Sacred Economics: Chapter 6, "The Economics of Usury" (Pt. 7)
The following is the seventh installment from Sacred Economics: Money, Gift, and Society in the Age of Transition, available from EVOLVER EDITIONS/North Atlantic Books. You can read the Introduction here, and visit the Sacred Economics homepage here.
In spite of the holy promises of people to banish war once and for all, in spite of the cry of millions "never again war" in spite of all the hopes for a better future I have this to say: If the present monetary system based on interest and compound interest remains in operation, I dare to predict today that it will take less than twenty-five years until we have a new and even worse war. I can foresee the coming development clearly. The present degree of technological advancement will quickly result in a record performance of industry. The buildup of capital will be fast in spite of the enormous losses during the war, and through the oversupply [of money] the interest rate will be lowered [until the money speculators refuse to lower their rates any further]. Money will then be hoarded [causing predictable deflation], economic activities will diminish, and increasing numbers of unemployed persons will roam the streets ... within these discontented masses, wild, revolutionary ideas will arise and with it also the poisonous plant called "Super Nationalism" will proliferate. No country will understand the other, and the end can only be war again.--Silvio Gesell (1918)
We are faced with a paradox. On the one hand money is properly a token of gratitude and trust, an agent of the meeting of gifts and needs, a facilitator of exchanges among those who otherwise could make none. As such it should make us all richer. Yet it does not. Instead, it has brought insecurity, poverty, and the liquidation of our cultural and natural commons. Why?
The cause of these things lies deep within the very heart of today's money system. They are inherent in the ways money today is created and circulated, and the centerpiece of that system is usury, better known as interest. Usury is the very antithesis of the gift, for instead of giving to others when one has more than one needs, usury seeks to use the power of ownership to gain even more-to take from others rather than to give. And as we shall see, it is just as contrary to the gift in its effects as it is in its motivation.
Usury is built into the very fabric of money today, from the moment of its inception. Money originates when the Federal Reserve (or the ECB or other central bank) purchases interest-bearing securities (traditionally, Treasury notes, but more recently all kinds of mortgage-backed securities and other financial junk) on the open market. The Fed or central bank creates this new money out of thin air, at the stroke of a pen (or computer keyboard). For example, when the Fed bought $290 billion in mortgage-backed securities from Deutsche Bank in 2008, it didn't use existing money to do it; it created new money as an accounting entry in Deutsche Bank's account. This is the first step in money creation. Whatever the Fed or central bank purchases, it is always an interest-bearing security. In other words, it means that the money created accompanies a corresponding debt, and the debt is always for more than the amount of money created.
The kind of money just described is known as the "monetary base," or M0. It exists as bank reserves (and physical cash). The second step occurs when a bank makes a loan to a business or individual. Here again, new money is created as an accounting entry in the account of the borrower. When a bank issues a business a $1 million loan, it doesn't debit that amount from some other account; it simply writes that amount into existence. One million dollars of new money is created-and more than one million dollars of debt.1 This new money is known as M1 or M2 (depending on what kind of account it is in). It is money that actually gets spent on goods and services, capital equipment, employment, and so forth.
The above description of how money is created, while widely accepted, is not fully accurate. I discuss the subtleties in the appendix. It will suffice for now because it is accurate enough for the purpose of describing the effects of usury.
An Economic Parable
Usury both generates today's endemic scarcity and drives the world-devouring engine of perpetual growth. To explain how, I will begin with a parable created by the extraordinary economic visionary Bernard Lietaer entitled "The Eleventh Round," from his book The Future of Money.
Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone's barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.
One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. "Poor people," he said, "so primitive." The farmer's wife overheard him and challenged the stranger, "Do you think you can do a better job handling chickens?" "Chickens, no," responded the stranger, "But there is a much better way to eliminate all that hassle." "Oh yes, how so?" asked the woman. "See that tree there?" the stranger replied. "Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I'll explain the better way."
And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. "Now you can trade and bargain with the rounds instead of the unwieldy chickens," he explained.
It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.
"Oh, by the way," he added after every family had received their 10 rounds, "in a year's time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives." "But where will the 11th round come from?" asked the farmer with the six chickens. "You'll see," said the man with a reassuring smile.
Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.
So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.
This parable begins to show how competition, insecurity, and greed are woven into our economy because of interest. They can never be eliminated as long as the necessities of life are denominated in interest-money. But let us continue the story now to show how interest also creates an endless pressure for perpetual economic growth.
There are three primary ways Lietaer's story could end: default, growth in the money supply, or redistribution of wealth. One of each eleven families could go bankrupt and surrender their farms to the man in the hat (the banker), or he could procure another cowhide and make more currency, or the villagers could tar-and-feather the banker and refuse to repay the rounds. The same choices face any economy based on usury.
So imagine now that the villagers gather round the man in the hat and say, "Sir, could you please give us some additional rounds so that none of us need go bankrupt?"
The man says, "I will, but only to those who can assure me they will pay me back. Since each round is worth one chicken, I'll lend new rounds to people who have more chickens than the number of rounds they already owe me. That way, if they don't pay back the rounds, I can seize their chickens instead. Oh, and because I'm such a nice guy, I'll even create new rounds for people who don't have additional chickens right now, if they can persuade me that they will breed more chickens in the future. So show me your business plan! Show me that you are trustworthy (one villager can create ‘credit reports' to help you do that). I'll lend at 10 percent-if you are a clever breeder, you can increase your flock by 20 percent per year, pay me back, and get rich yourself, too."
