The subject of usury – the unjust charging of interest on loans – is now foreign to our understanding. It seems to defy the basic assumptions of modern economic practice on lending and borrowing and making profits. Yet the condemnation of usury goes back to the Old Testament, and extends as moral teaching at different points in Christian history, at least up to the Council of Trent in the 16th century.
Dr Garrick Small, a property economist and author with wide academic experience, has addressed this subject in previous articles in The Defendant. He has teased out the moral principles involved – first, in acquiring wealth justly and receiving a living wage (Summer 2025 issue), and secondly, in charging a just price for goods (Autumn 2026).
In this third contribution, he provides further historical background, which sheds light on usury as an immoral practice, as well as on such issues as the difference between a loan consisting of money and a loan for what money can buy – viz, a productive asset.
Most recently, Pope Leo XIV has renewed the Catholic condemnation of usury – as a “grave sin” that exploits and enslaves the vulnerable, and a sign of the “corruption of the human heart”.
For reasons of politics rather than morals, the sin of usury dropped from sight in Christendom with the advent of Protestantism.
It had been illegal and immoral in Catholic communities for about a thousand years. That ended when Henry VIII legalised the charging of 5% interest as he rejected traditional Christianity to establish his own religion in England. Legalising usury was a political step to consolidate his supporters.
At about the same time, Luther’s new religion implicitly contained the same opportunity for German bankers. Using a quasi-theological approach, Luther argued that salvation came from faith alone (sola fides), independent of works. If works did not save you, then neither could they damn you.
Calvin’s new religion introduced the principle of double predestination to achieve something similar. According to it, God knew who was to be saved or damned before they were created, so their actions had no real effect on the outcome.
Max Weber, a Protestant sociologist and historian, explained the way that Calvinists used wealth as evidence of God’s favour to identify the elect. Since bankers tended to be wealthy, they must be amongst the saved in the Calvinist world. Their means of growing wealthy could not then be used to condemn them. Something similar also led to the Protestant invention of the “divine right of kings.”
All three approaches carried considerable political benefits but they robbed the Catholic Church of influential supporters. Some in the Church, such as St Peter Canisius in the 16th century, continued to condemn usury, though others were more pragmatic. Despite going on to be canonised, he was censured by the pope for refusing absolution to German bankers. Others, such as the more progressive members of the Spanish “Neo-Scholastic” School of Salamanca, employed modern arguments to retire any condemnation of usury – in what were amongst the earliest intrusions of the modernist heresy into the Church. As a result, the Salamanca School has become the patron for the economic leanings of Catholic neo-conservatives, who favour free markets and what has been termed “democratic capitalism”.
Moral distinctions as economic circumstances changed
Overall, the Church stood back from the thorny problem until, in 1745, Pope Benedict XIV issued the encyclical, Vix Pervenit. The pope correctly stated that usury is mortally sinful, but he added reference to “extrinsic titles” as mitigating the apparent gain. Extrinsic titles are elements in the nature of a money loan that might justify the return of a greater quantity of money than was lent, such as inflation and other changed circumstances, but which do not represent an actual profit.
The key element in the concept of extrinsic titles is that, although a person may not make a profit from a money loan, he should not incur a loss.
St Thomas Aquinas’s consumptibility argument – distinguishing between goods that are consumable (like food or wine) from those that are durable (such as a house or a hammer) – demonstrated why a person had no right, no title, to a gain from a money loan.
This was based on the fact that a person owned, or had title to, his money, but it was not the money, but what the money bought – something useful or productive – that benefited the borrower.
Risk-taking and Profit
The element of risk is also important. In a money loan, the borrower incurs the obligation to repay the lender with the money value – that is, the purchasing power – that was borrowed. That obligation remains regardless of what happened to the money. The repayment obligation was risk-free. It did not depend on what the borrower subsequently did with the money, and it could be retrieved even if the purpose for which the money was borrowed proved to be a failure.
This makes a money loan very different to the loan of a productive asset. If I lend you a cow, I lend you its value as a cow, and its future benefits in milk and calves. I have a right, or a title, to the cow, its future milk and its calves. I can ask for payment for all three. In practice, you might apply labour to feeding and milking the cow, so you deserve a share in the milk and calves, and we can negotiate how to share those. But the cow is still mine, and I continue to be responsible for it. I take a risk since the cow might die.
When I lend you money to buy a cow, I take no risk. You buy the cow, enjoy its milk and calves, and accept the risk of its dying. My money was used up in buying the cow, so it has served its purpose. Its usefulness was exhausted when you bought the cow. At some point in the future, you owe me that purchasing power, no more.
If, therefore, I charge you more than the money’s purchasing power, I am charging you for more than I gave you, since it was not the money but what it bought, that provides the benefits above its price.
Extrinsic titles – when higher repayment may be justified
In the cow example, an example of extrinsic titles can be added. If the cow cost $100 today when I lent you the money, then today you owe me $100 of purchasing power. If cows are worth $110 in a year’s time, then I have the right to ask you for the value of a cow when the loan is repaid. I receive $10 more in return, but I have not taken any more purchasing power from you than what I lent you. I have not extracted usury from you because I had a right, a title, to the same purchasing power, which at repayment time was a greater money value.
Today’s economy is complex, so identifying specific extrinsic titles is difficult. There remains a general test that I may use. If I am earning a real riskless gain from a loan, then it is probably usury. If not, then usury is unlikely to be present.
Many people earn a little interest from having their money deposited in a bank, but the interest rates seldom exceed the inflation level; and even if they do, the current tax lawsmean that any real gain is lost to the government through income tax. There is no usury here.
Conversely, the interest rates that banks charge borrowers are usually sufficient for them to cover their risks, administration costs, obligations to depositors and taxes, and still leave a robust profit to the bank’s shareholders. That profit to shareholders is most likely usury and should be avoided.
Profits on shares in other companies may also raise some questions regarding usury. Where dividends are due to profits and risks from real productive assets, there can be no usury, but part of the dividends may also be risk-free – and thus may contain usury. What is called the “Capital Asset Pricing Model” of modern finance theory sheds some light on this issue, as it seeks to balance the taking of higher risk with the expectation of higher returns. But this is a complex topic to explore at another time.
For a person wishing to avoid usury, a simple test can be this – whether a real (inflation-adjusted) profit is being made that does not participate in the risks of the productive assets that actually produce the benefits.