Decentralising economics, 3. The theory of the mutual bank with regards to interest-rates and regulation.

"The plans of the diligent lead to profit as surely as haste leads to poverty."
Proverbs 21. 5

1.— Introduction.

In part 2 of this essay series, the concepts of interest-rates were touched upon as they related to the decentralised, mutual bank.  However, this purposely was not given much detail, as another essay is required to better expound its operative mechanisms and how they relate to a local economy's inflationary and deflationary cycles.  It has also been left open to prove how, with a decentralised economy and via mutual banks, inflationary boom-and-bust cycles can become a product of the past in direct correspondence with the breaking-up of central banking institutions.  All of these enquiries coalesce to satisfy the Christian social-ethical concern regarding usurious interest-rates, being an exorbitant rate of interest charged on loans, typically rooted in moral deficiency.  Again, the purpose is to unit ethics and economy— or, a return to the nature of "oikonomos," being true management of the household; it is believed that such can be found in the nature of decentralised, federative economic systems. With regards to this essay, it is a continuation of the enquiry into mutual banking institutions, and how they can better promote such.

Although there is a section below dedicated to combating usurious interest-rates, it would not suffice to leave out a brief word in the introduction on the topic.  A large part of Christian economic concern tends to revolve around what constitutes usury; typically, this involves the issuing of loans against an exorbitant interest rate; for instance, today's loan-sharks provide a good example of what it looks like, as their interest-rate percentages frequently top figures in the hundreds.  As Christians, we are concerned with this practice precisely because it becomes erosive to the dignity of the borrower and, frequently, leaves them consumed in a bigger debt— once the primary debt has been settled, of course.  A corollary of solutions to the issue of usurious loaning have been advanced,— and surely these will be entreated below,— but for now it suffices to mention that there are plenty of arsenal against its practice, and the mutual bank itself provides one of the surest guarantees against it, as well as decentralisation mechanisms found within a federative polity.  If we are to reunite the "oikonomos"— the practice of "household management," being the domestic economy— with ethic, then this must fall into consideration, particularly within an essay which focuses upon the subject of its concern, being interest-rates.  It is further important to ensure that this can be done without making heavy recourse to reliance upon the state, as will be shown.  

The overarching goal of these essays, it should be noted, is that of what best promotes sustainable, productive self-employment and small business practices; quite simply, this is because those are the economic activities which best protect the right to property-ownership and in keeping the fullest fruits of one's labour.  These are presupposed to be immutable rights and form the logical crux of the theoretical suggestions fleshed out amongst these essays.  From there, a host of benefits ensue: decentralisation ensures against administrative bureaucracy and alienated finance, whilst tailoring itself organically to the unique cultural characteristics embodied in local communities across British soil.  They also form a bastion of security for the family unit, which is considered to be the smallest functional unit within a wider, healthier society.  

All above considered, before entreating on the role of mutual banks as a solution to the problem of usurious interest-rates, there are first two concepts which it is apt to cover: that of time-preference and that of legislative regulation which caps interest-rates on loans.  


2.— The concept of time-preference.

Before beginning with the central purpose of this essay as such, it would pay to introduce and briefly explain the nature of time-preference— a favourite concept of Austrian School economists.  It is being mentioned precisely because it does go a long way to better understanding the purpose behind the mutual bank, especially with regards to how it operates in the regional context and interacts with its members.  

Time-preference, as a concept, is best understood as being the rate at which individuals are willing to forego immediate expenditure and save money.  This aggregates to a social time-preference, which is an average of the rate of savings measured against currency in circulation. This concept is also operative on a scale, between high time-preference and low: by nature of the scale, it should be noted that time-preference is not measured through distinctive, dichotomous modes, and as such there is no hard-and-fast line which separates the two.  Instead, it is posited as being in a state of flux, oscillating between the higher and the lower end of the scale.  There are some basic identifying factors, however, between a socially high time-preference and a socially low one.  

 In cases of high time-preference, people typically spend money immediately, rather than forego expenditure to save it for some greater purpose; in cases of low time-preference, the reverse is true— i.e., that people are more willing to forego expenditure and save money, rather than spend it immediately.  (It should be noted, expenses are a daily and weekly occurrence; and so there is always some standard rate of high time-preference with regards only to necessary expenditure.)  It is also a measure of investment in future, time-consuming economic activities, such as the development of new businesses, property-ownership, &c.; but this is only plausible provided that there are social savings from which to draw loans in the first place— which are indicative of an average societal low time-preference, for instance.  

