This is the post where I propose that there is an acceptable kind of lending at interest. Which we can then use to evaluate other situations and see how they stack up. Here goes:
Imagine for a moment that I give up my life of prayer, goofing off, and educating children (let us not contemplate which one I put most effort into — hint, the prayer part could use a lot of work), and decide to start a business. Any kind of business, but one that produces a tangible product. Knitting socks, growing tomatoes, something like that.
[If either of those sound immoral to you, just imagine me producing something that you think really truly ought to be produced. We’re going for an unimpeachably worthwhile productive activity here, for the purposes of our study. And we are going to refrain from comments about how my knitting and gardening skills are only slightly better than the prayer life.]
Now imagine that I have the talent for this business, all the necessary organizational skills, even the ability to file my taxes properly. (Which I actually can do!) But that YOU are the one who has the cash I need to buy supplies. And you’re perfectly willing to invest in my business.
So what do we do? Surely the Church does not require you and I to abandon all prospects of a business venture, on account of the peanut butter and chocolate never being permitted to touch. You have the cash, I have the rest, we can change the world one sock at a time, if only we can join forces. Our current options are this:
Become full partners in a business. It’s like getting married, only harder to put asunder if things go awry. You love me, but not that much. Really all you want is to fund some yarn purchases in exchange for a cut of those huge margins I’m gonna make on my extraordinarily unique sock creations.
I sell you stock in my company. If it’s a publicly-traded company, it will be relatively easy for you to sell off your portion of the business if you so desire, but you may or may not get your desired share of the profit if you do that. If it’s a privately held company, it’s eerily like that partnership option. And from my perspective — do I really want you having a voice in how I run my sockworks?
–> Really what you and I both want is for you to contribute some cash to this year’s sock run, and at the end of the season you take your cut of the profits and move on. Maybe we’ll join up again later, maybe we won’t. But we want a nice, clean, short term arrangement.
Now in certain staunchly Muslim countries I am told that to get around the usury problem, a profit-sharing type of financial instrument is available. But here in the U.S., we either have ownership equities (those stock or partnership options rejected above), or . . . DEBT.
Our friend, debt.
Bet you never thought I would type that ever.
But here’s what: Debt is simple.
You want to contribute some cash to my sock works in exchange for a share of the profits. Now we could, in theory, set up something to do exactly that. I say you’ll get, say, 10% of the profits off of this year’s sock production in exchange for buying a year’s supply of yarn. But where does that leave us?
–What if we disagree about how to calculate the profits? I feel sure sure sure my knitting needles will depreciate fully this year, and you think I can get a good twenty years out such sturdy bamboo. (Which means lower costs, more profits, a bigger piece of pie for us to split.)
–What if I have more than one product line, and you only funded one of them? Now the accounting gets really rough. How do I allocate my call center costs between the project you funded (all that beautiful chartreuse wool — thank you!) and the project my other faithful reader funded?
-And that’s not even taking into account horrible management decisions, strange market conditions, and everything else. Surely I would have made much more money, you argue, if I’d gone with the other shade of chartreuse. And if only we had waited 14 months before settling up instead of 12, you would have gotten 10% of a much bigger pie, what with the sudden epidemic of Sheep Flu that hit right after I paid you off.
Summary: Profit sharing is complicated.
So we simplify our agreement. I expect that if I use your $100 to buy wool, I can turn around and sell the socks for $150. Dividing the proceeds fairly, after taking into account my other expenses, we agree that if I pay you back the $100 plus an additional $5 as your share of the expected profits, that will be a win-win. And we agree that I’ll pay you back exactly one year from now, rather than having to worry about exactly when the project is over.
Will one of us end up the loser? Maybe. I might not sell as many socks as planned, and I still have to pay you the $5 interest. I might make more profit than planned, and you still get only a measly $5. But it is a clean arrangement, built around the real expected values of what wealth the sock project is going to generate. If it is part of an overall habit of making prudent business decisions over the long run, it should balance out. Maybe this project you get the better end of the deal, next time chance favors me, but in the long run, when we aggregate all these little arrangements we work out within the business community, we both get our fair share.
And that, I think, is the basic model of why and how debt can be good.
Usury, I argue, is something else. A situation where we pretend to have good wholesome debt, but in fact one of us is abusing the financial instrument to exploit the weaker party. We’ll look at that in Part IV.