Re: interest v. "usury"

royls_at_telus.net
Date: 09/05/04 

Date: Sun, 05 Sep 2004 18:39:17 GMT

On Sat, 04 Sep 2004 12:05:24 -0700, The Trucker <mikcob@verizon.net>
wrote:

>royls@telus.net wrote:
>
>> On Fri, 3 Sep 2004 12:54:54 -0500, "Jim Blair" <jeb@wisc.edu> wrote:
>>
>>>"Mark Monson" <m_monson@ztech.com> wrote in message
>>>news:D0xZc.78422$0o5.2933@bignews1.bellsouth.net...
>>>>
>>>> From Economics for Helen, by Hilaire Belloc:
>>>>
>>>> Usury is the taking of any interest whatever upon an UNPRODUCTIVE loan.
>>>>
>>>> A man comes to you and says: "Lend me this piece of capital which you
>>>possess" (for
>>>> instance, a ship, and stores of food with which to feed the sailors
>>>> during
>>>the
>>>> voyage of the ship). "Using this piece of capital to transport the
>>>> surplus
>>>goods
>>>> from this country over the sea and to bring back foreign goods which we
>>>need here I
>>>> shall make a profit so large that I can exchange it for at least one
>>>hundred tons of
>>>> wheat. The voyage there and back will take a year."
>>>>
>>>> You naturally answer: "It is all very well for you to make a profit of
>>>> one
>>>hundred
>>>> tons of wheat in one year by the use of my ship and of my stores of food
>>>for sailors
>>>> who work the ship, but what about me ? I grant you ought to have part of
>>>this profit
>>>> for yourself, as you are taking all the trouble. But I ought to have
>>>> some,
>>>because
>>>> the ship and stores of food are mine; and unless I lent them to you
>>>> (since
>>>you have
>>>> none of your own) you would not be able to make that profit by trading
>>>> of
>>>which you
>>>> speak. Let us go half shares. You shall have fifty tons of wheat and I
>>>will take
>>>> fifty, out of the total profit of one hundred tons.
>>>>
>>>> The man who proposed to borrow our ship agrees. The bargain is struck,
>>>> and
>>>when the
>>>> year is over you make a fifty tons profit of wheat on your capital.
>>>>
>>>> That is the earning of interest on a productive loan.
>>
>> No, that is the earning of profit in a partnership.
>
>If the ship and provisions are "capital" as defined by Adam Smith and
>Henry George, then the return to these is interest.

The provisions are consumer goods, same as any worker's food.

>Not to be confused
>with rent paid to the use of fiat money.

The money system is a separate issue.

>>>> There is nothing morally wrong about that transaction at all. It does no
>>>one any
>>>> harm. It does not weaken the State or society, or even hurt any
>>>individual. There is
>>>> a sheer gain due to wise exchange (which is equivalent to production);
>>>everybody is
>>>> benefited - you that own the capital, the man who uses it, and all
>>>society, which
>>>> benefits by the foreign exchange. Supposing your ship and stores of food
>>>were worth
>>>> a hundred tons of wheat, then your profit of fifty tons of wheat is a
>>>profit of
>>>> fifty per cent, which is very high indeed. But you have a perfect right
>>>> to
>>>it: your
>>>> capital has produced a real increase of wealth to that extent. If your
>>>capital be
>>>> worth ten times as much, then your profit is only five per cent instead
>>>> of
>>>fifty.
>>>> But your moral right to the fifty per cent is just as great as your
>>>> moral
>>>right to
>>>> the five per cent. No one can blame you, and you are doing no harm.
>>>>
>>>> Now supposing that, instead of coming to ask you for the loan of your
>>>ship, the man
>>>> came and asked you for the loan of a sum of money which you happened to
>>>have by you
>>>> and which would be sufficient to buy and stock the ship. It is clear
>>>> that
>>>the
>>>> transaction remains exactly the same. The loan is productive. He makes a
>>>true
>>>> profit, that is, there is a real increase of wealth for the community,
>>>> and
>>>you and
>>>> he have a right to take your shares out of it you because you are the
>>>owner of the
>>>> capital, and he because he took the trouble of organising and
>>>> overlooking
>>>the
>>>> expedition.
>
>This is fine as far as it goes. But let us understand that the money was
>NOT capital and never will have been capital. When the money has been
>SPENT and we now have ownership of the actual stuff we can then talk
>about being owner(s) of capital. And if the enterprise fails then we
>lose and there is no owing of some amount of money to the person that
>had the money in the beginning. His money has been placed at 100%
>risk just as his ship and his stores had been placed at 100% risk
>and it is this actual INVESTMENT and the risk of loss that entitles
>the owner of _real_ capital to the earning of INTEREST.

