Ted Trainer. (5.11.06)








Basic to our economy is the practice of charging interest on money that is lent. There are a number of reasons why this practice is wrong and cannot be part of a satisfactory economy.


Firstly this is a morally unacceptable practice. Several hundred years ago it was not permitted because it was seen as highly immoral. How is it that if you borrow a surfboard from a friend who doesn't need it you are only expected to give one back, but if you borrow $100,000 from a bank to build a house you will have to pay back this sum, plus another $100,000 or more in interest.


It is not right that some people can get an income, and in general a very high income, just because they are rich and have money to lend, when most people have to work hard to get money and many can’t even get a job. That is not an acceptable way for a society to organise things. It is clearly unfair that some can get wealth this way while others, most people, can’t.


Because of the cost of interest we pay a lot more for things than we otherwise would, possibly on average 40% when compounding is taken into account. (Kennedy, 1988.) In other words a significant amount of what you pay for your car or bread goes to pay the interest on the money its producer had to borrow for capital works. There is a cost of this kind on everything you buy. This transfers large amounts of wealth to the richest few who are the ones with money to lend.


Most of the rich few with capital to lend have not “earned” it. Most wealth is inherited. Even those who have made their money through hard work or initiative or risk should not then be able to get more money just because they have accumulated a lot of money. Money is stuff with which one can buy things that have been produced by work. One should only be able to get the money with which one can get such goods by working too, i.e., making a contribution to the production of things people can use. But rich people can get (lots of) goods without having to do any work to produce anything. This is obviously wrong.


Interest represents a huge continual flow of wealth from poor to rich, because the rich are the one’s who do the lending and the poor are the one’s who do most of the borrowing and paying back with interest. Rich people do borrow from each other, e.g., to invest in new factories, but they don’t borrow much from poor people and therefore don’t transfer much interest to them. But poor people have huge mortgage and credit card etc. debt, and the high interest charges on these go to the few who have much capital to lend.


It is important to recognise how very few people have most of the world’s wealth. (See Inequality.) The distribution of capital is even more narrow than for wealth. In the US in the 1980s a mere .5% of people owned half the capital (Brower, 1988), (…and the distribution is worse now as globalisation rapidly enriches the super rich.) So vast amounts of money are continually paid in interest to the very few who have most of the wealth in the first place.


The conventional view is that interest (and profit) are the rewards to those with capital for risking their capital investing to set up businesses and create jobs. Yes, people who invest capital do take a risk … but what is the risk they are taking? They are risking losing their capital and then having to work for an income like the rest of us!


What about the fact that retired people need an income from interest to pay for their aged care etc? ln this economy that’s the way retirement is organised, but there are other ways we could provide for older people, and these could be much more secure and fair ways. Society should guarantee a comfortable old age to everyone, with no need to depend on an income from risky investments, and no chance that their savings or superannuation could be lost through mismanagement or fraud. In the US now pension systems are being seriously undermined, eliminated or lost as corporations and the government take less responsibility for retirement. Savings are being moved out of secure arrangements into investments that individuals have to take responsibility for, and which finance sharks can plunder.


In this society being able to get interest on money is taken for granted and is never thought of as problematic. This is another example of the way the dominant ideas tend to be those that suit the rich. Interest is thought of as legitimate, even by those who are most disadvantaged by the practice.


The moral significance of debt and interest is glaringly evident when we look at the Third World. Many countries have debts they can never pay off, for reasons that are obviously not the fault of their people. They are trapped in un-repayable debt. Yet over time the interest they pay on their debt adds to much more than the debt. In some recent years annual total Third World debt repayments have been 9 times as much as total aid to the Third World. Often the rate at which they can pay the debt off is less than the rate at which the debt increases when the interest payments are added. This is called “debt slavery”. The rich countries have used this situation to keep poor countries to the policies that suit the rich, i.e., they give more aid only if poor countries agree to pursue policies which keep their economies open to the operations of our transnational corporations on the terms that suit us. (See IMF, World Bank, and World Trade Organisation, and especially the way Structural Adjustment Packages are used to force acceptance of policies that suit the rich countries.)


If all Third World countries are impossibly indebted, and rich countries also have big debts, and the richest country, the US, has so much debt that we should all worry, then to what country is all the debt owed? The point is that all this debt is not owed to any country, it is owed to the few people here and there in the world who have great amounts of capital to lend, especially those who own and run banks.


The important point here is that we could have a different system that did not involve interest and therefore inwhich no one received an income just because they had money. Banks might take our savings for safety but pay no interest. Loans would have to be repaid plus only a small fee to cover administration costs. (The boards of our town banks would decide who is to get the loans in terms of social benefit, not profit to banks.)


Finally there is an over-riding reason why we must not have an economy in which interest can be gained. This is the fact that any economy in which interest is paid must be a growth economy. If money is lent but more must be paid back than was lent, this is not possible unless the borrower generates, produces, wealth that is greater than the amount lent. A sustainable society cannot have a growth economy.


