Interest, Just And Unjust
The definition of interest, or interest charge, is the premium paid by the borrower for the use of what he borrows. It also is defined as, a charge for borrowed money, generally a percentage of the amount borrowed.
The definition of the word rent is a periodical payment for the use of property.
We might say then, that the word interest is applied when we speak of a payment for the use of money: and the word rent is applied when we speak of a payment for the use of property.
We now wish to determine under what conditions interest charges are just and under what conditions interest charges are unjust. We have frequently heard that interest charges are unjust when the rates are too high. That is true. But interest charges which are low could also be unjust if they were charged, say on counterfeit money, or on inflationary money, or when the loan was not necessary, or if it were impossible for the borrower to pay it, as is the case when the medium of exchange is borrowed, with interest, and no medium of exchange exists with which to pay the interest.
Let me give some illustrations. If we own a house and rent it to a tenant, it is a just practice for us to charge him a fair rent for the use of it because, as time goes by, he is, in a sense, using up the house. The house depreciates in value. If given enough time it will lose all of its value. The same thing would occur if an automobile or some other piece of machinery were rented out. It would gradually be used up.
Therefore, it is a just practice to charge a reasonable fee or rent for the part that was used up. It might be correct to say that such rent charges are, in a manner of speaking, the selling of the house or the automobile [p. 105] a little at a time. The part that is used up each year is the part that is sold each year and it is the part for which the money is paid as rent. So we can conclude that it is a just practice to charge a fair rent for the use of an object which we own and which we allow someone else to use.
Now let us consider the charging of a fee (interest) for the renting (loaning) of a medium of exchange (money). When money is rented (loaned out), the money is not being worn out or used up, as a house or an automobile wears out or is used up. You would not, so to speak, be selling it a little at a time as you do when you rent out your house or your automobile.
Let us say you loaned or rented a brand new automobile to your neighbor for a period of one year. When the year was up he returned it and you charged him a fair price for the use of it because he really did use it. The car was partly used up. It is just for you to charge him for the part that was used up. That payment was due you.
But suppose instead of your neighbor returning the partly used car, he returned to you a brand new car, equal to the one you loaned to him a year earlier. This one is even a year newer. You could not charge him for any used up part of the car, because the car was not used up at all. In this case you did not really rent or loan the car to him; you traded the first car for the one he returned a year later.
Some writers say that when a person loans out money he deprives himself of the use of that money for the length of time he has loaned it and he should be paid for his willingness to do without it for that length of time. That idea might have merit if some of his energy were used up because he deprived himself of the use of it for that time.
In practice, however, the person who loans money only loans his surplus money. He loans money that he does not need at that time, but he wants to have it at some future time. Therefore, he does not suffer any hardship; he does not use up any of his energy by his willingness to do without it at that time. It might then be unjust for him to ask for more money from the borrower than he gave to [p. 106] him. A case can be made so that, in justice, he might have to pay the borrower for keeping his money current or up to date for a certain period.
We will give an example. Remember, all bona fide money (medium of exchange) is either a tax credit certificate or a certificate of credit. All have an expiration date after which they will not be redeemed. The expiration date may be unknown; it may not be written on the certificate or on the coin or on the token. We saw how the United States government set June 24, 1968 as the expiration date for its silver certificates. .
Now let us suppose a person has a surplus of tax credit certificates that are redeemable for a certain year only. If he loans these certificates to a neighbor who agrees to give him, a year later, certificates of equal value of the next years tax credit certificates, that neighbor will be, so to speak, keeping his money current or up to date. He is, in that sense, rendering him a service. He might be entitled to a fee for that service. On the other hand, the person who made the loan also rendered a similar service to his neighbor by making the loan to him when he needed it. Those services that each one rendered to the other did not require the expenditure of energy by either one. Both practiced justice by making exchanges of equal value; one years certificates were traded or sold for the next years certificates. If any interest or fee were to be charged by either one of those two, that might be an unjust charge; however, it would be just to require collateral security for such a loan. .