So real interest only compensates risk and depreciation? This does
not account for time preference.

>>>> These are examples of profit on a productive loan.
>>
>> Right. Profit, not interest.
>
>Profit is often used to hide rent. Better to call the return by the
>correct classical name _interest_.

IMO the classical account of the payment of interest to capital is not
clear. Interest is commonly expressed as an annual rate, and the
return to capital is just a sum, which may not even be positive.

>>>> Now suppose a man to come to you if you were a baker and say: "Lend me
>>>half a dozen
>>>> loaves. My family have no bread and I cannot see my way to earning
>>>anything for a
>>>> day or two. But when I begin to earn I will get another half dozen
>>>> loaves
>>>and see
>>>> that you are not out of pocket. " Then if you were to reply: 'I will not
>>>let you
>>>> have half a dozen loaves on those terms. I will let you owe me the bread
>>>for a month
>>>> if you like, but at the end of the month you must give me back seven
>>>loaves": that
>>>> would be usury.
>
>The point being missed here is that the enforcement of this contract by
>the sovereign (the dudes with the swords) will insist that the lender
>be paid regardless of the condition of the borrower. The punishment
>could be confiscation of assets, or whatever it might take to make the
>lender whole. This is NOT interest because the lender is not at risk.
>The lender is protected from loss.

Yes, there is a problem of risk transfer here, and I believe that this
may be the source of the "usury" issue.

>> ?? Those who can pay cash have all the bread they want. Others who
>> can't pay cash also want the bread. How to allocate it, if no
>> interest may be charged?
>
>http://GreaterVoice.org/econ/credit.php
>
>If the people can show the ability to hold a job then credit should be
>extended at NO INTEREST (really at no rent).

Fine. I'll take an infinite amount of credit at no interest, please.

>This is done by a rational
>government subdepartment called the banking system.

?? "Rational"? Not.

>>>> The man is not using the loan productively: he is consuming the loaves
>>>immediately.
>>>> No more wealth is created by the act. The world is not the richer, nor
>>>> are
>>>you the
>>>> richer, nor is society in general the richer. No more wealth at all has
>>>appeared
>>>> through the transaction.
>>
>> Yes, it has: the wealth he would not have been able to produce had he
>> starved.
>
>And what if he is a no good bum (or a rich man's son) that will never
>produce any wealth at all.

The latter has collateral, but why would anyone lend to the former?

>The determination of whether or not the
>individual is worthy of credit needs to be as rational and reasonable
>as can be tolerated by the society as a whole.

Why not just as rational and reasonable as the extender of the credit
chooses to be?

>How much "finance
>charge" is the greater community willing to pay so that less than
>pristine credit history can be accepted by the financial intermediary?

Why not leave it up to the parties to the arrangement?

>>>Therefore the extra loaf that you are claiming is
>>>claimed
>>>> out of nothing. It has to come out of the wealth of the community - in
>>>this
>>>> particular case out of the wealth of the man who borrowed the loaves -
>>>instead of
>>>> coming out of an increment or excess or new wealth. That is why usury is
>>>called
>>>> "usury" - which means: "wearing down", "gradually dilapidating.
>>
>> Lots of voluntary interactions likewise result in losses to one or
>> both parties: boxing, marrying for money, gambling, buying drugs or
>> junk food, etc. Does that mean they should be forbidden by law?
>
>With a proper monetary system and a proper credit system there is no
>need to forbid usury unless it results in crime.

There is no need in any monetary and credit system.

>>>> It is clear that if the whole world practised usury and nothing but
>>>> usury,
>>>if wealth
>>>> were never lent to be used productively, but only to be consumed
>>>unproductively, and
>>>> yet were to demand interest on the unproductive transaction, then the
>>>wealth that
>>>> was lent would soon eat up all the other wealth in the community until
>>>> you
>>>came to a
>>>> situation in which there was no more to take. Everyone would be ruined
>>>except those
>>>> who lent; then these, having no more blood to suck, would die
>>>> themselves,
>>>and
>>>> society would end.
>>
>> Silliness. Society would likewise end if everyone were to devote
>> themselves to nothing but making shoes. Does that mean shoemaking
>> must be forbidden?
>
>Usury need not be forbidden. All that is necessary is to understand that
>wealth that is not at risk is not capital and not entitled to interest.

There appears to be no room in classical economics for the return to
extension of credit.

