Ann, I’m having trouble understanding where you are coming from. Do you have a proposal for a new economic system?

Christians should not be against usury. The Bible does not call the charging of interest a sin at all.

However, I can agree with the statement “… creating money at no cost and lending at rates of interest intended to accumulate reserves of unearned income. Of reaping that which one did not sow.”. This will seem wrong to many if they knew how the system worked. Of course, there’s still the risk and capital requirements but it really does seem like “something for nothing” with the retail banks. For the central banks it is much more clearly so.

I can also agree that “the love of money is the root of all evil”. People are wrapped up in conspicuous consumption. A return to basic values would be welcome. The coming worldwide depression will give us all pause to think and reflect.

It would be good to see the monetary system reformed but I do not see how simply abolishing interest can do that. If I have £1000, why would I lend it to you at risk of complete loss, without charging a fee for that risk?

What seems to have been the fuel of the current crisis was the artificially low interest rates set by central banks around the world. This kind of price fixing isn’t capitalism. This was the fuel for speculative mania in property and share markets. If the rate of interest was even lower (zero as you suggest), wouldn’t that have made the mania even more pronounced?

I hope for a return to some kind of sound monetary system where my hard earned money can be stored safely without the evils of inflation. High inflation is what encourages people to take their money from deposits/bonds and speculate on property/shares in order to keep ahead of inflation.

We needed higher interest rates, not lower ones.

Cheap money is evil.
Inflation is evil.
Interest is not evil.

Comment By Steven Shaw on October 13th, 2008 at 3:11 am

Yes indeed. The use of interest rates entrench inequality by definition, because the poor borrow money and have to repay it with interest while the rich earn interest on their money surplus. So the debt-based money system is - by mathematical logic - amoral and unethical; like cancer it grows exponentially, but in the real world the cancer kills the organism and the growth stops: not so with money.

Finally, our money system - I save £1,000 at 5% for a year and “earn” £50 - is predicated on the assumption of continuous economic growth. The alternative is inflation.

So our current money system is both inherently unstable and inflationary!

Comment By Martin Hyams on October 13th, 2008 at 4:00 pm

Steven,

I’m atheist (thank God) but I’ve heard that Jesus, bless him, turned over the tables of the money lenders. Check out the history of usury and you’ll find that every great civilisation ruled against the charging of interest.

I agree with Ann - but I’d go further. I’d reduce all interest rates to 1% and wouild eventually phase out debt completely. The money phased in would be zero-based - no interest rates, no debt and no credit. Instead, productive investment through share dividend systems.

Comment By Martin Hyams on October 13th, 2008 at 4:06 pm

The way in which Interest works (or doesn’t, in actuality) is at the root of the problem. It is poor systems engineering. Our current system is maintained by appalling mechanics.

Say a bank lends out £1000 at 10% (to keep our figures simple). The bank creates the £1000 out of thin air and thereby swells the money supply by £1000. But it now has a legally enforceable right to receive £1100. The problem is this:

The £100 in interest has NOT BEEN CREATED AT THE POINT OF THE LOAN.

Where is the £100 to be found by the borrower? It can only be found by other people taking out loans that swell the money supply with our borrower aiming to get some of that so he can find the £100 interest.

The flaw at the heart of the banking system is therefore this:

Banks are always owed an amount of money (capital + interest) THAT IS GREATER THAN THE ACTUAL AMOUNT OF MONEY THAT EXISTS.

The only way to deal with this, is for the system to continually issue ever more interest bearing loans so that the liquidity is in the market to enable current loans and interest to be paid.

Think of it as a feedback loop in an audio circuit. What we have just had is a loud BANG as the circuit couldn’t hold the feedback anymore.

EXAMPLE OF HOW HONEST INTEREST WOULD WORK

When a man is loaned £1000 at 10%, the bank creates both the £1000 and the £100 interest ie £1100 total. It pays itself £100, giving the £1000 to the borrower. The bank will in due course spend that £100 into the economy meaning that the interest amount exists for the borrower to obtain it. The system does not have to keep generating new loans to generate the £100. The system is in balance. The banks are now owed an amount equal to or less than the total amount of money in the system.

So no feedback. No pointless loans. No aberrations and complications in the system.

The type of money we use, interest bearing credit, is designed to transfer all wealth into ever fewer hands. Until we change it, we change nothing. No Govt measure will have the slightest effect unless this systemic design fault is rectified.

Comment By Paul on October 13th, 2008 at 8:25 pm

Paul, you idea of honest interest is interesting but it sounds even more inflationary than our current system.

Comment By Steven Shaw on October 14th, 2008 at 2:19 am

Paul, your idea of honest interest is interesting but it sounds even more inflationary than our current system.