It is important to remember, for the sake of having knowledge on the subject, that all bona fide money, tax credit certificates, and certificates of credit will not be redeemed after enough time has elapsed. That is why, when you loan out money you cannot expect to get the same money back. That same money may no longer exist. You are really, when making a loan, exchanging the money you now have for some other money that you expect to get in return. Therefore, in justice, you should get back money of equal value, no more or no less.
Bona fide money (medium of exchange) does not lose [p. 107] its value because of the elapse of time. (We shall not consider inflation, because inflation exists only when a non-bona fide money is used.) Therefore, you cannot charge a rent (interest) fee for the use of money because it is not really used. The same money that is loaned out is not returned; other unused money is returned in its place.
Money (a bona fide medium of exchange) is not really used by anyone. When we receive money (medium of exchange), we do not use it as we use a suit of clothes or a piece of furniture. We keep it until we are ready to buy something with it. While we are keeping it we are not using it. Then, when we spend it, we no longer have it. So, we do not use it after we have spent it. Thus, it seems proper to say that money is not really used.
51 Money is a document like a deed. We never speak of using a deed. We keep a deed as evidence to show that we have a claim to a certain piece of land. We do not rent out a deed. We do not loan out a deed. We give a deed to a person who buys our property. Money (a bona fide medium of exchange) is given as evidence to show that the bearer has a just claim for some goods or service for which it will be redeemed.
If a manager of a store gave you a gift or credit certificate for some goods in his store, you could give that certificate to another person as a gift or you could exchange it for some other item of value with another person. But you would not, with justice, rent or loan it out for an interest fee.
Bona fide money (medium of exchange) is created for the purpose of buying and selling goods and services. If money is created for the purpose of being loaned out to obtain interest, it is not bona fide money (medium of exchange). It was not issued as evidence of a claim for some goods or services. Things that are really used can be loaned out or rented, but things that are not used cannot, with justice, be rented or loaned out. The following are some examples: You cannot rent out a document, such as a deed or a license off any kind. You cannot rent a chicken dinner or a loaf of bread. You cannot rent a gift certificate, a certificate of [p. 108] credit, a tax credit certificate, or money. When you cannot get back the same item you loan out, you cannot rent out or loan out that item. (Those items can be sold, traded, or given away, but not rented or loaned.)
When we loan out or rent a house, an automobile, or a hand saw, the borrower will return the same item we loaned to him. But when we pretend to loan out items that cannot be returned, once they are used, such a loan is not a real loan. It is a trade or barter for a similar, but not the same, item that also had not been really used by the borrower.
For example, if a lady borrows a cup of sugar from her neighbor, she will not return the same sugar because she used it up. She will return a cup of some other sugar. She did not borrow (rent) that first cup of sugar; she made a trade or bartered the one cup of sugar for the other cup of sugar.
The same may be said about borrowing or renting other items that are consumed or destroyed when used. Food and fuel are good examples of such items. Money (credit certificates) also falls into that same class. It is, in effect, destroyed when it is used, redeemedthat is, when it has fulfilled the purpose for which it was created. Therefore, you cannot really rent or loan it out. You can trade it for money (credit certificates) of equal value, which will be returned to you at a later date. But it might not be just to demand more money than you gave merely because the trade was not completed on the same day.
It may at first appear to us that if we loaned money to a person we are, in justice, entitled to some interest for our going without the use of it until the time the money is returned. But if we kept the money, it would not have increased in value while we kept it. If we spent it for an item such as a lawn mower, we would have the use of the lawn mower, but the mower would lose its value as it was used and time went by.
Again, it is worth noting that bona fide credit certificates do not lose their value with the elapse of time, but the thing for which we spend them might. That indicates that credit certificates (money) are not used up, even with [p. 109] the elapse of time. That is why we could consider it unjust to charge interest (rent) just because of the elapse of time.
