is

is

our concept his due and

to

is

the strictest sense every man what

of

a

or

a

or

of

in

it

conforms rendering

to

as

tice

of

of

of

be

a

to

In

al

values,

or

pro transactions between individuals not one ratios portions between persons and things, but an exact arithmetic equality thing for thing, quid pro value for value, quo. matters commutative justice, the individuals are equal. Whether robbery assumed theft committed poor man against rich man, commutative justice de mands restoration of the exact amount taken. For this reason, viz., that commutative justice deals with exactly measurable jus

con

198

sidered by some writers ly deserves the name.

as the

only form of justice that proper

Commutative justice demands the restoration of equality in the case of involuntary transactions, i.e., the restoration or compensation for loss suffered in consequence of an attack upon one's person or property. In this sense it is called by Aristotle “corrective” justice.” But in addition to such in voluntary transactions, it governs also voluntary transfers individuals. It is under this aspect that we shall be concerned with interest as a problem of commutative justice, i.e., that form of justice which governs voluntary exchange be tween individuals, as in the case of buying and selling, bor rowing and lending. between

in

of

attainment.

as

20

seem most capable

of

by

is

in

II,

In the chapters that follow, we shall consider interest as a problem first of commutative, secondly of distributive and lastly of social justice. We shall include in this enquiry not only the economic concept of interest as defined in Part regulated but the manner which interest modern so justice ciety and the institutions which the ideal could

concerned

are

in

two different spheres.

or

S.

as

or

is as

be

by

of

In

a. 3.

q.

as

to

a

or

or

St. Thomas observes, whether such violations They occult. embrace offenses (1) against one's person, e.g., by killing mutilation; (2) against one's reputation, by slander, detraction, by person related, false testimony; (3) against whom one allied adultery; and (4) against one's property, Theol., by damage, theft, robbery. II-II, reputation, the 61, the case offenses against one's person compensation demanded justice can only approximated, for the values

It

makes no difference,

are public

2 The Morality of Interest as a Problem

of Commutative Justice

JUSTICE GOVERNs the relations between in dividuals in the case of transfers of both a voluntary and involuntary nature. If the transfer has been forced, exacted against the will of the owner, as in robbery or theft, justice demands restitution or compensation to the full value of the property taken." In the case of voluntary transfers, i.e., free exchanges of goods and services, justice requires an objective equivalence of value between the two terms of the exchange or, in the case of indirect exchange, between price and value. Thus the problem of justice in exchange becomes in a money economy the problem of the “just price.” But this, in turn, involves the solution of a more fundamental problem, viz., how the value of a commodity is determined. OMMUTATIVE

The just price,

as stated

by St. Thomas, was that price

which neither exceeded nor fell short of the value of the good or service. Yet nowhere, as we have noted in our historical survey, does he tell us exactly how the value of a commodity

Though he does enumerate a number is to be ascertained. of elements which are considered to enter into the determina tion of value, we are left in the dark

as to the

relationships Of

1.It is significant of the attitude of borrowers towards interest charges in the days of the Fathers that usury is commonly treated by the latter under the general heading of theft. 109

The Morality of Interest

200

as

process of price formation. Nor is any made between the different possible types of

in the

these elements

discrimination economic relationships. Only from his use of occasional ex amples can we judge of the conditions of buyer-seller relation ships of his day to which he intended his principle of the just price to be applied. The elements thought to enter into the determination of value are: (1) the capacities of an object to satisfy human

(2) their abundance or scarcity; and (3) their production, especially the remuneration for labor and costs of risks. The value of an object depends, we are told, not upon any intrinsic excellence (otherwise, as St. Augustine had pre viously noted, a slave must necessarily fetch a higher price aptitude than a horse, or a mouse than a pearl), but upon serving for human needs (humanis usibus apta).” This value may vary with different individuals according their needs.” utility, community) But addition value (to the will de pend also upon the scarcity abundance the commodity place commodity will according conditions time. higher price produce sold takes more effort im transport prove considerable risk from place place, there are fewer rather than more sellers.” Finally, commodities must equal their costs the exchange-value production. The idea seems that (as Aristotle thought) proportion the relative values commodities will the amount labor expended on them and the importance many shoes “are ex the needs they satisfy. For unless

be

it

to

to

to

or

A

or

it of

if

to

or

there

to

to in

is

greater than that farmer no exchange.”

the tanner

of

. . .

the labor and expense

of

for food

as

house

V,

in

a

3, to

9.

a.

4,

a.

q.

In

5 4

to

different individual valuations the same object. As determinant however, utility seems general. be taken relative human wants Ibid., II-II, 77, ad 2m and ad 4m. Decem Libros Ethicorum, Lib. V, lect.

of

In

ad

2,

a.

a.

of 1,

q.

q.

Theol., II-II, 77, 3m; Decem Libros Ethicorum, Lib. St. Augustine, De Civitate Dei, Bk. XI, chap. 16. Theol., II-II, 77, resp. and ad 3m. These examples illustrate

3 9; 2 S. S.

lec.

will

be

for the builder

or a

changed

or

as

of

of

of

be

be

to

of

of

if

at or it, a

of

or

to

in

to

its

needs or desires;

price,

a Problem

of Commutative Justice

201

find in Aquinas no formal theory of the con stituent elements of value, so too will we search in vain for any formal statement as to the relation of these elements in the

Just

as we

determination of exchange value or prices. Yet from what has been said above it would seem that the theory he had in mind resembled, in a general way, that later developed by the Classical school, viz., that while in the short run, given the supply, exchange-value or market price will be determined by demand and supply (utility and scarcity), in the long run the customary or average or natural prices of commodities will depend upon their cost of production, in particular upon the relative amounts of labor required to produce them. Yet whatever his conception of the manner of operation of these elements in price formation, it is quite clear that for Aquinas the effect of their interrelations is to produce objec tive exchange ratios which are quite distinct from individual valuations and which form the basis of the just price." While ratios determine the relative values of com modities, their absolute values are measured in money (which, in turn, is not always stable in value). Since exchange is intended for the common advantage of both parties," justice requires that the price asked be equiv alent to the exchange value of the commodity, and not to the utility of the object for the buyer. But how is this exchange value to be known under any given set of conditions? In the case of sales in the open market, the answer is clear enough. these exchange

of the just price as to whether the just price was considered to be ob

6 One finds in the literature on the medieval conception a great deal of discussion

jective or subjective. Certainly the just price was conceived as objective in character, but so is the competitive market price with which the individual buyer and seller is faced in modern equilibrium analysis. The subjective element lies in the individual valuations which combine to form the objective exchange ratios of the market. On the nature and determinants of these sub jective individual valuations or “marginal utilities” and of the relation of these “values in use” to the objective exchange ratios of equilibrium market prices, we find no less enlightenment in the medieval than in the general trend of value theory previous to the 1870s. 7 “pro communi utilitate utriusque,” S. Theol., II-II, q. 77, a. 1, resp.

The Morality of Interest

202

The seller

can take the price which he finds

in

as

the market,”

even though he knows that the advent of subsequent sellers depress the price — for he is selling at the present and not at a future price. Yet there may be occasions when the

will

just price cannot be exactly determined.” In such cases it must be reckoned by a sort of estimate, allowing a sufficient latitude (modica additio vel minutio) for error in either di rection. Here Aquinas would seem to have in mind such cases as exchanges between individuals apart from the market, yet against the background of market values — or perhaps sales involving such imperfections of market conditions as are found in retail trade. In these cases, the basis of the “esti mate” would seem to be the natural or customary price, which may be assumed to remain fairly stable under conditions of legal and guild regulation in a relatively static economy.” Whether or not one will agree with the above interpreta tion of St. Thomas' conception of the just price will not affect quod invenit,” Ibid., II-II, q. 77, a. 3, ad 4m. q.77, a. 1, ad Im. 10 Cf. the example given by St. Augustine, i.e., of a man who gave a price corresponding to the real value of a book for which the seller in his ignorance asked much less. De Trinitate, Lib. 13, cap. 3, sec. 6. Professor Cannan, in a similar example, would consider it unjust for a professor to take advantage of the ignorance of a student in the purchase of a rare book, but not of a book seller who is presumed to know his trade—a fine distinction which, doubtless, would win the full approval of scholastic “casuistry.” On one condition, adds Aquinas, the just price may exceed the value of the object sold, viz., when the seller suffers a loss in parting with this case, the just price will exceed compensation. purchase and sale the value the object the amount this character he opposes the ordinary case which exchange intended puzzling one for the mutual advantage both parties. The assumption and certainly not compatible with competitive market conditions wherein the buyer could purchase the article its market price from someone else. The only circumstances fitting the case are those which the writer can conceive which the buyer, because immediate and urgent need, unable have recourse another seller and the object worth more the seller than its exchange value. The same difficulty met St. Antoninus’ statement that thing though “when itself worth ten dear the owner were propose give not only ten but must, worth twelve own much worth him.” Summa Theologica, Vol. Part IIa, tit. 16. But why can't, why should pay twelve can get from another for ten? And worth only ten? s “pretium

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a Problem

203

of Commutative Justice

the remainder of our argument. We have inserted it merely for the sake of precedent, believing as we do that it does agree on general lines with our own view of how the just price is to be determined under present economic conditions. Our knowledge of the nature and interrelations of the elements of exchange ratios and of the mechanism by which they are determined has made considerable progress since the days of St. Thomas. We know, for example, that the objective exchange values of the market, given the supplies and the in dividual scales of preference, emerge as a summation of the individual demand and offer schedules; that these individual valuations are the result of subjective scales of preference on the one hand and scarce means of satisfying these desires or preferences on the other, i.e., that the value of these means to the individual will depend upon their marginal utility or desirability as modified by and not independent of scarcity; and that the exchange ratios of the market, though equaling their relative costs of production in equilibrium, will rather determine the extent of production than be determined by production costs. We shall dispense, however, with any elab oration of these developments in the modern theory of in dividual and market value and assume the existence of a

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competitive market in which these equilibrium exchange ratios (the prices at which supply will equal demand and the market will just be cleared) are already established. Faced with these price ratios, the individual buyers and sellers will carry on exchange until for each individual the marginal value price and the relative of every commodity will be equal to prices and marginal utilities respective the commodities proportional will each other. This the position individual equilibrium, the position which exchanges will any advantage cease for lack either party. Do these competitive market ratios express the norm the just price? We venture affirm that they do. We contend that, given the conditions under which they are determined, equality they afford the best criterion for the calculation exchange demanded commutative justice, i.e., the fixed

The Morality of Interest

204

as

ratios at which commodities should be exchanged for one an other and the absolute values of particular commodities to which the money prices should correspond. The arguments which lead us to this conclusion are both

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positive and negative in character. On the positive side there first, the fact that the competitive market price an ob jective entity independent beyond and the control in dividual buyer and seller. Only his own demand and sup ply constituent elements the equilibrium price can the price, buyer seller affect that and that an insignificant degree. Faced with the competitive market price, the seller no more and will charge no less. There no possibility taking advantage charging the buyer higher price that corresponds the buyer's subjective mar ginal valuation.

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of the various commodities have been so distributed that their is

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those the market. own subjective valuations correspond position Once this reached there no further incentive advantage be gained from exchange. per Finally these competitive exchange ratios express fectly any human contrivance can the social estimate valuation (the communis aestimatio Scholastic theory upon many divergent interpretations have been put) which satisfying human wants, under any given the various means income-level, property distribution, tastes, conditions quantities production. Were resources and technique attempt individual authoritarian body determine could, prices according estimate, this social even with fairly complete knowledge all the complicated data, only hope approach rough estimate approximation the actually operation results attained the the forces the competitive market. Nor could hope change these valu

in

ations (and preserve equilibrium the market) without ~\ tering the data upon which they are based.

al

a Problem

205

of Commutative Justice

Approaching the problem from the negative side, we might If the competitive market price does not express the just price for the individual buyer and seller, why doesn't And brought does not, what does? Two objections may commodity against allowing the price determined open market competition: either that the price too high producer. may for the consumer that too low for the industry which would have be thought, for example, that contract production under competitive conditions should, for political social reasons, maintained its current size. Or the prices certain commodities may considered too high for the physical other needs certain groups the community. Yet these are matters that belong not com They justice. quite beyond mutative but social are the control individual buyer and seller. Granted that the ends be

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are justifiable, within the competence them, attain and that only by change

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the state alone the data, e.g., by the distribution the problem be

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output, subsidies and shifting restriction property and income. But this aspect longs our next chapter.

