Why the Church called interest theft, and how lenders got round it

A rule with a loophole from the start

The oldest written rule against interest in the Western tradition already had an exception in it. The book of Deuteronomy forbids lending at interest "unto thy brother", and in the next verse permits it "unto a stranger".¹ Interest was wrong inside the community and allowed outside it. Every later rule against interest has had a similar shape: a real ban, and a way round it.

Aristotle's argument

Aristotle gave the argument that the Church would adopt. Money was invented for exchange. Interest makes money produce more money. That, he wrote, is "most reasonably hated", because the gain "comes from money itself and not from that for the sake of which money was invented".²

"Selling what does not exist"

Thomas Aquinas, writing between 1265 and 1274, turned the argument into a legal principle. "To take usury for money lent is unjust in itself," he wrote, "because this is to sell what does not exist."³ His reasoning: when you lend a barrel of wine, the wine and its use are the same thing, so charging separately for the use is charging twice. Money is consumed in its use in the same way. So a lender may charge for the money, or for its use, but not both. That is why it is theft, not merely greed.

Aquinas was not naive about lenders' losses. A lender may be compensated for an actual loss the loan caused him, he wrote. What he may not charge for is the profit he "has not yet", the gain he might have made with the money.⁴ The whole modern argument about the cost of capital sits in that distinction.

The same section of his work sets out the "just price". To sell a thing for more than its worth, or buy it for less, "is in itself unjust and unlawful".⁵ A seller who hides a defect makes the sale "illicit and fraudulent".⁶ And trade itself is lawful when its gain is "directed to some necessary or even virtuous end".⁷ Profit was allowed. Concealment was not.

The charitable pawnshop

A ban on interest does not stop people needing to borrow. In 1462 Franciscan friars in Perugia opened the first Monte di Pietà, a "mount of piety": a charitable pawnshop that lent against a pledge. A borrower got roughly two-thirds of the pledge's value, repayable within a year, with a small charge to cover costs. About forty more opened across Italy within eight years.⁸ The charge was defended as expenses, not interest. In 1515 Pope Leo X sanctioned the institution at the Fifth Lateran Council.⁹

So within fifty years of its founding, the Church's own pawnshop was charging borrowers a fee, with papal approval. The ban held. The label changed.

The triple contract

The commercial route round the ban was cleverer. The "triple contract" bundled three lawful agreements: a partnership, in which the lender shares the borrower's profit; a sale of the uncertain profit for a fixed sum; and an insurance contract against loss of the capital. Each was allowed on its own. Together they produced a loan at a fixed rate of interest. The Fugger banking house used it. A theologian, Johannes Eck, defended it from 1515. Pope Sixtus V condemned it in 1586. Within a century most theologians accepted it anyway.¹⁰

What this history teaches

Three things. First, the objection to interest was never that lenders should not be paid. It was that they should not be paid for nothing, and should not hide what they were charging. Second, every ban produced a workaround built from permitted pieces, and the workaround was usually harder for the borrower to read than the thing it replaced. Third, the institution that policed the rule ended up running a version of the business.

The Academy's own position is the medieval one, stripped of the theology. Interest at a fair rate, plainly stated, is the price of credit. What is charged on top of it, and what is hidden inside the bundle, is where the argument has always been.