The villagers ask, "That sounds OK, but since you are creating the new rounds at 10 percent interest also, there still won't be enough to pay you back in the end."
"That won't be a problem," says the man. "You see, when that time arrives, I will have created even more rounds, and when those come due, I'll create yet more. I will always be willing to lend new rounds into existence. Of course, you'll have to produce more chickens, but as long as you keep increasing chicken production, there will never be a problem."
A child comes up to him and says, "Excuse me, sir, my family is sick, and we don't have enough rounds to buy food. Can you issue some new rounds to me?"
"I'm sorry," says the man, "but I cannot do that. You see, I only create rounds for those who are going to pay me back. Now, if your family has some chickens to pledge as collateral, or if you can prove you are able to work a little harder to breed more chickens, then I will be happy to give you the rounds."
With a few unfortunate exceptions, the system worked fine for a while. The villagers grew their flocks fast enough to obtain the additional rounds they needed to pay back the man in the hat. Some, for whatever reason-ill fortune or ineptitude-did indeed go bankrupt, and their more fortunate, more efficient neighbors took over their farms and hired them as labor. Overall, though, the flocks grew at 10 percent a year along with the money supply. The village and its flocks had grown so large that the man in the hat was joined by many others like him, all busily cutting out new rounds and issuing them to anyone with a good plan to breed more chickens.
From time to time, problems arose. For one, it became apparent that no one really needed all those chickens. "We're getting sick of eggs," the children complained. "Every room in the house has a feather bed now," complained the housewives. In order to keep consumption of chicken products growing, the villagers invented all kinds of devices. It became fashionable to buy a new feather mattress every month, and bigger houses to keep them in, and to have yards and yards full of chickens. Disputes arose with other villages that were settled with huge egg-throwing battles. "We must create demand for more chickens!" shouted the mayor, who was the brother-in-law of the man in the hat. "That way we will all continue to grow rich."
One day, a village old-timer noticed another problem. Whereas the fields around the village had once been green and fertile, now they were brown and foul. All the vegetation had been stripped away to plant grain to feed the chickens. The ponds and streams, once full of fish, were now cesspools of stinking manure. She said, "This has to stop! If we keep expanding our flocks, we will soon drown in chicken shit!"
The man in the hat pulled her aside and, in reassuring tones, told her, "Don't worry, there is another village down the road with plenty of fertile fields. The men of our village are planning to farm out chicken production to them. And if they don't agree ... well, we outnumber them. Anyway, you can't be serious about ending growth. Why, how would your neighbors pay off their debts? How would I be able to create new rounds? Even I would go bankrupt."
And so, one by one, all the villages turned to stinking cesspools surrounding enormous flocks of chickens that no one really needed, and the villages fought each other for the few remaining green spaces that could support a few more years of growth. Yet despite their best efforts to maintain growth, its pace began to slow. As growth slowed, debt began to rise in proportion to income, until many people spent all their available rounds just paying off the man in the hat. Many went bankrupt and had to work at subsistence wages for employers who themselves could barely meet their obligations to the man in the hat. There were fewer and fewer people who could afford to buy chicken products, making it even harder to maintain demand and growth. Amid an environment-wrecking superabundance of chickens, more and more people had barely enough on which to live, leading to the paradox of scarcity amidst abundance.
And that is where things stand today.
The Growth ImperativeI hope it is clear how this story maps onto the real economy. Because of interest, at any given time the amount of money owed is greater than the amount of money already existing. To make new money to keep the whole system going, we have to breed more chickens-in other words, we have to create more "goods and services." The principal way of doing so is to begin selling something that was once free. It is to convert forests into timber, music into product, ideas into intellectual property, social reciprocity into paid services.
Abetted by technology, the commodification of formerly nonmonetary goods and services has accelerated over the last few centuries, to the point today where very little is left outside the money realm. The vast commons, whether of land or of culture, has been cordoned off and sold-all to keep pace with the exponential growth of money. This is the deep reason why we convert forests to timber, songs to intellectual property, and so on. It is why two-thirds of all American meals are now prepared outside the home. It is why herbal folk remedies have given way to pharmaceutical medicines, why child care has become a paid service, why drinking water has been the number-one growth category in beverage sales.
The imperative of perpetual growth implicit in interest-based money is what drives the relentless conversion of life, world, and spirit into money. Completing the vicious circle, the more of life we convert into money, the more we need money to live. Usury, not money, is the proverbial root of all evil.
Let's examine how this happens in a bit more detail. Just like the man in the hat, a bank or any other lender will ordinarily agree to lend you money only if there is a reasonable expectation you will pay it back. This expectation could be based on expected future income, collateral, or a good credit rating. Serious consequences for default enforce this expectation. The repayment of debt depends not only on the ability to do so, but on various forms of social, economic, and legal pressure. Courts can order the seizure of assets to meet contractual debt obligations, and, while we don't have debtors' prisons any more,2 delinquent debtors suffer endless harassment at the hands of collection agencies, as well as denial of apartments, employment, and security clearances. Many people also feel a moral obligation to repay their debts. This is natural: in gift economies as well, those who have received are under social and moral pressure to give.
The money to repay principle and interest comes from selling goods and services, or it could come from further borrowing. Any time you use money, you are essentially guaranteeing, "I have performed a service or provided a good of equivalent value to the one I am buying." Any time you borrow money, you are saying that you will provide an equivalent good/service in the future. In theory, this should be to everyone's benefit, because it allows the connecting of gifts and needs not only across space and profession, but across time as well. Credit-based money exchanges goods now for goods in the future. This is not inconsistent with gift principles. I receive now; later I give.
