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For God and Profit

How Banking and Finance can Serve the Common Good

The Crossroad Publishing Company

Introduction

People have to struggle to live and, frequently, to live in an undignified way. One cause of this situation, in my opinion, is in our relationship with money, and our acceptance of its power over ourselves and our society. ... We have created new idols. The worship of the golden calf of old has found a new and heartless image in the cult of money and the dictatorship of an economy which is faceless and lacking any truly humane goal.

Pope Francis, 2013.

With these words spoken to four new ambassadors to the Holy See — two from countries often labeled as tax havens — a newly elected Pope Francis expressed the conviction of many Christians that something is fundamentally awry in the world of finance. On another occasion, Francis stated that Christians who work in financial markets faced particular temptations that aren't so easily resisted. Then, almost one year after making the remarks cited above, the pope departed from a text of remarks about the Sacrament of Confirmation to denounce what he described as the "dramatic social wound" of usury. "When a family doesn't have enough to eat because it has to pay off loans to usurers," the pope insisted, his voice rising, "this isn't Christian! It's not human!"

Rather less well known was that the same pope's views of money were more nuanced than often supposed. In an October 2013 homily, for instance, Francis insisted that neither he nor Christianity was in the business of demonizing money or those who work in finance. "Money contributes," he stated, "greatly to many good works for the development of the human race. The real problem is a distorted use of money, attachment and greed. Hence the Lord's warning: 'Take heed and beware of all covetousness.'" In a speech in 2015, the pope quoted one of the Church Fathers, Basil the Great, to the effect that money is "the devil's dung." Prior to saying these much-reported words, however. Pope Francis carefully noted, in words that went virtually unreported, that money is in fact indispensable if you want to have investment, pay wages, and organize resources.

Christianity has always stressed the potential pitfalls associated with disordered attitudes toward wealth. It has been equally clear that greed, rather than money per se, is the primary stumbling block. Nevertheless, many Christians have been extremely critical — often with good reason — of particular uses of money and capital by individuals, companies, and the state. In the midst of the Great Depression, Pope Pius XI referred to an "accursed internationalism of finance." He even claimed that a "dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money."

Today one does not have to look far to find similar remarks in the statements of prominent Christians about specific financial practices. In a speech in September 2008 in London to the Institute of Worshipful Company of International Bankers, the Anglican Archbishop of York, John Sentamu, had strong words for those who engaged in short-selling shares. Referring to a spate of short-selling surrounding the British-based banking and insurance company HBOS, the archbishop exclaimed, "To a bystander like me, those who made £190 million deliberately underselling the shares of HBOS, in spite of its very strong capital base, and drove it into the bosom of Lloyds TSB Bank, are clearly bank robbers and asset strippers."

Bank robbers — that's a serious accusation. But one difficulty with the archbishop's statement was that, judging from his speech, it is not clear he understood what short-selling is.

Knowing before Judging

In simple terms, short-selling involves selling a stock that you have borrowed. You may look, for instance, at the stock price of MAG Enterprises and see that it's currently trading at $ 1,000 a share. Based on your research and experience, you conclude that the stock is overpriced and likely to decline in price. You consequently decide to borrow 100 shares of that stock through your stockbroker, who purchases the shares and then lends them to you. You are now "short" 100 shares of MAG Enterprises. The short sale is possible only because you borrowed the shares in the first place and you promised to purchase the stock in the future as a way of extinguishing your debt.

One month later, as you anticipated, MAG Enterprises releases poor results for the previous quarter. Stock in MAG Enterprises subsequently plummets to $500 a share. You then choose to close your short position and buy 100 shares of MAG Enterprises on the open market at $500 a share and return them to your stockbroker. In effect, you are buying back the stock at a lower price. Put crudely, this means you only have to pay back half of what you originally owed. The difference (after you've paid your stockbroker a service fee and any dividends earned on the stock during the time of the loan) is your profit.

If, on the other hand, your judgment proves to be wrong and MAG Enterprise's stock rises after one month to $2,000 a share after you borrowed the initial 100 shares (at $1,000 a share) you make a considerable loss. Why? Because you face the prospect of having to pay back twice as much as you initially borrowed.

Short-selling is not for the faint of heart. Nor are the transactions always simple. But looking at the series of exchanges detailed above, the choice to steal or engage in fraud does not manifest itself at any point. Instead, short-selling is about taking risks, and the Christian understanding of justice has always regarded willingness to assume risk as a potential basis for receiving more than those who choose not to take a risk.

