Reforming the Morality of Private Business. The Early Modern Lutheran Theologians on Loans at Interest

Today usury consists in lending money at excessive rate of interest. At the threshold of the sixteenth century, usury was the practice of lending at interest. Whatsoever interest in a loan, not only a high rate of interest, was prohibited. The interest prohibition originated in the tradition of the Roman Catholic Church. This prohibition continued to be effective among the Lutheran reformers but it underwent profound changes. In this post, I will give a brief and general overview of these changes and its implication for private business. The reader who wants more information can consult my book Lutheran Theology and Contract Law in Early Modern Germany.

Medieval canonists and theologians pointed out many reasons against lending at interest, but here we only focus on one: the famous passage of Luke 6:35, where Christ ordered to lend hoping for nothing. This passage was incorporated in a canon law norm forbidding the practice of interest. As lending should be gratuitous, a different type of contract was invented: the sale of annuity. This contract produced effects similar to a loan, but it was a sale and therefore, according to several theologians and canonists, it was lawful. In sixteenth-century Germany, a special form of this contract was very popular: the so-called five per cent contract. In this operation the investor lent to the entrepreneur the capital, to use for business, with a clause that guaranteed that the investor would recoup not only the capital but also a fixed part of the profits of the entrepreneur (5% of the invested sum).

In his first sermons on usury, Martin Luther (1483-1546) condemned the five per cent contract as a usurious contract. He repeated the teachings of the canonists: loans should only gratuitous. Besides, he added that the entrepreneur looks at his private interest forgetting the neighbour and therefore he is acting against the precept to love the neighbour. A few years later, Holy Roman Emperor Charles V (1500-1558), considering the nature of this contract, a sale and not a loan, legalized it. Even though this contract was formally defined as a sale it was in substance a loan. Practically speaking, lending at interest was legal. This created a fundamental problem for Luther’s disciples: to condemn the five per cent contract or to approve it; to refuse the secular law or to accept it. How was one to reconcile the interest prohibition with the new law of finance? The theologians argued that not every loan at interest is forbidden.  Only if charity towards the neighbour is offended, does a loan at interest go against the interest prohibition. They did not prohibit every loan at interest in general, as did their Catholic colleagues, but left to the individual Christian to choose whether a contract is against charity and thus a violation of the interest prohibition.

The new theory derived in great part from a reinterpretation of the precept of Luke 6:35. Philip Melanchthon (1497-1560) interpreted the precept of Luke 6,35 as only concerning the lending to indigents. In this way, he eliminated business transactions from the range of application of the prohibition on lending at interest. Similarly, Johannes Brenz (1499-1570) interpreted the precept of Luke 6,35 as not pertaining to every Christian but only the poor. We read here an excerpt from his sermons to Luke 6,35: if the love for the neighbour is really true, it does not only bring with it that civil form of justice, making you lend to somebody from whom you hope something in return; it also makes you lend to the needy and poor, from whom you hope nothing in return. Everyone in fact loves himself so much that he desires to receive a loan when he is oppressed by necessity or poverty, even if he cannot repay it. (…) If the precept of Luke is to relieve the poor and lend to them gratuitously, will it be illicit to use civil contracts, in which returns are equal, with the rich people and those who possess lands? Shall I lend hoping for nothing in return even to the rich and those possessing lands? Not at all. The rule of love asks me to love the enemies when I am turned towards the enemies, as we said earlier, while at the same time I must love the friends when I am turned towards them. The same is true in a loan: when I am turned towards the poor, I have to take care of them as much as I can, but, by the same token, when I am turned towards the rich, land-owners and those possessing other things, I will be allowed to use civil contracts with them.

Thus, Brenz distinguished two categories of people, the rich who can practice the five per cent contract and the poor to whom it is forbidden. Johannes Aepinus (1499-1553) went further and proposed a threefold classification: the beggars, the working poor and the rich. Alms regard the first class, loans are for the second class, and business contracts can be stipulated among people of the third class. The effect of the new interpretation is that Luke 6,35 only concerns gratuitous loans to the poor. Private business can be practiced as long as it is between rich people.

To Urbanus Rhegius (1489-1541), in order to be usurious, a loan must not only provide a charging of interest but also harming the neighbour. Therefore, the Christians are called to apply the five per cent contract according to natural law and Christian charity. Charging interest is only forbidden when it harms the other contracting party. With an emphatic expression, Rhegius wrote that the Christian must firstly have before his eyes natural law and the love for the neighbour. Aegidius Hunnius (1550-1603) and Johann Gerhard (1582-1637) similarly held that the passage of Luke 6,35 should be interpreted as forbidding only the loans that harm the neighbour. It occurs especially with the loans at interest towards the poor.

Before concluding an agreement the businessman must ascertain the qualities of the other contracting party. The loan could only be concluded if the debtor could afford it. What happens then if the rich become poor because of an unexpected circumstance? The theologians responded that charity as a moderator and director shall mediate between the parties, and after consideration of the circumstances shall order to remit the interest or also the principal. Indeed, as Gerhard explains, when men of the third class are reduced to the second class, then loans towards them must be gratuitous, and when they are reduced to the first class, they are should be helped with alms. The solution was, therefore, the remission of debt when the debtor cannot repay it because of an unexpected negative circumstance.

In sum, the Christians are responsible to make sure that charity is observed. They have to protect the other contracting party from damages, and assist him in case of necessity. This is a judgment that concerns the detailed circumstances of every agreement. The Christian has to decide whether his private business is against charity. Charity implies the mitigation of law under particular circumstances. Christians must decide whether to apply the law, whether to execute a certain financial operation or whether to enact a specific contractual term on the basis of charity.

Roman Catholic theologians and canon lawyers built an absolute prohibition against lending at interest, established in the canon law. But then by way of exceptions, they allowed many financial transactions. The Lutherans placed the Scriptures at the center of the system. From an absolute prohibition of interest, the theologians devised a prohibition to harm the neighbour by charging an excessive interest rate. This prohibition was especially geared in favor of the weaker party, the poor. The Lutherans stressed the responsibility of the single Christian to avoid damaging the other contracting parties in the concrete situation while the Roman Catholics permitted a larger number of financial techniques by the authorization of priests, who circumvented de facto the strict prohibition. Once these authorities gave green light the conscience could be free to pursue one’s interest, unconcerned for the real situation of the other party.

As we have seen in our precedent post, for the early modern Lutheran theologians private property should be moderated by charity. The private is not absolute but depends on the needs of the neighbour. Here it is the same. Private business is not entirely private. The Christian has not to look at his private interest only but also keep into consideration the other contracting party. If this party has not enough means to support the contractual risks the agreement should not be concluded. If this party suffered damage for an unexpected negative circumstance the other should assist him. It is the Christian conscience, informed by the Gospel, who must take this decision.