Friday, February 15, 2013

#24 A Rigorous Definition of Usury

Usury – Ludwig von Mises Institute:

Usury is a term which originally was used to denote the charging of interest, but is also used to express the charging of excessively high interest rates. Usury is derived from the Latin term usura which means "money paid for use". One of the first commentaries on usury can be found in Aristotle's Politics where he expresses his disdain for the practice by saying:

The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term usury, which means the birth of money from money, is applied to the breeding of money, because the offspring resembles the parent. Wherefore of all modes of making money this is the most unnatural.”

Aristotle, Politics

See also: Interest

In the Middle Ages

In the Middle Ages, lending money at interest was a sin for Christians. Usurers, people who lent money at interest, had been excommunicated by the Third Lateran Council in 1179. Even arguing that usury was not a sin had been condemned as heresy by the Council of Vienna in 1311-12. Christian usurers had to make restitution to the Church before they could be buried in hallowed ground. They were especially detested by the Franciscan and Dominican orders, founded in 1206 and 1216.

The word usury has been used on this blog to signify one thing and one thing only; upon the creation of money by the agency of a loan at interest, the created money is not enough to pay back the interest, the money wherewith to pay which was not created. We're going to address situations that may look like usury but are not. We are going to insist that within the present banking system, where money is created out of nothing (by FIAT) through a loan at interest (where the money to pay the interest was not created), that a condition exists that can be definitively called usury; the taking back of more than was originally created.

We may examine the following interesting definition: noun, plural usuries.
1. the lending or practice of lending money at an exorbitant interest.
2. an exorbitant amount or rate of interest, especially in excess of the legal rate.
3. Obsolete . interest paid for the use of money.
Origin: 1275–1325; Middle English usurie < Medieval Latin ūsūria (compare Latin ūsūra ), equivalent to Latin ūs ( us )

Exorbitant amount or interest? How about any interest? But what exactly is interest? And more importantly, what is not interest, but represents something else? Legal rates? Who decides what's too much interest and why? Obsolete? To who?

We're going to discuss a wide range of concerns in this post, beginning with the point of issuance of money, that should adequately demonstrate the major differences between the proposed Value Unit and present day currencies. 

In the present day system, money is issued by central banks as loans to the governments they supposedly serve, though it's really the other way around; governments become the perpetual debtors who must serve the needs and demands of banks and the corporations that sprang up around them (Thomas Jefferson warned us but we paid no heed). The amount of money issued is created, whether out of nothing or backed by gold or silver, makes no difference. All money issued by governments is unbacked since they do not intend putting back for sale into the market an equal amount for what they buy.  It is permissible for individual human beings to do this, it is not for governments.  They aren't individual human beings and have no inalienable right to issue money whether they have it or not. For each unit created interest is charged. The money to pay this interest is not created; the eleventh marble: $A does not = $A+(X%)$A where $A is the money created and X the interest demanded. This results in a perpetual (forever) artificial scarcity in the money supply; no matter how much money is created in this way, as the principal, the money issued, plus the interest, from money not issued, must both be repaid. Yet, under such a system, were all the money to be paid back, it would extinguish all the money on earth and demand even more of that which was never created, the eleventh marble, to repay the debt.

The result is a situation of perpetual debt slavery to the central bankers, and frankly to every last bank in the system that goes along with the same business model, because they are all involved in the process of both the creation and destruction of money. Many, perhaps most bankers, just don't know any better, because banking is one of those institutions that has changed very little for thousands of years. We must always be mindful of the fact that some people who are bankers are caught in the system through their own failure of critical examination of the business models they accept as the normal premises to do business. To the extent they remain ignorant, they are themselves caught. Would they know any better, those with any ethical consciences would resign and just walk out, as they would realize they were involved in a fraudulent activity and that sooner or later public scrutiny would find them out.

In this particular instance, demanding repayment of that which was never created, the issues are both perfectly rational and of monstrous consequences; the banking model as it presently exists is intended to benefit the bankers at the expense of everyone else, as a gang of parasites upon the rest of society. Their tactic to stave off discovery is to get their debtor puppet, the government, to front for them. After all, they have a monopoly on the control of money and FORCE society into using it by the legal tender laws, which are nothing other than the grant of a monopoly on trade to these same people. What did they do or who are they, that they deserve this favour from the rest of society?

