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I don't think Jim Schroeder is currently subscribed
to the List, but some of our discussions have been posted there. And there
seems to be some interest in them. The following is the latest, and follows
my forwarding of Bill Ryan's recent two explanations regarding 'interest' on
recurring loans to Jim. I would invite Bill, John, Javier and others
on the List to add their comments before I 'muddy the waters'
further. Jim's comments are in red, and then blue. Mine are in maroon
italics.
Joe Thomson
----- Original Message -----
Sent: Tuesday, July 27, 2004 9:23
AM
Subject: Re: It's Not Interest,
Jim:
Again, this is going to be a colourful message
Joe as I'll respond to Bill in blue.
----- Original Message -----
Sent: Tuesday, July 27, 2004 12:51
AM
Subject: Re: It's Not Interest,
Jim:
Hi Jim,
This came as a further explanation from Bill,
again not in specific reference to what we've been discussing, nor what
you've written below, which he hasn't seen. I'll reply in
'maroon' italics below your comments on copy
1.
COPY 2:-
The point is that there are two recurrent loans, for
five dollars
each, spread six months apart, year
after year. The employees draw
incomes equal to $10
per year. But the banker and the entrepreneur
collect interest and profit in the amount of $2 per
year. It
would seem that 10 must equal 12, a paradox
or impossibility. But
it is merely a subtle though
trivial fallacy. The monetary cranks
count the same
quantity of money twice.
We think of interest and
profit as being the
"residual," after something is "paid" back. In
reality, interest and profit represent income
transferred from
employees to bankers and
entrepreneurs, in payment for financial and
entrepreneurial services.
----------------------------------------------------------------------------------
COPY
1:-
Usually the fallacy goes something like this: There
is
only ten dollars existing in the world that arose
in the first
instance entirely from a bank loan, that
must be repaid plus ten
percent interest at the end
of one year. How is it possible to
pay back the
borrowed principal without having to borrow the money
to pay the interest, thereby compounding the
underlying
debt?
The simple answer is that there are many overlapping
loans in the real world, but to disprove the rather
trivial
fallacy all we need to assume is there are
merely two loans that are
recurring.
The loan granted at T-zero is in the amount of five
dollars, payable in one year at ten percent. The
second
loan in the amount of five dollars is granted
six months later, at
T-one/half, payable one year
after that at five (should read
'ten'~Joe) percent.
At this point in time there are ten
dollars in
"circulation," constituting the credit expansion
phase of the circuit, which is paid in wages to
employees during
the course of time.(Agreed).
At the end of the
first year $5.50 is due and payable
including principal plus
interest to the banker,
which the entrepreneur pays, at the same
time
collecting fifty cents profit for himself on his
transactions with consumers.
At this point, the employees
have received income in
the amount of ten dollars, the banker has
received
interest income in the amount of fifty cents, and the
entrepreneur has received fifty cents profit.(Yes, and also at this point, the money owned by the
workers and the entrepreneur is 4.50, and the remainder owed on the
second bank loan is still $5.00, and now the bank has $.50 in bank
equity to spend back by buying goods off the entrepreneur. $5.00
has come out of circulation at this time by paying back $5.00 in
debt) But , as he specified in this
example's beginnings, the loans are 'recurring'. And this
parallels reality. The banker doesn't simply make two loans and go
out of business when both of them are repaid. He makes other
loans. It's no different than our business. We don't just
buy one load of logs, cut them, sell the lumber, take our profit, (if
there is any), and quit. The process of 'production', whether it's
of 'lumber' or 'money' is ongoing. And good thing, too, because
'consumption', definitely depends on it being so in the world we live
in. But there is a difference. I
can CHOOSE to produce and consume more. The ongoing process is
actually a CHOICE. With usury, I am no longer able to chose to
create more loans. In fact, I am FORCED to create more loans, and
this fact, FORCES me to produce and consume
more.
A third loan is granted at T-one, in
the amount of
five dollars, payable, as before, in one year at ten
percent. (Whoa, why are you now having
to introduce a third loan? Because it's
'recurring'. It gets paid off and more money is lent. It's
what bankers 'do'. Otherwise production and
consumption can't be carried on under that particular money system.
