Saturday, November 25, 2017

Poor on McCulloch

Poor on McCulloch
Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on John R. McCulloch. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    John R. McCulloch (1789-1864) was a Scottish economist, author, and editor. He was a professor of political economy at the University of London. Among his works are Principles of Political Economy (1825), Principles, Practice and History of Commerce (1831), and A Description Statistical Accounts of the British Empire (1837). Poor reviews McCulloch’s notes to his edited work of Adam Smith’s Wealth of Nation (1828).
    Poor introduces his review of McCulloch with:
Fully accepting the doctrines of [Adam] Smith, and the wide distinction which he made between the qualities of the precious metals which fit them for money and those which determine their value in exchange, he proceeds to consider the laws by which their value is determined when their movement is perfectly free; and those by which they are affected when artificial restraint is imposed upon it (p. 318).
    McCulloch states that under free competition, the value of gold and silver depend on the cost of their production. The prices of commodities, i.e., their value measured in money, vary with their cost of production, supply and demand, and the cost of gold and silver to which they are compared (p. 318). When the supply of gold and silver is restricted, the supply of money is limited. He writes, “Whenever the supply of money is limited, its value varies in inverse ratio to its quantity as compared with the quantity of commodities brought to market, or with the business it has to perform” (p. 318). For that reason, if the supply of commodities doubles while the amount of currency remains the same, their price would be reduced by half. On the other hand, if the supply of commodities were reduced by half and the amount of currency remains constants, their price would double (pp. 318-319). Thus, money is merely a ticket or counter used to compute the value of property, and in transforming it from one to another. [McCulloch seems to confuse value with price. The two are different. Price measures value, but it is not value. Furthermore, some items, e.g., air, patriotism, and religious beliefs, have great value, but are not priced.] He claims “that a debased currency may, by first reducing, and then limiting its quantity, be made to circulate at the value it would bear were the power to supply it unrestricted, and were it of the legal weight and fineness; and, by still further limiting its quantity, it may be made to pass at any higher value” (p. 319). [History shows that when governments debase their currency, prices rise even if the supply is limited, which it seldom is.] He believes that nonconvertible paper money can be given a higher value than an equivalently denominated gold coin if its supply is sufficiently limited. A half-sovereign coin can be made to do the work (number of exchanges) as a one-sovereign coin if all one-sovereign coins were replaced by half-sovereign coins and no new coins were minted. [He means replacing each one-sovereign coin with a one-half-sovereign coin. He does not mean replacing each sovereign coin with two half- sovereign coins.] The same quantity of commodities would now be exchanged for the same number of coins. [This conclusion is highly unlikely. When exchanges were made under the gold standard, they were based on the gold content of the coin and not the number of coins. People compared the value of the product to the value of the gold content of the coin and not to the coin itself. Most likely, what would happen if half-sovereigns replaced all one-sovereigns, dealers who sold their products for one sovereign would now sell them for two half-sovereigns. Cutting the money supply in half as in McCulloch’s example would significantly hamper commerce and, by that, production.] He offers no example where what he suggests would happen has ever happened. McCulloch maintains that the value of inconvertible paper currency “depend[s] on the proportion which its amount bears to the commodities brought to market, or to the demand; and wherever a currency of this kind, or a limited gold currency, is in circulation, the common opinion that the price of commodities depends wholly on the proportion between them and the supply of money is quite correct” (pp. 319-320). However, “with a freely supplied currency consisting of gold and silver, . . . fluctuations in the supply and demand of such currency have no permanent influence over its value. This is determined by the cost of its production” (p. 320). [In The Value of Money, Anderson argues that the cost of production determining gold’s value is incorrect. He asserts that the “value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters.” “Value {of money} is prior to exchange. Value is not to be denned as ‘power in exchange.’” According to Anderson, the social value theory best explains the value of money: “the social value theory is the only way of giving a psychological explanation to the demand-curve, and a marginal value explanation of marginal demand-price.” Thus, the value of money derives from the value of the commodity of which it is made and from its services as money. The value of the commodity as money is combined with the value of the commodity in its non-monetary use. Like all other commodities, and everything else, the value of the monetary metal and of its use as money is psychological. Anderson concludes, “The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.”]
