The quantity of money – and thus the economy – can continue to grow indefinitely. Here we must distinguish between limited and unlimited growth. Both our own bodies as well as plants and animals are physically determined by limited growth. Once we reach an optimum size, so from about age twenty-one, we stop growing.
Thus for most of our lives we – and all our subsystems – almost exclusively change qualitatively and not quantitatively. A fundamentally different growth pattern is so-called exponential or doubling growth. Here growth is small at the beginning but grows continuously and finally enters almost vertical “unlimited” quantitative growth. Like cancer, it only finds its limit when the whole organism on which it grows collapses or is destroyed. That is precisely the pattern in accordance with which our money behaves, as monetary investments double at regular intervals through interest and compound interest.
The problem is that interest – as the most important price in our economy – sets the limit of what we consider to be “economical”. If the interest is not at least earned, plus an additional profit, an investment is not economical. This means that the economy has to aim for exponential growth and that the gap between the financial and the real economy keeps growing over time, that speculative bubbles form which invariably burst with the whole cycle starting again from the beginning. Most people cannot imagine the consequences of exponential growth. That can easily be demonstrated.
Which option would you spontaneously choose if you had the opportunity: being given 10,000 euros a week for a whole year or 1 cent in the first week of the year, double the amount in the second week, double again in the third week and so on for the whole of the year? Most people would probably decide in favour of the first option because they would be able to estimate immediately in their heads what they would get. And even if they had some idea or, indeed, knew that the second opportunity is the more lucrative one, they would grasp neither intuitively nor rationally what the result would be at the end of the year: namely more than 45,000,000,000,000 or 45 trillion euros.
That corresponds to about two thirds of the world’s gross national product (GNP). On average that would work out at about 800 billion euros per week instead of 10,000 euros, as in the first option.
If we apply that to the current situation, it means that we stand helpless in the face of the growth in power of the international financial sector, the exponential growth of wealth and debt, the impoverishment of the large majority and the excessive wealth of a minority because both the historically tested and the new solutions for these problems are too little known or are no longer applied.
We only pay interest when we borrow money from the bank or other lenders. Wrong. Every price we pay includes an interest component. Namely the interest which the manufacturers of the purchased goods and services had to pay the bank to obtain machinery and equipment. For waste collection charges, for example, this component consists of about 12 percent, for the price of drinking water it is 38 percent and for rent in social housing it can reach as much as 77 percent. On average we pay about 40 percent interest in the prices for goods and services in daily life. If, therefore, interest could be replaced by another mechanism which encourages the owners of money to lend it, most of us could almost double our income or work correspondingly less to maintain the same standard of living.
Interest is a fair fee or premium for providing liquidity which everyone receives on their savings deposits and which everyone has to pay in every price. Only very few people understand the extent to which they pay over the odds, as the effect of interest and compound interest ensures a constant redistribution of money in a perfectly legal way. If German households are divided into ten equal groups, it becomes clear that nine of them, or 90 percent of households, on average pay almost twice as much interest as they receive. In the meantime the richest ten percent make what the large majority loses through interest. In other words, the “fairness” which is based on all of us getting interest back through savings and investments turns out, on closer inspection, to be deceptive. Only with interest-bearing investments of 500,000 euros or more do those who own these investments profit from the interest system. In 2001, the amount which was redistributed from the large majority of the population in Germany to a small minority came to about 600 million euros.
Attempts to neutralise the destructive potential of money
In contrast to the much-vaunted requirement of achievement in an “achieving society”, interest thus provides an income without achievement. It enforces pathological economic growth and leads to the aggravation of unequal income distribution, in other words, the polarisation of society. Furthermore, speculating with currencies on the financial markets becomes far more lucrative than investing in the real economy without real values thereby being created.
All great religious leaders both in Christianity and Judaism as well as in Islam understood the destructive potential of a monetary system based on interest and compound interest and left us solutions as to how that could be neutralised.
The Christian churches in Europe in the Middle Ages practiced a strict ban on interest. Anyone who took interest was excluded from the Christians communion and was not given a Christian burial. Regular coinage debasement of the bracteat money made sure that money kept circulating. The respective lord of the mint “debased” the coinage every three to four years. It had to be returned and newly coined money was issued with a deduction of thirty to forty percent. The deduction was simultaneously a way to collect taxes. Anyone using the old coins could expect a prison sentence. There was no point in hoarding money. If someone required a loan over several years, they mostly received it without interest because the lender was happy to be able to maintain the current value of the money. Instead of speculating with money, people invested in everything that retained its value over the long term: solid houses, quality furniture, jewellery, paintings, expensive household effects. People were so well off that they could afford to introduce an additional day off – “blue” Monday – and build enormous cathedrals, and they were able to do so with the donations from the citizens alone although they knew that it would take at least 200 years until they were completed.
In Islam, Sharia prohibits not just investments in morally or socially harmful projects but also speculation and excessive interest on loans. As a result lenders, be they private or banks, turn into partners of the projects which they finance. If they bear fifty percent of the cost they also receive fifty percent of the profit. As a consequence lenders have a strong interest in the success of the project and – when losses threaten – do not pull out but do everything to ensure that there is a successful conclusion.
Judaism solved the problem of interest and compound interest by regularly holding a jubilee year every seven years in which all debt was remitted. And after seven times seven years there was not only the remission of debts but debt slaves were freed and private property reverted back to the community.
New monetary schemes
Attempts to test new monetary schemes have multiplied since the 1980s. Today there are many viable models at all levels of economic activity:
• The first models were set up at a local level. Here many barter groups have shown for decades that the “money business” does not need to be left only to the banks (www.tauschringe.de).
• At a regional level the growing number of regional currencies in Germany shows that people are prepared to find new ways to support their region economically. In January 2011 there were about 30 initiatives which were already issuing their own payment instrument plus additional initiatives preparing to do so (www.regiogeld.de).
• At a national level the WIR system in Switzerland has provided a model since 1934 which supplies 60,000 small and medium-sized businesses in 15 regions with money by means of a parallel currency (www.wir.ch).
• At the international level there is Bernard Lietaer’s proposal for a global currency secured by goods and services, the “terra” (www.terratrc.org). If introduced worldwide, it would supplement and partially replace the existing barter or exchange systems (www.barterportal.net) and counter-trade transactions (e.g. Russia supplies Vodka to the USA in return for a caffeine-containing lemonade syrup).
These new monetary schemes work without interest and only charge for transaction costs and risk. They offer interest-free payment systems of various geographical dimensions and are supplemented by complementary sectoral currencies. The latter are organised in such a way that money flows to where it creates the greatest social and economic benefit (www.monneta.org). In place of social programmes which stop at the transfer of financial resources from rich to poor, complementary currencies are a completely new way to meet the demand for social benefits and greater social justice. Once they have been introduced and work, they finance themselves without placing a burden on the national finances. In other words, they can supplement the welfare state without themselves being a welfare system. In this sense they are highly innovative means of self-help which through creative action in the sense of “collective intelligence” support the independent initiative of individual people and groups, strengthening their intrinsic value and thus our “social capital” as a whole.
About the author: Prof. Dr. Margrit Kennedy is the author of the book Interest and Inflation Free Money which has been translated into 23 languages. Her book Regionalwährungen - ein neuer Weg zu nachhaltigem Wohlstand together with Bernard Lietaer appeared in 2004 and serves as a basis for the introduction of regional currencies in Germany. Her most recent publication is Occupy Money - damit wir zukünftig alle die Gewinner sind. Her work focuses on the design, introduction and testing of complementary currencies.