And it shouldn't be carried on under
this particular money system. Again, that's my point!This
is my point! The only way interest can be paid is by access to
more loans, but guess what? But the
process, in reality, is like that. It's 'dynamic'. Like the
chicken and the egg. Which came first? What does it matter,
as long as the process involved continues, and we continue to benefit
from it. It most definetly matters
"which came first". The moment the first loan was made in this
fashion, it CONDEMNED us to ongoing loans. Do we benefit from ever
increasing production and consumption? I thought Social Crediters
wanted a life with more leisure? I thought the idea was to
substitute "unnecessary" production for the sake of leisure? Well,
my point is that much production is unnecessary, but exists in order to
obtain loans, and thus money necessary to pay off the interest on
preceding loans. This third loan has interest too, so now
you're going to have to make a fourth loan, and then a fifth,
.....................ad infinitum They are
'recurring'. They now MUST be
recurring. because usury FORCES you
to loan more money to pay off the interest.)
Take the interest out of it. Where did the entrepreneur's 'profit'
come from? He borrowed and paid out 10 dollars, but collected 10
dollars and 50 cents back. I can solve
this problem with a user fee, and I know you think a user fee is the
same as interest, but I can prove it isn't. The difference lies in
the fact that a user fee is a one time payment, whereas interest is a
continuous funtion of time. I'll elaborate below.
At this point there are nine dollars in
the pockets
of the employees, fifty (should read 'cents'
~Joe) in the pockets of the banker,
and fifty cents in the
pocket of the entrepreneur.(At this point in
time, without access to a third loan, the banker has spent
his equity back into the system, thus leaving the entrepreneur and the
workers with $5.00, but they owe the bank $5.50 - again, there is a
shortage of money to pay the debt, so even if they paid $5.00, they
would still owe$.50. From the $5.00, $.50 would go towards
interest, and $4.50 to pay down the debt, but that leaves $.50 in debt
still unpaid. Yes, the bank equity that the bank owns comprises
the $.50 yet to be paid on the debt. However; by the TIME
the bank spends back the $.50 it has in equity, interest has accrued on
the debt remaining of $.50, so the total debt is not $.50, but $.50
+ interest, and again we do not have enough money to pay off the loan,
and I can continue this process ad infinitum, And this is where the scenario resembles, at least to
me, 'Zeno's problem'. It is an example of the type of
'classical' thinking that can be found in the first section of 'Social
Credit'. The 'deduction' you're making may be perfectly
correct in relation to what's being considered. But what's
being considered doesn't relate to what's actually happening in
'reality'. Yes, but it's the "reality" I
seek to change. I seek to change the fact that we are dependent on
more loans to pay interest on previous loans. The whole
process is 'dynamic'. It doesn't stop when one loan is paid
off. It doesn't change the analysis
that it can NEVER be stopped. New loans, and the production
necessary to bring about their existence, can NEVER stop.
Leisure will never be an option under this type of monetary
system. Never mind the great inequity it causes as well.
And in any case, if it did, under fractional reserve
banking, even with no interest, the repayment of the loan would
immobilise the goods it was issued in respect of, or other goods of the
same value, if they were still in existence. They would stay
immobilized, in relation to money, until there was a further loan.
If 'money' were the only 'effective demand' for goods,
the recall of any bank loan before the goods have been
'consumed', creates a disparity between the 'price values' of those
goods and the total 'purchasing power' still in
existence. And this is by far the larger problem than
'interest'. But the aggregate debt
would remain unchanged. A debit would be "prematurely" cancelled,
and replaced with another debit, but the credits (money) would equal the
debits (debt), and if we ever wanted to substitute production for
leisure, all we need do is pay down the debt with the money in
existence. but unless you have access to more loans, which
only exacerbate this problem, because they too have interest, I default
on the second loan and declare bankruptcy. What this
demonstrates is that usury FORCES us to loan more money. It drives
us to produce more and more, because our options are simple, economic
growth, or financial collapse.)'Bank
policy' FORCES us to produce more and more. Take 'interest'
completely out of it. Again. Then you have to find a way to
recompense the banker for his services. Service
fees. Also, banks should not be able to create money.
