Ye exact usury...

By Gavin R. Putland

I quote from sections I and II of J. Benes and M. Kumhof, The Chicago Plan Revisited, IMF Working Paper No.12/202, August 2012 (emphasis added):

[U]nder the present system banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries...

Bank reserves held at the central bank... do not play any meaningful role in the determination of wider monetary aggregates. The reason is that the “deposit multiplier” of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending, turns the actual operation of the monetary transmission mechanism on its head. This should be absolutely clear under the current inflation targeting regime, where the central bank controls an interest rate and must be willing to supply as many reserves as banks demand at that rate. But as shown by Kydland and Prescott (1990), the availability of central bank reserves did not even constrain banks during the period, in the 1970s and 1980s, when the central bank did in fact officially target monetary aggregates. These authors show that broad monetary aggregates, which are driven by banks' lending decisions, led the economic cycle, while narrow monetary aggregates, most importantly reserves, lagged the cycle. In other words, at all times, when banks ask for reserves, the central bank obliges. Reserves therefore impose no constraint.

... Zarlenga (2002)... shows that private issuance of money has repeatedly led to major societal problems throughout recorded history, due to usury associated with private debts. Zarlenga does not adopt the common but simplistic definition of usury as the charging of “excessive interest”, but rather as “taking something for nothing” through the calculated misuse of a nation's money system for private gain. Historically this has taken two forms. The first form of usury is the private appropriation of the convenience yield of a society's money. Private money has to be borrowed into existence at a positive interest rate, while the holders of that money, due to the non-pecuniary benefits of its liquidity, are content to receive no or very low interest. Therefore, while part of the interest difference between lending rates and rates on money is due to a lending risk premium, another large part is due to the benefits of the liquidity services of money. This difference is privately appropriated by the small group that owns the privilege to privately create money. This is a privilege that, due to its enormous benefits, is often originally acquired as a result of intense rent-seeking behavior... The second form of usury is the ability of private creators of money to manipulate the money supply to their benefit, by creating an abundance of credit and thus money at times of economic expansion and thus high goods prices, followed by a contraction of credit and thus money at times of economic contraction and thus low goods prices... It repeatedly led to systemic borrower defaults, forfeiture of collateral, and therefore the concentration of wealth in the hands of lenders. For the macroeconomic consequences it matters little whether this represents deliberate and malicious manipulation, or whether it is an inherent feature of a system based on private money creation.

The second form reminded me of something that I read many years earlier:

Some also there were that said, We have mortgaged our lands, vineyards, and houses, that we might buy corn, because of the dearth.

There were also that said, We have borrowed money for the king's tribute, and that upon our lands and vineyards. Yet now our flesh is as the flesh of our brethren, our children as their children: and, lo, we bring into bondage our sons and our daughters to be servants, and some of our daughters are brought unto bondage already: neither is it in our power to redeem them; for other men have our lands and vineyards.

And I was very angry when I heard their cry and these words. Then I consulted with myself, and I rebuked the nobles, and the rulers, and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them.

— Nehemiah 5:3–7, KJV.

The common element between the two forms of usury is land. Because most of the rental value of land is not collected for “the king's tribute”, it is capitalized into a selling price, which can then be mortgaged to lenders. And because the rental value is increasing, the price/earnings ratio can be much higher than that of a constant income stream; that is, the rental yield of land can be much lower than the going rate of interest. If the rental yield is equal to the lender's interest margin, and if the loan-to-value ratio is 100%, the lender gets the entire rental value of the land under the guise of the interest margin. Thus there is considerable overlap between the “first form of usury” and the classical definition of economic rent.

(See also “How inflationary is government-issued money?”)