Usury and the Increasing Money Supply

[Fox_McCloud]

Ok, first off, let me make it clear that I’m an Austrian, through and through, and that I do not believe in any intervention in the market-place.

That said, there’s a few articles I’d like to have a few of you take a look at and find the fallacies in…I know they’re incorrect, but I just can’t put a paw (erm, finger) on them.

www.monies.cc/publications/usury.htm

http://www.perfecteconomy.com/pg-why-inflation-is-a-lie.html

http://www.perfecteconomy.com/pg-whats-wrong-with-expanding-money-supply.html

Again, I’m not in support of this, at all, merely attempting to discover the flaws and fallacies in these examples.

[DanielMuffinburg]

For a hundred years we’ve been told that inflation is the enemy. That’s not the whole truth at all; and there is a reason we aren’t told the whole truth.

The whole truth of what? Anyway, I can’t follow what he’s saying. He’s unintelligible.

[Arvin]

Didn’t really read your links, but I guess they’re about interest rates and how they create debt that can’t be repaid. How people come to this conclusion, I really don’t know. But basically, interest rates are just prices to get goods now instead of the future, and hence a price for a service. Saying that interest rates can’t be paid in an economy where money circualtes is like saying that services can’t be paid for. It is obviously fallacious.

[nirgrahamUK]

hey fox, if you think this guy makes a credible argument, cant you state it for us. you will find it easier to critique (by yourself even) if you can say what his argument is.

[DanielMuffinburg]

For reasons which I will develop, I oppose this practice. I believe that banks and other lending institutions should not be lending at all; instead they should make their money by taking a share of the risk or equity in business enterprises.

Should we all grow our own food too?

My interest in this question arose from the tragedy of my own family which was made bankrupt through usury. The June 1999 issue of London Miscellany carried my article on The Sudeley Bankruptcy and its significance for today. At the time, owing to an agricultural depression, we were in debt for about half a million pounds Sterling. Unfortunately, Lloyds Bank refused to accept our collateral so that some assets could be sold on a reasonable timetable to fetch their proper value. Instead, the bank filed for bankruptcy to force immediate payment of the debt. Our creditors got next to nothing while we lost everything.

[I] How about we just outlaw bankruptcy? [<:o)]

[Fox_McCloud]

To understand why it is impossible to solve the real consequences of a currency subject to interest, we only have to return to what happens as we maintain such a circulation: as we re-borrow principal and interest paid out of the general circulation, the sum of debt perpetually and irreversibly increases so much as periodic interest on debt; and so, in servicing this perpetually multiplying debt, ever more of every dollar is dedicated to servicing debt; and ever less of every dollar can be dedicated to sustaining the commerce which must service the debt.

Thus a circulation subject to interest requires both:

1. perpetual, escalating inflation of the circulation relative to the remaining value of related assets, merely to maintain sufficient circulation to sustain the commerce which must service the debt; and/or
2. perpetual price inflation, to maintain industrial solubility against the ever escalating sums of debt that commerce must service.

In a purported economy which can only multiply debt in proportion to a circulation however, the impropriety is not simply an increase in circulation per goods and services (for which we might otherwise appropriately use the traditional definition of inflation) because it is impossible to increase the circulation with only this consequence, and it is further impossible merely to maintain the circulation with no other consequence.

First of all, we cannot really increase a circulation above the value of new or further enterprise, because the rules we comply with prevent us from borrowing into circulation more than the further enterprise the circulation is to sustain. We don’t borrow $200,000 to buy a $100,000 home any more than we borrow $50,000 to pay for a $5,000 automobile. There is no real such thing as traditional inflation then; and thus there can be no fixed linkage between a purported increase in circulation per goods and services, and inherently increasing prices.

There is one and one only systemic cause driving prices ever upward, and that cause is interest. As we maintain a circulation by re-borrowing whatever we pay against principal and interest as subsequent sums of debt increased so much as periodic interest, the perpetual artificial multiplication of debt we must endure imposes ever greater costs of servicing debt for a given circulation. We must borrow at an ever greater rate then to maintain the circulation, and as the sum of debt increases, ever more of the circulation is inherently dedicated to servicing debt, while ever less of the circulation therefore remains to sustain the commerce which must service the debt.

Since the rate of interest charged on a loan is a compound rate, the growth in the money supply and the consequent need for economic ‘growth’ increase exponentially. A dollar invested at 10% compound interest would be ‘worth’ $1.1 after one year; $1.21 after two years; $2.59 after ten years; $117.39 after fifty years; $13,780.65 after a hundred years; and around $2.473,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 after a thousand years—which is about ten trillion times the weight of the Earth in gold (at its current value). Imagine trying to collect the interest on that.

this is ultimately what I’m driving at…it seems there’s a fallacy somewhere, but, as I said, I just can’t quite put a paw on it.

