"This is the story of how the modern banking system, through credit cards and installment debt, impose a form of modern slavery on the people. First they create the money from thin air. Then they loan it to you. Then you are not only responsible for paying back what you “borrowed,” but the interest charged on it as well. (And if you miss a payment, it is going to cost you double) Unfortunately, the bank didn’t create the interest…they never do. So where are you supposed to get it? Ah, there is the rub my friend. There is the rub. You have to take it from some one else’s principal.
Have you ever wondered why it is such a competitive, dog-eat dog world out there, and it seems as though everyone – from the bum on the corner to the multinational bank that he begs in front of; from the late night infomercials to the pushy brokers calling you during dinner – is trying to scratch and claw a nickel out of you? It is not because people are naturally mean, competitive money grubbers. It is because of the system, man."
This is the idea that interest can never be paid back because the banks create only the principle. Because money is created as debt, all money has interest charged on it. The problem is, you have to keep creating money just to pay off the debts. This view is what the video “Money as Debt” is based on.
They use the formula P/P + I, meaning principle divided by principle plus interest. So, the quotient is the number of people who will go bankrupt.They say the system is inherently unsustainable because bankruptcy is built into it.
However, the proponents of this view have a socialist position on interest - that usury is immoral; making money work for you is “unearned income”. This is wrong, of course, and it leads me to question the entire theory.
What is the Austrian explanation for this “no-interest-money” idea?
I’d say the story is fairly accurate, as far as it goes, but doesn’t have any relation to the conclusion that interest is bad.
Suppose we had a world that respected private property, and didn’t allow the creation of money. So we have some commodity standard, like gold. There is still an economic explanation for interest - sometimes you want to do a project that requires more gold than you have on hand, so you borrow it, with the expectation that you’ll pay it back, plus pay for the time preference - for the fact that the loaner didn’t have the money for a year or two.
Now, come back to our world, with paper currency. What’s happening is that the money in your pocket is constantly declining in value, since the banks are printing more. What’s immoral is not the interest charged, but the way they create your need for loans - by constantly taking away the value of your savings.
When you use a credit card to buy something, the credit card company in effect loans you the money by paying the seller with their money, which you then have to pay back to the credit card company. I don’t see where credit card companies are creating money out of thin air. As for interest, it’s essentially the price for borrowing someone else’s money. It’s up to you, the user of the credit card, to decide if getting the item now, instead of saving up for it, is worth the cost of the interest. The problem with consumer credit is that you have to come up with the money from somewhere else to pay the interest. If you were borrowing money for a business venture, then you would be engaging in productive pursuits that would hopefully succeed and be able to pay for the loan. However, I don’t see why one has to take it from someone else’s principal–what’s that supposed to mean? You simply have to be productive enough at your own job to pay your expenses and your loans–obviously, if you get too much debt, you’re going to have a hard time paying it off.
I would agree that money created out of debt is a bad idea, but it’s the government that’s borrowing the money, essentially, and when governments get in over their heads, they usually just repudiate the debt–they never pay it back. Governments can’t actually go bankrupt, although they can sure wreck the economy in the process of trying. But this is different from consumer credit, precisely because the government is creating the money, credit card companies and such are not creating new money.
However the system will result in a net transfer of wealth, equal to the sum of all the interest, from the borrowers to the lenders. And in our current system, yes the lenders can pull that money out of thin air using a method roughly analogous to embezzlement (Rothbard gives quite a good analogy to grain warehouses in “The Case Against the Fed”).
However, it’s also noteworthy that the Fed generally doesn’t buy haircuts from the market when it’s buying “assets”. Instead, what they tend to buy is government bonds (i.e. more debt) - which certainly doesn’t help the equation above any. It means that the amount of debt in the system and the interest payments are mounting exponentially - which is very interesting for the Fed but a pretty crappy deal for the people. The net result of this is that each year, a greater and greater percentage of all your income taxes go directly into the pockets of the shareholders of the Fed (remember, this isn’t a public institution and those shareholders take a 6% dividend).
Money supply does grow over time, currently at 12.5-15% in the US for M3. Even under gold coin standard, worldwide gold supply grew at an average of 1-2% per year over 2000+ years . . . under gold exchange standard, the number was even higher (than the 1-2% rate).
If you take out a loan with an interest rate that is higher than money supply growth rate, you’d better make sure you can make more money back on that loan than other people can . . . because in effect, you are trying to lay claim to a higher per centage of total amount of money out there.