    Poor retorts:
Mr. McCulloch might as well have assumed a particular county of England to be fenced off by a wall so high that only a small amount of vital air could get into it; and that, in such case, the right to breathe would sell at an enormous price; and have inferred, therefrom, that, should the amount of money be limited, its price would rise in like ratio. One illustration is as pertinent, or rather as impertinent, as the other (p. 320).
    Poor continues, “Whoever gets gold, gets it to spend. There may be quarrels between those who dig and those who rule as to who shall enjoy the product; but, whatever the result, it would immediately go into circulation” (p. 320). [Today, the rulers have resolved the quarrel by driving gold from the monetary system. They have given themselves absolute control of the monetary system. Contrary to the claims of most orthodox fiat money proponents and probably all fiat money reformers, the Federal Reserve is not an independent agency independent of the government and does as it pleases. It is just the junior partner in the scam to pillage the American people. The government is the senior partner. It created the Federal Reserve; the Federal Reserve did not create the government. It exists at the pleasure of the government, which may abolish the Federal Reserve anytime. Working together, the government and the Federal Reserve can confuse the people by blaming the other for the country’s economic problems although both are guilty.]
    Poor notes that in another work of McCulloch, McCulloch claims that controlling the movement of precious metals is impossible for governments (p. 320). Poor writes:
His illustrations, however, are in keeping with those of the school to which he belonged, which is always assuming impossible instances as a means of setting forth its conclusions and beliefs. It is the way of children, not the method of men of full stature. Neither the production nor possession of the precious metals can be monopolized. Their value everywhere, under all conditions (allowing for the influence of accidental circumstances), is measured by their cost (pp. 320-321).
[Governments may not be able to prevent the movement of gold, but they can greatly hamper its movement. For example, with few exceptions, the U.S. government prohibited Americans owning gold between 1933 and 1974.]
    Commenting on McCulloch’s belief that if the currency’s quantity is strictly limited, a debased currency can function as well as full-weight coin, Poor remarks that Locke had proven more than a century earlier, that a debased coin will not function as well as a full-weight coin. About the period of recoinage of English money in 1696 when Locke made his argument, Poor writes:
For a time, the amount of coin in circulation, or currency of all kinds, equaled hardly a tithe of that required for the exchanges of the country. These, for a considerable period, had to be made by means of credit or barter. Yet the necessity which then existed for a “circulating medium” did not exert the slightest influence in raising the value of the debased coins. The value of each was measured by the cost of the metal that each contained. Had their value risen greatly above their cost, supplies would immediately have flowed in from other countries. If tickets or counters were all that were wanted, these could easily have been provided, as McCulloch suggests, by cutting the pieces in circulation into a sufficient number of parts. It was capital, not counters, that was wanted, and relief came only when that was supplied (p. 320).
    Poor continues:
But even admitting that, by reducing the amount of metal in coins, their value might be maintained from the necessity of their use, there was still an important link wanting to connect his premise with his conclusion. Gold gets into circulation by means of its value. It circulates at its value. If its amount were permanently decreased, its value would increase. This is palpable enough; but how is that which is valueless in itself to get into the category of values (p. 322)?
[This is the question that others also ask: How can that which has no value itself and is not the representation of value measure value?]
