i see many people believing that interest is the stinge in our money system. i want to use a simpel model here to explain where they go wrong. basically the argument is that they use an oversimplified model.

first let me remark that the use of money as a means of exchange is a function that only became widespread in use millenia after money had been invented as a means of recording credit. the oversimplified model(s) used by people that believe that interest is the problem never comprise this credit functionality.

my model consists of three workers: a farmer, a baker and a banker.

now the farmer produces grain enough for three breads.

the baker can bake three breads from the grain produced by the farmer.

the banker runs the money system that the three of them use to interchange their goods.

before i go into the dynamics of this model i’d like to make clear that if the farmer, baker and banker would trust each other there would be no need for money.

the whole idea of (institutionalised) credit is that we don’t trust each other, instead we trust the value of money.

what money (credit) really does here is enabling swapping THROUGH TIME.

it works like this:

the farmer produces grain that the baker would like to bake.

because the farmer doesn’t trust that the baker will give him one of the breads he will bake, the farmer wants the baker to pay him for his grain.

but the baker can only pay after he has sold his bread, not upfront.

now the banker is willing to take this risk.

therefore the banker makes 1 coin.

the banker lends this coin to the baker and makes the baker promise that the baker will pay back this coin twice (so 100% interest).

now the baker buys the grain from the farmer with this 1 coin.

now the baker can bake three breads, keep one for himself and sell the other two.

first the farmer buys one bread for 1 coin.

now the baker can pay the interest to the banker.

consequently now the banker can buy a bread form the baker, again for 1 coin (this is the step that the oversimplified models forget).

so the baker acquires this coin once again and consequntly the baker can pay back his debt to the banker.

so the system started with the farmer having grain and the banker having 1 coin.

at the end of the dynamics each of the farmer, baker and banker have a bread and the coin has returned to the banker.

this is what money is supposed to do, it enabled the farmer and the baker to interact (over a longer period of time) without trusting each other.