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Hence we conclude that from the point view com income, dis mutative justice, given the conditions level property, tastes and supplies, the exchange ratios tribution competitive the market furnish the most objective and im partial criteria the just price that should regulate exchange between individuals. We must now apply this criterion the just price the case loan interest. interest, the price There are two conceptions the rate concept and the premium concept. The first implied the “price “price money” definitions interest the the capital.” may used either two senses: (1) the price capital income, i.e., the amount terms income that paid annually for the use capital will (2) the price of capital, capitalization, i.e., income terms the rate years' purchase the number the amount time required equal the capital sum. The price concept for the income really postulates the existence perpetual annuity and

The Morality of Interest

206 used chiefly

as

the case of long-term commitments such as annuities and bonds. The premium concept expresses the difference or premium which appears in the rate of exchange

in

between goods at two different points of time. If $100 today will exchange for $103 to be delivered one year hence, the rate

of premium is 3 per cent. The rate of interest in this sense may be considered as applying to a terminable annuity or to the purchase and resale of a perpetual annuity and is used more commonly in the case of short-term lending. Though the two may be considered as interchangeable, for purposes of logical analysis we think it preferable to confine the price concept to the case of the rate of return on invested capital and to apply the premium concept to the case of loan interest. Taking the rate of interest in the premium sense, the pricing process is now concerned with the present exchange ratio between the same (physical) good at two different points of time, e.g., now and a year hence. In this it differs from the previous case in which we were concerned only with the es tablishment of price ratios between different goods at the same point of time. Yet the forces and the process by which the exchange

in

both instances. In fact the difference between the same phy sical commodities at different points of time (relative to the satisfaction of wants) is so great as to make them as economical ly different commodities as physically different goods (that satisfy different wants) at the same point of time. We have noted in Part II the factors and have analyzed the method by which these exchange ratios at different points of time are determined. On the side of supply or of sellers of investible funds, individuals are faced with the alternative hoices either: (1) of consuming the whole of their present income or (2) of refraining from spending the whole or a part of it and of either (a) retaining the amount saved (or a por or

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liquid form against future emergencies un opportunities exchanging (b) for larger |foreseen amount future income offered investment opportunities. The distribution of income over these three alternative uses, |tion of

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values are determined are exactly the same

a Problem

of Commutative Justice

207

and therefore the individual's supply schedule of investible funds, will depend upon the relative influence upon his act of choice of these three forces of propensity to consume, quidity-preference and investment opportunity at various rates of interest offered by the market. Adding together these

li

individual supply investible funds.

On

curves,

we get the total supply curve of

the side of demand or of purchasers

of present supplies

of funds, we find individuals who are willing to exchange cer tain definite amounts of income available a year hence for smaller amounts of income available at the present moment. This desire to purchase present income at a premium may be due either to a lower valuation of future goods (as future goods) relative to present, or to the fact that one's income a year hence relative to one's needs will be greater than it is at present, or to both." Demand for present funds in the second case may be due to a desire either: (1) to distribute more evenly over a period of time an already determined but un even stream or to alter the shape of a constant income stream to meet an uneven flow of wants or (2) to increase one's in come in the future by the employment of present funds in pro ductive investment (by far the most important source of de mand for investible funds at the present day). The indi vidual's demand schedule for present income will therefore express the varying amounts he is willing to borrow at different rates of interest either to increase consumption or to exploit investment opportunities.” Summing up the individual de mand curves, we have the integral demand curve for present available funds which, when superimposed upon the total supply curve, establishes the equilibrium market rate of in terest, i.e., that rate which will just clear the market under 11 In the first case, assuming equal quantities of income and the same wants, the marginal significance of the future income will be lower merely because it is future; in the second case, the marginal significance of present income will be at a premium only if the supply of future income, or if present wants, is greater. 12 It is evident that the same individual may appear on both sides of the market as when, e.g., one invests one's own savings in one's own enterprise.

The Morality of Interest

208

as

these conditions of demand and supply. Faced with this mar ket rate, each individual will borrow or lend, purchase or sell

funds, until his own marginal valuation of present income either rises or falls to the point of coincidence with that of the market. This is the point of individual equilibrium at which exchange offers no further advantage to parties on either side. present

but sufficiently realistic as sumptions of modern economic theory, the rate of interest is but an element, a premium, in the present exchange ratios between the same commodities available at different moments

Thus under

the simplifying

of time.” Interest is the premium in an inter-temporal price relationship. Expressed as a percentage of the value of the present good it becomes the rate of interest relative to some unit of time. Granted these assumptions, there is nothing in the nature of loan interest contrary to commutative justice, and if under conditions of competition (or those approximat ing competition) the competitive market price expresses the just price, then the market rate of interest is the premium es tablishd by the just price of present goods in terms of future goods. Faced, then, with the market rate (or rates) of interest, the individual is entitled by commutative justice to lend at those rates even though his own valuation of present goods is less than that of the market.” In the presence of a market price

determined by impartial forces external to and beyond the control of the lender, there can be no exploitation of the needs of the borrower. The latter will borrow only if his own valu ation of present goods is higher than that of the market. How ever great his own subjective estimation, he need and will pay no more than the market price, a price which expresses the social estimate or valuation of the community as a whole of present goods 13 It makes

in

terms of future goods.

no difference for formal analysis whether this commodity is or anything else, i.e., whether we use the concept of money or of real income. All economic goods are grist to the mill of the pricing system. 14 In fact if it were not, there would be no “common advantage” in the exchange, and he would not lend at all except for other motives, e.g., of charity.

money

a Problem

We

have been concerned so far with the norm of the just

developed under the somewhat simplifying assump tions of economic theory. The conditions of borrowing and lending which approach most closely to these assumptions in real life are those found on the money and capital markets, i.e., in borrowing for industrial, commercial and financial purposes. In the case of the central banking system, there indeed, monopoly considerable element the way control over the volume of credit and discount rates.” But

of is,

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a

price

209

of Commutative Justice

to

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this controlling force again external and quite beyond power the individual borrower and lender alter and significant chiefly public policy matter social interest, implications belong rather the sphere social justice justice. commutative than is

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the field small lending, particularly for consumption perfect competition purposes, the assumption far less greater realistic. Here the chances are that the lender may by

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monopolist oligopolist, hold the position which case exploitation fixing the danger the borrower there especially prices according his needs. This true the petty “usurious” money-lending, entrance into which trade definitely discouraged the fear social ostracism and public ill-repute. Yet interest charges for this type lending merely they are not considered usurious because exceed pure interest the rates the capital market, for addition non-repayment and op such charges will cover also risks erating costs, both considerably higher for lend which are ing again type. this Here the criterion commutative jus tice would the competitive price the open market." The prevention any social evils that might occur, e.g., from un impecunious, even un wise borrowing the improvident competition, again der conditions matter social jus of

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16

15

Note W. Dempsey's discussion the concept “institutional usury.” Op. cit., chaps. IX and X. this connection, someone has facetiously remarked that instead jailing the usurer the authorities should jail the borrower for the removal competition the usurer only aggravates the lack the trade.

-

The Morality of Interest

210

as

tice rather than of Commutative justice, falling within the range of the economic functions of the State.” In the light of these conclusions, let us cast a brief but critical glance over the historical survey of interest-ethics out lined in Part I.

For an understanding of the attitude of St. Thomas towards the ethics of interest we must look: (1) to the inheritance of early Scholasticism as derived (a) from the Scriptures, (b) from

tradition as found in the writings of the Fathers and in the legislation of provincial and general councils and (c) from the teaching of Aristotle and (2) to the nature of the debtor-creditor relationship as determined by the eco nomic conditions of his time. Yet the means whereby he sought to establish those views upon a rational foundation was an analytical technique constructed chiefly from concepts bor rowed from Roman law. ecclesiastical

Our examination in Part I of the relevant passages in the Scriptures and ecclesiastical tradition led us to the conclusion that the condemnations and prohibitions of “usury” found therein were grounded rather on considerations of social jus tice than of commutative justice. Usury is forbidden because of the hardships it imposes upon needy borrowers, especially when charged exorbitant rates and because it manifests a spirit of avarice and greed contrary to the ideal of brotherly love or the obligations of Christian charity and generosity. Nowhere is it condemned as an evil in itself, as a violation un der all circumstances of strict commutative justice. The Old Testament texts consist of: (1) prohibitions of interest charges on loans to fellow Israelites, especially to the needy poor (though they are allowed in the case of loans to strangers who are not members of the Jewish community) and (2) condemnations of cruelty, avarice, lack of compassion and 17 The same would apply to such problems as forced sales, bankruptcies on mortgages caused by inability in times of general depression

and foreclosures

to meet interest obligations on long-term contracts—problems which may in volve serious social consequences, e.g., an undesirable redistribution of wealth, the seeming injustice of which often leads uncritical observers to condemn all interest-taking with little knowledge of its real nature.

a Problem

of Commutative Justice

211

exhortations to charity, mercy, liberality and generosity on the part of the rich in sharing the use of their goods with the poor. The few relevant passages of the New Testament are mostly corroborations of those in the Old Testament. The parable of the faithful servant testifies to the custom of the time without adverse comment and the much debated text of Luke 6:34 is manifestly an exhortation to the perfection of charity and not a statement of an obligation of commutative justice.

The language of edge in the trenchant

the Scriptures is given even a sharper

sarcasm and impassioned denunciations of usury by the Fathers. They flail the usurer for his cupidity, avarice and hardness of heart, repeating the gospel teachings of charity, mercy and generosity towards one's neighbors. They champion the cause of the weak and the poor against their oppressors, pleading for the unfortunate victim who, brought to ruin by “devouring” usury, is often driven to suicide in the face of expropriation, imprisonment, banishment or slavery imposed by law upon the defaulting debtor. But they de nounce as well the prodigal, the spendthrift and the indigent for their improvident recourse to borrowing, exhorting men to live by the hire of their labor and not by begging or bor

rowing.”

consists at first only of disciplin to clerics the practice of usury as an occupation fraught with dangerous consequences and un worthy of the dignity of the clerical state. But as the social evil becomes more acute in the face of the growing “insatiable rapacity” of usurers and their “grave and immoderate” charges, the prohibition is extended, under severe penalties, by the later general councils to the laity as well. Yet the

The canonical legislation

ary regulations forbidding

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There was probably considerable need for such exhortations the days following the breakdown the Roman Empire when shiftless multitude, ac being treated customed bread and circuses, had acquired distaste for labor.

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canonical prohibitions contain no rational analysis of the problem nature interest commutative justice. They/

The Morality of Interest

212

as

are but a reiteration of the scriptural precepts directed against the same social evils and individual vices as was the Mosaic

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law, but they are applied to a world in which all men, and not the members of a particular nation, are brothers.” disposal Gratian's De Scholasticism found all this at Scripture and ecclesias cretum. Therein lay the authority tical tradition forbidding lenders exact the borrowers undertaking more than the amount the loan. But rationalize this prohibition, the early Scholastics must first this unearth and examine the motives which underlay endeavor, previous writers had not been entirely successful. Sufficient account was not always taken the limitations, the

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doubts expressed and the exceptions explicitly made the robbery and theft authorities certain instances. Usury metaphorical sense, i.e., the deprivation assistance right which one has Christian charity, became time juridical robbery and theft the sense.” thought was opened Besides, new channel Scholastic philosophy that had been closed the Fathers that the

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Aristotelian system. Like the Fathers, Aristotle condemned interest for evil consequences. He shared, too, their dis approval commerce and all form chrematistic acqui opposed sition (of which usury was the most blameworthy) fostering exchange money “natural” and desire for an end itself. To this must added his thorough personal lending and commerce, dislike all who engaged class of

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considered the very bottom the social scale which malpractice. capable any and But the matter did not rest brought here. To the support this condemnation making commodity money rational analysis. Usury and an end in itself diverted from its natural function as

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and measure value. Involving two unequal sums violated justice. For barren metal could not be made to breed its kind.

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The Jews were allowed exercise for considerable time their Mosaic privilege lending strangers until their excesses finally evoked interest Papal condemnation. Cf. Spicq, op. cit., 461.

a Problem

213

of Commutative Justice

Such was the inheritance of Thomas Aquinas on interest

But if the voice of Aquinas' own condemnation was the voice of authority, the hands were those of Roman law.

ethics.

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was chiefly from this source

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(with some assistance from Aristotle) that he drew the tools for his analytical apparatus whereby, after careful scrutiny of the concept of usury, he declared it to constitute a violation of commutative justice. sup Thomas The voice of authority as interpreted by ported that natural reason. Aquinas' analysis, we have seen, centered upon the fungible non-fungible perishable distinction between and and durable goods (rather than non-productive and produc tive, some have interpreted it). Fungible goods are those whose use identified with their consumption; non-fungible goods are those whose use distinct from their consumption.” Money fungible good, for chief purpose, medium spent exchange, spent; once ceases exist Aristotle, spender far the concerned. the words

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profit which may accrue

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“sterile,” incapable either reproducing kind affording any utilities own. the case durable good, justice requires, addition the return the object payment for the use object during lent, the the time charge for such was the borrower's possession. But use pay consumption good the case would demand ment for something which does not exist. this case, the equivalence justice demands that only the amount the loan be returned. Neither can one charge for the time between expiration, for time the loan and free gift God which the lender has exclusive title. Hence, virtue the equality values between things exchanged demanded by commutative justice, the contract mutuum (loan fungible goods) essentially gratuitous. justice any share Neither can the lender claim the

The Morality of Interest

214

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mutuum because the mutuum necessarily implies the sur render not only of dominion but also of ownership to the borrower (hence the name: meum, tuum — mine becomes thine). One has no claim to what is no longer one's own. Should the loan entail any sacrifice or loss, however, then the lender may charge compensation according to the interesse or amount of the loss. On the other hand, in the case of invest ment in an industrial or commercial enterprise (e.g., the con tract of societas or partnership), since the investor retains the ownership of his capital (shares in the risks of the venture), he has a right in justice to a share in the profits. So spake Aquinas on the ethics of interest. Let us examine: (1) the concepts employed in his analysis and (2) the nature of the debtor-creditor relationships to which it was applied. Is it true that money is a “fungible” good? From the point physical properties, money (i.e., metal coins) of view of goods. But this not what Aquinas one the most durable “proper Money meant. its function” medium ex contended, fungible good, for change, use iden consumption. Once spent tified with used up, spender consumed, far the concerned. this conclu exchange sion correct? Certainly money medium fungible good perishable generic good. But the sense non-productive good. For money this does not make representative exchange has but medium derived util ity. Its significance derived from that the commodities exchanged.” represents and for which which this non-productive productive sense, money may either

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signif both. actual exchange, produc consumption good icance will either that purchases. tion good according the nature the good exchange Hence the act not the end but the beginning money. the significance good.

