How Arbitrary is Interest?

Interest is an arbitrary term in the first place, as mentioned in a previous post, it was once considered as compensation for the loss in value that the wear on the gold or silver removed. It has also been considered a compensation for taking the risk of lending out of the gold or silver, back when highway robbery was actually considered lawful in places... Some authors even considered interest in the sense of a bond, where there is an obvious net sharing in profit and ownership, the venture capitalist approach. It certainly is not a form of punishment, since in the United States, everyone has a right to a jury trial where the amount in question exceeds $20.00 (Amendment 7 of the United States Constitution).

Now that we have a sanctioned capitalist economy, most of the reasons for charging interest have fallen by the wayside. With a paper or electronic money, there is no wearing away of value, so that excuse is null and void. Highway robbery is no longer a valid excuse, since there are civil laws to protect against it, which we are obliged to trust as citizens, the failure to do so is equivalent to a failure to trust in the government and hence its money as well. The venture capital approach is still valid, as a sharing in the profits earned by the investment between the financier and the businessman, but the term 'profit' would suffice better than the term 'interest'.

The highway robbery excuse has morphed into what is now known as a 'risk' factor, based upon the credit worthiness of the borrower. The problem with this is that it is no longer in the range of the definition of profit
on capital, the only principally sound basis for interest in a capitalist economy that can remain consistent with the economic form. Instead, risk is a form of insurance payment that must be distinguished from the term 'interest'.

Were we to distinguish interest and insurance properly, an individual could simply have debt insurance that they could pay to one company that would base their rates on risk. This would be a legal criteria for administering a loan, the same as having insurance on a car as a legal criterion for procuring a loan already represents. Rolling the risk insurance into the term interest is arbitrary and misleading and a route to undermining the profits on capital and the liberty of the citizens. Instead of interest, the sole price of a loan with a fiat money can within the bounds of reason be none other than the cost of servicing it and perhaps a normal rate of profit on that. In other words, the price of a loan is necessarily independent of the quantity of that loan with a fiat money. Some of the arbitrary, unreasonable and unpredictable excuses for perpetuating the myth of interest:

• Credit risk - the risk of default on the loan due to bankrupcy. This risk should be set to zero if the individual has debt insurance.
• Maturity/Term risk – the risk involved in a long-term investment: This risk is forfeit by the lender when the investment is not made in the real capital market, that of business and industrial growth. When an investor chooses to invest in, say, consumer loans, it must be due to the fact that they have no other option and the loss of future opportunity is their own and must be borne by them. The equivalent is; if I invest in a stock and it goes down, I do not get any compensation for that, so what magical incantation priviledges the monied class over the commoner class in the United States when it comes to loans?
• Liquidity risk – the need of compensating the illiquidity of the debt: This 'risk' is borne by both the lender and the borrower and is not a real risk unless viewed from the perspective of an illegal priviledging of a class of people. Ultimately, such a priviledging does not include profit making capitalists, only old leisure class money and corrupt bankers. And this "compensation" comes directly out of the profits of working capital, whether via labor costs or loss of consumer power.
• Inflation risk; Is the most disengenuous of the excuses, since it is unbridled debt and illegitimate interest charging that are most responsible for inflation. With a fiat money, inflation is 100% manageable by the government that backs the money's value and hence, to charge for this nature of 'risk' is to fail to trust in the government and the money's value itself, which is absurd. That the propagation of this inflation is by these very same lenders who fein to doubt the value of the money is in fact treachery against the government and could readily be viewed as treason. Obviously there is also corruption within the U.S. Treasury Department to allow ot this sale of individual liberty, which needs to be removed and harshly dealt with.
  
• The fluctuation of a currency due to the currency exchange rate is normal economics and it is irrational to ground any excuse to charge interest on this notion of risk. The value of a money is due to the quantity of money in circulation. If there is an imbalance in international trade, where there is a sound monetary system, the value of the money will in fact fluctuate, but such fluctuation in a large economy is minimal, and were it to occur it would represent an increasing in the wealth of the nation, and an increase in the purchasing potential of all money. If the loan were large and the value of money increased, that is that much more wealthier the banker becomes as the loan is repaid. If the value of money decreases due to a revolution in productivity and international sales, that is all the more insignificant the magnitude of the loan becomes. In neither case is there a genuine 'risk'.
  

Other excuses for charging of interest today are:

• Time value of money: having money now is more valuable than having it at some future time because interest is earned; Obviously this is the profit earning motive for lending money. It is also the very reason why there is a prime lending rate. The investment incentive should be to investing in stocks and bonds and not proffering loans. John Maynard Keynes ("The General Theory of Employment Interest and Money",1936) very ably showed that there is no market limit to the rate of interest and that if it can find a way to exceed the rate of profit it will do so to the detriment of industry, and employment. Allowing of this excuse for the charging of interest should occasion the elimination of Ben Bernache's job. As it stands, the prime lending rate should be the only allowed lending rate for any and all loans made in the public or private sectors, since all interest payments ultimately derive from the profits of capital, and protecting the right to profit is the very point of setting a prime lending rate in the first place.
  
• Interest is the value borrowers place on having money now; Wants are unlimited, hence by this excuse, interest should be unlimited. This is the very justification of the need not to have interest. And when money is of the fiat nature, and does not represent any form of real capital, it is in direct competition with real capital for the right of profit... under any name.
• Opportunity cost: The cost in terms of options no longer available once one particular option is chosen; Again, this is the 'want' factor. Wants are unlimited. If another individual has the means to make the purchase, they are the rightful purchasers. If there is no one capable of making the purchase, by the law of supply and demand, the price must come down. If it is a profit making venture, say during the course of business competition, then the sharing in the profit through the tool of a bond is justified, but the term interest, due to it's current state of corruption might be changed to profit, which the 'interest' in a bond represents.

The United States Constitution, Article 1 section 9 states that: No title of nobility shall be granted by the United States. And that is not an amendment. It strictly implies that no citizen of the United States shall be priviledged as nobility either. Hence there can be no priviledging that results in payment to any individual or institution based strictly on their wealth or title alone within the United States, nor any recognition of such priviledging from abroad. Hence all the rationalizations for charging interest on fiat money are null and void, since it does not represent actual ownership of capital, but only the possession of the value necessary to obtain capital. The possession of this form of value can not be construed as an entitlement to any priviledge that can be interpreted as belonging to a nobility class, such as the command over interest today represents.

The modern capitalist class emerged from the merchant class, which is what Adam Smith's "invisible hand" quote refers to when taken in context. This class displaced the nobility class by impoverishing it out of the sheer volume of production and novelty that such production could obtain overwhelming the financial capacity of the nobility. The emergence of this new class did lead to substantial hardships of its own, primarily at the beginning, where some things were mechanical and others yet manual labor. Over time, however, and with the conception and establishment of the modern republic, capital has produced great benefits to humanity.

The founding fathers warned that a republic must always be on guard against this old school nobility. Human nature has a bad side, and when power collects in one center, liberties are lost, lives are lost, and the state of war of every man against every man returns. It is up to the capitalist class to oppose this collecting of power in one center. And it is up to the people to recognize this threat and back the emergence of a U.S. Capitalist Party.

Vote U.S. Capitalist Party