The problems start with interest. Because interest-bearing debt accompanies all new money, at any given time, the amount of debt exceeds the amount of money in existence. The insufficiency of money drives us into competition with each other and consigns us to a constant, built-in state of scarcity. It is like a game of musical chairs, with never enough room for anyone to be secure. Debt-pressure is endemic to the system. While some may repay their debts, overall the system requires a general and growing state of indebtedness.
Constant, underlying debt-pressure means there will always be people who are insecure or desperate-people under pressure to survive, ready to cut down the last forest, catch the last fish, sell someone a sneaker, liquidate whatever social, natural, cultural, or spiritual capital is still available. There can never be a time when we reach "enough" because in an interest-based debt system, credit exchanges not just "goods now for goods in the future," but goods now for more goods in the future. To service debt or just to live, either you take existing wealth from someone else (hence, competition) or you create "new" wealth by drawing from the commons.
Here is a concrete example to illustrate how this works. Suppose you go to the bank and say, "Mr. Banker, I would like a $1 million loan so I can buy this forest to protect it from logging. I won't generate any income from the forest that way, so I won't be able to pay you interest. But if you need the money back, I could sell the forest and pay you back the million dollars." Unfortunately, the banker will have to decline your proposal, even if her heart wants to say yes. But if you go to the bank and say, "I'd like a million dollars to purchase this forest, lease bulldozers, clear-cut it, and sell the timber for a total of $2 million, out of which I'll pay you 12 percent interest and make a tidy profit for myself, too," then an astute banker will agree to your proposal. In the former instance, no new goods and services are created, so no money is made available. Money goes toward those who create new goods and services. This is why there are many paying jobs to be had doing things that are complicit in the conversion of natural and social capital into money, and few jobs to be had reclaiming the commons and protecting natural and cultural treasures.
Generalized, the relentless pressure on debtors to provide goods and services is an organic pressure toward economic growth (defined as growth in total goods and services exchanged for money). Here's another way to see it: because debt is always greater than money supply, the creation of money creates a future need for even more money. The amount of money must grow over time; new money goes to those who will produce goods and services; therefore, the volume of goods and services must grow over time as well.
So it is not just that the apparent limitlessness of money, observed since ancient Greek times, allows us to believe in the possibility of eternal growth. In fact, our money system necessitates and compels that growth. Most economists consider this endemic growth-pressure to be a good thing. They say that it creates a motivation to innovate, to progress, to meet more needs with ever-increasing efficiency. An interest-based economy is fundamentally, unalterably a growth economy, and except for a very radical fringe, most economists and probably all policy makers see economic growth as a demonstration of success.
The whole system of interest-bearing money works fine as long as the volume of goods and services exchanged for money keeps pace with its growth. But what happens if it doesn't? What happens, in other words, if the rate of economic growth is lower than the rate of interest? Like the people in the parable, we must consider this in a world that appears to be reaching the limits of growth.
The Concentration of WealthBecause economic growth is almost always lower than the rate of interest, what generally happens in such conditions is no mystery. If debtors cannot, in aggregate, make interest payments from the new wealth they create, they must turn over more and more of their existing wealth to their creditors and/or pledge a greater and greater proportion of their current and future income to debt service. When their assets and discretionary income are exhausted, they must go into default. It can be no other way, when the average return on investment is lower than the average interest rate paid to obtain the capital invested. Defaults are inevitable for a certain proportion of borrowers.
In theory at least, defaults are not necessarily a bad thing: they bring negative consequences for decisions that don't further the general good-that is, that don't result in more efficient production of goods that people want. Lenders will be cautious not to lend to someone who is unlikely to contribute to the economy, and borrowers will be under pressure to act in ways that do contribute to the economy. Even in a zero-interest system, people might default if they make dumb decisions, but there wouldn't be a built-in, organic necessity for defaults.
Aside from economists, no one likes defaults-least of all creditors, since their money disappears. One way to prevent a default, at least temporarily, is to lend the borrower even more money so she can continue making payments on the original loan. This might be justified if the borrower is facing a temporary difficulty or if there is reason to believe that enough higher productivity is around the corner to pay back all the loans. But often, lenders will throw in good money after bad just because they don't want to write down the losses from defaults, which could indeed send them into bankruptcy themselves. As long as the borrower is still making payments, the lender can pretend that everything is normal.
This is essentially the situation the world economy has occupied for the last several years. After years, or even decades, of interest rates far exceeding economic growth, with no compensatory rise in defaults, we face an enormous debt overhang. The government, at the behest of the financial industry (i.e., the creditors, the owners of money), has done its best to prevent defaults and keep the full value of the debts on the books, hoping that renewed economic growth will allow them to continue to be serviced.3 We will "grow our way out of debt," they hope.
At the political level, then, the same pressure exists to create "economic growth" as it does on the level of the individual or business. The debtor is under pressure to sell something, if only his labor, in order to obtain money to pay debt. That is essentially what growth-friendly policies do as well-they make this "selling something" easier; that is, they facilitate the conversion of natural, social, and other capital into money. When we relax pollution controls, we ease the conversion of the life-sustaining atmosphere into money. When we subsidize roads into old-growth forests, we ease the conversion of ecosystems into money. When the International Monetary Fund (IMF) pressures governments to privatize social services and cut spending, it pushes the conversion of social capital into money.
