Here is the link with Mr. Ilink’s responses to the questions I posed regarding his views on monetary systems including the banning of interest. I thank him for providing such thorough explanations, and I will explore these further here.
I now understand his idea of “Natural Money” comes with
three components: 1) the banning of interest on loans, 2) no
fractional-reserve-lending, and 3) a currency with demurrage. This should be kept in mind when reading his
comments.
Will it be implemented by
force?
I asked this question (repeatedly) because advocates of this
concept either ignore or talk away from how the system will be
implemented. It seems to me that the
only way this will gain any meaningful traction in the market is if force of
some significant amount is applied – in other words, I don’t see a significant number
of individuals with capital voluntarily rushing to a system that promotes that
they will not earn interest if they lend a portion of their capital.
Whether or not something is
implemented by force is the central theme of libertarian thinking. If it is
implemented by force then libertarians think that it must be wrong.
It is a libertarian thing, but not only a libertarian
thing. The initiation of force is wrong
for many people, not only libertarians. Forgive
my bluntness….
Walk up to a stranger and shoot him in the head for no
reason. Is this wrong? I will assume you answer yes. Then for what reason, short of shooting
someone in the head for no reason will you draw the line – where is it “right”
to initiate force? Why?
Specifically here, we are speaking of commercial
transactions. Why should force be
introduced by a third party if two others agree to a commercial transaction, a
transaction that does not initiate force against an unwilling third party? I find no justifiable reason, and the
possibility that the borrower might not be able to repay the lender or that the
borrower must be protected from himself is not a justifiable reason.
There are two domains: the public
and the private.
This is political thinking.
There is truly only one domain when it comes to human interaction, that
of the acting individual. The “public”
sector is made up of acting individuals, empowered to act in ways not allowed
for private citizens, up to and including acts of pre-meditated murder. There is no ethical justification for this
distinction.
In my opinion, the public domain
should be ruled by democratic decision making. I am strongly in favour of
referendums like in Switzerland so the government can be completely controlled
by the citizens. Referendums should be implemented on all levels: municipality,
state/province and country.
Again, forgive my bluntness…
What if you and two others vote to decide which of the three
of you will receive the bullet in the head, and you lose? What if the two of them believe that there is
a really good reason to shrink the population by one-third? Is this wrong? Again, I will assume you answer yes. Then for what reason short of taking a bullet
to the head because of majority vote will you draw the line on the initiation
of force approved by democratic means?
Why? What makes your opinion on
this more valid than mine?
That a majority votes for an act might legalize it, but a
majority cannot legitimize it. That a
majority voted for pre-meditated murder cannot provide an ethical justification
for the act. Majorities have acted in
tyrannical ways against minorities many times in history, and even in current
times.
Assuming that a country decides
after a referendum to implement a specific type of money, make it legal tender
and ban other types of money, is this force?
A country cannot decide anything – a country is lines on a
map, often without even a common heritage.
Individuals can decide things. If
an individual cannot opt out of an act with which he does not agree, it is
force. If the specific type of money subject
to vote was of good quality, a referendum would not be necessary – in a free
market, such a money would find willing takers.
A referendum on voluntary economic matters is silly. Why not a referendum on the type of bread we
eat? Or the type of cigarettes to smoke?
Market participants have the option
to buy gold or foreign currencies….
Why can the world survive with multiple currencies, but a
community cannot? Why must a participant buy a foreign currency for
diversification, one that is not accepted in his home town? Why not competing currencies within a
jurisdiction – none of these given force or preference by government action? Why not let individuals decide on this in the
manner that each one feels is most beneficial for his purpose?
….so if it is a bad plan then
markets will end it.
If the plan is enforced by the government because the
democratic majority approved it, it will only end after it has done systematic
and horrendous damage. See the world
around you today, and tell me I am wrong.
We all live under a “bad plan” for money. You are correct, the markets will end
this. But because government actors
fight against the market, thus delaying the end and enlarging the problems, we
are all going to suffer tremendously in the meantime and in the end – as opposed
to the relatively minimal suffering if markets are allowed to perform the
cleansing one bad decision at a time.
If the market ends the plan, is
this force?
No, it is the sum of individual choice – with each
individual left free to enjoy or suffer the consequence of his choice. Unlike force through democracy.