    Poor asks how can something that has little or no value get into circulation in the first place? He answers that McCulloch would claim that some medium of exchange is needed and people agree that this worthless thing would be their medium of exchange. To this answer, Poor replies, “[I]t is useless to reply to such assumptions as these. They are the dreams or vagaries of persons bereft of all sense in reference to the subjects to which they relate, and who, unfortunately, are wholly impervious to reason” (p. 322).
    Commenting on bank notes, McCulloch writes:
Notes not legal tender, and payable on demand, or at some stipulated period, are not paper money, though they serve the same purposes during the time they continue to circulate. The value of such notes is wholly derived from the confidence placed in the ability of the issuers to retire them when presented for payment, or when they become due. Whenever, therefore, this confidence ceases, their circulation necessarily ceases also (p. 322).
    About paper money, i.e., government notes, McCulloch states that “confidence in the solvency of the issuers exercises the smallest influence over the value of paper money” (p. 322). Paper money is legal tender and not legally convertible into gold or anything else. “It circulates because it is made legal tender, and because the use of a circulating medium is indispensable; and its value, supposing the demand to be constant, is, in all cases, precisely as the quantity in circulation” (p. 322). He believes that the issuer of inconvertible paper money can maintain par with gold or silver without difficulty (pp. 322-321). To maintain a constant price of gold, all that the issuer needs to do is to decrease or increase the quantity of paper money. [This is the recommendation of some supply-side economist in recent years.]
    Poor questions McCulloch’s assumption that “an inconvertible government note of the nominal value of an ounce of gold, to be of equal value, and exchangeable therefor” (p. 323). Moreover, Poor comments that according to McCulloch, inconvertible government notes circulate “not from any value it possessed, but from the necessity for its use as a ticket or counter of exchange” (p. 324). Furthermore, according to McCulloch, such money need not be made legal tender (p. 324). Poor wonders how such money would ever get into circulation and who would accept it (p. 324). Also, how would the excess be retired? [The government can get its notes into circulation by printing them and paying them to its employees, welfare recipients, and suppliers. It can further encourage the circulation of its notes by requiring them in payment of taxes and making them legal tender at the debtor’s option for payment of debts. In theory, the excess could be removed by having tax receipts to exceed expenditures enough to retire the excess — when was the last time that happened?]
    McCulloch proposes eliminating precious metal, either as bullion or coin, as money because of the excessive cost. Paper should be substituted for metal. Thus, paper would replace gold as the reserves held by banks (pp. 324-325). [In the United States between 1862 and 1879, U.S. government notes replaced gold largely as reserves for banks. Today, all bank reserves are in paper and its electronic equivalent, which is even cheaper than paper.]
    If McCulloch’s proposals were implemented, Poor sarcastically remarks, “The monetary millennium would then dawn on the world” (p. 325). [If McCulloch had lived another hundred years, he could see the results of his monetary millennium. His monetary millennium arrived in 1971 when the world divorced itself completely from gold and substituted entirely a paper and electronic monetary system in its place.]
    In response to McCulloch’s proposal, Poor writes:
But what does every one seek in exchanging that which he possesses? To better his condition; to get something which will be more valuable to him than that with which he parts; in order to have that which, when he wishes to use it, will bring to him the greatest possible amount of values in other forms. Gold and silver, therefore, are always demanded in exchange, for the reason that they are values in their highest forms. The whole effort of mankind is to convert its industries and products into such values, or into that which shall produce them; and which, till its possession be demanded, is drawing interest in kind for the benefit of the party entitled to it. The whole effort of nature is in the same direction, — to convert lesser into greater values (p. 325).
Then Poor remarks that McCulloch “would invert all this order, by converting whatever a person has to sell, not into the most valuable, but into the least valuable form” (p. 325).
    In his concluding remarks on McCulloch, Poor writes, “Nothing can be more disgraceful in a man like him, — Professor of Political Economy in the university of a city which, commercially, is the very eye of the world, and standing at the very apex of his school, — than the ignorance and assurance he displayed” (p. 327).

