In the first part of this article we learned about the term "usury". In its simplest form usury is the loaning of money on which interest is charged. However, as with most things simple, we humans have figured out a way to make it astoundingly complex. So complex, I believe it now rates as the greatest swindle of all time.
We are all living in what I consider to be the decline of the Golden Age of Usury. With its decline may well come the end of modern civilization as we know it. And while many will perceive this as a bad thing, I say it is in fact good news!
With the Industrial Revolution in the latter half of the 18th century came a new wave of goods and services. Modern production methods replaced the skilled craft trades as the main source of everyday essentials such as furniture, kitchen goods, house wares, sundries, appliances and so on.
Items could now be produced in mass to address the needs of emerging mass markets. However, in order for the cycle to be complete, consumers needed to be able to afford all the latest gadgets, labor saving devices and other goods pouring into the market place like a plague of greed.
Before usury came to the rescue, the world economy operated in simple and natural way. Economics was based upon supply and demand. Demand dictated supply. In other words, the skilled trades turned out just enough pots or buckets to meet the needs of the local community.
With the Industrial Age came the ability to product thousands of buckets at a time. In one day a factory could produce more buckets than a skilled craftsperson could fashion in many months. The cost per bucket was such that each one could be produced and shipped to a local merchant a thousand miles away, who could then offer those same buckets at lower prices than similar buckets produced locally.
However, shipping the buckets took time. Often a month or more. If a merchant ordered buckets on the first day of the month, she might not receive her order for a month or more from the day it was shipped. Yet payment for the order was often expected at the time the order was placed.
Merchants soon began to demand different terms. They wanted to pay for their goods at the time they arrived, not a month or more before. Hence the idea of Net 30 terms came into being. Payment could be sent 30 days following the date the goods were shipped. These same terms are still used today, even though merchants usually receive their goods within a matter of days.
With the idea of Net 30 terms came a new and potentially risky system of buying and selling. Prior to this, one paid cash for an item at the time of purchase. If a bucket was needed, and you didn't have the money, you did without the bucket until the money was acquired.
This system of paying cash money for purchases was both simple and natural. Everyone bought only what they could afford with their cash. Sellers always received payment. However, with merchants enjoying Net 30 terms, soon customers began asking for similar terms. At first, purchases could be made during the week with payment not being due until the weeks end. This soon stretched into monthly accounts.
Customers who could not pay their bills on time, soon found themselves paying interest on their unpaid balance. This interest was in the form of a "late fee". The ability to charge "interest"was reserved for official financial institutions. But no matter what you call it, late fees were still interest, plain and simple.
The next phase of usury was its employment as a means of creating a mass market of qualified consumers. All the goods and services in the world would never amount to much if no one can afford to purchase them.
Happily, usury provided the perfect answer. You could now spend money today that you wouldn't even earn until this time next year! See that lovely dinning room set or that wonderful new stove? What? You don't have $500? Well if you have $46 you can take that stove home with you today! All you need do is pay $46 down and $46 a month for 11 months and that stove is yours!
Simple interest opened the door for the have nots. All of a sudden, they had ten times the purchasing power, thanks to usury. And if it had all stopped there, perhaps it wouldn't have been such a bad thing. But one terrible day usury took a hugh turn for the worse; the world would never again be the same.
Someone once asked Albert Einstein to describe the most powerful thing he had ever witnessed. Everyone thought he would say it had been the atomic bomb. In his wisdom, Einstein said, "compound interest".
Compound interest takes usury to levels never dreamed of by its ancient inventors. Compound interest is the evil master that enslaves millions of us today. It guarantees that the rich will get richer while the rest of us will for the most part never experience anything even approaching wealth.
Simple interest is computed annually on the principle. The example of the stove for $500 paid for over 12 months at $46 a month is simple interest at work. You get the stove and you end up paying a total $552, if the stove is financed at 10% simple interest.
With compound interest, your interest is computed each month on the unpaid balance and added to your loan. In this way, you now pay interest on the interest, which is why it is call compound interest.
If you put that stove on a credit card today at 19.8% compound interest and paid the minimum payment of $10 each month, it would take you over nine years to pay it off! The interest would be $584, so your stove would end up costing you $1,084! Your first payment of $10 would break down to $1.67 going toward the stove and $8.33 in interest!
We will continue this delightful look at the evils of usury next month in the final installment of this article. We will see just where usury has taken our vast American market and we will learn how to escape forever from the clutches of this evil and insidious curse!
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