The statement that "centrally
planned solutions can never be justified – neither for the means nor the
ends" is a political view.
Incorrect.
It is a
moral and ethical question on the one hand, and a pragmatic question on the
other. For the means, it utilizes force
up to and including the state-sanctioned murder of those who disagree. For the ends, it is demonstrated economically
that central planning is not as efficient as free market solutions. There is no justification for this. It is only political because it benefits
those on the inside to centrally plan solutions. It doesn’t mean those of us on the outside
should sanction this, or offer to serve more power to the insiders by utilizing
governmental approaches to wishful “solutions.”
There are traffic rules for
instance, and other rules everyone thinks are justified, and they are enforced
by a central government.
There are many means by which traffic behavior can be enforced. That it is done a certain way today does not
mean this is the only possible way.
Imagine if roads were privately owned, for example…but not to digress….
This example comes up often as a reason for government as it
exists today, and it is equally faulty every time.
Before there were hundreds of millions of cars on the road
driving at 120 k/mh, there were two cavemen walking in opposite directions on a
path. Every day they would bump into
each other, not sure about which side each should use to pass the other. While a nuisance, it wasn’t life threatening.
Admittedly, these two were a bit slow. After a few hundred days of bumping into each
other, they decided to meet over a woolly-mammoth steak dinner and talk it
out. They decided at the dinner to
always pass to the right. This seemed to
work just fine. When other people came
to their path, they quickly learned the rule for passing.
Later, when they rode on horses and drove wagons, they
continued the practice of passing to the right.
But now they found some difficulty at an intersection – again, rarely
life threatening, but needlessly troublesome.
Over a pork steak, they decided that the wagon driver to the right would
have the right of way. This practice
spread from town to town as people travelled and traded in wider circles.
Then someone developed a traffic circle – an individual had
to figure this out before any government could force it on everyone, after
all. This really improved the flow, and
other towns copied the idea. By the time
cars came along, everyone in the region pretty much had the rules down pat.
Look up videos and stories of various communities that have
removed street lights and other traffic control markings. The traffic flows much faster.
The point here is: Are people free
to democratically decide on the issue of money?
Fifty percent plus one of them might be free in such a
scenario. Not the rest. People aren’t free if others get to force a
decision upon them. Why don’t we have
people democratically decide the issue of milk, bread, or beer? After all, I am sure someone can
scientifically demonstrate which beer is the best of all. What is the difference between forcing a beer
choice and forcing a money choice?
A reader asked: Who will be
receiving the tax on the money? Most likely this will be the government issuing
the currency.
What is the right way?
There is an example of free money
in operation for 1,500 years. Joseph introduced grain storage in Egypt around
1,500 BC. He also caused the introduction of free money by his actions. This
system lasted until the Romans forced gold and silver as money upon the
Egyptians. So, the idea that free money
is not sustainable in the long term is contradicted by facts, see:
The historian Friedrich Preisigke
discovered that the Egyptians used grain receipts for money [+]. Farmers
bringing in the food, got receipts for grain. Bakers who wanted to make bread,
brought in the receipts, which could be exchanged for grain. Because Joseph
took all the money from the Egyptians (Gen. 47:14-15), they had to invent an
alternative currency.
It did not take long before the
grain receipts were accepted as money. Because of the degradation of the grain
and mice eating from it, the value of the receipts was steadily decreasing.
The charge was not for holding currency, the charge was for
the reasons you mentioned, additionally for storage – these are reasonable
charges. However, as you describe this,
it was a commodity-based currency, not one backed by nothing. Gold would work better than grain (not
subject to degradation or mice), but backing by any commodity with demand in
the market is a good beginning basis for a currency – thereafter the
differences based on the characteristics of the commodity would determine the
acceptance and relative value of the currency.
There apparently was no force
needed to make people accept the money. So free money is natural and not
contradicting human behaviour like you assert.
My assertion was specific to the banning of interest. I maintain this view – it against the nature
of man to defer satisfaction and take a risk and at the same time not receive some
benefit for this. Beyond this, I have
not studied the 1500 year period in question to address any of these
points. Perhaps I might, and perhaps
like Wörgl I will find other, more over-riding factors to the story.
The borrower is servant to
the lender
Why does The Bible condemn charging
interest?
