The “French Connection” of Austrian economics: Debunking usury by applying Bastiat’s concepts

By The Transparent Unicorn for Real Currencies and The Transparent Unicorn

A sometimes forgotten strand of Libertarianism flourished in 19th-century France, one that represents an important link between 18th-century English free-market economists such as Adam Smith and the classic Austrian school founded by Carl Menger. One of the most illustrious representatives of this French school of laissez-faire economics, and certainly the one most closely associated with Libertarian views, was the economist, politician, and polemicist Frédéric Bastiat (1801-1850).

Frédéric Bastiat (1801-1850), French political economist

Bastiat’s writings are worth reading for their clear-headed and prescient debunking of Socialism and Keynesianism avant la lettre. Moreover, Bastiat’s witty and concise style is more enjoyable than, say, Ludwig von Mises’ often stodgy prose.

Bastiat’s famous essay “Ce qu’on voit et ce qu’on ne voit pas” (What is seen and what is not seen) is rightly regarded as a masterpiece which anticipates many tenets of modern Austrian economics. By focusing on the unseen “third party”, Bastiat shows that State intervention and lawmaking only displace money or otherwise direct the transfer of wealth, but do not create new wealth.

Similarly, in Capital and Interest, Bastiat’s justification for interest evokes the time preference theory later put forward by Menger and Eugen von Böhm-Bawerk. In “Maudit Argent!” (What is Money?), Bastiat also makes a key distinction between what he defines as useful wealth, referring to things that directly contribute to our well-being (such as food, clothing, and housing), and money, the latter being only a symbolic representation of real wealth, and goes on to show how a lack of awareness of this distinction can lead to terrible economic blunders.

Of course, Bastiat, as a proponent of the Illuminati deception that is Libertarianism, mixes a small amount of subtle but poisonous disinformation with a good deal of truth. It should come as no surprise to learn that Bastiat was a high-ranking Freemason, like his contemporary and political nemesis, the noted socialist theorist Pierre-Joseph Proudhon. Indeed, the fact that Proudhon and Bastiat, who debated fiercely in the French National Assembly, probably took part in the same occult rituals only adds to the mounting evidence that the elites control both sides of the socialist/capitalist dialectic.

One of the most cherished lies of the Austrian School is its defense of usury. Indeed, interest is one of the main tools by which bankers have enslaved humanity, and over the last few centuries they have recruited the best economists to justify this practice condemned by all Abrahamic religions. In this article, I propose to debunk Bastiat’s justification of usury, with the additional twist that I will do so using Bastiat’s own methodology for the most part.

Capital and Interest: Bastiat’s justification of usury

Bastiat’s essay Capital and Interest is based on a series of examples through which he makes the case that the lender should be compensated by the borrower for the time during which the former could not make use of his capital. This argument, which is essentially the same one advanced by later Austrian economists, can hardly be disputed: indeed, there would be absolutely no economic reason for James to lend his tool to William for a year if he is not compensated in some way. Furthermore, this is a voluntary transaction, which William may evidently refuse if he does not think it is advantageous for him; thus, as Bastiat remarks, James’s compensation is “naturally limited” by William’s self-interest.

So far, so good. But Bastiat then points out that, whereas most people will agree that such a compensation is perfectly just in the case of the lending of tools or materials, many will object that in the case of money, which does not produce anything by itself, it is immoral. However, since money is merely a symbolic representation that functions as a transitory substitute for real values (as explained in What is Money?), Bastiat argues that it is pure sophistry to treat interest differently in the latter case.

There are, in fact, at least two important distinctions to be made between physical capital (useful wealth such as tools and materials) and financial capital, which is monetary credit advanced to a borrower, but Bastiat ignores them, and therein lies the essence of his subtle but deadly deception about usury.

Let us review these distinctions, one at a time.

No justification for charging interest on financial capital

Bastiat’s examples always involve physical capital whose creation (or accumulation) require a significant amount of work. Whereas it is logical and just for the lender to be compensated in such cases, it is difficult to justify why a monetary loan, which in the modern banking system is created at the time it is loaned by punching a few keystrokes on a computer, should be compensated. The bank is essentially crediting the borrower based on his reputation and ability to pay back the loan. In fact, we can say that it is the community which is crediting the borrower, and the bank is merely an intermediary providing a service. The “time preference” justification is hardly valid in this case, since the bank is not really loaning its own capital and a fair compensation should merely cover the bankers’ administrative charges and salaries.

