In a previous article, I have mentioned the system of rent and interest, our current economic system in other words. The present writing is a somewhat closer look at this system, especially at the reason for and the consequences of interest on debt.
WHAT IS WRONG WITH OUR ECONOMY?
Let's assume as one of the basic characteristics of a just economic order, that the income of the individual should be dependent on his or her production, on the person's effectiveness. This will lead to differences in income but it will not result in an unjustified or disproportional accumulation of capital and thereby power.
The principle of exchange is one of the fundamental laws of human society. We can approximate this principle by saying that income and outgo, or in other words production and reward, should be in balance. No one should get an income for which he does not have to work (excepting of course assistance to the needy) and on the other hand, no part of our well-earned income should be withheld from us.
However, we all know that the present (capitalistic) system leads to an exactly opposite effect: a few get richer and richer through the work of a large but powerless majority.
THE MECHANISM OF INTEREST
The mechanism that brings about this effect is simple and ingenious. It is the mechanism of interest, which, through the yearly addition of interest to the capital and the calculation of interest upon interest, leads to an exponential growth of accumulated capital, without requiring direct production. This distorts competition and violates the principle of exchange.
In order to get an idea of the complete absurdity of this mechanism, let's imagine that someone invested one cent at the time of Christ's birth, for a moderate yearly interest of 4 %. In our time, all the riches of the earth would not be sufficient to pay back this penny with the accumulated interest and the interest upon interest. In fact, even if we had a clump of gold the size of our planet, it would be far too little to pay off the debt owed to the astute and long-lived investor.
Even if though the creditor does not need to directly produce, in order to receive interest, the profit represented by the interest has to be produced by someone. In fact, the work necessary to pay interest on a global scale is done by that part of the population (probably greater than 95 %) that is earning it's income without being capitalists, that is, without living majorly from investment and the resulting interest.
This mechanism is not very obvious, because interest is hidden as a percentage in all prices we normally pay. This is the more dangerous as we do not see the interest and so cannot fight against it.
The percentage of interest hidden in prices is somewhere between 30 and 70 % and is caused by the fact that the producer, the builder, the businessman have to "serve" the capital needed to produce the goods, to build the houses or to deliver their services. In other words, their investments cost them interest. The percentage of interest is especially high in house or office rents, as mortgages require long-term financing and consequently more interest. Often more than 70 % of the rent figure is not caused by building costs but by interest!
Salaries are of course subject to the same treatment and so the working person pays twice to the capitalist: once because his salary is lower than it should be and a second time when he pays his rent or buys the things he needs for his survival: food, clothing, household appliances, water, energy, transport, even our free time is taxed mercilessly by that same mechanism.
This becomes even more obvious if seen in the context of the finances of a country, because some 30 to 40 %, and that is a respectable amount of billions of dollars, goes not to education, building infrastructure, keeping up the state bureaucracy or even defense, no - it goes to pay interest! The single largest item of expense in many a national budget is what is called "debt service". That money goes to those persons and societies that have lent money to the country against treasury bonds or other instruments of debt issued by the government.
It should be interesting to follow the current budget discussions and see how many billions of dollars the federal government spends for the payment of interest on its debt, an expenditure that is of course our own as the country's income is based on the taxes paid by the individual citizen.
Far worse off are the countries of the third world, whose interest payments have become outright nightmares. Those countries all use a large part of their export earnings to pay the usurious interest rates demanded from them, without having a realistic possibility of ever paying back their debts. As a whole, the industrialized countries or rather their banks and the capital interests behind these are sucking more out of the third world every year in terms of money and raw materials than gets given to these countries - even considering third world loans and the pennies that are called "development aid".
THE CAPITALIST SYSTEM
The stock exchange was originally established with the purpose of providing capital for productive societies, through the issue of stocks or bonds which, with a promise of interest, would attract investors. Today this function has become largely incidental and the game has degraded into one of speculation. There is speculation with "futures", that is, with future prices of goods. Currency speculation is making up a large part of the international buying and selling. "Junk bonds" are used to finance hostile takeovers of companies, which are then more often than not ruined by "asset stripping", i.e. selling off the most promising parts, to regain finances for the repayment of the bonds.
Black Fridays and black Mondays are costing the small investors immense sums of saved-up capital and enrich those who "predicted" or rather precipitated the crash. Dog eat dog, a rather rough game.
The situation with the banks is not much better. They are "respectable" partners in the same games of speculation and many of them, to use a somewhat direct expression, are "drug addicted". A large part of their cash flow is based on the proceeds of illegal drug dealing and other such activities. An effective control has not been possible so far and it even seems that the laws against drug abuse and drug dealing, far from stopping the drug business, are the very guaranty for its success. In fact, the prohibition of drugs, just as half a century ago the prohibition of alcohol, is establishing a very lucrative monopoly for those ruthless enough to get into the business, and the yearly income from illegal drug sales internationally has hit hundreds of billions of dollars.
