< HOME  Saturday, November 05, 2005

Exactly How Does A Loan 'Bear' Interest?

Did you ever ask yourself exactly how a loan "bears" interest?

Take a dollar bill, bury it in the ground, water it and see if it "bears" little tiny dollars. Don't hold your breath, though. Short of a miracle, it will never happen.

Do you understand how people "make money work?" Don't bother, because money does not work by itself. Money does not--and cannot--talk, walk, or work! Only people do!

I challenge anyone to take a $20 bill, place it on the kitchen counter, and ask it to wash the dishes.

Good luck if you expect an affirmative response from the $20 bill, or a set of clean dishes in the morning--it simply won't happen.

It can't. Only a human being, someone who thinks that the $20 bill is valuable enough to trade for their labor, can wash those dishes!

The $20 bill is useless unless it is coupled with something else of value.

Given that simple reality, how can collecting interest on the bill itself (or the credit) possibly be justified?

Simple answer: it can't.

If you've followed me so far, let's examine why the person above (the "dishwasher") might consider trading his labor in exchange for the $20.

Now, "In God We Trust" is inscribed on the bill. This is no coincidence because the entire system hangs on that faith.

First, the dishwasher must have faith that the person possessing the bill earned it.

If the dishwasher thought for a moment that he pulled the bill fresh off the printing press in his cellar, the dishwasher would never accept it! One, it's illegal, but also the dishwasher knows that, if recognized as counterfeit, no one else would accept this bill!

For this exchange (and the entire system) to work, it is critical that the dishwasher have faith that any and everyone that possesses the goods and services he needs will willingly, indeed eagerly, accept this bill (that he's worked so hard to acquire) in exchange for those products and services which the dishwasher needs.

If the dishwasher thought for a moment that his vendors or service providers would reject the bill, he would reject it too; he would refuse to exchange his labor (which has tangible value) for the bill (which has no tangible value). Indeed, everyone would refuse to exchange anything of value for this bill because, if no one is willing to accept it, it is worthless!

Thus, we reach a second important conclusion:

The $20 bill has value only if it is accepted by enough people such that it can serve its purpose--to facilitate exchange.

How many people is enough? A self sustaining economy has enough people. In other words, a community (however small or large) has enough people if collectively it produces everything its individual constituents need to survive and thrive.

Is it beginning to make sense to you?

Now, let's return to the counterfeiter to examine the crucial issue of legitimacy. Remember, the dishwasher would reject a bill if he knew it came straight off the printing press in the cellar. Yet, he accepts the so-called 'real' bill eagerly, though he knows with certainty that at some point it too came off the printing press--only this printing press is located at the U.S. Treasury.

That's odd! What makes the printing press of the U.S. Treasury more legitimate than the printing press in the cellar?

Simple answer: the U.S. Treasury derives its power from Congress, which derives its power from the Constitution, ratified by the people (us), who in turn TRUST that the government faithfully issues just enough money or credit to facilitate trade in our national economy. Remember, we only need money to facilitate trade. We already have wealth--our labor!

Now, how much is just enough money? It is difficult to determine with precision, especially when you're measuring so much wealth, but ideally the government decides on a unit and its equivalent value (in labor) and issues enough units so that the entire productive capacity of the nation can be utilized.

In other words, each time the productive capacity of the nation grows (e.g., an adult joins the workforce), the government considers that growth and, accordingly, faithfully issues enough money to facilitate trade between the owners of that new productive capacity--us!

Issuing enough money is especially important when the monetary system has entirely replaced the barter system. Otherwise, if there is not enough money, the economy stalls (unemployment rises, etc.), not because there is not enough wealth--people are lined up ready and willing to work and their labor IS wealth!--there is simply not enough money with which they can exchange their wealth with one another!

We have finally reached the heart of the matter--the colossal flaw of an interest-based financial system.

If the government issues money (by the authority vested in it by us), and that money represents our wealth, then why should WE pay INTEREST on something that merely REPRESENTS our wealth and is only designed to facilitate its exchange?!!

