I recently saw a YouTube video where an advocate of social credit gave a really bad argument against the existing economic system. It was an argument that I remember hearing years ago from the distributist writer John Médaille. The argument claims that the existing economic system is unstable because new money is created when loans are made and loans are required to be paid back with interest, yet the amount of money that the loan will cost in interest is not printed when the loan is made. Thus, there is simply not enough money in existence for the principal and interest on all loans to be paid. This means that some people will have to default on their loans, no matter how hard they work to pay it off, simply because it is mathematically impossible for everyone to pay off their entire debt. There are too many people chasing after too few dollar bills.
Here's an example of Médaille's version of the argument:
"The method of creating money through loans at interest has some grave consequences. Since every dollar represents a debt, and every debt carries an interest charge, there must be an infinite series of loans to pay off any debt. Suppose a loan of 1,000 dollars at 10% simple interest for a year. At the end of the year, the borrower must pay 1,100 dollars. The loan created the 1,000 dollars, but not the 100 dollars interest. This presumes that somebody else borrows 100 dollars to pay back 110 dollars, which presumes someone else borrows 10 dollars to pay back 11 dollars, etc. This means that credit must always expand to service the existing debts. But since infinite expansion is impossible, the system must periodically contract to wipe out at least some debts. In this way, financial crises are written into the DNA of a debt-money system."―John Médaille (There is No Such Thing as a Bank Loan)
Here's a link to the video where the social credit advocate made the same argument:
I am, actually, quite sympathetic to both social credit theory and to distributism, although I would have considerable disagreements with any proponent of either school of thought. However, I simply think this argument is wrong. There is an element of truth in the argument, but also a sort of blunder.
Firstly, the guy in the video suggests that it is mathematically impossible for all the debtors to pay off their loans. It is not. All of the debtors did not receive their loans at the same time and for the same period. And new money will be created to pay off those loans. Central banks today generally try to maintain a relatively small level of inflation, which would easily address the objection raised. And Médaille says that "infinite expansion [of the money supply] is impossible." Well, that simply isn't true. If you expand the money supply too quickly, then it will cause hyperinflation. However, if you gradually increase the money supply, the market will adjust and hyperinflation will never occur. When inflation occurs slowly, over a long period of time, prices and wages adjust. If there is gradual inflation, then wages and prices will tend to rise by the same percentage as the rate of inflation. If inflation happens gradually, so that 10% inflation occurs over a decade's time, and wages and prices both increase by 10% as well, then it is really only nominally that things have changed.
Furthermore, these folks tell us that usury is the reason for the business cycle. Their analysis is oversimplified and naive. The problem of usury might perhaps take up a single sentence in a footnote in a book on business cycle theory, but it probably wouldn't be mentioned at all. The reality is that business cycles would still happen under capitalism even if usury were abolished. Usury is not the driving force behind the business cycle. It is more of a symptom than a cause. I do, however, think that the implications of usury should be taken into account when analyzing business cycles. A comprehensive theory of business cycles would have to take into account the insights of F. A. Hayek, John Maynard Keynes, and Karl Marx. I also think that there is something to be said for the role of economic overgrowth and the size theory of the business cycle put forth by Leopold Kohr. I also think that there is something to be said for usury being an institution that exacerbates our economic woes. Nevertheless, it is a mistake to assume that abolishing usury would end the business cycle.
I do believe that usury is immoral. I also believe that inflation is generally bad. And I think that we are in need of serious monetary reform. However, the fact that loans are made with interest does not cause the system to be unsustainable. The system may be unsustainable for other reasons, but not because of usury (except, perhaps, insofar as usury contributes to inequality that leads to instability). And business cycles are not primarily driven by usury. Yes, easy credit and cheap loans do cause booms that result in busts, but the busts would occur even if no interest was charged at all! In fact, they would be worse because there wouldn't be much to keep people from borrowing, and thus the lack of interest would encourage even more malinvestment.