3. The Triple-Contract

a) A Package of Three Contracts

1) An Investment Contract for a specified period of time-- Assumed to make a specified amount.

E.g., an investment of 1000 florins for one year which is assumed to make 12%, i.e., 120 florins, but no more.

2) An Insurance Contract on the amount of the Investment (To be paid for by the investor out of the profits from the Investment Contract)

E.g., Premium on this Policy: 5% of the investment, i.e., 50 florins

3) An Insurance Contract on a specified return on the Investment - 5% (To be paid for by the investor out of the profits from the Investment Contract)

E.g., Premium on the Policy guaranteeing a 5% return: 2% of the investment, i.e., 20 florins.

Both Investments and Insurance had long been recognized as legitimate financial transactions.

At the end of the year, after paying the 70 florins in premiums, the investor is guarenteed by the insurance policies the a return the 1000 florins invested (first policy) and a profit of 50 florins (second policy) on the investment of 1000 florins. So at the end of he year investor leaves the investment he has 1050 florins.

No loans are made; no interest is charged; therefore no usury is committed.

b) These three contracts could be made with three different persons

c) For convience sake, the person invested in could also be an insurance broker selling the insurance policies.

d) Even if it is never explicitly mentioned, when I give you the 1000 florins it can, by custom, be assumed that I am making an investment in you and buying two insurance policies from you, and forgoing any profit beyond the amount insured.  This triple-contract is implied whenever an investment is made (unless it is specified otherwise).


Conclusions drawn by Noonan regarding the Triple Contract:

The triple contract was accepted by the majority of leading scholastic theologians.

Begining in 1485 with its proposal by Angelus de Clavasio, its licitness had clearly become the common teaching by 1581, when the second Jesuit Congregation approved it.

It was never free from sharp individual attacks, but in practice all businessmen must have used it, and few confessors can have troubled them.

Since its effects were distinguished from those of a loan only by the designation for a business purpose of the funds it conveyed, there were no practical differences between it and a loan for business.

In 1823 when Cardinal Luzerne defended the pret-de-commerce or business loan, he said with simple accuracy that what he defended was "only the triple contract under another name."

The moralists' acceptance of the contract meant the practical exclusion of the old usury theory from business finance.

As the triple contract smacks so much of sophistry, what it achieves should be precisely noted: as Molina implied, it is merely a roundabout way of legitimating lucrum cessans.

It is a legal fiction reaching a sound practical result. One may object to the clumsy analytical device; one might even object, on substantive grounds, to lucrum cessans as an interest title. But once lucrum cessans is seen as sound in principle, there can be no substantive objection to using the triple contract formula as a cumbersome means of defining the class of business contracts where lucrum cessans is always present.

The implications for the scholastic theory of usury proper were as profound as the practical consequences were widespread.

Acceptance of the contract meant the definitive rejection of the theses

that any temporary, riskless transfer of property was usury;

This thesis had been tacitly assumed by a number of medieval authorities, although no rational defense of it had ever been attempted.

that the incidence of risk was the criterion of ownership;

This thesis had already been rejected by the scholastic acceptance of insurance

that money was sterile and could not bring a reward to itself.

This thesis had always been rejected by the scholastic theory of societas.

The triple contract established definitively

that a riskless transfer need not be usury;

it destroyed the use of risk as the index of ownership by the usury theorists; and

it made dominant for usury theory the concept of capital which partnership analysis had always implied.