We should also look at interest charges according to the purpose for which the money is spent by the borrower. When it is spent for something which is really used, such as a house or an automobile, the
52 interest charge then would be the equivalent of rent because the one who made the loan would, in effect, be part owner of the house or the automobile. The interest charge then could be a just charge in the same manner that rent is a just charge. When the borrowed money is spent for something that is not worn-out, such as food, fuel, a taxi ride, or for the payment of government expenses, the interest charges are really a fine or a penalty imposed on the borrower because of his delay in returning the money. While such a loan should not be made with interest, it still may not be just to charge interest as a penalty for the delay in getting the money returned.
To explain just how great is the injustice that results when interest is charged for a long period of time, we shall make a table showing how much $1000 becomes when it is loaned out at six percent interest, compounded annually. It has been computed that money loaned at six percent interest compounded annually, a little more than doubles every twelve years. We therefore submit the following table:
|$1000 @ 6% Interest, after 12 years equals||$ 2,000|
| " " " " " 24 " "||4,000|
| " " " " " 36 " "||8,000|
| " " " " " 48 " "||16,000|
| " " " " " 60 " "||32,000|
| " " " " " 72 " "||64,000|
| " " " " " 84 " "||128,000|
| " " " " " 96 " "||256,000|
| " " " " " 108 " "||512,000|
| " " " " " 120 " "||1,024,000|
| " " " " " 132 " "||2,048,000|
| " " " " " 144 " "||4,096,000|
| " " " " " 156 " "||8,192,000|
| " " " " " 168 " "||16,384,000|
| " " " " " 180 " "||32,768,000|
| " " " " " 192 " "||65,536,000|
| " " " " " 204 " "||131,072,000|
We see that $1000 loaned out at 6% interest compounded annually amounts to $1,024,000 after 120 years. If it is left at 6% interest compounded annually for another 84 years, the total becomes $131,072,000. Think of it! We started out with only $1000! If we had started out with one billion dollars, the total would be a million times that amount; that is, it would be one hundred thirty one trillion, seventy two billion dollars ($131,072,000,000,000).
The above figures give us a good idea as to the cost of interest payments over a long period. When money is borrowed to pay for items that are really used, such as a house or an automobile, the interest payments are, in effect, rent payments on the unpaid part of the house or the automobile. The payments will end either when the house or auto is paid for, or when they are worn out or destroyed.
When money is borrowed by a government to be used as a medium of exchange, or to pay for services, or to pay for goods that are consumed or destroyed, there is no end to the length of time the interest payments have to be made. They continue indefinitely. To be sure, the bonds mature, but new ones are issued to replace the one that matured. The nation can never get out of debt. If the government paid off a part of the debt, it could do so only if private enterprise went more into debt. Otherwise a shortage of the medium of exchange would exist and a depression would occur.
Remember, it is not necessary for a government to borrow its medium of exchange. It can issue tax credit certificates, or the equivalent in notes or coins, just as easily as it can issue bonds or other interest-paying notes. All are backed by the same taxing power of the government. [p. 111]
In 1969 the federal debt of the United States was over $360,000,000,000. The interest on that amount at 5% per annum amounts to $18,000,000,000. We should look at that as the fine or penalty the taxpayers pay because the officials do not see to it that bona fide money is used. If bona fide money is not used, these debt and interest charges will continue to increase and increase almost without end. Of course there will be an end: it will be severe inflation or some other violent end.
EXAMPLES OF JUST INTEREST
Let us say we own a house worth $12,000. If we rent out that house for $80 per month or $960 per year, we will come up with the following figures:
Our annual cost of owning that house is as follows:
Out of the $960 per year rent paid by the tenant, he is paying for the following:
|Use of House||480|
So the tenant is paying only $480 rent for the use of the house. The other $480 extra he would have to pay if he were the owner. The owner could charge the tenant 4% interest on the $12,000 and have the tenant pay the taxes, [p. 112] insurance, and repairs, the result in cost to him would be the same as if he paid it all as rent of $80 per month. Such an interest charge would be a just charge because it is a rent payment for the use of the house. It only appears as if it is a charge for the use of the money.
