Is there a 'just interest rate'? We see banks having interest rates when loaning money. Can this be done justly? I am interested in the Catholic viewpoint.
Is there a 'just interest rate'?
The “just rate of interest” is the fair rate of interest which should corresponds to the average gain that those engaged in business may generally expect in a determined centre.
According to the Catholic Church, the Catholic Encyclopedia explains it as such:
Just rate of interest
Even today one can still sin against justice by demanding too high an interest, or usury, as it is called. What interest then is just and moderate? Theoretically, and in an abstract way, the fair rate of interest nearly corresponds to the average gain that those engaged in business may generally expect in a determined centre. It nearly corresponds, for the interest being guaranteed, whilst the profit is uncertain, we must discount the value of an insurance premium from the average profit. Accordingly, in a determined centre, if those who sink their money in buildings, land, or industrial undertakings generally look for a profit of 6 percent, the just rate of interest will be about 4 or 5 percent. This rate covers the risks and ordinary inconveniences of lending. But if one had to run special risks or had to give up an extraordinary premium, one might in all justice exact a higher rate of interest. Such, therefore, is the theoretical rule. In practice, however, as even the answer of the Sacred Penitentiary shows (18 April, 1889), the best course is to conform to the usages established amongst men, precisely as one does with regard to other prices, and, as happens in the case of such prices, particular circumstances influence the rate of interest, either by increasing or lowering it. In this way, the security offered by advances to the governments of wealthy countries and those that cover mortgages diminish the rate for public loans and loans on mortgage. On the contrary, the interest on shipping, and mercantile business is higher than that in civil business, on account of the greater uncertainty in sea voyages and in commercial enterprise.
Lending and expecting more in return is usury, a sin against justice.
Take not usury of him nor more than thou gavest. […] Thou shalt not give him thy money upon usury: nor exact of him any increase of fruits.
love ye your enemies: do good, and lend (mutuum date), hoping for nothing thereby: and your reward shall be great, and you shall be the sons of the Highest.
St. Thomas Aquinas, Summa Theologica II-II q. 78 a. 1 co.:
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.
accipere usuram pro pecunia mutuata est secundum se iniustum, quia venditur id quod non est, per quod manifeste inæqualitas constituitur, quæ iustitiæ contrariatur.
Borrowing under a condition of usury is just, "provided the borrower have a good end in view, such as the relief of his own or another's need." (ibid. a. 4 co.).
Pope Benedict XIV's 1745 encyclical Vix Pervenit condemns usury:
I. The nature of the sin called usury has its proper place and origin in a loan contract (contractu mutui). This financial contract between consenting parties demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given. Therefore he contends some gain is owed him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.
It is still usury regardless the interest rate or whether the loan is a "productive" loan:
II. One cannot condone the sin of usury by arguing that the gain is not great or excessive, but rather moderate or small; neither can it be condoned by arguing that the borrower is rich; nor even by arguing that the money borrowed is not left idle, but is spent usefully, either to increase one’s fortune, to purchase new estates, or to engage in business transactions. The law governing loans consists necessarily in the equality of what is given and returned; once the equality has been established, whoever demands more than that violates the terms of the loan. Therefore if one receives interest, he must make restitution according to the commutative bond of justice; its function in human contracts is to assure equality for each one. This law is to be observed in a holy manner. If not observed exactly, reparation must be made.
Extrinsic titles may justly be affixed to the loan contract:
III. By these remarks, however, We do not deny that at times together with the loan contract certain other titles—which are not at all intrinsic to the contract—may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.
Money does not enter into the processes of production; it is in itself, as Aristotle showed [in Politics bk. 1 § 10, 1258a-b], quite sterile.⁷
And there is another kind of moneymaking, interest (called τόκος* in Greek), whereby money increases itself. And so the Greeks called it τόκος, since that means offspring. For we perceive that things generated by nature are like the things generating them. And so there is a kind of generation when money increases from money. And so also such acquisition of money is the most contrary to nature, since it is according to nature that money is acquired from natural things, not from money. Therefore, one kind of moneymaking is praiseworthy ["that acquires money from natural things (e.g., crops and animals)"], and three kinds [the other two: (1) "commerce…transformed from what is a necessity of nature to what desire demands" and (2) "lending money for a fee"] contemptible, as he has said.
*cf. Our Lady's title Theotokos (θεοτόκος), the God-Bearer
To find out what the Catholic Church thought was a just interest rate you can look at the rates actually used by the Church, since it was the biggest moneylender in Italy and the Spanish empire.
The Fifth Council of the Lateran (1512–1517) stated (among other things) that the Church was allowed to charge for administration of credit providers set up for benefit of the poor, or Montes Pietatis.
Inter multiplices, Papal Bull, Leo X, 4 May 1515 (Denzinger 739):
With the approval of the holy Council, we declare and define that the aforesaid "Mountains of piety" established by the civil authorities and thus far approved and confirmed by the authority of the Apostolic See, in which a moderate rate of interest is received exclusively for the expenses of the officials and for other things pertaining to their keeping, as is set forth, for an indemnity of these as far as this matter is concerned, beyond the capital without a profit for these same Mountains, neither offer any species of evil, nor furnish an incentive to sin, nor in any way are condemned, nay rather that such a loan is worthwhile and is to be praised and approved, and least of all to be considered usury.
These were institutionalized nonprofit pawnbrokers and organized charities, first set up in 15th-Century Italy as a response to the growth of secular moneylending. They were established with a monte—funds donated by individuals as a work of charity without expecting repayment. They made 1-year loans with a fixed interest rate intended only to pay cost of administration in return for deposit of a valuable item; the loan would be for about 2/3 the worth of the item. Interest was allowable because it would allow the institution to survive, and the institution would protect the poor and needy from usurers. If income was sufficient to allow a decrease in interest rates, this was done.
Jesuit procuradores (business managers) made loans to Spanish colonists at 5% interest (in one case).