I don’t know. There
are many Christians who interpret this in a different manner than you seem to
do. In any case, choosing to use
religious doctrine (usually subject to varying interpretations) does not seem a
reasonable basis by which to order society.
It tends to divide rather than unite.
Even the Christians have split into hundreds, if not thousands, of sects
– each one believing it has found the truth.
But as you choose to lean on the Bible: nowhere does Jesus
advocate the initiation of force – yet you do quite openly. In fact, He often speaks in terms that are
quite the opposite. Nowhere in Scripture
does God offer that violation of His commands can be ignored as long as a majority
decides. Why don’t you lean on this
aspect of Scripture, instead of finding fault with those who speak against the
initiation of force?
The lender/borrower relationship
with interest is oppressive in nature.
Why? The borrower
does not have to borrow. The lender does
not have to lend. They know the terms
before they agree.
He or she who owns money is in
command, at least when the money is gold or silver.
Why specifically gold and silver?
How did the rich person get in a position to own the
money? In a free market, he achieved
this by providing desired goods and services to willing customers. This is the most democratic system known to
man. As the rich man (in a truly free
market economy) became rich by making good entrepreneurial decisions and
thereby satisfying customers, he would seem quite well qualified to make
further entrepreneurial decisions regarding his lending. Someone will decide the terms under which the
owner of money will lend – is it justifiable that someone other than the person
who owns the money decides this for him?
On what basis?
The rich had the choice to give the
poor a job or to lend them money.
Your use of the word “give” gives me pause.
You are suggesting that the man who is unqualified to work
IS qualified to receive a loan?
So the rich man decides: that bum over there is not
qualified to work for me. In fact, none
of my rich friends at the club would hire him, either. He is a good-for-nothing bum who can’t get a
job anywhere. He has no marketable
skills. Wait a minute! I have an idea! I will lend him money, money that I know he
can never pay back because he is not qualified to work.
He is so poor and such a bum that he doesn’t even have any
assets with which I can secure the loan.
What a deadbeat.
And when he doesn’t pay me back, he will be worse off and I
will be better off…wait a minute...that last part doesn’t sound right. Let me think about this for a minute…When he
doesn’t pay me back, I am worse off because I am out the money and since I
didn’t hire that bum I didn’t even get anything in exchange – I could have at
least had him mow my lawn or wash my car, perhaps take my dog for a walk or
take out the trash. At least I could
have received something. Instead, I got
nothing.
Meanwhile, the bum is better off because he got my money
without having to do anything for it.
Yes, I see why you say the lender / borrower relationship
with interest is oppressive. Poor
lender. Poor, oppressed lender. He loses everything when the loan cannot be
repaid, while the borrower was able to enjoy the proceeds of the loan.
The only thing that happens when a borrower cannot repay the
lender is that the ownership of the security, if any, is determined by the
underlying contract. Nothing more. The previously owed debt disappears. The previously owed interest disappears. No compounding for 2000 years. None.
Economic downturns
You assume that economic downturns
are brought on by the cleansing of the bad investments brought on by the prior
expansionary money and credit schemes made possible by central banks. Economic
cycles are not primarily caused by central banking. Bad investments are
primarily caused by optimism, and can be fuelled by cheap credit, and central
banks can make credit cheaper. There have been economic cycles before central
banks were installed and partly they were caused by fractional reserve banking.
Your explanation is more thorough than was mine, as
fractional reserve banking is unstable (I have many thoughts about FRB, but these
are tangential to this discussion). The
reason I point to central banks is that fractional-reserve lending (along with derivatives
that multiply the leverage) cannot occur to the extent it does today without
the power vested in government-enabled central banks. More importantly, there would not be a money
printer of last resort available to bail-out the institutions that practice
poor business. So, while I agree that
fractional reserve banking existed before central banking, I suggest that if a
bank went too far, the problem would be exposed much sooner and would not
represent a systematic failure.
Natural Money includes a limit on
credit as banks cannot create money. All loans must be made out of savings.
I take it from this that you would ban fractional reserve
lending. This was not clear to me
before, so I am glad you point this out now.
You already have my thoughts about using force in relationships so I
need not go further here.
Interest is an allowance for
risk and 'no cost money'
I think that it should be better
when private individuals take the risks themselves by bringing in more equity.
