It's All About Usury

With all the turmoil in the financial industry, you would think that there would be a national conversation of money and lending. You would think that this would be a good time to re-examine the way we create money and the way we lend it. You would think, especially, that it would be a good time to review the subject of usury, especially since the credit card market is about to collapse in the same way the mortgage market did. But no, that conversation has not taken place.

Indeed, the last great economist to address the subject was J. M. Keynes, back in the 1930's. Keynes, who was no friend of the Church, surprised himself by finding that the Church's restrictions on usury made perfect economic sense, a sense ignored by classical economists:

Provisions against usury are amongst the most ancient economic practices of which we have record. The destruction of the inducement to invest by an excessive liquidity preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds…I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together, namely, the rate of interest and the marginal efficiency of capital. [The General Theory, 351-2]

What Keynes is saying in this somewhat technical language is that when returns to pure loans are higher than returns to actual investments, you will have a problem; if you can make more money lending to consumers at 25% than to auto makers at 10%, then the money for making things will dry up, and loans will shift to consumption and speculation. We have often noted this problem in the pages of The Distributist Review, (see The Utopia of Usurers, Usury!, Usury: Wealth Without Work, and many other articles) but we can't honestly claim that we have made a big impression on the public. However, Thomas Geoghagen in the pages of Harper's Magazine, has written an indictment of the current system entitled “Infinite Debt: How unlimited interest rates destroyed the economy.” Unfortunately, the article is not yet available on-line, but it is worth picking up a copy of the magazine to read it.

There is an interesting parallel between the lifting of the usury laws and the abolishing of the abortion laws: both were accomplished not by democratic process, but by legislative fiat; in Marquette National Bank v. First of Omaha Service Corp., a 1978 Supreme Court opinion, the court found that an 1864 law prohibited the states from enforcing usury laws in their own state if it was legal in another state. For all practical purposes, this ended usury laws.

The lifting of the usury laws had dire unintended consequences, one of which was the decline of manufacturing:

It may be hard to grasp how the dismantling of usury laws might lead to the loss of our industrial base. But it’s true: it led to the loss of our best middle-class jobs. Here’s a little primer on how it happened. First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had “cheap money” flooding in from China, Saudi Arabia, and even the Fourth World. May God forgive us—we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn’t even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that’s the kind of thing that got the “normal” big return; i.e., not 5 percent but 35 percent or even more.

But in addition to the economic effect, it had a profound effect on the moral character of the nation:

The change in credit-card caps also had a bad effect on the moral character of the nation. Because interest rates were so high, the banks no longer wanted borrowers with good moral character. Look at the way lending has changed just since the time I was in law school in the early 1970s. Even then, the mantra of my teachers in contracts and commercial paper was: “The loan must be repaid!” I have a friend, a professor, who still quotes that refrain. But it’s out of date. At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don’t really want the loan to be repaid—they want us to be irresponsible, or at least to have a certain amount of bad character.

One question, however, is why we were willing to oblige the bankers by displaying such a poor moral character. No doubt the convenience of the credit card was a factor, but there is more to it than that. One reason is that we had too. The shift in the economy from manufacturing to finance meant that workers were no longer able to bargain for wages through unions and other means. Since 1972, the median hourly wage has stagnated. We experienced a very odd phenomenon: productivity exploded, but wages remained the same. Obviously, there was not enough purchasing power to clear the markets. Workers responded in two ways. One was to work more hours and put more family members to work, with a devastation effect on family life. The other was to borrow more. Further, the best and brightest of our students no longer went into engineering or manufacturing, but into finance. We started to lose even the knowledge of how to make things. As Thomas Geoghagen points out, not only did financial companies account for 40% of corporate profits in 2003, (up from 18% in 1988) but this may understate the problem. Many “manufacturing” firms, like GM and GE, actually made their profits from their finance divisions. GM became a company that manufactured cars in order to make loans on them.

Our current bail-out plans are mainly directed at the banks, the hedge funds, the insurance companies, and other financial institutions. But this will not work. Without restoring manufacturing, farming, mining, and other basic industries, we cannot rescue the economy. But we have the order exactly reversed. The bankers get an instant bailout, no questions asked, while manufacturers, like the Big Three, have to crawl over broken glass to get what amounts to “chump change” in the context of the overall “rescue” numbers. Moreover, “contracts” with the derivative traders of AIG are regarded as sacred and unbreakable, while union contracts are broken at will.

