Basic to our economy is the practice of charging interest on money that is lent. Firstly this is a morally challengeable practice. Several hundred years ago it was not permitted because it was seen as highly immoral. Interest is income for which a lender did not have to work. It enables a few rich people to receive large incomes without ever having to do any work, while most people have to work hard for relatively low incomes.

If you borrow a surfboard from a friend who doesn't need it you are only expected to give one back. However, if you borrow $100,000 from a bank to build a house you will have to pay back this sum, plus another $100,000 to $200,000 in interest. In the present economy interest plays an important role because it motivates those with capital to make it available to users. However we should be trying to move to an economy that operates on different principles and does not enable rich people to get richer just because they are rich in the first place..

Because of the cost of interest we pay a lot more for things than we otherwise would, probably on average 40%. Kennedy (1988) claims that sometimes 40% of what you pay, for instance to the Water Board in your water rates, goes to pay the interest on the money it had to borrow for its capital works. There is a cost of this kind is on everything you buy. This siphons large amounts of wealth to the richest few who are the ones with money to lend. Poor people have no savings so get no interest payments, and they have more debt so they pay out money in interest to richer people. Admittedly most people have some savings and receive some interest, but most savings are in the hands of a very small proportion of people. In the US a mere .5% of people own half the capital. (Brower, 1988.)

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, p29.) America's total debt has grown 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. (Hixson, 1992.)

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 debt...to rich people who do not need to work at all! In a sane economy this would be completely avoided, saving 20% of all the resource use and work performed.

Many ordinary people now depend on interest payments on their accumulated savings to generate modest incomes during their years of retirement. In a good society all older and disabled people would be looked after comfortably by society, so interest payments are not essential for this purpose.

Another very objectionable aspect of the present system is that governments borrow huge amounts of money from the private banks and therefore have to pay to those banks 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 at no interest at all! (Or if a low interest was charged it would go to the government.) Australian taxpayers pay 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.

A few decades ago the practice was for governments to borrow money from their own banks, enabling them to carry out major works at no interest cost, notably the construction of the Trans Australian Railway. However, the practice now, all around the world, is for governments to borrow from private banks. 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.)

Even more stunning is the fact that most of the money the banks lend to governments and corporations is simply created out of nothing by the banks. They just write numbers in a computer. This point is usually incredible for anyone not familiar with banking and the money supply system.

One of the most fascinating and least understood questions is, where does money come from? Each year in the early 1990s the amount of money in the Australian economy was increased by about $25 billion. As the economy grows more buying and selling takes place and more money is needed to enable this. so it must be put into circulation. Now where does the additional $25 billion comes from each year, and how?

Unfortunately most people have great difficulty accepting the fact that the additional money is simply created out of nothing when banks grant loans. One moment the money doesn't exist but as soon as the numbers go into the borrower's account the money does exist, and then can be spent by writing cheques. Private banks then collect interest on these loans. This is one of the most objectionable elements in our economic system.

It is important to recognise that 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.

The creation of new money to increase the money supply should be carried out by government banks and it should be "spent into circulation ", not lent into circulation at interest. That is , the government should use the process to pay for new public works, such as more hospitals.

The money creation and banking system is one of the most outrageous, irrational and unjust element in the present economy. It enables a few private banks to create large volumes of money, lend them to corporations, individuals and governments, and get it back plus large amounts of interest!

Note that creating new money from nothing is not the problem; this has to be done because more money is needed all the time to enable the increased volume of buying and selling people that want to do. The absurd thing about the way the supply is increased in our economy is that we allow private banks to create and lend it and then get it back from borrowers plus interest.

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, and at present the private banks do this, so why is it OK for private banks to do it but not OK for the government to do it?

Another objectionable 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 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 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. In Australia we could be spending $18 billion more every year on these purposes if the governments took back the job of creating new money and therefore ceased paying this sum in interest to the private banks which presently create the money. Note that this sum is presently going to rich shareholders to be spent on luxuries, when it could be going to many low income people via reduced taxation, to be spent on necessities.

In our system the money in existence, except for 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.

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. In Britain the banks now own 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.

Another absurd implication of the present system is that it makes it 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, as more has to be paid back than was borrowed. The point 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.

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.

Thus many people fear that our money creation, interest and debt system is one of the things most likely to bring about catastrophic breakdown in our society in the near future. Many people believe it alone will and must soon lead to collapse of the economy. At the very least it is a major worry along with other huge problems that are increasing all the time, such as the environment, petroleum supply and the Third World. It makes it difficult or impossible to spend money on our problems, because so much is siphoned off to pay interest.

Here is a possible way. People could put their money into banks for safety, and for the convenience of paying by cheque. They might pay a small fee for this service. No interest would be paid on these deposits. These banks might be allowed to lend in various categories, e.g., for house construction or purchase, or to small local firms. No interest would be charged on loans; they would simply have to be repaid in a given time. This would be enormously beneficial to ordinary people

Banks could be private firms which provide these services, including lending some of the deposited money. A proportion of all deposits or savings would go to "governments", especially the local and regional assemblies, to be spent on public works. New money might be created by banks at any level, in a planned way. At all levels the process would enable new money to be put into circulation by paying for desirable projects.

However, a sustainable society must have a steady-state or zero-growth economy, meaning that there would be no need to create new or additional money because the amount of purchasing, investing, producing and selling going on would not increase over time.

An increasing number of people are arguing for change in the banking and money supply system. Many regions are now experimenting with new money systems. For instance in the LETS system people just tell the central registry what they owe each other after trading without exchanging any normal money. This involves a form of money that carries no interest charges, and which people can create as they need it . (This is really the same as writing an IOU which creates something that enables you to pay even though you have no normal money, on the understanding that you will earn the money to pay off the debt later.)

Support is now gathering for the "Sovereignty Proposal" initiated recently in Canada, whereby governments would only borrow money from government banks, and at no interest.

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Brouwer, S., (1988), Sharing the pie, The Big Picture Books.

Clairmont, F. E., (1996), The Rise and Fall of Economic Liberalism, Penang, Third World Network.

Hixon, J. , (1992) Economic Reform, Dec.

Kennedy, M., (1988), Interest and Inflation Free Money, Permacultur Institute, Ginsterweg, D-3074, Steyerberg, Germany.

Tanzer, M., (1992), "After Rio", Monthly Review, Nov. 1-10.

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