JOHN TURMEL'S MOST CRUCIAL MISTAKE
Ardeshir MehtaThere is no question that interest on loans is harmful to society, and that, in more ways than one. I myself have written against it at my article "The Abolition of Interest on Loans"; and many others, among them Prof. Margrit Kennedy and economists Bernard Lietaer and Silvio Gesell, have pointed out the same thing. John Turmel has also expressed his views on the subject at his web site.
Ottawa, 24 January 2011
John Turmel has expressed many excellent views, particularly those expressed at his web page <http://turmelpress.com/abprogs.htm>; however, this is not to say that all his - or anyone else's - criticisms of interest are necessarily valid. In this article I shall endeavour to show that John Turmel's argument against interest, at least as expressed in his article found on line at <http://turmelpress.com/socred1.htm>, is not necessarily correct.
In this article, Turmel writes, inter alia:
HOW "MORT-GAGE" INTEREST CREATES A DEATH-GAMBLE
The word "mort-gage" is derived from the French word "mort" meaning "death" and "gage" meaning "gamble". Bankers create the money supply when they make loans. Producers are forced to gamble by borrowing newly created Principal(P) to pay for production costs and then inflating their prices to earn back the Principal and Interest(P+I) in sales.
Because total goods priced at (P+I) can never be sold when consumers only have P dollars available, a minimum amount of goods must remain unsold and a minimum number of producers must fail and suffer foreclosure. The economist Keynes likened the mort-gage death-gamble to the game of musical chairs. Just as there are insufficient chairs for all to survive the musical chairs death-gamble, so too, there is insufficient money for all to repay (P+I) and survive the mort-gage death-gamble.
The conclusion, given in the last part of the last sentence quoted above, is not necessarily true, as the following suffices to show:
1. Let the amount of money created as Principal on all the loans issued in a given economy during any given time period T be designated as P.
2. Let the total amount of Interest charged on all the loans issued during said time period T be designated as I.
3. Let the period of time over which said loans are issued be designated as T.
4. Let the velocity of money - defined as the average frequency with which a given unit of money is used to conduct monetary transactions in the given economy over the time period T - be designated as V.
5. Let the total price of all the goods produced over the time period T be designated as G. (Then G equals (P+I), as John Turmel also says above.)
6. However, over the time period T, transactions amounting to a total monetary value of (PV) will be conducted in the economy.
7. Then it is clear that as long as (PV) > (P+I), all the goods priced at G can be sold over the time period T. (Even if I is as great as P - which is about the maximum magnitude of I in actual practice, and it only gets to be that high on very long term loans and mortages - more than 20 years usually - as long as V>2, all the goods priced in total at level G can be sold).
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Over the time period T, some of the Principal P created during the time period T - especially at the beginning of the time period T - will be repaid. It is a common belief that such repaid principal is "extinguished", though I see no evidence for this claim, and have written elsewhere challenging this belief. However, even if it be granted that the principal of a loan is extingushed when said loan is repaid, during the time period T there would be unpaid principal remaining in circulation from loans issued before the time period T. Thus in an economy in which the rate of issuance of loans is more or less constant, the amount of money in circulation will also be more or less constant, and during any given time period T will more or less equal the amount of Principal P on all the loans issued during said time period.
SOME CRITICISM ANSWERED:
One criticism that has been raised to the above is as follows:
By a minority of the population immobilising money both P and I are diverted away from loan repayment to Savings (S). Also the velocity of money says nothing about money's path, the money can recirculate among any group as tends to be the case with small elites, making it unavailable to others who bear significant debt burdens at interest.
So, it cannot be said that PV - S > P+I, it depends on how how fast V is and how big S (savings) is.
As I have sated [surely the writer meant to say "stated"?] before all it takes is for PV-S < P+i for any minimum period for the instability of interest to cease to be contained leading to further debt growth and increased instability. Interest is at the root of it because it alone causes arbitrary growth and redirection of money.
The answer is, that savings is not money taken away from circulation or "immobilising" it: it is money invested in productive enterprise, and as a result, it remains in circulation. A saver typically puts the money into a savings account at a bank or financial institution, and the bank or institution then lends it out to producers, who spend it.
Hoarding is money taken away from circulation, but most people don't hoard, they save.
As for money being diverted away to small elites, "making it unavailable to others who bear significant debt burdens at interest", that is a problem, not of interest as such, but of wealth inequity. That is not part of John Turmel's argument quoted above, or of the claim that is his conclusion, viz., the claim that "there is insufficient money for all to repay (P+I) and survive the mort-gage death-gamble". Certainly wealth inequity is a problem in society, and the abolition of interest will help correct it, but it is irrelevant in the present context, which is a critique of John Turmel's above-quoted argument and claim.
Additionally, the money the wealthy elites own nevertheless circulates within the economy and contributes to V.
In any case, S cannot be a major part of P. In most cases it is likely to be less than 50% of P. Thus even if it is true that (PV - S) must be greater than (P+I) for all the goods priced at G to be sold, and even if S = 0.5P and I = 2P, it suffices for V to be greater than 4 for (PV-S) > (P+I). This is easily the case in the real world over a period of time T so long that I = 2P (typically more than 20 years.)
Another criticism was as follows:
I don't think you are qualified to judge of John Turmel's work, especially when you claim "his most crucial mistake." He is a pioneer in applying science to economics through sound engineering. He taught many of us what economics engineering is about and he deserves our polite respect.
I read your expose and the first thing that became clear is that you exposed your lack of basic fundamentals.
Ardeshir wrote: Then it is clear that as long as (PV) > (P+I), all the goods priced at G can be sold over the time period T. (Even if I is as great as P - which is about the maximum magnitude of I in actual practice, and it only gets to be that high on very long term loans and mortages - more than 20 years usually - as long as V>2, all the goods priced in total at level G can be sold).
Your premise is based on a misunderstanding of basics; bogus in, bogus out. You suggest the velocity of money makes up for the P+I > P imbalance - it doesn't. Money may be used over and over in multiple transactions. But money can only be used once in repaying the principal on bank debt. P cancels out P, leaving I. There is no velocity when repaying principal debt, its one and done.
Please note that I am not disputing the claim that P+I > P. I am disputing John Turmel's claim that "a minimum amount of goods must remain unsold and a minimum number of producers must fail and suffer foreclosure".
It is to be noted also that all of the Principal P is not paid back - and thereupon cancelled - until the period of time T is over. Indeed, under the usual repayment schedules in practice all over the world, the initial instalments of loan repayments consist of a preponderance of Interest I over Principal P; and as a result, more than half of the Principal P remains in circulation well after the period of time T is half over.
As a result, Turmel's claim that "a minimum amount of goods must remain unsold and a minimum number of producers must fail and suffer foreclosure" is clearly proved wrong; for over the time period T, and especially during the first half of it, most of the Principal P remains in circulation, and can therefore be used over and over to buy goods (and services), so that there is no need for any of the goods to remain unsold.