Now instead of renting the house, let us sell the house for $12,000. The buyer will pay $2,000 down and the balance of $10,000 by paying $1000 off the principal each year for the next ten years, with 4% interest on the unpaid balance.
The buyers payments will be as follows:
|Payment at time of purchase|| $ 2000|
|Payment of principal at end of 1st year||1000|
| " " interest " " " " "||400|
| " " principal " " " 2nd year||1000|
| " " interest " " " " "||360|
| " " principal " " " 3rd year||1000|
| " " interest " " " " "||320|
| " " principal " " " 4th year||1000|
| " " interest " " " " "||280|
| " " principal " " " 5th year||1000|
| " " interest " " " " "||240|
| " " principal " " " 6th year||1000|
| " " interest " " " " "||200|
| " " principal " " " 7th year||1000|
| " " interest " " " " "||160|
| " " principal " " " 8th year||1000|
| " " interest " " " " "||120|
| " " principal " " " 9th year||1000|
| " " interest " " " " "||80|
| " " principal " " " 10th year||1000|
| " " interest " " " " "||40|
When the buyer made the $2000 down payment, he really did not buy the whole house; he only bought 2/12 of the house. He then bought 1/12 part more of the house during each of the next ten years.
We can see that the interest payments, in this case, were really payments for the rent (use) of the portion of the house that the buyer did not yet own, because he had [p. 113] not yet paid for that portion. When he made the down payment of $2000, he only paid for a 2/12 part of the house. The first year that he lived in the house he paid rent for the use of the other 10/12 part, which he did not yet own. He possessed it, but he did not own it. The second year, after he paid off an additional $1000, he then paid rent for the use of 9/12 of the house. That was the part he did not yet own.
So each year as the principal was paid off, he became owner of 1/12 more portion or the house and his interest (rent) was reduced accordingly. At the end of the tenth year he had the house paid for and he then owned the whole house. He did not have to pay any more interest (rent). The interest payments he made during those ten years were just as if they had been payments for rent.
The reader may enjoy knowing that, in the event the owner of the house were receiving $100 per month rent instead of $80, he would have had to charge 6% interest, instead of 4%, when he sold the house, in order to bring his rent income from the still unsold part of the house up to equal the amount it was when he was renting out the whole house for $100 per month. The reader can prove that, by substituting 6% in place of 4% in the above payment plans. That also is another indication that those interest payments were equivalent to rent payments.
The same principle will apply when a person buys an automobile on the installment plan. He buys a portion of the car and pays rent for the use of the unpaid portion. The fact that the payment is called interest instead of rent does not change the matter. So when a buyer pays an interest charge that is really a rent charge for the use of the unpaid part of the car, it is a just interest charge. We assume it is not excessive.
A farmer could buy livestock, farm machinery, or land and be charged an interest (rent) charge on any unpaid portion. Such an interest charge would be a just charge, because he would be paying it as rent for the use of the unpaid part of those items. He would not be paying for the use of money.
If a person borrows money to buy a house, a car, farm [p. 114] machinery, etc., he really does not buy those items; the person or banker from whom he borrows the money is the one who is the real buyer. Then the person or banker agrees to sell the item to the borrower under the condition that the borrower will pay for it on the installment plan. The borrower will become the owner when the loan is repaid. The borrower agrees to pay interest (rent) on the unpaid portion until the balance is paid.
Again, such an interest charge is just, because the borrower is paying the equivalent of rent for the use of the part of the item he does not yet own. He is not paying for the use of money.
Thus we can conclude that interest charges are just, when made as rent for the use of an unpaid part of an item in the process of being purchased and which is being used by the one making the purchase.
EXAMPLES OF UNJUST INTEREST CHARGES
1. If counterfeit money were loaned out at interest, the interest charge would be unjust, no matter for what purpose the loan was made because the counterfeiter would be stealing from the borrower and all holders of bona fide media of exchange. Stealing is an unjust practice.
2. If inflationary money or inflationary banks credit money were loaned out with interest; the interest charge would be unjust because the inflationary money or the inflationary bank credit money is not bona fide money. It is, in effect, legal counterfeit money.