In a free market, it is always individuals that take on
risk. This is true whether the
investment is debt with interest or with equity. The difference in these is which individual (the
one giving capital or the one receiving capital) takes how much risk, and
therefore has the opportunity for more or less of the reward.
With debt, the borrower takes more risk but has a chance to
receive more of the reward if his venture succeeds. With equity, it is the other way around. The choice made can be left to the
participants, can it not?
Again, you seem to operate under a false assumption: the
interest-based debt behind such an enterprise, even after the enterprise fails,
will continue to compound somewhere, affecting everyone – society at
large. It just isn’t so.
You can never be sure about the
long term prospects of a borrower, but it is clear that banning interest will
reduce risk taking.
Why would you design a system that will reduce
risk-taking? Why do you assume this is inherently
good? Why do you get to decide? Cannot each individual decide the amount of
risk he is willing to take? Why should
this be subject to majority vote?
A more specific definition of
Capitalism
Within the context of Natural Money
Capitalism is defined as private enterprise within an interest based economy.
Thank you.
Less government and regulation is
feasible when there is a ban on interest.
You are saying that “[l]ess government and regulation is
feasible when there is” more government and regulation. You just suggest it should be your version of
government and regulation. Everyone has
a formula they believe is the right formula.
I say, go test it in a free market.
Take the risk!
This is because interest is the
root cause of many problems governments are trying to solve with their
interventions.
The monopoly system of money and credit is the root cause –
no competition allowed, with government as the enforcer. And the root cause of this is envy in the
hearts of the people, envy sanitized by democracy.
On this example, you have
criticism. You ask me: "Is tripling the life of the house the best choice
one might have for his incremental 200,000 units?" If the alternative is
destroying the planet and killing my children then I am inclined to think so.
At best, no one can really say that human action is
destroying the planet (in my opinion, this is nonsense, supported by
politically motivated junk science – the uncovered emails prove what many long
suspected). In the meantime, it is 100%
certain that millions of people are suffering daily for a variety of reasons,
many of these reasons perpetrated by insiders who control democratically
elected governments.
So it seems to me that the 200,000 currency units can do
more good today against problems that are occurring with 100% certainty as
opposed to 100 years from now against minutely possible (if that)
problems.
Best of all is to allow the person who owns those 200,000
units to decide. Not you, not me.
A complete free market in
money
I do not oppose a free market in
money, but only if people choose so democratically, for example in a
referendum.
You must realize this is a contradiction. A free market means a free market.
If people make democratic choices
to make certain types of money legal tender, and outlaw other types of money,
then I will accept that. If it is a democratic choice to punish people for
using gold and silver as payment, then I will accept that.
Of what business is it to a voting majority of 50.1% if two
people decide to conclude a transaction using silver as payment? How do they harm the majority? How do they harm you? Why is this a punishable act? Please remember to tell me at what point you
draw the line on majority rule prior to the majority vote to put a bullet in
your head.
People who criticise me are more
useful as they help me to improve the theories.
I hope I have been of some service.
Therefore I work on my theories
alone, engage in discussions, and rethink the theories. If the theories are valuable,
then they may be noticed one day, and people may see that I am on to something.
I applaud you for this.
There are many people who see tremendous faults and
unfairness about the current system, yet come to different conclusions about
the “fix.” I will state again here what
I said in my earlier post:
“If you truly want to reduce the risk of economic downturns,
advocate for a complete free-market in money, credit and banking, without
government force and coercion. No
government support for any one scheme, no government regulations, no taxes on
currency exchanges, taxes can be satisfied in any currency unit, etc. End the monopoly. From this, let a thousand experiments be
tried and propose yours as one of them.
Find others of a like mind who will voluntarily cooperate with you.”
Propose any system you like.
There are hundreds of them floating around on the internet. I think there are so many floating around
precisely because none of them get to be tested by the market. So I suggest that all those who see the
problems of the current system would, in addition to advocating for their
favorite system, always also advocate for allowing free competition to decide
money, currency, credit, and banking. If
they would do this, there may be some chance at breaking the monopoly. Then we can leave it to the marketplace to
determine the answers that people find best and we could quit having these
theoretical debates.
This for me is enough.
There is another fundamental Austrian critique against government mandated interest rates notwithstanding that the rate is set at zero. Without Natural rates set by the free market we are denying ourselves the coordinating function of these rates between consumption and investment by truly reflecting consumers' time preferences and available resources. It is like blinding ourselves in the name of efficiency.
