David R. Henderson  

Irving Fisher Explains Interest to Socialist

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In a speech delivered before the Yale Socialist Club a decade after his return to New Haven, [Irving Fisher] related this minor incident of his stay in Santa Barbara:

Discovering that the man who came to massage him was a Socialist and believed that "interest is the basis of capitalism and is robbery," my father determined to make the most of his pedagogical opportunity.

To the question, "How much do I owe you" the masseur replied, "Thirty dollars."

"Very well. I will give you a note payable a hundred years hence. I suppose you have no objections to taking this note without any interest. At the end of that time you, or perhaps your grandchildren, can redeem it."

"But I cannot afford to wait that long."

"I thought that you said that interest was robbery. If interest is robbery, you ought to be willing to wait indefinitely for the money. If you were willing to wait ten years, how much would you require?"

"Well, I would have to get more than thirty dollars."

With a gleam of triumph, Father thrust home. "That is interest."


This is from Irving Norton Fisher, My Father Irving Fisher (New York: Comet, 1956), p. 77.

The passage appeared under the heading "Explaining Interest" on the back cover of the December 1994, Volume 102, No. 6 issue of the Journal of Political Economy.


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CATEGORIES: Economic Education , Finance




COMMENTS (10 to date)
Jacob Egner writes:

Was the masseuse swayed by Fisher?

David R Henderson writes:

@Jacob Egner,
I don’t know.

Bedarz Iliaci writes:

I am not seeing why the masseur is obliged to accept any promissory note from the customer, with or without interest. Plenty of shops insist on cash payment and do not offer credit

This

If interest is robbery, you ought to be willing to wait indefinitely for the money
is irrelevant and in fact presupposes the point in dispute. In other words, it begs the question whether interest ought to be charged on promissory notes.
Mark writes:

@Bedarz Iliaci

What anyone 'ought' to do is entirely beside the point. The question is, why wouldn't a masseur, or anyone, accept a promissory note? Why is a promissory note for $10 worth less than $10 in cash?

The reason is because $10 now is worth more to most people than $10 in a week, a year, or at any point in the future, especially since $10 now can be easily turned into $10 in the future by simply not spending it. Additionally, there is uncertainty about whether the the customer will actually fulfill the obligation of the promissory note. There is, however, no uncertainty about whether $10 cash is $10.

And hence why lenders charge interest. 1) To compensate for the time over which the lender won't be able to spend the money he lent, and 2) to compensate for the risk that the borrower won't repay the money. No robbery invoked.

Jon Murphy writes:

Well, that's just a brilliant use of the Socratic method on Fisher's part.

David R Henderson writes:

@Bedarz Iliaci,
I am not seeing why the masseur is obliged to accept any promissory note from the customer, with or without interest.
I’m not either. Nor did Irving Fisher. Read it again. Fisher simply supposed the masseur had no objection. He did not say that the masseur was obligated.
@Mark,
What anyone 'ought' to do is entirely beside the point. The question is, why wouldn't a masseur, or anyone, accept a promissory note? Why is a promissory note for $10 worth less than $10 in cash?
Exactly.
@Jon Murphy,
Well, that's just a brilliant use of the Socratic method on Fisher's part.
I agree.

Bedarz Iliaci writes:

Why is a promissory note for $10 worth less than $10 in cash?

You assume that a promissory note for money is essentially the same as money. For simplicity, consider only the commodity money e.g. silver.
Clearly, a promise of a quantity of silver is not the same thing as a quantity of silver itself.

Hence, it is perfectly reasonable for a man to not accept being paid for his labor in promises, esp when he was previously contracted for his labor in money.

PS The third reason for charging interest could be risk flowing from potential debasement of the money by the govt.

David R Henderson writes:

@Bedarc Iliaci,
You assume that a promissory note for money is essentially the same as money.
You’re addressing Mark, but I’ll provide the answer. Your answer makes sense only if Mark had posed his question as a rhetorical answer. In context, it’s clear that he didn’t. He was asking the question to lead into his answer, which he gave in his next paragraph.
Hence, it is perfectly reasonable for a man to not accept being paid for his labor in promises, esp when he was previously contracted for his labor in money.
You’re absolutely right. You wouldn’t get disagreement from me or from Irving Fisher.
PS The third reason for charging interest could be risk flowing from potential debasement of the money by the govt.
Good point. You’ve provided yet another reason for interest, this time for a nominal, rather than real, interest rate.

MP writes:

A more clever masseur may have answered, "Come the revolution, I'll be happy to give you those terms. But for now, we're all trapped within the capitalist system."

David R Henderson writes:

@MP,
A more clever masseur may have answered, "Come the revolution, I'll be happy to give you those terms. But for now, we're all trapped within the capitalist system."
Possibly more clever, although I think mainly in the sense of being a smart ass. But notice that such a statement would admit Fisher’s point. In the current system, interest makes sense.
Moreover, it’s hard to see why in a communist or socialist system, interest rates would be zero. They would still have to discount the future in all their planning on capital expenditures.

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