Regína sacratíssimi Rosárii, ora pro nobis!

Usury and Interest

Written in mid-March AD 2005 but other questions took precedence
and this was never published in the Parish Bulletin.
A related article, written earlier in time, was published in the April AD2005 Bulletin and should be read first.

    Question: You don’t think interest payments are usury? Have you any idea what one pays over 30 years to buy a house?!! What happened to the idea of friends and neighbors getting together to build each others barns?

    Answer: For purposes of this discussion, the assumption is that a fully informed buyer and lender enter freely into a contract. You can make the interest calculations for yourself to see the effect of the interest rate and the length of the loan in years. (Those allergic to numbers can skip the next two paragraphs.)

P = L[c(1 + c)n]/[(1 + c)n - 1]

Where P=monthly payment
L=dollars borrowed
c=monthly interest rate (annual rate /12)
n=number of payments

or you can go to an online calculator such as the one at:


    For those of us who usually don’t walk around with $10 in our pockets, the numbers are awfully large, particularly on a 30 year mortgage. At 6% a $100,000 loan will cost a total of $215,838.19. Cutting the length to 15 years will drop the cost to $151,894.23. Had the rate been 12% for 30 years the cost would be $370,300.53. The 6% figure is closer to current market rates, but 12% was not unheard of a few years back—18% during the Carter administration. Let’s note that 6% for 30 years requires a monthly payment of $599.55; and for 15 years it rises to $843.86. The real question is “are these numbers unreasonable?”

    “Unreasonable” is a meaningless word unless we relate it to the alternatives. What is “reasonable”?

    An obvious alternative is to live with Mom and Dad-but they may not approve, particularly if there are a number of sisters and brothers—and they might even want money from you.

    Many people rent. Even if they are “saving up to make a down payment,” they rent until they are ready. Perhaps one could save the entire amount before buying. The problem there is that rental apartments often cost somewhere around what a person will pay on a house payment. For many folks, that doesn’t leave a great deal to save.

    Here in Deerfield Beach the average newly constructed home in 2003 cost $118,900.[1] That requires $712.87 at 6% for 30 years. With a few hundred for taxes and insurance we are at about $1,000 a month. But that is also the rough cost of a two or three bedroom apartment in the same locale.[2] Now, suppose you could afford both to rent the apartment at $1,000, and to save $1,000 a month. Let’s say you can get 4% on your savings—in just a bit over eight years you will have the $118,000. But are you sure that in eight years your rent will not rise, and are you sure that the house will still be $118,000? And, with a $2000 a month payment you could pay off the $118,000 house in seven or eight years—including $300 to $500 a month for taxes and insurance.

    Obviously there are intangible factors that cut both ways—one gets maintenance issues right along with pride of ownership. But who is more the usurer in this example—the landlord or the banker?

    Still, a few will question why there should be any interest charge at all. (Even paying for the house in eight years will add about $31,000 to the $118,000.) After all, “I am going to pay the money back-why should I have to pay something more?”

    To begin with, the banker doesn’t know that you will pay him back. People do die, go to jail, and disappear into the night. Through experience the banker knows approximately how many, and passes the cost of those unpaid loans on to the honest and reliable people. If he didn’t, he wouldn’t be there to loan the money. He may charge higher rates for purposes he judges to be more risky, but he knows he cannot collect from the missing or the bankrupt.

    But the major factor in interest rates is the “opportunity cost.” It may be easier to understand if you put yourself in the position of the lender. Suppose an acquaintance came to you asking to borrow, say, $5000 for five years. Rich or poor, you probably don’t have it lying around the house. Maybe you have it in a CD, or you own a few shares of stock—immediately, the cost of withdrawal penalties or brokers’ commissions enter into your thinking—it will cost you something just to liquidate the money in order to turn it over to the acquaintance. And then you will ask yourself what you will be losing in interest or dividends (about $1100 at the 4% we assumed for savings above). And, finally, you will ask yourself what might be the effects on your own plans—if, say, you had intended to spend the $5000 on a new roof sometime in the next two years—what would be the effect of not having your money for five years? And, no matter who the acquaintance is, the risk calculations will be going on in your mind if not on paper. Unless you are prepared to make a gift to the acquaintance of somewhere between $1100 and $5000, you will have to charge something for the use of your money.

