Leaving aside ideological and environmental compulsions, intellectual and emotional fixation and self interest generated by interest-earnings deposits and bonds, there does not appear to be any reason for regarding interest anything other than usury. Its survival is sustained by artificial scarcity of capital resources injected into the credit structure by the practice of bank reserve. It is protected by the largest accumulation of unadulterated sophistry in the entire corpus of economics, to the extent that it is not possible to find a single sentence written in favour of interest during the last three years which can conceivably be regarded to fall outside the category of sophistry. There Is not a single posture related to the issue, evolved by a discipline claiming itself to be a science, which can be justified.
It is surprising that the one reason for the retention of interest and also from distinction from usury is hardly ever given. The reason relates to the practical necessity of retaining the institution of interest because no basis of credit other than interest, which may squarely measure up to the complexities of various kinds of credit transactions, has yet been discovered. Even it be conceded that abolition of reserve can extinguish scarcity of capital, it leaves many questions unanswered. We need to evolve an alternative to statutory reserve that may be able to perform all its positive functions without creating its constrictive consequence. Besides, no other method of meeting the costs of operating banking establishments and provide adequate incentive for efficiency in the shape of profit to those who manage them has yet evolved. This statement will need to be preceded by a candid profession that practically all that has been said against interest by moralists, humanists and economists. It needs to be followed by a statement about the steps that have hitherto been taken to evolve a humanistic and creative alternative to interest and the nature of obstacles that stand in the way of our attaining our objective. If, for whatever reasons, unconcern with the issue has been the only obstacle, the magnitude of problems that we face including those of unemployment, inflation, budgetary deficits, foreign deficits, the sheer magnitude of indebtedness, the pace at which it is rising, along with the intractable nature of all these problems should force us now to feel anxious enough to see how interest generates each one of these consequences, and why it is necessary for economics to shed its unconcern with the necessity of evolving an alternative basis of banking.
This absence of viable and workable alternative to interest and the remarkable absence of efforts to evolve it, and even acceptance of any necessity to undertake this exercise, is the basic factual reason for the existence of interest. All theories of interest that seek to assign a value to it higher than the basic realities are mere exercises in quibbling, and all positive qualities ascribed to it mere balderdash. If the objective reality of compulsion to lend and borrow on the basis of interest, on account of the absence of any other equally workable basis of credit, had been candidly advanced as the only sustainable reason for the survival of interest, the marketing of false postulates to distinguish it from usury would have been entirely unnecessary. The only purpose of this distinction is to provide justification for interest. That precisely is the point where economics is in error. It is an error of approach and vision, and unsustainable nature of reasons advanced is really mere reflection of that basic error.
It is possible to argue that it is not the collusion of wealth owners, but requirements of liquidity in the banking sector and those of monetary management which compel the adoption and retention of bank reserve. This would have been a good argument if it were supplemented by an alternative to this restrictive arrangement that would answer its positive qualities without creating an artificial scarcity of capital. So far as I am aware, not only has no effort has been made by anyone in this direction, but the even the need of making any such direction does not appear to have deserved recognition by economics. The indifference of economics in this regard matches, perhaps even exceeds the one it has displayed in declining to concern itself with evolving a humane and creative basis of lending in place of interest. It is this background that gives support to the view of those economists who regard it as a monopoly price. The very existence of bank reserves, whether dictated by statute or convention, coupled with consistent abstention of all concerned to look around for an unrestrictive alternative, not only establishes collusion between owners but shows the degree to which the establishment-political, monetary and academic-is forced to toe the line of wealth owners.
Like all monopolists, wealth owners use the price for the use of money at the level which maximizes their return without it to cross the line of endurance of borrowers. As the changing profit-level in the market reflects the endurance of the buyers, elasticity in the level of interest has to be introduced in order to draw maximum advantage in every given situation. For monopolists of money, there is no difference between usury and interest. Whatever the line of demarcation, and in fact even that keeps shifting according to wishes of the wealth owners, they have the capability of crossing it with impunity, if necessary with the help of limitless subterfuges. If during a slump, interest tend to come down, it is not in deference to the fine distinction woven by textbook economics between usury and interest, but merely for the consideration that a higher rate will repel borrowers.
As Frank H. Knight has said,' The most important immediate cause producing changes in interest rates in modern time...have been the fluctuations of business conditions in the now unpleasantly familiar cycle, war and the opening up or saturation of new fields of investment'. This means that when there is pace and stagnation in trade and industry, the lenders cannot explicit their borrowers beyond a low rate of interest, since a higher demand will render their resources idle. On the other hand when the opportunities of investment open up or when hot and cold wars pervade the scene, they insist on higher price because they know that conditions exist in which a higher rate of extortion is possible. There is no reason to believe that the motivating factor determining the supply price of loans-exploiting the scarcity of capital to limit the borrower can bear-has undergone any change since the dawn of history. As textbook economics leans heavily on history for support to its contention of differentiation between usury and interest, it may perhaps like to note that history does not support any of the claims made by it, just as etymology, logic and even practical expediency decline to concur in its posture.
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