Debt Free Money alone does not solve Compound Interest
Debt free money in a full reserve banking system can still be subverted by the Money Power through Compound Interest. This is a vital issue for all Debt Free currency activists and theorists. It also is relevant for Gold and even Bitcoin.
An important model to finance national economies without the Money Power is debt free currency. It is printed by Government and spent into circulation. Either by Government itself, a la the Greenback, or by the People, Social Credit, which is preferable.
The key reason why this method is better than the current ways is because it allows an interest free money supply: the money in circulation is not burdened with interest. Considering the fact that trillions of dollars are now circulating, each costing 5 to 10 cents per year in debt service, this is a major improvement.
However, there are a few limitations to debt free money. I discussed them here, but there is a crucial problem that merits independent analysis.
As we know, debt free money does not completely eradicate interest. For credit a banking system is needed and these banks would require capitalization: deposits by savers that can be lent out. To attract these deposits, interest is necessary.
The interest payed over credit in this system will continue to be a wealth transfer to the rich. Because also in this system it will be the poor who borrow and the rich who lend.
Worse, the risk is very real the Money Power would be able to subvert a debt free money supply.
Let’s say we implement Social Credit. The Government prints money and the People spend it. The Money Power would open a number of banks on a full reserve basis, all credit backed by deposits.
During the first year it would acquire a fair bit of the new money. They would easily be able to do so: they could sell some of their Gold or other assets. And they would have major income through for instance Big Business. It would use that income for their loan shark operation.
Let’s say, for argument’s sake, they obtain 10% of it’s supply.
They start lending at say 5%. Of this 5% they use 2% for cost. The remaining 3% is profit, new capital, new deposits for their banks.
After 1 year of lending they control 13% of the money supply. After two years 16.09%. After three years 19.28.
After 10 years of lending they would control 34 percent and after 20 years 81% of the money supply.
Compound interest in operation.
Of course, the exact numbers are not important here, it’s the process that matters.
Yes, Government could print ever more money, but this would mean unstable prices. And the idea that the Money Power is still raking in so much interest is unacceptable.
There are two ways of combating this. The first is to combine debt free money with Mutual Credit, preferably in a free market environment.
The second is approach is known as ‘demurrage’.
Demurrage is interest on holding money instead of credit. It means that if you have money in your account, you will be paying interest over it. It was invented by Silvio Gesell. Demurrage is the secret behind the famous ‘Wörgl Freigeld‘. I recommend everyone not familiar with it to take note of it. It is the basic model of the German Regional Currencies, that circulate in dozens of Germany’s towns and cities.
The effect of demurrage is predictable: people start dumping their cash. The velocity of circulation is massively increased. Wörgl vouchers circulated up 140 times in the 13 months they were allowed to finance the local economy. A dollar or euro would typically go round maybe 8 or 10 times.
Because of higher velocity, far less money is required. That’s also a notable aspect. This explains why it is so useful in a depressed economy: depressions are caused by scarce capital.
But the key is that people, in order to get rid of their cash, start paying up front. This has been confirmed in Wörgl, so its not just an idea. They even pay taxes up front, just to avoid the penalty of holding cash.
If we pay our supplier up front, we basically give him an interest free loan.
In this way businesses and commonwealths would be able to finance many big projects interest free.
Debt free money, especially Social Credit, is vastly superior to our current system. It does have a major limitation: the Money Power, through compound interest, would be able to control the money supply.
This problem exists both under fractional reserve banking and full reserve banking. It does not matter whether it’s Gold or debt free money.
Two easy solutions are available: a combination with Mutual Credit, allowing interest free credit, or demurrage.
Perhaps other ways are imaginable.
This shows just how nefarious the implications of interest really are. It is a good reminder to not stop until we completely get rid of it.
I’d be interested in any comments, as I believe this is a serious issue.
This is also discussed in Ellen Brown’s Web of Debt, the chapter on the Goldbugs vs Greenbackers.