    The Commercial banks do look at loans from a slightly different perspective. Through the magic of the Federal Reserve system, they can loan the same money out to several customers at the same time. They call this “fractional reserve banking.” You can’t do this with your $5000, but under current reserve requirements, your banker can take your checking deposit of $5000, place $500 in reserve, and loan out $4500. No magic yet, but when that $4500 gets deposited in another bank, that banker can loan out $4050, which in turn can back another loan for $3645 ... $3280.50 ... $2952.45 ... $2657.21 ... $2391.48 ... $2152.34 ... $1937.10 ... $1743.39 ... $1569.05 ... $1412.15 ... $1270.93 ... and so on to equal $50,000 in loans. Since borrowers generally deposit the checks they receive from the bank in that bank or another, the money circulates pretty evenly and it is unlikely that there will be a run on any one bank beyond the amount they hold in reserve. The reserve requirements, which may vary from time to time, are set by the privately owned central bank known as the Federal Reserve (“the Fed”). As of June 2004 they were 10% on checking accounts and 0% on savings accounts.[3]  There are arrangements for loans from the Fed if a bank gets in trouble maintaining the mandated level of reserves.[4]

    A number of objections can be raised to the Federal Reserve, not the least of which is monopoly control of the money supply by private bankers—a money supply based entirely on government debt (No, Virginia, not gold, not silver, but debt). Fractional reserve banking is one aspect of the Fed that usually raises eyebrows more than others. It is relatively safe, for the Fed can pump “money” into the system in general or to specific banks if there are signs of a run. But our discussion is on usury, and even if loans are made to fully informed borrowers, there does seem to be something a bit “off” about the banks loaning the same money ten times over at 6% or whatever the prevailing rate. That issue could be addressed simply by adjusting the rate—but it is impossible to determine just what the rate ought to be in the absence of a free market—the Fed powerfully influences the interest rate via its “open market operations,” the sale or purchase of US Treasury bonds in order to raise or lower the money supply; the “federal funds rate,” which banks charge each other; and, ultimately, the interest rate paid by consumers. The Fed’s buying of T-bonds increases the money supply and lowers the rates; selling T-bonds decreases the money supply and raises the rates.[5] The Fed also dictates the fractional reserve requirement, also thereby controlling the money supply, and very strongly influencing the interest rate—but changing the reserve requirement is a lot more bother for everyone involved than open market operations. What should the interest rate be? Today it is whatever the Fed says it should be.

    Since the money supply is not pegged to any standard of value there is a tendency toward inflation. If anything, there is a bias in favor of inflation—as opposed to deflation, recession, or depression—in the Fed’s thinking. Those living on a fixed income will be able to afford a little less each month, even though they have the same number of dollars. Those who can will demand “cost of living raises,” thus adding to the inflation. The T-bond holders will benefit from a rise in the price of their bonds as the Fed shops for a few million dollars worth of bonds, and, characteristically, they will reinvest their inflated profits in other things before the effects of the inflation propagate through the market (i.e. they will enjoy the proverbial dream of “selling high and buying low”). Open market operations .are conducted through normal investment channels. The Fed goes to the large investment brokers to buy the T—bonds-they too make their profits before inflation works its way through the economy and can reinvest at rates that are soon to be low.

    The economy is a complex thing, and this writer, a priest with only moderate experience and education in business, is not qualified to set all of its problems right; yet others far more knowledgeable and far more experienced have drawn similar conclusions. But if there is a moral issue in this, it is not in borrowing of money by people above the lower levels of poverty voluntarily agreeing to pay interest in return for an improvement in their condition. The moral question concerns the structures of our governmentally imposed economic system. “Is it not possible,” we must ask ourselves, “that a different approach might lead to lower levels of poverty and a uniformly higher degree of well-being?” There is an undisputable connection between the fulfillment of basic security needs and the ability to grow in the spiritual life. Perhaps there is the opportunity here to allow more people to know God, and to know Him without despair and resentment over their material condition.

Yes, People Did Help Friends and Neighbors to Build

    Let’s consider Luke Smith, the young man of a hundred years ago who met Becky Thatcher at the church’s Sunday ice cream social; the third son of an average farmer, who has decided that he wants to build a new home, marry Becky, and bring her home to it on their wedding day. Matthew Smith Jr., the firstborn, will inherit the family household, and Mark Smith is soon to be ordained to the priesthood. The father, Matthew Smith, Sr. thinks Becky is a good girl, approves of their wedding, and agrees to deed a few acres out of his two hundred to Luke.

