In the previous posting on this subject, we noted that it seems to be a part of human nature that people like to be useful and engage in productive activity. The Great Reset and similar proposals, however, appear to be far more concerned with meeting people’s material needs by any means necessary, with no attention paid to whether or people become productive and useful.
Instead, those people who are productive would seem to be penalized for being productive, forced to turn over the fruits of their labor or ownership to others without receiving anything in return — a sort of “reverse usury” in which productive people are forced to give up their profit to those who have done nothing to earn it. This, in a sense, is almost logical, given the way that the different types of money are consistently misused.
Real logic, however, would dictate that the type of money determines its proper use. Money that is created by reducing consumption should be used for consumption, not production. Money that is created by promising to deliver something in the future should be used to increase production, not consumption.
This brings in usury, a concept that has been grossly distorted by the past savings assumption and misunderstanding the different types of money. Surprisingly, usury is very simple to grasp once you understand the two different types of legitimate money.
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| Even I can see it's logical. |
Usury consists of taking a profit when no profit is due. That is all. That is the sense, for instance, in the title of Vix Pervenit, Pope Benedict XIV’s encyclical “On Usury and Other Dishonest Profit.”
Obviously, if all profit is usury as some would have it, then describing usury as “dishonest profit” is redundant. No, the existence of dishonest profit necessarily implies that there can be honest profit, just as the universal prohibition against theft (e.g., “Thou shalt not steal”) necessarily implies the legitimacy of private property under natural law.
To explain, if existing money is lent for consumption, the lender is due back only the value of what he lent. Admittedly, this can get a little complicated and raises some ethical questions that we cannot get into here in any depth.
For example, suppose you lend someone $100 to buy food for his family. When he comes to repay the loan, the value of the dollar has fallen by half, that is, a loaf of bread that cost fifty cents when you loaned the money now costs a full dollar. Are you due $100 or $200?
Suppose you lend someone that same $100 for the same purpose, but the value of the dollar remains stable, i.e., a loaf of bread that cost fifty cents when you lent the money still costs fifty cents when the money is repaid. In order to lend the money, however, it cost you an additional $10 to obtain it yourself, e.g., a trip to town to go to the bank, a check cashing fee, etc. Are you due $100 or $110?
And what about opportunity cost? Suppose you were planning on using that $100 yourself in a productive project that you believe would have resulted in a profit of $25? Are you due $125? (Ethically, this one is easy: no. You cannot be compensated for what might have been, only for what is or was. It was your choice to forgo a potential profit by lending the money, and you cannot ethically have your cake and eat it, too.)
Suppose, however, that you lent someone that same $100 for a specific productive project that made a profit of $50. Asking around, you discover that people who lend money on productive projects of that sort are entitled to 10% of the profits, with 90% of the profits divided among the people who provided labor, land and technology. Are you due $105? Most certainly.
This is because there is a fundamental difference between production and consumption, even though they are two sides of the same economic equation. Consumption is just what it sounds like: something gets consumed or used up.
Production, however, is the opposite of consumption because something is brought into existence, not taken out of it. What confuses matters these days is the tendency of many people who should know better to use “investment” to describe virtually every expenditure that yields some benefit.
Strictly speaking, investment refers to financing the production of marketable goods and services — some activity intended to generate a profit in and of itself. An education is not an investment, nor is eating a meal or gambling.
Speculation is not investment, although sometimes trying to decide whether a specific project is investment or speculation can be difficult at times. For example, the Medieval scholastics considered taking a profit on a rise in the value of goods held for resale (investment in inventory) to be legitimate, as it was incidental to the purpose for which the goods were held. On the other hand, they considered holding goods in the hope of a rise in price, or — especially — trying to corner a market for a good to drive up the price to be illegitimate.
What about renting land, tools, or anything else? For renting, the rules are a little different. For example, since the item rented is not “consumed by its use,” the actual item loaned is returned. What the renter purchases, and for which he owes a fee, is the “usufruct,” which is legal language for “use.”
Nor does it matter whether the item rented is used for a productive purpose. It is the use that the renter buys, not the item. This, by the way, is why interest is not the “rent” of money. The proper use of money is to be spent, and the actual money loaned cannot be returned, except by coincidence.
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| A bill of exchange is a future savings instrument. |
All of that, however, relates to the use of existing money. The case is different for “future savings” money, that is, money created by lending that is not based on past savings.
First, such money should not be used for consumption as there has not yet been production to back the promise. This is why most consumer credit today must be regarded as pure usury, along with the bulk of modern government debt.
What about a productive project financed with future savings? Is the lender due anything? Emphatically, yes — but it might not be what most people today think.
Because no existing money is lent when money is created with future savings, a share of the profits — interest — is out of the question. Instead, because the money is created by lending, the lender is entitled to a one-time service fee based on the amount of new money created, not an ongoing periodic charge.
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| Discounting a bill of exchange |
Thus, where loans of past savings bear interest, a loan of future savings is discounted. Someone who borrows $100,000 of existing savings at 5% per year owes the lender $100,000 plus 5% of the unpaid balance as long as any part of it is outstanding.
Someone who borrows $98,000 discounted at 2% owes the lender $98,000 principal, plus a $2,000 service fee. Out of this $2,000 the lender must cover the costs of creating the money, any risk premium, and a profit. If a lender cannot cover his costs and a reasonable profit, he should not make the loan.
Mentioning the risk premium raises a final issue on this topic. Because a lender is obligated to make good on any money he creates, even if a loan is not repaid, a prudent lender will ensure that he will be able to do so. Most loans require that the borrow pledge some form of collateral, which is wealth that can be seized in the event the borrow cannot repay the loan.
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| Louis Kelso |
To the collateral is added as risk premium based on the likelihood that the loan will not be repaid. The risk premium is key because ethical lenders do not usually want the collateral, but their money. Even if collateral is sold, it rarely covers the full value of the loan, and may be difficult to liquidate in any event.
As we have seen a number of times on this blog, Louis Kelso proposed making lending more secure and less costly — and also more accessible by everyone — by combining the traditional collateralization requirement and the risk premium. He proposed using the risk premium as the one-time premium on a capital credit insurance policy.
So it should be a relatively simple matter to get rid of the usurious orientation of modern finance. It is only necessary to end the reliance on past savings as the primary source of financing for new capital formation.
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