The best contradiction to this, that comes to mind, is G. Edward Griffin’s explanation:

WHO CREATES THE MONEY TO PAY THE INTEREST?
One of the most perplexing questions associated with this process is “Where does the money come from to pay the interest?” If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you - and all others with similar loans - can possibly pay off your indebtedness. The amount of money put into circulation just isn’t enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for the interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a never-ending spiral leading inexorably to more and more debt.

This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the only way to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let us assume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of that represents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job. The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as “interest,” it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank’s floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and - this is the point -the money you receive is the same money that you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out the revolving door as your wages, and then back into the bank as loan repayment.

It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank, and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money. It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.

One could argue, of course, agianst G. Edward Griffin that "what if this profit from the bank wasn’t spent in the country or what if it wasn’t spent at all?

Any further thoughts are much appreciated.

[scineram]

How do I pay interest? I earn it.

[Fox_McCloud]

I’d like to hear a little bit more comprehensive answers than just that, no offense.

[protection]

Could it be that the contradiction is in your concept ?

If people lent gold, silver, or copper coins, from where would the interest come ? one would have to dig up new gold or silver to add the interest to the coin supply. In the case of bank-notes, we need to borrow further bank-notes. From where do bank-notes come ?

As population and production increases, the coin supply has to increase, too. What if we don’t find new gold, silver, copper mines ? If we use bank-notes, who should issue the new notes ? and how should these new notes enter into circulation ? through being borrowed (at interest) into existence, or through being spent into circulation(against goods and services) without interest ?

Inflation is the increase of money supply compared to the goods and services produced; interest is neither goods, nor services.

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If a country has no gold or silver in its ground, should it never advance beyond barter ?

Who came up with the idea that gold and silver are valuable and should be used as meadium of exchange ?

[DanielMuffinburg]

@protection

If people lent gold, silver, or copper coins, from where would the interest come ? one would have to dig up new gold or silver to add the interest to the coin supply.

Why? Couldn’t I pay the interest in chicken eggs?

As population and production increases, the coin supply has to increase, too.

Why?

Inflation is the increase of money supply compared to the goods and services produced

No. It’s not. You can have an increase of the money supply AND and increase in goods and services. The supply of good and services is irrelevant.

[Fox_McCloud]

As population and production increases, the coin supply has to increase, too. What if we don’t find new gold, silver, copper mines ?

No, it does not; the existing money stock will merely become more valuable (after all, money is a commodity too, it’s just a unique one), which will compensate for the increase of goods and services (ie: efficiencies) in the economy. Increasing the money supply, as Rothbard shows in “The Mystery of Banking” and “What has the Government Done To Our Money? and The Case for the 100% Gold Dollar”, confers no social benefit.

Inflation is the increase of money supply compared to the goods and services produced

That’s not correct. My 1975 Randomhouse College Dictionary defines inflation as

undue expansion or increase of the currency of the country, esp. by issuing of paper money not redeemable in specie.

If people lent gold, silver, or copper coins, from where would the interest come ?

this is ultimately what I’m getting at and attempting to get answered…I believe it’s best covered by G. Edward Griffin (please check out the quote I posted)…I’d really like some other individuals on this board to expand on it, if possible.

[nirgrahamUK]

@Fox McCloud

If people lent gold, silver, or copper coins, from where would the interest come ?

one implicit assumption here is you are assuming the lender doesnt spend money. that at the start the lender has 1000 and entrepeneur has nothing. then lender has nothing and waits for 1200 bucks to come back, but the entrepeneur will only be able to pay 1000 over the time because what else can he do theres no money to pay back the interest with…

if we start out with the lender having 1000$ and he lends to some guy to invest in his business.

and the guy starts to make repayments at interest. 100$ payments for 12 month.

could it be that the lender gets the 100$ repayments and spends a portion of it, a portion which can buy up the goods the entrepeneur has started to produce. if 200$ gets spent by the lender in the 12months, then that covers it.

[Luis_Buenaventura]

I don’t know if it would help you, but there was a previous thread that tried to deal with this supposedly Mathematically Perfected Economy- https://forum.freecapitalists.org/t/mathematically-perfected-economy/1790 . Hope it helps. [;)]

[protection]

Why ?

Yes, you could, if the lender took eggs as interest payment

Why ?

Because if population doubles but money supply remains the same, you just cut everyone’s wages in half, and doubled the price.

The supply of good and services is irrelevant.

Inflation refers to the ratio between money supply and goods and services; can hardly leave one side of the equation out of the equation. If one inreases or decrease while the other remains the same, we have inflation or deflation.

---

Money is not a commodity; it is the tangible representation of an abstract idea.

undue expansion or increase of the currency of the country, esp. by issuing of

>> paper money not redeemable in specie.

And I said what ?

