Jon Irenicus:No, it's a price control on loanable funds.
Fair enough. Anyway, it is a price control.
Jon Irenicus:Money is both a good and a medium of exchange.
Maybe it is a question of definition. I you assume fiat is not money, you are right.
Jon Irenicus:There is a price control on the rate at which savings may be lent.
You are correct.
Jon Irenicus:More like instability, which is precisely what this will cause. There's no economics behind this, just wishful thinking.
This is what this discussion is about. It is more about systems theory than about economics. Systems theory and economics are conflicting on some points. Economic statements do not always make sense in the real world.
Jon Irenicus:I think you have no idea what you're talking about.
If everybody agrees on this subject, we did not have a discussion.
Jon Irenicus:Rubbish. No Austrian assumes this. And it is totalitarianism, even if it is a majority imposing its will on a minority.
You may call it totalitarianism. This is ok with me. But we disagree.
Jon Irenicus:Assertion/nonsense.
For me it is difficult to argue with that.
Jon Irenicus:You say you've read Austrian works, yet I do not see it.
I said I have some understanding in general and I have read some articles, but I never said I have read complete books.
Indeed. Especially considering that most of modern economics is built off the idea that assumptions need not be true, which is a major beef Austrians have with it.
Sorry if I am blunt, but generally ask before asserting something if you're not sure about it. Rothbard definitely thought fiat money is possible.
Indeed, but it's a complex topic, and one that requires some basic knowledge of the major Austrian tomes. Have you at least read George Reisman's article on the matter of fiat money and wealth inequalities?
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
Jon Irenicus: This is what this discussion is about. It is more about systems theory than about economics. Systems theory and economics are conflicting on some points. Economic statements do not always make sense in the real world. Indeed. Especially considering that most of modern economics is built off the idea that assumptions need not be true, which is a major beef Austrians have with it. If everybody agrees on this subject, we did not have a discussion. Sorry if I am blunt, but generally ask before asserting something if you're not sure about it. Rothbard definitely thought fiat money is possible. For me it is difficult to argue with that. Indeed, but it's a complex topic, and one that requires some basic knowledge of the major Austrian tomes. Have you at least read George Reisman's article on the matter of fiat money and wealth inequalities? -Jon
I was just reading some other works.
I will try to show some understanding of the Austrian view:
Why should you surrender you work or your goods and services for money that is not a commodity and is having no real value at all?
The answer lies in the trust you have that you can get something back for this money.
When trusting this money, your work and goods and services can be stolen from you, by inflation.
Therefore you should never trust fiat money. Therefore natural money is just money and should not be a store of value. If you want to store value, and you choose not to lend the money at 0% avoiding the tax, and you choose not to buy stock, you are free to buy gold.
This is the bit that throws me off. Why should it be taxed? Price controls are not known to provide stability of any sort, so why is such necessary?
Jon Irenicus: Therefore you should never trust fiat money. Therefore natural money is just money and should not be a store of value. If you want to store value, and you choose not to lend the money at 0% avoiding the tax, and you choose not to buy stock, you are free to buy gold. This is the bit that throws me off. Why should it be taxed? Price controls are not known to provide stability of any sort, so why is such necessary? -Jon
First of all, the tax is not a price control, but the forbiddenness of interest is the price control.
If you are with me, that money may not need to be a commodity, you see it is not a real price control in the sense of a price control on goods or services.
It is a limit on lending money. When the price is fixed, the amount of money available for lending, is also very inflexible. Only the highest quality borrowers will qualify for a loan. If there is more demand for money, only the best borrowers will get the money.
Why should this be?
If you are with me that boom and bust creates instability in the system, you see the point more clearly.
There will be no overspending, no overborrowing, therefore a stable growing of capital and wealth. For people it now becomes clear that government intervention is not needed.
I hope this explanation is clear enough.
Yeah, that's correct.
But it isn't a price control on money... it's a price control on loanable funds. Anything can be loaned.
Indeed, but it first needs to be shown that lending money at an interest rate is the cause of the boom/bust cycle, given that all interest rates do is show to what extent present as opposed to future consumption is generally preferred. It's the fed's setting the interest rate too low (i.e. a price control) that misleads individuals into thinking there are in fact more loanable funds than there really are, leading them to engage in unsustainable investments in higher order goods and durable consumer's goods, that cannot be completed when it is revealed that funds were indeed inadequate.
But as a price control on loanable funds there will most certainly be over-borrowing, resulting in scarcity.
Jon Irenicus:But it isn't a price control on money... it's a price control on loanable funds. Anything can be loaned.