That is why, in America, Democrats and Republicans are equally eager to "open new markets," "enforce intellectual property rights," and so on. That is also why any item of the commons that is unavailable to exploitation, such as oil in the Alaskan Wildlife Refuge, local food economies protected by tariffs, or nature preserves in Africa, must endure constant assault from politicians, corporations, or poachers. If the money realm stops growing, then the middle passage between defaults and polarization of wealth narrows to nothing, resulting in social unrest and, eventually, revolution. Without growth, there is no other alternative when debts increase exponentially in a finite world.
If this growth, this conversion of commonwealth into money, happens at a rate faster than the rate of interest, then everything is fine (at least from the financial perspective, if not the human or ecological perspective). If there is enough demand for chickens and enough natural resources to feed them, villagers can borrow at 10 percent to increase their chicken flock by 20 percent. To use conventional language, capital investment brings a return in excess of the cost of capital; therefore, the borrower gains wealth beyond the portion that goes to the creditor. Such was the case in frontier days, when there was plenty of the unowned ripe for the taking. Such is still the case in a society where social relationships are not fully monetized-in economic parlance this is called an "undeveloped market." Only with economic growth can "all boats rise"-the creditors get richer and richer, and the borrowers can prosper as well.
But even in good times, growth is rarely fast enough to keep pace with interest. Imagine now that the villagers can only increase their flocks by 5 percent a year. Instead of paying a portion of new growth to the bankers, now they have to pay (on average) all of it, plus a portion of their existing wealth and/or future earnings. Concentration of wealth-both income and assets-is an inescapable corollary of debt growing faster than goods and services.
Economic thinkers since the time of Aristotle have recognized the essential problem. Aristotle observed that since money is "barren" (i.e., it does not leave offspring like cattle or wheat do), it is unjust to lend it at interest. The resulting concentration of wealth had been seen many times already by 350 BCE, and it would happen many times thereafter. It happened again in Roman times. As long as the empire was expanding rapidly, acquiring new lands and new tribute, everything worked passably well, and there was no extreme concentration of wealth. It was only when the growth of the empire slowed that concentration of wealth intensified and the once-extensive class of small farmers, the backbone of the legions, entered debt peonage. It was not long before the empire became a slave economy.
I need not belabor the parallels between Rome and the world today. As growth has slowed, many today, both individuals and nations, are entering a state similar to Roman debt peonage. A larger and larger proportion of income goes toward the servicing of debt, and when that does not suffice, preexisting assets are collateralized and then seized until there are none left. Thus it is that U.S. home equity has declined without interruption for half a century, from 85 percent in 1950 to about 40 percent today (including the one-third who own their houses free and clear). In other words, people don't own their own homes anymore. Most people I know don't own their own cars either but essentially rent them from banks via auto loans. Even corporations labor under an unprecedented degree of leverage, so that a large proportion of their revenue goes to banks and bondholders. The same is true of most nations, with their ballooning debt-to-GDP ratios. On every level we are, increasingly, slaves to debt, the fruits of our labors going to our creditors.
Even if you carry no debt, interest costs factor into the price of nearly everything you buy. For example, around 10 percent of U.S. government spending (and tax dollars) is devoted to interest on the national debt. If you rent your home, most of the rental cost goes to cover the landlord's highest expense-the mortgage on the property. When you eat a meal at a restaurant, the prices reflect in part the cost of capital for the restaurateur. Moreover, the costs of the restaurant's electricity, food supply, and rent also include the interest that those suppliers pay on capital, too, and so on down the line. All of this money is a kind of a tribute, a tax on everything we buy, that goes to the owners of money.
Interest comprises about six components: a risk premium, the cost of making a loan, an inflation premium, a liquidity premium, a maturation premium, and a zero-risk interest premium.4 A more sophisticated discussion of the effects of interest might distinguish among these components, and conclude that only the latter three-and particularly the last-are usurious. Without them, concentration of wealth is no longer a given because that portion of the money doesn't stay in the hands of the lenders. (Growth pressure would still exist, though.) In our present system, however, all six contribute to prevailing interest rates. That means that those who have money can increase their wealth simply by virtue of having money. Unless borrowers can increase their wealth just as fast, which is only possible in an expanding economy, then wealth will concentrate in the hands of the lenders.
Let me put it simply: a portion of the interest rate says, "I have money and you need it, so I am going to charge you for access to it-just because I can, just because I have it, and you don't." In order to avoid polarization of wealth, this portion must be lower than the economic growth rate; otherwise, the mere ownership of money allows one to increase wealth faster than the average marginal efficiency of productive capital investment. In other words, you get rich faster by owning rather than producing. In practice, this is nearly always the case, because when economic growth speeds up, the authorities push interest rates higher. The rationale is to prevent inflation, but it is also a device to keep increasing the wealth and power of the owners of money.5 Absent redistributive measures, the concentration of wealth intensifies through good times and bad.
As a general rule, the more money you have, the less urgent you are to spend it. Ever since the time of ancient Greece, people have therefore had what Keynes called a "liquidity preference": a preference for money over goods, except when goods are urgently needed. This preference is inevitable when money becomes a universal means and end. Interest reinforces liquidity preference, encouraging those who already have money to keep it. Those who need money now must pay those who do not, for the use of their money. This payment-interest on the loan-must come from future earnings. This is another way to understand how interest siphons money from the poor to the rich.
