1. An Economic Model of the
Medieval Church:
Usury as a Form of Rent Seeking
ROBERT B. EKELUND, JR., ET AL
JOURNAL OF LAW, ECONOMICS & ORGANIZATION
EDWARD H. FREDERICKS, JR.

2. Background
 Study treats the institutional Roman Catholic church
of the middle ages as an economic organization
 For purposes of this paper medieval is defined as year
1000 ending in year 1500
 Study models church policy on usuary as a ‘static’,
profit-maximizing, monopoly

3. Background
 During the Middle Ages the Roman Catholic Church was the
dominant firm in the salvation industry
 It operated as a loose confederation of ownership and
management interests with economic agents operating far from
decision-making
 Communication, transportation, and other transaction costs
were high within the hierarchy due to low-level technology and
geographic dispersion of the ultimate sellers
 The medieval church may be viewed as an economic unit
directed by a Coasian entrepreneur – an individual or body of
individuals who take the place of the price mechanism in the
direction of economic resources

4. Background
• Church supplying monopoly input -- Conditions of
Salvation
• Offered hope, belief in support of an afterlife
• Hope against brutish conditions of medieval life
• Found many demanders, even at steep prices
• Demand for salvation was price-inelastic, church preached
only way to salvation was through church doctrine
• In return for payments, church dispensed solace, status and
ultimately salvation
• Preconditions of active rent-seeking were woven into
the fabric of the medieval church

5. Background
• Authors suggest medieval Roman Catholic Church resembled:
 An upstream monopolist supplying:
 Goodwill and intangibles
 Doctrinal purity
 Brand distinction
 Guarantees
 And other factors creating demand inelasticity
 To downstream suppliers of final output
• Church behaved as a rent-seeking monopoly, but faced coordination
problems typically associated with various forms of profit-capture in a
nonintegrated vertical chain of production and distribution
• Enforcement of policy and doctrine and collecting revenues were an
ongoing problem.

6. Entry Control and Demand Inelasticity
• Church established institutions helped to fix the role of the
papacy as an input monopolist:
• Church accelerated efforts to maintain doctrinal purity, instituting
prohibitions against heresy, engaging in disputes with papal
pretenders and declaring holy wars. Church asserted exclusive
right to interpret Holy Scripture
• Established regulations against specific practices and policies that
diminished its authority or its revenues, especially concerning
simony, usuary, and jurisdictions of monastries and churches
• Established a corporeal agency – the apostolic camera – to collect
rents, to enforce control, and to suppress interlopers, cheaters and
malfeasors.
• The rite of confession gave clerics a unique method of determining a
penitent’s demand elasticity for the purchase of release time from
purgatory.

7. Entry Control and Demand Elasticity
• Church history is replete with many attempts to punish heretics
and interlopers.
• Consistent with spirtitual goals but also economic goals of protecting
papal monopoly.
• Rent collection, cheating and interlopers were major concerns.
Interloping opportunities existed in connection with practices of
simony and investiture.
• The sale of ecclesiatic offices were widespread and the papal
staff grew to accomadate it
• During Leo X (1513 – 1521), one-sixth of the papal income came
from the sale of offices.

8. Entry Control and Demand Elasticity
• Interlopers involving Investiture:
• Investiture meant the appt. of church officials
• Lords, Dukes, and Kings often sought support of monasteries
because they were quasi-independent and administered real
property (also were sources of loans)
• To gain control lay rulers frequently claimed rights to appt heads
of religious houses
• The church viewed this as usurpation of its authority
• Such behavior is consistent with a monopolist protecting its ability
to collect economic rents.
• Spiritually, consistent with maintaining doctrinal purity and
quality control

9. Collection and Enforcement:
The Apostolic Camera
• Metaphorically – the church consisted of a board of directors (the
pope and curia) that oversaw a large number of geographically
dispersed franchises (the clergy)
• The ecclesiastical enforcement mechanism set up to control
downstream activity was the papal camera (treasury)
• Financial adminsitration became important as the church grew
• By the 14th century, the the camera became the central power
within the papacy and the most efficient taxation system in
Europe
• The camera combined finance and judicature
• Auditors of the camera were given sweeping powers [to make
enquiry into and punish crimes…to admonish, excommunicate
and absolve all persons concerned…]
• Jurisdiction over clerical usurers was clearly established

