Endimen

An interesting thought:

In the real world there are thousands of banks and millions of borrowers. The banks are continually making new loans and retiring old ones as they are repaid. In the aggregate, the debts owed to banks are increasing with the mere passage of time, because interest accrues over time. The money available to repay those debts, however, can be created only by the banks as they make additional loans. The net requirement, then, is that banks must make new loans faster than they retire old loans, that is, there must be a continual expansion of bank credit money. If there is not, the result is depression — increasing numbers of defaulted loans, greater numbers of bankruptcies, expanding unemployment — and all the human misery that comes with it.

The problem is not that we use bank credit as money but that there is an interest burden attached to it. In systems theory this is known as a “positive feedback” mechanism, one that causes each subsequent state to be, in some way, bigger than the preceding state — in simplistic terms, an explosion, but in this case an explosion of debt.

Am I saying, then, that all interest is dysfunctional and must be avoided? Not necessarily. It is one thing for those who have earned money to expect a return for its use when they lend or otherwise invest it; it is quite another for banks to charge interest on newly created money that they authorize based on debt.

In the former case, we are talking about businesses and individuals who have earned money in the course of their business and exchange activities. They have produced and sold real goods or services, received money in return and seek to make productive use of their current surplus through saving and investment. They are entitled to share in the gains resulting from the allocation of these surplus funds to others.

In the latter case, however, the imposition of interest creates an unstable condition in which the money supply always lags behind the growing amount of debt owed to banks. Inevitably, a point is reached at which the private sector is unable or unwilling to assume any additional debt burden. Then, a way must be found to keep the money supply from lagging behind the growth of debt. Such was the case during the Great Depression of the 1930s. From that time onward, the federal government has assumed the role of “borrower of last resort.” Thus, when the monetization of private debt cannot be further pursued, the Federal Reserve will monetize part of the government budget deficits to prevent a shrinkage of the supply of money.

The prevailing monetary policies of the Fed determine whether money is “easy” or “tight,” that is, whether the monetization of government debt will be sufficient to provide private “borrowers” with the amounts of money needed to pay what they owe to the banks, or whether it will fall short. These actions by the Fed are largely responsible for the “business cycle” and periodic rounds of inflation and recession. Through the various mechanisms under its control — interest rates on loans it makes to banks, purchase or sale of government securities, and setting bank reserve requirements — the Fed has the power to decide whose interests will be favored and whose will be harmed.”

Excerpt from Thomas Greco’s Money: Understanding and Creating Alternatives to Legal Tender.