1. B.M. Anderson, The Value of Money (New York: The Macmillian Co., 1917), pp. 8-9).

2. Ibid., p. 9.

3. Ibid., p. 42.

4. Ibid., p. 591.

Copyright © 2017 by Thomas Coley Allen.

More articles on money.

Friday, November 17, 2017

Mencken on Politics under Democracy

Mencken on Politics under Democracy
Thomas Allen

    In 1926, H. L. Mencken (1880-1956) wrote Notes on Democracy in which he expressed his views on democracy and related issues. He was a journalist, satirist, and critic and a libertarian and one of the leaders of the Old Right. In his book, he describes politics under democracy, pages 29-35. Below is an overview of his discussion on politics under democracy; my comments are in brackets.
    Since fear controls politics under democracy, politicians use it to manipulate the mob. “The demagogues, i.e., the professors of mob psychology, who flourish in democratic states are well aware of the fact, and make it the corner-stone of their exact and puissant science.” Thus, “[P]olitics under democracy consists almost wholly of the discovery, chase and scotching of bugaboos. The statesman becomes, in the last analysis, a mere witch-hunter, a glorified smeller and snooper.” The whole history of the United States “has been a history of melodramatic pursuits of horrendous monsters, most of them imaginary: the red-coats, the Hessians, the monocrats, again the red-coats, the Bank, the Catholics, Simon Legree, the Slave Power, Jeff Davis, Mormonism, Wall Street, the rum demon, John Bull, the hell-hounds of plutocracy, the trusts, General Weyler, Pancho Villa, German spies, hyphenates, the Kaiser, Bolshevism.” [Many of these threats were real; however, politicians exaggerated them to terrorize the mob. Politicians used this tactic of fear to get the American people to beg for the police state following 9-11. Fear has been used to terrorize the people to demand just about every enslaving program that the US government have ever adopted.]
    Under democracy, the plain people “never vote for anything, but always against something.” Consequently, the democratic state tends “to pass over statesmen of genuine imagination and sound ability in favour of colourless mediocrities. The former are shining marks, and so it is easy for demagogues to bring them down; the latter are preferred because it is impossible to fear them.” [The demagogue is a democratic man and is, therefore, part of the mob. Thus, being one of them, the plain people understand him and do not fear him. Does this explain the rabid fear that the common Democrat and many Republicans have of President Trump and especially his supporters and their embracement of Hillary Clinton?] Mencken continues, “The demagogue himself, when he grows ambitious and tries to posture as a statesman, usually comes ignominiously to grief, as the cases of Bryan, [Theodore] Roosevelt, and Wilson dramatically demonstrate.”
    Using Bryan as an example, Mencken shows the rise and fall of a demagogue. “If Bryan had confined himself, in 1896, to the chase of the bugaboo of plutocracy, it is very probable that he would have been elected. But he committed the incredible folly of throwing most of his energies into advocating a so-called constructive programme, and it was thus easy for his opponents to alarm the mob against him. That programme had the capital defect of being highly technical, and hence almost wholly unintelligible to all save a small minority; so it took on a sinister look, and caused a shiver to go down the democratic spine.” [Consequently, most political campaigns consist almost entirely of slogans and mudslinging with little or no details about what the candidate plans to do if he wins.] Continuing, Mencken writes, “It was his cross-of-gold speech that nominated him; it was his cow State political economy that ruined him.”
    According to Mencken, “[g]overnment under democracy is thus government by orgy, almost by orgasm. Its processes are most beautifully displayed at times when they stand most naked — for example, in war days.” He uses World War I, which was then known as World War, to illustrate the use of fear to manipulate mob psychology. “[T]he World War is simply a record of conflicting fears, more than once amounting to frenzies. The mob, at the start of the uproar, showed a classical reaction: it was eager only to keep out of danger. . . . In 1916, on his fraudulent promise to preserve that boy from harm, Wilson was re-elected.” Then came the task of the demagogue to convert the people to warmongers. “The problem was to substitute a new and worse fear for the one that prevailed — a new fear so powerful that it would reconcile the mob to the thought of entering the war.” Right after the election, all agencies of the US government began clamoring for war. “No ship went down to a submarine’s torpedo anywhere on the seven seas that the State Department did not report that American citizens — nay, American infants in their mothers’ arms — were aboard. Diplomatic note followed diplomatic note, each new one surpassing all its predecessors in moral indignation. The Department of Justice ascribed all fires, floods and industrial accidents to German agents. The newspapers were filled with dreadful surmises, many of them officially inspired, about the probable effects upon the United States of the prospective German victory.” As a result, the mob became convinced “that a victorious Germany would unquestionably demand an accounting for the United States’ gross violations of neutrality.” Thus, the demagogue gave the mob a choice of fears. “The first was a fear of a Germany heavily beset, but making alarming progress against her foes. The second was a fear of a Germany delivered from them, and thirsting for revenge on a false and venal friend.” The second fear won. Soon the mob “was reconciled to entering the war — reconciled, but surely not eager.” Now the demagogues had the task “of converting reluctant acquiescence into enthusiasm.” A new fear was the solution. Thus, the government strove to throw “the plain people into a panic. All sense was heaved overboard, and there ensued a chase of bugaboos on a truly epic scale. Nothing like it had ever been seen in the world before, for no democratic state as populous as the United States had ever gone to war before.” By the end of 1917, the American people “were in such terror that they lived in what was substantially a state of siege, though the foe was 3,000 miles away and obviously unable to do them any damage.” Only the draft “gave them sufficient courage to attempt actual hostilities. That ingenious device, by relieving the overwhelming majority of them of any obligation to take up arms, made them bold.” Mencken continues, “Before it was adopted they were heavily in favour of contributing only munitions and money to the cause of democracy, with perhaps a few divisions of Regulars added for the moral effect. But once it became apparent that a given individual, John Doe, would not have to serve, he, John Doe, developed an altruistic eagerness for a frontal attack in force. For every Richard Roe in the conscript camps there were a dozen John Does thus safely at home, with wages high and the show growing enjoyable.” Mencken concludes, “So an heroic mood came upon the people, and their fear was concealed by a truculent front. But not from students of mob psychology.” [Today, the same use of fear is being used to manipulate psychology in the War on Terrorism with all agencies of the government and their collaborators in the media inciting war. President Bush’s inane remark that “if we do not fight them over there, we will have to fight them here” was an insult of the highest magnitude of the U.S. Air Force and U.S. Navy. How could anyone with no air force and no navy attack the United States, unless the Bush regime let them into the country?]

