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.

§ 14 Responses to Caught somewhere in the time value of money

  • tz2026 says:

    Money is a medium of exchange but has two other functions.

    A store of value (and it need not decay – if there are no good investments based on risk and return, it is better to keep the cash). An insurance company needs to store value since the premiums are a stream but the payouts tend to be single large events. Not only does it not decay, but ordinary progress will normally cause a mild deflation as processes become more efficient, so the same amount of (commodity) money will typically buy more later rather than now. Smartphones and tablets are an example – the prices aren’t that much different but the capabilities have gone way up.

    The third function is a standard to compare values, instead of having to calculate how many cows are worth how many bushels of wheat v.s. how many horse shoes v.s. a day’s labor in a pure barter system, everything has a value stated in the local currency, originally a verified (coined) amount of silver, gold, or copper.

    The term “time preference” is what causes interest even if there is neither risk nor inflation of the monetary unit. If I offer you $100 today (in exchange or some transaction) or $100 three months from now, is there any reason not to take the $100 today? However if I offer you $110 three months from now you might prefer that to $100 today.

  • Zippy says:

    I agree that pricing is done in units of money, so I agree with the comparison function. (That is integral to the function I described of allowing barter to take place independently, more or less, of time and space constraints).

    I do not agree at all that money is a store of real value though. You can’t (qua money) eat it, drive it, cultivate crops on it, email your friends with it, or fashion it into jewelry. Its value consists only in civilization’s gentlemen’s agreement to honor it as the completion of a barter transaction. It has only virtual value, not real value.

    Part of the problem is that we aren’t using the same terms though, and to that extent are talking past each other. I know this because you used the term commodity money, and commodities are not money. For accidental historical reasons money and commodities are often conflated with each other; but they are not the same kind of thing at all.

    Commodities – actual piles of gold or bags of seed corn, say – do store value. Money qua money does not store value.

  • […] Usury is when profitable interest is charged for the use of money -qua- money, independent of what the borrower does with the money and without reference to the purchase and rental of actual real assets from which principal may be recovered. […]

  • tz says:

    We are using words differently – you can fashion gold in the form of a coin into jewelry. And precious gems were an alternate (less liquid) store of value.

    If for you money can only refer to a platonic form but nothing real, then all your arguments are against strawless-men.

    The “real value” sounds like the “no TRUE Scotsman” retort.

    We also need to be clear about economic value, not some abstract ideal which could never apply either in the City of Man (which has to deal with common ideas and real things) nor the City of God (which has no need to measure or store value of any sort).

    I would rather think that something which is being used as a medium of exchange, is used as a store of value, and is used as the measure of value IS money. Because Government says “X” is money (or various governments – note that the treasury sells silver coins with a dollar value) does not make it so, or it only makes it so insofar as people agree. Confederate dollars are worthless. So are Zimbabwe or Weimar notes.

    I use “commodity money” to distinguish it from “fiat money” or even “credit instruments” or “money substitutes” as Mises would refer to them. Commodity money – a commodity being use as money – has the value of the underlying commodity. Fiat money has nearly zero subjective value (the ink and paper). Originally bills representing a claim on a quantity of a commodity were issued as being more convenient than carrying around the actual commodity, and the link to the commodity was severed – which is and was fraudulent.

    A “Dollar” (“toler”) referred to a coin with a specific amount and fineness of silver. You can call the pieces of paper “dollars”, and there used to be “silver certificates” which were actual claims against the treasury you could exchange for silver, but severing the link makes the word “dollar” a lie. In this case we really mean different things, one means a claim on about 1 troy ounce of silver, the other is entirely virtual.

    If I issue a paper claim on silver, I first had to obtain the silver. So the number of claims in excess of the amount of silver they represent is fraud.

    When the Government issues a new “Dollar” – either paper or electronic entries – or even their own debt, backed by NOTHING – nothing of value is created or exchanged – isn’t that Usury on a grand scale?

  • Zippy says:

    We are using words differently

    Yes, I acknowledged as much in my previous comment. My understanding of money is not a Platonic ideal; it is the same as Aquinas’ understanding, as far as I can tell. Fiat money is what we call it today, and as I’ve already discussed here I think fiat money is a more honest medium of exchange than commodity-backed money, since the commodity creates value distortion among other reasons.