The charging of interest on created (issued) money is bad enough, compounding of interest by banks makes the essential problem worse (geometrically grows the eleventh marble!), as also the accordion effects of fractional reserve banking, which functions both at each bank and among the range of banks radiating out from the central banks; the national banks and the local banks, all in their turn borrowing money from the central bank (or they may do so) and then perform the same lending at interest, each bank contributing to the push and pull (the booms and busts of banker caused business cycles, economic bubbles that grow and burst, which are credit cycles) of the money supply, affected, my friends, entirely by the range of interest rates, set to begin with by the central banks.

The business model of the banking system is such that loan defaults result in foreclosures, the lenders get to own the property that formerly belonged to the borrower. Also in this model, defaults on loans expose the fractional reserve system to loss of funds supposedly held in trust (fiduciary responsibility) for its customers, a clear fraud exists (breach of fiduciary responsibility supposedly corrected by deposit insurance); that these banks created many times more money than they had in reserves, such that when the lending goes bust, since the finance function is tied directly to the function of clearing transactions of trade, the whole system goes bust. That is what is going to happen eventually.

By direct comparison, the proposed Value Units are issued by the indigent (“red inkers”) or those on pensions, all the rest must be bought into existence. The proposed Value Unit would have to trade independently of all major currencies AT A FIXED VALUE AT A SPECIFIC POINT IN TIME, measured in a commodity that is readily traded; gold and silver bullion. This does NOT mean that any existing Value Units would be backed by precious metals, as will be explained. Anything could be bartered for Value Units as well, especially labour, but in none of these cases is any new money created within the VEN. New Value Units do enter the system other than by being issued by the “red inkers” when they are bought with the only things that can buy them; gold and silver bullion.

We want it to be absolutely understood right up front that anyone buying Value Units, does not receive a scrip for some supposed “real money” that still belongs to the buyer, being warehoused for them in the vault (or more likely the accounts) of your local IE. Oh no, the Value Unit is a real yardstick capable of determining any value, and stands independently apart from that with which it is exchanged. You buy them with gold and silver bullion like this:

An IE member (an A or B member), presents evidence of gold or silver bullion having been deposited in the account of the member's local IE. We expect that some of this can actually be set up to be transacted on-line. The IE responds by crediting the member's account with the appropriate number of Value Units, based on the prices of gold and silver at the time of sale, compared with the prices for gold and silver bullion at the Value Unit's inception.

Deposit gold / silver bullion – Credit IE gold & silver
Debit IE X # Value Units – Credit member's account X # Value Units
Debit member's account (.001)X # Value Units = Credit IE (.001)X # Value Units

There will be accounts for gold and silver bullion set up with qualified dealers for each IE as they will all operate independently. The financial details of these accounts will be transparent to any IE member. We're going to take some time right now to explain their function.

We say that Value Units must be bought unless a member qualifies to create them and everyone gets some free at the beginning. Those Value Units that are bought, which will be the vast majority, require the interposition of the gold and silver bullion dealer, who in some cases will be associated with the local IE by having some of its employees as A members. To repeat, the purpose of having only gold and silver bullion as the sole means of direct purchase into existence of Value Units is so that no IE ever needs to hold any currency.

The sole purpose of the gold and silver bullion on account for each local IE is to generate dollars, euros, yen, whatever, with which to satisfy local “legal tender” especially as regards payment of taxes. For anyone who thought for a single moment that the purpose of a Value Unit based monetary system is to evade taxes, think again. Those who may home school their children or place them in private schools must still bear the cost of the local public education system. Yes, we know what the government has done and still does (with those behind them who put forth their “big useless plans”) which will ultimately fail. But in the meantime, taxes must be paid. The rule to follow is to pay unto Caesar that which belongs to Caesar.

What happens then, since there is no direct exchange between dollars and Value Units? Everything having to do with taxes is figured in applicable currencies (dollars, euros, yen, what have you) based on what Value Units those currencies would trade for in terms of gold and silver bullion on the last day of the tax period. Then, knowing the taxes that must be paid, the IE member makes a transaction with the IE, selling Value Units back to the IE (extinguishing them) for silver and gold with which to buy Caesar's currency, with which to pay the taxes. The member gets a check from the gold / silver dealer with which to pay his taxes in the local currency. Once people know where their local IE's gold and silver are going, maybe they will care more about how much their governments are costing them.

As for anything bartered for Value Units, price levels for these trades would be entirely set by the local markets. The allowed forms of finance, all of which must rely on money that has already been created, will be discussed. There is never a shortage of money created by demanding back more than was contracted. The buyer always knows the terms of the credit contracts he engages in and the prices for things he buys are directly affected by his decisions; to buy on credit or save up for the purchase, all of course subject to the satisfaction of the seller's terms of sale. The Austrians referred to this as “time preference,” which we will recall is the tendency of people to prefer satisfaction of wants sooner rather than later. We're saying instead that where a buyer must resort to credit contracts, the meaning is that the price for something at any given point in time, depends on the money one has to make the purchase. The buyer's payment, or schedule of payments, represents the final price the buyer will pay.

