Home › Forums › Discuss Austrian Economics, Step by Step › Does loan interest rate require inflation to be sustainable?
- This topic has 1 reply, 2 voices, and was last updated 4 years, 10 months ago by jmherbener.
July 27, 2018 at 5:49 pm #18920remy.demarestParticipant
I’ve seen this criticism against usury several times already. The claim is that the fact that loans require the debtor to pay back more money than they borrowed means that the only way that loans in general can ever be repaid is by increasing the money supply giving bankers the ability to suck all resources in the economy.
I have a strong intuition that this line of reasoning is fallacious, and I’ve been able to convince people otherwise with simple arguments, but I’m still not able to convince myself that this criticism is erroneous.
Here are my basic arguments against this idea:
– Some loan fail meaning that the money that would have gone to the principal payment is now freed to go pay the interest payment.
– Bankers also consume therefore the extra money they gain from the interest payment is going to be spent in the economy which means it’ll eventually go back to the borrower who can pay the banker back with it. This has been attacked as a circular argument, but it happens through time it’s not like it’s codetermined like an equation.
Are these arguments valid and are there better arguments as replies to the criticism?
I think one part that confuses me with regard to this issue is that, as far as I understand, in the evenly rotating economy there is an interest rate, it is equal throughout the economy but it is still there, but the economy in that case is neither growing nor shrinking so what does it mean to have interest rate in that case? Is it just that the entrepreneur who buys the producer goods at time T1 and sells the consumer goods at time T2 values T2 higher than T1 with the time discount?July 29, 2018 at 4:49 pm #18921jmherbenerParticipant
Loan interest is just one category of the general phenomenon of present money trading at a premium for future money. The other category is the production structure of the economy. Entrepreneurs pay to buy factors of production in the present to earn a rate of return by selling their output at higher prices in the future. So, if this assertion about expanding money were true it would apply to all production in addition to contract loans.
There are two basic problems with this assertion. First, it fails to account for the demand for money or, as the neoclassical economists say, the velocity of money. The total expenditures in an economy over some time period depend both on the stock of money and how many times each unit of money is spent over the same time period, i.e., the demand for money. With a given money stock, total expenditures can be larger if the velocity of money increases, i.e., the demand for money declines.
Second, the interest rate, i.e., the price spread between input prices and output prices is independent of the stock of money. If the money stock in an economy were twice as large, then both buying prices of inputs and selling prices of outputs would be twice as high leaving the price spread the same. If the money stock were half as large, then both buying prices of inputs and selling prices of outputs would be half as high leaving the price spread the same. Put another way, prices adapt to any stock of money. So, even if the money stock shrinks, prices can fall sufficiently to allow every exchange to take place that took place before the money stock fell, including loans.
Take a look at Tom Woods on the issue:
Here’s Tom and Bob Murphy:
Ep. 1166 Everyone Is Wrong About Money Except the Austrian School
And Gary North:
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