If you nationalize all the banks, have them issue
'interest-free' loans, and pay their costs through taxation, have you
solved the problem? In a pig's eye you have! You've changed
the name of the source of their income from one thing to another, and
that's about it. And there'll still be 'poverty in the midst of
plenty'. I'll show you exactly how the problem
has changed. I'm going to copy a certain section of what I've
explained above. Then I will add comments in blue explaining the
difference between a service fee and interest.
From the $5.00, $.50
would go towards interest, and $4.50 to pay down the debt, but that
leaves $.50 in debt still unpaid. Yes, the bank equity that the
bank owns comprises the $.50 yet to be paid on the debt.
However; by the TIME the bank spends back the $.50 it has in
equity, interest has accrued on the debt remaining of $.50, so the total
debt is not $.50, but $.50 + interest, If
the service fee were a one time payment, and no longer a function of
time, the debt would not grow any longer. Once I paid my $.50,
that's it, I no longer owe the bank any money. Now the bank has
$.50 in equity, and I owe .50, and the bank could take forever and a day
to pay that fifty cents back, because that's all I'll ever owe
them. Now I have enough money to pay back the entire debt once
that bank equity is spent back in the system. The problem is that
on any loan, the moment I make the loan, it's entered as a debit (iou,
or debt), and a credit (deposit). However, as the loan moves
forward, the debt grows, but the credit remains constant. So in
order to pay the growing debt, which is due to interest, I must loan
more money, but again, this loan has the debt growing and the credit
constant. This is why I suggest that under usury, and with regards
to the Zeno problem, the debt is achilles, and the credit is the
hare.
Let's look at what
Douglas said in regards to usury, even though I'm somewhat critical of
Douglas in regards that he downplayed, or did not understand, it's full
effect.
The debt
differs in nature from the debt created by private finance in exactly
the same way that a debt to foreigners differs from an internal debt-its
repayment actually takes money out of the country. If a rise of prices
has occurred, it is repaid twice over, once in increased prices and
again on redemption. Secondly, there is no provision in this method
of financing for the money required to pay the interest on the
debentures, which, in fact, can only be paid, if it is paid, by the
issue of fresh money to pay it, which, under existing
circumstances, comes from the same source, that is to say, the financial
system.
When listing the
causes of B in A+B you will notice that usury is mention FIRST.
1. Money profits
collected from the public (interest is profit on an
intangible).
2. Savings, i.e., mere abstention from
buying.
3. Investment of savings in new works, which create a new
cost without fresh purchasing power.
4. Difference of circuit
velocity between cost liquidation and price creation which results in
charges being carried over into prices from a previous cost accountancy
cycle. Practically all plant charges are of this nature, and all
payments for material brought in from a previous wage cycle are of the
same nature.
5. Deflation, i.e., sale of securities by banks and
recall of loans.
There are other causes of, at the moment, less
importance.
I would however
state that interest is not like any other profit. It is guaranteed
to grow over time. And other profits are not really a function of
time, but exist in it. Take for example the production of
cars. The profit on the cars is a function of the amount of cars
sold, the fact that this takes place over time does not make the profit
on cars a function of time. I can sell no cars in a period of
time, and that proves that profit does not have anything to do with
time, it has to do with the amount of cars I sell. The profit on
the cars becomes a function of how many cars I sell, not a function of
time. However, interest is a function of time. Interest
compounds over time. Interest is guaranteed to grow over
time.
I'm not sitting here
suggesting that interest free money is the panacea to our woes. In
fact, if a dividend offsets the inbalancing factor of interest, then I
favour that. What Douglas wrote about has a whole lot more in it
than just A+B. And in fact, I agree with Douglas' analysis that
the way assets are accounted for and then expensed differs from the way
loans are created, and thus, this causes periods of high inflation and
then periods where there's not enough money for the market to clear as
the debts are cancelled on the loan for the asset, but the costs of the
asset are expensed in the cost of good sold. I agree. I also
agree that we should be looking for more leisure as we become richer,
because the supply curve of labour is "backward bending" above a certain
wage rate. Also, I think individual liberties need to be
protected. I agree with many things Douglas said, and am always
willing to learn more. I think we have much more in common than it
may appear. But the usurous process of banking must be fixed
first. Then all other problems can be solved one by one.
