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Interest is an interesting phenomenon. What should be answered before diving into this subject is the following question:

Who's interest does interest serve?

Joe:

He dude can I borrow a dime?

Dude: (State Capitalist - Authority on Interest - Self-imposed Banker - Moneyed Man - Friend of Order:)

Sure thing Joe.

Joe:

Thanks I'll get it back to you as soon as possible.

Dude:

I'll expect my two dimes by Friday or you will be punished.

Joe:

Forget it dude. I'll find someone else.

Dude:

There is no one else. I control credit.

Joe:

Dude, are you serious. You do not control credit. You control debt.

Dude:

Debt is debt and credit is credit. I know, I'm an Austrian Economist. You don't know; you are a poor slob who can't save a dime.

Joe:

So Mr. know it all. How is it that you got your dime?

Dude:

Interest.

Joe:

I see.

Dude:

No, you do not see. Only I can see.

Joe:

OK Dude, let me delve into this interest thing a little further. By what principle is this interest thing driven?

Dude:

Pfffft, My time cannot be wasted in educating stupid people. Time is money.

Joe:

Your time is your money. What if, by chance, I can be taught to adopt your system? Will it not be in your best interest to gain membership just in case my system grows in membership to such a degree that we are large enough and powerful enough to compete against your membership?

Dude:

(Contemptuous Laughter) Al right simpleton, let us compete in this battle of ideas. Soon enough your error will be exposed.

Joe:

Where do we begin? Is my earlier question a fair one? I wish to find equity in this exchange.

Dude:

You have asked: "By which principle does my system operated": to which my reply is to categorically deny that my system is a system at all. Therefore; your question does not suffice to begin the competition equitably. You have begun with an advantage gained by deception.

Joe:

Then; can we proceed without the need to label the things that you and your friends do together? Leave that blank or, perhaps, you can label those things that you do with your friends together - by your own term? It does not matter what you call the things you do; my question is asking why do you do the things that you do?

Dude:

Again; you expose your stupidity. I do not need to label anything. I merely observe what is and proceed according to nature.

Joe:

Excuse my ignorance, please, my question simply wishes to identify the principle by which you choose which path to take during the process of proceeding. You have identified a term common to me and my friends. We both proceed from this moment to the next and something guides our thoughts into action. I ask a question seeking an answer. You decide to answer. What causes you to decide to answer?

Dude:

My decision to answer is driven by market forces and again; I am finding no inspiration to continue. I am wasting time. Your error is exposed. I have no more reason to waste any more time with you.

Joe:

Listen Dude, I am not a beggar. I am temporarily out of cash. In fact I have enough cash at home to return your dime, I can add a dime of interest, and I can add another dime to employ you in the process of answering my question.

Dude:

Apparently you take me for a fool. If you have no dime now, then, by what logic can I assume that you have 3 dimes at home?

Joe:

By what logic have you decided to continue talking to me?

Dude:

Interest.

Joe

I see. So we have identified the principle behind your actions.

Dude:

Indeed we have and I might add that we have made a verbal contract that legally binds you to pay me 3 dimes.

Joe:

And what happens if I do not take your dime?

Dude:

It is too late. I have already consented to spend my time and the clock is already ticking.

Joe:

What happens if I spend the rest of the day talking to you?

Dude:

I have already answered your question. The deal is complete here is my dime. Return it with interest tomorrow.

Joe:

I am busy tomorrow. I have work to accomplish. I must feed my children.

Dude:

That is unfortunate for you. The longer you delay the higher will be the interest. Good day. Here is your dime.

Joe:

I no longer want your dime. In fact it appears to be rather obvious that your system is not a system at all. You are running an extortion racket.

Dude:

Ignorance is no excuse for the Law. Take your dime.

Joe:

My dime. I thought it was your dime.

Dude:

It was my dime but now it is your dime. You must take possession of it in order for me to take it back; with interest.

Joe:

One of us is most certainly ignorant. I will not take your dime but my curiosity continues. How is it that you intend to make me take your dime?

