Source: George P. Brockway, "The End of Economic Man", p. 174-177, 1995.

Interest
And the Parable of the Talents

Money functions or serves as it is used in buying, selling, and contracting for goods and services, and in storing wealth, and only as it is so used. Money declares or publishes or makes possible comparative prices, both present or spot prices and future or forward prices, and only money does this. To engage in economic activity, one must put money in one's purse. just as war is too important to leave to the generals, money is too important to leave to the bankers.

The services money performs command a fee, which is interest, just as workers are paid wages for their labor and landowners exact rent for the use of their property. In all these cases, whatever performs the service is eventually returned to its owner, unless it is destroyed or damaged (whereupon the owner has a claim on the person responsible). Interest, wages, and rent are paid for the service, not for what performs the service. With ordinary commodities, it is the other way around.

Interest, wages, and rent are all contractual payments, whether explicit or implicit. An agreement is reached on a service to be performed and on the payment that will be made for it. When a loan is discounted, the interest is paid before the service is performed, and similar arrangements can be made with wages and rent. In either case, the services of money, labor, and land are all continuing services, and the contracts governing them necessarily look to the future.

Most economists have tried to validate interest (or in the case of St. Thomas, to invalidate it) on some special ground, usually psychological. Nassau Senior established his reputation with the notion that interest rewards abstinence; Alfred Marshall, observing that rich lenders are not necessarily abstainers, defined it as the reward for waiting; Keynes called it the reward for not boarding; and Irving Fisher gave it a base in impatience. 1

These theories approach interest from the point of view of the lender, although the borrower is, as we saw in Chapter 3, the active partner in the transaction. In any case, it is not important for economic theory, even when true, that borrowers are impatient and lenders patient. The same distinction can be made between employers and employees, between renters and landlords, and between buyers and sellers of any commodity. I hire someone to mow my lawn, partly because I am lazy and partly because I am impatient to get it done and claim to have other things to do. I rent a house because I'd have to wait too long if I first tried to build one or to accumulate enough to buy one. I buy a Hat because I don't know how to make one. None of this matters.

What matters economically is that someone sees a way to make a profit by borrowing some money, and someone else sees a way to make a profit by lending it. If two "someones" have these modest complementary visions, they are in a position to reach an agreement upon a mutually acceptable fee for the use of the money.

They do not start with a tabula rasa. They have before them the fundamental interest rate set by the monetary authorities and the customary or historical variants from that rate to cover the type and duration of the loan they have in mind, together with estimates of risk, of transaction costs, of the likelihood of inflation, and so on. On this basis they each judge the value to themselves of the services (the use of some money) that one proposes to buy and the other to sell. As in any other economic exchange, one party (either one) makes an offer, and the other accepts it, or makes a counteroffer, which may itself be countered. Whether through groping or not, eventually they come to an agreement; if they don't, there has been no economic event and, as Cournot said of a similar situation, there is nothing to explain.

One retains the services of a moneylender for the same reason one retains the services of a laborer or a landlord- because one needs them or wants them. Turgot put the economic situation clearly: "Lending at interest is simply a kind of trading, in which the Lender is a man who sells the use of his money, and the Borrower a man who buys it, just as the Proprietor of an estate and his Farmer sell and buy respectively the use of leased property." 2

What is done in the labor, money, and real estate markets is more significant of the sort of people we are than are the doings in the various markets for goods, because labor, capital, and land are involved in every economic transaction, while no one has to have a new hat. The money market, however, is in principle different from the labor market or the real estate market; it is a condition of their operation, as it is a condition of the operation of all markets, that is, of the price system.

As we have noted, an economy with comparatively high interest and low wages (consequences of high planned profit) is one marked by cynicism and greed. A cynical and greedy society will make inadequate use of its labor and inappropriate use of its money and so will be less productive than it might have been. Its speculating economy will outweigh its producing economy.

Money is not an ordinary commodity like bread. The practical consequences of this domestic consideration can be quickly shown. If bread is, for whatever reason, overpriced, only the bread bakers languish. We can always eat cake. If, however, money is overpriced, that is, if the interest rate is too high bankers may prosper rather than repine, for the increase in the rate may off set, or more than off set, a possible fall in the demand for loans. But the rest of the economy will surely suffer.

****************************************************************************************************************** NOTES:
1. Nassau Senior, Industrial Efficiency and Social Economy (New York: Arno, 1972), vol. 1, pp. 197-202; Marshall, PrinciPles, p. 193; Keynes, General Theory, p, 174; Irving Fisher, The Theory of Interest (Philadelphia: Porcupine Press, 1977), p. 66ff.

2. Anne-Robert-Jacques Turgot, On the Formation and Distribution of Riches (New York: Kelly, 1971), p. 65. For somewhat similar views, see Carl Menger, Principles of Economics, (New York: New York University Press, 1976), p. 156; Keynes, Writings, vol. 14, pp. 221-22.

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