ReplyDeleteI quote below Roger Garrison from his discussion on Natural Rates of Interest. I quoted extensively (hope it fits), but I recommend the entire article, link here:
http://www.auburn.edu/~garriro/natneut.pdf
So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. In macroeconomic terms as applied to a wholly private economy, it is the rate that governs the allocation of resources between current consumption and investment for the future. By keeping saving and investment in balance, the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy’s productive capacity is ways that are consistent with people’s willingness to postpone consumption.
In the hands of the Austrian economists, the natural rate became the rate that reflects the time preferences of market participants and allocates resources among the temporally defined stages of production. The output of one stage serves as input to the next in this logical and broadly descriptive representation of the economy’s production process. The temporal dimension of the economy’s capital structure is a key macroeconomic variable in Austrian theory. Time preference is simply a summary term that refers to people’s preferred pattern of consumption over time. A reduction in time preferences means an increased future-orientation. People willingly save more in the present to increase the level of future consumption. Their increased saving lowers the natural rate of interest and releases resources from the final and late stages of production. Simultaneously, the lower natural rate, which translates directly into reduced borrowing costs, makes early stage production activities more profitable. With the reallocation of resources from late to early stages of production, the preferred temporal pattern of consumption gets translated into an accommodating adjustment of the economy’s structure of production.
Movements in the natural rate are also critical to the economy’s performance when changes occur in the availability of resources or in technology. Suppose that a technological breakthrough makes a time-consuming production process much more productive than before. Future consumption—even increased future consumption—can now be secured with less of a sacrifice of current consumption. People’s choices in the marketplace will determine how much of the technological gain will be realized in terms of current consumption (less saving) and how much in terms of future consumption (in which the availability of a new technology more-than-offsets the effect of reduced saving). A rise in the natural rate during the transition period is portrayed by the Austrian economists as an “interest-rate brake,” a term we owe to Hayek (1933, pp. 94 and 179). The interest-rate brake moderates the rate at which the new technology is implemented and thereby allows for increased current consumption even during the period of implementation. Inventories are drawn down in late stages of production and some resources are reallocated toward less time consuming projects.
In summary terms, the natural rate is seen as an equilibrating rate. It is the rate that tells the truth about the availability of resources for meeting present and future consumer demands, allowing production plans to be kept in line with the preferred pattern of consumption.
Thank you for this. It is good to be reminded that interest rates are prices, and prices are the best communication tool devised. It is best to leave prices free such that these can communicate honestly.
DeleteAny regulation or ban done outside of market forces hinders price discovery and introduces inefficiency and waste. This is true for the price of money and risk, just as it is true for the price of any good available.
Jonathan, thank you for your reply.
ReplyDeleteI could answer this, but I think would become an exchange of political views. I have done that before. It is pointless.
I am not in the business of convincing people. I am trying to improve the theory of Natural Money, and only time will tell whether or not the work will yield results.
There are some things written that I intend to use, for example I am planning to investigate the issue of natural rate in more depth.
Bart
DeleteThank you for the time.
I will encourage you to consider the justification of force via democracy, and where you would draw the line. If you want to make any headway with people in the Mises community, you must be able to explain this well.
In any case, I wish you well.
Mr. Ikink,
DeleteTo advocate banning anything, including loans at interest, is an inherently political statement.
Politics is all and everywhere about when and under what circumstances the use of force is to be considered legitimate. Nothing else.
It is impossible to "ban" any human activity in the way I think you mean the term. Humans can and will engage in the banned activity. So to speak of banning an activity is really to speak of what and how much force, aka violence, is to be used against the person as punishment for engaging in that act.
The compulsory aspects of your Natural Money plan can never be disentangled from political discussion until and unless it is %100 voluntary. You will continue to engage in political discussions until that time.
gpond, thank you for your valuable contributions in this discussion.
DeleteReverting to your initial comment in the first post on this topic, I am satisfied that there was value in this discussion.
Mr. Ikink, compared to most who propose the scheme of banning interest, took the time to thoroughly answer the questions I initially posed.
Through this, at least there was clarity that it will take force to achieve his proposed plan. And as you point out, this is a political question.
Politics cannot be avoided as long as politics is advocated in reaching the solution.