The article below, by the late Professor of Eonomics at Waterloo University in Ontario, was originally published in 1984 in Policy Options Politiques Vol.5 No.2, and reproduced in 1997 in The Social Crediter Vol.76 No.6
Doesnt God understand economics?
Interest push is a prime cause of inflation; our policy direction should be towards an interest-free and therefore more equitable world.
Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury. (Deuteronomy 23:19)
The rich ruleth over the poor, and the borrower is servant to the lender. (Proverbs 22:7)
Why is the Bible so down on the charging of interest (usury)? Why did Moses and the prophets of ancient Israel men who felt empowered to write, Thus saith The Lord forbid the taking of interest, considering it so great a crime as to be worthy of death?
Why did the Catholic Church for more than 1,000 years forbid interest taking, declaring usurers unworthy of receiving Christian Communion or Christian burial after death? ...
Why too has modern opinion changed? Economists write long books on how bankers create the money they lend us out of nothing, without the slightest hint of tongue clucking or denunciation.
Indeed, most economists could hardly imagine a world without a positive rate of interest. How could we discount future income flows to present values without an interest rate?
But how did this great transformation in the opinion come about? Did God change His mind?
As one who is not well versed in theology or moral philosophy, I hesitate to go too far into the questions of the morality of interest taking. However, as an economist ... on grounds of practical workability and, yes, morality, I believe I can show why Moses, the prophets and the fathers of the Church were wholly correct to condemn the charging of any interest. I believe I can also show why, with the rise of Protestantism and Capitalism, some relaxation of this condemnation was supportable. I also believe that I can show why in the long run Moses, the prophets and the fathers, are right and the modems are wrong.
Interest on loans introduces an exponential element of limitless growth into a finite economic and social system. The result is always increasing injustice and eventual breakdown. There is nothing more powerful than compound interest (exponential growth) if it has lots of time to work.
To illustrate, suppose one cent had been borrowed at 1% compound interest in the year zero (at the birth of Jesus Christ). Picture Mary and Joseph as being able to save one cent from the gift of the Magi if you will. Supposing they could find a bank that could stay in business for 1,991 years and would accept such a longterm deposit, how much would be owed in the year 1991?
We may answer by using the doubling time formula, the so called rule of 70;
2T = 70/i, where 2T is the .number of time periods it takes for anything (T, thus money, population, prices) growing at the percentage rate i, to double. If i is 1% per year, the doubling time is 70 years; if i is 2%, the doubling time is 35 years; if i is 20%, the doubling time is only 3.5 years.
Let us use the rule of 70 to calculate the Christ Childs savings account balance in 1991. At 1% interest, Jesus cent doubles 1991 /70 = 28.44 times to $4,016,568, (or about 4 x 106 in scientific notation) and would be increasing $110 a day.
Suppose instead that our hypothetical bank was willing to pay a more attractive 6% interest on the Christ Childs savings account. How much money would be owed on one cent at 6% in 1991? (Test your intuition here: How much larger do you think the answer will be? Will it be six times larger, or about $24 million? Or will it be larger? About how much larger?)
Using our formula, we have 70/6 = 11.67; 1991/11.67 = 170.61 doublings or $2.2645 x 1048. This is an almost unimaginably huge amount of money, $2 followed by 48 zeros!
The reasons our modern economy of legalized usury works at all have to do with such facts as the following: no one lives long enough to leave money in the bank for many years; lenders spend their interest rather than merely compounding it; banks fail and borrowers repudiate their debts through bankruptcy or by raising the prices of the things they sell (inflation), thus partially repudiating their debts; and finally, in recent centuries per capita real income has also been growing exponentially.
Let us examine this last point carefully. Luigi Pasinetti has recently shown that the only sustainable or natural rate of interest is the rate of growth of the productivity of labour. If the market rate of interest exceeds the natural rate the share of the rentier will grow and the share of labour (and by extension of Pasinettis model, the entrepreneur) will shrink.
If, on the other hand, the market rate falls below the natural rate the money lenders share of total income falls, at least if we assume that total indebtedness is growing no faster than total income.
Pasinetti demonstrated his conclusion only for a model world of a pure labour economy. However, if we extend his argument to a world of money and prices we can see why John Maynard Keynes, unlike his Keynesian disciples, put such great emphasis on the need to drive down the rate of interest if we are to avoid cyclical instability and secular unemployment.