If a boat-load of gold coin dumped into the country without the corresponding increase of goods and services, it is inflation also. This happened when the spanish brought back loads of gold from South America. That is why in those days advocates of hard money (a.k.a. the scum of the planet) wanted to de-monetize gold. It was too plentiful for their good. But, back to your original question, good luck. Interest is an increase in the money supply without a corresponding increase in goods and services, therefore, inflation.

confers no social benefit

Really ??!

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one implicit assumption here is you are assuming

No, the point would have been that if we use strictly coins, only, and the number of coins in existence in the country is, let us say, 100,000, from where would the 1000 coins to pay for the interest come.

Historical example, U.S. Monetary Commission report March 2, 1877

“That the disasters of the Dark Ages were caused by decreasing money and falling prices, and that the recovery therefrom and the comparative prosperity which followed the discovery of America were due to an increasing supply of the precious metals and rising prices, will not seem surprising or unreasonable when the noble functions of money are considered. Money is the great instrument of association, the very fiber of social organism, the vitalizing force of industry, the protoplasm of civilization and as essential to its existence as oxygen is to animal life. Without money civilization could not have had a beginning, and with a diminishing supply it must languish, and unless relieved finally perish.”

So, if no gold/silver we should live in the stone age, just to satisfy Rothbard philosophy ? Or, perhaps, come to our senses and use whatever is readily available for medium of exchange (and spend it into circulation, free of interest) ?

“Where there is no property there is no justice”

So, would you advocate division of land, and limitation of property size ?

[DanielMuffinburg]

@protection

Because if population doubles but money supply remains the same, you just cut everyone’s wages in half, and doubled the price.

No. You are incorrect. Not increasing the supply of gold while increasing the supply of goods and services would decrease the price of goods and services in terms of gold, thereby, increasing real wages.

@protection

Inflation refers to the ratio between money supply and goods and services; can hardly leave one side of the equation out of the equation. If one inreases or decrease while the other remains the same, we have inflation or deflation.

No. You are incorrect again. Inflation is the expansion of the money supply.

Interest is an increase in the money supply without a corresponding increase in goods and services, therefore, inflation.

I-n-c-o-r-r-e-c-t.

Lastly, is seems that, in your understanding of libertarianism, only gold and silver, and perhaps copper, would be money. However, it would be incorrect to believe that, since libertarianism advocates for the free market to determine the money.

[Fox_McCloud]

very tired, at the moment, but this is something that I came across that is against what G. Edward Griffin said:

http://www.perfecteconomy.com/pg-invalidation-of-griffin-creature-from-jekyll-island.html

I’m too tired to read it tonight, but if any of you feel like picking it apart, be my guest.

[liberty_student]

Mike Montagne from the Perfect Economy website has been roundly refuted here. He has no understanding of basic economics, and is just another computer programmer with a “perfect program” to solve the problems of rational self-interest and scarcity.

File him under kook and move on. It’s not worth your time.

[Fox_McCloud]

@liberty student

Mike Montagne from the Perfect Economy website has been roundly refuted here. He has no understanding of basic economics, and is just another computer programmer with a “perfect program” to solve the problems of rational self-interest and scarcity.

File him under kook and move on. It’s not worth your time.

Ok, I’ll look for the articles/postings on this forum debunking him; thanks for informing me.

I figured he was a kook and was wrong, I just wanted to see the reasons why (always trying gather informaiton to combat anyone possible).

[DD5]

I believe he’s describing the famous “debt virus”. It never occurs to these people that they should grasp a better understanding of basic economics before they set out to change the world (always by more socialism, of course)

They don’t see interest as simply a from of income to the capitalist in the everlasting rotating economy (ERE). They somehow imagine the Capitalist just accumulating his compounted interest never consuming a penny. At the end, it is the capitalists (or bankers) that end up with all the Gold. Or that is how the story goes.. If the capitalist does hoard on his accumulated money, then the money supply will supposingly decline and that is, of course, a disaster!

They don’t realize that this argument can be made about any business or individual who sells his services for an income and hoards his money.

[Fox_McCloud]

@DD5

I believe he’s describing the famous “debt virus”. It never occurs to these people that they should grasp a better understanding of basic economics before they set out to change the world (always by more socialism, of course)

They don’t see interest as simply a from of income to the capitalist in the everlasting rotating economy (ERE). They somehow imagine the Capitalist just accumulating his compounted interest never consuming a penny. At the end, it is the capitalists (or bankers) that end up with all the Gold. Or that is how the story goes.. If the capitalist does hoard on his accumulated money, then the money supply will supposingly decline and that is, of course, a disaster!

They don’t realize that this argument can be made about any business or individual who sells his services for an income and hoards his money.

in practice though, people never do that…what’s the point of earning income just to store it away permanently? (Rhetorical question).