If the money issued by the government represents our wealth, whose wealth does the "interest" on that money represent?

Remember, the government does not issue "interest"; it only issues principal--either by printing money, or issuing treasury bonds used to borrow money. Principal represents tangible wealth (or labor). But, from where does interest derive its value?

Simple answer: interest sucks its value from our wealth, i.e. our labor!

It is mathematically impossible for every outstanding loan in the U.S. today, both public and private, to be paid in full at once, both principal and interest! There is simply not enough money issued to accomplish this! The government only issues principal! For one man to pay his loan in full, interest and pricinpal, another man must become unable to pay his debts; the money must come from somewhere!

INTEREST does not add any value to the economy it merely acts as a gigantic vacuum sucking up principal that's already in circulation!

As of August 31st, 2005, the U.S. government has already paid $335 BILLION in interest on U.S. Treasury Bonds. Some of this goes directly to the Federal Reserve System, the central banking system of the U.S. which is comprised of 12 private banks and a Board, all of which are independent of the government. The rest of the interest goes to other private bondholders, domestic and foreign.

These banks have a complete monopoly of the money supply of the nation and they have private shareholders. The Federal Reserve banks audited annual reports reveal that together these banks own over $772 Billion worth of U.S. Treasury Bonds for which they collect tens of billions of dollars in interest annually from the U.S. Treasury. Thankfully, they are required to deposit all of their surplus money (after operating expenses, etc.) back into the U.S. Treasury. But, you would be truly impressed at how costly it is to run the Federal Reserve System!

Now, proponents of the Fed argue that its modest profits pale in comparison to that which is made on interest charged by other bondholders, domestic and foreign.

But first, everything is relative; what's modest for you could be a fortune for me. And second, that only begs the question: Why should the Feds, or anyone for that matter, profit AT ALL from the circulation of that which is conspicuously described as 'the nation's treasure?!!'

And, what about the bushels of interest commercial banks charge the public for private loans to which the public otherwise has no access?

Where does the money come from to pay for all this interest?

Simple answer: from the wealth of the nation--our labor!

How? Government interest is paid by cutting so-called benefits (actually, we pay for them, so the term benefit is a misnomer, we're entitled to them), and by raising taxes!

An interest-based financial system does nothing but siphon wealth from the working class to give to the idle rich, because only those with money can collect interest--that's how interest works!

Are you outraged yet?!!

Getting back to the $20 bill and the dishwasher: If the dishwasher is desperate enough, he will wash lots of dishes for that $20. You would correctly conclude that it is because the dishwasher's labor is not worth much--to him. But, to stop there would deny the reality that the value the dishwasher places on his labor is one he derives by comparing it to the value of the $20 bill--to him. Remember, EVERYTHING is RELATIVE!

Now, the value of the $20 bill is controlled by those who issue the bills (or the credit)--the Feds.

But, they do not utilize conventional methods to increase and decrease its supply because that would be too transparent (and printing presses are too akin to counterfeiting). Instead, they concoct the concept of interest which has a rhetorical appeal to it--after all it's hard earned money (yeah, right!) and it's only fair that they get the 'time value' of the use of their money (at whose expense?).

Through interest they discourage or encourage people from borrowing money depending on whether they increase or decrease interest rates. When interest rates are raised, it is more expensive to borrow money (and more lucrative to lend it!), and vice versa.

Now remember, only the Feds can print money, and only they are allowed to distribute it. And, of course they only distribute money at interest.

In other words, the only way money (or credit) comes into circulation is at interest, which means that every dollar bill and EVERY dollar of credit circulating in the economy is accruing interest to be paid to at least one, or multiple creditors in a long succession.

This means that every time the Feds increase interest rates, governments and businesses MUST pay more to conduct their affairs;

governments MUST factor this increased interest into their budgets and taxes go up;

businesses must factor it into their cost of production and the price of EVERYTHING goes up!

So, when the Feds increase interest rates, which they do AT THEIR PLEASURE and arbitrarily, the price of everything goes up; taxpayers must pay more; and governments can do less for the people who need it most.

