Monday, January 28, 2013

Ban Interest via Democracy (a Global Force for Good)

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.


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.


  1. 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.

    I 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:

    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.

    1. 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.

      Any 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.

  2. Jonathan, thank you for your reply.

    I 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.

    1. Bart

      Thank 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.

    2. Mr. Ikink,

      To 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.

    3. gpond, thank you for your valuable contributions in this discussion.

      Reverting 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.