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22

spent When money not “consumed” like perishable goods such food, drink and firewood. transformed (for the spender) into the goods purchased, which may perishable durable, production consumption

a

Problem

215

of Commutative Justice

Yet by the very fact that money serves as a universal me dium of exchange, it fulfills the added function of a store of value, a means of satisfying all wants in the future, especially if those be of an unforeseen or uncertain character. In this not a mere derived or representative commodity own. As such a distinct value of Commodity, fungible but not durable good, giving pos off continual flow services during the period utility not greater than that session, for were the com sense, money possesses

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a

of

of

of

Aquinas' superstructure we must fungible, i.e., perishable go still farther. The loan generic good, involves transfer all ownership and control good. this, the mutuum differs from the lo over such that be catio. Fundamentally the difference corresponds tween loan interest and rent modern economic theory.” In the contract of rent, called Roman law locatio-conductio the bedrock

of

in

of

a

or

in

is

or

is

is

a

of

a

of

he a

A

of

is

of

of

letting and hiring, the physical identity the unique specific good which the subject the contract retained. good justified on the ground charge for the hire such that the rentier sells for time the services the physical commodity over which proprietary rights. retains But generic goods homogeneous the case loan return made only kind. The physical identity the commodity

im

of

as

as

of

a

by

is

borrowed and return not preserved. This necessarily plies surrender ownership the lender well

the

“a

as a

of as

at

of

to

a

in

of

as a by

to

in

to

be

of

of

of

a

of

in

of

of it

in

of

is

is

24

its

of

or is

in

to p.

in

us

to

of

or

is a

of

as

of

in

of

is

23

Keynes' theory one two, and This liquidity-preference the theory we have adopted, one many, variables which the rate interest money such, and not merely function. This absolute utility medium, implied measure Aristotle's characterization kind security respect exchange some future time.” Nicomachean 114. Yet Aristotle failed realize the implication, re Ethics (trans. Chase), stricting his analysis the other two functions. The durable character paralleled Aquinas' examples money money borrowed this function display pledge: for purpose serve which cases, he contends, justified. charge for use capitalization can Yet rent by the process reduced interest the sense rate return on the value the physical object.

The Morality of Interest

as

of

of

or

to

a

in

of

use.

to

Hence, argues Thomas, charge for the use commodity the loan this sort (the mutuum) charge either for something that does not exist apart from the actual consuming the good for something the right to which has been transferred to the borrower with that of

is

right of (usura)

St.

216

is

is

in

of

of

of

St.

on

of

In

of

of

a

in

of

at

of

of

in

of

a

of

to

in

at of

it

as

a

of

by

is

a

of

In

ownership. homogeneous (fung other words, the loan ible, generic) good really sale, and governed such principle just price. the the How this instance the equality exchange values be determined? Aquinas' theory we note striking Here the very heart divergence between the mode determination the just price inter-temporal exchange this instance and that intra-temporal exchange (i.e., different goods the same point time) previously examined. This we attribute to: difference his assumptions regarding the conditions (1) buyer-seller relationship and (2) his attitude toward the the economic significance time. what we could construct the theory value which

in

of

It

to

an

by

a

is

of

of

of

to

underlie Thomas' teaching the just price intra-temporal exchange, we noted his recognition the vari commodity ability and relativity value. The value not immutable quantity fixed once for all some intrin utility may vary according sic property. conditions seemed

of

of

of

of

|. sum

in

I

money than was loaned.”

“Money cannot

as

is

sold for

a

4m.

reality intra-temporal be

in

is ad

2,

78,

a.

Theol. II-II,

exchange q.

The

of

or

a

of

always 1:1.

*-

a

present value. Whether present the determination sell money (or any homogeneous good) for sum avail any number years hence, the ratio able one year

of 25 S.

a

–-

of

to

In

sit

of

a

>

at

in

J.

in

as

he

of

place and time. and scarcity under different circumstances just price may Hence the seller take the that which finds any moment the market time. But the case in ter-temporal exchange the standard becomes rigid, objective quan Equality one. value and value becomes equality tity and quantity. “Pecunia non potest vendi pro pecunia ampliori quam quantitas pecuniae mutuatae.” other words, Aquinas denies the element time any function

far

larger

a Problem as the

217

of Commutative Justice

determination of value

is

concerned, i.e., the sale of

a

given quantity of present goods for the same amount of the same kind of goods no matter when they are to be delivered.

It is difficult to determine from the texts whether Aquinas speaking is here of value in the economic or in the ethical sense.” As we have previously noted, in the whole discussion of usury the assumption seems to be that of isolated exchange between borrower and lender and consumption loans to the needy. Nowhere is any mention made of the presence of a market for inter-temporal exchanges. This assumption would correspond to the economic conditions of the times, wherein the small loans (mostly for consumption) seem to have been negotiated privately between the individual borrower and the petty money-lender and the larger loans negotiated between merchant and merchant or merchant and prince, while the institution of the capital market “was only present in the Middle Ages in a very rudimentary form.” On such an assumption, Aquinas' attitude may be interpreted as a denial not of the role of time as a determinant of individual and market value, but of the validity of making such a subjective valuation the criterion of the just price. In isolated exchange there is no external objective standard controlling the ratio of exchange, either in the economic sense of the market price or in the ethical sense of the just price. Apart from any con siderations of justice, the exchange ratio upon which the par ties finally agree will depend upon their respective bargaining power and may lie anywhere between the highest price that the buyer is willing to pay and the lowest price that the seller opens the door to a full exploita tion of the subjective valuation of a needy borrower by a

will take.”

This situation

27

is

28

S.

ad

et

by

Tempus”; Theol., Cf. Opusculum “De Emptione Venditione Ehrenberg, loc. cit. ad 7m. Economically, the solution indeterminate between these two limits.

II-II, q.78,

a. 2,

26

is,

strong and unscrupulous lender. But how is one to find an objective standard that would meet the requirements of Com mutative justice in such an exchange? The valuation of both buyer and seller are purely subjective and there as

The Morality of Interest

218

as

sumption, no market value as a standard of comparison. To this question, Aquinas would seem to answer that if the ex change is of an intertemporal character, the element of time must not be allowed to influence the exchange ratio. This ratio must be considered as that of an exchange of present goods or sums of money. Justice demands equality between the sum lent and that returned, with due allowance for Com pensation for any inconvenience which the loan may cause the lender. If this judgment seems severe, the severity at least is

in

in

greater

need of protection.” however, Aquinas' contention that time serves no function in the determination of economic value, then his simply not universally true facts. Far from statement time being free gift some the Scholastic writers seem goods. No one can have believed,” one the scarcest by taking thought day, action add one with absolute as bring one day nearer the present, surance, the future, lessen by an appreciable amount the uncertainty en joyment. Yet though we cannot control time, we can control

of

of

of

as

is

of

in

is

time.

It

goods

in in

of

the distribution

its

it

or

to

or

or

it

a

to

is

to

is

If,

the favor of the borrower who stood

this sense that we of

sort of index-number, of those commodi fact, the difference ties which enter into the pricing process. physically between two identical economic goods available points great two different time warrant their to

as

so

is

of

at

In

as a

modification,

be

to

a

a as

—

inter-temporal are concerned with time the framework commodity bought exchanges not and sold, but

in

at

to

to

of

as

of

by

is

as

of

as

as

of

of

of

is

at

is

to

in of

30

in

at

is,

a

at

of

of

is

to

of

of

of

by

as a

The alternative is

29

just exchange-ratio we would offer isolated ex buyer and that determined the interesection the offer curves seller on the contract curve. The reason for our acceptance this ratio conforming justice the standards that the offer curve each individual, willing independent expressing quantities he exchange various prices, equilibrium the valuations the other. Hence the point their inter section, i.e., the exchange ratio which the amounts offered by both parties will coincide, while affording rate that equally advantageous both parties the same time, free from any exploitation one party the other. This inter-temporal intra-temporal exchange. would apply cases well Communi, formerly attributed Cf. De Usuris St. Thomas but now quite definitely identified the work Giles de Lessines. change

a

Problem

of Commutative Justice

219

classification as different economic goods. If we imagine, for example, 100 units of any commodity as available at successive intervals of a year in the future, then on either or all of three assumptions, none of which are unrealistic in modern life, the present value of the future quantities will decrease relative to that of the present quantity in proportion to the distance of the year of availability from the present. These assump tions are (1) that the individual places a lower present value upon future goods than upon the same quantity of present goods merely because they are future goods (and therefore subject to uncertainty); (2) that the provision for one's wants is more abundant in the future than in the present (rising in and (3) that the possession of present goods a larger quantity of the same goods in the future (investment opportunity). If for any or all of these reasons, the individual is willing to exchange 105 units of a commodity becoming available next year for 100 available now, the premium 5 on the value of the present good over the future good becomes a rate of time-preference of five per cent. This rate of time-preference will decrease with each addition to one's stock of present goods in exchange for a subtraction from one's supply available next year. We have already seen how from the interactions between these individual demand sched come stream);

will render available

in exchange for future goods and the supply schedules of those who are willing to offer varying amounts of present for future goods at different prices, there will emerge in a competitive market a rate of exchange, or rate of interest, which expresses the community's rate of time ules for present goods

i.e., their valuation of present goods in terms of future goods. This market rate of interest expresses, we main tain, the just price in relation to inter-temporal exchange as preference,

does the market-price

We

to intra-temporal exchange. have devoted considerable space to the teaching of St.

in relation

Thomas as it furnished the starting point of all subsequent Scholastic theory. In the course of the development of this theory, there is noticeable a tendency, while retaining the same analytical apparatus, to restrict more and more the scope

220

of the mutuum with

The Morality of Interest

as

the result that a wider latitude is allowed

for the application of interest in the broader sense. This is exemplified in the addition of lucrum cessans and periculum sortis to the extrinsic titles and in the legitimation of the census realis (to which was later added the census personalis) or rent-purchase and of the contractus trinus. To estimate the social and economic effects of the Scholas tic theory of interest is not an easy task. We venture to state (subject to the qualifications previously mentioned) that it was suited well enough to the exigencies of the times it was first intended to serve, viz., to an economy in which the bor rower stood in greater need of protection and where, in the absence of anything but a very rudimentary type of capital market, nothing like an objective impartial standard was available for the determination of the just rate of interest.” Neither does it seem unlikely that investment, as many economic historians believe, was definitely favored by the le gitimizing of profit and the discouragement of unproductive loans. Yet this was not the avowed aim of the Scholastic doctrine, the basic distinction of which was between fungible and non-fungible goods, not productive and non-productive loans. Nor have we found in the discussions and canonical prohibitions of the Middle Ages any evidence that we would be inclined to interpret, in the words of Lord Keynes, as an “honest effort to keep separate ... the rate of interest and the marginal efficiency of capital” or that would seem to indicate that “the disquisitions of the Schoolmen were directed towards the elucidation of a formula which should allow the schedule of the marginal efficiency of capital to be high, whilst using rule and custom and the moral law to keep down the rate of interest.” Apart from the fact that the Scholastics were con cerned primarily not with the level of interest but with the 31 When lending and borrowing developed later on a larger scale, it seems at first to have been disguised under the forms of bills of exchange, which were

justified on the grounds of risk and operating costs and from which the capital market seems to have evolved, and of census or rent-purchase. 32 Keynes, The General Theory, etc., p. 352.

a

Problem of Commutative Justice

221

question of whether interest as such was justified (only indi rectly, i.e., by the extrinsic titles, was interest, when permitted, limited to the rate of profit), we would not, for another reason, expect a priori to find them concerned with such an objective, for this problem is one of social justice and the Scholastics were concerned with interest first and foremost as a question of commutative justice. Yet neither do we accept as a fair criticism the accusation exemptions from usury charges were but sophistries mere casuistical concocted to extricate them from the web of their theorizing. Certainly the scholastic analytic al apparatus (especially in view of the often bitterly contested struggles over these very exemptions) must have found it difficult to keep pace with the rapid economic developments of the fifteenth and sixteenth centuries, chief among which was the development of an organized capital market. Yet we consider it a definitely ungenerous interpretation of motives that the Scholastic

to read into their efforts to extend the scope of interest in the broader sense any mark of intellectual dishonesty. Their ex emptions were, for the most part, logical deductions from their initial assumptions, and while the writer sympathizes with their efforts to adapt the theory to the conditions of the times, yielding to the lender the benefit of a doubt wherever possible, the fault he is inclined to impute to them is a failure to see that their assumptions and analytical apparatus no longer fitted the conditions to which they were applied.” Nevertheless, the Scholastic theory as evolved in the course

at

or

its

of the Middle Ages has continued to persist and still enjoys a number of adherents among Scholastic moralists even at the present day. On the other hand, it began, as we have noted in Part I, to meet with definite opposition from the sixteenth century onwards. Not only did Protestant writers attack its analysis, but Catholic moralists and jurists as well began to question the validity of assumptions least their ap of

to

de

p.

