Banks themselves do tend to make full recourse (that is, usurious) loans to individuals

07 Jun Banks themselves do tend to make full recourse (that is, usurious) loans to individuals

44) Suppose I am thinking about agreeing to a financial contract which will produce some interest or other profit for me – say by opening a bank account. How can I be sure that what I am about to do is not usury?

If you can identify specific individuals who are personally liable under the agreement to return your principal and pay you profitable interest, the contract is usury. If you cannot identify any such individuals, the contract is not usury.

It is fine generally speaking to make investments as a hedge against this, in an effort to preserve wealth; but it is not morally licit to make usurious loans as a hedge against this

Opening an interest-bearing account is therefore remote material cooperation with evil when that is the case – and it is almost always the case in modern economies. You haven’t done anything intrinsically wrong by opening the account.

In fact even vacation loans or loans to buy groceries are not necessarily usurious. It depends on whether the ‘loan’ in question is a mutuum (full recourse) or a societas (non recourse).

No. The answer is implicit in Question 35 – once you’ve grasped the difference between mutuum and societas it becomes clear that the price of the ‘currency’ most likely will fluctuate all over the place relative to other things, whatever is used as currency. The mutuum might be in wheat or oranges or even computers or cars as opposed to dollars; but that doesn’t change the nature of the contract.

So if it is an interest bearing mutuum it is usury, and the inflation rate (or price fluctuation between commodities or currencies generally) is irrelevant.

In effect what the “just-to-cover-inflation” usurer is attempting to do is enslave the borrower (as opposed to purchasing claims against some actually existing property) as an inflation hedge. All property is subject to entropy, decay, devaluation, theft, political unrest, changes in market conditions or personal circumstances, and other risks.

[Some folks have found this approach to the answer confusing, so I answered it again from a slightly different perspective in Question 53]

I could go on and talk about all sorts of different contracts and the practical implications. But the bottom line is that those contracts are generally fine as long as they are ultimately secured by recourse to some inventory of real assets and only that inventory of real assets – if they are non recourse. Just about any creative structure of contract is possible in theory – as long as real assets are posted as security and the parties agree that all recourse terminates in those real assets. (This doesn’t mean that any and all creative non recourse contracts are morally licit by necessity: it just means that they are not specifically usurious. See Question 11).

I’ll give a simple example of a non-usurious futures contract. (A real example might involve insurance bonds or the like as part of the arbitrage over the real assets tied up in the contract; but I’ll try to make this as simple as it can be to describe it conceptually).

However the interest bearing savings or checking account agreement you make with the bank is not full recourse to any particular person or persons, so it is not itself usurious

Suppose it is springtime, and Farmer Bob and Investor Bill disagree about whether wheat prices are going to go up or down. Bill thinks there will be a drought, and Bob thinks the harvest will be big. Given supply and demand, then, Bill expects high wheat prices in the fall and Bob expects low wheat prices.