We take Mr. Ferrara’s reference notes seriously, for they show what he regards as evidence. We have, for example, seen him quote with uncritical approval from the writings of Kevin Carson, Joel Bakan, Kirkpatrick Sale, Charles Beard, and Amintore Fanfani. (See our labels list in the right column.) His citation of University of Oklahoma College of Law Professor Brian McCall’s “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” however, already noted in our previous post, elevates the tone of the discussion somewhat.
Since Mr. Ferrara thanked Professor McCall for illuminating the daily workings of the Fed and (as we shall see later) analyzing the “inside-baseball” dimension of credit-default swaps (the occasion of, if not the key to, the 2008 “meltdown,” according to Mr. Ferrara), we regard the professor as our author’s mentor on matters of finance where expertise is required, and that’s why we examining this monograph.
In it, Professor McCall not only argues for the contemporary relevance of the traditional ban on usury, but also defends it, to the extent of suggesting that the (de jure but not de facto) ban on interest in Islamic countries is a promising development for non-Muslims. We intend not only to show that Professor McCall fails to mention, let alone engage, the (in our opinion, anti-economic) arguments presupposed by usury-ban advocates, but also to undermine the implicit suggestion that Catholics ought to presuppose them as well.
In short, Mr. Ferrara did well—or, at least better than usual—by sourcing his argument in Professor McCall’s paper, but the defects of one leaky bucket cannot be remedied by another.
* * *
Before pinpointing the salient errors and oversights of this six-part study, let’s have before us Professor McCall’s summary:
Part I will briefly present statistical data illustrating the problems in our consumer credit market. . . . Part II outlines the historical approaches to usury that predated the scholastic theory, noting now some of them survive in contemporary debates. . . . Part III presents the essential aspects of the scholastic theory of usury as it developed from the fourth to the sixteenth century. Part IV discusses the scholastic theory’s adaptation to the new commercial environment of the sixteenth century. . . . Part V evaluates the history of scholastic theory and abstracts the essential principles of theory. Part VI makes some general observations regarding the application of these principles to the modern credit system, while noting that the growth of Islamic finance in recent decades shows the feasibility of such a theory interacting with modern economic realities.
I: The Problem of Consumer Credit (552-554)
The explosion of consumer credit and bankruptcies in the twentieth century certainly generated a lot of statistical data, which Professor McCall summarizes, but data can indicate a problem only in the light of a theory. He provides only a series of brute facts, however: this number went up, then that one, then that one, etc.
The nominal quantity of what consumers have borrowed over the last century has increased, but we must remember that they were not borrowing shares of a relatively stable supply of, say, gold or silver. If those consumers were competing with each other to borrow precious metals, they would have rather quickly brought about a monetary shortage, which would in turn have driven up the cost of borrowing, thereby tending to slow its increase.
Ceteris paribus, prices of goods and services tend to fall when the demand for money increases. In other words, such an alarming increase in consumer demand for money as Professor McCall documents would predict (or rather retrodict) a corresponding increase in money’s purchasing power over the same period. But that’s not what happened:
Again, Professor McCall asserts the existence of a problem, i.e., the increase in consumer borrowing, but shows little interest in its causes. For instance, who have been the lenders over the same period, and how have they been able to satisfy this consumer demand, avoiding shortages? The answer: commercial banks, all of which are statutorily required to belong to a cartel whose central bank, the Federal Reserve, can and does inflate the supply of money virtually at will and then dispenses this “fiat” currency to cartel members.
That is, what the banks have lent so promiscuously is not a scarce commodity like gold or silver, which has to be mined, refined, and coined. No, it is rather a scarce commodity like paper, which grows on trees, so to speak. Fiat currency requires only (a) a secret printing process that distinguishes legal currency from the pieces of paper used in board games and (b) a state-sanctioned monopoly privilege to effect that process. Should someone effect the same material process without enjoying the privilege, the law would deem it “counterfeiting.”
Ironically, Professor McCall cites a Federal Reserve study of the increase in total household debt from 1976 to 2006, but never asks whether the Federal Reserve’s systematic credit expansion, which has been going on now for almost a century, had anything causally to do with the increase in consumer credit that he finds troubling. (553-554 n. 12) Instead, he notes that the dual increase in debt and bankruptcy filings correlates with both a “growing laxity in usury laws” (553) and “legal scholarship calling for new approaches to credit regulation” (554), all of which, if we have correctly interpreted the titles listed in his reference note, treat the symptoms rather than the root cause. (554 n. 21)
To Be Continued
 Brian M. McCall, “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” Cardozo Law Review 30.2 (2008): 549-615. The quotation is from page 552. Subsequently, and only in this sub-series of posts this paper, parenthetical page references will be to this article.