If you borrow a car and pay money for it, I do not see the problem. The car was already in existence and can not be created out of thin air.
Jon Irenicus:Indeed, but it first needs to be shown that lending money at an interest rate is the cause of the boom/bust cycle, given that all interest rates do is show to what extent present as opposed to future consumption is generally preferred. It's the fed's setting the interest rate too low (i.e. a price control) that misleads individuals into thinking there are in fact more loanable funds than there really are, leading them to engage in unsustainable investments in higher order goods and durable consumer's goods, that cannot be completed when it is revealed that funds were indeed inadequate.
I have some problems with the theory of preferring present consumption above future consumption. This sounds quite odd when you apply this on the real world: Would I prefer having two new cars now to having one new car now and another new car in five years time? Would I prefer 365 loafs of bread today in stead of one loaf of bread every day of the year?If you analyze this strange economic theory, it is based upon the assumption of interest on money.
Low interest rates can only result in unsustainable investment, if there is supply of money, which is not there if you have natural money.
Jon Irenicus:But as a price control on loanable funds there will most certainly be over-borrowing, resulting in scarcity.
If the money is not available, you cannot borrow it, because supply is very inflexible. The market mechanism still works here, only selecting the highest quality borrowers in stead of setting a price.
No, I mean you can lend anything out, e.g. a car, and expect more (e.g. the car plus some corn) in repayment for what you lent out, given that you were deprived from using the good during the time it was lent out. Money is not unique in this regard, and in the case of commodity money there is no difference at all.
I have some problems with the theory of preferring present consumption above future consumption. This sounds quite odd when you apply this on the real world: Would I prefer having two new cars now to having one new car now and another new car in five years time? Would I prefer 365 loafs of bread today in stead of one loaf of bread every day of the year?
No, it applies strictly to the same unit of a homogeneous good (i.e. one of identical serviceability), i.e. one car (of the same serviceability) now as opposed to one car (of the same serviceability) in the future.
How does that work, exactly? Low interest rates mean nothing if they reflect time preferences. It is only if they are beneath the equilibrium level by government mandate that they become problematic, like any price under a control.
Yes, but it's still over-borrowing, at least until the supply of loanable funds runs dry.
There's nothing wrong with the charging of interest. If there are only two people in the world, you and I, and I loan you $10 with 5% interest, you can work for me and make enough money to pay me back all of the loan.
Political Atheists Blog
No money is created through charging interest by itself.
This misconception arises because you assume the current fractional-reserve banking with on-demand deposits. But consider other combos:
Current banking (fractional-reserve + on-demand deposits) creates "virtual" money because all participants assume they can withdraw the money at any given moment. The "virtual" money migrates when payments/transfers are made. Real money creation occurs when the central bank supplies the private banks with the "missing" liquidities in order to pay back those deposits.
Jon Irenicus:No, I mean you can lend anything out, e.g. a car, and expect more (e.g. the car plus some corn) in repayment for what you lent out, given that you were deprived from using the good during the time it was lent out.
As I have said before, capital should earn interest. That is only natural. A car is a form of capital.
Jon Irenicus:Money is not unique in this regard, and in the case of commodity money there is no difference at all.
If money is a commodity, it is a form of capital. But there is a twist. If you assume money to be a commodity, you assume money to be capital. As we have seen, money can be anything, even only an agreement. Natural money should therefore not be capital.
Jon Irenicus:No, it applies strictly to the same unit of a homogeneous good (i.e. one of identical serviceability), i.e. one car (of the same serviceability) now as opposed to one car (of the same serviceability) in the future.
Might be. But not being an economist, and using the train every day, I do not need a car now but in 5 years. Then I would like to travel to Spain by car. I rather would like to have a car in 5 years. So in the real world, there are some problems with this assumption.
Jon Irenicus:How does that work, exactly? Low interest rates mean nothing if they reflect time preferences. It is only if they are beneath the equilibrium level by government mandate that they become problematic, like any price under a control.
I am not an economist, so I might go wrong here. In plain English I see it working like this: there is only a limited supply at a given price. So therefore all would be borrowers should do a beauty contest, and only the best will get the loan. This is a market functioning at a fixed price, how strange this may seem. It is a cap on the risk people will take. Maybe I am missing something, but it does make sense to me.
If there is a large supply of money to be lent, it may be possible that the price of money for the best borrowers goes negative. This would not be a problem as far as I can think of. Still, if there are no enough qualified borrowers, some of the money to be lent will not be used. The lender then may choose to invest in stocks.
