Bills of Exchange

I came across a refreshingly well informed professor explicating bills of exchange.  While I recommend his article, I felt obliged to critique as well.

Dear Prof. Fekete,

Your exposition is to be recommended, especially as you outline a world few people understand, and the degree to which "bills of exchange" (in essence vendor financing) worked in history long before banks, or even money, and works quite well to this day.

You are right to note that the state has ruined a perfectly good system.

I could not agree more with your conclusions, but I wonder at a few points:

1. You note "Banks need not be involved." yet you say fractional reserve had nothing to do with the depression. I understand you posit it was the destruction of the bills of exchange system, but I do not think that which the state-chartered banks took over were any longer bills of exchange when the banks took over.  They did indeed employ fractional reserve, and it did indeed due much harm.

2. I think you place too much emphasis on "the final gold-paying consumer"... the final consumer was not paying in gold, I think the self-liquidating credit system you note extended down to the workers, whose employment was on credit as well. These people were obliged to be customers to a particular pub, and forbidden to drink elsewhere. Sailors mutinied for not being paid for years. My point is, this credit, backed by bills, was far wider than I think you are even admitting.

3. In trade especially in the times you cite, "bills" means "lists, " not "what is owed." This small clarification is important, because it shows how value was associated with a particular list of goods.

4. Lending and borrowing against bills is not fractional reserve banking, it is two parties making a contract.  The trick in banking is they get involved and lend their credit, where there is nothing, no bills (lists of goods by which the loan is backed) to warrant such a loan.  This is fraud, and when allowed by the state, given the potential for violence.

If there is a argument for fractional reserve, you have not made it.  In any case, the rest of the article is stellar.

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Home Loans?

I was speaking with a realtor of the Muslim faith on Sharia compliant transactions, and he deplored the "Sharia-compliant" programs on offer in USA.  He confessed he was not the most devout Muslim himself, but he said people who accept these deals are accepting "pork labelled beef."

I share his desire to see things labelled properly.  A most obvious source of confusion in the discussion is calling what mortgage bankers offer "home loans."

Well in Islam and Christianity loans are strictly a charitable act, in which no interest (usury) may be charged, under any circumstances.  Both religions are clear and strict on this point.

The idea of a home loan is confused.  No bank lends money for a home as a charitable act (and as a matter of fact, banks lend credit, not money, anyway.)  So a bank offering a home loan suffers an internal contradiction.  Banks do lend money (or credit) for homes as a business proposition.

Now making a loan of money to someone to buy a house, as a charitable act, is applauded in both religions (although the IRS expects to tax someone on imputed usury income).  That would be the term "home loan" properly used in both Islam and Christianity.

Now banks do business lending credit at interest (usury), a practice strictly forbidden to this day by both religions.

And both religions approve the business of helping people get into homes.   How, if not by lending money (or credit).  Well, by a means that goes back to the beginning of mankind.  A business deal in which a homeowner sells his house with time payments to two or more people, who form a partnership.

Say Tom has $450,000 he is looking to invest in a business and I have $50,000.  Tom already has a house. We agree to pool our money to buy a house together.  Now Tom owns 90% of the house, and I own 10%.  We agree I will rent out Tom's 90% from him and live in the house.

If further I want to buy the house form Tom, and he is willing to sell, then at any point I buy him out, or  but up his portion over time.  As long as "interest"is not built into any of the payments, this business deal is quite acceptable in both religions.

So home ownership, the process of acquiring a home, ought to be looked at as a business deal, not a loan (unless of course someone is simply gifting you a house, or lending you money to buy it, with no interest on the repayment, as an act of charity.)

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Finance & Cheating

Here is a TED talk in which a fellow talks about people who cheat, with some interesting experiments relating to financial cheating and money.  What is interesting is his observations regarding cheating in relation to money as opposed to other things.

It may explain the mechanics of why usury became "interest" and became acceptable in Western countries, and what Moslems should watch for as Islam struggles with the question of usury.

If people are made to recall ten commandments, if if they are not believers, they are less likely to cheat.  This certainly supports the idea that the Lawgiver reminded us of what he wrote on our hearts when he made us.

Here is from the transcripts:

Think about the following intuition. How bad would you feel about taking a pencil from work home, compared to how bad would you feel about taking 10 cents from a petty cash box?

and

So, what have we learned from this about cheating? We've learned that a lot of people can cheat. They cheat just by a little bit. When we remind people about their morality, they cheat less. When we get bigger distance from cheating, from the object of money, for example, people cheat more. And when we see cheating around us, particularly if it's a part of our in-group, cheating goes up. Now, if we think about this in terms of the stock market,think about what happens. What happens in a situation when you create something where you pay people a lot of money to see reality in a slightly distorted way? Would they not be able to see it this way? Of course they would. What happens when you do other things, like you remove things from money? You call them stock, or stock options, derivatives,mortgage-backed securities. Could it be that with those more distant things, it's not a token for one second, it's something that is many steps removed from money for a much longer time -- could it be that people will cheat even more? And what happens to the social environment when people see other people behave around them? I think all of those forces worked in a very bad way in the stock market.


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A Bank, In the Biblical/Koranic Sense

On the question of a bank formed compliant with Shariah and Christian obligations, a correspondent, and ex-banker says:

First hurdle would be the Feds closing you down – not tolerating the honest competition.  

I wonder.  The feds charter banks to be a part of a game based on usury, and not even relating to money, but usury on credit (today termed interest on money).

So if one was making loans of money, properly defined, in charity to others, at no point is there any usury or credit.  so why would the feds care from a banking regulation point of view, since no banking is going on in the modern sense (but certainly in the Biblical/Koranic sense.)

So if I put out 1000 gold coins to be lent to someone in need to be paid back over time at 1000 gold coins total, then where does regulation come in?

As to the question of where does one get credit then, so say build a house, well at all times and places in history there was "vendor financing" which here again the feds have no interest in.

Except obliquely, and here is the problem.  All of these loans are presumed to be interest bearing, to the point where the law requires income be imputed, and that income taxed.  So should a bank, or a private entity make a loan in the Biblical/Koranic sense, the IRS would demand the lender pay taxes on the profits, even though in fact there are no profits.

And if not the lender, the borrower, who through the margin of inflation gained by paying no interest, must be taxed on the passive income.

This is ripe for testing.

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