We can state right here that any credit contract describing a schedule of payments without a final settlement date is automatically a bogus or unlawful contract.  Any financing that requires a financial entity to extend credit to enable a business to settle prior obligations -refinancing- that is without a final settlement date is likewise bogus.  The entire schedule of payments must represent the final cost to the buyer to settle a purchase with the seller, or said contract is invalid.  

Also, since all finance operations are separated from clearing transactions of trade in the VEN, the various finance businesses would be responsible for their own exposure to risk of default without crashing the entire system. They may take on too much risk and go under, but the transaction system, the VEN and all the money in it, will remain unaffected. There will not be any ripple effect, as has and will occur in the case of the present banking system when it fails.

Of late, one person who really understands the position the banking sector must be in is Michael Rivero, who on the date of writing this, 8 February, 2013, is saying that rule by debt slavery is just as illegitimate as rule by divine right or any other claims to rule, that humanity has OUTGROWN these follies. We believe this is the correct view forward. Again, our message resonates with Rivero's; ours is that we should all prepare to “come out of her, my people” and into a newer, better system for transacting business. We have to think of a time when we will not even be willing to accept their money for any terms of trade including being paid in it for our labour.

Usury, for our rigorous definition then, directly involves the issuance of money. It can affect loans of money too. If money is created at interest, the following results:

Debit Central Bank $A new money – Credit Government $A new money
Debit Government $A(X%) - Credit Central Bank $A(X%) interest

Note that $A did not exist before it was lent as debt to the government. The money to pay X, the interest, was never created. Also in compounding interest the number of these,
Debit Government $A(X%) - Credit Central Bank $A(X%) interest

could be infinite.

The rigorous definition of usury is therefore to demand back that which was not created and using indebtedness on default to acquire property that formerly did not belong to the lender. The former is fraud, the latter is theft, the basis of the whole business, a lie; that it is possible to repay that which was not created. All other matters concerning laws that would supposedly temper whatever amount of uncreated money is demanded back in repayment, are rendered both erroneous and irrelevant.

Debt under the Value Unit system.

In the proposed VEN, the term chosen, the credit contract, describes what it is and what it concerns; 
1) an agreement between a buyer and a seller concerning terms of sale,
2) the extension of credit by the seller to the buyer, 
3) the final price being the total of all payments by the buyer to the seller. 

These are standard commercial transactions and employ no usury because nothing more is being demanded back than was delivered, the only difference was that the buyer had to pay a higher price (perhaps a much higher price) because he didn't have the money to buy the product at what would have been for him a lower price on the day of the purchase. The difference in price the buyer pays is accordingly called by the Austrians, his “time preference.” We prefer to say that all such appeals to credit represent whatever incomplete ability to pay in full today with a promise to pay in full later, usually results in a higher price, through a series of instalments over time, because the buyer didn't have all the money at the time of sale. What is always inferred in such an agreement is that the buyer pays for his purchase using this credit resulting in a higher price.

Of course, the prudent buyer saves up enough money to make the purchase in full and receives his purchase at a lower price. There is also a time difference expressed here; the frugal buyer must wait to enjoy the object of his desires, while the buyer who opts for a credit contract has it now. If that object is a tool which produces something the buyer thinks he can readily sell during the time it would have taken to save up the money, perhaps the difference in time matters.

Under a Value Unit system, there are only exchange accounts, which are demand deposit, checking accounts. Time deposits, savings accounts, will not be offered by any IE within the system because no IE will ever be engaged in lending money. Savings could be money you decide to leave in the exchange account to stack up, or it could rest somewhere in a safe place at home as Value Unit exchange notes and coins. In any case, these are stores of value (pools of liquidity) that curiously enough tend to keep prices down, because they are taken out of circulation for as long as they are saved and not spent. There has been a complaint in the past about alternative currencies not circulating, but what is not as clearly understood is the need to get certain pools of liquidity; savings, started. No alternative to existing currencies stands a chance of acceptance without being able to hold its value in savings over long periods or to finance really big purchases.

Within the VEN, anything of value can be bartered for Value Units, without however increasing the number of Value Units in circulation. We can further differentiate between, 

1) those items or products that have a specific price denominated in dollars (or something else) or those things encumbered by a previously existing debt expressed in dollars (or something else) and 

2) those items that are free of any previous pricing which can be priced in Value Units. Into the latter category might be anything intended to barter for Value Units including labour and services as well as local produce, crafts, tools, etc.