    Incidentally, I think the idea that we understand money better today than the medievals did is wrong. Even a relatively usury-friendly book like Noonan’s The Scholastic Analysis of Usury makes that much clear.

    The “real value” sounds like the “no TRUE Scotsman” retort.

    Not really. It is just that it is clearly the case that there is more to real value than subjective preferences taken in themselves. Subjective preferences taken in themselves do not and can not create real value.

  • Kristor says:

    If preferences could create real value, then my preference to have my cake and eat it too should result in a limitless store of cake in my cupboard. Value must in the final analysis be something like real ontological capacity to produce an actuality. It is a power, or virtue, that inheres in things as they are, rather than as we might wish them to be.

    This is not to say that all value is merely physical (even the physical is not merely physical). Nor is it to deny that people evaluate real values differently. The value of an actuality will be actually different from one perspective than it is from another; this is not just analogous to, but is corollary to, the fact that the velocity of an actuality is truly different, depending on the observer’s inertial frame.

    Nevertheless, the actuality that has momentum x in respect to observer X, and momentum y in respect to observer Y, has from its own perspective just the qualities and properties that it understands itself to have (tace for the moment on the issues surrounding self-deception and error); and even more absolutely, it has just the qualities and properties that God (whose perspective is catholic) understands it to have. Indeed, it could not have momenta x or y to X or Y unless it had first its own True Momentum T, from the Divine or catholic perspective. Particular, parochial perspectives presuppose prior panopsis. You can’t have a relative perspective on something that has no absolute actuality (if you could, then you would be able to have your cake and eat it too).

    Usury, then, is akin to lying about the true state of affairs, because it is an assertion that real ontological capacity actually exists where it does not – where it exists only potentially, depending on what the debtor does, and what happens to him. The obligation it creates is a form of slavery; in his legal recourse to the productivity ot the person whose life alone secures his loan, the usurer is effectually the Lord of his debtor. If the debtor cannot repay the usurer by selling other assets, he has no option but to repay him with his own human life value.

    As a lie about the true state of affairs – or, at best, an error – usury is a fundamental disagreement with reality. And such disagreement is the formal cause of sin; is the form of sin.

  • Zippy says:

    Usury, then, is akin to lying about the true state of affairs, because it is an assertion that real ontological capacity actually exists where it does not – where it exists only potentially, depending on what the debtor does, and what happens to him. The obligation it creates is a form of slavery; in his legal recourse to the productivity ot the person whose life alone secures his loan, the usurer is effectually the Lord of his debtor.

    I’m trying out a notion here in what follows, not fully committing to it as yet. (I’ve tried it out before, and I’m leaning toward it but I’m not sure it has been tested well enough).

    This is where fractional reserve banking – which is perfectly licit in and of itself, presuming non-usurious loans – compounds the insult to the common good. When only non-usurious loans are enforced all of the circulating capital is ontologically real. Sure, business values rise and fall as the business succeeds or fails; but because non-recourse “loans” to these businesses have recourse only to the business itself for recovery of capital, no counterfeit capital is produced by the process.

    When you throw fractional reserve lending on top of usurious loans, however, there is a creation of pseudo-capital, counterfeit capital, out of literally nothing at all. The mere fact that Bob now owes the bank an unsecured $100K “creates” (because unsecured: secured loans are simply a proxy for the security) $100K in new capital out of thin air. This circulating counterfeit capital debases existing, real capital. In other words, usury causes not ‘merely’ moral harm to the common good but financial harm as well.

    Usurious loans coupled with fractional reserve banking are not just individual theft but social theft: a kind of financial skimming of value off of all of the real capital in circulation. Credit card and other full recourse unsecured debt creates counterfeit assets, literally stealing value from all of the real assets in the economy at any given time.

