There is a story that does the rounds on Fundamentalist Christian discussion boards, intended to show the evils of usury, and that the major bankers of the world will end up owning everything.
I can’t help feeling that there’s a bug in the argument somewhere, but don’t know enough economics to debunk it myself. Any help will be appreciated… (Sorry about the length of the story, I tried to condense it):-
A chap called Fabian had a bright idea to simplify the barter system. He made gold coins and distributed them to all the people of the village in a proportion which everybody agreed was fair. They were to use these to denote the value of grain, chickens etc in the same ratios as they had used to swap or barter goods before. In order to compensate him for the work of making the coins and administering the system, it was agreed that folk would pay him each year a small percentage of the amount they had been allotted. At the end of the year a few people had more money than they had started with, most had about the same, and a few less than they began with. Once they had given Fabian his cut, the majority therefore had less money to exchange for goods over the coming year than they had the first time around. Some began to know poverty. In due course, some people became unable to repay Fabian his “interest” and went to him with their troubles. Fabian was sympathetic. He offered to lend them some more money - at the same rate of interest - on the understanding that if they did not eventually repay the interest they already owed him then he would instead be given ownership of one of their outbuildings, or a piece of their land. He called it borrowing on security…
Money represents capital goods. Capital goods can work to create more capital goods. If you lend them to someone else, you become poorer. Therefore, you charge interest.
Imagine that instead of lending gold, Fabian lent his tractor. Now, if he kept the tractor he could use it to build his wealth. By lending it out, he allows someone else to use it to build his wealth. The result is a net loss for Fabian for loaning out his tractor. Therefore, to recover the ‘opportunity cost’ of loaning out his assets, he must charge interest.
The problem with your little fable is that it assumes the economy is a zero-sum game. It’s not.
If no one were to charge interest, then no one would ever loan anything to anyone else. Wealth would stratify, the poor would never be able to climb out of poverty, and the world would be a much poorer place.
Dhanson, not quite sure about your answer. The tractor analogy could be solved by co-operation, I would have thought. (You borrow the machine, and then help me out putting up my shed at the weekend?). Would that be an interest-free loan in effect? I don’t understand what you mean by the “zero-sum game”, I’m afraid.
Darkcool, it’s from a whacky song popular in Britain in the sixties. (We’ll drink-a-drink-a-drink/ to Lily the pink the pink the pink/ the saviour of - the human race/ 'cos she invented - medicinal compound - most efficacious, in every case!) Don’t ask me why it seemed an appropriate name to use on this discussion board: it just did somehow!
Co-Operation is a form of interest. You loan me your tractor, and in payment I will return the tractor AND help you build your barn.
A Zero-Sum game is one in which there are a fixed amount of goods. Imagine I baked a pie. We then flip a coin to see who gets to eat first. If I win, I eat as much as I want.
In this game, the more pie I eat, the less you get. It’s a ‘zero-sum’ game.
Now imagine an economy in which I make pies for a living, and you make pie pans. I figure that if I borrow two pie pans from you I can make three times as many pies. You, however, want a pie as interest for loaning me the pans. Should I do it? Sure. I borrow the pans, make three pies instead of one, give you one of them, and I have one more pie than I otherwise would have had. You’ve made a ‘profit’ of one pie. Everyone’s happy.
Notice that the number of goods we wind up with in the end is not fixed like it was in the original example. In a zero-sum game, if I gain something you must necessarily lose it. In the real economy, it’s common that two people will make an agreement that causes them both to do better. In fact, that’s the overwhelming majority of economic interactions. The ‘pie’ keeps growing.
That’s the fundamental (heh) flaw in your religious theories about interest - in an economy, material goods help you make more material goods. Not having access to them costs you. So if you lend money to someone without charging interest, they are gaining a benefit at your expense. By charging interest, you both win - the borrower gains more value from the capital than what the interest costs (or he wouldn’t borrow it), and the lender gets compensated for giving up access to his capital (compensated slightly more than if he just used it himself, or he wouldn’t lend it).
I can tell you something about why the name Fabian is used. There was a group in the U.K. which was of some influence from the late 19th century to the middle of the 20th century called the Fabian Society or the Fabianists. They were socialists. The group may still exist, but they have no significant influence anymore. They popularized the ideas of socialism and were one of the groups that formed the Labour Party.
A brief check with a search engine found some conspiracy sites that mention the Fabianists. Apparently, like the Bavarian Illuminati, they continue to haunt conspiracy theories long after they have disappeared.
In the story, it appears that the supply of gold coins is fixed. If Fabian gets his cut every year, he will indeed eventually own all the coins.
If the supply of goods increases (because of investment and labor) while the supply of money is constant, deflation will occur: goods will cost less each year. The money supply should grow at the same rate that the supply of goods grows. (At this point, everybody bow to Paul Volcker and Alan Greenspan.)
Also, if the supply of gold coins is fixed, other members of the “economy” run the risk of a type of “Gambler’s Ruin”. Fabian (The House) can afford to lose some but a regular member of the economy can easily get tapped out. Without another source of funding (another member who’s share has grown), the loser must go to Fabian.
Lily, you wrote: “Darkcool, it’s from a whacky song popular in Britain in the sixties. (We’ll drink-a-drink-a-drink/ to Lily the pink the pink the pink/ the saviour of - the human race/ 'cos she invented - medicinal compound - most efficacious, in every case!) Don’t ask me why it seemed an appropriate name to use on this discussion board: it just did somehow!”
I have an old phonograph record with a version of what sounds like the same song, except that “Lydia Pynk” is used in place of “Lily the Pink.” Apparently Lydia Pynkham sold some sort of medicinal compound many years ago.
OK, I think I’m getting the hang of the zero-sum game. At first I was thinking that the pie illustration disproved it’s own point - after all, if people are eating more of Mr Hanson’s pies, they’ll be eating less of someone else’s sausage rolls! But I do get the point about the money supply being increased to match production. The whole economic miracle trick seems to turn on either the number of consumers (the population) increasing, or people being persuaded to buy more material goods (eat a pie and a sausage roll, then go out and buy some slimming products!).
However, isn’t most of the new money that’s added done so in the form of debt (ie credit cards/bank loans)? And the level of debt in general does seem to have increased considerably. It has now been reported that the average house price (in England) is so high, that new buyers can’t re-pay it over the standard 25-year term. They are being offered 100-year mortgages, and will pass the outstanding debt on to their children! Also, we are always hearing about countries’ National Debt, but I have never heard of a country with a National Credit?
Thank you all for your help.
PS Mr Wagner - yes I’m sure the name Fabian was meant to further discredit the “system”. I think that the Fabian Society might still exist, and there is also Fabian Press which publishes leftist literature.
