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Hello Mr. Sidman,

First of all, I must say that I have huge respect for you, I really admire your work. However, this time I do not share the same opinion with you.

Gesell described interest as a plaguespot of an economy and I think he meant that we need to completely eliminate it.

“Free-Money, that is to say, money free to circulate, money free from the anomaly of interest.” (p. 119)

Your division and explanation open doors to unearned income.

3- expected inflation) In one of your previous articles, you said that inflation is different from demurrage because it is inconsistent and unpredictable. So how borrowers and lenders can precisely decide expected inflation and deflation? The decided rate will always be different from the occurring rate. Therefore usury will be always there.

Also, “The currency office will not be dormant like our present monetary administration which with indolent fatism expects the advantage of swindlers, speculators, and usurers; it will intervene decisively to establish a fixed general level of prices, thereby protecting honest trade and industry” (p. 123)

2- risk premium) Since it is not possible to decide which part of money contains a risk premium and which part contains pure interest, I think it should be illegal to demand all kinds of excesses from the debts. In order to earn risk premium people must seek to invest in real business (e.g. starting their own company or making a partnership etc.). Higher risk must offer higher dividends but not interest. (briefly, the main difference between these two: the company pays dividends if there is a profit but interest must be paid regardless of all scenarios.)

4- Administrative costs) It might be legit to demand this cost however, it should not be a ratio that limitlessly grows with the amount like interest. But it should be a pre-decided fixed rate.

So one might say what would be the point of lending money if it is a 1:1 ratio payment? The lender will avoid the deprecation of his money with demurrage. (Please remember the story of Robinson Crusoe by Silvio Gesell.)

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Thank you for your comment. It's a complex subject, and unfortunately Gesell didn't address all of these specific points, so the best we can do is speculate about what he would have thought. And that was exactly what I was attempting to do in this article.

Gesell did NOT argue for the elimination of interest by law. Outlawing interest has never worked in human history. It just drives lending into the black market. I don't believe that was Gesell's intent. Rather, he sought to eliminate interest by creating a form of money that doesn't give lenders the power to demand interest. And, given that he believed in the principle of free markets, my conclusion is that he believed the terms of loan contracts should be determined by private negotiation, not by law. Furthermore, I believe this view is consistent with the Robinson Crusoe story. The reason Crusoe was unable to demand interest from the stranger was not because it wasn't legal, but because the stranger convinced Crusoe that it was in his self-interest to lend his goods without interest. However, what if the stranger was a gambler and an alcoholic who was unlikely to put Crusoe's capital to good use and thereby be able to repay the loan? In that case, Crusoe might very well have concluded that it was in his self-interest to let the bugs eat his grain, since he would lose less that way than by lending to a profligate borrower. After all, it's better have a store of grain partially eaten by insects than one completely eaten by a stranger who has no means with which to replace it. And, again, all of this would be based on each individual pursuing his own self-interest, not by imposing legal restrictions on their actions.

So I don't see any inconsistency in assuming that high-risk borrowers would have to pay a positive rate on loans. If higher rates cannot be charged to risky borrowers than to safe ones, no one would ever lend to risky borrowers. And I don't see this as necessarily contradictory with the idea of eliminating interest, if we define the word "interest" so as to exclude the risk premium component. This would make it possible to have a market for loanable funds in which "pure interest" doesn't exist, but in which risky borrowers can still access loans by paying a premium to compensate for their greater likelihood of default.

Furthermore, consider the case of Argentina. If we interpret the "elimination of interest" in the way that you suggest, there would simply be no loans made at all. If inflation is running at 100% per year, one would be foolish the lend money even at a "usurious" rate of 95%. So is your position that no loans should be made in Argentina until they get inflation down to a level at which lenders judge it to be in their self-interest to make interest-free loans?

Of course, if we were to switch to a Gesellian monetary system and, as he believed would be the case, that system could be managed in such a way that neither inflation nor deflation existed, then the third component -- i.e. expected inflation/deflation -- would become unnecessary and irrelevant. However, here we get into another complex can of worms that Gesell didn't specifically address. How exactly do we define the price level? Presumably we do so using price indices, but that is hardly an exact science. The basket of goods that would comprise such indices would always be changing as technology advances, so I think it is fanciful to imagine that it would ever be possible to completely eliminate any and all variations in the price level. Of course, as I mentioned in the article, there are ways to account for this factor other than by including an expected inflation/component in the loan rate.

So, I'll just repeat that I believe the perspective I offered in this article is consistent with everything I understand of Gesell's thinking. But I acknowledge that this is just my best guess, since he didn't specifically address these points.

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