It is the habit of the modernists to despise the past, and so it is no surprise that a restriction which existed in most cultures from the time of the Babylonians to the time of Jimmy Carter would be overturned. Yet, even modernism posits some empiricism, actually looking at the effects of an action. It is now long enough to look at the effects of the Supreme Courts 1978 decision. And without revisting this decision, we cannot fix the economy.

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Usury: Wealth Without Work and Why it Matters

The following is a talk I will give later this week to the American Monetary Institute conference in Chicago.

The great problem a theologian has in discussing usury is that economists regard it as a moral term and therefore exclude it from scientific discourse. In this view, ethics and economics occupy separate ontological realms, and between the two worlds, there can be no real connection or communication. To them, it is positive science that remains the “master discourse,” the true and only description of reality, while ethics occupies the shadowy world of “what ought to be” rather than the real world of “what is.” Ethics and economics, according to economists, can never meet and can never enlighten each other. The question, as the economists see it, is one of science: they are happy to wear the mantle of “positive” science, and leave the “normative” talk to priests, shamans, or whoever else wants the task, just so long as the priests and shamans will leave them alone.

The problem with this view is that it is not scientific. To be precise, the very distinction between a “normative” and “positive” science betrays a misunderstanding of the scientific enterprise in general, and the work of economists in particular. For clearly, economics is a humane science, dependent on the other humane sciences for the very definition of its starting terms; to cast off the humane sciences is to abandon any possibility of being scientific.

In this paper, I will attempt three tasks. The first is to explicate the relationship between normative and positive science and to annihilate the difference between them. The second task is to show the relationship between ethics and economics, or more precisely, between equity and equilibrium. The third task is to show how usury destroys equity, and therefore makes equilibrium impossible. But more importantly, I will attempt to demonstrate that there can be no real quarrel between the moral order and the economic one; to posit such a quarrel merely means that one has either misunderstood ethics, or misunderstood economics.

Science, Normative and Positive

Some wag somewhere has remarked that economists suffer from “physics envy.” One could certainly make that charge against W. S. Jevons (1835-1882), one of the founders of marginal economics, when he wrote that a “perfect system of statistics … is the only … obstacle in the way of making economics an exact science”; once the statistics have been gathered, the generalization of laws from them “will render economics a science as exact as many of the physical sciences.”¹ More than a century has passed since Jevons wrote these words, and in that time there has been a growth of vast bureaucracies, both public and private, devoted to establishing this “perfect system” of statistics. Today, we have access not only to vast amounts of statistics, but to computing power unimaginable in Jevons’ day; still, the models, worked out in great precision and computed on engines of vast power, seem to lack any predictive reliability whatsoever.² Despite these failures, economic orthodoxy clings to the notion of itself as a positive science.

In light of these failures, we can ask if economics really is a positive science. But let me suggest that the question is meaningless. Every science, insofar as it really is a science, is both positive and normative. Every science, insofar as it is a science, must be “normalized” to some criteria of truth. These criteria will arise from two sources, internal and external. The internal criteria involve a science’s proper subject matter and methodology. But such internal criteria alone are insufficient to found any science as a science. In addition, there must be external criteria of truth, and these truths can only come from one or more higher sciences. In the absence of such an external check, the science will merely be circular, dependent on nothing but itself and unconnected with the hierarchy of truth. Thus, for example, biology is responsible to chemistry, chemistry to physics, physics to mathematics and metaphysics. No biologist can violate the laws of chemistry, and no chemist can reach a conclusion contrary to physics. Thus every science is responsible to its own methodology (and therefore “positive”) and to the higher sciences (and therefore “normative”). A scientist’s obligation to be faithful to his proper method does not relieve him of his obligation to higher truths.

It is necessary, then, to determine what the higher sciences are for economics. Now, the physical sciences terminate in physics, but the humane sciences terminate in some view of anthropology derived ultimately from philosophy and theology, with stops along the way for psychology and sociology. It would seem to be self evident that a complete view of man would involve these sciences, yet this view is not generally accepted by economists. How is it possible that a humane science can cut itself off from these indispensable sources of knowledge about humans? The answer lies in the fact that neoclassical and Austrian economists accept as a purely economic truth that which is, in fact, a purely philosophic stance, namely that of Jeremy Bentham’s utilitarianism. Mises's Human Action, for example, merely renames Bentham's hedonistic thesis Praxeology, and claims that is has the same epistemological status as do logic and mathematics, “unconditionally valid for all beings endowed with the logical structure of the human mind.”³ Nevertheless, some of us, clinging to our illogically structured minds, have sought another basis for the understanding of human relationships.

