Assume full reserve commodity backed currency. If a bank lends out $1,000 @ 10% interest, isn't $100 of fiat created by the interest rate. Where would that additional 10% come from if the $1,100 is paid back to meet principle and interest?
ViennaSausage: Assume full reserve commodity backed currency. If a bank lends out $1,000 @ 10% interest, isn't $100 of fiat created by the interest rate. Where would that additional 10% come from if the $1,100 is paid back to meet principle and interest?
Ok, let's set up the example in a different way. Let's say there is a baker who accumulates 10 loafs of bread. Now, his neighbor is a shoe manufacturer. For some strange reason, the shoe producer needs four loafs of bread so that he can permanently extend his daily production of shoes. So, the baker loans him these four loaves of bread (the shoemaker cannot outright afford them), exchanging four loaves of bread (which he could otherwise consume). Because the baker prefers present goods, he requires a greater amount of wealth returned in the future (or else, it wouldn't make sense for him to loan out part of his capital); that is the interest. He requires the equivalent value of the four original loaves of bread, plus another loaf. The shoemaker takes these loaves, invests them and increases his daily production. He increases it, and so is therefore able to payback the original value of the loan, plus the additional loaf of bread. He pays this out of capital that make makes (as profit) from his venture.
This is an example in a barter economy. The concept still applies in a money economy, only money acts as a medium of exchange. The money represents an amount of capital that the person owns. And so, he is basically paying back the loan with capital that he can accumulate, including the interest.
This is fundamentally different from credit expansion as a result of fractional reserve banking. In this case, there is no actual increase in capital. It has just been money created out of thin air by accounting measures (produced by having multiple claims on the same deposit). In other words, imagine those four same loaves of bread. Let's say that the baker stores them in a warehouse under the contract that he can withdraw them and consume them when he wants. The warehouses senses profit and loans these loaves out. There are two claims on the loaves, and so therefore the bank acts as there are now eight loaves (under the assumption that the original four will not be claimed by the original depositor, and so everything will work itself out in the end). The eight loaves do not exist, so one of the two players are not actually investing capital.
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whoever lends the money must produce something to repay the 10%, or else he cannot repay it, plus interest.
it may be hard, but it may be necessary to maintain money supply.
Thanks for the insightful example. So, I just want to make sure I have this straight.
Suppose there is party A, B, C.
Fractional Reserve Loans
Under the Fractional Reserve system, D deposits $1,000 into the Bank A. D has a title to the $1,000 in Bank A. Bank A has enough reserves to lend D's $1,000 out and lends it at 10% to borrower B. Borrower B also has a title to the same money $1,000 as A. Consumer C purchases $1,200 of product from B. D takes $1,000 dollars out. B pays $1,100 back to Bank A, keeping $100 profit for self. $1,200 has been created by fiat.
Full Reserve Loans
Under the Full Reserve system, D deposits $1,000 into the Bank A. D has a title to the $1,000 in Bank A, but D allows bank A to lend money out, even it means risking loss. Bank A lends $1,000 to Borrower B, Borrower B now has a title A's $1,000. Consumer C purchases $1,200 of product from B. D CANNOT take $1,000 dollars out on demand. B pays $1,100 back to Bank A, keeping $100 profit for self. D can now take $1,000 out.
So the $100 interest comes from consumer C, it's not created by fiat.
Sound about right?
What you pay back on interest should be taken out of the picture. It's not entirely relevant (unless the interest is being paid through another loan). The interest represents the cost of the loan, because the person who is making the loan expects more future goods than the present goods not consumed. Fiat money is money that is not backed by a commodity. Fiat money is created when a bank makes a loan without actually having the commodity to loan out. Money really obscures reality, which is that a loan represents the loaning of a specific amount of commodity. When money is used as a medium of exchange it represents the value of those commodities being loaned out. In fractional reserve banking, what happens is that there is a number of commodities in the bank (represented by the money). The depositor is claiming them for present consumption, while the bank loans them out. For that reason, one of the two people who have claims to the money is not actually using the money which represents those commodities. They are using fake money that is not backed, which is what causes inflation and ultimately what also causes the misallocation of resources.
Your example not only assumes a commodity backed currency with full reserves but also a legal tender law that prohibits people from exchanging other things of value for the principal or even the interest and a fixed amount of currency and no way for more of the commodity to enter the marketplace. In your simple example above the borrower could take the $1000 to buy a home for his family. Then borrower could then work for the 1000 and grow beans. The borrower could pay off the lender in currency plus beans. Or maybe the borrower works to make shoes and sells the shoes to a person who mines or grows the commodity backing the currency so there is 10% more of it. Also the commodity like gold or silver or copper have alternate uses. So as demand for the commodity as currency rises the people using the commodity for alternate uses will switch to other materials instead of the commodity. Like people switching from copper tubing to PVC in homes as the price of copper continues to climb.
Regardless of the solution there really is no limit on the amount of currency as long as people can either create more of the commodity backing the currency or trade something else of value in lieu of the currency. And history is full of examples both of these behaviors. Going back to the Romans there were gold, silver and copper coins. If suddenly copper became useful then copper would increase in scarcity relative to silver. So people would move to making exchanges in silver or gold.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Author G. Edward Griffin (Creature from the Jekyll Island) has pretty good article exactly about this subject in his review of conspiracy movie Money Masters (a movie that advocates theories of C.H. Douglas, greenbacks etc.)
One of the most perplexing questions associated with this process is "Where does the money come from to pay the interest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you - and all others with similar loans - can possibly pay off your indebtedness. The amount of money put into circulation just isn't enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for the interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a never-ending spiral leading inexorably to more and more debt.
This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the only way to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let us assume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of that represents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job. The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as "interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank's floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and - this is the point -the money you receive is the same money that you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out the revolving door as your wages, and then back into the bank as loan repayment.
It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank, and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money. It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.
http://freedomforceinternational.org/freedomcontent.cfm?fuseaction=money_as_debt&refpage=issues
We all know that Griffin has some odd conspirational views but he seems to be a fair and decent guy and his book on the Fed was mentioned as a "must read" in the end of Ron Paul's book Revolution: A Manifesto.
Bogart: Your example not only assumes a commodity backed currency with full reserves but also a legal tender law that prohibits people from exchanging other things of value for the principal or even the interest and a fixed amount of currency and no way for more of the commodity to enter the marketplace.
Your example not only assumes a commodity backed currency with full reserves but also a legal tender law that prohibits people from exchanging other things of value for the principal or even the interest and a fixed amount of currency and no way for more of the commodity to enter the marketplace.
I'm not sure how this is relevant. It illustrates why the interest is not credit expansion.
I am trying to show that in the example provided there are far more constraints than just the few that were stated. I am also trying to show markets resolved this problem already.
Youtube Khanacademy. A small webinar of 20 clips that show the accounting process of banks using very simple language that evolves into more complex ideas. Its definetely very good (although i think his definition of wealth is abit to eschew)
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