10. Usury
 Usura, which usury derives, meant payment for the use of
money in a transaction that resulted in a gain for the lender
 Interesse, which interest derives, meant loss and was
recognized by ecclesiastic and civil laws as as a reimbursement
for loss or expense. Interest was commonly regarded as
compensation for delayed repayment or for loss of profits to the
lender who could not employ his capital in some alternative use
during the term of the loan
 Risk was not considered as a justification because loans were
generally secured with property worth more than funds
advanced

11. Usury: A Case Study of Monopoly Church Behavior
 The first official prohibition of usury appeared in 325AD, banning the
practice among clergy
 Later, the Hadriana (Charlemagne), a collection of canons, extended the
prohibition to everyone, defining it as a transaction where more is
asked than given
 Subsequent practice made the ban an absolute prohibtion, with the
laws enjoying widespread and official support
 Civil prohibitions varied widely from country to country
 Usury laws had the effect of constraining credit and of altering resource
allocation
 By the 15th century, usury was treated as a relative prohibition rather
than an absolute
 Pope Nicholas V in 1452 determined a redeemable census (mortgage)
was licit provided it did not pay over 10%.

12. Usury: A Case Study of Monopoly Church Behavior
 Church officials manipulated the usury doctrine to bolster the
monopoly power of the church
 Hypothesis: the church recognized rent-seeking opportunities that the
doctrine of usury permitted
 As a lender – church priced loans at market rates or above therefore
extracting rents
 As a borrower, the church enforced the doctrine, thereby extracting
rents by reducing its cost of credit
 Consistent with the activities of a rent-seeking monopoly
 Consistent with monetary and non-monetary goals
 Monetary – finance salvation efforts
 Nonmonetary – preserve and extend doctrinal hedgemony

13. Usury: A Case Study of Monopoly Church Behavior
 Church officials gathered residuals from usury doctrine
 Policies of restitution for usury changed overtime but favored the church
 Usary was classified as:
 Certa: known victims
 Incerta: unknown or unidentifible victims
 Church policy permitted known victims to receive certa restitution
 Policy required incerta restitution to go to the poor or be used for pious
purposes
 Licenses were issued to clerics entitling them to a percentage of incerta
restitution
 Policy similar to sales/revenue royalties contracts employed by franchised
firms
 Church routinely looked the other way for favored transgressors but
continued to condemn [manifest, public usurers ]

14. Usury: The Church as Borrower
 Papal loan demand was heavy as the church financed the crusades and
other territorial conquests
 Records are sparse as the terms of the loans were often camouflaged in
papal rhetoric (i.e. references to gifts, etc.)
 Medici Bank was paying interest on deposits of 5% - 10%
 Camera was paying 2.3% to 6.6% on loans
 Loan activity continued unabated through the middle ages
 A camera document of 1492 lists 47 papal creditors to whom the
camera owed 128,424 ducats, approx. ½ of the total estimated papal
income that year

15. Usury: The Church as Lender
 Historians maintain the papacy was not a lender but Vatican records show
a history of lending in-house to its own clerics
 Camera financed loans incurred by clerics required to pay a tax (servitia) to
the papacy upon being raised to the episcopate
 Pope designated special clerks to execute the ecclesiastical penalities and
processes if the borrower did not meet the terms of the loan
 Monasteries incurred heavy debts, typically backed by real property
 Not unusal for the pope to use his influence to insure repayment
 In one instance, monasteries were forced to lend to the English monarchy to
repay Vatican loans
 The monasteries borrowed from the Vatican and were charged interest rates
between 16% and 21%
 Monks were threatened with excommunication if they did not repay the
loans

16. Usury: The Church as Lender
 Church operated on both sides of the loan market
 Borrowed freely from its own bankers
 Made usurious loans to prelates while outwardly declaring
public doctrine of usuary in creative ways
 Financing the crusades and recruiting personnel for the holy
wars
 Recruited fighters by selectively absolving volunteers of guilt and
dispensing of restitution
 Exempted payment of usury on past loans
 Encouraged crusaders to seek long-term loans versus short-
term leases
 Policy had the effect of essentially financially ruining many of
the crusaders

17. Conclusion
 Church acted as a vertically integrated monopoly
 Institutional framework of the church created many
opportunities for rent-seeking
 Created numerous problems for enforcement
 Church manipulated doctrine of usury to enforce monopoly
position and promote its rent-seeking opportunities