I'm reading through Human Action at the moment, and am about to enter the chapter titled "The Rate of Interest".
I have a question.
In a scenario where there is a 100% commodity standard, with no fractional reserves, when money is loaned out, where does the money come from that pays back the interest? Does this money just come from somewhere else due to making the "correct" economic decisions as an entrepreneur?
I hope this isn't a dumb question.
Thanks,
Cole
Obviously! You are right.
If the entrepreneur who borrowed the money uses it properly, by allocating resources from the lesser important needs to the much greater important needs, he'd be gaining entrepreneurial profits which can help him pay the interest.
The interest will come from the profilts. Folks who have currency will trade that with the business for the product or service. The profits can then be used to pay the lender for their load plus interest. Keep in mind that the purchasing power of the currency will increase. This does not mean that interest can not be paid, it means that the lender and borrower will take into account the increasing purchase power of the currency to determine the rates of interest.
Keep in mind that previous societies using the metal standards encountered this issue when their currency purchasing power increased so much that the currency was no longer useful for certain transactions. These societies would use different metals: typically gold-large transactions, silver-medium actions and copper for small transactions. And as the purchasing power of the currency rises, that will provide people incentive to deliver more goods and services to that society and for people to mine the metals that make the currency.
Well it is like anything else, if you make a product and you make a profit you are successful..
Thanks you guys.
It seems so simple. I was just wondering if there would be some unnecessary complications.