Jon Irenicus:Yes, but it's still over-borrowing, at least until the supply of loanable funds runs dry.
Over-borrowing is in the eye of the beholder if you do not specify it. For me over-borrowing exists only when lenders cannot pay back the loans. I think this is not the case in general, because otherwise the loans would not be given anyway.
There is always a "bad luck" element in it, for example if collateral gets destroyed. So even in natural money systems there is some risk for loans not being returned. Maybe this can be insured, but here the matter gets tricky, because insurance implies a risk premium which should be backed by capital and not by money. And in this case capital is probably money. So I see a problem here. At this moment, capital and money are the samen. I never said the system was perfect in the first place.
Maybe the solution is to never insure loans.
krazy kaju:There's nothing wrong with the charging of interest. If there are only two people in the world, you and I, and I loan you $10 with 5% interest, you can work for me and make enough money to pay me back all of the loan.
At least there is no moral problem.
But there is a practical problem in my opinion: to make matters simple, you charge the outragious amount of 100% interest a day:Day 1: Money supply $10, debt $10. So the employer says, in a generous mood, I give you all the money I have for your work, being $10.Day 2: Money supply $10, debt $20. So the employer says, in a generous mood, I give you all the money I have for your work, being $10.Day 3: Money supply $10, debt $30. So the employer says, in a generous mood, I give you all the money I have for your work, being $10.Of course this is an utterly ridiculous example, but my observation is: there is a money world and a world of goods and services. Maybe, if the economy is doing well, prices of goods and services are going down, and the employee can buy more for $10, but still money wise there is a problem. At some point the employer must see that the employee will never pay back his debt. Because the employee is the only customer needing the product, the factory closes down and employee gets fired. The capital is destroyed.
My conclusion: you must manage the money system in such a way that capital is not destroyed. That is far more efficient.
niphtrique:Sorry for my lousy calculation and lack of explanation:Day 1: Money supply $10, debt $10. So the employer says, in a generous mood, I give you all the money I have for your work, being $10. But $ 10 debt still remains.Day 2: Money supply $10, debt $20. Because the employee needs $10 to live through the day, he again loans $10. The employer is still generous and giving all the money he has.Day 3: Money supply $10, debt $30.
I think I agree with Austrians on many points, or at least the following:- capital should earn interest- government should leave markets alone- fractional reserve banking is not a wise thing
The only difference is: Should money earn interest? And therefore: is money the same as capital?
<B>Systems theory perspective</B>Try to imagine that the economy is a system, just like the human body. All parts of the system need each other to operateproperly. Try to imagine that money flowing in the economy is like blood flowing in the body. In this case it would notmake sense that a kidney is saying to the liver: This is my blood, you may borrow it with interest. It also does not makesense for parts of the body to hoard blood because there might be no blood flowing in the future. Strange enough, economists dothink this makes sense.Systems theory conflicts with economics. Charging interest makes sense to economists, but interest presses the weakestspots in the economy the hardest. This is because the weakest borrowers have to pay the highest interest rates. If engineers build planes like that, they would fall from the sky. Therefore according to systems theory, the economy could be far more efficient when the weakest spots are not pressed, capital would only be build and not be destroyed, recessionsand depressions did not exist and full employment is a constant state of the economy.
Example of natural money system:
http://www.newciv.org/nl/newslog.php/_v105/__show_article/_a000105-000002.htm
Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example? Wörgl's Stamp Scrip – The Threat of a Good Example? 12 comments 26 Jun 2002 @ 01:50, by Martin Oliver
On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job, and 200 families were penniless.
The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly any money with which to carry them out. These included repaving the roads, streetlighting, extending water distribution across the whole town, and planting trees along the streets.
Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as 'stamp scrip'. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid, and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.
Because nobody wanted to pay what was effectively a hoarding fee, everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. This offer was rarely taken up though.
Of all the business in town, only the railway station and the post office refused to accept the local money. When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cashflow they would receive from the trees.
The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the only Austrian town to achieve full employment.
Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the 'miracle of Wörgl'. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.
At this point, the central bank panicked, and decided to assert its monopoly rights by banning complimentary currencies. The people unsuccessfully sued the bank, and later lost in the Austrian Supreme Court. It then became a criminal offence to issue 'emergency currency'.
Unterguggenberger was opposed to both communism and fascism, championing instead what he referred to as 'economic freedom'. Therefore, it was deeply ironic that the Wörgl experiment was first branded 'craziness' by the monetary authorities, then a Communist idea, and some years later as a fascist one.