Justice and Economics

If what has been said so far is true, then economics will be critically dependent on certain terms that are beyond the competence of economists to define. Terms like “freedom” (as in “free” markets) or “liberty” or “society” or even “man” are critical to economics, but their precise definition depends on other sciences. But above all the critical terms in economics, the most important is justice. This is because economics is the science that deals with social provisioning, with those human relationships necessary to the material sustenance and continuation of the social order. And the virtue that governs all human relationships is justice, or at least it is according to Aristotle and all the Scholastic thinkers who followed in his wake.

For Aristotle, justice is not just a part of virtue, but “virtue entire, nor is the contrary injustice a part of vice, but vice entire”.⁴ Justice underlies all the virtues and governs all relations of man to man, man to society, and man to himself. It is within this relationship of man to man, that is, within justice, that Aristotle locates economics. He presents a sophisticated analysis that includes a demand function, a distinction between use and exchange values, the function of money as the medium between value and demand, and usury, among other things.

Aristotle discusses justice of two kinds: distributive and corrective. Distributive justice deals with how society distributes its “common goods.” This refers to the common goods of a state, a firm, a partnership, or any cooperative enterprise. For Aristotle, these distributions are proportional to one's contributions. However, different contributions can be valued in different ways. For example, how does one measure the relative contribution to production of, say, the janitor and the engineer? For Aristotle, this is a cultural question, “for democrats identify it with the status of freeman, supporters of oligarchy with wealth (or with noble birth), and supporters of aristocracy with excellence.”⁵

Corrective justice,⁶ on the other hand, deals with “justice in exchange”; that is with transactions between individuals. In this case, justice consists in exchanging equal values, in “having an equal amount before and after the transaction.”⁷ The problem is how to determine what values are equal when dealing with dissimilar products, which is nearly always the case. To use Aristotle’s example, how many pairs of shoes are equal to one house? The only way to know this is by “need,” which many economists understand as the demand function, mediated by money. Thus the demand for houses and shoes can be compared by looking at their prices and the two can be equated in terms of money. Money, however, is a social convention: “this is why it has the name money (nomisma)—because it exists not by nature but by law (nomos).”⁸ Thus the requirement for equality in exchange comes from the natural law, but the method of implementing it is legal or conventional.

It is important to note that distributive justice is a theory of production, and corrective justice a theory of exchange, and hence these are two separate parts of a complete theory. Under distributive justice, what one gets is proportional to what one gives; one's wealth is related to one's work. The Philosopher gives us the following model of an economy: the cobbler receives a number of shoes proportional to his contribution to the production process, while the carpenter receives a certain number of tables and chairs. This is distributive justice. Since neither needs that many shoes or chairs, they then exchange between themselves to correct the imbalance. This is corrective justice. Of course, cobblers and carpenters are paid not with actual shoes and chairs, but with money. Nevertheless, the corrective and distributive principles remain the same.

Up until the 15th century, the unity of distributive and corrective justice was recognized both implicitly and explicitly; economics was essentially a virtuous enterprise. However, in the 16th century, as new forms of ownership and production began to take hold, a more individualistic approach to economics gradually developed. The ethical framework of medieval economics came under attack, but there was little to replace it. Or rather, what sought to replace it was a new concept which preached quite openly that “greed is good.” This idea was most famously expressed in Bernard Mandeville’s The Fable of the Bees: or Private Vices, Publick Benefits (1724) “in which he put forth the seemingly strange paradox that the vices most despised in the older moral code…would result in the greatest public good.”⁹ The locus of economics shifted from the virtuous to the vicious, and it is Mandeville, and not Smith, who is the true founder of modern economics.

In The Wealth of Nations, Adam Smith attempts to include both kinds of justice, but they are disconnected from each other. Smith's “labor theory of value” is about production, and it is inherently a theory of distributive justice, since production is always a social process. The so-called “invisible hand” theory, however, is about exchanges between individuals, and hence falls under corrective justice. Smith could never join the two halves of the theory into a coherent whole. So it is no surprise that after Smith, economic theory bifurcates into two contending traditions, the labor theorists and the utilitarians, each one owing allegiance to a different form of justice. Neither side could offer a complete description of the economic situation, try as they might.