Such decisions, alongside the institutional and financial contexts which influence them, have an impact upon the wider economy, with regards to things such as the rate of interest and inflationary against deflationary phenomena. Yet, the purpose of time-preference as a concept is designed to better understand economic function by way of social decision; in other words, it measures the effects upon economic cycles against the general decision to either spend money or forego its expenditure to save.  Therefore, it can be asserted: 

a.— that a high time-preference, which is the propensity to forego immediate expenditure and instead place that money into savings, is preferable in the societal scale; this is because,
b.— the increase of the supply of social savings will be met with a decrease in the rate of interest, which will further encourage others to apply for loans;
c.— the increased demand for loans will be met with a higher interest-rate, benefiting savers and encouraging people to save further; 
d.— those who have had loans approved, and apply the capital productively, will increase the general prosperity, providing recompense for the social forfeiture of capital by way of economic activity and future savings;
e.— the recompense, with regard to social savings, will come with increased social savings out of those who directly benefit from the new business' activities, such as the business-owner and employees;
&c. 

Although this on its own does not necessarily suffice to explain the system in its entirety, what it does do is better enable an understanding of the administrative behaviour of banks, with a particular view to setting and guiding interest-rate policy.  Yet, this explains a process which is entirely directed by the market, rather than central government; in the latter instance, there are a series of monetary and fiscal policies which can be employed to distort this process.  These policies produce an inversely-proportional impact on inflation or deflation of the currency, and therefore interplay according to the present financial circumstance.  

3.— Why legislative regulation is not the answer. 

To anybody who feels that usury itself— being defined as an excessive rate of interest on loans— is an issue, refusing to legislate against or around the issuing of loans seems somewhat counter-intuitive, especially with the presence of today's loan-sharks on the market.  This is usually the process resorted to, as in the historic cases of laws against usury, which were designed to set an upper limit to the rate-of-interest.  The point is that strictly legislative measures do not necessarily work, albeit with the best intention; therefore, it would be dangerous to rely solely upon them if the object is the trampling of usury.   

A case against usury laws and strict regulatory legislation can be made when it is understood that they inadvertently lead to the monopolising of loan-issuing, in some instances, and even to the creation of loan-shark businesses seen today.  This is detrimental to an economic point of view that seeks to expand, rather than suffocate, the existence of the self-employed and small businessman, regarded as the cornerstone of economic stability and well-being.

If, for example, the interest-rate on loans issued were to be capped at 7 per cent., with regulations stating anything higher impermissible, there would be a problem.  Given that any loans issued are measured against the trustworthiness and security of the individual, some institutions would prefer to loan at a higher rate of interest to cover any potential losses or damages assessed; yet, if they were not able to do so, they would have to decline the loan and thereby disenfranchise the individual who wished to apply to the capital his work and generate self-employment or the growth of a small business, for example.  Per the example, there are two potential outcomes going forward:

a.— An individual who does meet approval within the boundaries specified by a capped rate of interest, and thereby able to secure a capital loan, will do so; from there, he will be able to employ the labour of the individual who could not do so, thereby failing to encourage sustainable, fair self-employment; or,
b.— The individual who could not secure a loan from the bank would either submit to employment elsewhere, or turn to a loan-shark for the capital required; the former instance would fail to promote self-employment, and the latter would entail its obvious concerns and feed a usurious loaning industry.  

In both cases, there results either: a monopolisation on the ability to draw loans, against the current of promoting widespread self-employment, or a nod to usurious credit markets, which it is the object to stop.  Both instances fail a program designed to benefit and increase both self-employment and small businesses; in both cases, there is hypocrisy— especially if the goal is to promote property-ownership and the right to keep the full fruit of one's labour.  

Taking it as given that, in theory at least, there is a healthy and prosperous local economy, it should be borne in mind that interest-rates produced from the market would better-inform the policy of those banks; they would not be able to arbitrarily assign the rate of interest, but rather, would have to do so informed by market analysis. Therefore, if interest-rates in a society of low time-preference are low, any that are commanded upon a loan repayment would be proportionally lower as well.  Likewise, arbitrary restrictions upon the rate of interest for loans could well defer people who would otherwise offer a loan in credit unions from doing so— depending on the rate at which it was restricted. 

4.— The mutual bank as a potential answer.

So, how does these things relate to the mutual bank?  Quite simply, insofar as a mutual banking institution is better understood through the lens of both time-preference, as a concept, coupled with decentralisation and deregulation.  In the second essay of this series, the mutual bank as related to savings-deposits and loan-issuing was covered.  However, the details as to how it can secure non-usurious loaning rates was only briefly touched upon; the purpose hereafter is to prove them.  