33

Roover, “Scholastic Economics: Survival and Lasting See Raymond Influence from the Sixteenth Century Adam Smith,” Quarterly Journal Economics, (May, 1955), 189.

The Morality of Interest

222

as

of

in

a

to

a

its

plicability to changing economic Conditions. Yet neither has the writer found among the theories of their critics what he considers a satisfactory solution. The attack upon the Scholastic doctrines of usury, first begun by Calvin and developed by his successors, then later championed by prominent Scholastic moralists, took the form of an attack upon the original Scholastic analysis of money. In view of the representative character or applicability of quasi-productivity, money to productive enterprise, or of they believed that money could no longer be considered fungible good. This was money from the shift loan a

of

a

to

of

a

or

It

in

of

to

of

to

of

charge the mutuum that the locatio which the object was considered legitimate. But this for the use method attack we do not consider have served any very purpose. useful confused the various senses which fungible good has often been taken. For perishable non

class

specific good, which we take distinction, may be either

is

or

is

it

to

of

in

of

is

of

of

is

of

of

of or

of

In

a

of

is

of

is

of

it

of

of

in

to

a

or

be the real foundation the productive non-productive put. This good, according the use which also true applic money view the representative character ability they speak. which Yet this does not remove from fungible goods whose real characteristic the class that ownership and reality their transfer involves surrender interest, then, sale. The question that the just price equivalence present values. view the productivity real capital, the virtual-productivity which these writers only speak one, one, indeed but the factors which account present money for the difference between the present value

of

of

to

exchange

between individual borrower and lender which

—

of

in

of

a

as a

of

it

by

of

by

a

as

of

of

and the present value future money. This essential charac ter interest difference between the present values present goods and future goods was clearly stated Abbé Turgot who failed Galiani and repeated later reconcile charge for the use with his other theory interest productive good. But this line thought remained neglected until recent years. We have also noted previously that all these counterproposals the assumption was still that isolated

a Problem

223

of Commutative Justice

if it threw

any light on the question

“Is interest moral?” question — would not answer the further “What rate may be considered moral?” even

We believe that the authority of at least one great Scholastic moralist can be proffered in corroboration of our solution, that of the late Father A. Vermeersch, S.J., who seems to give

to the existence of a capital market. In Vermeersch, is legitimate as the just price the general utility of money, and as the on the general estimate which depends not on universal but on general utility, I may require the price of that general utility even if the article is of no use to me.” If we interpret: (1) the “general estimate” as the community's valuation expressed in the market price under given condi tions of competition and given data, (2) “general utility” as market value and (3) “universal utility” as the subjective value or marginal utility of the commodity to the individual seller, Father Vermeersch's solution of interest as a problem of commutative justice is essentially the same as that which

due consideration terest, says Father corresponding to just price is based

we have endeavored to establish in this chapter. As far as any decisions of the Church are concerned,

the

practical problem has, as we have seen in Part I, been settled by the various declarations of the Roman congregations in the nineteenth century to the effect that the faithful who lend money at moderate rates of interest are not to be disturbed provided that they are prepared to abide by any future de cisions of the Holy See. Yet the theoretical problem still r mains an open question. “Finita quidem; utinam vero so luta.” It is our firm belief that the desired solution lies in the direction indicated by the present study.

34 Catholic Encyclopedia, “Usury,” 35 Van Roey, op. cit., p. 81. lem were solved.

The

XV,

235-238.

controversy

is ended; would that the

prob

*_

º w

3 Interest as a Problem

of Distributive Justice

HE function of justice is to protect rights, and rights are founded on the dignity of human personality. Of the whole complex of rights enjoyed by man in modern society some are “natural” in the sense of being inherent in the nature of man, belonging to man as an individual. Such are the right to life, the right to happiness, the right to certain kinds of freedom (which are ends in themselves) and the right to any means necessary to attain these ends, such as the right to property in the abstract sense, i.e., to the possession of prop erty in some form, whether communal or private, as a means of preserving life. Others are social or “conventional” in the sense that they are found necessary for the preservation of

in society for which man is fitted and inclined They are based on the social rather than on the

peace and order

to

224

well

as

this sense, they are also “natural”

as

In

1

of

by of

or

of

to

of

its

by nature." individual aspect of man's nature. Such is the concrete right of private ownership of the means necessary for life and enjoyment. society are under obligation The individual members justice respect, commutative refrain from violating, proprietary, the rights, whether personal their fellow society. They are likewise obliged members social justice “conventional.”

225

to co-operate, to contribute both negatively and positively, towards the welfare of society of which they are members and without which their capacities and needs could not be fully attained. Governments, on the other hand, are charged by distribu tive justice to protect the rights of individuals and to enforce their claims against other individuals and against society; they are charged by social justice to utilize the best means at their disposal to achieve not only the security but the state of prog ress necessary for the welfare of society which they represent. Applying these principles, which we accept as the as

sumptions of a rational system of ethics, to the conditions of modern life, we have endeavored in the preceding chapter to establish the proposition that within the framework of the pricing system, given the conditions of tastes, resources, tech nique, and level and distribution of income, the competitive market price is the most satisfactory criterion of the just price demanded by commutative justice in the exchange of goods and services between individuals. On this proposition we justification have based the of loan interest as the competitive price present market of income in terms of future income.

This

is not to deny, of course, that under certain circumstances may be obliged by the higher claims of social

an individual

justice to lend to another without interest or to surrender out right to another a portion of his goods to which the dire need of his neighbor establishes a more valid title.” 2 This consideration we believe

to be relevant to the ethics of the living

large group of moralists would seem to maintain that the right of the worker to a standard minimum wage is one of commutative justice. Their ar wage.

A

gument is that since in view of the dignity of human personality every man has a right to a decent livelihood, and since for a very large percentage of the population the only means of obtaining this livelihood is by hiring out their labor, the wage paid for labor cannot be below this minimum standard. In

of

to

it

of

to

a

to

of

a

its

other words, labor acquires a minimum intrinsic value which must be made the basis of the equality of commutative justice. But apart from this consideration of need, they would seem to admit that labor should be rewarded according to the value of service. Apart from the fact that this argument without multiplicity qualifications leads many absurd conclusions, seems the writer be based upon confusion between the claims social and

Interest

226

Viewing

Problem

as a

the problem from the other approach, that of

of the government to

the individual members of the community, we venture to add two further propositions:

the relation

within the framework of the competitive pricing sys the just principle of distribution is that of division of

(1) that tem

II,

total income in proportion to the value of services rendered, while outside this framework (i.e., in the case of those who through no fault of their own are incapable of entering the circle of exchange) distribution should be based on the prin ciple of need qualified by the necessary provisions that in dividual initiative and responsibility be not thereby discour aged; and (2) that within the functions of government lie the power and the duty of controlling the conditions under which the pricing system will operate to the extent that this is found necessary or expedient for the good of all. On the basis of these propositions, we shall analyze the ethics of interest as a problem of distributive justice and of social justice.” The first problem to be considered is that of interest as a distributive share. As we have previously noted in Part

of

of

of

as

to

is

a

to

is

it.

is

to

is

to

of

to

so

it

if

or

to

if

so

to

it

of

If

to

of be

to

of

of

of

to

a

a

as of

is a

of

of

to a

of

of

is

of

social, not one commutative justice. The criterion needs one com mutative justice. The claim the willing and able worker minimum earning standard welfare claim against society the opportunity such standard. Within the framework the production-distribution sys payment not for labor tem, wages are such, but for the value the contribution the product made by the services labor. And this under competition, will equal any given conditions the market value type labor. this principle service-value function the criterion commutative justice above the minimum standard, we see no reason why wealthy deny that should fail do below Yet this again not employer, especially reaping large monopoly profits, may be obliged he by social justice bridge an existing gap between market and minimum obliged standard wages can be done without loss that the state employ whatever means that lie within its power control the conditions willing and able under which the pricing system operates that the claims a

of

in

to

it

of

as

of of

is

in in

8

It

in

ist

best calculated

as

to

a

minimum standard may be fulfilled. We suggest that the measures policies attain this end are be found not restriction character but such policies will increase production per capita. may be noted here that the distinction between distributive justice and fulfilling social justice not always clear-cut and sharply defined. For even its obligations distributive justice the government must keep view not only the rights individuals, but also the general welfare individuals represents. the community which workers

of Distributive Justice

227

interest viewed as the percentage return on the capitalized value of all wealth represents not a part or a share of income but the whole of the income. Now this aspect of interest is of great importance in economic theory, emphasizing as it does the role of time in the process of valuation and showing how the theory of interest plays a central role in the theory of value and prices and, therefore, of distribution. Yet it is not very helpful as a starting point for the analysis of the so cial problem of distribution, for it resolves into one homo geneous quantity the various elements with whose comparative significance and individual justification we are here con cerned. Hence we shall follow the more conventional method and attack the social problem of interest from the point of view first of functional distribution and then of personal dis tribution.

The four distributive shares (wages, rent, interest and profits) into which income is divided by conventional eco nomic theory may be grouped into income from the services of labor and income from the services of property. This dis tinction lies at the heart of our problem, for there are very few who would not agree with the principle that personal serv ices are justly rewarded in proportion to the value of the con tribution of those services. But many would deny the validity of this principle in the case of income from property, main taining either that as property contributes nothing to the value of the product it should have no share in it or that re muneration for the contribution to productive enterprise of services other than those of labor is not a legitimate source of private income. Hence we shall examine the ethics first of income from private property in general and secondly of in terest as a special form of such income.

Though,

we have previously noted, the right of property in the abstract is a natural right in the sense that it is necessary (1) for the exercise of one's faculties and the development of one's personality and (2) for the preservation and enjoy ment of life, the expression and exercise of that right in the form of the institution of private property is not of universal as

Interest

228 necessity.

The right to an end

as a

Problem

necessarily implies the right to

the means necessary to attain that end. But the exercise of that right may take different forms according to the conditions of human existence. Were we to assume an earthly paradise in which goods were present in such abundance as completely to satisfy the wants of all, the institution of private property

would fare.

be necessary neither for

Or again in

individual nor for social wel of voluntary communism

an utopian state

where men, inspired by religious and humanitarian motives, surrender completely their possessions and contribute gen erously their services to the community, content to receive in return remuneration according to their needs, there is little doubt but that the wants of all are better satisfied than they would be by the exercise of the right of private ownership." But, unfortunately, the common state of man is blessed by no such exuberance either of natural bounty or of human be nevolence. We live in a world in which goods are scarce relative to human wants and in which human nature is a

compound of good and of evil. Experience attests that in such a world the exercise of the right of ownership through the in stitution of private property is an individual and social neces sity. It protects what one has legitimately acquired against appropriation by others, thus affording a guarantee of security, of self-reliance and of the opportunity of personal develop ment; it stimulates personal initiative by furnishing an incen tive to expend one's labor and ingenuity in the interests of 4 As for riches, says Tolomeo de Lucca, speaking of human nature before the fall of Adam, “all things were in common which can only happen among

the perfect” upon which Bede Jarrett, O.P., comments: “Innocence could live from a common purse, not ordinary man. Communism was a lost ideal left behind in the Garden. Between it and our world was a flaming sword.” Jarrett, Social Theories of the Middle Ages, 1200-1500 (Boston: Little, Brown, and Company, 1926), chap. V, “Property.” It should be noted that the volun tary communism practiced in some of the early Christian communities differs toto coelo from the involuntary communism that some utopia-makers would force upon the world today. This type of voluntary communism is likewise practiced by members of religious orders today wherein the exercise of the right of private ownership is surrendered not as a matter of obligation but as a counsel of greater perfection.

of Distributive

229

Justice

of centralization in one's self and

it

the Community;

guarantees

a salutary

de

the organization of productive enterprise;

is a necessary condition for the stability

it

of family life; it sup

of

is,

by

plies a firm basis of social security, stability, order and peace without which life in society would be altogether intolerable." Yet the right of private ownership is not absolute and un limited. As an important and much-quoted papal encyclical has strongly insisted private ownership is social as well as indi therefore, limited the demands vidual in character and social welfare." These limits concern both the extent of ac

so

is

of

of

a

of in

or to to as

of

to

of

a

of

so

or

be

of

quisition and the use private possessions. For the social good requires that an individual group should not al acquire large possessions lowed either use their put jeopardy share the wealth the community proper the welfare the other members. The preservation balance between the individual and social requirements private ownership not an easy task, and the correction the by governmental authority, should never social abuses, e.g.,

by a

as

or

is

it

of

of

of

to

as

so

destroy the individual character far own ership. Finally, for the valid exercise private owner the right ship, necessary that one acquire such possessions valid either primary title. Such titles are commonly classified be carried

in

is

of

of

to

of

in

be

5

to

of

Following Aristotle, and contrary Plato, St. Thomas the opinion private ownership and common Aquinas taught that property should use. Acquisition and disposition over private possessions he held be both lawful and necessary, their necessity being based on the three arguments Aristotle, i.e., individual solicitude for what one's own, of social order and

to to

a. 2,

q.

in

or

is

may

Quadragesimo Anno (Catholic Social Guild translation),

be abolished by 17

it

is

“conventional”

p.