Copyright © 2017 by Thomas Coley Allen.

More political articles.

Wednesday, November 8, 2017


Thomas Allen

    Usury as used in this article means interest or fees charged on loans or loans on which interest or fees are charged and not just exorbitant interest or fees. Loans may be of money or other goods. Anti-usurers are opponents of usury.
    During the Middle Ages, moralists, the scholastics, claimed that charging interest on loans, usury, was immoral and, therefore, unlawful, although people devised convoluted ways to circumvent this prohibition against charging interest. Even today, some moralists maintain that charging interest on loans is immoral and should be prohibited. They based their argument against usury in part on the teachings of Aristotle and in part on the laws of Moses.
    Since the Reformation, primarily since Calvin, most moralists have ceased believing that charging interest on loans is immoral. (Some have accused Calvin of being a crypto-Jew or an agent of the Jews for justifying usury.)
    Moralists of the Middle Ages claim that if a lender charges interest on a loan, exacting hire for money lent, he is guilty of the sin of extortion. Modern moralists, as Dabney calls them, disagree. They hold that reasonable interest is as just as a reasonable hire for any work or instrument of work.
    Aristotle argued that usury was against nature, unnatural, and beneath the dignity of citizenship. To Aristotle, even the use of money, though necessary, was tainted and not worthy of study. Money, gold and silver, was sterile. (If money is sterile, why are people willing to pay to use it?) If one planted seed in a chest of gold or silver coins, nothing would grow. (Planting seeds in a box of nebulous electronic money, which is what most of today’s money is, would prove even less fruitful. Nevertheless, if properly watered, seeds planted in a chest of coins will sprout, and these sprouts are eatable.) Moreover, a bag of coins stored for years does not increase by a single coin — thus, proving the barrenness of money. (Food stored for years will not increase in amount either, but unlike gold coins, the stored food will deteriorate and become worthless. Does this mean that food is barren?) Because the use of money was unnatural, usury was unnatural since it is an increase based on money. Only an increase from herds, farming, hunting, and war were natural. Thus, even trade and mechanical arts were unnatural. Money was something used by those involved in trade, and, therefore, its use was base and beneath the dignity of a citizen. Since trade for money was contrary to nature, so was usury on its use. To Aristotle, money was a mere medium of exchange and did not increase by passing from one person to another, so he saw no justification for interest. He never sought to discover why people paid interest and never developed a theory of interest.
    In Exodus 22:25, Moses declares, “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.” In Deuteronomy 23:19, he declares, “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.” Most who condemn usury today overlook Deuteronomy 23:20, which reads, “Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.” Thus, the laws of Moses allowed charging interest on loans to strangers. The scholastics interpreted “stranger” to be anyone who was not a Christian. Consequently, a Christian could not charge interest on loans to another Christian.
    As the Church forbade Christians lending Christians money at interest, it drove borrowers to the Jews for loans. As a result, the Church gave the Jews a virtual monopoly on lending money, which largely explains why today Jews dominate banking. (Hypocrite that it was [is], while condemning usury as a venal sin, the Papacy lent and borrowed at interest, although it called the interest “fees,” “gratuities,” etc. — anything but “interest” or “usury.” By the Reformation, the Papacy was allowing charitable loans, called contracts, to pay interest while it continued its prohibition against interest-bearing business loans. Businesses often used “insurance contracts,” which guaranteed the lender a fixed rate of return, otherwise known as interest, instead of a percentage of the profit.) When Christian lending to Christians at interest became acceptable, Christians no longer had to borrow from Jews.
    As Dabney explains, the modern moralists and the Middle Age moralists, the scholastics, do not disagree on morals, but they do disagree on a merely economic question. They disagree on money being an effective force or influence in the production or creation of new value. Whereas, the modern moralists argue that money is an effective force in the production or creation of new value, the scholastics argue that it is not. To the modernist, money is an exchangeable form of capital, and capital is the agent that creates new value. Thus, charging interest is not a moral issue; it is an economic issue.
