It's awesome watching new ideas form about what money is and how it should be used.
I'll put something up on the "Economic Totalitarianism" thread in a day or two, but
maybe this theard gets there first. For now, I'll posit a better "Orchard" model. I'll set
some variables closer to the real world, others are set to limit the model.
In an ideal Island world, the king owns all the land, and leases are for sale at zero rent.
There are only two orchards, side by side, and the trees are a thousand years old.
One orchard is up for sale, and is bought $20 cash and $80 loaned from the bank.
The loan carries 10% interest because the bank expects the orchard to go bust,
but demands the orchard as collateral.
The other orchard is owned by the bank, has a similar loan on the books, but
has interest set at the Internal Rate of Return (IRR) some 2%. This comes
about because the bank is closer to the source of the monetary expansion.
To create a "static" economy, both orchards use slave labour so there is no
compeditive advantage and the slaves eat all the apples, sold in a free market.
In year 1, the money in circulation is $200.
In year 2, the bank calculates $210 in circulation, and demands interest be paid.
The bank makes a profit of $3 on its orchard, and rolls over the loans, increasing
the the external loan to $83. When the external loan approaches $100, the bank
will foreclose, and put the orchard up for sale, again.
That can't happen if Usury is prohibited.
Interesting... I assume each orchard made a profit of $5 from the apples for the year. It is interesting why the external orchard chose to take out the loan owing more interest per year than yearly profits. Any ideas? There may be something I am not getting.
The external orchard chose to take out a loan because they were unable to accurately assess the profit potential of the orchard. They were unable to make this assessment because of fundamental economic distortions that are introduced by fractional reserve banking.
Credit creation makes it appear as if the supply of "saved funds" ready for investment has increased, for the effect is the same: the supply of funds for investment purposes increases, and the interest rate is lowered. Borrowers, in short, are misled by the bank inflation into believing that the supply of saved funds (the pool of "deferred" funds ready to be invested) is greater than it really is.
When interest rates are artificially low, entrepreneurs are led to believe the income they will receive in the future is sufficient to cover their near term investment costs. In an environment where the money supply is continually expanding via debt, entrepreneurs mistakenly conclude that investments are really available for long term projects when in fact the pool of available funds has come solely from artificial credit creation that can and will be contracted at will by the banking sector. Entrepreneurs see spending in the economy and assume consumer demand exists for their projects when in fact consumer demand is artificially and unsustainably elevated.
As bank credit percolates through the economy it moves downward from business borrowers to landowners and capital owners who sold assets to the newly indebted entrepreneurs, and finally onto other factors of production like wages, rent, and interest.
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Some investments made during the artificial monetary boom were inappropriate and "wrong" from the perspective of the long-term financial sustainability. Others should be sound but nevertheless fail due to the economic distortion and contraction triggered by sudden credit tightening.
The boom is revealed for what it is, a period of wasteful malinvestment, a "false boom" where the investments undertaken during the period of fiat money expansion are revealed to lead nowhere but to insolvency and unsustainability. Seizure of collateral and general price deflation or reduction in inflation ensues. The longer the false monetary boom goes on, the bigger and more speculative the borrowing, the more wasteful the errors committed and the longer and more severe will be the necessary bankruptcies, foreclosures and depression.
As we have seen, an increase in the supply of money benefits the early receivers, that is, the government, the banks, and their favored debtors or contractors, at no point is this more true than at the bottom of the business cycle when asset prices are artificially depressed and only favored borrowers are allowed to borrow. It is at the bottom that favored insiders can still borrow allowing assets to be purchased at depressed prices.
Money in whatever form it takes gold, dollars, or bitcoin is ultimately a signaling system a channel for information to travel through.
Knowledge and Power by George Gilder
https://www.amazon.com/Knowledge-Power-Information-Capitalism-Revolutionizing/dp/1621570274Capitalism is not chiefly an incentive system but an information system. We continue with the recognition, explained by the most powerful science of the epoch, that information itself is best defined as surprise: by what we cannot predict rather than by what we can. The key to economic growth is not acquisition of things by the pursuit of monetary rewards but the expansion of wealth through learning and discovery. The economy grows not by manipulating greed and fear through bribes and punishments but by accumulating surprising knowledge through the conduct of the falsifiable experiments of free enterprises. Crucial to this learning process is the possibility of failure and bankruptcy. In this model, wealth is defined as knowledge, and growth is defined as learning.
That new economicsthe information theory of capitalismis already at work in disguise. Concealed behind an elaborate mathematical apparatus, sequestered by its creators in what is called information technology, the new theory drives the most powerful machines and networks of the era. Information theory treats human creations or communications as transmissions through a channel, whether a wire or the world, in the face of the power of noise, and gauges the outcomes by their news or surprise, defined as entropy and consummated as knowledge. Now it is ready to come out into the open and to transform economics as it has already transformed the world economy itself.
Let us imagine the lineaments of an economics of disorder, disequilibrium, and surprise that could explain and measure the contributions of entrepreneurs. Such an economics would begin with the Smithian mold of order and equilibrium. Smith himself spoke of property rights, free trade, sound currency, and modest taxation as crucial elements of an environment for prosperity. Smith was right: An arena of disorder, disequilibrium, chaos, and noise would drown the feats of creation that engender growth. The ultimate physical entropy envisaged as the heat death of the universe, in its total disorder, affords no room for invention or surprise. But entrepreneurial disorder is not chaos or mere noise. Entrepreneurial disorder is some combination of order and upheaval that might be termed informative disorder.
Shannon defined information in terms of digital bits and measured it by the concept of information entropy: unexpected or surprising bits...The accomplishment of Information Theory was to create a rigorous mathematical discipline for the definition and measurement of the information in the message sent down the channel. Shannon entropy or surprisal defines and quantifies the information in a message
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In the Shannon scheme, a source selects a message from a portfolio of possible messages, encodes it through resort to a dictionary or lookup table using a specified alphabet, then transcribes the encoded message into a form that can be transmitted down a channel. Afflicting that channel is always some level of noise or interference. At the destination, the receiver decodes the message, translating it back into its original form. This is what is happening when a radio station modulates electromagnetic waves, and your car radio demodulates those waves, translating them back into the original sounds or voices at the radio station.
Part of the genius of information theory is its understanding that this ordinary concept of communication through space extends also through time. A compact disk, iPod memory, or Tivo personal video recorder also conducts a transmission from a source (the original song or other content) through a channel (the CD, DVD, microchip memory, or hard drive) to a receiver chiefly separated by time. In all these cases, the success of the transmission depends on the existence of a channel that does not change significantly during the course of the communication, either in space or in time.
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The problem with fractional reserve is that it allows
multiple simultaneous claims that are expected to be honored but in reality cannot be. Thus it allows fraudulent claims or noise into the channel. The ultimate consequence of this is an increasing distortion of the underlying signaling mechanisms in the economy.
Yes of course depositors also benefit some to from the scheme. It is everyone else in the economy who suffers. Fractional reserve banking is different than central banking. However, fractional reserve is ultimately a process that increases economic distortion or noise. This is why it was recurrently associated with economic crises and bank runs. Historically this distortion directly paved the way to our current central banking (an even greater distortion) and there is no reason to think the same processes would not immediately recur if we could somehow reset the system back to a gold or silver standard.