6

sometimes drawn that because governmental fiat.

it

is

it

of

it

to

of

of

S.

in

of

to

to

of

of

social peace. But the use external goods he maintained be common all. By this he meant that the rich should not deny the indigent access the goods which they possessed excess their own needs. “Unde proprietas possessionum non est contra jus naturale sed juri naturali superadditur per Theol., II-II, 66, adinventionem rationis humanae.” ad lm. This has private become the traditional view Scholastic philosophy on the right property. Between and the Utilitarian theory we see no conflict the private property expedient extent that the institution conventional socially necessary. Yet this does not warrant the inference the sense that

sq.

Interest

230

Problem

as a

of

of

by of

to

is

is

to

a

to

at

of

of

by

of

of

by

of

of

of

to

by

a

or

of

is

in

of

its

derived. The primary titles, viz., labor and first occupation, apply to the acquisition of objects which were not previously the possessions of another. In the case of the first title, it must be noted that labor confers a right to the whole value of a new produc product only if it is the sole factor responsible for applicable discovery tion. The second title the case and occupation new lands the finding new sources natural wealth. The secondary titles confer right by transfer another, viz., possessions from one owner exchange, by donation and inheritance. private ownership wealth, Granted the justification enjoyment with the limitations we have noted, the right the owner, with the same limitations, the produce, the serv private logical in ices, the income possessions follows property has ference. We may say then that the owner least presumptive title income from his property provided really due equal that this income and the value the services thereof and that no one other than the owner can

of

or of

of

is

it

of

of

to

a

is

of

is

of

of

as a

functional share, expressing the value the capital, contribution total output the services neces pricing and evaluation. In sary under any rational system capital terest on not mere “historical category,” an ar to

tem, interest

of to

to

of

In

in

of

of

of

a

to

in

of

be

of

by

of

of

in

or of

is

to

in

in

be

a

of

superior title. The presence both these provisions readily enough will admitted the simple case wherein producer capital the uses both his own and his own labor production. The producer then entitled the whole value the product. But some will allege the absence either one production both the case wherein the services labor property are contributed and different individuals groups. Against this we maintain that under competitive con fulfilled and that the owners ditions both provisions will capital (as property) are entitled by dis all other forms tributive justice share the total income equal the capital, i.e., market value the services the rate in capital employment. terest times the amount establishing the presence our first provision, not difficult show that within the framework the pricing sys present

of Distributive

231

Justice

bitrary share exploited from the income of society which may be annulled by governmental decree. Even under the control its

of production and distribution by an economic dictatorship,

of

of

of

of

to

its

a

be

be

altered, its existence could not allocation could abolished. For capital, like all scarce factors, has marginal value determined by the demand for services relative its supply. The price, i.e., the rate interest, which under competition expresses the marginal value conditions those services, limits the demand, the effective use, those though

of

a

of

as

of

of

of

us

of

is

of

a

of

in

of

it

at

if

it

be

its

of

as

as

is be

of

a

to

if

a

at

be

in

of

to

of

of

be

to

of

it

of

as

of

to

the available supply.

of

In

this way, the rate in terest acts the regulator economic activity. Beyond any existing margin production, there lie other wants which produc profitable satisfy, other methods would become tion which might undertaken were the available supply capital increase and the rate interest fall. With rise marginal production interest, types the rate certain operated profit which could heretofore must now product abandoned. Only the community's desire for price will cover the value capital such that the services produced. Hence, factors, well the other will we have noted previously, even an economic dictatorship, pro makes any pretence an efficient use the factors satisfying community, duction the wants the must put upon capital. expressed value the services This value competition by the market rate interest under conditions which, when multiplied by the total value capital, gives services

of

of

in

or

by

of

or

by

a

of

to

of

of

to

of

a

as

of

society that functional share the total income capital. goes the owners property income Our second condition for the licitness any superior was the absence title that the property owner. We may conceive such claim being presented produc either the worker who cooperates with capital consumer, tion, simply by the some less fortunate member the community. Of these three, the worker's might

interest

to

is

is

it

of

be

to

the most plausible claim. Yet from the point view distributive justice, without any rational founda proposition tion. The that labor entitled the whole value

of

appear

Interest

232

as a

Problem

to

is a

If

in

a

it

be

it.

in

is

its

of the product is valid only when labor alone is responsible for production. The laborer entitled the whole product only when his own labor and his own capital have been em ployed producing capital scarce commodity with price, co-operation market will used with labor only on the condition and to the extent that the increase in the

of

as

to

in

as

in

it.

to

of

of

by

in

a

to

of

of

to

to

is

to

a

is

It

of

to

of

to

of

to of

is

of

value the total product sufficient cover the value capital the contributions both and labor. To the income the value this contribution the serv which corresponds capital ices the total product, the worker worker has any right no claim distributive justice. support The claim the consumer has even less The productivity and has consumer consumer takes no part any share no claim distributive justice the product. satisfy his wants that production undertaken. Though right protection having pay too dearly against he has for the satisfaction those wants, this right does not extend beyond the guarantee that the cost commodity will be

in

of

of

to

in

to or

is

of

if

in

he is a

he

of

of

in

a

of

is

if

to

is

by

to

of

If

of

a

of

us

of

in

he

to

in

be

a

to

to

a

in

to

of

of

to

its is

of

to

necessary no more than cover the costs the factors that production. To transfer contribute the consumer the form still lower prices the share the total income that corresponds capital would the value the contribution grant subsidy be which he has no valid claim, subsidy his share which would direct proportion the amount capital employed goods purchased. the This leaves with the claim brought against property income by any less favored member the community than property the owner. To evaluate such claim we must first make enquiry into the condition the claimant. contributor the social product within the framework the pricing system, then he entitled distributive justice remuneration equivalent the value the services con tributes. But his position that an involuntary spec participant tator rather than the productive process, though within the system his remuneration insufficient welfare, the community meet even the minimum standard proportion owes him distributive justice compensation

of Distributive Justice

233

to his needs. This latter condition may give rise to a claim in social justice against the recipients of property income whose fortunes have grown so large as to jeopardize the welfare of their fellow men. This brings us to the problem of personal distribution and of the control which the state must exercise in the interests of the common welfare over the conditions

within which the pricing system may operate. From the point of view of functional distribution,

we have

seen that the division of income between labor and property will depend upon the comparative total values of the contri butions of the services of labor and of property or of capital in the sense of all income-bearing property. With the steady increase of the national dividend in most countries of western

civilization, both shares have grown in absolute value. Though the relative values of the total incomes from property and from personal services have maintained a rather stable pro portion of approximately 30 per cent to 70 per cent in England and America, the value of the share of property relative to that of labor may show some tendency to increase as production becomes more and more “roundabout” or capitalistic. Yet this in itself affords no valid argument against the intensifica tion of capitalistic production. In view of the fact that the society total income of is increased by technical progress and by the utilization of resources in the manner that will bring maximum returns, the correction of any evils resulting there from relates rather, as Wicksell suggests, “to the problem of the social distribution of income, and not to that of the eco nomically most advantageous method of production.” The problem, then, is not that of the relative magnitude of the share of income from capital, but of how many or how few of the members of society participate in that share. This in turn will depend upon the distribution of property in society. The right of private property, as we have noted previously, is social as well as individual in character. The amount of property which

a

man may

possess

7 Knut Wicksell, Lectures on Political ledge and Sons, Ltd., 1934), I, 142.

is limited by the

require

Economy (London: George

Rout

Interest

234 ments of the common welfare.

There

as a

Problem

is no doubt but that the

common welfare demands some correction of the inequalities in the distribution of property manifest in modern society. What, then, are the causes governing the distribution of prop erty? And how can the cumulative process of inequality be controlled? Among the causes governing the distribution of property in society, there is first of all the difference of ability between Talents, skill, ingenuity, resourcefulness individuals. and initiative differ with different individuals. Hence, even were

of

of

to

in

of

it

in

of

to

of

a

in in

of

by

is

of

of

to

of

a

of

of

is

of

of

it.

of

we to assume an absolute level of equality of property as a starting point, this equality would not long be maintained, nor would it be advisable in the interest of the social good to try to maintain enticing into For one the best means the service the community the full resources the talents proportion its members that remuneration the however, resources, depend value those services. These not only on native ability, but also upon education and training, and here we find the germ cumulative process tending fur existing inequalities any ther increase wealth. For, though the possession property confers no native talents, does afford more favorable opportunities for the development such talents. This evident the comparative advantages enjoyed the children the rich over those the poor. most important function af Here the state can perform opportunity all, not only fording greater equality the form of cultural education but also in the form of technical of

in

a

of

of

or by

in

of

of

of

is

to

of

be

by

to

a

—

training thus effecting shift the supply workers from the poorly the more highly paid skilled employments. per property will also The distribution affected particularly applicable sonal characteristics. This habits saving and spending. As we have seen Part II, low impatience induced thrift, providence rate habits to

of

to

of

in

of

for the future one's self one's dependents, will lead savings from one's present income which will grow into larger and larger accumulations the future. But the high rate impatience spendthrift deplete his the will induce him

of Distributive

235

Justice

earnings either by borrowing on the future or by dis of the instruments on which those future earnings de In the first case, the individual or the class will grow in the second, poorer. Hence, as Irving Fisher remarks, the loan market becomes an easy highway for the redistribu tion of wealth. “The existence of a market rate of interest to

future posing pend. richer,

which the individual adjusts his rate of impatience supplies an easy highway for the movement of his fortune in one direc tion or another.” Here again we find a tendency towards a cumulative process, for the rate of impatience depends not only on personal characteristics but on the size of one's in come stream as well. The difficulty with the poor man is not so much that he is extravagant as that he finds it impossible to satisfy any more than his immediate needs. The lower his

income falls, the keener becomes the poor man's appreciation of present goods. On the other hand, the greater the wealth of the rich man becomes, the lower his rate of impatience falls and the easier does accumulation become.

its

Yet not all who enter the highway of the loan market as borrowers do so to their greater loss. Borrowing has become the foundation of great fortunes for those who were able to foresee investment opportunities which would bring a return far in excess of the rate of interest. Under conditions of com petition, such high rates of return will not be of long life, for by

once a new venture is proved successful,

opportunities will

338.

of

of of

of

of

Fisher, op. cit., chap. XV,

p.

8

In

of

of

of

is

of

—

to

of

he

a

if

is

to

of of

of

new entries into the field until the rate be exploited brought down profit. Only return the normal level monopolist the enterpriser enjoys the favored position protect profits against can his abnormal the incursions competitors with what loss the community one can readily monopoly profits see. This source one the most im portant causes inequality property and the distribution property-income that menaces the welfare modern society. ownership we must To the above causes inequality add risk and luck. all new investment opportunities, there

Interest

236

Problem

as a

is an element of risk. If the risk is great, success may mean a fortune; failure, impoverishment. In other types of invest ment where the chances of success are small, individual losses are correspondingly small, but the gains of the lucky are tre mendous. “Only fools,” remarks Professor Cannan, “invest in lottery tickets;” but some few make a fortune on them.” Such fortunes mean a redistribution of property in the direc tion of greater inequality, taking a few dollars from the pockets of the unlucky and putting some hundreds or thousands in the pockets of the lucky. Another very important determinant of the distribution its

of wealth in society is that of bequest and inheritance. As society progresses, a larger and larger proportion of wealth

it in

is

is

in

to

of

it

of

of

a

it

a

In

of

it

to

is

of

is

in of

the accumulations

of

consist

of

previous generations. Here again the effect inequalities personal distribution cu property that one mulative. The greater the amount acquire more inherits, the easier will be save and private inheritance the future. The institution not right that socially expresses self social evil. fact family life. Yet necessary for the maintenance and stability property-rights, like all types has its limits set by the

will

of

of

of

society, and the enforcement demands the welfare governmental these demands falls definitely within the scope

a

of

in

of

to

a

of

to

of

as

of

action an obligation social justice.” Distributive justice, then, requires not the abolition private income from capital (that would lead but stagna living), lowering general tion and the standard but widening the opportunities share that income. This

of to

of a

in

as a

of

of

to

of

to

in

of

to is

a

of

as

to

in

of

F.

10

T.

p.

