The Banker on a Desert Island Fable
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A bank loan at interest requires more money in repayment than was created by the loan.
When the loan is completed the borrower will have paid Principal plus Interest (P + I).
Obviously, (P + I) must be greater than P alone for any positive value of I.
This leads many to insist that interest can't be paid because it wasn't created. They seem to forget that the $20 bill in their wallet may have already been used a thousand times to pay off $20,000 in interest charges or any other expense and after they spend it, will continue to multiply itself via transactions. Just as cash circulates, so does bank credit. Interest is not extinguished when paid to the bank. It is the bank's income which, when spent on operating expenses and dividends to shareholders, flows back into circulation. Borrowers use the same "stock" of created Principal to pay the interest again and again.
Therefore, P < (P+I) has no bearing whatsoever on whether interest can be paid in installments, NONE.
It is ONLY VALID as the SUM of what has been paid upon completion.
IF all loans were concurrent and payable in one lump sum,
as in the many variations of the banker on a desert island fable, then P < (P+ I) would be true.
Charles Eisenstein, author of the book, Sacred Economics: Money, Gift, and Society in the Age of Transition, falls prey to the simplistic “impossible interest” fallacy and bases his proposed solution on negative interest or "demurrage".
Oh, by the way,” he [the banker] added after every family had received their 10 rounds, “in a year’s time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives.” “But where will the 11th round come from?” asked the farmer with the six chickens. “You’ll see,” said the man with a reassuring smile.
Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.
Given how much I love Charles Eisenstein's book overall, it is painful to read this, and especially that he claims he got it from Bernard Lietaer. For one thing we don't need to assume that population and annual production stay the same. This is just extraneous thought. If a total of 1000 money units were created, and 1100 money units are required in payment simultaneously in one lump sum and the banker is the only one who can create money units, then it is clearly impossible to pay.
The question is... does this model represent reality?
The answer is NO. It is a mind trick.
In reality, the banking system is designed upon the concept of monthly payments that are a mix of interest and principal.
So, if we make the banker on a desert island scenario actually resemble the real world and DOUBLE the interest as well, the banker can lend everyone $1000 on Jan.1 and demand $200 interest paid over the first 11 of 12 equal payments of $100, totaling $1200.
Each month, the banker spends the interest on the production of the borrowers in order to feed, clothe and shelter himself and re-lends the principal if asked to. The shortage of money stock disappears like a mirage, because flow multiplies stock.
Everyone pays their so-called debts to the "banker" with their production. To do so they can use the same money stock over and over.
The banker is providing a service and, despite the way it is calculated, paying interest is no different than paying any other bill. And the receiver of ANY payment has the same choices of what to do with it, whether it be an individual, a business, a government or a bank... spend, lend or invest it.
The problems begin when money lent into existence by banks is lent a second time (or who knows how many more times) by whoever has it and doesn't need to spend it. This includes savers.
While everyone obsesses over interest, an imaginary problem, the real problem goes entirely unexamined and savings are considered a good thing like a foundation of value rather than what they really are, indefinitely interrupted debt cycles, the root cause of system instability.