This impasse was broken by the “marginalist revolution,” by which returns to labor and capital were (in theory) priced at their “marginal” contributions to production, and commodity prices driven to the cost of production. The magic by which productivity and price were to be equated was free bargaining. Both worker and capitalist were free to accept or reject any contract offered. By this means, and over time, returns to both capital and labor would be normalized to each other, that is, there would be neither great wealth nor great poverty, prices would be driven to costs, and economic rents eliminated. Therefore, the economy could achieve equilibrium by a pure system of exchanges without recourse to distributive justice; contractual (corrective) justice alone could solve all economic problems. The messy cultural problems of distributive justice could be eliminated entirely, and economics placed on a mathematical basis, thus becoming a “true” science.

The problem with this theory, however, had already been pointed out by Adam Smith a century before the theory was advanced; namely that contracts do not arbitrate productivity, they arbitrate power. Most workers cannot withhold their labor for as much as a month, and few could hold out for a year. On the other hand, the “masters” (as Smith called them) could easily survive for years on their wealth without employing a single hand. Therefore, the capitalist will always have an inherent advantage over the worker, and the wage contract will reflect this advantage, unless something is done to address the imbalance of power between them.¹⁰ That is to say, unless there is some prior institution of distributive justice, corrective justice will be insufficient to relate wages to productivity.

Equity and Equilibrium

There is one simple principle that must apply in any economic theory: in order for there to be economic equilibrium, what one takes out of the economy must be equivalent to what one puts in. That is to say, work and wealth must be equated. Under such conditions, equilibrium is a trivial problem; absent such conditions, equilibrium is impossible. Now, equity need not be perfect because equilibrium need not be perfect. Nevertheless, if there is not a general balance of supply and demand, if there is not a general expectation that markets can be cleared at a price sufficient to cover the costs of production, the economy will grind to a halt. Investors will not invest and wages will be too low to clear the markets. Try as we might, we simply cannot get away from the Aristotelian requirement of distributive justice.

The most obvious economic truth in the world is that if there is wealth without work, then there most also be work without wealth. If someone gets more than he gives, someone else must give more than he gets. It is quite true that no value theory can fix with mathematical precision the relative values of giving and getting. Yet, reasonable judgments may be made, and each theory provides a criterion for judgment, namely that profit and wages are normalized to each other. This means that if there is a high degree of social inequality, then someone must be getting more than he gives, and the economy is out of balance.

Non-Economic Equilibrium

But no society can long tolerate such disequilibrium conditions. Lacking a principle of distributive justice, we must use non-economic means to balance the economy. The major non-economic means of restoring equilibrium are charity, welfare and government spending, and consumer credit, that is, usury. Each of these methods transfers purchasing power from one group, which presumably has an excess, to another which has a deficit. The first method, charity, will always be necessary to some degree because no economic system can be perfect.

The second non-economic means is welfare and government spending in general. By these means, governments seek to re-establish equilibrium conditions either by redistributing incomes or by increasing spending. And for a good while, this method worked fairly well. However, in this system, distributive justice takes the form of the less efficient redistributive bureaucracy.

But for some time now, government redistributions have been insufficient and the economy has depended chiefly on the third method, usury or consumer credit. This is the plastic economy, an economy based on credit cards. And to the extent than an economy depends on consumer credit, it is, quite literally, a house of cards, and will be as unstable as those structures usually are. Of course, usury merely delays the problem, postpones the crisis to a future period; clearly, a borrowed dollar used to increase demand today must decrease demand by that same dollar tomorrow—plus interest. This necessitates more borrowing, and eventually, the system falls of its own weight, as credit is extended to an increasingly weakened consumer, and a credit crisis results. The “stability” conferred on an economy by usury is illusory and temporary.

Non-economic equilibrium provides us with a measure of just how well an economy is doing in economic terms. If the economy has a high dependence on non-economic means, we may assume that there are serious problems in the economy itself.

Usury: Wealth Without Work

We are now in a position to make a judgment about usury. The criterion for this judgment will be whether usury adds anything to the economy, or whether it is an example of wealth without work. If the former, then it is a proper part of economic order; if the latter, it destroys economic order. Note here that the moral judgment and the economic judgment are identical, however one judges the case. There are not two separate ontological realms, but only one truth to which all sciences must relate. Before we can make our judgment on usury, a few comments on money are in order.

