Abolishing interest isn’t a new idea, but it could hold the secret to ending our economies’ environmentally damaging addiction to growth
When it comes to global warming, we know that the real problem is not just fossil fuels – it is the logic of endless growth that is built into our “economic” system. If we don’t keep the global economy growing by at least 3% per year, it plunges into crisis. That means we have to double the size of the economy every 20 years, just to stay afloat. It doesn’t take much to realise that this imperative for exponential growth makes little sense given the limits of our finite planet.
Rapid climate change is the most obvious symptom of this contradiction, but we’re also seeing it in the form of deforestation, desertification and mass extinction, with species dying at an alarming rate as our consumption of the natural world causes their habitats to collapse. It was unthinkable to say this even 10 years ago, but today, as we become increasingly aware of these crises, it seems all too clear: our “money system” is incompatible with life on this planet.
The question is what to do about it. How can we redesign the global economy to bring it in line with the principles of ecology? The most obvious answer is to stop using GDP to measure economic progress and replace it with a more thoughtful measure – one that accounts for the ecological and social impact of economic activity. Renegade economists like Kate Raworth is making headlines with her Doughnut Economics and is calling for such changes for years and it’s time we listened.
But replacing GDP is only a first step. While it might help refocus economic policies on what really matters, it doesn’t address the main driver of growth: INTEREST. Interest is the reason the economy has to grow in the first place. Because debts are subject to interest, it grows exponentially – so if a person, a business, or a country wants to pay down debt over the long term, they have to grow enough to at least match the growth of their debt. But with or without growth, debt piles up and eventually triggers an economic crisis. No such thing is economy at all!
One way to relieve the pressure for endless growth might be to cancel some of the debt – a kind of debt jubilee. But this would only provide a short-term fix; it wouldn’t get to the real root of the problem: that the global “economic” system runs on “money” that is itself debt subject to interest.
This might sound a bit odd, but it’s quite simple. When you walk into a bank to take out a loan, you assume that the bank is lending you money it has in reserve – money that it stores somewhere in a vault, for example, collected from other people’s deposits. But that’s not how it works. Banks only hold reserves worth between 5% and 10% of the money they lend out. In other words, banks lend out 10 to 20 times more money than they actually have. This is known as fractional reserve banking.
So where does all that additional money come from? The popular saying is that “banks create it out of thin air” when they make loans – they loan “money” into existence. But that´s a misleading way to describe what really happens. Without becoming to technical, the banking system never ever in the history of banking gave up anything of value in the process of money creation and are not even risking anything. In contract law, each party has to give up consideration for the contract to be valid, “quid pro quo”. The banking system never has, and never will give up consideration. It is the people giving up consideration with respect to their labour and collateral, such as a house, in the money creation process. I will leave it here, but legally something is very wrong.
Given the above, this accounts for about 95% of the money circulating in our economy right now. It’s not created by the government, as most people assume: it is created by commercial banks in the form of loans. In other words, every currency that passes through our hands represents somebody’s debt. And the debt has to be paid back with interest. Debt is now comprised of the principal amount + added interest. Only the principal amounts enters our economy. Because our money system is based on debt + INTEREST, it has a growth imperative baked into it. It is mathematically impossible to pay down any prior sum of debt without “borrowing” further. Think about that for a second! In other words, our money system is heating up the planet.
Once we realise this, some people propose as a “solution” that we need banks to keep a bigger fraction of reserves behind the loans they make. This would go a long way toward diminishing the amount of debt sloshing around in our economy, helping reduce the pressure for economic growth. But at the same time, it would diminish the money supply so dramatically that a crisis would be imminent. Those who advocate these sort of measures, including rules and regulations, have no leg to stand on really, because at most it can only temper an inherently terminal system.
Then there’s an even more exciting “solution” some might consider. We could abolish debt-based currency altogether and invent a new money system completely free of intrinsic debt. Instead of letting commercial banks create money by lending it into existence, we could have the state create the money and then spend it into existence. New money would get pumped into the real economy instead of just going straight into financial speculation where it inflates huge asset bubbles that only benefit the mega-rich. But how do we account for inflation and deflation? And is the issue really debt?!