Dude:

The reality is, you poor slob, that the law has already prescribed a solution to this situation; the precedent has already been set by law. After I drop your dime in the sand - my next step is to call the authorities. Once they are activated your fate is sealed. I will get my 3 dimes later. You had better pick the dime up now. If you do not pick the dime up now then I will have 4 dimes.

Joe:

I can see now why you have so much confidence in your system.

Dude:

Pick up the dime!

Joe:

That dime is not a dime at all. It is an obligation. That dime carries with it a prescription for my disaster. You have created that dime to coerce me into being your slave. I have no intention of picking up that dime.

Dude:

You deserve no pity. Your word is of no value whatsoever as documented in this exchange. We made an agreement and now your lies are exposed. This will cost you dearly.

Joe:

OK Dude, it is just a dime. I'll pick it up.

Dude:

You owe me 3 dimes by tomorrow. Good day.

Joe:

I have 5 more dimes for you.

Dude:

Ridiculous!  After all that nonsense do you expect me to believe that you can afford to pay me 5 more dimes?

Joe:

I know a thief who is rather successful. He is very interested in new methods of taking peoples money. My friend will certainly pay for the information that you have already given me. I simply wish to gain a little more information concerning the system.

Dude:

What makes you think that I am interested in dealing with criminals?

Joe:

Interest.

Dude:

I see.

The dialog above may illustrate the nature and principles behind interest. Below is a rewrite of a post that was allowed to appear on the Austrian Economics Forum. It further supports the true nature and principles behind interest:

What is the first step down the slippery slope?

Have you ever wondered why the card that represents debt is called a credit card and the card that represents credit is called a debit card?

In the old days a bank took your gold and gave you credit for that deposit in paper denominations of some kind. Anyone, including the original depositor, could return those pieces of paper, those credits, to the bank and get the gold.

A bank full of gold could store the gold and keep it secure for the depositor. The idea was to have a safe place to keep gold. It caught on. Storing gold in banks became a fashionable business; perhaps too fashionable.

People with gold credits could use those pieces of paper as payment for things and never actually have to go to the bank to get the gold. The bank could even store its own gold in its own safe.

Who paid the costs of storing the gold? How much did the bank charge to store the gold? What were the costs of storing the gold?

If the bank charged a small amount form each customer, in gold, to store the gold, then, the bank could cover the costs of storing gold. A banker could then become a useful member of society. The banker would have to charge enough to cover the cost of living for the banker too.

If the bank became very popular then the bank could gain more money with each new customer. The banker could then start accumulating a lot of gold. The banker could become very rich if the number of customers continue to grow. The banker could afford to hire a new bank teller or two to handle the increase in customers. The bank could afford to build a larger safe as more customers required more storage space. The larger volume of customers, the larger then must be the volume in the safe, the greater the number of small fees charged to each new customer and then collected for storage by the bank; the larger therefore will be the total gold owned by the banker.

If the bank continues to charge the same amount for storage to each new customer, then, as the number of customers increase, the bank could make an ever larger profit; a bigger pile of gold. Competing banks may undercut the storage fee and take away market share. Bankers may then learn to cooperate, instead of competing in a price war, and then the cooperating banks may learn to maintain a mutually high profit for storage. A banking agreement can eliminate competition and bankers can then fix the cost of banking despite the increase in the total customer base. Each new customer would have to pay the same amount to store their gold as the advantage of larger economies of scale would not be competitively distributed. Banks can learn to share the profits equitably. The banks create a Banking Union like a Labor Union only without the Labor part.

What does the Bank do with all that profit?

