Under these conditions repayment of principal + interest is on the one hand possible by issuing an additional credit. But an additional credit can only issued if additional property (that has stable value, not bread etc.) is existent. The credit can thus not be used solely for the purposes of consumption as your example suggests but has to be used as an investment, that is for the creation of new stable property (find new gold). But once new Property is found, it can be used for the creation of new property to repay the total debt. On the other hand, if the borrower is not able to create enough new property to create new credit he will have to transfer at least part of the mortgage to the lender. He will thus loose property but still fulfill the credit contract.

The money system thus incites the whole society indeed to always expand it’s total wealth, to grow, to invest. But this need not mean enslavement as long as there is no strong concentration of wealth. A concentration of wealth means that an oligopoly in the credit market will exist (only a few people or institutions will serve most borrowers with credits). This would lead to exaggerated interest rates which would lead to further concentration etc. It can – I believe – be argued that this is the situation we are in today, and it can also be argued that there is a natural tendency that such an oligopoly is created if nothing is done to prevent it. But at this point I am unsure what follows as a matter of practical politics from this. A critical discussion would be welcome.

…what happens to the principle. The $20 remains in existence at the end of the year. It has been converted into debt free money, I guess. But how does that square with your last response to me, where you said:

“If all debts were paid off, there would be no fiduciary money, that’s right.”

Here’s how it squares: If all debts were paid off: no money. If all debts were not paid off: money.

As I conclude in the original article:

Now, you may argue that, because B is putting repayments of principal back into circulation without loaning them to anyone, the supply of debt money in my example is being converted into non-debt money, and that is correct. But it is entirely irrelevant. Were the repayments of principal simply re-loaned out to other persons by B, what was true for W (possibly at a later date) would be true for everyone else who rented notes from B: all, over time (and at differing times) would eventually be able to repay both their principal plus interest without B increasing the money supply.

Peter continues:

Just a newbie here, so most humbly I ask if the disagreement between you and Mr. Bhed is about whether that debt created money is in fact extinguished when the debt is paid off, or is converted into debt free money by the banker paying it back into the system, in which case the statement of yours that I quote above is not true.

There is no disagreement about the fate of repaid dollars of principal: when a dollar of debt is repaid, it ceases to exist. However, in practice, banks are issuing debts to some while others repay their debts. The flaw in the “$X cannot be used to repay $X+interest” is that X is always taken to equal the entire money supply, rather than a portion of it. Therefore, when X=the-entire-money-supply, the argument that “$X cannot repay $X+interest” is exactly the same as the argument “If you eliminate all money, there will be nothing left with which to satisfy outstanding debts”. In the example I gave in 2001 (reproduced in the article above), I dealt with that issue by treated repaid principal as though it had been replaced with other dollars of debt, dollar-for-dollar (or, the functional equivalent, within the context of the example: debt-free money). Thus the final paragraph in my post, above.

BTW, I am diving into the Ronnie Phillips stuff and trying to understand full reserve.

There’s a great article by Phillips concerning “The Chicago Plan”. It is definitely a worthy read, particularly at this point in time. It is available, for free, at the Levy Institute website (it is a “working paper”).

Also, haven’t studied much Rand, but really appreciated the concise comments by Michael M on this site I found yesterday from your page: http://dagblog.com/reader-blogs/randthrasymachus-marx-and-dostoyevsky-616

Have a look at http://www.aynrandlexicon.com. Many people recommend reading “The Fountainhead” and/or “Atlas Shrugged” before reading Rand’s non-fiction. However, in my experience, folks who do that struggle with non-essentials and self-inflicted red-herrings. In my view, the shortest read that gives one the most insightful first-blast of Ayn Rand’s philosophy is her essay “The Objectivist Ethics”, which is the first chapter of her book “The Virtue of Selfishness”. I’d start there.

“If all debts were paid off, there would be no fiduciary money, that’s right.”

Just a newbie here, so most humbly I ask if the disagreement between you and Mr. Bhed is about whether that debt created money is in fact extinguished when the debt is paid off, or is converted into debt free money by the banker paying it back into the system, in which case the statement of yours that I quote above is not true.

Darn if chasing these dollars around the economy isn’t like trying to keep track of individual trout at the the hatchery!

BTW, I am diving into the Ronnie Phillips stuff and trying to understand full reserve.