  • Kristor says:

    I think you are right about this. Fractional reserve banking is just one of several media whereby faux assets can be laundered, fooling the financial markets, so that the faux assets can then be used as if they were real. Securitization of credit card debt or of Ninja mortgages is another. Insurance on such pools, and then the reinsurance of those insurance contracts, are yet others. All these otherwise perfectly legitimate and harmless means of making markets and controlling risk and coordinating activity then become susceptible to being hijacked, introducing tons of noise into the pricing system, thus badly misleading market participants about the true productive capacity of society. This is one thing that can produce bubbles in financial markets, such as the one that popped in 2008.

    Simplifying: if you loan me $100K unsecured by anything but my good looks and promise to repay, and then I loan Lydia $100K under a similar contract, and she then loans you $100K under exactly the same contract, we are none of us really any richer than we were, yet there is $100K in circulation that has no signification relating to real factors of the economy. I.e., the $100K is sheer noise. And it distracts us from the real assets and debts on our balance sheets (if only because we have to keep track of our payments to each other and keep the books on these notional notes), so that it messes up our decisions about them.

    This example comes from the WWWW thread where you first convinced me that usury is wrong, by helping me understand what it actually is. It is the example I used to sum up your whole argument, which it took you about 50K words to explain to me. Sorry!

    People have a hard time getting the Thomist argument against usury – well, I did, anyway – because they think usury is nothing other than charging an interest rate on a loan that is “too high.” Whatever that might mean.

    Here’s a question. Would Thomas have condemned a merely notional note that carried an interest rate of 0%?

  • Bill says:

    Money is merely a medium of exchange.

    I like this definition of money as well.

    So, may I make a contract with you saying “I will deliver to you 10 apples right now and, in exchange, you will deliver to me four pears in a year’s time?”

  • Zippy says:

    From the information given, I can’t bless your proposed barter as definitely morally just. But I can conclude that it does not fall under the species usury.

  • Bill says:

    Then what is usury? There would be no practical difficulty in denominating all forward contracts in commodities. The contract I mentioned could carry a positive, negative, or zero interest rate depending on the current and futures prices of apples and pears.

    If there is nothing special about money, then it seems that banning interest amounts to banning all futures contracts.

    On your more recent post, you say you want to make all loans non-recourse. Does that mean you want to make the contract I proposed above non-recourse? You want to make all contracts for future delivery non-recourse?

  • Zippy says:

    Then what is usury?

    Full-recourse lending at profitable interest.

  • Bill says:

    That is not responsive.

    How do we determine whether or not the proposed contract is or is not full recourse lending at profitable interest? Presumably it is full recourse since I did not say otherwise—the default is that you can sue me to perform or compensate you if I don’t. Certainly there is no collateral involved, since apples rot or will be eaten before the end of the contract. So, the failure to be usury comes from where, the lack of profitable interest? But there need not be a lack of profitable interest—it all depends on the relative prices of apples & pears, today and in a year.

    So, the only way to be sure that the proposed contract is not usurious would be for delivery of the pears to be unenforceable, right? For the contract to say the delivery of the pears is optional or for courts to routinely refuse to enforce delivery in contracts like this. Right?

  • Zippy says:

    —the default is that you can sue me to perform or compensate you if I don’t. … So, the only way to be sure that the proposed contract is not usurious would be for delivery of the pears to be unenforceable, right?

    Ah, I see. You aren’t really asking me about the actual contract you explicitly specified: you are asking me what the sovereign should do when Apple Guy sues Pear Guy for breach.

    If I were the sovereign I would do three things. (Actually what I would do depends a great deal on the circumstances. But these three things reflect my general inclination, given the sparse information you have provided so far).

    First, I would sternly lecture both Apple Guy and Pear Guy (especially Apple Guy) about the foolishness of futures contracts that involve no posted security and no explicit terms for what to do in case one or the other party is in breach.

    Second, if Pear Guy actually had four pears I would make him give them to Apple Guy. If he didn’t have four pears I would make him hand over ten apples. If he had neither I would make him hand over something of equivalent value.

    Third, I would take the value of four pears plus ten apples and fine both parties five times that amount for harming the common good with their foolishness, failing to work things out themselves, and generally wasting my time. I would give the fine proceeds to Franciscans to pass out to the poor.

    Is that more responsive?

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