    With his father’s generosity and approval, at first, Luke thinks that his problems are all over. Then he gets down to the realities of what must be done and how long it will take before there is a house which he and the new Mrs. Smith can safely—let alone comfortably—inhabit. Let us imagine his planning:[6]

    Luke Smith’s ten acre home site is just over the hill from his parent’s home. That is fine, since he will continue to be a part of the family farming effort—at his new home he will have to make structural provision for only a few horses and a wagon, some winter storage, and a few essential domestic animals; a few dozen chickens, a pig or two, and probably some goats—probably, a structure no bigger than his own house and less expensively constructed, will suffice.

    Luke’s first concern will be with the water supply-where does he dig the well? No point in building a house where there is no water! Ezechiah, the local dowser, can usually take a fresh green forked stick, spit on the short end of the fork, hold the long ends in his hands, and find water on the first dig. Ezechiah demands two bottles of “liquid corn” for his services, but has been known to settle for three and a half dozen very brown eggs. If, after Luke digs the thirty-five foot deep hole, there is no water, Ezechiah will renegotiate his fee for the second dig. Once the well is under way, Luke will also have to lay out and dig two other significant holes: one for a root cellar under the proposed house, and the other for an outhouse, as far as possible downwind, downstream, and downhill from the water supply. Luke’s friends and relatives will help him to dig these fairly significant holes, but he will have just begun to consider the capital outlays necessary to make the holes and the whole enterprise viable.

    Luke probably has to buy some cement and some kiln fired brick to make his diggings secure and safe for his new family; some bricks for the walls of the root cellar, and some bricks to encase a well shaft a few feet in diameter while backfilling the rest of the hole with gravel. Instead of a bucket on a crank, Luke hopes to have a mechanical hand pump, and a covering over the well. He would do well to build even the walls of his septic pit with stone or brick. (There is nothing worse than thinking that one is comfortably about his business while seated on the deck of an outhouse that is collapsing into the pit below!) Already there are capital requirements that cannot be supplied by the labor of family and neighbors.

    After digging and reinforcing a significant number of large holes in the ground, Luke Smith will begin to think about acquiring the necessary building materials to raise his and Becky’s new home. We’ll assume that the root cellar is the only thing akin to a foundation, and that the house will be built, essentially on the ground.

    Wooden beams and boards now become essential. The only way for Luke to acquire them is to fell trees and have someone establish a portable saw mill on the property. The saw mill owner cannot afford to contract just for eggs or liquid corn, even if he is a friend or family member, because he has to provide for the supply and mechanical upkeep of his equipment—beyond his own physical needs or wants. While the sawmill is being arranged for and set up, Luke and his friends are feverishly working to fell timber at the correct time of year, so that it may lie on the ground until properly “seasoned” and thus be impervious to rot and infestation.

    When it is time to invite the friends and neighbors for the actual construction, an number of capital outlays will have to have been made. The sawmill operator will probably be able to make or get a good price on wooden shingles for the roof, but a few roles of tar paper will mean the difference between comfort and drip. Corrugated tin will work for the stable, but it would be awfully hot in summer, cold in winter, and terribly noisy when it rains or hails on the house. Nails for the boards and bolts for the beams must be secured from a distant factory—metal hinges, as well. There will be a few dozen items that everyone forgets which will have to be bought and paid for at the last moment.

    When all of the initial work is over, the Smiths will have a house that is not much more than a big room. Hopefully there will have been time, material, and labor to raise a wooden floor off the ground. At one end will be the kitchen, equipped with an enameled sink, piped through the wall to an adjacent garden patch, and a large black iron stove (two more capital outlays)—at the other end there will be provision for the future building of a stone fire place. Until both ends of the house can be heated, walls and doors will be purposefully scarce. Things in general will look nothing like what you have seen in Western movies.

    The point of this imaginary exercise is that even with free land, natural building materials, and abundant help from friends and neighbors, the new Smith family will move into relatively primitive housing that will be upgraded to more comfortable standards only as years and decades pass. There are relatively few places left where the local authorities would even permit such construction—it would certainly be impossible and illegal on a quarter acre city lot. Most modern Americans would find themselves without the time, the ability, or the energy to undertake such an effort—-hardly any would give it a second thought.

    The alternative is to borrow the money at the beginning of construction, build a house that is more or less complete in its amenities, and spend those years and decades in both making payments and enjoying the home.

    Or one might “go back to nature,” living far from civilization....






[6]  We can only imagine, for our fictional Luke Smith will have had to deal with an incredible number of variables, taking time, location, wealth, and technology into consideration.


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