INTEREST. - From the Latin interesse, "to be included, to matter," it is the price of a service: that of the lending of capital. Measured against a conventional unit of capital (one hundred lire) and the unit of time (one year), it is called the rate or ratio. Being a price, interest generally follows the law of supply and demand. A high rate is therefore the expression of the scarcity of capital, as well as of a high total risk: and vice versa. Total risk is composed of three elementary risks: of investment, of immobilization, and of devaluation. These risks, and particularly that of devaluation, which is certain and permanent, by themselves justify the interest on loans: in fact capital degrades over time, and no longer buys, at the moment of repayment, what it bought at the moment of the loan.
The legal rate considered by administrative necessities is precisely proportioned to the sum of the insurance premiums relating to the first two risks and to the average annual rate of devaluation.
The ancient prohibition of interest-bearing loans on the part of almost all religions, including the Christian one (v. USURY), is to be understood as relating to loans properly so called, which are those of contingency or of charity, technically defined as unproductive. It is natural, in fact, that if as a consequence of the loan there is no production of new wealth, the payment of an interest that exceeds the sum of the insurance premiums against risks and the rate of devaluation is contrary not only to moral and charitable precepts, but also to economic ones: it represents an inflationary expense, destined to drive prices back up, and therefore to devalue the currency.
The other loans, that is, the productive ones, are in reality contracts of participation in profits (dividends), even if these are "flat-rated" into a fixed rate (bonds and certificates) with the covenant of non-interference and control in the management and administration of the firm (v. SECURITIES).
It is moreover to be observed that many loans also belong to the category of unproductive loans which would not appear to: for example, state loans to a large extent, and the financing of voluntary and parasitic industries, or those that feed the bureaucracy and war. Evaluating the enormous mass of such loans, to which interest is often paid at quite high rates, one has the impression that, alongside useless labor, in the interest of unproductive loans, and especially in the accumulation of compound interest, there lies one of the fundamental and permanent causes of the incessant monetary devaluation: a cause in turn of class struggle (v. PRICE). A capital invested at 5 percent doubles in a little more than fourteen years, to then rapidly reach astronomical figures, even if it produces no new wealth. The natural corrective of the paradox is precisely the general rise in prices, or monetary devaluation (v.).
All this is in perfect harmony with "Mutuum date nihil inde sperantes" (Lk. 6:35), and confirms that religious and moral precepts always precede, and in the end coincide with, scientific and practical requirements destined to reveal themselves over time. Religions have therefore never departed from the prohibition of interest-bearing loans: nor do art. 1543 of the CIC and the recognition of the legitimacy of "a modest interest" constitute attenuations of the principle (Decree of the Holy Office, 18 Aug. 1830, Denz-U. 427; Decree of the Sacred Penitentiary, 16 Sept. 1830). The Lateran Council of 1515 had explained that "it is usury" where the lender's gain does not derive from a fruitful thing, and requires no labor, nor expenses, nor risks on his part (Mansi, XXXII, 906).
Economists and sociologists call for, and in various ways pursue, the progressive lowering and finally the disappearance of the interest rate even on productive loans: it is clear, however, that the rational way to obtain the goal is only that of the insurance of savings, a source in turn of the abundance of capital.
For the interesting history of the moral questions see more fully: USURY.
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Mario Baronci