Also, haven’t studied much Rand, but really appreciated the concise comments by Michael M on this site I found yesterday from your page: http://dagblog.com/reader-blogs/randthrasymachus-marx-and-dostoyevsky-616

Stuff like:

“And the “No Rules” assumption ignores the central political principle of Rand’s radical capitalism:

No person may initiate the use of physical force to gain, withhold, or destroy any tangible or intangible value created by or acquired in a voluntary exchange by any other person.”

That seems pretty reasonable to me.

You write:

If there is only $20 in the money-supply, then there is only $20 in the money supply. I don’t care how long you take to pay it back, there is only $20 available with which to pay it back…none of which can increase the supply of money to repay the interest.

But that’s my point: one does not pay-back the entire money supply. Some debt – i.e., some money – is expected to remain owing at all times. Therefore, some of the debt (some portion of $X) is used to make each payment of interest. There is never a need simultaneously to come up with both (a) all outstanding principal (i.e., to repay the entire money supply), plus (b) interest on the principal. Therefore, it is irrelevant that $X < $X+$interest.

I started this discussion by commenting on and raising a question relating to fractional versus full-reserve banking.
My question had to do with fractional-reserve MONEY-CREATION by the Fed, or by private commercial banks that have that monopoly cartel privilege.

My question addressed the matter that in the present fractional-reserve, debt-money system, an ‘achilles heel’ exists with regard to money supply expansion via debt-money, and again, thus, the TOTAL money supply, due to the failure to provide for the payment of interest.

Why don’t any of your replies address this question directly, rather than transferring the monetary system discussion to the banking system discussion?

Trying to read between the lines of the many conspiratorial myth charges of your response, I don’t see a thing that addresses my point, or my question. I am left here with an unexpected conclusion that you are incapable of addressing he money-system question.

At some point, you WILL need to recognize the difference between the monetary system, of which the money supply and monetary polcies are parts, and the capital markets and the banking system, WHICH HAVE NOTHING TO DO WITH THE MONEY SYSTEM.

In fact, if you read M. Friedman’s Framework for Economic Stability, it can be seen that this discussion IS, and ought to be, about the separation of the banking powers from the money-creation powers.
The joining of these two functions is what constitutes the fractional-reserve banking system of the Fed, which is what I thought we both opposed.
Of course, again, in Friedman’s Framework piece he fully supports full-reserve banking, our common denominator.

I find your rush to join these discussions, to hopscotch back and forth between money-creation and banking, is counter-productive to an infomed readership here.

I leave your idea that somehow $20 can repay the entire debt load to fall on its own merits, as, again I said, this is about the velocity of money, and not about the problem of the insufficient quantity of money as contained in Lachance’s explanation of the debt-money system being broken.

Having re-read it all yet again, I will probably abandon this disussion by repeating myself.
If there is only $20 in the money-supply, then there is only $20 in the money supply. I don’t care how long you take to pay it back, there is only $20 available with which to pay it back. The two suitcases of the Zeitgeist Addendum.

Monetary velocity can change that $20 of real money into copious quantities of rolled-over ‘debts’, or non-money money, each of which can cancel the other out, but none of which can increase the supply of money to repay the interest.
And my discussion has to do with the interest owed on all the debt-money created as the money-supply(Q).

The fact that prices can be changed, that wages can be increased or that interest rates can vary between various transactions has NOTHING to do with the money-supply question.

The fact that you are not capable of acknowledging the difference between these two distinct operations of the financial economy is perplexing, but that’s what it is.

Neither do I understand why a full-reserve advocate, as am I, ignores this essential reality that could sound the death knell to the immoral fractional reserve money-creation system.

So, I close and wish you good luck in your pursuit of full-reserve banking, knowing you have a supporter in joebhed.

ALL money is created as debt. We agree on that, no?

Yes, we agree on that. These days, some of the debt money is called “currency” (i.e., debts issued by central banks) and some of the debt money is called “credit” (i.e., debts issued by chartered banks).

A has a $20 note., AND
A owes B $40., AND
B owes C $40., AND
C owes A $40.
(my emphasis)

[...]are these “creditors” banks?
You haven’t stated that they are banks, but you implicate by this discussion about debt-money creation and the interest factor, that A, B and C are banks. Otherwise, these debts are not part of the debt-money-supply according to your definition in 1.

