Interest bearing credit does not fuel increased money supply – but it does a few other things
There is a simple analogy that shows a money lender assisting a gift/bartering society to trade more easily by giving them tokens to use as money on condition that they pay him 10% interest in such tokens per annum. In brief, the story is that at the end of the year not all members of the community have such number of tokens spare to pay the interest; thus the lender has to create and lend out more tokens.
QED – Charging interest on loans mandates an ever-increasing money supply but ..........
This analogy and variants – some of considerable length, have been widely published and swallowed in recent years – including by myself. But the respected Prof Steve Keen http://www.debtdeflation.com/blogs/ has written that it makes him apoplectic for it is so wrong, so misleading – and he has a mathematical model to demonstrate that! ‘Interest is a flow, not a stock’, he insists.
Could there be another simple analogy – which illustrates that Steve Keen has a point?
Here is my version of such:
A money lender arrives in a community of ten families who have been gifting and bartering to meet each other's needs and share resources. He introduces them to money as a way of making life easier all round; he lends each family $1000 on condition that they pay him 12% interest by each family giving him $10 each calendar month.
One month passes and Mr Big collects $100. Being now a member of the community, he spends this locally. The money supply is unchanged for the interest has, indeed, flowed back to the community and will be available to circulate and meet interest commitments next month. Obviously this can continue indefinitely.
QED Interest payments are a ‘flow’; usury does not mandate an ever-increasing money supply. Viva Professor Keen!
But this analogy also shows how interest on the credit based money supply ensures that 12% of the community endeavours goes to keeping Mr Big in the style to which he has become accustomed; he now has a nice house on the hill and there is a special room for his money creating machine.
The ten original families would be 12% better off if their community had the money machine and the monthly interest payments went to teachers, nurses, artists.
QED A community will be enriched by owning their own money creation entity.