The town went back to 30% unemployment. In 1934, social unrest exploded across Austria. In 1938, when Hitler annexed Austria, he was welcomed by many people as their economic and political saviour.
The 1920's had already seen a scrip currency called the 'wara' in the German town of Schwanenkirchen. This saved the town's economy and kept a coal mine operating. It started circulating more widely, and became part of a movement called 'Freiwirtschaft' (Free Economy), based on the ideas of the economist Silvio Gesell.
Central to Gesell's ideas was the use of a hoarding fee of the kind used in Wörgl (technically known as 'demurrage'). The soundness of such an idea was affirmed by John Maynard Keynes in his 1936 work 'General Theory of Employment, Interest and Money'.
Perhaps the most groundbreaking feature of demurrage is that it is intrinsically anti-inflationary. Whereas conventional currencies are progressively devalued by interest, anti-inflationary money steadily increases in value. As each monthly stamp is added, the value of the note effectively increases by the stamp amount. This is technically equivalent to a negative interest rate.
The present short-term focus of investments, and the consequent lack of long-term vision are exacerbated by interest-driven currency devaluation that, from a profit perspective, reduces the appeal of longer-timescale projects. The use of a demurrage currency gives an edge to those working for sustainability, because a rate of return is achieved SIMPLY BY LENDING OUT MONEY. When money is repaid (remember these are non-interest currencies), it will have increased in value owing to the money saved by having avoided paying the monthly demurrage fees. This has the potential to enable investment in highly benefical but economically marginal activities such as earth repair.
A recommended book that covers scrip currencies and more fully explains this 'negative interest' principle is Bernard Lietaer's 'The Future of Money' (see Resources). The following three sites also cover demurrage:
In case the ending of the Wörgl story was disempowering, I'd like to add that the number of complimentary currencies around the world is undergoing an exponential growth. As of 2000, there were more than 2,500 in operation, and I expect that the number is still fast-growing. Local stamp scrip currencies can only work in a country firmly committed to decentralising power.
niphtrique: Example of natural money system: http://www.newciv.org/nl/newslog.php/_v105/__show_article/_a000105-000002.htm Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?
Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?
What kind of imbecile would mistake Wörgl Stamp Scrips (WSSs) for sound money. You cannot redeem any of the 40,000 Austrian Schillings backing the currency. You have no way to be sure that the managers of this currency are not inflating the supply of WSSs. In fact the whole idea of stamping each note every month smells like deliberate inflation, only they had absolute control each month so that it didn't suddenly soar. I take it, if you find a WSS in the trash bin in the month of March, with a stamp from January, but not from February, the WSG is worthless? So you could print more WSSs than your backing the moment you realize how many of the old WSSs the weren't restamped.
Reading the story from Wörgl I can readily imagine why Mr. Keynes loved the idea: No one hoarding money! It does all the things he loved so much, i.e. destroy savings, destroy the real value of each WSS (the once invalid at least), and transfer wealth from savers to the town's treasury wherefrom the mayor and the town counsel could use all the extracted buying power to run soup kitchens and build brigdes and pyramids. It does all of this without inflation. How wonderful! Also, the story enfolds from 1932 to 1934 right? Hardly enough to notice the long term effects of total government malinvestment or a bubble. People maintain a cash-balance for a deliberate reason, read Mises; who are anyone to take this choice away from them?
You don't know what money is, you don't know what real wealth is.
niphtrique:Try to imagine that the economy is a system, just like the human body. All parts of the system need each other to operateproperly. Try to imagine that money flowing in the economy is like blood flowing in the body. In this case it would notmake sense that a kidney is saying to the liver: This is my blood, you may borrow it with interest. It also does not makesense for parts of the body to hoard blood because there might be no blood flowing in the future. Strange enough, economists dothink this makes sense.Systems theory conflicts with economics. Charging interest makes sense to economists, but interest presses the weakestspots in the economy the hardest. This is because the weakest borrowers have to pay the highest interest rates. If engineers build planes like that, they would fall from the sky. Therefore according to systems theory, the economy could be far more efficient when the weakest spots are not pressed, capital would only be build and not be destroyed, recessionsand depressions did not exist and full employment is a constant state of the economy.
Could your straw man get any bigger?
