As some of you might know, I am a fan of progressive economist, Dr. Michael Hudson. At the beginning of the financial crisis that began over a year ago, Hudson gave a speech at the Oslo conference, "Financial Crises in Capitalism" on August 27, 2007. The title of his speech was, "Why the 'Miracle of Compound Interest' leads to Financial Crises" It can be found here: Michael Hudson's website
He states his purpose as:
"In this paper I want to discuss the financial sector’s tendency to dominate, deflate and polarize economies, thwarting economic potential. Understanding these financial dynamics is essential to explain why all nations are not operating up to the technological potential toward which classical liberalism aimed, and why the world economy is polarizing, as are domestic economies even in the most advanced industrial nations."
Please join me below for a discussion of Dr. Hudson's eye-opening paper.
The paper is much too long to summarize adequately here but there are some stunning points. One of the main points that I found especially intriguing is Hudson's discussion of the economics of compound interest. Hudson notes that even in the time of the Babylonians, they knew that:
"The real-world economy was unable to keep up with the exponential growth rates projected in purely mathematical calculations of sums being placed at interest. The volume of trade could not keep on multiplying exponentially, and domestic lending opportunities also were limited."
Apparently such luminaries as Thomas Jefferson and Abraham Lincoln understood this fact. That is why they, among others, warned about the hazards of a private banking system such as we have in our Federal Reserve System.
Hudson gives a simple illustration of why compound interest impoverishes a nation in fairly short order. In his illustration, Hudson cites the work of 19th century economist, Michael Flurscheim:
"Flürscheim composed an allegory pitting the Spirit of Invention against the Demon of Interest and his offspring, Compound Interest, in a battle to see whose powers were stronger. The Spirit of Invention had an army of tools and machines, water power, air and wind power, fire and steam power to drive machinery. But Flürscheim asked whether its minions really would bring about a golden era, or whether this power could be conquered by finance capital and made to serve it by paying tribute rather than serving mankind in the form of higher living standards. To illustrate the principle at work he related a Persian proverb about a Shah who wanted to reward the inventor of chess, and asked what the man would like. The man asked 'as his only reward that the Shah would give him a single grain of corn, which was to be put on the first square of the chess-board, and to be doubled on each successive square; which, to the surprise of the king, produced an amount larger than the treasures of his whole kingdom could buy' as the amount doubled on each of the board’s 64 squares.
For the first row of the board the amount of grain being measured out was modest: 1, 2, 4, 8, 16, 32, 64, 128 grains, reaching the power of 27 but still not even a cupful. By the second row, it became a large sackful: 215, or, 32,768 grains. It soon became obvious that to fill the entire 64 squares – eight rows – would 2123, far more than n the kingdom or, for that matter, the whole world possessed. The moral, Flürscheim concluded, was that in due course the mathematics of compound interest was "much more powerful than the Spirit of Invention," ending up enslaving it.[5]
The political fight in nearly every economy for thousands of years has been over whose interests must be sacrificed in the face of the incompatibility between financial and economic expansion paths. Something has to give, and until quite recently creditors have lost. This is the point that modern economists and futurists fail to appreciate. Financial claims run ahead of the economy’s ability to produce and pay. Expectations that interest payments can keep on mounting up are 'fictitious,' as Marx and other 19th-century critics put it. When indebted economies and their governments cannot pay, bankers and investors call in their loans and foreclose."
Hudson notes:
In the modern epoch, J. P. Morgan and John D. Rockefeller are reported to have called the principle of compound interest the Eighth Wonder of the World...Flürscheim described Napoleon as voicing a similar idea upon being shown an interest table and remarking, 'The deadly facts herein lead me to wonder that this monster Interest has not devoured the whole human race.' Flürscheim commented, 'It would have done so long ago if bankruptcy and revolution had not been counter-poisons.' And that is just the point, of course. Something must give when the mathematics of interest-bearing debt overwhelms the economy’s ability to pay. For awhile the growing debt burden may be met by selling off or forfeiting property to creditors, but an active public policy response is needed to save the economy’s land and natural resources, mines and public monopolies, physical capital and other productive assets from being lost to creditors."
If the bankers know all of this--and I certainly have a hard time imagining that they don't--why is it that we continue to amass debt through our private banking system instead of having money issued directly by our own government? During the American colonial period, a visitor from England who stayed with Benjamin Franklin marveled over how prosperous the Colonials were. Ben said that it was because they did not have a private central bank like the Bank of England--that the government issued its own Colonial Scrip. Food for thought in the midst of our horrendous debt problem. In his paper, Hudson has a thorough discussion of the world-wide problem of debt in easy to understand terms. Let's discuss.