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An article on Interest free lending by Rajini Bakshi :
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Today we take it for granted that borrowed money should carry an interest. The global economy rests on such interest-bearing money. This practice of charging interest is treated almost like a law of nature. Yet the future of the planet may well depend on encouraging money systems that are based on zero-interest or negative interest.
The idea may sound heretical but it is not new. The most prosperous period of ancient Egypt was built upon a system when currency was backed by grains and operated with a negative interest. Some of the grandest cathedrals in Europe were built in the 12th and 13th centuries, as community projects using money which carried a demurrage charge.
What possible relevance can these historical examples have in modern times? Why are some activists and academicians working seriously on the positive potential of interest-free money? Let us first briefly review why the prevailing monetary system is problematic.
Human society now has the means to produce more than enough food to feed everybody and there is also enough work for everyone. But there is not enough money to pay for it all. The scarcity is in our national currencies, says Bernard Lietaer, a former banker and author of a recent book titled “The Future of Money: Beyond Greed and Scarcity”. Adds Lietaer: “the job of central banks is to create and maintain that currency scarcity. ...Money is created when banks lend it into existence. When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn’t create the second $100,000, the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.”
For most borrowers to earn this interest money the economy must keep growing exponentially. This means that the Earth and human beings are required to produce real wealth much faster than it is possible to sustain. For example, the annual growth rate of trees and fish is actually much slower than current demands for economic ‘growth’ require. This is one of the fundamental reasons why the world’s forests and fish reserves are being rapidly depleted.
Before going into the implications of switching from the interest-bearing monetary system to one that encourages negative interest, a brief glimpse at the history of interest and lending.
Lending is at least as old as settled agriculture. At the dawn of civilization people made loans of seeds, animals and tools to each other. Since what was loaned had the power of generation, the borrower shared the generated surplus with the lender, a kind of interest payment. The Sumerians used the same word, ‘mas’, for both calves and interest.
In ancient Egypt people stored their surplus grain in state run godowns and in exchange got tokens which served as a currency. The tokens carried a demurrage charge and thus kept depreciating. This created an inbuilt incentive to keep the tokens in rapid circulation for such a currency is only a medium of exchange and not a store of value.
The problem probably began when currencies came to be based on metals. Since metals are ‘barren’, they have no powers of generation, any interest paid in them must originate from some other source or process. The result, in many societies, was chronic indebtedness.
In the ancient Greek city states lending of metal-based money gradually turned a class of free small farmers into slaves or servants. Thus in the 4th Century BC Aristotle formulated the classical view against usury, the practice of charging excessive interest, calling it the most hated sort of wealth getting.
Consequently usury has been universally condemned by all the world’s cultures as an anti-social misuse of the money mechanism. In India interest was traditionally limited to the full amount of the loan. In medieval Europe the Christian church placed strict limits on interest. Christian tradition also observed every 50th year as a Jubilee year, during which all outstanding debts were dissolved. Islam forbade interest altogether. The Quran considers interest as war on Allah and exhorts Muslims to spend whatever is surplus to their needs, ensuring circulation of wealth.
During the 12th and 13th centuries in Europe many regions had the brakteaten monetary system which operated with a negative interest rate. In this system currency was issued by local lords in the form of silver plaques that were called back about twice a year and re-issued a bit thinner. Like the earlier Egyptian system this one had an in-built dis-incentive against hoarding of currency. It was also conducive to ambitious local community enterprises, like the building of grand cathedrals -- which in turn drew economic activity into that area. This brakteaten system collapsed when centralised kingdoms emerged and the kings claimed a monopoly on the creation of currency.
This not to suggest that these systems were any where near perfect or entirely just. But certain political and economic activists are drawing clues from these historical experiences which could help to build better monetary systems than we have at present. More recently, in the 1930s, there were successful alternative currency experiments in both Europe and the USA. These will be discussed in more detail in the next column. There has also been theoretical work on this concept in modern times.
In the late 19th century the case for a negative interest rate was strongly argued by Silvio Gesell, an Argentinean businessman and economist. Gesell suggested that money be used primarily as a medium of exchange and a public service good on which a small user fee can be levied -- a sort of demurrage charge. Later, the 20th century’s most influential economist John Maynard Keynes supported Gesell’s idea of a demurrage charge. Keynes went so far as to predict that “the future would learn more from Gesell than from Marx”.
