What is wrong with interest, one might be tempted to say. Is not the bank giving us interest on our deposits and the state on treasury bonds? Why would that not be something positive?

Let's have a closer look at what we call interest. In its original intention, interest is a reward for the person who saved money and who is prepared to loan out that money, putting it back into circulation.


The primary function of money is the mediation of the exchange of goods and services. This exchange, seen in its entirety, is what we commonly call "the economy". Any progress from caveman up to present civilized society is based on specialization, on the distribution of different tasks within the community to different people. This specialization in turn is wholly dependent on the existence of a functioning means of exchange. Money being this medium, the optimum functioning of that exchange depends on a proper equilibrium between the amount of money in circulation and the amount of goods and services being offered.


If the amount of money is too small in relation to the amount of goods and services offered, we see at first that less goods are getting sold. A second symptom is a general decrease of prices, called deflation, and at last we enter a full blown recession with jobless by the millions, bankruptcy of factories, hunger and general misery. In the reverse case, when the amount of money is greater than the corresponding offer of goods and services, the economy gets "overheated", prices rise, our money buys less, year after year. We call this an inflation.

Of course this is known to central banks and they increase or decrease the amount of cash and credit available by setting interest rates, to prevent these two extremes. They do not always succeed in this task and one of the main difficulties is that the amount of cash in circulation is almost impossible to determine exactly, as long as money can be removed from circulation by private interests and can be put back into circulation by these same interests. Any fluctuations are aggravated just like water swapping over in a bowl you are trying to carry for any distance. People tend to spend less when times are bad, pulling money out of circulation when the economy needs it and they tend to increase their spending when things look up, putting money back into an economy that may already be getting overheated.

So the steering mechanism of the central banks is a very wobbly affair at best. The outcome is almost always a slight inflation, because generally economists tend to accept the smaller of two evils. Continued economic growth is bought at the price of an increased inflation rate. Nothing could be said against this in principle, if inflation would not eat up our saved up money with such rapidity. So savings tend to go into "secure" investments like real estate or high interest bearing certificates and bonds.


If there was no possibility to get interest and our currency was more or less stable, many of our citizens would be reluctant to put their savings back into circulation by investing their saved up cash or bringing it to the bank. However, interest as a carrot and inflation as a stick persuade us to seek "crisis proof" investments for our savings. In this sense, interest and inflation are necessary in order to bring savings back into circulation in the economy but they do have serious unwanted side effects. We all know more or less the effects of inflation. It is the effects of interest that are more hidden and that we will examine more closely here.


We know that interest has been practiced for thousands of years, probably from the time where money was made the general means of exchange. The necessity for interest arose from a need to counteract the dispersal of the means of exchange which was not available in unlimited amounts. Coins were made mostly of gold or silver and through personal savings and other uses for these precious metals, such as jewelry, the amount of money in circulation tended to be drastically reduced. At the time, interest was probably the only practicable means to limit these losses and get the means of exchange circulating again.

Pure interest or basic interest, as Silvio Gesell, a German/Argentinian businessman and economic innovator, has called it, has been stable for at least two thousand years. Basic interest is that part of the interest rate that remains after removing those parts that represent compensation for the risk of giving a loan and for the expected inflation rate. Already at the times of the roman empire and still today, basic interest is roughly between 4 and 6% a year.

Since interest represents a source of income for those already rich at the cost and expense of the poor, the practice has historically been condemned and prohibited by various world religions. These prohibitions however showed no lasting effect, because in reality, interest was the only way - as long as currency was based on precious metals - too keep the economy going in some way. The alternative was deep recession because of a lack of cash.


Ideally, our money should be a means of exchange with no value in and by itself, its only proper function being that of mediating the exchange of goods and services. The function of cash as a repository of value, of a means of savings, is not compatible with its more vital function of mediator of exchange.

How is it then, that money can demand a fee for its services? It seems to be just this conflict between the two functions of means of exchange and means of savings, which allows money to demand interest for its use.

Money is superior to goods and services in the sense that the owner of money has no urgency to spend. Cash will buy tomorrow just as well as today. Goods and services on the other hand are offered with a certain urgency. If goods are not sold, they generally lose value and the more time passes, the less their owner will be able to demand for them. Services that are not delivered today can never again be delivered. Any service delivered tomorrow is tomorrow's service, not today's. So in that sense, money turns out to be superior to its counterparts, goods and services, and thus it can demand that extra price, the current percentage of interest.