The example you are referring to was to demonstrate that any amount of money can cancel a larger amount of debt. It doesn’t matter why the debt arose; whether it is principle owing, or rent owing or interest owing (note: both rent and interest are money paid for the temporary use of capital).

The example I intended you to re-read was the one in my original post, above, which explicitly involves a bank (B).

By that definition, B could only owe C $40 (of debt-money that has been created) if that $40 increased both the total of debt-money in existence and the total of the debts owed.

Again, otherwise by definition, we are not discussing the problem I first raised of money creation via debt. You’re back to velocity.

Carrying that thought forward, the money supply in your example is automatically, and by that I mean by your definition, a minimum of $120, and more likely $140.

No. Not all debts are money. A can lend a $20 note to B, who can lend it to C, who can lend it to D who can lend it back to B, such that B owes $40: $20 to A, and $20 to D. In such a case, apart from the $20 of debt that is money, there is $80 of debt that is not money.

When the bank CREATES through fractional reserve banking and lends me the $1K, that IS money-creation. When I give it to Johnny for the Chevy, and then Johnny lends that money to Fred, and Fred buys tomatoes, etc., etc., none of these other transactions result in an increase in the money supply. As such, they are not relevant to the repayment of my $1K to the bank with interest.

You are correct that “none of these other transactions result in an increase in the money supply”. However, you miss the point. If Fred is the bank to which you owe interest, and you are the guy growing and selling him tomatoes, then (a) the the bank is paying some of its interest revenues to you, and (b) you are then able to pay those tomato revenues back to the bank (Fred) in satisfaction or partial satisfaction of the interest you owe.

The debt-money problem relates to the fact that ALL money is CREATED as a debt, that must be repaid with interest. Again, it is not a problem that relates to the number of times the $1K changes hands WITHIN the economy, and, as such, it is not a problem that can be solved via those internal turnovers of the money, regardless of their volume, or their velocity.

You are referring to situation that is entirely unreal: a demand that all dollars be repaid simultaneously; this is unreal because it implies the elimination of the money supply altogether. That is one of the two errors I pointed out in my original post.

So long as the banks are not demanding the return of all debt – so long as they are not eliminating the money supply – there is (a) no problem paying interest, and (b) paying interest does not require an increase in the money supply.

Sorry, Paul, but it should become painfully obvious at some point that using your example and your rationale, you could take that $20 and run as quickly around the country for as long as you could and pay off all the nation’s debts.

If a $20 bill can repay $120 in debts, then why not $120,000?
All you need is enough time.

Correct: all debts that are not money could, in theory, be repaid with a single penny. A claim that such is impossible would be wholly and demonstrably false.

I am open to your ability to proving your theory is correct, and I invite you to draw on your long history to play the trump card here.
Right here, on this your blog.
Once and for all, you CAN settle it.
Something to think about.

The example in my original post is a proof that $X can be used to pay $X+interest. I do not argue that which is implied by all of those who say that $X cannot be used to pay $X+interest: each implies a scenario in which the repayment of all outstanding debt money is demanded, and no new debt is issued; each implies an elimination of the money supply; each says merely “if we remove all money, how can we pay debts of interest that are owing?” Clearly, the answer is: you cannot pay for anything without a means of payment. You cannot pay rent, you cannot pay for groceries, and you cannot pay interest. But there’s nothing fascinating about that: a two year old knows he cannot buy bubble gum if his father takes away his quarters.

PS – for some reason, in your entire explosion of the interest myth, and in your presentation of various examples of multiples of debt repayments, you NEVER mention the interest, only the debt.
Why is that?

Your statement is incorrect. See my original post: “Let’s see if W can repay $20 principal plus $2 interest…”

I understand how an individual can pay back principle plus interest, but where did the money for the interest come from originally? Some place other than the principle on somebody’s debt?

No place other. The money that is borrowed is used to pay back the money and the interest on the money. What makes that possible is the fact that the bank pays interest back into the economy when it pays its employees and suppliers.

What is you opinion of the assertion that if all debts were paid off, there would be no money?

If all debts were paid off, there would be no fiduciary money, that’s right. However, that would not prevent people from using things other than debt as money: e.g. gold coins.

Back to basics.
ALL money is created as debt. We agree on that, no?