One might be able to justify paying interest on long-term, illiquid, risky investments, for such interest is actually a kind of compensation for forgoing liquidity. It is in keeping with gift principles, in that when you give a gift you often receive a greater gift in return (but not always and never with absolute assurance; hence, risk). But in the present system, even government-insured demand deposits and short-term risk-free government securities bear interest, allowing "investors" to profit while essentially keeping the money for themselves. This risk-free component is added as a hidden premium to all other loans, ensuring that those who own will own more and more.6
The dual pressures I have described-toward growth of the money realm, and toward the polarization of wealth-are two aspects of the same force. Either money grows by devouring the nonmonetized realm, or it cannibalizes itself. As the former is exhausted, the pressure of the latter increases, and concentration of wealth escalates. When that happens, another pressure arises to rescue the system: redistribution of wealth. After all, ever-increasing polarization of wealth and misery is not sustainable.
Wealth Redistribution and Class WarWithout wealth redistribution, social chaos is unavoidable in an interest-bearing, debt-based money system, especially when growth slows. Nonetheless, wealth redistribution always happens against the resistance of the wealthy, for it is their wealth that is being redistributed. Economic policy therefore reflects a balancing act between the redistribution and preservation of wealth, tending over time toward the minimum amount of redistribution necessary to maintain social order.
Traditionally, liberal governments seek to ameliorate concentration of wealth with redistributive policies such as progressive income taxes, estate taxes, social welfare programs, high minimum wages, universal health care, free higher education, and other social programs. These policies are redistributive because while the taxes fall disproportionately on the wealthy, the expenditures and programs benefit all equally, or even favor the poor. They counteract the natural tendency toward the concentration of wealth in an interest-based system. In the short term at least, they also run counter to the interests of the wealthy, which is why, in the present conservative political climate, such policies are characterized as class warfare.
In opposing redistributive policies, conservative governments seem to see concentration of wealth as a good thing. You might too, if you are wealthy, because concentration of wealth means more you for and less for everyone else. Hired help is cheaper. Your relative wealth, power, and privilege are greater.7 Governments serving the (short-term) interests of the wealthy therefore advocate the opposite of the aforementioned distributive policies: flat-rate income taxes, reduction of estate taxes, curtailment of social programs, privatized health care, and so forth.
In the 1930s, the United States and many other countries faced a choice: either redistribute wealth gently through social spending and taxing the rich, or let the concentration of wealth proceed to the point of revolution and violent redistribution. By the 1950s, most countries had adopted the social compromise forged in the New Deal: the rich got to stay on top, but they had to give up through taxation an amount offsetting the profits of ownership of capital. The compromise worked for a while, as long as growth stayed high as it did through the early 1970s.
However, even this gentle solution bears many undesirable consequences. High income taxes penalize those who earn a lot rather than those who merely own a lot. They also set up an unending battle between tax authorities and citizens, who usually end up finding ways to avoid paying at least some of their taxes, employing tens of thousands of lawyers and accountants in the process. Is this a good use of our human resources? Moreover, it is a system in which we are giving with one hand to the owners of money and taking away with the other.
In an interest-based system, class war is inevitable, whether in muted or explicit form. The short-term interests of the holders of wealth oppose the interests of the debtor class. At the present writing, the balance has swung to the wealthy, as their political representatives have dismantled the mosaic of redistributive social programs assembled in the 1930s in most Western countries. For a while, in the post-World War II era, high growth obscured the inherency of class warfare, but that era is over. Until the money system undergoes a fundamental change, we can expect class warfare to intensify in coming years. This book aims to change the basic ground rules and remove the basis of class warfare entirely.
As the social contract forged in the 1930s breaks down and debt levels reach crisis proportions, more radical measures may become necessary. In ancient times, some societies addressed the polarization of wealth with a periodic nullification of debts. Examples include the Solonic Seisachtheia, the "shaking off of burdens," in which debts were canceled and debt peonage abolished, and the jubilee of the ancient Hebrews. "At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbor shall release it; he shall not exact it of his neighbor, or of his brother; because it is called the Lord's release" (Deuteronomy 15:1-2). Both of these ancient practices were much more radical than bankruptcy because the debtor got to keep his possessions and collateral. Under Solon, lands were even restored to their original owners.
A more recent example of debt nullification has been the partial annulment of the foreign debts of impoverished, disaster-stricken nations. For example, the IMF, World Bank, and Inter-American Development Bank canceled Haiti's foreign debt in 2008. A broader movement has existed for decades to cancel Third World debt generally but so far has gained little traction.
A related form of redistribution is bankruptcy, in which a debtor is released from obligation, usually after the forfeiture to creditors of most of his property. This is nonetheless a nominal transfer of wealth from creditor to debtor, since the amount of the property is less than the debt owed. In recent times, it has become much more difficult in the United States to declare true personal bankruptcy, as the laws (rewritten at the behest of credit card issuers) now force the debtor onto a payment plan that assigns a portion of her income to the creditor far into the future.8 Increasingly, debts become inescapable, a lifelong claim on the labor of the debtor, who occupies a state of peonage. Unlike the Seisachtheia and Jubilee, bankruptcy transfers assets to the creditor, who then controls both physical and financial capital. The former debtor has little choice but to go into debt again. Bankruptcies are a mere hiccup in the concentration of wealth.
