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The Theory of interest on money

OECD . . . English  . . . SDN <===>  Money   . . . Robinson Crusoe   . . . EuroStaete

The devastating role of interest on the economy and society

By: Silvio Gesell
Mai 5th, 1920

A STORY OF ROBINSON CRUSOE

To introduce the theory of interest here expounded, and to facilitate the removal of old prejudices, which are nowhere stronger than in connection with the subject of interest, I shall begin with a story of Robinson Crusoe. *

Robinson Crusoe, as is well known, built his house, from motives of health, on the south side of the mountain, whereas his crops grew on the damp but fruitful northern slopes. He was therefore obliged to carry his harvests over the mountain. To eliminate this labour he decided to construct a canal around the mountain. The time required for this enterprise which, to avoid silting, would have to be continued without interruption, he estimated at three years. He had therefore to lay in provisions for three years.

He slaughtered some pigs and cured their flesh with salt; he filled a deep trench with wheat, covering it carefully with earth. He tanned a dozen buckskins for suits and nailed them up in a chest, enclosing also the stink-glands of a skunk as a precaution against moths. In short, he provided amply and, as he thought, wisely, for the coming three years.

As he sat calculating for the last time whether his "capital" was sufficient for the projected undertaking, he was startled by the approach of a stranger, obviously the survivor of a shipwreck.

"Hallo, Crusoe!" shouted the stranger as he approached, "my ship has gone down, but I like your island and intend to settle here. Will you help me with some provisions until I have brought a field into cultivation and harvested my first crops?"

At these words Crusoe's thoughts flew from his provisions to the possibility of interest and the attractions of life as a gentleman of independent means. He hastened to answer "yes."

"That's splendid ! " replied the stranger, "but I must say at once that I shall pay no interest. I would prefer to keep myself alive by hunting and fishing, for my religion forbids me to pay, or to receive, interest."


note:
* To save space I have not subjected the loan-contract here described to the regulating effect of competition. If the conditions of the loan were determined by competition in the form of several loan-givers (Crusoes) to one loan-taker (the Stranger) the contract would be still more favourable to the loan-taker. It is also assumed that both parties are guided by the principles of Free-Land, for otherwise the outcome would be, not a loan contract, but a fight.


Robinson: Crusoe: An admirable religion! But from what motive do you expect me to advance you provisions from my stores if you pay me no interest?

Stranger: From pure egoism, my dear fellow, from your self-interest rightly understood. Because you gain, and gain enormously.

R.C.          That, stranger, you have yet to prove. I confess that I can see no advantage in lending you my provisions free of interest.

S.             I shall prove it in black and white, and if you can follow my proof, you will agree to a loan without interest, and thank me into the bargain.
                I need, first of all, clothes, for, as you see, I am naked. Have you a supply of clothes?

R.C.           That chest is packed with buckskin suits.

S.              My dear Crusoe! I had more respect for your intelligence. Just fancy nailing up clothes for three years in a chest - buckskins,
                 the favourite diet of moths! And buckskins must be kept aired and rubbed with grease, otherwise they become hard and brittle.

R C.           That is true, but I have no choice in the matter. They would be no safer in my clothes-cupboard - less safe, indeed, for it is
                 infested by rats and mice as well as by moths.

S.              The rats and mice will get them in any case. Look how they have already started to gnaw their way in!

R.C.            Confound the brutes! I am helpless against them.

S.              What! A human being helpless against mice! I will show you how to protect yourself against rats and mice and moths, against
                 thieves and brittleness, dust and mildew. Lend me these clothes for one, two or three years and I agree to make you new
                 clothes as soon as you require them. You will receive as many suits as you have lent me, and the new suits will be far superior
                 to those you would have taken from the chest. Nor will you regret the absence of the particular perfume you have employed!
                 Do you agree?

R.C.           Yes, stranger, I agree to lend you the chest of clothes; I see that in this case, the loan, even without interest, is to my advantage. *

S.             Now show me your wheat; I need some for bread and seed.

R.C.           It is buried in this mound!

S.

    Wheat buried for three years! What about mildew and beetles?

R.C.     I have thought of them and considered every other possibility but this is the best I can do.

S.       Just bend down a moment. Observe this beetle crawling on the surface of the mound. Note the garbage and the spreading patch
          of mildew. It is high time to take out the wheat and air it.

R.C.     This capital will be my ruin! If only I could find some method of protecting myself against the thousand destructive forces of nature!

S.         Let me tell you, Crusoe, how we manage at home. We build a dry and airy shed and shake out the wheat on the boarded floor.
            Every three weeks the whole mass is turned over with wooden shovels. We also keep a number of cats; we set mouse-traps
            and insure against fire. In this way we keep the annual depreciation down to 10%.

R.C.      But the labour and expense!

S.         Exactly! You shrink from the labour and expense. In that case you have another course. Lend me your wheat and I shall replace it,
            pound for pound, sack for sack, with fresh wheat from my harvest. You thus save the labour of building a shed and turning over
            the wheat; you need feed no cats, you avoid the loss of weight, and instead of mouldy rubbish you will have fresh, nutritious bread.

R.C.       With all my heart I accept your proposal.

S.         That is, you will lend me your wheat free of interest?

R.C.       Certainly: without interest and with my best thanks.

S.         But I can use only part of the wheat, I do not need it all.

R.C.       Suppose I give you the whole store with the understanding that for every ten sacks lent you give me back nine sacks?


Note  * This obvious fact has been overlooked by every writer upon interest up to the present day, even by Proudhon.