DEBT is not the issue
Debt is simply the tool to retire money from circulation and to keep a balance with whatever that money represents. Borrowing 100k to buy a 100k home, and then pay the 100k back at the rate of depreciation of that house hurts no one, and there is always a balance between remaining debt, the remaining free market value, and the remaining obligation to pay down the debt. There is always enough money in circulation to pay of any prior sum of debt without the need to borrow further, and without the need to grow further. We can clearly identify that the issue is interest, making it mathematically impossible to pay down any sum of debt without the need to borrow/grow further.
“Abolishing interest holds the secret to getting our system off its addiction to growth”
The faults of the present “money” system
- Inflation & Deflation
- Systematic manipulation of the cost or value of money or property
- Inherent, irreversible multiplication of debt in proportion to a vital circulation, engendering inevitable systemic failure at a finite system lifespan defined by an inevitable, terminal sum of insoluble debt.
Without making things to complicated, in layman terms;
Inflation: “Money” as we know it today does not holds its purchasing power, an ice cream in 1960 cost perhaps 10 cents, and today we pay 2 euro´s or more for the same ice cream, and it is not because there´s a shortage in ice cream. Somebody, or something, is stealing from us!
Because interest keep draining money from circulation (deflation) the money in circulation is decreasing against the things it should represent resulting in an imbalance which can only be restored temporarily with further “borrowing”, but at the same time the sum of debt keeps going up until we can no longer afford servicing the escalating debt. Simply put, debts keep multiplying, due to interest, until we fail … again.
“Every “economy” subject to interest will eventually terminate itself under insoluble debt”
The responsibility for money creation would be placed with an independent agency that – unlike banks – would be non-profit, democratic, accountable, and transparent, so money would become a truly public good. A mere accounting system to keep track of our promissory notes.
This is not a fringe proposal. It has been around since the early 60´s, when Mike Montagne proposed it as a way to solve the previously mentioned faults of the “money“ system.
Mathematically Perfected Economy (MPE), as it was called, made headlines again during the 2008 crisis, when progressive activists put it forward as a strategy for preventing the global financial crisis from recurring. They pointed out that MPE would dramatically reduce both public and private debt and make the world economy sustainable.
What they noticed is that abolishing interest also holds the secret to getting our system off its addiction to growth, and therefore to arresting climate change. As it turns out, reinventing our money system is crucial to our survival in the Anthropocene – at least as important as getting off fossil fuels. And this idea is already beginning to gain traction: worldwide, the campaigning group People for Mathematically Perfected Economy has generated momentum around it, building on a series of excellent explanatory videos.
“Mathematically perfected economy is little more than elimination of interest in lieu of a singular charge, equal to the value of actual financial services rendered.
The currency of mathematically perfected economy is purely a token of value. Rather than being issued by the privilege of private profiteers, it is issued and regulated by mutual consent of the public itself, without profit, that it may be purely a token of value, and that as a token of value, it replicates the natural processes of true free enterprise.
To replicate the processes of true free enterprise, it is only necessary to synchronize payment of debt with rate of consumption, that in trade, every producer receives equal to their production.
Beyond this, mathematically perfected economy is merely to provide adequate circulation, that all possible commerce can be sustained. The quantity of circulation necessary to sustain trade of all production is equal to the production itself. No circulation comes into existence without creation of equivalent production. The value of the circulation is comprised directly of, and without obstruction of procuring, the value of the production it immutably represents.”
The idea has its enemies, of course. If we shift to a Mathematically Perfected Economy, the banking system will no longer have the power to literally make money out of nothing and the rich will no longer reap millions from asset bubbles. Unsurprisingly, neither of these groups would be pleased by this prospect. But if we want to build a fairer, more ecologically sound economy, that’s a battle that we can’t be afraid to fight.