9

of

Income,” The Economic Outlook (Lon Edwin Cannan, “The Division Unwin, 1912), 242. England by system An attempt has been made death duties reduce the importance inheritance cause the existing inequality failing distinguish between large and small be wealth. Yet the system, quests distinct from large and small estates, provides no incentive for the breaking up large estates into number small bequests different per provided sons. Such an incentive the recommendation that death duties be graduated according the size individual bequests and also according the existing wealth the beneficiary. don:

of Distributive Justice

237

of property among the in dividual members of The state can accomplish the inequalities correction of in the present distribution chiefly by powers secondary distribution, e.g., taxation in prevention comes, bequests and inheritances. The these inequalities the future will achieved measures sharing calculated broaden the opportunities future income. Among these may be mentioned: better facilities education and technical training; the encouragement thrift and saving by those moderate incomes; the discouragement purely fortuitous character (e.g., pools investments among poor; regulation especially and lotteries) the the small loans for consumption; the affording better facilities for credit the small trader, manufacturer and farmer; the profit encouragement enterprises co-operative sharing character; some regulation divorcing the owner ship and control and the consequent centralization control rigid control industry; “natural” monopolies; and penalizing upon restraints trade with view the reduction monopoly profits. Such measures and gradual abolition imply governmental policy not laissez-faire but inter greater competition. vention favor freedom Thus the long run, with the growth technical prog consequent increase leisure, income from the ress and property may services become for an ever increasing per population comple centage the either substitute for ment that from the services of labor. But the short run, wages are still, and may remain, the chief not the only source proportion greater society. income for the To them the fairly steady employment indispensable for guarantee individual and social security. This brings an important point contact between the rate interest and social justice. implies

a

more equal distribution

of

by

in

of of or

of a

of

of

of

of

or

of

of

of

of

to

us

is

of

of

if

to

in

a

a

of of

its

in

of

in

a

of

of

a

to

a

of

of

a

in

of

to

of

of

a

in

of

of

of

of

of

of

to

be

by

of

of

in

of

of

its

society.

4 Interest as a Problem

T

of Social Justice

HOUGH we have allotted separate chapters to consideration

of the requirements of distributive and of social justice as applied to the rate of interest, we must bear in mind that these two types of justice cannot be kept in air-tight compartments and studied in complete isolation. There is an interdepend ence between social and distributive justice, as there is an interrelationship between social and commutative justice. The demands of social justice may, under certain conditions, over the requirements of distributive justice or of both distributive and commutative justice. Hence cer tain questions which we attempted to answer in the preceding chapter as problems of distributive justice were also problems of social justice insofar as they affected the common good or take precedence

economic welfare of the community. This was particularly true of the discussion of the redistribution of income, i.e., of the effects of personal and institutional influences which should bring about a changed — and presumably more just income distribution than would occur if certain economic and

–

social forces were left freely to operate. It remains for us to examine in this chapter certain ethical problems related to the rate of interest which are primarily problems of social justice. The most important of these prob lems stem from the relation of the rate of interest to two ques 238

239

tions which have been given much attention in discussions of economic and social policy in recent decades, viz.: Is it within the powers and duties of government (1) to assist in securing and maintaining a high level of employment and (2) to assist in securing and maintaining a relatively steady and high rate of economic growth? The answers to these questions pre suppose, in turn, the answers to two more fundamental ques tions, viz.: (1) Do we have sufficient knowledge of the means of achieving those goals and, if so, do we also possess the means? (This knowledge refers not only to the type of means to be used but also to the timing and dosage necessary in any spe cific case.) and (2) Does the application of these means inter fere substantially with the attainment of other social ends, such as freedom

or

democracy,

or with the achievement of justice? commutative and distributive And if such conflicts do arise, how are the various aspects of justice to be weighted in resolving the conflict? There is a rather widespread consensus among economists at the present time that we can use fairly successfully a com prehensive anticyclical policy which will at least dampen to a considerable extent economic fluctuations and which is also consistent with a good rate of fairly stable economic growth.” When disagreement occurs, it is generally regarding the amount of over-all planning

needed for that purpose. anticyclical policy This is a skillful blend of monetary, fiscal and market policies, the details of which we cannot enumerate here. What is of primary concern to us is the role which changes in the rate of interest may play in the complex ar rangement of such a policy. 1 From these, in turn, may arise secondary

problems of social justice, such

as the relation of the distributive shares and of security and stability of income to the social goals mentioned above. 2 For a general survey of the consensus of most American economists see the Report of the Committee of the American Economic Association, “The Problem of Economic Instability,” American Economic Review, XL (Septem ber, 1950), 505 sq. See also Howard S. Ellis, “The Rediscovery of Money,” in Money, Trade and Economic Growth (New York, London: Macmillan Co., 1951).

-

Interest

240

as a

Problem

Government (which, in the wider sense, includes the cen tral banking authorities) may influence the rate of interest in two important ways, i.e., by means of (1) monetary policy or (2) fiscal policy. These measures may either affect the rate of interest directly and through it the amount of money or loanable funds, or they may affect directly the quantity of money or loanable funds and through these the rate of interest.

The controls

used

will

be those of monetary policy

if the tools

used are either the discount rate and open market policy such quantitative and qualitative controls as

will

or

affect the

in

of

of

of

of

of

of to

of

capital, the marginal efficiency the propensity income, conversely save), consume (or the level viz.,

of to

of

a

II

of

in

of

of

of

of

be

of

in

its

in

to

ly

as

in

is,

amount of money and thus indirectly, to some extent, the rate of interest. Fiscal policy is primarily concerned with govern ment spending, especially deficit spending. It may affect the interest rate either directly or indirectly through the quantity of money or the policies used in the management of the public again, quite general agreement among econ debt. There omists that monetary policy should prove fairly effective dampening such expansion cannot be maintained indefinite cyclical movements, but that fiscal policy and hence leads checking any serious contrac must play an important role manipula tion. Keeping mind that the interest rate and only many tion offer one tools available and that the effects quite different this manipulation might the different phases the cycle, we may draw some very general conclusions from the simplified model our general theory interest. general theory The interest which we have outlined many variables, Part makes the rate interest function

of

a

be

of

liquidity-preference and money. Equilibri the quantity process um within the system will effected by mutual adjustments until the quantities expressed by these interde

of

to

in

of

of

of

of

or

of

pendent functions are compatible with each other. Given the money and the level income, any change quantity the will, marginal efficiency capital propensity the consume by affecting the level income, operate upon the rate in terest via liquidity-preference. The rate interest which

241

of Social Justice

emerges from the process of equilibrium will depend upon the concrete shapes of the investment, consumption (or sav

if

of

in

or

is a

of

of

is

or

1,

is

as

in

If,

ing) and liquidity-preference functions. The nature of the reaction of the rate of interest to changes in the marginal efficiency of capital and in consumption will depend upon the two elasticities of the liquidity-preference function previously mentioned, i.e., the negative interest elasticity and the positive income-elasticity. In general this reaction will be the greater, the greater is the positive income elasticity of demand for cash balances and the smaller is the negative interest-elasticity. At opposite ends of this whole range of possibilities we find, as Dr. Lange points out, two limiting cases: that which Lord Keynes seems to assume in the General Theory and that of traditional economic theory.” case either the income-elasticity the demand for liquidity infinite, i.e., zero the interest-elasticity the demand for liquidity function the rate interest only, consumption-saving func then changes the investment tions will have no effect on the rate of interest which will be to

of

is a

if

is

of

of

of

is

of

by

is of

of

of

2,

in

as

is

of

if,

of

of

a

in

determined only by factor the data external the system, money independently i.e., the quantity the level in come. (Interest, from the point view the lender, the liquidity.) But price case the interest-elasticity liquidity zero, i.e., demand for cash balances constant function income only (and the total income determined money), then the rate the quantity interest will de pend solely upon the investment and the consumption-saving functions. Assuming that savings and investment are equal, savings, equilibrating their supply with interest the price the demand for investment.

of be

Ibid., pp. 24-33.

a

of

savings may have 4

Cf. Lange, op.cit., pp. 12-33.

in

determine. An increase 3

to

its

or

to

to

to

of

as

This analysis, Dr. Lange further suggests,” would seem throw some light on the problem the optimum propen sity preserving the proper balance between consume, spending and saving which Malthus, while realizing im portance, feared beyond the powers economic analysis twofold effect

242

Interest

as a

Problem

upon investment. To the extent that it curtails expenditure on consumption goods, it discourages investment in those indus tries; to the extent that it lowers the rate of interest, it also encourages investment in the production goods industries.” The optimum rate of saving, or that which maximizes invest ment, must therefore preserve a balance between these two effects of a change in the proportions of spending and saving. On the assumption of zero interest-elasticity of the demand for liquidity (case 2 above), any propensity to consume (or rate of saving) is an optimum. For with every increase in saving there goes pari passu an increase in investment effected by a

fall in the rate of interest. The system moves easily by a self regulating process from one position of stable equilibrium to another, and all are compatible with full employment. But in the case of zero income-elasticity or infinite interest-elasti city of demand for liquidity (case 1 above), a great barrier stands between any change either of saving or of investment and the rate of interest. Since the rate depends only on the quantity of money, an increase in saving may disturb the equilibrium necessary for full employment of resources, which can only be restored by (1) increasing the quantity of money or (2) stimulating the propensity to consume. The optimum propensity is restored when any further expenditure on con sumption goods can no longer increase investment and merely raises the prices of consumption goods. Within the confines of the general theory bounded by these two special cases, the optimum propensity to save may move over a wide range, varying directly with the income

elasticity of the demand for liquidity and with the elasticity of investment with respect to the rate of interest and inversely with the interest-elasticity of the demand for liquidity and with the elasticity of investment with respect to expenditure on consumption. From this it would seem to follow that on any assumptions other than those of case 2 above (the traditional 5 This is subject, of course, to the assumption that no frictions arise in the transfer of factors from one type of industry to another because of complement arity and specificity of factors.

of Social Justice

243

theory), any divergence of the rate of saving from the optimum should require some external measure of control to restore the state of equilibrium compatible with full employment, such as, e.g., taxation of savings or subsidizing of investment or an increase of the quantity of money sufficient to reduce the rate of interest to the level that it is prevented by liquidity preference from attaining. Any conclusions as to social policy, therefore, will depend upon our assumptions as to the nature and shape of the quidity-preference function that is considered to be operative under any given conditions. The argument for the utility and social necessity of government intervention to keep employ ment stable by means of an appropriate monetary policy re ceives full support from the Keynesian assumptions, but none from the Classical assumptions. But which assumptions ap proximate nearest the conditions of real life?

li

Certain considerations would seem to suggest that both the Keynesian and the traditional assumptions have their place in real life, the first over the lower ranges of the rate of interest (and hence lower levels of employment in the cycle) and the second over the higher ranges of the rate of interest (higher levels of employment in the cycle). This would seem to sup port the contention that monetary policy should be most ef fective in times of expansion, and fiscal policy most effective in the face of serious contraction. Some degree of empirical knowledge has been achieved in this respect, but much work

still to be done. Though the interest rate is but one of many the tools in the chest and one of a total of many divergent factors, there are times when it may be an important one. With respect to the functions of government relative to the actual operation of economic policy, we agree with Wicksell that (1) while trusting to nature (“physiocracy”) is the only correct treatment so long as the system is in perfect health and (2) while even in ill-health this method is superior to bad treatment and the use of dubious medicines, yet (3) “it can

has

not compare with a really scientific treatment which assists nature in a reasonable manner,” and (4) “in the last resort

Interest

244

as a

Problem

or

of

to of

of

of

of

a

in

to

be

it

be

of

in

vs.

the effects of even the most brilliant cure cannot be compared with those of rational hygiene which aims at preventing dis ease and preserving health.” Closely related to the use of the interest rate in controlling economic fluctuations is the question of the relative merits free competition the banking of monopolistic control by system. Should the control credit note issue and dis count policy vested central banking authority should left the working free competition between private banking institutions? From the point view the operation adjusting the automatic mechanism the volume credit to

be

of

of

of

in

of

in

to

of

by

of

bank reserves (limiting the demand investment the supply interest), cogent savings variations the rate argument might seem lie on the side free competition banking. There are those who contend that the coincidence hoped the market and equilibrium rates interest might

a

of

to

in

be

to

of

the roots

in

if

of

is

in

of

overissue

of of

the trade cycle are found the credit resulting from the reliance individual emergency, bankers upon the central authority times justification. banking without economic But then central cyclical fluctuations lie rather any overissue the causes of credit or in the nature of the functions which determine the

If

cycle.

of

of

to

to

as

in

if

if

for with greater confidence bankers were individually re sponsible for their liquidity positions than they could rely on the central authority time distress. Hence for final judgment the comparative advantages the two systems, banking policy we must look the relation the trade

of

a

of

in

of

the system, e.g., the shape the liquidity preference function which prevents natural adjustment

equilibrium

if

by

Wicksell, op. cit., 52. An excellent summary

I,

6

a

a

or

be

of

to

interest, and savings via the rate investment these mal adjustments can prevented corrected central mone tary policy, then central banking system becomes not only economically desirable but socially necessary."

of

in

of

in

of

in

&

S.