So, much for 'controlling inflation by increasing interest rates.' Increasing interest rates is, by definition, inflationary; especially in an economy whose money and credit supply is monopolized by a single entity--the Feds.

Of course with all these increased costs, the demand for money increases.

Meanwhile, the supply decreases because no one can afford to borrow money at such high interest rates!

Wow! Are you outraged yet?

Then consider again our poor dishwasher against this newly acquired perspective.

Since the barter system has been effectively replaced by this thoroughly corrupt interest-based financial system, when the poor dishwasher sees the $20 bill he will now go totally nuts to earn it because money is scarce, the cost of living is high, and there is no other means by which he can exchange his labor for the food, clothing and shelter he needs to sustain himself and his family.

Please, open your eyes and see this reality in the light of day. This is all a colossal scam. It doesn't have to be this way. Alternative systems are out there, but we must demand them!

If we can collectively get beyond this illusion, put our trust in each other, instead of government officials that have betrayed us, then we can begin to solve our problems--together.


At Saturday, November 05, 2005, Anonymous Anonymous said...

Never heard it put quite like that before and you are right, it is a scam. I think there are quite a few of us that are tired of this bullshit and our only hope seems to be the Dems. They represent us and in them, all of our hope lies.

I post comments as:
Corporate Greed or
Fred Ranger

At Saturday, November 05, 2005, Blogger qrswave said...

Thanks for stopping by!

I am glad my explanation was helpful.

There are a few democrats that agree that an interest-based monetary system is destroying our country--Dennis Kucinich is one of them.

But, as a rule of thumb you can test a politician's integrity, and whether they align themselves with working americans or the idle rich who grease their palms, by whether they acknowledge that interest-bearing loans, especially those made to governments and to the poor, are categorically wrong.

For example, I used to consider Howard Dean a politician with integrity, until I found out he spearheaded an initiative to launch a credit card for the DNC that charges up to 30% APR!

The working class and the poor suffer enough from the outrageous ravaging of our government budgets by municipal and treasury bondholders who collect horrendous amounts of interest annually from our governments. As a result, governments are forced to cut government benefits, and government jobs and the working class and the poor suffer while the rich (bondholders) collect interest.

This SOB compounds the injury by making it even more difficult for the working class and poor to get private loans when they need it most.

At Wednesday, December 28, 2005, Blogger yusuf chun said...

hey, q

only just read this cause you linked to it. solid!

At Friday, January 20, 2006, Blogger Gegner said...

Hey qrs,

What a great post! I couldn't have done better myself. We're on the same page on this topic anyway.

At Friday, January 20, 2006, Blogger Gegner said...

Hey qrs,

Great post, couldn't have done it better (although I tried)!

Yeah, I'm the same Gegner from you know where...I have a blogger page too!

At Thursday, April 13, 2006, Anonymous Anonymous said...

Nice analogy. So now that the problem is defined, how do we begin the corrections?

My first thought, really as a means of self-preservation...

Never unless absolutely necessary buy on credit. Cut up the plastic and toss all the 'instantly approved' letters from these tricksters into the kindling pile.

You will benefit more from using these solicitations in your fireplace than you will from the promised instant purchasing power which is really a thin sugar coating over the malignant, unsavory, parasite that will feed upon you, your family, your resources for the duration of your life.

I also found that eliminating Cable, and those tv commercials full of subliminal programming to buy buy buy...has changed my perceptions about what I need, want, and must have.

Cut the cable and the cards. We are more than just 'consumers'! I hate that term...it sounds so Orwellian...like the scale that aunts harvest....that sucks the life out of trees.

I guess the question is...which one are we and which one are the bankers...the impersonal oblivious scale...the tenacious, crafty ants...or the depleated, struggling fruit tree?


At Friday, April 14, 2006, Blogger Tahoma Activist said...