The first understanding is that the nature of the mutual bank would strip away the administrative bureaucracies of a central bank.  As an institution, its mutualisation policy is designed specifically to accommodate local exchange systems, and thereby small businesses, enterprises, and the self-employed.  A large problem with centralised currency administration is that there is often a time-lag between their response to social phenomena, such as time-preference changes, and the implementation of policy.  This could well be witnessed in the huge recessions which have taken place since the turn of the 21st century, as central banks were allowed to print money, inflate the credit market, deliver loans (specifically, mortgages) which could not be repaid, and thereby had to liquidate assets to restore balance.  No doubt, centralisation and the administrative errors therefrom played a large part in the situation.  A regionalised, mutual-banking institution could well avoid these same administrative errors by nature of being built around the communities they serve, designed to instigate financial policies to their benefit,— as explained in the last essay,— rather than being predominantly beholden to stockholders, who are more inclined to seek centralisation with heavy state backing, rendering them "too big to fail."  They are to be considered more interpersonal and connected to their communities, which facilitates a smoother flow of finance and investment, rather than alienation when an institution is swallowed up through centralised and international finance.  

The second understanding is via the mutual bank's investment strategy.  Again, as mentioned in the previous essay, depositors in the mutual bank tend to have their money secured via typically conservative investments, which tend to produce a lower interest-rate than those which delve into the stock market as such; all the same, there is still a more sustainable and secure level of interest payment. To better understand this, recourse should be made to the statement that people typically save for two reasons: on the promise of an appreciative yield on their decision to forego immediate expenditure, and also on the understanding that it is a means by which they might save towards future goals.  These things typically produce a society of low time-preference, which, as aforementioned, is the preferable society due to its propensity to accumulate social savings adequate to invest in future enterprise, and thereby an increase in general wealth.  More, it thrives under two conditions: high-security returns on savings, and a social culture which places higher levels of importance on property-ownership, entrepreneurial and self-employed activities, and the family.  It must be a combination of the both to fully stimulate a society of low time-preference.  Therefore, the investment strategy of the mutual bank would reflect these precepts, especially if its credibility as an institution is reflected in its public conduct, accumulation of reserves, and the stability of the currency.  Naturally, this is more likely to be successful within the context of a decentralised, deregulated banking institution, as it would be more accommodated to the immediate requirements of its regional and local communities. 

All well and good.  But how would such an investment strategy feed into the issuing of loans and benefit the wider community?  How does it do so?

By formulating its conduct and policy to encourage the accumulation of societal savings, interest rates would be kept lower by nature of the investment portfolios and an increased supply of loanable capital; alongside stimulating demand for such capital, it is salient to note that any rates of interest on loaned capital would be proportionally lower too, as they would be hinged upon the precedent set by the supply-demand equilibrium, with interest-rates given to fluctuate around said equilibrium rather than reside directly upon it.  What this means is that the rate of interest on loan repayments could not be set disproportionately high if the general rate of interest is low, facilitated by a sensible policy directed towards an increase in societal saving, the bank's reserves, and thereby cheapening the repayments required on loaned capital.  The purpose of this is to demonstrate that, although the rates of interest could well be marginally higher depending upon the security and risk assessment of the applicant, they would not have to be disproportionate to secure capital upon which an individual could labour. 

Therefore, in this instance, the mutual bank within the context of a self-sustaining and self-regulated market economy would be able to offer the solution on two fronts: the first, against the official regulatory tendency to monopolise the loan of capital from trusted institutions and thereby feed individuals to the hands of loan-sharks; and the second, to secure loanable capital upon which individuals may bestow their labour, at a sensible rate of interest that is flexible according to the risk assessment.  It should be further noted that incumbent with a market system is competition, and therefore a little more incentive to keep interest-rates low; yet the best check against this is to first secure an increase in the bank's reserves, and thereby an increase in the supply of loanable capital, which would keep the rate of interest lower in the first place. 

More, such practices would encourage currency stability by not necessarily requiring the printing of money to issue loans, and thereby not artificially inflating the currency.  In cases where money would have to be printed, it would be done sparingly; the bulk of the trading and investment within the mutual bank structure would be engaged between debtholders and depositors, and would thereby gravitate predominantly around supply-and-demand.  Any inflation or deflation of the currency would be a market occurrence, rather than that of government policy or artificial action, and thereby more containable.  

5.— Concluding thoughts.

In conclusion, this essay was designed to give a brief rundown of the way in which mutual banks would operate around interest-rates, and why legislative regulation is not necessarily the solution.  The intention is to build a bank upon the foundations of a traditionally-secured society, and thereby engage its financial conduct with what best suits the requirements for justice,— being, the ownership of property and small businesses or self-employment,— family security, and peace.  A financial institution which can best serve the causes of stability will naturally allow such conditions to sustain, repeat, and continue.  

It should be noted that these are only brief, theoretical rundowns, and not full economic expositions.  The idea is not to say that hardship, downturn, or change will never happen; rather, it is to approach in theory ways in which we can better minimise that hardship with the guardrails of Christian social ethic, and encourage thought around what changes can be made to potentially bring this outcome forward.

+ God bless