There are also several external benefits from short-selling that escape many people's attention. Short-selling has, for example, the broader effect of driving down the price of otherwise overpriced securities. As the English economist and commentator on Christian social ethics Philip Booth notes, short-selling causes "a share price to reflect information quicker than it otherwise would." The pace of price adjustments is thus accelerated, thereby improving the efficiency of financial markets in correctly pricing assets. This is good for everyone.

In other instances, short-selling serves as an early-warning system for fraud — often turning up malfeasance long before regulatory authorities become aware of the problem. It was a hedge fund, for example, whose research first identified problems with Enron's accounting practices, which led the fund to short that stock. That was the first tip-off to the wider world of Enron's inflated revenue reporting. In testimony to the Securities and Exchange Commission, the short-seller concerned pointed out, "Many of the major corporate frauds and bankruptcies of the past quarter century were first exposed by short sellers doing fundamental research: Enron, Tyco, Sunbeam, Boston Chicken, Baldwin United, MicroStrategies, Conseco, ZZZZBest and Crazy Eddie are but a few examples... "Of course, if those involved in short-selling a stock in our fictional MAG Enterprises engaged in spreading rumors and untruths about the company's health in order to drive down the price, that would be wrong. The moral error in such cases, however, isn't short-selling but lying.

My point here is not to belabor the specifics of short-selling. Instead it is to illustrate that a clear understanding of the nature of a given financial practice is necessary before morally assessing it. For many Christians, the work of those involved in finance has always been immersed in a fog of moral ambiguity. One reason for their confusion is their lack of concrete knowledge of what bankers really do and why.

The need to gain such knowledge before rendering moral judgment has been underscored by some of modern Christianity's finest minds. In a response to a question about the 2008 financial crisis during a 2009 meeting with priests, Pope Benedict XVI said,

I see now how difficult it is to speak with competence on this subject. If we do not deal competently with the matter, it will not be credible. On the other hand, it is also necessary to speak with great ethical awareness, created and awakened, so to speak, by a conscience formed by the Gospel. Hence it is necessary to expose the fundamental errors, the basic mistakes, now being shown up by the collapse of important American banks ... We must do so courageously and concretely, for lofty moralizing does not help if it is not substantiated by knowledge of the facts, which also helps one understand what it is possible to do in practice to gradually change the situation} [emphasis added]

Benedict was hardly the first Christian to make this point. Similar thoughts were articulated by sixteenth-century theologians engaged in the study of usury. The Spanish Jesuit Luis de Molina (1535-1600) wrote on financial subjects ranging from coinage to taxation, bank deposits, and money exchanges more generally. He went out of his way to consult people actually engaged in these practices, whom he believed would have insights likely to escape a theologian's attention. "The practice of the merchants," he wrote, "makes a better estimation of goods than the scholastic doctors, and the merchants' judgment is rather to be abided by about the value of the goods, especially when they are used in the business they do with one another."

Faith, Morality, and Money

Not only did the bankers of Molina's time understand the workings of money. For the most part, they strove to be faithful Christians. From the beginning of the first forms of capitalism in northern Italy, Flanders, and other parts of medieval Europe from the eleventh century onward, many of the merchants involved in increasingly sophisticated forms of finance wrote inscriptions such as Deus enim et proficuum ("For God and Profit") in the upper corners of their accounting ledgers. Others opened their partnership contracts with a formula such as A nome di Dio e guadangnio ("In the Name of God and Profit").

One of the most accomplished scholars of this period, the Belgian economic historian Raymond de Roover, insisted that such mottos were neither "an expression of cynicism" nor "a sign of materialism. "Instead, these words reflected their authors' conviction that banking and finance were economically useful endeavors, and that in pursuing profit they were in some way giving glory to God by helping to unfold the full potential of the universe he had created.

Molina and the many other Christians who explored these areas throughout history were not searching for greater marketplace efficiencies. Their concern was moral. They analyzed the decisions that people made in finance to see which actions were morally upright and which fell short of the demands of Christian truth.

As important side effects, such studies helped to identify key features of money, clarified how interest worked as a means of calibrating risk, and increased knowledge of the true nature of capital, exploring how it could be used to generate wealth. Nonetheless, Christians were — and must continue to be — primarily concerned with the morality of different choices in finance.