This is why usury (the crime of selling capital at interest) was outlawed by the Lord in the Bible. To think that we could now be facing in some cases interest rates legally set as high as 490 percent (check cashing places) it's amazing that we have fallen so far.

There's a lot of crazy stuff in the Bible, but this is one rule I could definitely get behind.

At Monday, November 20, 2006, Blogger dreeves said...

I strongly disagree! Interest is here to stay, and for good reasons. In fact, in Muslim countries where it is illegal to charge interest, the law is commonly subverted by charging fees for borrowing money that are calculated to be entirely equivalent to interest.

So we couldn't get rid of interest if we wanted to. But do we even want to?
Personally, I think interest is a fine idea that serves a lot of useful purposes.

First, it helps to see through a lot of confusion by understanding that money is nothing but a scorekeeping system for favors we owe each other. The principle on which interest is based is that a favor now is more valuable than a favor later. Suppose I ask you to wash my dishes tonight and in exchange I'll wash yours ten years from now. Well you could be dead in ten years, or dishwashing technology could make major advances. In short, there's a lot of uncertainty about your value for this favor ten years out. So you counter: "In exchange for waiting ten years for you to reciprocate, maybe you could do my dishes twice when you finally do." If that sounds reasonable then so should a 7% interest rate, which implies that balances (whether positive or negative) should double every ten years.

In short, without interest no one would feel any urgency to pay back debts and society would collapse!

Daniel Reeves
Yahoo Research

At Saturday, December 20, 2008, Blogger Unknown said...

I'm also a little puzzled by your logic, or I have missed the point?

We all have a need at times to use things we cannot afford. If we hire a car or rent an apartment we will expect to pay for the privilege.

Sometimes we need, or want, to buy something but do not have the required capital. Few people have enough money to buy a house with cash, others do not have enough to buy a car, and businesses often need cash to start up or expand.

In such cases it is necessary to borrow money but why, when lending money, should this be free compared to renting an apartment or hiring a car when we would expect to pay?

Just as I would expect to receive something back if renting out my house (in the form of rent), if I lend someone money I would expect something back in the form of interest.

Did I miss your point?

At Friday, January 23, 2009, Blogger Unknown said...

Philip and dreeves missed THE point. That interest is sapping not facilitating exchange. Someone trades a back scratch today and yes...you have no guarantee or logical way of ensuring that you'll get a return.

The idea of a fee for borrowing and needing something you can't afford is a myth. "You can't always get what you want, but you get what you need!" If you want to imagine a fee for borrowing, that's the price the lender pays, for lending. With only the belief that they (the lender) will benefit from "BEING" the lender.

LET IT BE, don't tax the acts.

At Wednesday, January 28, 2009, Blogger qrswave said...

thank you hal!

some people just don't recognize extortion when they see it...

At Wednesday, January 28, 2009, Blogger Unknown said...

Happy to help and all ways ready to holla'. But one has to be a contortionist to "spot" extortionists: To pay or not to play...the master mind's may still bend the body's blinds.

At Saturday, February 14, 2009, Blogger Harrisonbergeron said...


I googled: "why does it cost the goverment interest to borrow its own money?"

..And it took me here.

That was pretty good, Thanks.

At Friday, February 03, 2012, Blogger Savio said...

I would like to add that in addition to charging interest on loans banks are permitted to do fractional banking i.e. loan out 10 Dollars if they have 1 Dollar on deposit and they expect to earn interest on each one of those virtual dollars. So for example a bank with a deposit of $1, loans out $10 with an interest rate of 10%, expects to get back the principle $10 and interest $1 at the end of the loan term, in effect a profit of 100% for the bank thanks to fractional banking.

The Monetary system in its current avatar is just one Big Ponzi Scheme, experiencing boom and bust cycles due to the practices of the monetary and banking system.

If you dig a little deeper you will realize that all the money in the system is already being charged interest. In fact every new dollar printed is charged interest the day it is printed, since all money in the system is created by the Federal Reserve buying government debt in the form of Treasury Bonds which bear interest. So really the banks are charging interest twice on the same money. Double Scam.

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