In addition to recycling the proceeds of drug sales, the banks are the collection agencies for interest, without which no money is to be had, be the need ever so urgent, the purpose ever so noble. The countries of the third world are largely under the management of the banks. They do not get credits and cannot even negotiate the terms of repayment of their debts, without first declaring, by means of "letter of intent", that they are willing to apply the recipes given them for their economies by the world bank and international monetary fund, which more often than not include a lowering of the often already pathetic standard of living of their population, the sale of their industrial capacity and raw materials to international speculators and a forced agenda of population control, which means sterilization of the women of childbearing age.
Even communism has never had a real alternative to the capitalistic system of interest. The countries of eastern Europe and what was formerly the Soviet Union, which are orienting themselves now towards the "free market" economy, are just as much in debt, with the same international moneylenders, as the countries of the third world and some of the industrialized nations of the west. Marx and Engels saw the exploitation of the "masses" as rooted in the ownership of the means of production. They did not see, however, that the owner of the means of production is just as far from being a capitalist as the worker himself. Both in fact have to bring sacrifice to the same god - interest.
From the time man has started to use money as a means of exchange, he was always in a dilemma: how to reconcile the double function of money - means of exchange and means of saving.
As a means of exchange, money must circulate. It must be available to buy and sell goods and services, because barter - the direct exchange of goods against goods or services against goods is too cumbersome and is impossible to realize once the group whose members want to interchange becomes too large.
However money, at first mostly a "valuable" or at least a rare substance, has to be available in an amount exactly corresponding to the goods and services that are available to be exchanged. If too much money is in circulation, the result is inflation, prices rise. In the opposite case prices fall, commerce is hindered, production crashes and the economy fails. The direct result is recession and crisis. The constant cyclic ups and downs of economic expansion and economic crisis are closely connected to the amount of money in circulation with relation to the goods and services produced.
Due to the double function of money however, and in part due to the relative scarcity or abundance of gold or other substances used to mint money, it was almost impossible to keep the amount of money in relative balance with the amount of goods. The saving of money had the effect of lowering the amount of money in circulation and often showed devastating effects on the economy.
In order to entice at least a part of the savings back into circulation, the practice of paying interest was a logical step. The person who had saved money was given a reward for letting his savings once again circulate as a means of payment, and that reward was called interest.
The excesses and dangers connected with this practice became obvious quite early on, and various attempts were made to keep the excesses under control. Usury was declared a crime and the Christian Church as well as the religion of Islam forbade their members to loan money against interest. What was not done however, was to separate the two opposing and incompatible functions of money.
The role of money lenders was thus given to the Jews and in fact even to this day Jews continue to gravitate in a certain sense to the banking and money business. This in fact is not an inborn racial or religious preference, but came about through an agreed upon historical separation of roles. It is no wonder therefore, that the first large european banking houses were in the hands of jewisch families.
The fact that a Hitler could come along and use this to justify his persecution of Jews which in Nazi Germany led to untold suffering and catastrophe, only goes to show our absolute lack of comprehension of these matters.
Even today, the central banks use interest in the form of the discount rate as a means to steer the economy. Instead of directly influencing the amount of money in circulation, the economy is "regulated" with the mechanism of interest, with more than doubtful results.
Besides leading to an unjust distribution of capital through the automatic accumulation of debts and the automatic increase of capitals, the mechanism of interest has another shortcoming: It cannot function below a certain percentage. When interest is less that 2 - 3 %, it loses its effectiveness in enticing money into circulation. People prefer to keep their money if they do not find a rewarding opportunity for investment.
What would be the solution to this riddle that has plagued us for centuries? It is not as complicated as most economists would have us believe. A man called Silvio Gesell has pointed out these pitfalls and worked out a solution already in the early part of this century.
Why was his voice not given consideration? It seems that may have something to do with the power of those who live mainly from interest - those we should rightfully call capitalists.
The essential points of a program of change would have to be the following:
- Interest can no longer be used as a regulating mechanism for the economy.
- The functions of means of savings and means of exchange must be well separated from each other.
- The circulating amount of money must be linked to the amount of goods and services offered, in order to achieve an absolute stability of prices - preventing both inflation and recession.
- That part of the money that should function as a means of exchange must be forced to circulate in a way that does not rely on interest. (Proposals have been made for a slight yearly devaluation of circulating cash which would prevent cash from being hoarded, thereby forcing circulation.)
In this way, interest rates would diminish to eventually reach zero. The loaning out of money by the banks would be paid for by a small percentage to compensate for the risk, that would however not be tied to the time of the loan and would not be causing a yearly increase of the capital.
The writings of Silvio Gesell (mostly in German but some books and brochures are available in English) are sold by INWO, the International Association for a Natural Economic Order.
Gesell has, besides a reform of the monetary order, proposed a reform of the ordering of land ownership, which would have to be undertaken in concert with a monetary reform to prevent property speculation from taking the upper hand but which, for reasons of space, cannot be discussed in the present article.
- INWO Switzerland Nussbaumweg 1 CH-8353 Elgg - Switzerland
(Website in German)
- INWO Austria Staudingergasse 11 A-1200 Vienna - Austria
- INWO Germany Jakobstrasse 54 D-7750 Konstanz - Germany
(Website in German)