>If I make sufficient down payment on a car and insure it then the bank
>is always protected against loss and there should be no INTEREST even
>though a finance charge needs to be assessed.

Please define this "finance charge."

>>>> As in the case of the ship, it matters not in the least whether the
>>>> actual
>>>thing,
>>>> the loaves of bread, are lent, or money is lent with which to buy them.
>>>The test is
>>>> whether the loan is productive or not.
>>
>> And that is up to the parties themselves to decide.
>
>Of course it is. But there must be a lender of last resort that will
>extend credit on NO RETURN of anything but principle and the finance
>charge where the finance charge is simply the cost of keeping the
>books and repossessing the actual goods or confiscation of other
>assets.

No, there mustn't. No interest = no basis for allocation.

>This inane stupidity that there is some limit to the amount
>of MONEY is ridiculous.

?? Whoa. We part company on that one...

>Money simply keeps track of who owes who.

That's debt, not money.

>To limit economic growth by virtue of constricting money is just
>plain stupid.

To pretend that purchasing power is infinite and need not be allocated
is even stupider.

>What matters is the actual VALUE of the money as it
>sits in someone's savings account and that value is always measured
>as the amount of labor one can command with this money.

?? But labor is not uniform, and cannot be measured in that way.

>>>The intention of Usury is present
>>>when the
>>>> money is lent at interest on what the lender KNOWS will be an
>>>> unproductive
>>>purpose,
>>>> and the actual practice of usury is present when the loan, having as a
>>>fact been
>>>> used unproductively, interest is none the less demanded.
>>
>> Interest was agreed. Why shouldn't it be paid?
>
>That IMHO would be called RENT.

But that is not what economists mean by "rent."

>>>> As in every other case of right and wrong whatsoever, there is, of
>>>> course,
>>>a broad
>>>> margin in which it is very difficult to draw the line. A man guilty of
>>>usury and
>>>> trying to excuse himself might say, even in the case of food lent to a
>>>starving man:
>>>> "The loan may not look directly productive, but indirectly it was
>>>productive, for it
>>>> saved the man's life and thus later on he was able to work and produce
>>>wealth."
>>
>> Bingo.
>
>The productivity of the loan is in the eye of the lender and the borrower.
>Usury is controlled by making credit available to those who are credit
>worthy WITHOUT enriching the holders/hoarders of money.

Who gets to say who is credit worthy? How much credit do they get?

>At the same
>time the VALUE of savings must be protected from _real_ inflation (which
>is a decline in the amount of labor that money will purchase).

I thought that was increased standard of living...
 
>>>> In this margin of uncertainty we have only common sense to guide us, as
>>>in every
>>>> other similar case. We know pretty well in each particular example we
>>>> come
>>>across
>>>> whether a loan is productive of not; whether we are borrowing or lending
>>>for a
>>>> productive purpose, or for a charitable or luxurious one, or for one in
>>>every way
>>>> unproductive.
>>
>> And yet, loans that many would consider unproductive have paid off for
>> society.
>
>Examples???

Lending Ferdinand de Lesseps money to build the Suez Canal was widely
considered unproductive folly, but wasn't. Lending him money to build
the Panama Canal was widely considered an opportunity to make huge
profits, but _was_ unproductive folly.
 
>>>> Usury, then, is essentially a claim to increment, or extra wealth, which
>>>is not
>>>> there to be claimed. It is a practice which diminishes the capital
>>>> wealth
>>>of the
>>>> needy and eats it up to the profit of the lender - so that, if Usury go
>>>unchecked,
>>>> it must end in the absorption of all private property into the hands of
>>>> a
>>>few money
>>>> brokers.
>>
>> No, only the property of profligate borrowers.
>
>Run around to the other side of this little arrangement and ask yourself
>why the holder of money should be entitled to anything at all other than
>the preservation of the value of his money less a service charge for
>preserving said value.

Time preference and compensation for risk.

>If I had a horde of peaches or gold or
>rice then I would need to protect this hoard from the roaches and the
>pirates. That is a cost. There is a COST to hoarding stuff and it is
>the protection of the hoard. People should PAY some small derisory fee
>for this service and their control over credit should be nil.

Whoa. Those are two entirely different and seemingly unrelated
propositions. I can agree with the first. But how can they have
control of their wealth and not have control over whether and to whom
and under what terms they will lend it?

>If they
>wish to earn interest they will need to actually INVEST the dough.

Facilitating present consumption in return for increased future
purchasing power is a service. Call the return to this service
whatever you like, there is nothing wrong with it.

-- Roy L

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