Thomson] Sure the interest is the bank's profit, but
did not Douglas believe that bank profit should be
restricted to something like a fee on turnover, or
for their administration of the loan?
----------
[Ryan} No.
[Thomson] The interest, if there is to be interest
aside from those fees, would return to the National
Credit Authority for distribution within the
community, would it not?
----------
[Ryan} The credit authority is not a lending institution nor
is it a central bank. Its position is analogous to
the capital account within a coherent set of
accounts.
[Thomson] What determines the rate of interest?
----------
[Ryan} It is determined quite arbitrarily though they will
tell you it is supply and demand, which is why the
rates should be regulated as the rates once were
regulated for public utilities.
Keep in mind that if you prohibit loans above a
certain rate, say six percent, it does not mean that
people who once paid ten percent will now get their
loans for six percent. They simply will get no
loans. There is a real cost to loans that varies
from loan to loan.
There is a time premium that increases with the term
of the loan.
There is a risk premium that compensates for the risk
of default.
There is an element of profit to the banker.
I can follow you on this, and the next post, too, Bill. But what happens in the case of default? Or if the bank decides its customer is no longer 'credit-worthy'? Lets suppose I borrow a sum of money, and the interest is based solely on time. I have a slowdown in business, and my profit from which I pay the interest diminishes, or ceases all together. Theoretically, as long as I was making the interest payment there would be no purpose in the bank wanting its principle back. And in this instance, we'll assume they don't. But if my paying that interest, the only expense other than property taxes, [and possibly fire-insurance], based solely on time, draws down my capital when there's insufficient coming in to replace it, pretty soon I'm not going to have enough dough to operate when things pick up. Unless I go back to the bank for another loan, that is. (Which, in the case of a small business, is highly unlikely to be granted.) Over time, particularly in a cyclical industry like ours, an indebted producer slowly finds he's more and more in hock to the bank. And they can, (and do), increasingly have his fate in the palm of their hands. With the result that purely a 'financial' result in the operation of the business has to be aimed for, regardless of anything else. Now as I read Douglas, this was one of the things he was most concerned about. How do we get away from that?
Joe
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