Why is it such a competitive world out there? Because you want food, water, fuel, shelter and etc. to stay alive . . . all the same resources that other people need. If you find a niche in the middle of nowhere and make a living off resources that nobody else wants, then yes you won’t face competition. Is that “dog-eat-dog”? No. On the other hand, taking resources from other people at gun point and fatten yourself, like any socialists advocate, that would indeed be cannibalism and “dog-eat-dog.”
If you can make a living off revenues generated from goods and services that you can offer people, you don’t need a loan. On the other hand, if you have a great idea and need to borrow resources to make it into reality, until it is reality it’s a gamble. It’s up to you and the bank to do the risk assessment together, and decide if you deserve the first call on resources before all the other people demanding to borrow the same resources. If you have no great idea, and nothing to offer as current goods and services (i.e. no way of producing sufficient revenue and income), yet you desire goods and services from others, I’m not sure what you can offer in exchange other than the promise of future services to others. Does that promise you make turn you into servitude? How good is your word? Is your word your bond?
It’s important that money supply growth rate be kept constant, in keeping with long-term trend-line natural economic growth rate, so that people can have a reasonable expectation of how much money they can make in the future on the money that they borrow/lend(save) today. A constant money supply growth rate will also eliminate the current system of wishy-washy haphazard money growth rate determined by FED to the benefit of bankers who made bad risk judgement. The job of a banker is to judge risks; when they do it right, they deserve fat bonuses; on the other hand, when they make mistakes, they deserve to have their wealth stripped from them . . . perhaps even jail time just like engineers who built bridges that collapsed.
I frequently see variations on the theme that the fiat money system implies either that the money supply must necessarily increase indefinitely in order to pay the interest, or that people must go bankrupt. It is not true. The fallacious reasoning is debunked in The Creature From Jeckyl Island. The truth is hardly less disturbing than the myth. The interest paid to banks, minus the interest banks pay to depositers, is discharged through the exchange value of goods and services consumed and paid for by the bank and its shareholders. Directly or indirectly, the interest is paid by people who feed, clothe, house, and pamper the bank owners in return for money the workers must pay to the bank in nterest.
You made one major error in your reasoning. If the money in circulation rises to pay the “interest” where and how does it come into existance? It is borrowed with interest. All “money” we use in our fiat system enters into the economy this way, so how is it possible to come out ahead in the long run? It cannot. We can only keep inflating ad infinitum. Eventually the system will collapse because it must.
No mistake. The money paid in interest is spent into the economy by the bank and its shareholders. It is thus converted from money into the goods and services that the bank and its shareholders consume. Check out the comments here:
I had a long discussion with a fellow who made the same argument that you make. It’s also to be found in a popular video called “Debt as Money.” The fellow came around when I brought raccoons into the discussion.
Not necessarily true I don’t think. Legally the Fed can only pay it’s shareholders 6% dividends and no more. So 94% of the profits stay in “The Fed” as an entity until such a time as “The Fed” as an entity uses those profits to buy assets from the market via Open Market Operations. The problem is that 90% of the Fed’s Open Market Operations concern the purchase or sale of government debt… which is only really an asset from the Fed’s point of view and any money injected into the markets in this form is simply the addition of more debt and attracts more interest. Only if the Fed buys something OTHER than debt from the market (something like houses, yatchs, private jets, shares in Google), can the exponential increase in interest be avoided… the occurence of which, as long as the government keeps running debts and keeps offering bonds, is completely at the discretion of the Fed. So it is the lender, and not the borrower, who decides when principal and interest will be paid off, or alternatively when the principal and interest payments should be left to fester and grow (to the benefit of the lenders who will see their yearly dividends rise).
I was talking about regular banks, not the Fed. But I don’t think it matters. The excess profits above 6% go to the treasury, and are spent into the economy by Uncle Sam. (BTW, that number is 6% of the member banks’ equity in their Fed shares.)
I just spent a lot of time winning this argument once. Please forgive me if I bow out. Read the youtube comment thread. That’s the best I can do right now.
At the moment I’m busy watching gold, silver, and every other commodity go through the roof.
Ahhh! I didn’t realize the rest went into the treasury’s budget. That makes sense - in NZ where the central bank is public 100% of the “profits” get lumped into the government’s budget… so effectively inflation there is just another form of government taxation.
