The price of time
The real story of interest
Publisher: Atlantic Monthly Press
Published: 16 AUG, 2022
The subject of the Prudong-Bastia debate was the justification of interest. Prudong's point of view was odd. According to this anarchist, interest was 'looting money.' Loan payments are exchanges that lend capital and demand more than one's rights in return and are unequal exchanges imposed by creditors on the debtor. Interest is a reward for boredom and the cause of inequality and poverty. To borrow Prudong's most famous phrase, he said, "interest is stealing."
The criticism did not end there. Prudong argued that interest would worsen the debt over time, eventually making the debt larger than a lump of global gold. He said that imposing interest on a loan slows the flow of money, leading to economic stagnation that speeds up the risk of unemployment, difficulties in agriculture, and overall bankruptcy—interest limits consumption by encouraging class hostility and increasing product prices. In a capitalist society, workers cannot afford to buy goods produced by their own hands.
"Iran is like a double-edged sword. Either way, you die," he concluded.
It proposes nationalizing French banks, expanding the money supply, and lowering interest rates to near zero. The interest rate charged by the People's Bank to cover the cost of this policy should be about 0.5%. Banknotes replace gold. Prudong went one step further and demanded a tax on capital (equivalent to a reverse interest rate). He predicted that the interest rate cut would have a 'huge effect not only on the Republic but also on Europe.' Debt will disappear, insolvency and bankruptcy will decrease, consumption will increase, and workers will be guaranteed employment. Workers' income will grow once the parasitic class of borrowers does not monopolize interest.
Bastia had a completely different idea. He argued that interest was not a steal but a legitimate reward for exchanging services. The borrower who lends money gives the debtor capital for a certain period. There is value in this time. Bastia quoted the famous phrase, "Time is precious," from Benjamin Franklin's Letters to Young Merchants (Durimedia, 2008). "Time is money. Time is a substance that makes life." Therefore, interest is "natural, justified, and legal while being beneficial at the same time.
Bastia predicted that if Prudong's plan were implemented, it would be disastrous. If the loan had no compensation, the loan would disappear. Restrictions on interest payments on capital would eliminate capital. Then savings would disappear. The National Bank of Prudong would also lend, but workers with insufficient collateral could not live a better life using the loan if the bank asked for collateral. If interest is abolished, only the rich will eventually benefit.
Free loans are the end of capitalism. Prudong believed that monetary reform could realize the goal of the 1848 Revolution. He said that a revolution could only be achieved with only three-quarters of the interest rate of 1%. Bastia responded to Prudong's statement: "Free loans are the final statement, last slogan, and ultimate effort of socialism. The factory where banknotes are printed indefinitely is Prudong's solution." The abolition of interest on capital will lead to 'credit destruction' and the death of capital.
Following the collapse of Lehman Brothers in September 2008, neoliberal economists implemented Prudong's revolutionary plan. Each country's central banks brought interest rates down to an unprecedented level in its 5,000-year history. In Europe and Japan, interest rates turned negative. However, the outcome was different from Prudong's expectations. Instead, Bastia's dismal predictions for free loans were closer to the truth.
White concluded, "The condition of easy money did not facilitate the process of redistributing capital from less productive to more productive resources, but rather blocked that process."
Ultra-low interest rates motivated investors to take excessive risks by lowering borrowing costs. At the same time, insurance companies and pension providers struggled to cope with the low-interest rate regime.