    The modern moralists and the scholastics agree on the major premise, but they disagree on the minor premise. Both agree that if a person takes something from another for nothing, he is guilty of extortion — the major premise. For the scholastics, the minor premise is that money lent yields nothing in the creation of new value. Therefore, the inference is that charging interest is extortion. For the modern moralists, the minor premise is that money lent is the capital that the borrower uses to create new values. Therefore, the inference is that when the lender receives interest on the money lent, he does not extort. As shown, the disagreement between the Middle Age moralists and the modern moralists is with the minor premise, which is an economic issue and not a moral issue. Much of the opposition to usury, then and now, comes from confusing interest with physical production and associating interest with money. Interest does not have to be in money; it can be in other goods.
    Today, nearly all monetary loans are exchanges of credit. The borrower exchanges his credit for the lender’s credit, which is usually more readily acceptable by the public than is the borrower’s credit. The borrower gives the lender a note, usually written, but occasionally oral, promising to repay the lender the money or credit borrowed. In exchange for this promise, the lender gives the borrower the lender’s credit, although occasionally the lender will give his cash, which today is another form of credit, to the borrower. Today, the credit is lent as checkable deposits where the lender promises to pay all valid checks present against these deposits. (In the past, bank notes were commonly used. The lender promised to pay his notes, which were his credit instruments, when presented for payment.) For the use of the lender’s credit or cash, the lender charged a fee called interest.
    Meyer defines interest “as the price paid for the use of loanable funds. Loanable funds may be used either for purchase of consumer goods or as capital in the process of production.” Mund defines interest as “the price paid for the use of loanable funds (money or credit) which are to be repaid at a later date.”
    According to Menger, interest is the payment for “the exchange of one economic good (the use of capital) for another (money, for instance).” By opposing the charging of interest, anti-usurers hold that money either is not an economic good or, if it is, not worthy of payment. As interest is the payment for the use of capital, the opponents of usury must assume that the use of capital has no value. If it does have value, then why is paying for this value immoral? If it does have value, then the anti-usurers believe that the user of capital is entitled to steal that value. Why is not such theft immoral?
    According to Ely, “[i]nterest represents the difference in value between present and future goods.”  In effect, people who oppose usury are claiming that the future value of a good is the same as its present value. However, by charging interest, the claim is that a good today is worth more than the same good in the future. That is, an ounce of gold or a loaf of bread is worth more to its holder today than it will be ten years later. Interest represents that difference in value. According to the anti-usurers, an ounce of gold or a loaf of bread ten years from now is worth the same to the holder as it is today. Usury assumes risk over time; zero interest assumes no risk over time. Usury assumes that present enjoyment and satisfaction is greater than future enjoyment and satisfaction; zero interest assumes that future enjoyment and satisfaction is greater in the future than they are in the present. That is, usury assumes that most people prefer to have an automobile today than ten years later. However, anti-usurers believe that people have no time preference and have no more desire for an automobile today than ten years later. If they do and are willing to pay a premium, interest, for an automobile today rather than waiting ten years, they are sinning — just as viewers of pornography are as guilty, as the producers and dealers are, of sin. Likewise, anti-usurers believe that given a choice between receiving a $100 today and a $100 a year later, people will be indifferent to when they receive the $100. (Most people would probably prefer the $100 today to a $101 a year later. However, a majority probably would prefer $200 a year later than $100 today. The $1 and $100 are interest paid for delayed satisfaction.) To the anti-usurers, present value and future value are equal, and, therefore, interest is not only immoral, it is not even needed.
    According, Alchian and Allen, “Interest is the price of earlier availability, rather than later availability, of rights to use goods.” Whenever people evaluate and exchange present goods or money for future goods or money, interest is involved whether they realize it or not. Moreover, contrary to the implied, if not expressly stated, claim of the anti-usurers, present goods or money are more valuable than the same goods or money in the future. Interest represents that difference in the present and future value.
