It’s appropriate that we take a look at
interest today, because the way interest rates have been manipulated in modern
times is one of the biggest April Fool pranks in history. Since the invention of central banking in
1694 with the institution of the Bank of England, the public has been mulcted
by having to pay interest on the loan of “pure credit” (i.e., not based on past savings) money.
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| Adam Smith: wages to labor, rent to landlords, interest to capital owners. |
Before we get into the benefits of a
two-tiered interest rate system that would solve this problem, however, we
should know what interest is — and what it isn’t. “Interest” comes from “ownership
interest.” In classical economics,
“wages” are the return to labor, “rent” is the return to land, and “interest”
is the return to capital. Interest is
also known as “profit,” which is the residual due to the capital owner after
all costs are met.
Now for the fun part. Most people, including virtually every
economist and wannabe, confuse “money” and “capital.” Capital, however, is “productive wealth,”
wealth that produces other wealth, while money is “token wealth,” a symbol for
actual wealth, which can be either consumer or capital goods. Yes, money can also be capital in a sense if
it is used to purchase capital. In that
case, however, because money is a financial asset, it’s probably better to call
it “financial capital” to distinguish it from “true” capital.
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| Moneylending: distant second to bills and notes in commerce. |
Even in the Middle Ages interest was
legitimate IF it was charged on money used to purchase capital or
lent to purchase capital. Someone
lending out of his accumulation of savings was (and still is) entitled to a
just return on his money — assuming that the money was used to finance a
productive project that made a profit.
The market would determine what a fair division of profits would be
between lender and borrower involved in a productive project.
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| Benedict XIV: "Dudes, usury is dishonest profit, not all profit!" |
Problems came in when lenders wanted a
return in excess of the market rate or that exceeded a fair share of the
profits (they can be different, depending) or, worse, when the money was lent
for a purpose that didn’t generate a profit at all, such as to purchase food,
clothing, or shelter. That’s usury:
taking a profit when no profit is due — note the real title of Pope Benedict XIV’s 1746 discourse Vix Pervenit: “On Usury and Other DISHONEST
Profit.”
We won’t get into the legitimacy of
“interest” on a home mortgage: that’s considered “quasi-rent” and is
legitimate; a similar justification can be made for interest on consumer loans
for goods that are not “consumed by their use,” i.e., “durables” for which rent would otherwise be due. And then there’s Aquinas’s really weird
exception to charging for the use (usufruct) of money: if you borrow bags of
gold from the local moneylender to display at a wedding feast or something to
show off your wealth, you owe rent for the use of that money to the moneylender
because you didn’t consume (i.e.,
spend) the money. And you thought
today’s wedding customs, with bridezilla and such, were strange.
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| "But, George, this IS the future!" |
That covers loans out of past
savings. What about loans out of future savings, i.e., money creation based on accepting a contract to be repaid out
of future profits? There are no past
savings to lend, although we might want to discuss “renting money” for
collateral to secure the ownership interest of whoever accepts our
contract. (Like the money borrowed to
display at a party, collateral is not intended for consumption. It is therefore legitimate to charge a fee
for the use of collateral if you don’t have your own. A capital credit insurance policy fills the
collateralization requirement perfectly, and the insurance premium qualifies as
the fee for the “rent” of the collateral — i.e.,
the insurance pool.)
Properly speaking, then, a loan of
“future savings” should not involve any payment of interest. That doesn’t mean it’s free, however. Whoever accepts your contract trusts you to
meet your obligation when it falls due, and in return either gives you goods
and services now, or allows you to use his good name to obtain goods and
services now. The other party is on the
hook twice: 1) he trusts you to meet the obligation in full in the future, and
2) a dollar today is worth more than a dollar a year from now.
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| "This was worth HOW much a century ago? Shut up and take my money!" |
Thus, if you get a dollar today and
repay a dollar a year from now, you have gotten the lender off Hook Number One,
but you’ve screwed him on Hook Number Two.
That’s why commercial notes and bills almost always pass at a discount
off the face. Another merchant or a
banker will accept your $100,000 note only on condition that you get goods, or
he creates money, respectively, less than the face of the note, say, 2% (which
seems to be the favorite example in all the textbooks). Thus, you agree to repay $100,000 for a loan
of $98,000.
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| With Capital Homesteading, everybody can be in the money. |
(Of course, when the Capital
Homesteading monetary and tax reforms pass, and the increase in the value of
the currency over time offsets the time value of money, you could actually
start to see long term bills and notes passing at a substantial premium! Whoever accepted your $100,000 note would
immediately rediscount it at a premium, and the final holder in due course
would make a profit by being repaid in dollars that were worth more than what
he paid for the note.)
A lot of people call the $2,000
difference interest, and the 2% an interest rate. That is not, however, strictly speaking,
correct. It’s not interest, it’s a
discount. It’s the fee to the other
merchant or banker to compensate him for risk and the time value of money, and
is also legitimate IF (that word again) if it is used ONLY for capital
projects. You’re using the other
person’s credit or goods for your own profit, and you should expect to pay for
it.
Tomorrow we have even more fun: we look
at the specifics of a two-tier interest structure.