Ask Auntie Pinko
February 28, 2002

Dear Auntie Pinko,

Why is there assumed to be a "Prime Rate"? Isn't money a product of the peoples' labor and a symbolic way to ensure the division of labor? Why do the money counters get a cut?

Seriously,

Fred
Kasilof, AK

Dear Fred,

Money - say, a fifty-dollar bill, or a quarter - is a product of the labor of workers at the various mints that produce it. As far as I know, it's not the product of anyone else's labor (or, if it is, the Treasury Department will probably want to have a word with them.)

All right, Fred, Auntie is being a little facetious with you. I do know what you mean. But we often forget that money, in and of itself, has no value at all (or the negligible value of the materials and labor which produced it - infinitely smaller than the hypothetical value printed or stamped on its face.)

Money is a symbol for value. A marker, if you will, that we can use to say "I want this object or this service enough to exchange objects or services of this much value for it." But when someone who works as a delivery messenger wants to buy a CD costing twenty dollars, s/he doesn't tell the proprietor of the music store "I'll deliver twenty dollars worth of messages in exchange for this CD."

Either the messages have already been delivered for someone who has given the messenger a symbol representing the value of their services, or -

the messenger has at least $20 worth of credit from someone who has confidence in their ability to deliver those messages and will loan them the money until that happens.

And there you have it. Credit is a service, like delivering messages, building houses, turning out parts on a lathe, or any other item we value. And interest (the prime rate and its many permutations) is the rental fee on money we don't have.

If you wish to buy a house that costs $100,000, and you don't have the cash, and you know that I have large amounts of cash, you may come to me and ask to use some of it to buy your house. It's perfectly fair that I charge you a rental fee on that cash. I can't use it myself when you have spent it. Over and above the value the cash itself represents, I am assigning it an additional value - an amount that represents the value I believe I could have added to the cash by other means, had I not lent it to you.

The modern world as we know it would never have evolved without credit, and credit would never have evolved sufficiently to support the world's economic structure without interest. No form of government - capitalist, socialist, absolute monarchy, oligarchy, theocracy, you name it - can exist without credit in some form.

Of course, credit and interest, are sharp tools with two edges. For all their usefulness, they can easily be abused, as Adam Smith (and many other great economists) have warned us. And of course, the fewer controls there are upon the market, the easier it is to abuse credit in all its forms (stock, by the way, is a form of credit.) We are seeing that today, with the failure of Enron.

Auntie Pinko has no quarrel with those who choose to provide credit - in fact I have cause to be grateful to them, for without a mortgage I would not have a cozy little cottage roof over my head. But neither do I believe that the rules of the credit game can be left to those mysterious "market" forces that enabled Enron to so thoroughly fleece its creditors. I am, after all, Auntie Pinko!

Thanks for asking, Fred!