It is not blood qua blood that matters and you know this perfectly well. It is the function of blood that matters, i.e. to transport blood cells (red blood cells) transporting oxygen to all the body's muscles (e.g. organs) and (white blood cells) to compat infections. And so we gather blood is a medium of exchange whose value (function) can be inflated/deflated due to different natural or unnatural stimuli.
corpus delicti:It is not blood qua blood that matters and you know this perfectly well. It is the function of blood that matters, i.e. to transport blood cells (red blood cells) transporting oxygen to all the body's muscles (e.g. organs) and (white blood cells) to compat infections. And so we gather blood is a medium of exchange whose value (function) can be inflated/deflated due to different natural or unnatural stimuli.
I know this perfectly well. It is not important what blood actually is, or what money actually is, but what it actually does.
Of course I was not expecting anyone to agree with me, so that is fine with me.
I only hope you can see the reasoning behind the theory. After all, knowledge is power.
corpus delicti:What kind of imbecile would mistake Wörgl Stamp Scrips (WSSs) for sound money. You cannot redeem any of the 40,000 Austrian Schillings backing the currency. You have no way to be sure that the managers of this currency are not inflating the supply of WSSs. In fact the whole idea of stamping each note every month smells like deliberate inflation, only they had absolute control each month so that it didn't suddenly soar. I take it, if you find a WSS in the trash bin in the month of March, with a stamp from January, but not from February, the WSG is worthless? So you could print more WSSs than your backing the moment you realize how many of the old WSSs the weren't restamped.
I will not say it is sound money like gold. There are of course options to insure the managers of this currency are not inflating the supply of WSSs. I also stated that when you make loans, you should make provisions to ensure the value of the loan. Apart from you not liking the idea, we do agree.
I will not say it is sound money like gold. There are of course options to insure the managers of this currency are not inflating the supply of WSSs. I also stated that when you make loans, you should make provisions to ensure the value of the loan. Apart from you not liking the idea, we do agree that this is not a store of value.
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niphtrique: corpus delicti:It is not blood qua blood that matters and you know this perfectly well. It is the function of blood that matters, i.e. to transport blood cells (red blood cells) transporting oxygen to all the body's muscles (e.g. organs) and (white blood cells) to compat infections. And so we gather blood is a medium of exchange whose value (function) can be inflated/deflated due to different natural or unnatural stimuli. I know this perfectly well. It is not important what blood actually is, or what money actually is, but what it actually does. Of course I was not expecting anyone to agree with me, so that is fine with me. I only hope you can see the reasoning behind the theory. After all, knowledge is power.
You are dodging the issue. You said it yourself, what is important is what it does! Blood does something, it is a medium of exchange. Not amongst humans, but amongst muscles. What is exchanged is oxygen. Oxygen enables glycosis in order to provide a muscle with energi. No energy, no action. Muscles can store some of the energy in the form of glycogen. What you are proposing is a Natural Blood Type were the muscle must pay some of its stored energy for the privilege of receiving oxygen, because apparently it is hoarding too much energy for you liking.
For a person maintaining a cash balance is to store, not energy, but to provide the person with means. No means, no action. You are proposing a hoarding fee on this person. What matters is not his personal means. Instead you want to siphon off some of his stored means, so that it can be borrowed to someone, who lacks the means. This is not a bad thing you say! Because while someone else is borrowing the means, the owner does not need to pay the hoarding fee, and so he profits when his means are returned. Isn't this exactly what you propose? If not, why not?
niphtrique: I will not say it is sound money like gold. There are of course options to insure the managers of this currency are not inflating the supply of WSSs. I also stated that when you make loans, you should make provisions to ensure the value of the loan. Apart from you not liking the idea, we do agree that this is not a store of value.
The only way to ensure non-inflation is redeemability. For a monetary system of Natural Money to work you must first assume: Non-redeemability. Otherwise no one would hold Natural Money.
Hence, we can infer that Natural Money would inherently be prone to inflation. Unless of course if we assume pure benevolent monetary managers.
Why shouldn't it be?
No, there aren't. The assumption is, that a homogeneous good is preferred now as opposed to later. If my needs shift, the good is no longer homogeneous, precisely because it is no longer of equal serviceability.
For the last time, loanable funds are not money, even if they are represented by it. A supply at a fixed price is still a supply, though. Interest is not the price of money.
You mean borrowers. Then the lender erred in his assumption and will be penalized with losses.
Or maybe the solution is to simply allow people to trade freely.
Money is a commodity only as long as it can be used as it is. Paper money isn't a commodity, since the face value is a lot higher than the possible use of its paper.
But gold is a commodity and gold money (or paper money 100% redeemable in gold) would make a good currency especially because one barters gold for other commodities.