Anyway, how can it be that there is such an increasing debt problem, when we are supposed to be getting richer all the time. The explanation is to do with one of the most serious faults in our economy, the way money is created. (Below.)




The interest system is the cause of the enormous problem of debt that burdens and distorts this society heavily, and could actually destroy it overnight through collapse of the financial system.


Firstly there is the vast amount of worry and unnecessary work and devastation to do with personal and small business debt. This has a huge toll in terms of depression, wasted resources, worry, ill health, family breakdown and suicide.


Then there is the realm of national debt. The total debt in rich countries, let alone poor countries, is now huge and has been rising very rapidly. In the world as a whole debt has been increasing at three times the rate at which the capacity to pay it off has been increasing; i.e., the economic growth rate. (Clairmont, 1996, p. 29.) America's total debt has grown on average at 5.8% p.a. for 200 years, much faster than total economic output. Total output multiplied 22 times in that period, but total debt multiplied by 187 times. In America between 1970 and 1990 only 40% of the money the US Federal government borrowed went to pay for anything useful; the rest went to pay off debt to private banks. Thus the average American family had to pay $4000 p.a. in taxes to those who had lent money to the government...when the government need not have borrowed from private banks and could have avoided all these interest repayments. (Hixon, 1992. See below.) Growing much faster than debt are the interest payments due. For example in the US in the early 1990s the interest that had to be repaid on debt each year was almost equal to 20% of the GDP. (Tanzer, 1992.) This means that Americans were working one day a week just to pay the interest on rich people who do not need to work at all!


The volume of US debt and its rate of increase is one of the most worrying aspects of the global situation. The US is by far the most indebted country and many fear that this will soon collapse the entire world financial system.


Why is there so much debt? The explanation is to do with the way money is created.

            The money creation and banking system.


One of the most objectionable yet least challenged aspects of the present economic system is that banks are allowed to create the new money that needs to be put into circulation all the time. As an economy grows the amount of money needed to enable the increased amount of purchasing must increase. (If there was only as much money today in people’s pockets as there was in say 1900 people would not have enough things like notes and coin to pay for all the items that are bought now.) In a sensible economy governments would print and introduce into circulation the amount of notes and coin etc. to enable transactions. Obviously the new money has to be created, printed, somehow. The absurd thing about our economy however is that the private banks are allowed to do this and then allowed to own the new money; to lend it to people and get it back with interest!


(Most money takes the form of cheques and cheque accounts. Only about 5% of the money used is in the form of notes and coins. Also not all banks create money, only the Trading banks. Some do only take in and lend savings.)


To anyone hearing this for the first time, the practice is incredible. It is as if we gave a firm the right to print all our bus tickets and then to sell the bus rides they stand for, pocketing all that income. Unbelievable as it may seem, the fact is that privately owned banks are allowed to create new money out of nothing, just by granting loans, and then lend it for interest. Few people understand that this happens but there are now many people around the world working to have this situation changed. (There have been times and places when government banks did issue the money, but this is not the norm tody.)


One of the most ridiculous aspects of this situation is that governments borrow huge amounts of money from the private banks and therefore have to pay them billions of dollars from our taxes as interest payments on these loans every year, when they could borrow all the money they need from the government's own banks with having to make any interest payment at all! In the 1990s Australian taxpayers were paying more than $18 billion p.a, about $1000 per person every year to the private banks in this way, i.e., as interest payments from the government to the private banks from which they have borrowed money.


If governments created all new money and “spent it into circulation” they could stimulate desirable development, for instance by building hospitals, or establishing factories where unemployment is high. The money creation system is a major cause of the ever-increasing debt problem. This problem cannot be solved. Why? Because when a new loan is made it creates that amount of money and adds it to the amount in circulation, but it does not create the additional money that will be needed to pay back the loan plus interest. The interest can only be paid if more loans are taken out, thus accelerating the growth of total debt.


Sometimes people say, "But it would be inflationary for the government just to print more money." This misses the point that someone has to create lots of money all the time and get it into circulation as the economy grows. At present the private banks do this, so why is it alright for private banks to do it but not alright for the government to do it?


Another highly unsatisfactory aspect of the banking system is that any dollar lent to a bank can in effect be lent many times at once, yielding interest from each lending. Let's say you deposit $100 with a bank. If the bank is legally required to keep 10% of deposits to cover any sudden increase in withdrawals, then it can immediately lend out $90 to someone else. Let's say that person spends it and the recipient puts the $90 in a bank. That bank can immediately lend out $81. This process can go on until the original deposit of $100 has actually led to the lending of about 10 times as much money by the banks as a whole. In effect the deposited money has been lent 10 times, and banks get interest on each lending. Two decades ago banks had to set aside about 10% of the deposits they had received, as a safety reserve. Now this is being reduced towards zero in most countries.