The natural rate of interest in an economy is the rate of growth in total factor productivity, that is, real output per head. Only in recent centuries has this been a significant, though small, positive number. Throughout the long centuries when the Bible was being written and the middle ages, productivity gains were virtually zero. Thus the natural rate was also zero, so the Bible was on this point scientifically correct!
How do we know? By the same arithmetic we used above for the Christ Childs supposed cent. If per capita income in A.D. 1 was $100 (Which is probably not far wide of the mark) and it grew only one percent a year we would all have a per capita income in 1991 of $40 billion (4 x 1010 ), or far more than the total wealth of the richest human being or indeed of many countries.
No such incomes are available to us, of course, because only in the 19th century had the industrial revolution proceeded far enough in a few countries for per capita real output to rise as much as l% a year sustainably. Only in the present century did the pace quicken to 2 or more percent per annum, thus doubling real income in 35 years or less. In the 1960s and 1970s, Japan and Singapore have been able to raise productivity by as much as 7% a year which is thus also the worlds highest natural rate of interest. However, money lenders have seldom been satisfied with even 7%; much less are they willing to receive only 2% or 1%. Thus the market rate of interest has a chronic tendency to rise above the natural rate.
What happens when the market rate of interest exceeds the natural rate? This depends upon other social arrangements. In the good old days of metallic money it quickly became impossible for debtors to repay; all they could do was sink deeper into debt as they mortgaged first their land, then their animals, then their wives and children and finally the debtor himself was sold into slavery.
In a world of metal money and zero productivity gains the exaction of any positive market rate of interest had one inevitable result: a society of a few rich moneylending landlords with every one else their serfs and slaves.
Such a result was the downfall of the GraecoRoman, and other ancient civilisations. To avoid this result ancient Israel had the year of Jubilee: every fiftieth year all debts were cancelled, all slaves set free, and all land returned to its original owners. (See Leviticus 5:914)
Ever since World War II, total debts public and private have increased even faster than money GDP and interest rates have increased fourfold. As a result, interest income has increased far faster than any other form of income and has thus been the most inflationary type of income distributed.
By 1988 Canadian money GDP had increased to $598,732 million, from a mere $13,473 million in 1947, or 43.4 times the 1947 level. However, real, or constant dollar, GDP had increased only 4.6 times over the same period.
Inflation is often blamed on wage push, and it is true that total wages in Canada increased to roughly 46 times their 1947 level, or somewhat faster than money GDP. Corporate profits rose 34 times from 1947 to 1988, or too fast for price stability but too slow to maintain the corporate profit share, which fell from 13.8% of GDP in 1947 to 10.8% in 1988.
Unincorporated business did far more poorly: nonfarm unincorporated business rose only 21.3 times, so that the small business share fell from 11.2% to 5.6% of GDP. Farm income increased only 3.7 times, slower even than the increase in real GDP, so that farm income plummeted from 8.2% of GDP to 0.9% of GDP.
Interest on private debts plus dividends rose from $194 million in 1947 to $45,784 million in 1988, or 235 times; so that interest and miscellaneous income rose from 1.4% of GDP in 1947 to 7.6% in 1988. Another way of putting things is as follows: in 1947 interest and dividend recipients received only 17.6% as much income as did farmers. In 1988 rentiers received almost nine times as much income from the private sector as did farmers.
Moreover it was interest, not dividends, that had increased most rapidly. Thus, from 1972 to 1988, interest increased roughly three times as rapidly as did dividends. In addition to this explosive rise in private debt interest, interest on public debts in Canada grew from $559 million to $50,506 million, or by 90 times.
In light of the above facts it is indeed strange that the government and the Bank of Canada have tried to stop inflation by raising interest rates! Not only is this policy unjust, in that it raises the incomes of the relatively welltodo who lend money (and own banks) faster than it does the incomes of ordinary citizens who borrow money; it is irrational, as it adds to the costs of every business, and it adds greatly to the governments own interest payments and deficits. Indeed, in recent years the government deficit and interest on the national debt have been of roughly the same magnitude. This is perhaps the greatest irrationality of all, for if the government would take moneycreation back into its own hands, a subject to be explored elsewhere, it could quickly pay off the national debt while greatly lowering taxes.
A government policy and financial system that results in money GDP increasing by twice the square of the increase in real GDP, total debts increasing even faster, and interest income increasing by more than twice the cube of the rate of increase of real GDP can only result in accelerating inflation and eventual breakdown through overindebtedness.
So it was with the prophets of old who knew what they were talking about, not the moderns; or, in summary: exponential growth of interest income at a higher rate than real income can grow, leads to accelerating inflation and economic breakdown. If thats not sin, what is?