Right, but it's always an economic good, which was my point.
corpus delicti:The only way to ensure non-inflation is redeemability. For a monetary system of Natural Money to work you must first assume: Non-redeemability. Otherwise no one would hold Natural Money. Hence, we can infer that Natural Money would inherently be prone to inflation. Unless of course if we assume pure benevolent monetary managers.
In the example the natural money is redeemable but then they had to pay an extra fee which is just a bit higher than the tax.
The money supply did not change so there was zero inflation. There was no strong incentive for printing extra units, because the money was coming back to the city in spades.
Benevolent monetary managers is the weak spot of the system. This system works only when people know what they are doing. At least the system is simple to oversee because there is no financial engineering. If you handle all the money in bank accounts, it is becoming even more simple to check.
corpus delicti:You are dodging the issue. You said it yourself, what is important is what it does! Blood does something, it is a medium of exchange. Not amongst humans, but amongst muscles. What is exchanged is oxygen. Oxygen enables glycosis in order to provide a muscle with energi. No energy, no action. Muscles can store some of the energy in the form of glycogen. What you are proposing is a Natural Blood Type were the muscle must pay some of its stored energy for the privilege of receiving oxygen, because apparently it is hoarding too much energy for you liking. For a person maintaining a cash balance is to store, not energy, but to provide the person with means. No means, no action. You are proposing a hoarding fee on this person. What matters is not his personal means. Instead you want to siphon off some of his stored means, so that it can be borrowed to someone, who lacks the means. This is not a bad thing you say! Because while someone else is borrowing the means, the owner does not need to pay the hoarding fee, and so he profits when his means are returned. Isn't this exactly what you propose? If not, why not?
The blood example was just an analogy to make a point. It is not to borrow to someone who lacks the means. Only the best borrowers are getting money at 0 interest. But because the money is flowing in the system, people become enabled to participate in the economy. The hoarding fee serves no other purpose than to circulate the money so everybody is enabled to be engaged in economic activity.
Jon Irenicus:If money is a commodity, it is a form of capital. But there is a twist. If you assume money to be a commodity, you assume money to be capital. As we have seen, money can be anything, even only an agreement. Natural money should therefore not be capital.Why shouldn't it be?
If people choose natural money, they choose for a concept, which includes money should not be capital.
Jon Irenicus:For the last time, loanable funds are not money, even if they are represented by it. A supply at a fixed price is still a supply, though. Interest is not the price of money.
Please don't be annoyed.
Jon Irenicus:Over-borrowing is in the eye of the beholder if you do not specify it. For me over-borrowing exists only when lenders cannot pay back the loans. I think this is not the case in general, because otherwise the loans would not be given anyway. You mean borrowers. Then the lender erred in his assumption and will be penalized with losses.
Therefore a lender is obliged to check the borrowers and pick the best.
I'm not annoyed. I just feel that I am not getting something through to you, namely that interest has nothing to do with money. BTW, money cannot but be a good, whatever form it takes. There's no avoiding it. And as far as I am concerned, natural money will be any form of money chosen by the market.
Now, another thing: you complain that the least credible borrowers are penalized on the market by higher interest rates but you also do not want these individuals accessing the loanable funds market. What on earth, then, is the point of an interest rate of zero? Untrustworthy (not necessarily poor) individuals will face higher interest rates, deterring them from gaining access to these funds. So from this POV, an interest rate of zero seems unsound.
I will answer the loanable funds question now, because I think I understand now what you mean. When you bring money to the bank, and you make a time deposit, it is not money to you anymore. It is capital and therefore it should pay interest.
I will try to be practical and try not to get into a theoretical twilight zone.
First of all, avoiding the money tax is a kind of interest on this capital. Secondly, when someone is borrowing the money, the loanable fund becomes money again, and therefore should not be charged with interest. As you cannot create interest out of thin air, it should be this way.
Jon Irenicus:I'm not annoyed. I just feel that I am not getting something through to you, namely that interest has nothing to do with money.
To me, interest is a return on capital. Maybe we do agree on that.
Jon Irenicus:BTW, money cannot but be a good, whatever form it takes.
Maybe it is just a question of definition. Personally, I do not find fiat money to be a good, as it is backed by nothing. Fiat money is just a concept. Fiat money is an evolution of markets interacting with government choices or something like that. The money selection process is a process that not only involves markets but also choices that humans make deliberately.
Jon Irenicus:There's no avoiding it. And as far as I am concerned, natural money will be any form of money chosen by the market.
To me it is a process of human thinking combined with market processes. If a human invents a money that is rejected by the market, it is a failure anyway.