3. When Federal Reserve notes or bank credit money are created in order to be loaned to a governmental body, with interest, the charge for interest is unjust because it is not necessary for a governmental body to borrow bank credit or Federal Reserve notes, and because if it does, it cannot (by itself) pay back the principal and the interest.
Let us explain that statement. When a governmental body borrows money, it gives as security for the loan its agreement or promise that it will levy a tax on the people within its jurisdiction, sufficient to repay the loan with interest. When the governmental body issues tax credit [p. 115] certificates, it also levies a tax that will be paid with those tax credit certificates, but no tax will have to be levied to pay interest. The tax credit certificates can be used as money without interest.
The tax credit certificates and the bonds or notes given as security for a loan are both equally backed by the taxing power of the governmental body. If the bankers are willing to accept that backing for their loans, the non-bankers will also accept the tax credit certificates when they understand all the advantages.
When the federal government wishes to issue tax credit certificates, it may do so in the form of United States notes and/or coins. But state or local governmental bodies should issue only tax credit certificates.
We also said that the governmental body, even by using its power to tax, cannot, by itself, repay the principal of the loan with interest. How can that be? We all know of cases where a governmental body paid off its loans. Yes, that is true. But it could only do that because some other governmental body or private corporations or private persons had borrowed other money which was used to pay off the loan with interest. In other words, there was bigger debt, governmental or non-governmental, within the country when the loan was paid with interest, than there was at the time the loan was first made. Perhaps the easiest way to explain that point is to start with a government in a country where all of its money was destroyed or had lost all of its value.
Let us say the government borrowed from a foreign country, $1,000,000. The money could be gold coins, gold certificates, or bank credit money. The government borrowed the $1,000,000 at 3% interest. It levied a tax sufficient so that it could pay back, after one year, the $1,000,000 of principal, plus $30,000 for the interest.
When the year was up and the people tried to pay their taxes, they could give to the government only $1,000,000. They could not pay the extra $30,000 simply because there were no extra $30,000 worth of gold coins or gold certificates or bank credit money to be found within the [p. 116] whole country. Only $1,000,000 was borrowed and only that $1,000,000 existed within the whole country.
The only way enough money would exist with which to repay the loan, with interest, would be for the government or someone else within the country to borrow more money. Thus we see, whenever a nation borrows the money which is used as a medium of exchange, that nation can never get out of debt. In fact, the debt will have to be increased in order to have enough money just to pay the interest charges. As the years go by, the debt and interest charges will become a very great burden.
Therefore, if any governmental body anywhere in the world needs a medium of exchange, its officials should issue tax credit certificates. These tax credit certificates are a bona fide medium of exchange (money). If honest and informed officials create the bona fide medium of exchange to be used in their country, they will never put their country in debt. The country will not have to pay any interest for the use of their medium of exchange. The country will not be dependent upon or obligated to any money lenders, domestic or foreign.
4. Money (medium of exchange) need not be borrowed, with or without interest, on goods that are about to be offered for sale. If enough money (medium of exchange) does not exist so that the goods can be sold, then the owner or possessor of the goods should issue certificates of credit for those goods. Those certificates of credit are a bona fide medium of exchange. Goods being offered for sale are the proper items for which a medium of exchange is created. Therefore, certificates of credit should not be borrowed against such goods, but should, if necessary, be issued as a claim against them.
5. It would seem unjust to charge interest (rent) when money is loaned to a person for the purpose of buying a consumable item, such as food or fuel. Such items should be sold, traded, or given to the person, but not, in effect, rented to him. In fact, such items cannot really be rented because they cannot be returned. They are consumed and disappear at the moment they are used. Therefore, no [p. 117] charge for rent or interest can be justly made for the use of them.
If you loan a person money to buy food, you are, in effect, buying the food and then loaning the food to him. But such an exchange is really a trade for a similar amount of food, which he expects to return at a later date. Justice requires that he return the same amount that you gave him, no more and no less. [p. 118]