    Interest is merely a result of people preferring something sooner rather than later. Why is paying for the expression and consideration of this preference a sin? It must be a sin because the moralist anti-usurers want to prohibit usury in the name of morality.
    Rothbard states that “present money is worth more than present expectation of the same amount of future money” — the law of time preference. That is, the future always exchanges at a discount to present. This discount is the interest that bridges the time preference. Anti-usurers reject the law of time preference, and if it does exist, it is a sin.
    North gives a similar definition: Interest “is the discount we apply to future goods as against present goods.” Moreover, “[i]t is not a uniquely monetary phenomenon.”
    Anti-usurers argue that the future and future goods do not need to be discounted. Thus, they imply that the future is known; people do not live in an uncertain world. Furthermore, they assume that all people will live long enough to enjoy the future; therefore, people do not have to discount the future, i.e., charge interest.
    As interest gives time economic value, the anti-usurers must maintain that time has, or should have, no economic value. An item will have the same value a year or a century from now as it has today. In spite of the assertions of the anti-usurers, time is a scarce economic resource that needs to be economized. (People are not God, who exists outside time; they are prisoners of time.)
    As North notes, “Time is mankind’s only absolutely irreplaceable environmental resource.” Time is the foundation of all economic planning, and interest is the expression of this foundation. Anti-usurers must maintain that either time is irrelevant to economic planning or, if it is relevant, it has no value.
    In the name of morality, anti-usurers would deny compensation, interest, to anyone who saves his money, a present good, and makes it available to entrepreneurs to produce future goods. According to the anti-usurers, this service of capital, saving, to provide an advance in time, as Rothbard calls it, should be without charge; it should be free. To charge for this service is extortion.
    Usury rewards the farsighted and prudent — people who anticipate their future wants and needs and saves for it. Anti-usurers want to reward the spendthrift — the impulsive who must have immediate gratification. The anti-usurers would have the prudent to lend to the spendthrift at no charge.
    Interest is payment for the use of capital. Anti-usurers have no problem with paying wages to managers and workers for their labor. Most would not deprive the entrepreneur or owner his profit for organizing and superintending, either directly or indirectly through managers, the operation of his business. However, they would deprive the capitalist, who may even be a lowly worker via his meager savings or retirement account, any return on the use of his capital. Thus, the entrepreneur deserves a return on his entrepreneurship; the manager deserves a return on his management; the worker deserves a return on his labor; yet the capitalist does not deserve a return on his capital.
    Besides covering the cost of time-preference, part of the interest covers the cost of administrative expenses of transferring money from one person to another. Opponents of usury assume that this cost is either negligible or at least not worthy of compensation. Another part of the interest covers the cost of risk. Most anti-usurers assume that all loans are risk free. The few who realize that loans do involve risk to the lender believe that such risk should not be compensated. Why would anyone want to risk his money at no cost, zero interest, and give up the present enjoyment and satisfaction that it can bring so that another can satisfy his desires, either in consumption or production, today?
    As Mises notes, when the natural or ordinary interest is zero, no consumption occurs even into eternity. High interest rates show that people want to consume in the present and near term. Low interest rates show that people are willing to wait longer to enjoy consumption. At zero interest, which is what the anti-usurers demand, present consumption ceases, and everyone’s labor and resources go toward future consumption. Thus, people would starve as they invest all their labor and resources in capital goods. Do anti-usurers expect lenders to be so future oriented that they will choose death over usury?
    Hunger prevents the natural rate of interest from becoming zero. If food is available, people will eventually eat it before they starve. Thus, the present value of food will eventually exceed its future value, which means people start applying an interest rate to saving their food for future use, and consuming it in the present.