Interest and Profit

Now, we're going to discuss interest on a loan. If the loan creates money, the interest comes out of money that has not been created, which we have rigorously defined, with E. C. Riegel, and right here as usury. But how about all other loans with money that has already been created? We probably never think about it, but we should; when we see a price on something posted in a store, it is made up of the retailer's cost of goods and a markup for the retailer's profit. Types of stores have ranges of profit from as low as 2% or 3%. Certain markets, the found value markets (flea markets, antique stores, estate sale stores, foundation run used clothing stores, etc.), are capable of generating profits in the several hundred percent. Generally the smaller the profit, the larger the scale of the enterprise must be to survive. 

In an article appearing on the von Mises Institute website, 14 December, 2005 by author Glen Tenney, we read,

"Certainly, we all enjoy the constitutional protection of freedom of contract, but the state [Alabama in this case] has decreed some contracts as unlawful or immoral, and payday loan agreements are immoral on their face."

the words of one Mike Skotniki, who made his money on the time preferences of others; selling high interest payday loans. For instance, Skotniki might say to a guy named Smith, “I'll lend you $100 cash today for a post dated check for $120 that I'll cash in two weeks, after you get paid.” Skotniki can only do this maybe 25 times a year as long as Smith retains his $50 a week job (and presumably Smith has other jobs or makes more than $50 a week and is only willing to pay up front for the time advantage of having his $100 cash today rather than in two weeks' time. Skotniki must also have the cash to begin with, he is not lending uncreated money and of course Smith will hopefully not be paid in borrowed money, so all the money involved has already been created. The transactions look like this:

Debit Skotnicki $100 – Credit Smith $100
- 2 weeks later -
Debit Smith $120 - Credit Skotnicki $120

In 25 credit contracts, over about a year's time, Skotniki has loaned and received $2,500 and has made $500 from Smith paying for his time preference. Skotniki's return is a straight 20% Of course maybe because Smith has this money ahead of time, he is able to turn a deal to make so much more money that paying Skotniki his 20% on this money is more than counterbalanced. Skotniki has certain risks, but what he is really selling is time, which is a real commodity after all. But what would most people prefer to see? We'd prefer that Smith saved up enough money so he wouldn't need to pay Skotniki for it, as it is perceived that what Skotniki is doing is a form of loan sharking. But Skotniki isn't asking more back than has already been created, Skotniki is just having Smith pay, whether we think exorbitantly or not, for having his money ahead of time.

Self-financing labour.

Now recall what E. C. Riegel said about self financing labour, it's similar. Let's say that you are an A member who gets hired to do something for a B member of your local IE. You have some kind of contract for work that you have agreed to be paid in so many Value Units, etc. You take that contract back to your IE and somewhere on that contract is going to be a phrase indicating how far from the day you start work that you will be paid and then the IE does something interesting; it automatically forwards that sum in Value Units to that B member ahead of time, as if they are being paid up front the float to pay you the agreed upon price for your labour contained in the contract.

Labour contracts within the VEN will be the means of self financing the float during each pay period. The B member is basically borrowing your Value Units from the day you begin work to the day you get paid, when they have to pay you back. The B member also pays the minute transaction fee and you too will pay it when you deposit your check or Value Units are transferred directly into your account on the day you get paid. Should they continue to honour their contract for however long they agreed to it, this same automatic float would apply, month after month. This was not an idea unique with E. C. Riegel. There were some other German economists associated with the city of Berlin, who described similar arrangements. Notice that this money is the only kind that will be created for a limited time (the time from the first day of work in any period, to the date paid) and that when one's employers in the B member pay you, that same money is extinguished. Notice also that the amount of money created is exactly as called for in the labour contract, to be paid how many ever days from the first day of work, all of course without interest. The sums on either side are trimmed however by paying back the one tenth of one percent transaction fees.

A string of these short self financing of labour arrangements creates opportunities for all B member businesses to take advantage of this float between the first day of work and the pay date, offering the time advantage of the money at negligible cost. This is one of E. C. Riegel's most outstanding and revolutionary ideas, the ramifications for workers and professionals the world over are tremendous; employers will want to treat you better when they are being paid up front to hire you. They will feel obligated to do their best for you as an employee and everyone in this system will earn a reputation. 