Such an approach differs from that of most people studying finance today. Their focus is on seeking to understand and critique contemporary financial practices in order to improve the ability of financial systems to generate wealth and realize particular policy goals. In doing so these scholars have discovered a great deal about how modern finance functions — knowledge that should be just as helpful for Christians exploring these areas as the findings of scientific research have assisted Christians engaged in medical ethics.

Where the approach of faithful Christians differs from most secular approaches to finance is that Christians cannot accept appeals to expediency or utility maximization as the decisive criterion for making moral decisions. The author of one of the few modern studies of finance from a Christian standpoint, the late Thomas Divine, S.J., stressed this point. The potential for exploitation of borrowers by lenders, Father Divine argued, was dramatically reduced in the conditions of a competitive market for capital precisely because borrowers were no longer at the mercy of one or two lenders. Yet Divine didn't hesitate to affirm, "If the springs of interest are tainted in their source, then no amount of social welfare that interest may promote can avail to purify that source." Divine understood — just as figures such as St. Paul, St. Basil, St. Augustine, St. Thomas Aquinas, and more recently, C.S. Lewis did — that the very stability of orthodox Christian ethics lies in its unambiguous affirmation that there are exceptionless moral absolutes: that is, there are things that may never be done, no matter how much social welfare they may promote.

This doesn't mean that Christians cannot reflect on the foreseeable consequences of a given action. It is entirely legitimate for a Christian to note how short-selling can improve the process of pricing, or to be attentive to inflation's discernible effects on different social groups. There are also many instances in which we may reasonably measure the foreseeable consequences and efficiency of alternative choices. As the moral philosopher John Finnis notes, one such context is a market for those things that may legitimately be exchanged and in which a common denominator (i.e., money) allows appraisals of costs and benefits.

Christians studying finance can't, however, fall into the trap of thinking that it is acceptable to intentionally choose evil in order to realize good. That way of moral choosing and acting was specifically condemned by St. Paul (Rom. 3:8) and the entire orthodox Christian tradition. Moreover, Finnis cautions, making the assessment of calculations the primary points of moral reference is deeply irrational because it assumes the impossible: that humans can know and weigh all the known and unknown consequences of particular actions or rules.

Renewing a Tradition

Though many of us live in religiously pluralist societies in which it can't be assumed that everyone understands Christianity's core beliefs, many people nonetheless want to know what Christians think. It was revealing that, in as secularized a country as Great Britain, the primate of the Anglican Communion, Archbishop Justin Welby, was asked in 2012 to serve on a Parliamentary Commission into Banking Standards. This could be understood as reflecting a dawning recognition that the heavily utilitarian ethics that presently dominates Western societies has failed to produce convincing answers to many of the moral dilemmas facing modern financial systems.

There are, however, four significant impediments to the ability of Christians to shape today's financial sectors in positive ways. The first is one to which I have already alluded: the widespread unawareness — and, at times, outright ignorance — of finance among Christian clergy of all confessions. In an article in America magazine, the Jesuit priest and writer James Martin used some poignant examples to underline just how "at sea" are so many pastors with regard to economics in general and finance in particular:

Not long after the financial crisis in 2008, one priest confidently told me, "Capitalism is dead." I asked him if he could still go to the corner and buy a hotdog. Yes, he said. "That's capitalism," I said. "It's not dead." A few days later another priest with a Ph.D. asked me, as he read about the financial crisis, "What's a bond?"

From the other end of the finance/Christianity spectrum, it should be said that misunderstandings of Christianity aren't hard to find among those who work in or write about finance. In a Fortune article in 2014 about Pope Francis's reforms of the Holy See's finances, one financial commentator asserted, "The paramount duty of the church and its faithful is to aid those in need." Such comments reflect, at best, an inaccurate grasp of what Christianity is about. The Christian church isn't just another NGO, a gaggle of well-meaning do-gooders, or a collection of political activists. Its primary responsibility is to communicate the truth revealed in the person of Jesus Christ to everyone, and to bring all people who accept Christ's message of salvation into the fullness of the Kingdom of God. Everything else in the Christian message — including the promotion of justice in this world (which, by definition, can never be fully realized by sinful human beings) — flows from this.

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Excerpted from For God and Profit by Samuel Gregg. Copyright © 2016 Samuel Gregg. Excerpted by permission of The Crossroad Publishing Company.
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