Pure interest payments are payments from one human party to another human party. There is, simultaneously, a cash outflow from one person or organization of human persons and a cash inflow to another person or organization of human persons. All pure interest payments ultimately circulate functionally as initial, transitional, or final payments within the basic and surplus channels of circulation. There’s no big mystery here.
Contractual interest is what the obligor-lender charges the obligee-borrower for temporary use of the money which the obligor is able to lend. The contractual interest rate or coupon rate is determined in negotiation between the parties by considering a) the supply and demand for lendable funds, b) the estimated opportunity cost for the obligor, c) the probable prospects of repayment of principal by the successful obligee-borrower vs. the probability of default by that obligee-borrower, and d) the associated inflation risk, foreign currency risk, and political risk.
The pure interest piece of principal-plus-interest is a rental charge as payment for the privilege of temporary usage of money, just as pure rent is a payment for the temporary usage of shelter services.
Contractual interest is charged and accounted for in conjunction with one of five classifications of demand for money.
- Through (S”-s”O”): To finance an initial or transitional outlay for in-process (point-to-line) capital goods (including outlays for repair and maintenance of existing capital goods): i.e. to finance ordinary and pure surplus production of capital goods
- Through (S’-s’O’): To finance an initial or transitional outlay for in-process (point-to-point) consumer goods: i.e. to finance basic production of consumer goods
- Through (D”-s”I”): To finance an expenditure for capital goods: i.e. to finance surplus monetary demand for capital goods
- Through (D’-s’I’): To finance purchase of consumer goods: i.e. to support basic monetary demand for consumer goods
- Within the Redistributive Function itself: To finance gamblingof any sort, including an exchange of title to ownership of static wealth within the secondary market of previously issued stocks and bonds
Contractual interest may be paid directly to an individual lender to constitute entirely an initial operative payment, or it may be paid first to a banker-intermediary, who will then apportion it as a.) an initial payment as wages and salaries to its employees, and as dividends and retained earnings to its owners, b.) a transitional payment to the bank’s suppliers, or c.) a redistributive payment from the borrower Smith to the bank’s depositors and bond-holders Jones.
To review, an expansion of the economy requires additional credit (borrowed) money for expanded initial, transitional, and final payments in the operative circuits. This additional credit money bears an interest charge. The resulting interest payments circulate within the channels of circulation just as dollars of wage payments, rent payments, materials-supplies payments, etc. Contractual interest is a rental charge for the privilege of temporary use of money, just as pure rent is a payment for use of shelter services. Interest payments are payments from one human party to another human party. There is, simultaneously, a cash outflow from one person or organization of human persons and a cash inflow to another person or organization of human persons. All pure interest payments ultimately circulate functionally as initial, transitional, or final payments within the basic and surplus channels of circulation. There’s no big mystery here.