Money is a marvelous thing. Money directs the operation of an economy. There can be land to work, hands to work on it, and tools with which to work it, but without money, these will never get together, or will do so only in a very primitive manner. But although money is a marvelous thing, there is some dispute about just what kind of thing money is. For some it is a commodity, for others a store of value, and still others, a mere medium of exchange. But without going into these arguments, one thing we can say about money is that it is an accounting system.

If, in doing a day's work, I add, say, $100 to the stock of goods and services available to to the public, it is important that I get a credit for $100, credit which gives me the right to take an equal amount out of the said stock of goods and services. This credit can be in the form of gold coins, little slips of paper, or electronic bits roaming around cyberspace. In the latter case, no currency of any kind is required, and there need never be any reason for me to convert my electronic credits into actual slips of paper or metallic coins. The computer money is independent of any particular physical representation. I do a day's work and my account gets credited for that work; I go shopping and my account gets debited. The currency I carry, if I happen to carry any, is simply the credits in visible form, and in exchanging the visible credits for tangible goods, I surrender them and thereby debit my own account and credit the account of whomever I give the money to.

Once we grasp money as an accounting system, we understand immediately why any medium will do, why tally sticks work as well (if not better) than gold coins: the tally stick can be created whenever a new product is created, and marked whenever it is sold, over whatever period of time it takes to pay for the product. One need not wait on the mint or the bank to supply one with the visible form of the credits. Either the tally stick or the electronic bits can be supplied at virtually no cost. Money can be called into being simply by the production of salable products. Further, this accounting system exactly matches a proper economy: work adds both tangible wealth (real products and services) and the accounting wealth (money) necessary to circulate them.

The question is, does usury add a salable product to the economy? Is usury necessary for the circulation of real wealth? Clearly, in order to produce something, we must consume other things: labor, raw materials, tools. These things must be paid for, and paid in proportion to what they contribute to production. If, in order to produce something, I borrow any of these things, I must pay the owner a proportion of what is produced. If I borrow the money to pay for them, what I really borrow is the things themselves, the things that money stands for. To put it in concrete terms, if I lend a farmer a supply of seed corn to plant a crop, I have a claim on some portion of that crop. Likewise, if I lend him the money to buy the seed corn, I have exactly the same claim; the money merely “stands for” the actual seed corn, and the claim is identical. In such a case, there is no case of usury.

But suppose there is no crop. Suppose that wind and weather combine to cause a crop failure. What claim do I have? None that I can see. Like the farmer, I took a risk and like the farmer I take a loss; the failure of the crop dissolves all claims. To demand a payment would be to take a share of what did not happen. I may demand he return the property he borrowed, if that is possible, but I cannot demand he share of a profit that doesn't exist.

Further, my claim stands on one more assumption: namely, that I actually had the money I lent the farmer. However, if I did not have the funds, if, for some odd reason the powers that be had given me the power to lend what I did not have, any payments, whether for principle or interest, would truly be something for nothing, would be wealth without work. Of course, this is exactly what happens with fractional reserve banking: the bank lends money it creates out of thin air; money that represents no tangible asset and requires the bank to surrender no actual goods.

Investors may claim a share of the output, where there is output and where they actually have the money they invest. No society can advance economically without such investment, and since capital represents “stored-up labor,” to deny such returns to capital would be to deny returns to the labor it represents. But to demand a return where there is none, or to demand more than is made, or to demand when nothing, in reality, was lent, is to guarantee that the economy will always be both inequitable and unstable. Such economies must constantly rely on government interventions to rebalance their accounts, and must suffer recurring bouts of contraction that no government can cure.

Science and Religion

Most religious traditions roundly reject the notion of usury. But the sages of the Enlightenment, such as Bentham, rejected this teaching, mostly because it was a religious teaching. By doing so, they wrote into their systems the very sources of economic rent—the formal term for “wealth without work”—that make equilibrium economically impossible. Hence, and despite the best of intentions, they must suffer a continual expansion of government power oven an increasingly unstable economy, an expansion that must continue until collapse. And in place of a real science, we have only a series of contending ideologies masquerading as scientific truths; by declaring its independence from the hierarchy of truth, economics has declared itself independent of science itself and a slave to mere ideology. Only by subjecting itself to the sources of truth can economics claim the name of “science,” and only then can it give adequate guidance to those who would seek a more proper role for government, on the one hand, and a better distribution of wealth on the other.