From your earlier posting here:
“”1. All money is debt issued by banks (whether currency issued by a central bank, or credit issued by a chartered private bank).””
That was one of your facts. The one I call the CREATION factor.
With THAT in mind, consider this from your example :
A has a $20 note., AND
A owes B $40., AND
B owes C $40., AND
C owes A $40.
(my emphasis)

(THAT from your example, and THIS from your reply:
“joebhed: Just read through my example, which demonstrates the falsity of the idea that $X cannot be used to satisfy debt of $X+interest. The creditor doesn’t just receive money: he also pays it back into the economy. So the same $X can be paid to the creditor any number of times.”)

Paul, excuse me for asking but, are these “creditors” banks?
You haven’t stated that they are banks, but you implicate by this discussion about debt-money creation and the interest factor, that A, B and C are banks. Otherwise, these debts are not part of the debt-money-supply according to your definition in 1.

By that definition, B could only owe C $40 (of debt-money that has been created) if that $40 increased both the total of debt-money in existence and the total of the debts owed.
Again, otherwise by definition, we are not discussing the problem I first raised of money creation via debt. You’re back to velocity.

Carrying that thought forward, the money supply in your example is automatically, and by that I mean by your definition, a minimum of $120, and more likely $140.

Again, either that, or we need to re-define the money supply.
ALL money in the money supply is CREATED as a debt – everything from a chincy Fed faux-money issuance of One-Hundred-Billion$US to Treasury in return for a USG note, right down to the local bank’s providing me $1,000 in return for a PN(repayable with interest) and the pink slip to my ‘56 Chevy.

When the bank CREATES through fractional reserve banking and lends me the $1K, that IS money-creation. When I give it to Johnny for the Chevy, and then Johnny lends that money to Fred, and Fred buys tomatoes, etc., etc., none of these other transactions result in an increase in the money supply. As such, they are not relevant to the repayment of my $1K to the bank with interest.

When Fred sells the tomatoes and pays off the loan to Johnny, guess what?
I still owe the bank $1000 plus interest. So all those other transactions, while wiping out $3K in turnover of the $1K of debt money, have done NOTHING to eliminate the debt-money enigma. I still owe A+B, and the WHOLE MONEY SYSTEM has only created A.

The debt-money problem relates to the fact that ALL money is CREATED as a debt, that must be repaid with interest. Again, it is not a problem that relates to the number of times the $1K changes hands WITHIN the economy, and, as such, it is not a problem that can be solved via those internal turnovers of the money, regardless of their volume, or their velocity.

Again, your position:
“All of the various “$X cannot be used to pay $X plus interest” claims remove time and trade – including trade by the creditor – from the scenario, in order to take the re-use of the same dollars out of the scenario. Such claims are no different, really, than claims that a single $20 bill cannot be used to satisfy $120 of debt, but such a claim is similarly false:”

Sorry, Paul, but it should become painfully obvious at some point that using your example and your rationale, you could take that $20 and run as quickly around the country for as long as you could and pay off all the nation’s debts.
If a $20 bill can repay $120 in debts, then why not $120,000?
All you need is enough time.

Paul, I do not represent any other claims that may have been made about the problem that A+B IS ALWAYS > A.
I asked for your opinion, and we are discussing that opinion and my opinion.

With your permission, and despite your earlier good works on this subject that may place you in the position of determining what constitutes myth and what constitutes reality, I would like to escalate THIS discussion to THE discussion on the achilles heel of the debt-money system. Either it is, or it isn’t.

I am open to your ability to proving your theory is correct, and I invite you to draw on your long history to play the trump card here.
Right here, on this your blog.
Once and for all, you CAN settle it.
Something to think about.

respectfully.

PS – for some reason, in your entire explosion of the interest myth, and in your presentation of various examples of multiples of debt repayments, you NEVER mention the interest, only the debt.
Why is that?

Thanks for your response which I am digesting. I’ll let go of the bathtub metaphor; I guess it didn’t work as I didn’t mean the water would be eaten like cake or used up on any way. I only meant it as a metaphor for the money supply.

I understand how an individual can pay back principle plus interest, but where did the money for the interest come from originally? Some place other than the principle on somebody’s debt?

What is you opinion of the assertion that if all debts were paid off, there would be no money?

I appreciate the time you take to answer these questions.