Jon Irenicus:Now, another thing: you complain that the least credible borrowers are penalized on the market by higher interest rates but you also do not want these individuals accessing the loanable funds market.
I do not complain, but only observe the fact that it destabilising the system, if you see it like a system like I try to do.
Jon Irenicus:What on earth, then, is the point of an interest rate of zero? Untrustworthy (not necessarily poor) individuals will face higher interest rates, deterring them from gaining access to these funds. So from this POV, an interest rate of zero seems unsound.
To me it zero interest is very sound, because an untrustworthy individual is not deterred by higher interest rates.
But you're not being sufficiently subjectivist. Anything can be a good, provided it is seen by an economic agent as a means to an end. Even fiat money conforms to this definition, even if it is forced upon individuals and other monies outlawed. At any rate, economic analysis pertaining to money is an extension of the analysis of goods and can be applied to fiat money too, even if it's a poor form of money.
I'd replace "invents" with "proposes" but otherwise I agree.
Perhaps in the present, what with moral hazard and all, institutionalized by central banking, but ordinarily if a lender judges poorly, they lose their money and if they do so repeatedly they're ousted from the market, and in this sense it is self-correcting. An interest rate of zero is what'd be inherently destabilizing as it allows no room for adjusting the rate to the borrower's credit-worthiness.
Then they certainly will not be deterred by one of zero.
niphtrique:To me zero interest is very sound, because an untrustworthy individual is not deterred by higher interest rates.
Maybe the most fundamental cause for moral hazard to exist, is the existence of interest on money. This is just my point of view.
Natural money was not invented by Silvio Gesell. It existed for thousands of years. I have some interesting stories to tell, which might show how natural money can be. This is also added to the naturalmoney site today.
Using the concept of natural money, I will try to explain some historic facts, which puzzled historians for a long time. Some intriguing historic questions are:1. How could Western Europe become so powerful during the middle ages? They were backwards at the beginning, annihilated by Black Death, and still came out on top.2. How could the Egyptians build pyramids? This required a great wealth and a great organisation.3. Why did Rome collapse? They had the greatest civilisation and military organisation at the time.Although the explanation is speculative, and not proven, there is some logic in it.The rise of EuropeWhen the Roman Empire collapsed, Europe fell back into a dark period, called the middle ages. Money ceased to exist, because gold and silver disappeared out of circulation. Europe was very fragmented and in general there was no central power structure. Local lords issued stamp scrip currencies. Those currencies were valid for a limited period of time. After that period, the people holding the currency, had to return it to the ruler and a tax was levied. If you had 10 units, you got 9 new units in return. Those new units were also valid for a limited period of time. The actual value of the unit decreased slowly during the period and was the lowest just before the tax was due. People holding the currency, were inclined to spend it.If we assume this was a kind of Worgl situation, we may assume that Europe was building capital at maximum speed using full employment. Europe had to start at a very low level. Also, the local lords waged many wars that were destroying capital. But wealth steadily increased, faster than on any other part of the planet. When the crusades started, there was so much wealth to spend on a useless war, that Europeans could battle the Muslims for centuries on their own ground, keeping long supply lines, while the conquered land was not profitable. After that, Black Death annihilated about one third of the population, but only one century later, the exploration and exploitation of the rest of the world by Europe had begun.The building of the pyramidsIn the bible there is a story about a pharaoh having a bad dream about seven fat cows being eaten by seven lean cows. This dream was explained to the pharaoh. He was told seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store food on a large scale. They built storehouses for food. Farmers bringing in the food, got receipts for corn. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for corn. It did not take long before the receipts where generally accepted as money. Because of the degradation of the corn and mice eating it, the value of the receipts was steadily decreasing. This enticed people to spend the money fast.The grain receipt system lasted for many centuries. It made sense to store food to provide for hard times. If we assume this was a kind of Worgl situation, we can assume that also Egypt was building capital at maximum speed using full employment. At some point, irrigation systems were in place, houses were built, and there was nothing left to do. Because there was no limit on the ego of pharaohs, and they were worshipped like gods, the pharaohs could use this wealth to build pyramids. The people building the pyramids were probably no slaves but economically free men. The Egyptian civilization lasted for more than 2000 years, far longer than any civilization ever.The fall of RomeRome lasted only 700 years. The money system was based on gold and silver. In the beginning Rome was able to expand, and therefore capital could grow faster than interest charges. But after 400 years the expansion was over, and slowly growing debt was becoming a drag on the economy. The government was permanently short of funds. The value of money was therefore constantly devaluated. The military was also badly funded, and therefore other people could invade Roman lands. Debt was destroying Rome.
