Posted 29th October 2011
Margrit Kennedy: Interest and Inflation Free Money (Published by Seva International; ISBN 0-9643025-0-0; Copyright 1995 by Margrit Kennedy)
http://userpage.fu-berlin.de/~roehrigw/kennedy/english/
The following extracts are useful in providing quantitative context for why a new interest free money system is needed and the existing monetary paradigm is unsustainable. The full paper proposes an alternative interest free monetary system. It describes what a new money system could look like and the benefits.
The numbers relate to Germany prior to 1995 when the paper was written. The inequality of wealth distribution and the interest burden/benefit is even greater today and particularly acute in the privatised Anglo Saxon economies.
First Misconception :
THERE IS ONLY ONE TYPE OF GROWTH
Figure 2 shows the time periods needed for our money to double at compound interest rates:
at 3%, 24 years;
at 6%, 12 years;
at 12%, 6 years.
Story: Persian emperor who was so enchanted with a new chess game that he wanted to fulfill any wish the inventor of the game had. This clever mathematician decided to ask for one seed of grain on the first square of the chess board doubling the amounts on each of the following squares. The emperor, at first happy about such modesty, was soon to discover that the total yield of his entire empire would not be sufficient to fulfill the “modest” wish. The amount needed on the 64th square of the chess board equals 440 times the yield of grain of the entire planet.
That is exponential growth!
The solution to the problems caused by present exponential growth is to create a money system which follows the natural growth curve. That requires the replacement of interest by another mechanism to keep money in circulation.
Second Misconception:
WE PAY INTEREST ONLY IF WE BORROW MONEY
Therefore, if we could abolish interest and replace it with another mechanism to keep money in circulation, most of us could either be twice as rich or work half of the time to keep the same standard of living we have now.
Third Misconception:
IN THE PRESENT MONETARY SYSTEM WE ARE ALL EQUALLY AFFECTED BY INTEREST
Within our monetary system we allow the operation of a hidden redistribution mechanism which constantly shuffles money from those who have less money than they need to those who have more money than they need.
The interest and compound interest mechanism not only creates an impetus for pathological economic growth but, as Dieter Suhr has pointed out, it works against the constitutional rights of the individual in most countries. If a constitution guarantees equal access by every individual to government services – and the money system may be defined as such – then it is illegal to have a system in which 10% of the people continually receive more than they pay for that service at the expense of 80% of the people who receive less than they pay.
It may seem as if a change in our monetary system would serve “only” 80% of the population, i.e., those who at present pay more than their fair share. However, everybody profits from a cure, even those who profit from the cancerous system we have now.
Fourth Misconception:
INFLATION IS AN INTEGRAL PART OF FREE MARKET ECONOMIES
The tendency is clear – government debts will sooner or later outgrow government income, even in the industrialized nations.
Economic historian, John L. King, links inflation to the interest paid for the “credit balloon.” In a private letter to me (Margrit Kennedy), dated January 8, 1988, he states:
I have written extensively about interest being the major cause of rising prices now since it is buried in the price of all that we buy, but this idea, though true, is not well accepted. $9 trillion in domestic U.S. debt, at 10% interest, is $900 billion paid in rising prices and this equates to the current 4% rise in prices experts perceive to be inflation. I have always believed the compounding of interest to be an invisible wrecking machine, and it is hard at work right now. So we must get rid of this mindless financial obsession.
A 1,000% expansion of private and public debt occurred in the U.S.A. during the last 33 years, the largest share coming from the private sector. But every resource of the Federal Government was utilized to spur this growth: loan guarantees, subsidized mortgage rates, low down-payments, easy terms, tax credits, secondary markets, deposit insurances, etc. The reason for this policy is that the only way to make the consequences of the interest system bearable for the large majority of the population is to create an economic growth which follows the exponential growth rate of money – a vicious circle with an accelerating, spiraling effect. Whether we look at inflation, social equity, or environmental consequences, it would seem sensible from many points of view to replace the “mindless financial obsession” with a more adequate mechanism to keep money in circulation.
This analysis is deficient on four counts. First, the banking system does not behave as presented above. The payment of interest on debts that arise through the money creation process will neither contract the money supply nor result in the growth of debt relative to the money supply. Second, there is no reason for the money supply to equal the sum of debt and interest. Third, debt is such a common and essential part of an economy, there is always plenty of it available for money creation without any need to encourage the creation of more. (The fourth reason, that interest costs are not the cause of inflation, is discussed in another section).
Hi Brian
I think the onus is on you to provide some evidence for your assertions. Fractional Reserve Banking allows banks to create money from nothing. 97% of the UK money supply is bank credit. The interest is never created and so more debt needs to be issued to create sufficient money to pay the interest. I agree payment of interest to the bank doesn’t contract the money supply (it shows up in their P&L) but repayment of the original loan does (it shrinks the bank’s balance sheet) – money is destroyed as it is repaid as a corollary to its creation. If all the debt were repaid (an impossible, hypothetical proposition) 97% of the UK money supply would evaporate. That is the lunacy of our money system. Your third point demonstrates a misunderstanding of the process and seems to contradict itself. The money supply expands to create sufficient money in the system to pay the interest. Over the long term, growth of the money supply over the needs of the economy is inflationary. Try this: http://www.youtube.com/watch?v=KMMpBW9hbSY