S.         I must decline your offer, for it would mean interest - not indeed positive, but negative interest. The receiver, not the giver of the loan,
            would be a capitalist, and my religion does not permit usury; even negative interest is forbidden. I propose therefore the following agreement.
            Entrust me with the supervision of your wheat, the construction of the shed, and whatever else is necessary. In return you can pay me, annually,
            from every ten sacks two sacks as wages.

R.C.       It makes no difference to me whether your service comes under the heading of usury or labour. The agreement is, then, that I give you
            ten sacks and that you give me back eight sacks?

S.         But I need other articles, a plough, a cart and tools. Do you consent to lend them, also, without interest? I promise to return everything
            in perfect order, a new spade for a new spade, a new, unrusted, chain for a new chain, and so forth.

R.C.       Of course I consent. All I have at present from my stores is work. Lately the river overflowed and flooded the shed, covering everything with
             mud. Then a storm blew off the roof and everything was damaged by rain. Now we have drought, and the wind is blowing in sand and dust.
             Rust, decay, breakage, drought, light, darkness, dry-rot, ants, keep up a never-ending attack. We can congratulate ourselves here upon having,
             at least, no thieves and incendiaries. I am delighted that, by means of a loan, I can now store my belongings without expense, labour, loss or
             vexation, until I need them later.

S.          That is, you now see the advantage you gain by lending me your provisions free of interest? *


notes: * Knut Wicksell, Wert, Kapital und Rente, p.83, "Böhm-Bawerk asserts that present goods are at least equal to future goods, since, if need be, they can simply be 'stored for use in the future.' This is certainly a great exaggeration. Böhm-Bawerk does, indeed, mention that perishable goods, such as ice, fruit, etc., are an exception. But this exception applies more or less to all foodstuffs. Perhaps, indeed, all goods except precious stones and precious metals, if kept for future consumption, require special labour and attention to which must be added the danger of loss through accidents such as fire."

(Banks now provide, for private use special store-rooms for gold, precious stones and securities. For the use of these rooms, rent must be paid. The "present goods" are here inferior to the "future goods", by at least the amount of this rent.)


R.C.       Of course I do. But the question now occurs to me, why do similar stores of provisions at home bring their possessors interest?

S.          The explanation lies in money which is there the medium of such transactions.

R.C.        What? The cause of interest lies in money? That is impossible, for listen to what Marx says of money and interest: "The change of
              value of money that converts it into capital cannot be derived from the money itself, since money in its function of medium of payment
              does no more than pay the price of the commodity it purchases, and, as hard cash it is value petrified, never varying.
              Just as little can the change occur in the second act of circulation, the re-sale of the commodity. [For in both cases] equivalents are
              exchanged, and the commodity is paid for at its full value. We are therefore forced to the conclusion that the change originates
              in the use-value of the commodity, after its purchase and before its sale." (Capital I. VI).

S.           How long have you been on this island?

R.C.        Thirty years.

S.           I thought so! You still appeal to the theory of value. My dear sir, that theory is dead and buried. At the present day it has no defenders.

R.C.         What ?, Marx's theory of interest dead and buried. Even if no one else defends it - I defend it

S.           Well then, defend it not only with words but also in practice if you wish, in relation to me! I hereby break off the bargain we have just
              made. From their nature and destination your goods are the purest form of what is usually called capital. But I challenge you to take up the
              position of a capitalist towards me. I need your stuff. No worker ever appeared before a capitalist as naked as I stand before you.
              Never has there been so clear an illustration of the relation between the owner of capital and the individual in need of capital. And now make
              the attempt to exact interest ! Shall we begin our bargaining again from the beginning?

R.C.        I surrender ! Rats, moths and rust have broken my power as a capitalist. But tell me, what is your explanation of interest?

S.          The explanation is simple enough. If there were a monetary system on this island and I, as a shipwrecked travelled needed a loan,
             I should have to apply to a money-lender for money to buy the things which you have just lent me without interest. But a money-lender has not
             to worry about rats moths, rust and roof-repairing, so I could not have taken up the position towards him that I have taken up towards you.
             The loss inseparable from the ownership of goods (there the dog running off with one of your - or rather my -buckskins!) is born, not by
              money-lenders, but by those who have to store the goods. The money-lender is free from such cares and is unmoved by the ingenious
              arguments that found the joints in your armour. You did not nail up your chest of buckskins when I refused to pay interest; the nature of
              your capital made you willing to continue the negotiations. Not so the money-capitalist; he would bang the door of his strong room before
              my face if I announced that I would pay no interest. Yet I do not need the money itself, I need it only to buy buckskins. The buckskins you
              lend me without interest but on the money to buy buckskins I must pay interest!

R.C.        Then the cause of interest is to be sought in money? And Marx was mistaken?

S.           Of course Marx was mistaken, and as he was mistaken about money, the nervous system of economic life, he was mistaken about everything.
              He and his disciples excluded money from the scope of their enquiry; he was fascinated by the shining 'metal disks', otherwise he could
              never have written: "Gold and silver are not by nature money, but money is by nature gold and silver, witness the coincidence of their natural
              properties and its functions."

R.C.        Practice certainly doesn't confirm Marx's theory, that has been clearly shown by our negotiations. For Marx money is simply a medium
             of exchange, but money does more, it seems, than "merely pay the price of the commodities it purchases," as Marx asserted. When the
             borrower refuses to pay interest, the banker can close the door of his safe without experiencing any of the cares wich beset the owner of
             goods - that is the root of the matter.

S.          Rats, moths and rust are powerful logicians! A single hour of economic practice has taught you more than years of study of the text books.

From Silvio Gesell's "Natural Economic Order", Mai 5th 1920