When we "let our money work for us" we get interest. Sounds good and logical, but in the end who pays? Someone always has to work if someone else is to have an income without working for it. Only the banks tell us that money will grow all by itself.

Interest is a hidden fee that is quite normally contained in all the prices we pay. It is also quite normally deducted from our monthly paycheck. Any merchant must add on to the price of his goods the interest he pays to the bank or others for credits. Any industrialist has to pay interest for the capital that he uses to build his factory and buy raw materials. All rents contain their own hidden percentage of interest. How much? Between approximately 30% for goods and 70% for house and office rents.

In this manner, more than nine tenths (better than 90%!) of the population are forced to pay much more interest hidden in their daily expenses than they will ever receive for depositing their savings in the bank or from buying the state's papers. About 5% of the population receive about as much interest as they give. They do not benefit, but they also do not lose.

A very small number of people, only around 3% of the population, are the ones who get all the profit. They gain what over 90% of the population had to spend more because of interest. It goes without saying that those 3% are not really those who need the money most desperately! One could not by any stretch of the imagination call such a system of distribution an equitable one.


Not only do house rents contain a horribly high percentage of interest, it is the very practice of interest that restricts building activity from ever reaching a level that would assure ample availability of housing. If for any reason more housing construction is going on than normal, and the interplay of supply and demand of houses for rent causes a serious decrease in the average rents, then housing construction becomes "unprofitable" and any construction activity ceases until demand catches up and rents will once again reach the level where the normal 70% interest can be demanded.

Subsidized construction of housing may bring some relief, but ultimately the payment of interest is only shifted - to the taxpayer. So in the end we always pay.


From the viewpoint of the economy of a country, interest is a luxury that in the long run will be very costly even to an economically strong nation. The public debt and the payments of interest on this debt, which in any national budget are an untouchable, off the top expense, are a serious problem for any concerned politician.

It is however the developing countries where interest shows the most devastating effects. You may have heard of the debt bomb, that is how explosive the situation has become. Every day thousands of persons die in the developing countries because the economies of those countries - already weak - cannot bear the additional burden that interest on their debts is causing. Their governments are hardly able to scrape together the funds to pay the bank interest, let alone promote internal economic growth or social programs to relieve some of the poverty. What we call aid or relief is hardly more than a drop in the ocean. The poor nations of Africa and South America are among those in deepest trouble. But also Eastern Europe and the nations that have formed after the disintegration of the Soviet Union will soon have these same problems.

Some South American debtor nations are bringing a case at the International Court of Justice in The Hague and they are seeking a ruling of the court on a question of principle: What is more important, fulfillment of the contract with the banks even if interest rates have multiplied in the last years, or the moral duty of a government toward its citizens, to guarantee at least their economic survival.

Let us hope that the International Court of Justice will thoroughly investigate the matter of interest. The survival of millions of our fellow (world) citizens is at stake.


Most of today's environmental damage is a direct consequence of conditions created by the practice of interest.

In order to receive financing, a project has to first and foremost be profitable. Environmental compatibility is not one of the decisive considerations, interest is. Even the dedication of thousands of ecological activists will not change these facts.

Atomic power plants are large, profitable investments. The burning of petroleum and its refinery products in motorcars and electric power plants is economically more advantageous than for instance the burning of universally available hydrogen.

Clean chemical production facilities are just about impossible because the costs start cutting into interest. It is preferable to dump the poison into the next river rather than to lose profitability.

Where, in the name of ecology, sweeping technological changes are made, they are still dictated by the overriding philosophy of profit and interest.

For instance, someone is making a mint on all the platinum that is stuffed into catalytic converters, while the technology itself is neither safe nor effective. The effectiveness of catalytic converters at high speeds on freeways and as well in short-range driving such as city traffic is less than optimum. Furthermore, the catalytic converter and the unleaded gasoline required to run the motors that have one, are emitting new pollutants into the environment. Lung cancer statistics have shown a time coincident surge in areas where catalytic converters have been put into massive use, such as big cities in Japan and in the western US. It is Dr. Hans Nieper, a famous German heart specialist, who has been warning us for years of these signs of danger, with publications especially in magazines such as raum&zeit.