    Therefore, anti-usurers have to resort to the coercive power of government to suppress interest to zero. As contradictory as it seems, if the government forces interest to zero, as the anti-usurers want it to do, people will consume their capital. As a result, future goods will become more scarce and eventually cease to exist. Again, people will starve because they have consumed their “seed corn.” The few who survive would return to the hunter-gatherer stage of humanity. Thus, when the government outlaws usury, it forces people to become extremely present oriented.
    Is starvation what the anti-usurers want? If they succeed in outlawing all interest, starvation is what they will get.
    High interest rates occur when people are present oriented; they have a high time preference. Low interest rates occur when people are future oriented; they have a low time preference. Future oriented people value future income and satisfaction more than present oriented people value them. Generally, future oriented people and societies are much wealthier and more advance than are present oriented people and societies. The burden of time is much higher for present oriented people and societies than it is for future oriented people and societies.
    Anti-usurers seem to prefer present orientation to future orientation. They seem to prefer people consuming everything as quickly as possible to prevent delaying satisfaction, for that implies interest. However, as they demand zero interest, they seem to want to convert everyone to an extremely future-oriented person, who consume nothing in the present.
    Everything, and every action, carries an interest rate whether noticed or not. Interest guides people in their consumption. Even the farmer uses interest when he decides how much of his crop to consume now and how much to save for planting next season.
    Likewise, when a shipwrecked sailor rations his water consumption, he is employing time preference, interest. By weighing immediately quenching his thirst against quenching his thirst in the future, he is employing time preference, which interest represents.
    Today, many opponents of usury oppose charging interest on loans for immoral reasons rather than moral reasons. They merely want to use other people’s capital, money, to satisfy immediately their consumptive desires without any cost to themselves. With a forced zero-interest loan, the borrower is taking something, the use of another’s capital to save time, from another, the lender, for nothing, which the moralists consider extortion.
    Morally, one may be obliged to lend to a destitute Christian in dire need of the necessities of life at no interest (Exodus 22:25) and perhaps without the thought of repayment. (Actually, today with governments stealing the wealth of the productive and giving it to the poor to provide not only the necessities of life, but also many luxuries, no need really exists to lend to the poor and needy.) However, he should ensure that money lent goes for necessities and not for frivolous consumption or pleasure. (Perhaps a better solution is to give the person in need the necessities needed and allow the recipient to pay for them later when he can. [One should never lend any more money to any friend, relative, or acquaintance than he is willing to give them as a gift because he is not likely to be repaid.]) Nevertheless, no one is morally obliged to lend money interest free to invest in a business, to speculate, or to satisfy consumptive desires.
    Likewise, loans to Christian churches, Christian schools, and Christian charities should be interest free. But, then, why not just donate the funds?
    In a highly Christianized society, interest rates will be low, but not zero. They are low because Christians are, or should be, future oriented. As noted above, future orientation causes interest rates to be low.
    Anti-usurers need to decide if they want a future oriented society in which the wealth of mankind will continue to climb, or a present oriented society in which wealth declines toward the hunter-gatherer level. If they want a future oriented society with increasing wealth, they need to cease insisting on zero interest, outlawing usury. If they insist on zero interest, outlawing usury, they will create a present oriented society with declining wealth for all. As Christianity is future oriented and outlawing usury is present oriented, the anti-usurers are promoting an unchristian society.
    As the above discussion shows, usury, the payment for time, is essential to life. Without usury, civilization would not and could not exist. Without usury, mankind would only exist in a hunter-gatherer society. Moreover, anti-usurers promote a highly contradictory and impossible society: They want people to be extremely present oriented, have a high time preference, and extremely future oriented, have a low time preference, simultaneously. Anti-usurers are nothing more than promoters of “something for nothing.” In short, anti-usurers prefer lower-class living, present orientation, to higher-class living, future orientation.

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Copyright © 2017 by Thomas Coley Allen.

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