P.

is

7

the arguments the central vs. free banking found Vera Smith's The Rationale Central Banking (Lon King Son, 1936), chap. XI, “The Arguments don: Favour Central Banking Reconsidered.” controversy

245

of Social Justice

We may now briefly summarize our conclusions as to the ethics of interest. (1) From the point of view of commutative justice, interest is morally justified as the market price of pres ent income in terms of future income. (2) Interest as a func tional share is warranted on grounds of distributive justice as a remuneration corresponding to the value of the contribu tion of the services of capital to the total product of the eco

of

in

a

a

of

in

to is

to

of

—

of

a

of

in

of

by

a

to

is

of in

(c)

nomic system. (3) In view of the requirements of social justice: (a) an individual's right to interest in commutative justice may be superseded by an obligation to lend gratuitously to a needy borrower; (b) the state should by appropriate meas ures strive so to reduce existing inequalities of ownership of wealth that the functional share of interest may benefit as large a proportion of the population as possible; the State protection required should afford whatever the field competition small lending for consumption where the forces operate on wide scale; (d) economists are are less likely judi quite general agreement that the government can, monetary policies, achieving cious use and fiscal assist employment and fairly stable and maintaining high level rate economic growth which would connote an obliga part tion on the the State assist the attainment those goals, and though there less agreement regarding the im

of

in

is,

it

of

of

be

to

portance attached them the changing phases the price cycle and other ebbs and flows the level and the level employment, nevertheless, conceded that policies

of

of

to

be

of

of

a

of

to

a

or

or

to in

or

in

of

it.

of

of

a

of

of

as

in

of

which influence the interest rate are among the important and achieving those ends. necessary means justice developed aspects The three Part III all bearing on the justifiability any specific interest rate have government any individual and the action in per fluencing give may This rise concrete instances plexing problems rights. To what ex seeming conflicts justice tent must one aspect subordinated the other? justice, higher employment, Does social achieve level permit require lowering interest, either di the rate rectly indirectly, below the level which commutative jus sometimes

246

Interest

as a

Problem

tice would seem to require? What level of unemployment, or of inflation, would violate the requirements of justice? Do the requirements of distributive justice regarding functional shares need to be modified to achieve the goals of a high level of employment and steady economic growth? We can do no more in this study than point to such at least potential conflicts without attempting to resolve them. So we shall end, as we began, on a warning note. Though the general principles of justice may seem very simple and quite clear, their application to a particular concrete problem of economic life is not likely to be an easy task. The more com plex, therefore, the problem to which such ethical principles are to be applied, the greater is the need of, if not professional training, at least expert guidance and assistance in economics.

Index Bucer, 7.1, 78, 79, 84, 89 Bulgarus, 36

Accursius, 36, 53 Acts of the Apostles, 34 Aix-la-Chapelle (See Councils) Alciatus, Andreas, 78

Bull

Alexander III, 60, 61, 62 Alexander of Hales, 45 Alexius a Massalia. (See Salmatius) Almainys, 55 Andreas, Johannes, 81 Angelus. (See de Clavasio) Antoine, Charles, l 12, 113

Cahorsines, 40 Cajetan, Cardinal, 55, 58 Calderinis, Johannes, 81

Callistus III, 64 (See also Callixtus III) Callixtus III, 81, 82 Calvin, 71, 72, 73, 78, 79, 84, 87, 88, 89,

Apostolic Canons. (See Canons) Aquinas, 19, 25, 33, 45, 47, 48, 49, 50, 51, 53, 54, 57, 67, 81, 127,

º

198, 199,

92, 95, 96, 97, 102, 104, 108, 111, 222

201, 202, 203, 210, 215, 217, 229

Calvinism, 88 Cannan, Edwin, 202, 236 Canon Law, 77

Aristophanes, 12 Aristotle, 3, 12, 15, 16, 17, 18, 19, 20, 21, 22, 47, 65, 77, 127, 190, 191, 192, 193, 194, 195, 196, 198, 200, 210, 212, 213, 215, 229.

Arles. (See Councils) Ashley, W. J. 36, 55, 56, 58, 59, 84, 88 Augustinians, 57 Ausonius, 28 Austrian school of economists,

Apostolic; Canon 44, 34 Canon 2354, penalties on usurers, 116 Capital and credit, 87 Capital, Austrian theory of objections Canons,

to, 165

Austrian theory of, objections to, 165 definition, 123, 164 of, 58 investment liquid, 39 marginal efficiency of, 128 maintenance intact of, 161, 162 marginal productivity of, 128 productivity of, 42 relations between income and, 124 Capitalism, growth of, 38, 39 market, 42, 65, 127, 221

165

Babylonia, taking of interest in, 8 Bacon, 93 Ballerini, Petrus, 83, 103 Ballerini-Palmieri, 107, 111 Bankers, 39 Banking, 39 economic justification of central, 244 system, monopoly vs. free competition in, 244 Barth, 106

stocks, 101

value, determination of, 124 Carthage. (See Councils) Cash balances, motives for holding, 175 Cassel, Gustav, 182 Castro, Paul de, 55 Cato, 20

Benedict XIV, 103, 104, 106 Bentham, 19 Besold, 90 Beza, 78, 89

Biel, Gabriel, 58, 81, 82, 84 Böhm von Bawerk, Eugen, 48, 88, 90,

Census

93, 99, 106, 163

Census Census

Bonacina, 83 Bossuet,

102,

(See rent-charge)

personalis, 64, 81, 82, 220 realis, 64, 220

Charlemagne, capitularies of, 35 Child, Josiah, 80, 93 Christ, 24, 25, 70 Church, decisions of, 223

84

Boxhorn, 92 Brodrick, James, 85, 94 Nicholas, 97, 98, Broedersen,

cum onus, 82, 85

Detestabilis, 59, 82 of Gregory XIII, 82 Bullinger, 72, 89

103,

105, 108

Church, present and usury, 116

Buccerone, 110 247

attitudes to interest

248 Church, provincial and conciliar legis lation of, 24 Church, Western, 34 Cicero, 20, 21, 22, 30, 192 Clavasio, Angelus de, 55, 58, 59, 81, 82 Cleary, Patrick, 53 Clement V, 63 Code. Juris Canonici, Canon 1543, 115 Collet, 84, 95 Colona, Andreas de, 84 Commenda, 56 Commercial revival of the twelfth cen tury, 38 Commercial contracts, 84 Commodatum, 46, 76, 92, 113, 114 Communism, distinction between volun tary and involuntary, 228 Commutative justice. (See justice) Conçina, 102, 103, 104, 105, 106 Constantine, law of, 35

Contractus Germanicus. (See Triple contract)

Contractus trinus. (See Triple contract) Contract, Triple. (See Triple contract) Corduba, 81 Corinthians, 27 Councils of the Church, 59, 77, 210 Council of Aix-la-Chapelle, 35 of Arles, first, 34 of Arles, second, 34 of Carthage, Canon 12, 35 of Elvira, Canon 20, 34 of Laodicea, 34 Second Lateran, Canon 13, 60 Second Lateran, 62 Third Lateran, 36, 61, 62 Fourth Lateran, Canon 27, 61, 62 Fifth Lateran, 58, 64 of Jerusalem, 34 of Lyons, Second, 62 of Meaux, 35 of Nice, Canon 17, 35 of Paris, 35 of Pavia, 35 of Ticinum, 35 Vatican, 115 of Vienne, 63 Courçon, Robert de, 45, 52 Covarruvia, 81 Credit, contract of, 62 Credit, synonymous with loans and investible funds, 172 Credit facilities, 57

Credit transaction, 61 Crotus, 59 Culpepper, Thomas, 80 emergens, 43, 50, 52, 53, 54, 57, 71, 74, 78, 80, 83, 86, 104

Damnum

Dempsey, Bernard W., 86, 209 Denzinger, Heinrich Joseph Dominik, 60, 61, 62, 64, 94

Denzinger-Bannwart, 105, 109 Deuteronomy, 6, 7, 8, 10, 25 Devas, Charles, 113 Dio Cassius, 22 Dominicans, 57, 58 Drummond, William F., 194 Dumolin. (See Molinaeus) Durandus, 81 Ecclesiasticus,

6, 10, 25, 26

Eck, Johann, 58, 59, 81, 82, 84 Economic policy, 120 Economic theory, “ethical neutrality” of, 119 Economic value and the time element, Aristotelian analysis of, 126 analysis of, 126 Scholastic Economic value, marginal utility analysis,

126

Economics, applied, 120 Economics, definition, 120 Economics, pure theory of, 120 Egypt, taking of interest in, 8 Ehrenberg, Richard, 40, 217 Elizabeth I, 92 Ellis, H., 93, 239 Elvira. (See Councils) Endemann, Wilhelm, 57, 64, 82 Engel, 95 Equilibrium, theory of dynamic, 127 Equilibrium, theory of static, 127 Evats, W., 91 Exodus, 6 Ezechiel, 8, 9, 28 Fairs, 40 Fathers of the Church, 24, 26, 27, 33, 59, 62,72, 73,79, 87, 199, 210, 211, 212 Favre, 35 Fiscal policy in contraction, 243 Fisher, Irving, 122, 125, 127, 128, 130, 141, 143, 146, 152, 235

Foenus, 3, 92 Franciscans,

57, 59

249 Freedom of contract, 98 Funk, Franz Xaver von, 55, 57, 103, 112

Gaggia, 62 Galatians, 27 Galiani, Abbé Ferdinando, 48, 106, 107, 126, 222

Gand, Henry de, 45 Gibalinus, 83, 84 Goods, consumption, 42, 101, 115 durable, 42, 48, 92, 115 durable consumption, 124 fungible, 42, 44, 45, 46, 47, 48, 71, 92, 115, 213

Haberler, Gottfried, 171, 172, 185 Hammurabi, code of, 8 Harduin, 37 Hayek, F. A. von, 125 Hebrews, (See Jews) Heeken, Emile de, 104 Hefele, Karl Joseph von, 34 Heywood, Jasper, 85 Hicks, John Richard, 122, 185 Hindus, interest among, 8 Hobbes, Thomas, 101 Holy Office, 109 Holy See, 109, 110, 116, 223 Hume, David, 100, 101 Hutcheson, Francis, 100, 101

future, 49, 51 42, 51, 115

influence of time on valuation of, 99 non-fungible, 42, 46, 47, 71, 113, 115, 213

perishable, 42, 51, 92, 115 present,

49, 51

present 87

values

of present

and

future,

production, 42, 115 specific,

42, 115 Government and

maintenance of em ployment and economic growth, 239 Government, economic functions of. (See State)

control of operating conditions of pricing system by, 226 duty to protect rights of individuals under distributive justice of, 225 duty to secure welfare of society un der social justice, 225 duty with regard to monetary and fiscal policy of, 245 functions of regarding economic pol icy, 243, 244

policies of to stabilize em ployment, 243 monetary and fiscal policy of, 240 obligations of under social justice, 225 Graswinkel, 92 Gratian, 34, 212 Gray, Alexander, 52 Greece, attitude to interest in, 11 Gregory IX, 60, 61, 62 Gregory XIII, 62 Gresham, Sir Thomas, 93 Grisar, Hartmann, 68, 86 Grotius, 91 monetary

Income, definition of, 122 distributive shares of, 227 functional distribution according

to value of services of labor and capi tal, 233 future, 122 present,

122

principles of just distribution real, 122

of, 226

Income from property, claims in social justice to, 233 from property, ethics of, 227 from property, liceity of owner's title to, 230, 231

from property, liceity of others' claims to, 231, 232

from services of labor, justice of, 227 from services of property, justice of, 227

Ingram, J. K., 15, 23 Innocent II, 60 Innocent III, 61 Innocent XI, 94 “Institutional Usury,” 209

Interesse,

52, 53, 55, 90,

104, 214

Interest, 53, 81, 88, 90 a gain or profit, 86 a premium, 115, 205, 206 a market price, 115, 205 a price for the use of money, 99, 100 and profit, 100 and the rôle of time, 125 and waiting, 129 change in terminology, 96 justification, Church and theory of its

generic,

115

250 classical

theories

of the rate of, 175

compensation for loss, 56 definition, 4, 129

determinants of the rate of, 125, 126,

127, 128, 144, 145, 182, 185, 186, 240 determination of the rate of, 170

duties of Government in regard

to,

245

economic nature of, 119 economic necessity of, 93 ethics, under distributive

justice of,

226, 245

of under social justice, 226, 238 conclusions on ethics of, 245 explanation of, 167 functional distribution of, 227 general classification of morality of, ethics

114

theory of, 240 intrinsic justification of, 96, 97, 102, general

107, 112, 113, 114

justification as a competitive market price of, 225 Keynes' theory of, 170, 182-185 liceity of, 99 liceity based on the productivity of capital, 111 liceity on commercial loans of, 109 liceity of discussed by Galiani, 106 liceity of discussed by Maffei, 103 liceity of moderate rate of, 110 moderate,