More extreme is outright debt repudiation-refusal to pay a debt or transfer collateral to the creditor. Ordinarily, of course, the creditor can sue and employ the force of the state to seize the debtor's property. Only when the legal system and the legitimacy of the state begin to fall apart is personal debt repudiation possible.9 Such unraveling reveals money and property as the social conventions that they are. Stripped of all that is based on the conventional interpretation of symbols, Warren Buffett is no wealthier than I am, except maybe his house is bigger. To the extent that it is his because of a deed, even that is a matter of convention.
At the present writing, debt repudiation is not much of an option for private citizens. For sovereign nations it would seem to be a different matter entirely. In theory, countries with a resilient domestic economy and resources to barter with neighbors can simply default on their sovereign debts. In practice, they rarely do. Rulers, democratic or otherwise, usually ally themselves with the global financial establishment and receive rich rewards for doing so. If they defy it, they face all kinds of hostility. The press turns against them; the bond markets turn against them; they get labeled as "irresponsible," "leftist," or "undemocratic"; their political opposition receives support from the global powers that be; they might even find themselves the target of a coup or invasion. Any government that resists the conversion of its social and natural capital into money is pressured and punished. That is what happened in Haiti when Aristide resisted neoliberal policies and was overthrown in a coup in 1991 and again in 2004; it happened in Honduras in 2009; it has happened all over the world, hundreds and hundreds of times. (It failed in Cuba and more recently in Venezuela, which has so far escaped the invasion stage.) Most recently, in October 2010 a coup barely failed in Ecuador as well-Ecuador, the country that repudiated $3.9 billion in 2008 and subsequently restructured it at 35 cents on the dollar. Such is the fate of any nation that resists the debt regime.
Ex-economist John Perkins describes the basic strategy in Confessions of an Economic Hit Man: first bribes to rulers, then threats, then a coup, then, if all else fails, an invasion. The goal is to get the country to accept and make payments on loans-to go into debt and stay there. Whether for individuals or nations, the debt often starts out with a megaproject-an airport or road system or skyscraper, a home renovation or college education-that promises great future rewards but actually enriches outside powers and springs the debt trap. In the old days, military power and forced tribute were the instruments of empire; today it is debt. Debt forces nations and individuals to devote their productivity toward money. Individuals compromise their dreams and work at jobs to keep up with their debts. Nations convert subsistence agriculture and local self-sufficiency, which do not generate foreign exchange, into export commodity crops and sweatshop production, which do.10 Haiti has been in debt since 1825, when it was forced to compensate France for the property (i.e., slaves) lost in the slave revolt of 1804. When will it pay off its debt? Never.11 When will any of the Third World pay off its debt and devote its productivity to its own people? Never. When will most of you pay off your student loans, credit cards, and mortgages? Never.
Nonetheless, whether on the sovereign or personal level, the time of debt repudiation may be closer than we think. The legitimacy of the status quo is wearing thin, and when just a few debtors repudiate their debt, the rest will follow suit. There is even a sound legal basis for repudiation: the principle of odious debt, which says that fraudulently incurred debts are invalid. Nations can dispute debts incurred by dictators who colluded with lenders to enrich themselves and their cronies and built useless megaprojects that didn't serve the nation. Individuals can dispute consumer and mortgage loans sold them through deceptive lending practices. Perhaps a time is soon coming when we will shake off our burdens.
A final way to redistribute wealth is through inflation. On the face of it, inflation is a covert, partial form of debt annulment because it allows debts to be repaid in currency that is less valuable than it was at the time of the original loan. It is an equalizing force, reducing the value of both money and debt over time. However, matters are not as simple as they might seem. For one thing, inflation is usually accompanied by rising interest rates, both because monetary authorities raise rates to "combat inflation" and because potential lenders would rather invest in inflation-proof commodities than lend their money at interest below the inflation rate.12
Standard economics says inflation results from an increase in the money supply without a corresponding increase in the supply of goods. How, then, to increase the money supply? In 2008-2009, the Federal Reserve cut interest rates to near zero and vastly increased the monetary base without causing any appreciable inflation. That was because the banks did not increase lending, which puts money in the hands of people and businesses who would spend it. Instead, all of the new money sat as excess bank reserves or sloshed into equities markets; hence the rise in stock prices from March to August 2009.13
It is no wonder, given the lack of creditworthy borrowers and economic growth, that low interest rates have done little to spur lending. Even if the Fed bought every treasury bond on the market, increasing the monetary base tenfold, inflation still might not result. To have inflation, the money must be in the hands of people who will spend it. Is money that no one spends still money? Is money a miser buries in a hole and forgets still money?14 Our Newtonian-Cartesian intuitions see money as a thing; actually, it is a relationship. When it is concentrated in few hands, we become less related, less connected to the things that sustain and enrich life.
The Fed's bailout programs mostly put money into the hands of the banks, where it has remained. In times of economic recession, to get money to people who will spend it, it is necessary to bypass the private credit-creation process that says, "Thou shalt have access to money only if you will produce even more of it." The main way to do that is through fiscal stimulus-that is, government spending. Such spending is indeed potentially inflationary. Why is inflation bad? No one likes to see rising prices, but if incomes are rising just as fast, what harm is done? The harm is done only to people who have savings; those who have debts actually benefit. What ordinary people fear is price inflation without wage inflation. If both prices and wages rise, then inflation is essentially a tax on idle money, redistributing wealth away from the wealthy and counteracting the effects of interest.15 We will return later to this beneficial aspect of inflation when we consider negative-interest money systems.