Types and Nature of Credit Contracts

In simplest terms, a credit contract is a contract to supply credit within the VEN. The four types are:

1) credit contracted by an A member from a B member : Credit extended to a business customer.
2) credit contracted by a B member from another B member : Credit extended from one business to another business. 
3) credit contracted by a B member from an A member : Credit extended to a business by an individual; an investment.
4) credit contracted by an A member from another A member
Credit extended to an individual by another individual (personal loan).

A few ground rules for E. C. Riegel finance would include that no more money is created than is absolutely necessary to finance a deal, a sale, a transfer of property from the contractor (lender) to the contracted (borrower). It usually works out so that the buyer is getting the product ahead of time; his time preference. Ahead of what time? Ahead of the time it would have taken for the buyer to save the money to make the purchase at the time with all the money to satisfy the seller. This is what the Austrians called “time preference,” meaning the buyer was making a preference for the product ahead of the time he would have had all the money to actually pay for it. The buyer is getting a deal; the buyer gets the use of whatever it is that's bought right away. That may matter. But what is the result? The buyer must pay a higher price for the product received ahead of time. What we prefer to admit is that the buyer didn't have all the money to buy it when he bought it; he bought what he couldn't afford. What could the buyer do if he had to have it without fully paying for it at the time of sale? The buyer must agree to a higher price for the product, payable in terms acceptable to both the buyer and the seller.

Is this raising of price usury? Not at all. It's proved entirely by the law of identity; A = A. Thus:

A is not A+(X%)A

Any amount of money lent does not equal the same amount of money plus any additional percentage of that money as interest. However,

A, the value in a product or service IS A, its value in money, no matter how much money that is. Or put another way, anything you have is precisely worth to you the cost of buying it, whether that was retail or twice the retail price.

If a man buys a refrigerator from a company or another man, and takes delivery tomorrow, but he doesn't have the money to buy it, he agrees to a schedule of payments that might after all result in the eventual price paid for the refrigerator being twice its retail (cash) price. That's the price of time extended by the seller to get more of his money back and it usually works. But the seller is never asking more of the buyer than he believes the buyer will bear, because the value to the buyer will always reside in the refrigerator, no matter what he pays for it. It doesn't matter whether the man paid 675 for something he could have bought for 395, the fact is that no more money was ever created than was absolutely necessary to settle the deal. In fact none was created because the buyer eventually had to come up with all the money to satisfy the seller's terms. That's going to be one type of standard credit contract within an IE. Notice that the IE does not get involved in any of this finance business, it merely certifies that the contracts satisfy the rules.

Right here, we contrast this proposal with the current model which allows the business in charge of accounts and transfers to lend money, which it is in fact creating to satisfy a purchase. The lender demands back what was not created at the moment the loan was made in the form of interest and the lender's ability to lend is based rather loosely on the total value of their customer accounts; so called reserves. It is well to separate forever the value transfer business of exchange from the finance business of making loans.  Besides which, and I wish more would understand this, when you put your money into a bank, that money becomes part of their reserves, not yours.  What part of this do you not understand?

Lending money between members works like this. For example, the price a man agrees to pay for having 100 Value Units (VU's) today is paying a lender 10 VU's today and 100 VU's in a week. The lender gets paid up front 10% of the loan and gives the borrower 100 VU's. In a week, the borrower pays the lender 100 VU's. What was the difference between placing the difference, the increase, the interest, in front, rather than expecting it to be paid in a week along with the principle? The difference is that this “earnest money” paid up front for the rent of the 100 VU's was the borrower's to begin with, so that money had already been created. The man lending the other his 100 VU's is lending money that already belongs to him, it was not created when lent. He has received a mere tenth of his money back up front, so he is risking a 90% loss of his 100 VU's and will have to be content with the 10 VU's he has from the borrower in case of default. But the lender knows the man and he knows the man's credit record within the IE. That credit record follows an account whether the member moves to another IE or not and is always available to potential lenders. The standard avenues for gaining better credit apply; paying off your loans on time. This would be an acceptable credit contract and those engaging in this kind of financial servicing would be earning time value for their money without increasing its supply.

Debit 10 VU's A member (Smith) – Credit 10 VU's A member (Jones)
Debit 100 VU's A member (Jones) - Credit 100 VU's A member (Smith) 
Debit 100 VU's A member (Smith) – Credit 100 VU's A member (Jones)

(We would like to suggest that the IE could have a more positive effect on the way people manage their money rather than being adversarial as banks have to be due to their business model and methodologies. For example, the technology certainly exists that would allow certain amounts of a member's account to be held in escrow against the claims of lenders. Their monthly statements would show exactly how much money was available to save or spend and how much was in escrow and who the creditors were, their payments, etc.) 

David Burton


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