Report No. 63

2.9. Extrinsic circumstances as justifying interest.-

Yet, though interest was condemned on the basis of the intrinsic nature of the loan, it was allowed if certain extrinsic circumstances existed which gave the lender a title to compensation for loss or danger of loss. With the growth of industry and commerce and the expansion of loans for investment, the Scholastic philosophers became more and more lenient in justifying interest on the basis of these titles, such as loss incurred from delay in repayment of the loan (damnum emergens), or sacrifice of profit that might have been earned had the principal been invested rather than loaned (lucrun cessane), or risk of loss of the money loaned (periculum sortis) as in the case of such venture-some lending as a "loan on bottomry".

2.10. A second possible explanation for the broadened application of the prohibition against.usury is that the mediaeval philosophers only saw examples of loan proceeds being spent on items necessary for immediate consumption, and, therefore, put forth the theory that money had no productive capability justifying the collection of interest. They distinguished interest from rent, since land had a capability to produce crops, and this entitled the lessor to exact rents, while money had no such capability. St. Thomas Aquinas1 integrated this theory into the natural law which was gaining popular acceptance at the time. It was largely due to his writings that the theory persisted for several centuries, until the commercial age and the Reformation combined to bring about its rejection.

1. Noonan The Scholastic Analysis of Usury, (1957), p. 53, cited in Note on Usury, 18 Stanford Law Review, p. 1382.