Take care,
Jim
"and again we do
not have enough money to pay off the loan, and I can continue this
process ad infinitum,
When the second loan
comes due six months later at T-
one and one/half, the principal in
the amount of five
dollars is paid to the banker, plus fifty cents
interest, plus fifty cents profit to the
entrepreneur.
At
that point the transient period of the credit
expansion has ended
and has stabilized.
Year after year after that, the banker will
earn one
dollar in interest per year, the entrepreneur will
earn
one dollar per year in profit, and the employees
will earn ten
dollars in salaries and wages per year.
Total income per period
being earned by the community
in its totality is twelve dollars per
year, on loan
principal not exceeding ten dollars. The banker
is
supplying financial services, the entrepreneur is
supplying
entrepreneur services, and the employees
are supplying employee
services to one another in the
cooperative community, year after
year.
It is conceptually possible to devolve at this point
into some kind of "underconsumptionist" argument,
which would be
in departure from steady-state--where
either employees,
entrepreneurs or bankers do not
respectively spend all their income
for some reason
or another..(And that is
not the inbalance which people who attack usury are talking about.
We aren't talking about income and prices, although, what we state
AFFECTS income and prices. We are talking about the creation and
destruction of the money supply, and the effect of interest on this
process. The effect of interest on this is
a very minor problem, if one at all. The flaw in the accounting we're
presently using is the main problem. That can be corrected with a
change in accounting procedures as advocated by Douglas. Do that,
which IS presently very 'doable', unlike 'interest-free money', which is
NOT, and a great many of our problems will very quickly right
themselves. Tell me, and this is a question I could also ask
Don Bethune, if Canada and New Zealand were both such sterling success
stories when the central banks of both Dominions were financing
government at 'nominal' interest, why was this policy abandoned?
Why did the governments of both nations sell out to the current inane
policy of 'monetarism'? And remember it was a 'Labour' Party
government that did so in New Zealand. The equivalent
soul-mates of our NDP ~ the 'party of the people'. Now I
think I have an idea 'why'. Because both countries
'prosperity' was really largely disguised 'inflation'. And in both
Dominions it finally began to run away. (Just as Douglas had once
predicted it would, only his timing was a little premature.) And
at the same time our now developed export 'markets' began to be unable
to absorb all we HAD to produce to make our loan and tax payments.
Anti-usurers, if I can use this term, claim that because of
interest, the debt is greater than the money supply.Sure it is, but not because of
'interest'. This is because debt grows over time via
interest, but credit can only grow over time via access to more loans,
but these new loans also have interest, which in turn grows aggregate
debt. The fact is that the debt can NEVER be paid, and any
attempts to pay down debt would be financially disasterous, Unless you have, as both Canada and New Zealand (and
British Columbia, especially), once had, substantial exports into
virtually assured markets, and/or substantial foreign investment
coming
into the country. This is the 'Achilles heel' of Stephen
Harper's Conservatives. In the 'golden years' of Bank of Canada
'low interest' financing that Hellyer's been waxing on long about we had
the US wanting to tap our resources like never before, and 'invest' in
resource development on an unprecedented scale. Wonderful, for
those who see everything in relation to 'jobs, jobs,
jobs'. New Zealand had a protected market for her products in
Great Britain, and a 'monetarily' favourable balance of trade with that
country. It's no different than Klein in Alberta today, Jim.
A lot of problems that would be readily apparent very quickly can be
'masked' when there's a source of funds coming in from oil and gas
'exports'. He's just following, because he can, in the footsteps
of Ernest Manning and WAC Bennett and many other 'lucky'
others. Our current clown in BC has to pin his (false) hopes on the
2010 Olympic circus, just like Bill Bennett did on Expo 86.
whereas, we should be
allowed to decrease the money supply if we choose to live a more
leisurely life. Under the current financial system based on usury,
this can never happen.)
This could however
have nothing to do with interest
per se, in any respect that could
distinguish its
effects from not spending from income from any
source.
-
Take care, and talk to you
later,
Joe
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Re: It's Not Inter
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