Discharging a Debt vs. Paying a Debt

The "discharge a debt" vs. "paying a debt" distinction is an interesting one.

Under a gold standard, money has tangible value. If you lend me an ounce of gold for a year at 5% interest, and I pay you 1.05 ounces of gold a year later, that is a valid contract. You lent me an ounce of gold, risking the real loss of tangible goods. I expected to invest the profits for a gain of more than 5%.

In a true free market, there is no Compound Interest Paradox. The return of 5% represents the fair free market interest rate. The lender earns enough to cover his expenses, but there is no surplus unearned profit or economic rent. If people try to fraudulently expand the money supply via issuing too much paper, the people will demand physical gold instead of paper.

In the above example, if I don't expect to earn at least 5% on my investment, then I should not borrow. Capital will instead be available to someone else. In this manner, a true free market properly allocates capital and properly plans for the future. Everyone can follow their rational self-interest, and the result is the maximum efficiency for society as a whole.

State violence wrecks this equation. Suppose that, in 1932, I lent you $20 (an ounce of gold). In 1933, President Roosevelt defaulted on the gold standard. Suppose you try to pay me with $20 slave points. If I say "My contract specifies an ounce of gold. You are in default.", then a State court will not recognize my claim as valid. When President Roosevelt defaulted on the gold standard, he said that any contracts that demanded payment in gold were instead payable at the rate of 20 slave points per ounce.

A corrupt Congress and Supreme Court ruled this theft valid. As usual, this theft benefited financial industry insiders at the expense of everyone else. Freed from the restriction of gold-redeemable money, starting in 1933, the Federal Reserve inflated to bail out the banks, just like the Federal Reserve is inflating to bail out banks in the present. The result was a massive transfer of wealth from the productive sector of society to the parasite sector. This exacerbated and prolonged the Great Depression. In the present, the massive inflation by the Federal Reserve and Federal government will benefit the parasite sector of the economy at the expense of productive workers, who lose their salary and savings to inflation.

Inflation steals the savings of productive workers. Suppose I have $10k in the bank. Due to inflation, my savings are now worth only $5k. The State stole $5k of purchasing power that it used on corporate welfare. You see the work done by State employees. You don't see the new TV or new computer or new car that I would have bought with the $5k in purchasing power I lost. This is the usual "seen vs. unseen" fallacy.

When you gave me 20 slave points to pay a debt that specified an ounce of gold, you have "discharged your debt" instead of "paid your debt". Instead of providing me with tangible goods, you gave me a piece of paper that said "This debt is legally satisfied." You were in technical default, but a corrupt State ruled that your debt is no longer legally enforceable.

One problem with "discharging a debt" with a piece of paper instead of "paying your debt" with tangible goods is the usual "Who prints the paper?" problem. The Federal government and financial industry can always discharge their debts by printing new paper. As an individual, I don't have this magic money printing power, and will always be the slave of the bankers. With sound money, you cannot use a printing press to avoid paying your debts. If people have the right to convert your paper to gold, then your paper will start trading at a discount to gold when people start to suspect a default. Only State violence can force people to trade paper at parity to gold. Only State violence can force people to use paper as money instead of gold or silver.

Similarly, if you try to include a "gold clause" in a contract, a monopolistic State court will not recognize your debt as valid. I'm not sure if this has been tested since gold ownership was re-legalized in 1975. I know of nobody who asks for a "gold clause" in their contract, so the legal system must still not recognize such contracts as valid.

With sound money, you can "pay your debt" because the lender and borrower each are providing tangible goods. With continuously inflating paper money, you can discharge a debt but not actually pay it. State violence prevents people from making gold-denominated loans and using gold as money.