Standard theory says that government can fund inflationary spending either through taxation or deficit spending. Why would tax-funded spending be inflationary? After all, it just takes money from some people and gives it to others. It is inflationary only if it takes from the rich and gives to the poor-to those who will spend it quickly. By the same token, deficit spending is only inflationary if the money goes to those who will spend it and not, for example, to large banks. In either case, inflation is more a consequence or symptom of wealth redistribution than a means to achieve it.16
Inflation, then, cannot be seen as separate from more basic forms of wealth redistribution. It is no accident that political conservatives, traditionally guardians of the wealthy, are the keenest "deficit hawks." They oppose deficit spending, which tends to put money in the hands of those who owe, not those who own. Failing that, once deficit spending has already happened, they argue for retrenchment, the raising of interest rates and the repayment of public debts, which is essentially wealth redistribution in reverse. Invoking the specter of inflation, they make their arguments even when there is no sign whatever of actual inflation.
In principle, any government with a sovereign currency can create unlimited amounts of money without need for taxation, simply by printing it or forcing the central bank to buy zero-interest bonds. Yes, it would be inflationary-wages and prices would rise, and the relative worth of stored wealth would fall. That governments instead use the mechanism of interest-bearing bonds to create money is a key indicator of the nature of our money system. Here, at the very heart of a government's sovereign powers, a tribute to the owners of money is rendered.
Why should government pay interest to the wealthy for the sovereign privilege of issuing currency? Since ancient times, the right to issue coinage was considered a sacred or political function that established a locus of social power. It is clear where that power rests today. "Permit me to issue and control the money of a nation, and I care not who makes its laws," said Meyer Rothschild. Today, money serves private wealth. That indeed is the fundamental principle of usury. Yet the age of usury is coming to an end; soon, money shall serve another master.
More for You Is Less for MeThe systemic causes of the greed, competition, and anxiety so prevalent today contradict some of the New Age teachings I regularly come across-that "Money is just a form of energy," that "Everyone can have monetary abundance if they simply adopt an attitude of abundance." When New Age teachers tell us to "release our limiting beliefs around money," to "shed the mentality of scarcity," to "open to the flow of abundance," or to become rich through the power of positive thinking, they are ignoring an important issue. Their ideas draw from a valid source: the realization that the scarcity of our world is an artifact of our collective beliefs, and not the fundamental reality; however, they are inherently inconsistent with the money system we have today.
Here is a well-articulated example of this kind of thinking, from The Soul of Money by Lynn Twist:
Money itself isn't bad or good, money itself doesn't have power or not have power. It is our interpretation of money, our interaction with it, where the real mischief is and where we find the real opportunity for self-discovery and personal transformation.17
Lynn Twist is a visionary philanthropist who has inspired many to use money for good. But can you imagine how these words might sound to someone who is destitute for want of money? When I was broke a couple years ago, I remember feeling annoyed at well-meaning spiritual friends who told me my problem was "an attitude of scarcity." When the economy of an entire country like Latvia or Greece collapses and millions go bankrupt, shall we blame it all on their attitudes? What about poor, hungry children-do they have scarcity mentality too?
Later in the book, Twist describes toxic scarcity attitudes as follows: "It's like the child's game of musical chairs, with one seat short of the number of people playing. Your focus is on not losing and not being the one who ends up at the end of the scramble without a seat."18
But as I have described, the money system is a game of musical chairs, a mad scramble in which some are necessarily left out. On a deep level, though, Twist is right. She is right insofar as the money system is an outgrowth of our attitude of scarcity-an attitude that rests on an even deeper foundation: the basic myths and ideologies of our civilization that I call the Story of Self and Story of the World. But we can't just change our attitudes about money; we must change money too, which after all is the embodiment of our attitudes. Ultimately, work on self is inseparable from work in the world. Each mirrors the other; each is a vehicle for the other. When we change ourselves, our values and actions change as well. When we do work in the world, internal issues arise that we must face or be rendered ineffective. Thus it is that we sense a spiritual dimension to the planetary crisis, calling for what Andrew Harvey calls "Sacred Activism."
The money system we have today is the manifestation of the scarcity mentality that has dominated our civilization for centuries. When that mentality changes, the money system will change to embody a new consciousness. In our current money system, it is mathematically impossible for more than a minority of people to live in abundance, because the money creation process maintains a systemic scarcity. One man's prosperity is another man's poverty.
One of the principles of "prosperity programming" is to let go of the guilt stemming from the belief that you can only be wealthy if another is poor, that more for me is less for you. The problem is that under today's money system it is true! More for me is less for you. The monetized realm grows at the expense of nature, culture, health, and spirit. The guilt we feel around money is quite justified. Certainly, we can create beautiful things, worthy organizations, and noble causes with money, but if we aim to earn money with these goals in mind, on some level we are robbing Peter to pay Paul.
Please understand here that I do not mean to deter you from opening to the flow of abundance. To the contrary-because when enough people do this, the money system will change to conform to the new belief. Today's money system rests on a foundation of Separation. It is as much an effect as it is a cause of our perception that we are discrete and separate subjects in a universe that is Other. Opening to abundance can only happen when we let go of this identity and open to the richness of our true, connected being. This new identity wants no part of usury.
Here is an extreme example that illustrates the flaw in "prosperity programming" and, indirectly, in the present money system. Some years ago, a woman introduced me to a very special organization she had joined, called "Gifting." Basically, the way it worked is that first, you "gift" $10,000 to the person who invites you. Then you find four people to each "gift" you with $10,000, and then each of them goes out and brings the gifting concept to four more people, who each "gift" them with $10,000. Everyone ends up with a net $30,000. The program literature explained this as a manifestation of universal abundance. All that is required is the right expansive attitude. Needless to say, I jumped at the opportunity. Just kidding. Instead I asked the woman, "But aren't you just taking money from your friends?"
