Monthly Archives: February 2013

There is no such thing as a Debt-Slave!

The term “debt-slave” is heard primarily in conspiracy circles, but every once and a while, you’ll hear the term thrown out (albeit rarely) in mainstream discussion. The term itself shows a total lack of understanding as to what debt is. Debt is, at its core, nothing more than an obligation. Let me give you an example.

Suppose a person goes to a bank and asks for a $5,000 loan to take a trip to Disneyland, and after the bank determines him to be a worthy borrower and factoring in all of the risk, decides to charge an interest rate of 25%. The borrower, if he accepted the loan, regardless of how he pays it back, is obligated to pay back the $5,000 plus the 25% interest. So, a little bit of arithmetic shows that the borrower is liable for $6,250.

Is the borrower somehow a slave to the debt? Not at all, but let’s anticipate the objection that a proponent of the “debt-slave” myth is sure to raise, and point out that even if the bank had pulled a fast one on the borrower and made it to where the interest on this loan accumulates over time, and it got to where the borrower could barely pay the interest on the loan, the borrower can still hardly be said to be a “debt-slave.”

First and foremost, it is important to remember that banks don’t loan out there own money, they loan out the money deposited by their customers in savings, interest-bearing checking accounts, etc. Banks are directly responsible for the loans that they make, as mistakes cost their depositors, and thus their business dearly. When the bank makes the above loan, the bank must replace the $5,000 of depositor money that it loaned.

Now, our “debt-slave” conspiracy theorist would say, “Ok sure, the bank should be paid back the principle. Of course. But what about the interest!? There’s no reason to charge such high interest rates, and look at the profits the bank makes off of the interest of these! They should be limited in the interest they can charge!” Before I move to another paragraph, I’d like to point out two things about the former statement in quotations. First, some of the “debt-slave” advocates go a step further and say that interest should be outlawed completely. All interest is “usury” and should be abolished. Secondly, there is a very fallacious assumption in the last sentence of the quotation; namely, that banks are in fact limited in what they can charge for interest.

Sure, a bank could charge me an interest rate of 100% when I go to take out a loan, but would I take out that loan knowing full well that the interest on that loan is 100%? Of course not.

But, to the second half of our example, regarding the interest. Banks are, first and foremost, a business, and like any business, they have to make a profit. Now, it would be a VERY big mistake to think that interest rates exists for the sole reason so bankers can profit off of them. I won’t get into the important function interest rates themselves play, since other writers far more intelligent than I have already done just that. Instead, I’ll merely point out to you that the function of loaning liquid capital is a very important function. They make it easier for entrepreneurs to start businesses, which provide jobs for the otherwise unemployed, and to make it easier for those like the borrower in our example to enjoy leisure.

Now, we have already covered the principle of the loan, which takes care of the depositors, but what about the bank itself? Where is its remuneration in all of this? The bank provided the borrower the loan after considering everything to be considered, and the most it should get back for its service, according to the “ban interest” people, is to have the principle repaid?

Let me change the picture a bit in order to show you how silly this is. Suppose you have a department store that sells wrenches. The wrenches on the shelf are, let’s say for simplicity’s sake, $5 per wrench. The department store doesn’t make its own wrenches to sell, instead it buys them in bulk from another company at what comes to $4 per wrench. Now, if the department store were forced by law to lower their asking price of wrenches to $4 per wrench, what do you think would happen to wrenches? The department store would cease to buy them and cease to sell them.

Why? Well, let me show you. When wrenches were at the price of $5, $4 out of every $5 purchase of wrenches went to the department store’s supplier, while the $1 was kept by the department store as remuneration for their work in making it available to you. In other words, when you bought a wrench for $5, you remunerated two groups of people at once; the department store’s supplier of wrenches, and the department store itself. But, if price controls are implement and as a result the price is forcefully lowered to $4 per wrench, then the only one being remunerated for their work is the supplier of wrenches. The department store is, from their perspective, essentially selling wrenches at a loss because assuming every wrench that they buy sells, the department store doesn’t make any money. To make matters worse, the money that it fails to make off of selling wrenches is money that can’t be paid out in wages or in hiring new workers, or modernizing equipment, or negotiating with other suppliers in order to bring more goods to sale, etc..

The exact same thing applies to banks and interest lending. In the case of the $5,000 covered earlier, assuming that just the principle is paid and not the interest, how is the bank supposed to pay the interest on its interest-bearing checking accounts and saving accounts? The only way it could possibly do so is if it started charging its depositors storage fees, but the fee itself would have to be outrageous in order for the bank to make enough money to pay all of its obligations plus a profit. So, the banks only other option is to loan at interest. The interest that is paid on each loan remunerates not only the bank, but also the depositors as well (some of them the bank has to pay interest to.)

By getting rid of interest lending, not only would you stop banks from receiving remuneration for their work, but you would also stop the remuneration of the depositors who invested their capital to be lent, and you would also stop loans being made to businesses, as well as entrepreneurs.

But, some of the more sophisticated advocates of the notion that we’re all “debt-slaves” would say, “Of course we don’t want to get rid of interest or money, we just want to get rid of debt.” That’s fine enough on its own, but they go further, “but how can we get rid of debt when compounding interest prevents people from getting out of debt? Some people have paid the principle of their loans back plus more, and still can’t get out of debt. How can you say that these people aren’t debt-slaves!?”

Easily. I can say that these people aren’t “debt-slaves” for the same reason that banks aren’t “debt-slaves” to the people that they’re obligated to pay interest to; namely, those with saving accounts, interest-bearing checking accounts, etc.. If it is true that those who’re in debt are in fact “debt-slaves” to the bank, then by the same logic, the bank is a “debt-slave” to the people who open up depositor accounts that compound interest. Of course, no one would ever say that the bank is a “debt-slave”, but if no one is willing to call the bank, which is contractually obligated to pay compounded interest to certain people a “debt-slave”, then it makes no sense to say that the average person who can’t pay off his debt is a “debt-slave.”

If we dissect the term, “debt slave,” then we find that the term merely means at its core, “Slave to obligation.” The question should then be, “Why does this person have this obligation?” The so-called “debt-slave” is obligated to pay the principle PLUS the interest precisely because he agreed to pay it. If he didn’t know what the terms or the implications of those terms were before he signed, then the borrower has no one to blame but himself.