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The Story of the 11th Round

Submitted by on September 8, 2010 – 4:41 pmNo Comment

The story of the 11th round illustrates how the introduction of interest in a monetary system forces artificial competition amongst its users beyond what would naturally occur.

Once upon a time, there was a small village where people knew nothing about money or interest. Each market day, people would bring their chickens, eggs, hams, and breads to the marketplace and enter into the time-honored ritual of negotiations and exchange for what they needed. At harvests, or whenever someone’s barn needed repairs after a storm, the villagers simply exercised another age-old tradition of helping one another, knowing that if they themselves had a problem one day, others would surely come to their aid in turn.

One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a knowing smile. When one farmer who wanted a big ham ran around to corral the six chickens needed in exchange, the stranger could not refrain from laughing.  “Poor people,” he said. “So primitive.” Overhearing this, the farmer’s wife challenged him: “Do you think you can do a better job handling chickens?” The stranger responded: “Chickens, no. But I have a much better way to eliminate all the hassles. Bring me one large cowhide and gather the families. I will then explain this better way.”

As requested, the families gathered, and the stranger took the cowhide, cut perfect leather rounds in it and put an elaborate stamp on each round.

He then gave ten rounds to each family, stating that each round represented the value of one chicken. “Now you can trade and bargain with the rounds instead of those unwieldy chickens,” He said. It seemed to make sense and everybody was quite impressed with the stranger.

“One more thing,” the stranger added. “In one year’s time, I will return and I want each of you to bring me back an extra round, an eleventh round. That eleventh round is a token of appreciation for the improvement I made possible in your lives.”

“But where will that round come from?” asked the wife.

“You’ll see,” replied the stranger, with a knowing look.

Assuming that the population and its annual production remained exactly the same during that year, what do you think happened? Remember, that eleventh round was never created; it was never cut from the cowhide.

As the stranger had suggested, it was far more convenient to exchange rounds instead of chickens on market days. But this convenience had a hidden cost: the demanded eleventh round generated a systemic undertow of competition among all the participants. One out of every 11 families would have to lose the equivalent of all its rounds, even if everybody managed their affairs well, in order to provide the eleventh round to the stranger.

The following year, when a storm threatened some of the farmers, there was an atypical reluctance to assist neighbors. Families were now wrestling one another over that eleventh round. The introduction of interest-bearing money actively discouraged the long-standing village tradition of spontaneous cooperation.

The Eleventh Round is a simplified illustration for non-economists. The impact of interest was isolated from other variables by making the assumption of a zero-growth society: no population increase and no production or increases in the money supply. In practice, of course, all three variables (population, output and money supplies) grow over time, further obscuring the impact of interest.

The point of the Eleventh Round is that, all other things being equal, the artificial competition to obtain the money necessary to pay the interest is structurally embedded into the current system.

So how does a loan, whose interest is never created, get repaid?    In a static or declining system, it requires someone else’s principal being used. In other words, not creating the money to pay interest is the device used to generate the scarcity necessary for a bank-debt monetary system to function. It forces people to compete with each other for money that was never created, and penalizes them with bankruptcy should they not succeed. When the bank checks creditworthiness, it is really verifying their customers’ ability to compete successfully in the market place– that is to say, to obtain the money that is required to reimburse the principal and interest. Ultimately, someone must always lose.

In the current national currency paradigm, one reason why so much attention is paid to central bank decisions is that increased interest rates necessitate more bankruptcies in the future. The economic pie must grow that much faster just to break even. The monetary system obliges us to incur debt and compete with others in order to perform exchanges and pay the resulting interest to the banks or lenders. No wonder “it is a tough world out there,” and that those who live within a competitive monetary system so readily accept Darwin’s supposed “survival of the fittest.”    Excerpt from Of Human Wealth (Forthcoming).