"No," she replied, "because they are going to end up making $30,000 too, as long as they fully believe in the principles of gifting."
"But they are going to make that money from their friends. Eventually we're going to run out of people, and the last ones who joined will lose $10,000. You are essentially taking it from them, stealing it, and using a language of gifting to do so."
You may be surprised to learn that I never heard from that woman again. Her indignation and denial mirror that of the beneficiaries of the money economy as a whole, which itself bears a structural similarity to her pyramid scheme. To see it, imagine that each $10,000 entrance fee were created as an interest-bearing debt (which in fact it is). You have to bring in more people under you, or you lose your property. The only way those "at the bottom" can avoid penury is to find even more people to draw into the money economy, for example through colonization-ahem, I mean "opening up new markets to free trade"-and through economic growth: converting relationship, culture, nature, and so on into money. This delays the inevitable, and the inevitable-an intensifying polarization of wealth-rears its ugly head whenever growth slows. The people who have been left holding the debt bag have no way to pay it off: no one else to take the money from, and nothing to convert into new money. That, as we shall see, is the root of the economic, social, and ecological crisis our civilization faces today.
1. I have purposely left out issues such as margin reserve requirements, capital requirements, and so forth that limit a bank's ability to extend loans because they are not directly relevant to the discussion of interest in this chapter.
2. Actually, they are making a covert comeback in some U.S. states as people are incarcerated for failing to heed court summons for nonpayment of debts. See White, "America's New Debtor Prison."
3. Even after it is obvious that these debt-based assets are junk and the debts will never be repaid, the authorities do their best to hide this fact and maintain them at face value.
4. Actually, interest doesn't consist of "components"-this is an analytic fiction-but we can pretend it does. Most authorities list only three or five components of interest. I won't offer definitions here-you can look them up yourself-except for the most relevant, the zero-risk interest premium. That is equivalent to the rate on short-term U.S. government securities (T-bills), which have essentially zero risk and full liquidity. One might say that there is risk here too, but if things unravel to the point where the U.S. government is incapable of printing money, then no asset class would be safe.
5. The new means of keeping interest rates above growth is the Fed's new power to offer interest on bank reserves. Currently at near zero, the Fed plans to raise these rates when the economy starts growing (see, e.g., Keister and McAndrews, "Why Are Banks Holding So Many Excess Reserves?"). This will ensure that any new wealth created through economic growth will accrue to the banks and bondholders who benefited from the Fed's liquidity facility giveaways.
6. The situation has grown far worse in recent years, as the category of risk-free investments has expanded to include all kinds of financial junk that the government has decided to back up. By ensuring the solvency of risk-taking financial institutions and the liquidity of their financial offerings, the government has effectively increased the risk-free rewards of owning money and accelerated the concentration of wealth. No longer is the Fed Funds rate or T-bill rate the benchmark of risk-free interest. The concept of moral hazard that has come up in the context of "too big to fail" financial institutions isn't just a moral issue. When risky, high-interest bets are not actually risky, then those with the money to make such bets will increase their wealth far faster than (and at the expense of) everyone else. Moral hazard is a shortcut to extreme concentration of wealth.
7. The conservative argument that putting money in the hands of the wealthy will spur increased investment, more jobs, and prosperity for all holds only if the rate of return on capital so invested exceeds the prevailing interest rate on risk-free financial investment. As the relentless concentration of wealth in the absence of redistribution demonstrates, such circumstances are rare, and they will become rarer if not extinct as we near the limits of growth.
8. Moreover, some types of debts, such as student loans and tax debts, cannot be discharged through bankruptcy.
9. There are signs of the beginnings of such an unraveling, in the U.S. mortgage documentation crisis of 2010. Here, the web of agreements that constitutes a mortgage came under question. Mortgages had been split into so many pieces that it became difficult to prove who actually owned the property. The corpus of contracts, laws, regulations, and documentation practices began to crumble under the weight of its own complexity.
10. It is no accident that World Bank policy permits agricultural loans only for the development of export crops. Crops that are consumed domestically do not generate foreign exchange with which to service the loans.
11. Since the writing of this chapter, Haiti's foreign debt was annulled by a world sympathetic to its plight following the earthquake. Now the country has uncommitted income and assets-perfect targets for collateralization as the basis for renewed debt.
12. Moreover, many loans today have variable interest rates, often indexed to inflation (there are now even inflation-indexed treasury bonds.)
13. Moreover, many loans today have variable interest rates, often indexed to inflation (there are now even inflation-indexed treasury bonds.)
14. Economists try to deal with this question through the concept of "velocity of money." As the Appendix describes, the distinction between money supply and money velocity breaks down under close scrutiny.
15. There are some other negative effects of inflation, such as "menu costs" (from the need to keep changing prices), accounting difficulties, and others. In the case of very high inflation-above the carry cost of commodities-it can result in hoarding. These considerations play a role in envisioning negative-interest money systems.
16. The only kind of inflation that does not result from wealth redistribution arises from shortages of goods caused by war or embargo. In this scenario, which sometimes leads to hyperinflation, there is no equalizing effect since the rich simply hoard inflation-proof commodities.
17. Twist, 19.
18. Ibid., 49.
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