The present money and credit system makes money unnecessarily scarce. You can't get money to invest unless you are prepared to pay high interest rates, so many people who could set up a small business if they could borrow a small amount are not able to borrow that money. Similarly the services of many public institutions such as schools and hospitals are severely limited because

they can't get capital to build. But if all money creation was in the hands of the government it could put the additional money required each year into circulation by spending it to build more hospitals etc.


All this means that in our economy the money in existence, except for the small proportion of notes and coins, is debt. Any unit of money only comes into existence when a bank grants a loan. The recipient can spend the loan into circulation, but that money is a debt that must be paid back to the bank. If

everyone paid off their debts there would be no money in existence, except notes and coins.


This has the absurd implication that is totally and increasingly impossible for debt ever to be paid off! If someone borrows $100 at 10% interest then at the end of the year that person is expected to pay back $110. Now lets say that in one year Australians borrow $10 billion at an average 10% interest, meaning that at the end of the year they are expected to pay back $11 billion. Where will they get the extra $1 billion? If they got it from the money previously in existence, then over time the money in circulation would be slowly depleted as some of it is taken each year to pay the interest falling due from loans, as more has to be paid back than was borrowed. The point again is that the additional money to pay the interest was not created when the loan was created.


Where does it come from? It comes from new loans. So as time goes by Australians can only pay the interest due to banks by borrowing more from the banks. So at any one point in time it is impossible to pay off all debt, and over time debt must increase.


One of the most disturbing consequences of our money system is that it enables the banks to own a large amount of the property that exists. By the 1990s in Britain the banks owned 37% of all housing! That is the value of mortgages in relation to the value of housing. In other words the banks have come to own more than one-third of all the houses simply because people who want to buy a house have to borrow the money from a bank.


What happens in the long run? The answer seems to be that there is a crash, a major depression in which many debts can't be paid and are written off, while many firms and individuals go bankrupt, at great cost to large numbers of people.


            The US dollar in world trade;


The US gets an enormous amount of the world's wealth through this same process, at a higher level. The US is in effect the world’s banker. The US dollar is the unit of currency used for most trading, especially paying for oil. As trade increases there is a need for more dollars in circulation. The US meets the need by "printing" more dollars -- and then spending them to pay for imports! In this way the US gets a huge volume of the world's wealth, for nothing.


The myth that capital is crucial for development.


Conventional economics assumes that you can’t get things unless you first get money with which to buy them, so you must sell something to get that money. Similarly it is assumed that a poor country can’t import things unless it exports whatever it can to get money to pay for the imports, and to pay for things to put into development. Few of them can earn enough this way, so they must get capital by enticing in foreign investors, or getting loans or aid money.


These assumptions are overwhelmingly dominant. Hardly anyone in rich or poor countries questions them. But they are seriously mistaken. Of course they are precisely what the what the banks and owners of capital and rich countries want the Third World to think, because then everyone has to come to them to borrow capital to invest. But there is a totally different way to achieve basic development goals.


Appropriate development focuses on enabling local people to apply the productive capacity they have around them, the land, forests, fisheries, labour, skills and knowledge, directly to producing for themselves the basic things they need. If this is done even the poorest regions can provide themselves with most of the food, housing, clothing, education, basic health care, leisure activities etc. they need for a very satisfactory lifestyle. This will not solve all the problems; there will still be a need to purchase some imported items such as medicines, but then only a small amount of export effort would need to go into being able to pay for the crucial imports.


What appropriate development requires is not capital (or not much) but organisation of the existing productive capacity. Appropriate development is about organising people to begin applying the resources they have around them to meeting their needs directly and immediately. They have labour, skills, forests, soil etc. Appropriate development is not possible unless the myths and mistakes that conventional economic thinking reinforces are recognised and scrapped, myths such as “You must sell something in order to be able to get/buy things”, and especially “You can’t develop unless you get/borrow capital. You must become heavily dependent on the global economy. You must export so you can import.”


Think about the typical rich world neighbourhood, which urgently needs much development, and which has people watching TV for three to four hours of every day! Think about the development miracles they could be producing if that time was organised to go into building and running community gardens, workshops, services, drama clubs, etc. Now ask what is the role for capital in this? The answer is, almost none. Appropriate development just requires a different vision. With that things can be organised and built, and getting the small amount of capital required is no problem.


Of course appropriate development would be a catastrophe for the rich countries, foreign investors and conventional economists. It is directly against their interests if Third World people start believing that they can develop without having to sell things to rich countries and without having to borrow capital from them. Conventional economists never consider what this appropriate approach could achieve. In fact they instantly dismiss any notion of self-sufficiency or “subsistence” and see development only in terms of investing capital and plunging into the global economy. Again the Structural Adjustment Packages of the World Bank have been especially powerful in preventing poor countries from adopting anything like appropriate development.