The substitution of Chlorofluorocarbon refrigerants (CFCs) with similar, somewhat less damaging but much more expensive alternative refrigerant fluids will cost billions, not to the industry, but to the consumers. The increased profits go to the same industrial giants who have manufactured the old refrigerant fluids which now need to be replaced.

That is how things go in this world. Profit and interest are untouchable. Without them, nothing will happen.

And if somebody dares propose a hydrogen fuel cell, cold atomic fusion, a converter for zero-point energy or some other really clean method of energy production he will soon find out that the whole talk about the environment and clean energy is only valid in those cases that promise a high return of interest. In order to promise a high return of interest, the invention has to require huge capital investments. Also, it should of course not threaten existing investments such as power plants and distribution systems, refineries, drill rigs, motor assembly plants. That puts the inventor of an alternative and clean means of producing energy in a fine pickle.

In this way, interest actually hinders technical progress, which might very well help us handle some of the more pressing environmental problems of today. It also stops investment in other long range initiatives that are environmentally desirable but may not bring a short term return.


The question is more than justified: What to do about interest?

Why should we be able do achieve what has been tried for hundreds of years but never put into reality, the eradication of interest and all its distorting effects?

We see an encouraging start in the work of Silvio Gesell, about whom John Maynard Keynes once said: "I believe that the future will learn more from the spirit of Gesell than from that of Marx."

Gesell advised to drop the practice of backing currency with gold, which kept the amount of money dependent on the amount of gold being found. He was successful in this respect, although he never received recognition for his work.

He furthermore coined the expressions "free land" and "free money". These expressions characterize an economic system that would, free from the yoke of interest, make the fruits of the exchange of goods accessible to all.


Gesell's goals with regard to land included: absolute freedom of movement for all citizens of the earth, abolition of today's border controls and of all tariffs on the movement of goods, as well as a gradual acquisition of all land by the local community. Private ownership as such should not be touched. Only the land itself, as is the case already today for water and air, should be common property.

The land area acquired by the community should remain common property and should be leased to single persons or companies on long-term leases in public auctions. The community as owner of the land could of course put conditions on those leases to prevent over-exploitation or to increase fertility or generally the value of the land where indicated. It could also decide to not lease certain tracts of land that should be reserved for public use or as wildlife reserves. The duration of the leases should be long enough to give sufficient security also to the owners of buildings on such land.

The income from these leases should, it was proposed by Gesell, be distributed to the mothers of children depending on the number of their offspring, because the future of the country depends very much on the mothers and their children. This "mother's pay check" should, just as the public auctions for leasing parcels of land, be accessible to all persons of the area, regardless of their original nationality, regardless of their skin color and notwithstanding any trouble they might earlier have gotten into.


"Free money" should inherently contain a mechanism that would ensure its circulation. This would be a kind of money tax, a yearly devaluation of about 5% for cash in circulation. The purpose of this would be to bring cash back into circulation as fast as possible, forcing its owner to spend it buying goods or investing it or finding someone to loan it to. Otherwise, he would face the gradual devaluation of his stashed-away cash.

This would put money and goods on the same level. Both now would have a certain urgency to sell, the goods because they naturally go bad with time and the money because it naturally loses some of its value.

The central bank would now be able to control the total amount of cash in circulation and it could thus ensure stability of the currency combined with continued economic expansion. The only purpose of the central bank would be the administration of this new monetary system and the maintenance of price stability, increasing the amount of cash in circulation if the price index showed a tendency to fall and decreasing the amount of cash if prices were rising. The yearly devaluation or money-tax would go to increase state or federal tax funds.

Interest would become superfluous in such a system and by virtue of the easier availability of capital would gradually sink towards zero.


For sure the practical implementation of these ideas would not be without its problems. But on the other hand, what is at stake is our future. The environment will not be able to support the current distorted economic conditions in the long run.

This article should by no means be seen as a cure-all recipe. It is intended as a contribution towards the understanding of economic matters and if it has been successful in provoking interested thought or even discussion, its purpose has been more than achieved.

For those interested to study the matter further, I recommend the books of Silvio Gesell "The Natural Economic Order" (Peter Owen Ltd. London, 1958) and Dieter Suhr "The Capitalistic cost-benefit structure of money" (Springer Publishers, Berlin/New York, 1989).

Josef Hasslberger
Roma - Italy
September 1993