Sorry, bad font choice. I do not know how to change this.
Interest is merely the discount applied to future goods when valued presently, given the fact of positive time preference, and is the price the lender charges. The lender charges interest in order to insure what they get back is not worth less to them than the money at present. That's all there is to it. Nothing is created out of thin air (unless one is speaking of a fiat FRB system), but rather money lent at present is more valuable to the lender than an equal amount of money returned to them, so they require something extra, to compensate for the lower future value that money has to them. And money is merely the means used to acquire other goods. Saying there should be no interest rate because a medium of exchange is used to facilitate trade is beyond bizarre, and focusses too much on an intermediate aspect of the whole transaction. Avoiding the money tax is a cost, but not necessarily a form of interest.
Jon Irenicus:But you're not being sufficiently subjectivist. Anything can be a good, provided it is seen by an economic agent as a means to an end. Even fiat money conforms to this definition, even if it is forced upon individuals and other monies outlawed. At any rate, economic analysis pertaining to money is an extension of the analysis of goods and can be applied to fiat money too, even if it's a poor form of money.
It is quite philosophical. Being a systems engineer, I am not in a position to argue with that.
Jon Irenicus:Perhaps in the present, what with moral hazard and all, institutionalized by central banking, but ordinarily if a lender judges poorly, they lose their money and if they do so repeatedly they're ousted from the market, and in this sense it is self-correcting. An interest rate of zero is what'd be inherently destabilizing as it allows no room for adjusting the rate to the borrower's credit-worthiness.
Being a systems engineer I do not agree. If a borrower is not creditworthy he should not get a loan at all. When you are creating a greater margin for error, and that is what you do by allowing bad borrowers to borrow at higher interest rates, you are destabilising the system. Also, when doing this you are pressing the weakest points of the system the hardest. People that cannot afford the loan, pay also the highest interest rates, which makes them even less creditworthy than they were.
Jon Irenicus:Then they certainly will not be deterred by one of zero.
This is true. But in a natural money system they will not get a loan anyway.
They pay higher amounts precisely in order to account for the fact that they might default on the loan. There is no instability because lenders who cannot estimate well go out of business and individuals, faced with high interest rates, will be reluctant to borrow. Now, it's perfectly fine if you want to do business only with banks that refuse to give out loans to risky individuals, and in fact maybe you can even join a society where this is the norm.
Jon Irenicus:Interest is merely the discount applied to future goods when valued presently, given the fact of positive time preference, and is the price the lender charges. The lender charges interest in order to insure what they get back is not worth less to them than the money at present. That's all there is to it.
It at least works this way in the current money system. That is for sure. But in natural money this works not this way.
Jon Irenicus:Nothing is created out of thin air (unless one is speaking of a fiat FRB system)
Going back to the example when being in a natural money system, no interest should be charged to the borrower. If the lender than demands interest, this is impossible. Natural money should not be created out of thin air.
Jon Irenicus:, but rather money lent at present is more valuable to the lender than an equal amount of money returned to them, so they require something extra, to compensate for the lower future value that money has to them. And money is merely the means used to acquire other goods.
I can only say that this is not the case in a natural money system.
Jon Irenicus:Saying there should be no interest rate because a medium of exchange is used to facilitate trade is beyond bizarre, and focusses too much on an intermediate aspect of the whole transaction. Avoiding the money tax is a cost, but not necessarily a form of interest.
It sounds bizarre at first. But if the economy is doing better this way, you might just give it a try. If you are desperate, just like the mayor of Worgl, you will try even the most bizarre scheme. And in the case of Worgl it worked very well. The credit crisis is just in its beginning. I don't know how desperate people will get, so they will try it for sure.
And if it works (and that is the only criterium) it will spread like wildfire.
Jon Irenicus:They pay higher amounts precisely in order to account for the fact that they might default on the loan. There is no instability because lenders who cannot estimate well go out of business and individuals, faced with high interest rates, will be reluctant to borrow. Now, it's perfectly fine if you want to do business only with banks that refuse to give out loans to risky individuals, and in fact maybe you can even join a society where this is the norm.
Maybe we are too much going into theory. You can keep it in mind as a plan B. If all else fails, this is just a plan you can try. You now know it exists. It might save your life and that of your community.
I suggest you give Rothbard's Man, Economy and State a read. I think it'll explain these concepts in more depth than I am willing to go into here and should give you an understanding of some of the problems in prohibiting interest or visualizing it as being created "out of nothing".