62

morality of, 40, 51, 65, 66, 86 morally justified under commutative justice, 208, 245 necessity

for industrial and commer cial purposes, 98 new doctrine of, 96 positive justification of, 110 “quasi-productivity” theory of, 115 role in anticyclical policy of the rate of, 239 scholastic analysis of, 67,219-223 social and economic effects of the

theory of, 220 Scholastic solution of the moral problem of, 189 problem of, 227 social relation to employment and economic growth of the rate of, 238, 239 theory of, 119 Investment, 51, 56, 81 Investment opportunity, 128, 146-153 Investible funds, 172, 206, 207

Irnerius, 36 Ivo, 34 Jansenist influence, 84 Jansenists, 96, 97, 102 Jarrett, Bede, 228 Jeremiah, 9 Jerusalem (See Councils) Jesuit theologians, 82,85 Jesuits, 94 Jews, 5, 7, 29, 40, 61, 87,210

Job, 9 Julius Caesar, 22 Just price, 47, 48,

50, 112, 199, 200, 201,

202, 217

in inter-temporal exchange,

and intra-temporal

216

and competitive market price, 203, 205 and interest, 205, 225 of present goods in terms of future goods, 208

Justice, 46, 65, 98, 107, 190, 191 and inflation, 246 and unemployment, 246 application to real life of principles of, 246 commutative, 10, 41, 43, 45, 46, 67, 221

commutative commutative price, 203, commutative est, 26

defined,

197

and competitive market 204, 205

and morality

of inter

commutative and small money-lend ing, 209 commutative and the contract of mutuum, 213 commutative and usury, 33 commutative and value, 126 distributive defined, 195 distributive and taxation, 197 distributive scope of, 196, 197 function of, 224 in exchange, 199 interdependence of the types of, 238 interest as problem of social, 10, 32 legal defined, 192 obligations of Governments under social,

225

obligation to lend without interest under social, 225 social, social

33, 221 defined, 194

251 social

and central banking policy, 209 competitive market price,

social and 205

social and small money-lending, 209, 210 as grounds for condemnation of usury, 210 Justinian, 20, 36, 46, 53, 70, 78, 90 social

Kaldor,

Nicholas,

Keynes,

John Maynard.

157, 158, 166 (See Keynes,

Lord)

Lord, Keynes, 182, 185,215,

128, 146, 170, 220, 241, 243

174,

175,

Kloppenburg, 92 Lactantius, 29 Lange, Oskar, 177, 184, 186, 241 Langenstein, 63 Laodicea. (See Councils) Lateran. (See Councils) Lavington, Frederick, 185 Law, 98 Laynez, 86 Leadam, 12, 20 Le Correur, 84, 108 Legal title. (See Titulus Lehmkuhl, A., 111, 112 Leibnitz, 92

legalis)

Lessines,

Giles de, 45, 218 L., 82, 83, 86 Leviticus, 6, 10

Lessius,

Liquidity-preference, 42, 128, 169 Living wage, ethics of, 225, 226 Loan, 48, 52, 54, 57, 69, 101, 105 Loan, consumption, 95, 152 Loanable funds, demand and supply of, 173 Loans, 44, 81, 83, 88, 90 and competitive capital market, 127 commercial, 39, 41, 65, 66 commercial and interest, 26, 32 consumption, 10, 39, 43, 65, 108 forced, 57 liceity of interest on commercial, 109 money,

47, 98,

113, 116

negotiation of under isolated condi tions, 127 production, 10, 58, 95, 108, 152 public, 93 synonymous

with credit and investible funds, 172

to the poor, 25, 30, 31, 108 to the rich, 108

Locatio, 75, 76, 108, 114, 115, 215, 222 Locatio et conductio, 46, 47, 92, 97, 215 Locke, John, 93, 99 Lombards, 40 Lopez, 83 for, 83 Loss, compensation Lucca, Tolomeo de, 228 Lucrum cessans, 43, 50, 52, 53, 54, 55, 57, 71, 75, 81, 113, 114, 220

83, 84,

86,

103,

104,

Lugo, Cardinal J. de, 83, 86 Luke, 25, 28, 21 l Lundberg, 185 Luther, Martin, 68, 70, 71, 72 Luzerne, Cardinal de, 107, 108, l l 1 Lyons (See Councils)

Maffei, Scipio, 62, 102-106 Magnus, Albertus, 45, 54 Major, John, 58, 59, 81, 82 Malderus, 83 Malthus, T. R., 241 Malynes, Gerald de, 80 Mansi, 34, 35 Maresius, 92 Martin V, 63, 81 Mastrofini, 110, 111, 112 Matthew, 24, 25 Meaux. (See Councils) Medina, Johannes, 81, 82 Melancthon, 71, 76 Melon, 98 Mercantilists, 80 Migne, 27, 28, 29, 30, 31, 32, 33, 34 Molina, Luis, 82, 85 Molinaeus, 78, 89, 92, 95, 96, 98, 102, 104,

I 11

Monetary policy in expansion, 243 Money, 87, 93, 101 and capital, distinction between, 100 and capital market, 40, 41 Aristotle on, 213 functions of, 17, 77, 213-216 investment

of,

63

not barren, 90 “quasi-fertility” of, 111 representative function of, 101, 113 Scholastic theory of, 42, 222 sterility of, 70, 86 use of per se vendibilis, 107

252 value of present 107

and future, 48, 94,

value of productive uses of, 111 value of qua money, 169 value of use of, 97, 112 Money and credit, use in Middle Ages of 38, 39 Money capital, quasi-productivity of, 114 Montes, 58 Montes pietatis, 57, 64 Montes profani, 57 Montes, secular, 102 Montesquieu, 98 Mutuum, 4, 46, 47, 48, 76, 84, 87, 92, 95,

97,

102,

104,

105,

108, 109,

111,

113, 115, 213, 214, 220, 222

Navarra, Petrus de, 81, 83 Nehemias, 8 Neumann, M., 55, 71 New Testament, 24, 26, 28, 29, 31 60, 70, 72, 73, 75, 87, 211

Private property and income, criteria for just distribution of, 195, 196 limitations of social welfare on the right of, 229 necessity

of valid title to, 229, 230 right of, 227-230 right both of individual and social, 233

Private ownership, right to, 224 Procopius, 31 Production and distribution, theory of, 121

Profit, 42, 54 and interest, 100 liceity of, 63 loss of, 55, 56 Profits, 87 Propensity to consume, 174 Propensity to consume, optimum, 241 Propensity to save, optimum, 242 Property, causes of inequalities in the distribution of, 234-236

Nice. (See Councils) Nicholas, Pope, 64 Nicholas V, 81, 82 Noodt, G., 92 North, Sir Dudley, 93

duty of state to correct inequalities in distribution of, 237 more equal distribution of required by social justice, 237 right of, 227 Proverbs, 9

O'Brien, George Augustine, 55 Ohlin, Bertil, 175, 185

Psalms,

9

Puffendorf, 92

Old Law. (See Old Testament) Old Testament, 5, 24, 26, 28, 29, 31, 60, 61, 70, 72, 73, 75, 87,210

Quasi-montes, 83

Panormitanus, 55 Partnership, 102, 103 Paris. (See Councils) Pasqualigus, 95

Rate of interest. (See Interest) Reformers, 89 Rent, 42, 87 Rent-charge, 63, 64, 69, 70, 78, 81, 82,

Pavia. (See Councils) Periculum sortis, 52, 56, 81, 220 Peter, 27 Petronius, 22 Pichler, 95, 106 Pigou, Arthur Cecil, 185 Pirenne, H., 37-40 Pirot, 84, 94 Pius V, 64, 82, 85 Plato, 12, 13, 14, 15, 17, 18, 20, 22, 30, 190, 229

Plutarch, 11, 21 Poena conventionalis, 52, 53, 74, 78, 86 Pothier, 98 Price, just. (See Just price)

Ramsay, 20

84, 88, 97, 102, 103

Rent-purchase, 220 Ricardo, David, 158, 162 Richard of Middleton, 45 Rickaby, Joseph, 113 Rights of man defined, 224 Riley, 56 Risk, 56, 58 Roche, Aloysius, 22 Robertson, D. H., 184, 185 Roll, Erich, 80 110, 223 Roman Congregations, Roman law, revival of study of, 36 Rome, laws on taking of interest 19, 20

in,

253 Seneca, 21

Roover, Raymond de, 221 Rudolphis, Laurentius de, 57, 81 Sacred Office, 103 St. Alphonsus de Liguori, St. Ambrose, 30 St. Antonino 202

Sidgwick, Henry, 191, 193

Sidonius Apollinaris, 31 Sixtus V, 59, 82 Smith, Adam, 100, 101, 197 Smith, Vera, 244

106

of Florence, 57, 102, 103,

Social

St. Bernard, 27 St. Bernardine of Siena, 55, 102

St. Clement of Alexandria, 27 St. Cyprian, 28 St. Francis Borgia, 85 St. Gregory of Nyssa, 29, 30

Spicq, Père, 6, 35 State, economic functions of the,

St. Gregory of Tours, 32 St. Gregory the Great, 27, 32

Sir James, 100 Summenhardt, 81, 82

Stewart,

St. John Chrysostom, 29, 195 St. John Damascene, 31 St. Leo the Great, 31

Tacitus, 20

St. Peter Canisius, 85

St. Thomas Aquinas. (See Aquinas) Saint-Marcel, Mlle. de, 109 Salmatius, Claudius, 89, 91, 92, 96, 98, 103, 104, 108

Saving defined, 170 Saving, optimum rate of, 242 Savings and investment, divergence gross defined,

be

173

planned investment planned, 171

Savings,

Savings, sensitive terest, 174 Scaccia, 83

to

the

of

in

Scholastic analysis of money, 222 doctrine, 95, 106, 107, 108 Scholastic Scholastic theory of communis aestima tio, 204 Scholastic theory of interest, 219-223

24, 40, 88, 210, 212 19, 41, 43, 44, 53, 54, 65, 66,

68, 71, 80-90, 112, 113, 218

94, 98,

102,

104,

111,

Schoolmen. (See Scholastics) Schumpeter, Joseph A., 158 Scotus, John Duns, 53, 81 Scripture, 74, 77, 78, 79, 91, 210, 211, 212

Teucin, Cardinal de, 104 Thomas Aquinas. (See Aquinas) Ticinum. (See Councils) Time, difference in value of money over, 99

and

rate

Tawney, R. H., 72, 84, 93 Taxation, 197 Tertullian, 28 Testament, New. (See New Testament) Testament, Old. (See Old Testament) 87, 210

169

Scholasticism,

193,

196, 210

St. Hilary, 30 St Isidore, 33

Scholastics,

of satisfying

Social

27 St. Augustine, 31, 190, 200, 202 St. Basil, 28, 30, 31, 33

Savings,

of means

justice. (See Justice, Social) philosophy, 120 Socialism, 96, 196 Societas, 56,61, 75, 81, 214 congre Society of Jesus, third general gation of, 85 of, 85 fourth general congregation Solon, ll

St. Apollonius,

tween,

Social estimate wants, 204

Time, element of, 47 Time-factor, 43 importance of in economic value, 126 Time-preference, 32, 42, 43, 45, 49, 51, 65, 127, 128

nature and causes of, 130-142 relation between individual and mar ket rates of, 142-144 Titles, extrinsic, 43, 44, 52, 53, 57, 65, 66, 68, 69, 71, 80, 88, 97, 102, 107, 110, 114, 220, 221

Titles, intrinsic, 44, 113

Title of Civil Law, 106 Titulis legalis, 107, 108 Toletus, 83

Triple

contract,

57, 58, 66,

85, 95, 97, 102, 103, 220 Turgot, 97, 98, 99, 111, 222

81, 82, 84

254 Usury, 46, 61, 63, 74, 75, 87, 89 of, 222 attack on Scholastic doctrines attitude of Church of England to, 80 change in terminology, 6 commission to study morality of, 103 condemnation of, 21, 25, 70, 72, 210, 213

contract of justifiable, 36 definition, 3, 4, 56, 58, 64, 76 ethical criterion of, 41 evils of, 27, 28, 29, 30, 32, 33, 77 forbidden by canonical legislation, 211 moderate,

78, 79

new doctrine of, 92 patristic prohibition of, 41 prohibition of practice to clerics,

34,

35

prohibition to laymen, 59 Scholastic analysis of, 42, 52, 80, 114 Usury and interest, distinction between,

Valencia, Gregory de, 82, 86 Value and exchange, theory of individ ual and market equilibrium of, 121 Value, classical theory of, 201 determination of, 199 elements determining, 200 equivalence of, 43, 67, 106 Van Roey, Cardinal, 83, 84, 91, 95, 97, 105, 110, 223

Vermeersch,

A., 27, 33, 62, 85, 95, 104,

105, 110, 112, 223

Viginate, Ambrose de, 55 Wix Pervenit, 103, 104, 105, 109, 110 von Hefele. (See Hefele) Wicksell, Knut, 163, 165, 233, 243, 244 Wilson, Thomas, 72, 73, 79, 93 Writers, classical school of economics, 162, 182, 185, 201

78

Uncertainty 168, 169

Urban

III, 61

of

the

future,

effects

of,

Zech,

106

Zwingli, 71, 72, 89