In social justice circles, there is an old saying: “If you wish for peace, you must work for justice.” The economic equivalent is, “If you wish for equilibrium, you must work for equity,” for equilibrium is economic peace and equity is economic justice, and you will never see the one without the other.

1 Quoted in James E. Alvey, "A Short History of Economics as a Moral Science," Journal of Markets and Morality 2, no. 1 (Spring, 1999): 62.

2 Paul Ormerod, The Death of Economics (New York: John Wiley & Sons, Inc., 1994), 120-7.

3 Ludwig von Mises, Human Action: A Treatise on Economics, 4th Revised ed. (San Francisco: Fox & Wilkes, 1963), 57.

4 Aristotle, Nicomachean Ethics, ed. Richard McKeon, trans. W. D. Ross, Introduction to Aristotle (New York: Modern Library, 1947), 1139a, 10.

5 Ibid., 1131a, 25-29.

6 During the Middle Ages, the term “corrective” justice became “commutative” justice due to a mistranslation. The word Aristotle uses is  (diórthotikós), “corrective” (LSJ). Although the term “commutative” has become more common, we will use the term “corrective” as closer to the original sense in Aristotle.

7 Aristotle, Ethics, 1132b, 19-21.

8 Ibid., 1131a, 25-31.

9 Hunt, History of Economic Thought, 33.

10Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Amherst, New York: Prometheus Books, 1991), 70

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The Money Power

Hardly a day goes by when I do not get a posting or read an article by somebody complaining about the government “creating” money and thereby causing inflation. Now, the people who write these articles are absolutely correct about there being too much money created; they are absolutely wrong about who creates it. Only 5% of the money in circulation is created by the government; the rest is created by the banks. And if that were not astounding enough, even more astounding is how they create it: They create it out of thin air, out of nothing.

Most of us believe that when we get a loan from a bank, the bank is lending us money that comes from the depositors. But this is not true. The banks lend out 10 times the amounts on deposit. Where does this extra 900% come from? From nowhere. They just make an accounting entry and create the money. This means that all money is debt, and that without debt there would be no money.

Look at your dollar bill. At the top is says “Federal Reserve Note.” This has several implications. One, a “note” means that it is a debt. When you buy a home or a car on credit you normally sign a “note” for the loan. The dollar bill is exactly like that. The second thing about this is that the Federal Reserve Bank is not, as most people believe, a department of the federal government. Rather, it is a privately-owned bank. Or rather, 12 privately owned banks. These banks are owned by all of the federally chartered banks. The president does appoint the chairman of the board of the Fed Banks governing body and seven of the directors, and the law gives the FedBank certain powers. But for all that, it is a privately owned and operated system of banks.

Look to the left of Washington, and you will see the stamp of one of these 12 banks. That is to say, that it is one of these private banks, and not the government, that issued that particular dollar (The stamp has been removed from the new issues of higher denominations, but the system works the same way.) Up until 1913, that stamp would have borne the name of your local bank, rather than the local federal reserve bank, but the system is the same.

By having the power to create money from nothing, the banks have tremendous influence and control over the economy, and indeed over political life as well. Most people have difficulty believing that this is the way money works. As Marshall McLuhan noted, “Only puny secrets need protection; Big discoveries are protected by public incredulity.” And it is certainly hard to believe that all money is debt, created out of thin air by a private group with no responsibility towards the public good. Further, it is obvious that such a system must be (and is) unstable, one that requires constant “bail-outs,” bail-out that the government has no choice but to perform if the entire system is not to collapse.

No of what I have said here is particularly controversial. Any economist, of whatever stripe or ideological bent, will, if pressed, admit that this is the way money works. Few, however, will face the implications. Indeed, the whole subject is usually pushed to the back burner; like the dead mouse in the kitchen, it is considered gauche to bring the subject up in public. Therefore, the subject of money remains a complete mystery to the general public. Yet, no other issue affects them in their daily economics lives as does this one. It is important that each of us understand it.

Paul Grignon has brought up the subject; he has put together an interesting film on this topic. It is 47 minutes long, but it is well-worth your time. You can view this film at

http://silverbearcafe.com/private/moneyasdebt.html. I think it is important to take the time to view this film, and even to buy it and share it with your friends and neighbors.

