"Reciprocity and the difference between usury and interest"

From Magic, Maths and Money, June 13, 2014:

At the IASH meeting on the Human-Business interface I attended last week, Michael Northcott discussed the relationship between capitalism and sustainability.  Michael is an authority on both subjects, having written on environmental ethics and debt.  At the end of Michael's presentation I made the point that theologians distinguished interest ad usury in the past, a distinction that was missing in Michael's discussion.

Usury derives from the Latin usus, meaning 'use',  and referred to the charging of a fee for the use of money.  Interest comes from the Latin interesse, meaning 'compensation for loss', and originated, in the Roman legal codes as the fee someone was paid  if they suffered a loss as a result of a contract being broken.  So a lender could charge interest to compensate for a loss, but they could not make a gain by lending.

It is easier to understand this distinction with a simple example.  A farmer lends a cow to their cousin for a year.  In the normal course of events, the cow would give birth to a calf  and the cousin would gain the benefit of the cow's milk.  At the end of the loan, the farmer could expect the cow and the calf to be returned.  The interest rate is 100%, but it is an interest since the farmer, if they had not lent the cow to their cousin, would have expected to end the year with a cow and a calf.  Similarly, if the farmer lent out grain, they could expect to get the loan plus a premium on the basis that their cousin planted the grain, he would reap a harvest far greater than the sum lent.

Because money is 'barren', unlike land or labour it could not 'produce' anything.  As a result, money can have no intrinsic value, other than its use to facilitate exchange, and so charging for the lending of money is essentially selling something that has no value.  Thomas Aquinas argued that

To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.

So, usury contradicts 'natural law'.  Even if you could convince the canon lawyers that you were, in fact, selling something that did exist, the theologians might argue that usury was an affront to God because, since money was barren, the usurer was charging for time, and "time was God's exclusive property''.

In theory, this is all very clear, in practice there was still the question of where the dividing line between usury and  interest was and almost everyone who was handling money was looking to charge as much interest as was permissible.

Around 1236, an English professor of canon (church) law, Alanus Anglicus,  argued that usury did not exist if the future price of the good was uncertain in the mind of the merchant.  These theories became established in the medieval legal system between 1246 and 1253 by Pope Innocent IV, a former professor of law at Bologna.  Not only could a merchant adjust the 'just price' to cover their labour and expenses, but also they could also adjust the price to take into account the risk they bore,  called an aleatory contract, from the Latin word alea for chance.  In establishing this principle, a Catholic jurist initiated the scientific study of financial risk....MORE