Once the credit paper is issued to the customers then the customers can manage to avoid the bank. The customers can deal with each other and trade with each other without having to go to the bank to get the gold and use the gold for each transaction. The customers can avoid any transaction costs charged by the bank except when a customer moves and wishes to withdraw their own gold. A customer having withdrew their own gold from the bank can then bring their own gold with them when they move. The customer can avoid paying the bank to move the customers gold. The customer can take the risk of transporting their own gold themselves. The customer can also pay the bank to move the customers gold The bank can charge the customer for the risk and transportation costs. Transportation costs grow larger as a function of distance and risk Transporting customers gold through Indian country or through Jessie James country is risky especially when the wagon is full of gold. Meanwhile, back at the ranch, the local customers simply pass their credit papers back and forth between each other and conduct equitable commerce. The customers using credit paper need not return to the bank after every transaction. The customers can practically avoid adding any extra costs above the storage fee charged by the bank. This assumes of course that the bank issues small denominations of gold notes. For example: A customer holding one piece of paper to represent the customers entire gold account could not use that one piece of paper to buy a bottle of whiskey. The Bank would have to issue small denomination notes that credit the holder of these small gold denomination notes with a small denomination of gold. The Bank could also charge the customer, for a fee, for the issue of a check book. The Bank could then charge a customer for each check written by each customer. The Bank could then tax each transaction. Isn't that a good idea? If one Bank charged a fee to issue a check book and another bank didn't - if the bank that didn't charge a fee for a check book issued small denomination gold notes for nothing more than a storage fee than which bank would be more competitive in an open market? Did Jesse James rob Bank Unions? Was Shay's rebellion fought over taxes before the signing of the Constitution? Was the Whiskey rebellion fought over taxes after the Constitution? Did George Washington really need to conscript an army the size of the same volunteer army used to defeat the British just for a tax revolt? 

As the customer base grows ever larger and as the Bank Union remains uncompetitive and as more and more transactions are taxed - the Bank owns more and more gold.

What does the Bank do with all that gold? What happens when the gold owned by the bank becomes so large that the bank needs to purchase a larger safe just to store the bankers own gold? Do they turn away customers? Do they move their own gold to another bank to make room for their own increasing gold supply?

Let me put my “free market” non-interventionist, non-political, non-coercive, banking hat on:

I have a bright idea? Let us (the Union Bankers) invest some of our own profits toward potential new customers who have no gold. Perhaps these non gold owning dudes need some gold to get started. If we (The Union Bankers) can talk people into taking our gold and owning it themselves then we may be able to convince these new gold owners to store their new gold in our safe. I have thus managed to make the customers pay for the new larger safe rather than having me, the bank, finance the new safe myself. I simply transfer ownership of a portion of my gold from me to someone who can manage to make things that earn new gold. I could, for example, invest in someone who owns a silver mine or someone who owns a farm capable of producing an exportable commodity. My new customers can then pay me to store their new gold as my new customers bring in more gold from foreign trade and as my customers bring in silver for me to store. I don’t even have to transfer my gold to the local silver miner or the local farmer despite the fact that I give my gold to the local silver miner and the local farmer. I can just send them their new gold credits.

I can now purchase my new safe with my new customer’s gold. I made for myself a larger customer base by giving away gold. In time my new customers would pay back, in storage fees, the entire gift of gold. Then again farmers and miners are stupid. I'd rather invest my gold in building schools that teach economics. OOps I took my "Free market" non-interventionist, non-political, non-coercive, banking hat off.

Hat back on - sort of:

I don’t have to send any of my gold to the safe maker who may or may not want to store his new gold in my bank. If the new safe costs 100 gold pieces and I charge 1 gold piece per month to store the gold, then, I need 100 customers and one month to own a new safe. No gold need enter or leave my bank. I can just ask the customers to send their storage fee payments, in gold, to the safe guy. I may be able to get the safe guy to put his new gold in my new safe when he delivers my new safe. I can ask for the first month’s storage fee from the safe maker in advance. One safe filled with 101 gold pieces and I don't have to lift a finger.

Isn’t it better to have the customers paying for the storage of gold rather than the bank paying for the storage of gold? Isn't gold wonderful?

We, the Union Bankers, can increase the fees on gold storage whenever we want. We can gain new profits at will. We can do this to our current customers instead of investing in new customers but then again we have too much gold already; we need a bigger safe, not more gold. The gold supply continues to grow in my bank as the customers continue to make things that purchase gold and as the customers continue to pay the fee I charge to store their gold. I end up with so much gold that gold becomes worthless to me. But I do have power. I have the power to create or destroy customers at will. Isn't banking nice?

Then again I could come up with an idea that eliminates the need to store gold altogether. The idea would have to sell itself. The idea would have to be popular. It would have to be taught in schools. It isn't easy keeping the hat on.