I agree with Chris. I think interest works, though, with a publicly-owned bank because the interest returns to the community advancing the credit. There is thus no parasitic drain on the system. Also, assuming a certain percentage of defaults (which lose money into the economy), if interest is set at the same percentage as the defaults, as much will be drawn out of the economy as was lost to it in unrepaid principal, balancing the numbers out.

I don't have anything against banks charging interest; they wouldn't stay in the banking business long without it. My problem with the "velocity of money" theory for paying off a debt at compound interest is that it's still sleight of hand, rather like the goldsmiths getting away with lending the same gold many times over because they managed to come up with the gold when a customer needed it. The practical reality is that banks DON'T return 100% of their principal plus interest to the borrowers to pay back their loans. They don't spend much on hiring people to scrub their floors (which is Ed Griffin's example of the same theory). Their profits are generally pumped back into more loans. The Filipinos would probably LOVE to be hired by the banks to scrub their floors and pay off their loans, but the banks aren't hiring Filipino floor-scrubbers much. Instead they're just sitting back and collecting compound interest and investing the proceeds, while their loans proceed to bankrupt the country. A Filipino told me that 80% of the national budget now goes to servicing loans.

Another thing that concerns me is a private non-profit model in which the profits go for good community purposes. It's a wonderful, very moral model, but my concern is that this small bank might go bankrupt trying to compete with Wall Street in today's market. Wall Street gets all the benefits and holds all the cards. Small banks are going under right and left, because they're having trouble meeting capital requirements, have to pay huge sums for insurance to cover Wall Street's misdeeds, etc. etc. That's why I favor the model of a state-owned bank operating in the public interest. States have quite deep pockets, massive rainy day funds of various sorts basically sitting idle, the power to tax, etc.

Best wishes, Ellen

Post edited 3:00 pm – October 29, 2010 by wspademan

William

The problem with your theory of “immaculate interest flows” in your point #2 (which I have encountered before elsewhere) is that they are not realistic. In order for the flows to balance as you’ve described you have to make three assumptions that I am not willing to make:

1. There is no consumptive debt – all debt must lead to new production (or additional services performed)
2. No savings or any asymmetrical accumulations of the interest flows exist to clog up the system
3. Perfect flows exist between borrowers, lenders and consumers. (The corollary to this is that the interest HAS to remain in the community and must be spent into the community by the bank and/or its stakeholders.)

These points are so far out of the bounds of what we know to be true about the real world, I hesitate to spend too much time debating whether they are "logically" or theoretically possible. In the real world, some people are always going to be much more productive than other people, which will tilt the flows into some coffers more than others. Another truism is that individuals have different savings preferences, with some, especially the already-wealthy, having very high savings levels. This, too, will stymie the theoretical system by plugging the perfect flows necessary for it to truly operate.

Therefore, we could readily predict that interest flows are not ever going to balance out perfectly, not even under the most fantastical framework of Marxist command and control ever envisioned. There will always be accumulations and hitches, money will always pile up here and there but be in shortage elsewhere, and these little hitches and glitches will lead the theoretical model to break down.

For example, in this model nobody can ever:

• Borrow money for a new car (when their clunker already gets them to work)
• Borrow money for a house that is already built (in excess of its original sales price)
• Borrow money that gets lost on non-productive enterprises
• Borrow money to live on (credit cards, HELOCs, etc).
• Borrow money and spend it on a vacation outside of the community.

Because if they do, then the exponential system gains a foothold and is off and running.

But if the theory isn’t doing it for you, please reflect long and hard on this chart of 50 years of credit growth with a near-perfect exponential fit of 0.9937. If you have a meditation Mandela, take it down and out this up in its stead [click on the image to enlarge].

What does it mean that we live in a world with an all-but-perfect exponential money system? What are the implications? One is that interest based money systems will go exponential on you for some reason. That’s good enough for me (although I could bore you with models that would demonstrate why this happens).

If you want to get closer to a system that would allow your model (as constructed) to work the bank would have to exist only to give loans to productive enterprises and then collect a share of the profits, not a set amount of interest regardless of the outcome of the loan.

This way the flows of new production could be aligned with capital. Banks would then be (back into) the business of carefully assessing ventures and sharing in the risks and the profits, not simply be in the business of collecting interest and living off of spreads. But one thing you’d still have to live with is that the profits and capital will tend to accumulate in the hands of those who work harder and/or are more productive.

Regardless, as soon as you are in the business of collecting interest independent of whether the loan was used to enhance production or was used simply to boost consumption, then it is only a matter of time before you get an exponential chart that resembles the one above.

The bottom line for me is that I hold out no hope that interest based money can ever really work out in the long run, but especially not in a world of depleting resources. It is an unstable system, prone to unhealthy accumulations, vicious breakdowns, and therefore not really worth preserving.

Best,

Chris Martenson

[Moderator's Note: see Chris's website here]

Interest was historically considered evil because it makes one too reliant on state power to enforce property rights. Church leaders believed you should rather be engaged in productive work (investing in real tools) rather than hoarding money. The interest on Federal Rerve Notes doesn't exist, whereas the interest on non-debt-based money comes from someplace else in the economy..

In your example one may see the importance of circulation. $100 was created, which allowed $109 to be spent. The $9 was not created, but because the decreasing $100 circulated, money as accounting was able to account for the extra $9. In the real world Betty does not get the $9, she and everyone else except the investors who receive the $9, are impoverished by having to pay the $9 without receiving it. In the existing system interest transfers the wealth to the investors. By returning the $9 to the community the Common Good Bank deals with the problem of the interest enriching only the few, but it does not solve the problem of the divorced from reality nature of interest. In this example one can see the abstract nature of money as accounting. $100 was created $109 was accounted for. If money is abstract, i.e. accounting, then there should never be a shortage of money. The amount of money in circulation should always equal the prices of the real goods and services available. Interest is evil because it is based on a false idea about money. Money is either valuable in itself, a commodity with a value subject to market forces (and something real that can be lent at a price) and therefore no good as accounting, or it is accounting, which makes all the real goods and services commensurate so they can be exchanged. Interest is evil because it distorts our understanding of money. It makes a fiction real, it transfers the wealth which the money should only represent, automatically from those who owe more interest than they receive to those who earn more interest than they pay (about 1/10 of 1% of us). The Common Good Bank will do nothing to solve the problems of interest by obscuring the fiction. In this example the circulation of money makes it look as though the interest is somehow legitimate. The issue is that the quantity of money in circulation, including the circulation factor, should always be sufficient to allow the creation, distribution and consumption of all the goods and services people are wanting to create, distribute and consume. Creating the money as debt bearing interest makes no sense at all. In this debt based monetary system the debt that no one expects will ever be repaid (the Federal Debt) is the permanent money supply. The revenue from the income tax is always about equal to the interest owed on the national debt and the shortage of money in the economy presently is the only reason for the high unemployment. But I really only wanted to make the point that William's example does not absolve interest, rather it illustrates the totally abstract nature of money and the importance of circulation, in regulating the money supply.