It may be argued that Bastiat’s experience under the gold standard was different and that the banks would have been, in fact, risking their own capital in a “hard money” system. However, this would be only partially true under a fractional-reserve banking system, which was already prevalent at the time. In any case, 20th-century Austrian economists, aware of the perceived inequities associated with modern banking, have addressed these issues by proposing a return to a gold standard. Essentially, the idea is to bring back the symbolic representation of money into the physical world: by basing the currency on a commodity such as gold which is scarce and difficult to extract, it is easier to justify charging interest on monetary loans.

But Bastiat himself tells us that money is only a symbol, not to be confused with useful wealth. If this is the case, why are Austrian economists trying to confuse the issue? Moreover, using gold (or a similar scarce commodity) leads to an artificial scarcity of credit: the amount of money loaned is restricted by the amount of gold available. Austrians would make the case that this is preferable to human control of the money supply. To be sure, a monopoly on the issue of a symbolic currency leads to all kinds of abuse, as can be seen with our modern fiat currencies. But it does not follow from that observation that it would be advantageous to tie the money supply and the economic activity of a community to the amount of gold available. The only entities that would benefit from this situation are those that own most of the gold.

What is not seen: the third party in the lender-borrower transaction

In order to justify interest as a just compensation to the borrower, Bastiat insists that the loan is a free voluntary transaction between two mutually consenting parties. But what about the third party, the one Bastiat claims is always forgotten by classical economists in What is seen and what is not seen? Austrian economists will object: there is no third party directly involved in this transaction, so they should not have a say. But is this really the case?

If, as in Bastiat’s examples using physical capital, William borrows a tool from James, and James accepts an additional wood plank as compensation, then indeed one can hardly claim that the community is affected by this transaction. In fact, society may potentially globally benefit from the increased efficiency of labor brought by the loan of a tool, a benefit which Bastiat is right to point out.

But when a) the only thing exchanged is a symbol of wealth, whose only value resides in its being accepted as a means of exchange within a community, and b) this symbolic representation of wealth can only be created by one economic actor (for instance, in a currency monopoly), or at most a few participants (such as private banks), and furthermore c) the time compensation, or interest, must also be paid using this monetary symbol, then yes, the rest of society is indirectly involved in such a transaction, because society at large has now involuntarily become the “third party” from which the monetary units necessary to pay the interest must be extracted.

If he were true to his own principles, Bastiat should therefore remind us that the community, the third party in this transaction, does not necessarily benefit from a transaction involving the lending of financial capital: in fact, the borrower’s incentive to capture some additional monetary units to pay the interest simply leads to a heightened competition for the monetary units circulating in the community. In the end, the lender gains, and the borrower may gain (if he calculated properly and used his loan shrewdly), but these gains are necessarily made at the expense of the rest of the community.

Even if the loan eventually leads to an increase in productivity (for instance, if the borrower uses the money to acquire new machinery), it will still bring, as a side effect, an increased competition for the monetary units in circulation, and an unwanted transfer of wealth from society at large (the third party) to the lender. Would a community consent to such a transaction, if it were allowed to express its opinion? Probably not, if it could see the effects of this transaction.

At the very least, a third party which is aware of the unseen effects of interest paid on a monetary loan would likely want to know what the borrower intends to do with the loan and whether it could also indirectly benefit from that loan (for instance, with a gain in productivity). Indeed, it is probably a growing societal awareness of the unseen effects of usury on symbolic wealth that led to the universal prohibition of usury observed in Abrahamic religions, as well as to some of the principles governing Islamic banking.


Bastiat’s dishonest justification for usury ignores two valuable concepts that he introduced himself, namely that money is only a symbolic representation of wealth, and that we should always keep in mind the “third party” and the unseen effects of an economic transaction. By taking into account these concepts, we have shown that, contrary to Bastiat’s claims, interest on a monetary loan has much broader implications for the community than interest on purely physical capital such as tools or materials, and that there is hardly any valid justification for compensating the lender of a symbolic currency created effortlessly.

Let us heed the words of Frederick Soddy, the Nobel prize-winning chemist who emphasized this distinction between “real” and “virtual” wealth:

“Debts are subject to the laws of mathematics rather than physics. Unlike [real] wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest … It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era.”