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I Owe, I Owe, It's Off to Work I Go

I could go on and on about the purely economic evils of a nation that lives in debt, and I probably will in future posts. But there is a more serious issue. Debt is not just an economic question, but a moral one. And a moral fault is always a kind of enslavement. Sometimes, we must live beyond our means, because our work does not provide us with reasonable means to live, or because we can't find work at all. But that does not seem to be the cause of most debt today. Rather, most consumer debt today reflects our status as consumers; we identify ourselves not by what we are, but by what we have; identity has become a matter of having rather than being.

This is a kind of slavery. Americans work more than anyone else because we owe more. It is not the so-called "Protestant Ethic" that keeps us chained to our desks, but rather its break-down. Our forebears might have gone into debt for a few long-lived items: a house (purchased with a heavy down payment), a car, a piano, a little furniture. But the idea of putting a burger on the tab would have struck them as strange; the idea that they would be paying next year for a shirt they threw away yesterday would have struck them as bizarre.

In order to become a nation of debtors, we had to change our moral views; we had to acquire a sense of entitlement, and one that operated immediately: we cannot wait for what we want; all our desires must be filled this moment. But when we do this, we lose some degree of freedom. We work now not merely to get the things we need, but to pay for things we probably didn't need; in other words, we work for Mastercard; we labor for Visa. And Mastercard and Visa can never have enough of our work. If a man is working to get what he needs, the things he needs send him a signal as to when to stop working; but a man of unlimited desires, desires he largely gets from advertising, doesn't know when to stop working. Soon he does not own the things he bought with borrowed money; they own him.

Individuals and families go bankrupt for a variety of reasons; sometimes because they are spendthrifts, but other times there is illness, job loss, tragedy of some kind. But with nations, it is otherwise; before they lose their freedom they lose their character. Moral bankruptcy is the prelude to, and cause of, financial bankruptcy.

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Usury!

There! I've said it. I know it's not supposed to be said. I know it's an outmoded, even medieval word, a relic of clerical meddling in economic science. And yet, the shamans may be ahead of the scientists on this one.

First, what is usury? It is not, as some suppose, charging interest on a loan. Rather, it is charging interest on a non-productive loan. What does that mean? Well, we can lend money for production or for consumption; we can lend money to start a business (or expand one) or to finance current consumption, such as buying a hamburger (which is now commonly put on plastic.)

When money is lent for a productive enterprise, the lender is entitled to a share of the rewards, since he also shares in the risk. The loan will then be liquidated by the success of the enterprise, or will be written off with the failure of the enterprise. But in either case there will be no additional burdens, hence no “usury,” that is, no “using up” the stock of society.

But if the loan produces nothing, then nothing can be charged for the loan, or else it is a simply wealth transfer rather than real growth. The scholastics also recognized the right to receive compensation for certain “externalities” of money, namely for risk and the loss of the use of the money. But beyond these legitimate claims, usury is simply a transfer of wealth from one class to another that produces nothing of itself: It is wealth without work. This is especially true of consumer loans. They are merely a claim against future earnings without contributing to those earnings. An economy that depends on consumer lending to fuel consumption is in fact merely borrowing from consumption in future periods.

Usury, aside from its character as avarice, as the desire for wealth without work, has troublesome practical consequences as well. On the one hand, it “covers up” problems in the distribution system, that is, with the wage system. If we did not inject massive amounts of consumer credit, there would be a massive failure of demand and the problems of inadequate pay would become apparent to all. As it is, these problems are hidden and will remain so until the ponzi-scheme collapses (as it must), as it does in depressions. On the other hand, usury detracts from the amount of capital available for productive investments; the absurdly high rates of interest make investment in production less attractive than investments in financing consumption.

Perhaps the last well-known economist to take usury seriously was John M. Keynes, who said:

Provisions against usury are amongst the most ancient economic practices of which we have record. The destruction of the inducement to invest by an excessive liquidity preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds…I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together... (The General Theory, 351-52)

The standard economic theory treats all interest as just another form of profit. But this is incorrect. Indeed, it would be like calling the funds from a bank robbery profit; in a narrow sense they are, since they represent an excess of income over outflow. But interest and profit serve different ends. It is legitimate to think of interest as profit only when it is a participation in profits; but when it merely finances current consumption, then it is that greatest of social evils, wealth without work, growing rich without adding anything useful to society.

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