Caught somewhere in the time value of money
November 30, 2012 § 14 Comments
While I fully understand what is meant by the “time value of money,” it is deceptive semantics because money has no intrinsic value at all. Money is merely a medium of exchange.
Money has what we might call “virtual” value: it represents the suspension in time and space of an incomplete barter of items of real value. We suspend these incomplete transactions in time and space for the sake of liquidity and convenience. Money is a social convention among civilized people by which we agree to make the barter of valuable things non-instantaneous and non-local. This makes our commerce far more efficient, similar to the way that non-instantaneous non-local communication (email contrasted to in-person conversation) makes our communication more efficient.
But the medium is not the message.
Money doesn’t produce more money, let alone more real value, on its own: it has to be invested. To invest money is to complete the incomplete barter transaction implicit in a sum of money, by converting that money into something non-monetary (land, labor, materials, or what have you). An investment isn’t a loan (in the strict sense): it is the purchase of an ownership interest in some productive enterprise or existing assets. Ownership of assets entails the possibility of loss, a.k.a. risk.
That is why corporations don’t keep around any more cash than they really need to. Any competent CFO knows – whether he puts it in precisely these terms or not – that cash has a decaying virtual value and must be invested in something just to stay even, let alone to earn profits. The line called “cash and cash equivalents” on the balance sheet is mostly not cash at all: it is non-cash investments that are highly liquid, that is, which can be sold quickly to raise cash when cash is needed. (Why do we need cash? To facilitate the completion of suspended or virtual barter transactions, like the worker bartering his labor for a growing share of the house he lives in).
Usury is demanding profits from a loan to a person: from transfer of money to a person, from whom recovery of principal is demanded. This is distinct from purchase of an investment share in some particular thing or enterprise (the assets to which one has recourse for recovery of principal). As St Thomas Aquinas puts it:
He who lends money transfers the ownership of the money to the borrower. Hence the borrower holds the money at his own risk and is bound to pay it all back: wherefore the lender must not exact more. On the other hand he that entrusts his money to a merchant or craftsman so as to form a kind of society, does not transfer the ownership of his money to them, for it remains his, so that at his risk the merchant speculates with it, or the craftsman uses it for his craft, and consequently he may lawfully demand as something belonging to him, part of the profits derived from his money.
Whatever labeling conventions we use[*], if our investments are not ontologically a kind of equity – a kind of asset ownership, with rents or other profits produced by the use of those assets and with our personal risk tied up in those assets – then they are usury. Lending money to a person and expecting to be repaid principal and receive a profit has always been usury, is still usury today, and is always morally wrong.
[*] I’ve taken to using the terms asset recourse and person recourse to distinguish between whether our claims to recovery of principal are made on specific assets (in which case it is not usury, because our investment is de-facto a purchase of an ownership interest in those assets) or on a person (in which case it is usury). This is my shorthand for a contract distinction which was well understood by the medieval Magisterium but which many modern people would perhaps rather not understand.