Beyond the conventional view: Reconsidering money, credit and interest

Abstract

The 2008 Lehman Brothers bankruptcy brought the world to recognize the inherent instability of monetary and financial systems. In this light, it is worthwhile to reconsider various problems associated with money, interest and credit and also worth considering an alternative perspective that has not attracted sufficient attention from conventional economists. This chapter first critically assesses the widely accepted view that there was or naturally is a progressive development from barter to money to credit. It is pointed out that, historically, barter was much rarer than is commonly believed and that the credit system began in the ancient Babylonian times, the inevitable result of unequal exchange, something which requires records of credit and debt arrangement. This chapter then discusses the origin of money interest and the distinction between structural decay and functional decay. It is shown that distinguishing functional decay from material decay offers clues into the emergence of money interest and that if the principal of loan money is allowed to decrease, the total money interest to be paid never exceeds the principal. This idea of decreasing the principal of loan may be applied to the redemption of national bonds. This chapter also demonstrates: (i) any form of promise to pay in the form of general liquidity is an abstract right of demanding future payment from the debtor; (ii) general liquidity has a dual nature that is regarded as a debt communally, and as a form of wealth individually, a dual nature that causes the progressive expansion of debt; and (iii) the deposit system associated with the credit creation mechanism dates back to the idea of mutuum in Roman law, and the proper use of a credit system is exemplified by cash credit in 18th-century Scotland, a system that was based on the idea of accommodation paper.