Comment By Steven Shaw on October 14th, 2008 at 2:19 am

Martin,

At least we agree that inflation is evil :). I don’t think that interest is evil but I am happy to learn otherwise. I’m not a Christian either but I’ve read enough of the Bible to know that it’s not against usury.

What great civilisations ruled against usury? Perhaps your idea of “great” isn’t mine. Did those “great” civilisations also war against their neighbours? Burn witches? etc

I am interested in learning more about the idea of debt free money as you are espousing. In your system what stops me from borrowing a few million (or billion), live a wonderful life and never pay any back (perhaps you can get some back from my estate). Would you lend the same amount of money to a big stable company as to a new startup company?

It sounds like yourself and Paul have watched the “Money as Debt” video available online. Chris Martenson’s Crash Course is also interesting.

http://www.chrismartenson.com/crashcourse

I am a sceptic of all though. We must be sceptics in order to properly analyse a new proposal and not be led down the garden path. I particularly note that “Global Warming” is now known as “Climate Change” because the earth is cooling for the last decade or so. So, I’m a climate change sceptic too. Unless you know for sure, you can only sit on the fence. Of course, I can support prudent measure just in case.

For me, commodity money makes some sense and has a natural limit on monetary expansion (i.e. inflation). I haven’t thought much about how debt and interest works in a commodity money system but I think it is ok (e.g. gold/money deposited for a long term can be lent at interest to companies and individuals).

I’ve been thinking lately that debt is more natural than you may think. For instance, if I ask a favour of you, I will “owe you one”. If I was to write this obligation on a piece of paper (an IOU) then I have effectively printed my own money. Let’s say you looked after my kids while I went out for dinner. Let’s imagine I owed you the same and wrote it out as an IOU. It’s not money in the fungible sense. However, it is money that is not subject to taxation and is not inflationary (which is just a hidden tax anyway). In this case, it does have a limited lifetime (same as my lifetime or ability to look after kids which may be sooner).

I found online people who have expanded this idea of an IOU system. The one I found is called LETS. I didn’t like it because it makes all hours equal (i.e. babysitting is worth the same as legal work). Even though I don’t agree with the system in it’s current form, I will be reading more about it as it’s worthwhile to study it.

It’s an IOU system that makes me wonder most about the need for commodity money.

If we have a free market in money then people would be free to design their own money systems. In time the central banks may be able to be closed down (if everyone moves to new money system). My only concern would be the chaos…

Comment By Steven Shaw on October 14th, 2008 at 3:02 am

Steven -

It is not more inflationary. It is exactly the same as the current system except there is no abnormal growth bias placed into the economy.

When, using the example I cited above, the £1100 is fully repaid, it disappears out of the system. The money supply is not permanently swollen, it is swollen only until the loan plus CREATED interest is repaid.

Because the interest part exists in the system, the requirement for the system to keep issuing new loans is diminished massively.

Inflation would be less under this arrangement because there would no longer be a requirement to keep glutting the market with new loan money.

Comment By Paul on October 14th, 2008 at 1:17 pm

The Bible Condemns Usury Banking:

Deuteronomy 23:19 Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.

Leviticus 25:36-37 Take thou no usury of him, or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.

When the Babylonian civilization collapsed, three percent of the people owned all the wealth. When old Persia went down to destruction two percent of the people owned all the wealth. When ancient Greece went down to ruin one-half of one percent of the people owned all the wealth. When the Roman empire fell by the wayside, two thousand people owned the wealth of the civilized world…It is said at this time less than two percent (2%) of the people control ninety percent of the wealth of America. — Lincoln Money Martyred

Comment By Paul on October 14th, 2008 at 2:49 pm

[...] Economic Outlook won’t be topping Harry Potter any time soon, especially when she argues for outlawing usury! [...]

Comment By The Coming First World Debt Crisis « A School Without Walls on October 22nd, 2008 at 10:32 am

Hi Paul, the reason I thought it sounded inflationary is that it creates more money than our current system. It’s this monetary inflation that generates the price inflation that we experience at the shops (at least that’s the Austrian explanation).

On the Bible and usury. Yes there are some verses that support the anti-usury point of view. These all refer to “brothers”. It does not condemn “usury banking” as you put it. A point for the charging of interest is the parable of the talents.

From Wikipedia on Usury:

“Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?” -Luke 19:23

“Finally the master said to him “Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’” -Luke 19:11-19:27

Exodus 22:25 talks about not lending at interest to the poor: “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.”

Deut 23:20 mentions explicitly that you can charge interest to strangers: “Unto a stranger thou mayest lend upon usury…”.

Comment By Steven Shaw on October 23rd, 2008 at 1:49 pm