Some people believe that the time has now come to build on such ideas. There are at least two obvious incentives for moving in this direction. One, is the grave instability of the conventional currency system. The other is the alarming ecological damage being caused by the existing economic system. This remains true even after the adoption of corrective measures by many governments and corporations.
Thus the idea of a “Green Convertible Currency” , as proposed by Lietaer, is bound to appeal to all those who worry about losing the race to save the planet. Such a currency would be backed by a basket of commodities, like grains, minerals or petrol, and also carry a negative interest charge. Such a monetary system would be “one of the few true long-term structural measures that can spontaneously help to achieve ecologically sustainable growth within a market economy” says Lietaer who is based at the Centre for Sustainable Resources of the University of California, Berkeley, in the USA.
Just how this will happen is not clear but the basic aims are clear -- to create forms of a currency that are within the control of local communities, not scarce and thus naturally interest-free. This in turn would help create livelihood for far more people than the prevailing economic structures. This alone would not ensure ecological sustainability but it would help.
Of course there can be interest-free lending which does not raise fundamental questions about the existing conventional currency structures. Some Islamic countries have led the way on such lending. Small-scale interest free banks have operated in Egypt since 1963 and are now common in Malaysia, Philippines, Denmark, Australia and South Africa. In India there are reportedly 200 small Islamic banking institutions in Kerala alone. The deposits of each of these banks ranges from Rs. one lakh to Rs. 10 lakhs and they do not restrict their lending to Muslims alone.
In many Western countries mainstream banks are now opening special no-interest divisions to cater to Muslim clients who refuse to either pay or earn interest. But this is clearly the response to a niche-market of clients with special needs. There is still a long way to go before the idea of an interest-free money is taken seriously by conventional bankers and policy makers.
As most activists will themselves admit, loads of work still has to be done to connect the possibilities raised by local successes with the macro challenges of a troubled global economy. Thus the importance of looking at the workings of diverse experiments with community currencies. The increasing proliferation of such currencies all over the Western countries is a signal of the stirrings of change.
************************************************
Today we take it for granted that borrowed money should carry an interest. The global economy rests on such interest-bearing money. This practice of charging interest is treated almost like a law of nature. Yet the future of the planet may well depend on encouraging money systems that are based on zero-interest or negative interest.
The idea may sound heretical but it is not new. The most prosperous period of ancient Egypt was built upon a system when currency was backed by grains and operated with a negative interest. Some of the grandest cathedrals in Europe were built in the 12th and 13th centuries, as community projects using money which carried a demurrage charge.
What possible relevance can these historical examples have in modern times? Why are some activists and academicians working seriously on the positive potential of interest-free money? Let us first briefly review why the prevailing monetary system is problematic.
Human society now has the means to produce more than enough food to feed everybody and there is also enough work for everyone. But there is not enough money to pay for it all. The scarcity is in our national currencies, says Bernard Lietaer, a former banker and author of a recent book titled “The Future of Money: Beyond Greed and Scarcity”. Adds Lietaer: “the job of central banks is to create and maintain that currency scarcity. ...Money is created when banks lend it into existence. When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn’t create the second $100,000, the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.”
For most borrowers to earn this interest money the economy must keep growing exponentially. This means that the Earth and human beings are required to produce real wealth much faster than it is possible to sustain. For example, the annual growth rate of trees and fish is actually much slower than current demands for economic ‘growth’ require. This is one of the fundamental reasons why the world’s forests and fish reserves are being rapidly depleted.
Before going into the implications of switching from the interest-bearing monetary system to one that encourages negative interest, a brief glimpse at the history of interest and lending.
Lending is at least as old as settled agriculture. At the dawn of civilization people made loans of seeds, animals and tools to each other. Since what was loaned had the power of generation, the borrower shared the generated surplus with the lender, a kind of interest payment. The Sumerians used the same word, ‘mas’, for both calves and interest.
In ancient Egypt people stored their surplus grain in state run godowns and in exchange got tokens which served as a currency. The tokens carried a demurrage charge and thus kept depreciating. This created an inbuilt incentive to keep the tokens in rapid circulation for such a currency is only a medium of exchange and not a store of value.
The problem probably began when currencies came to be based on metals. Since metals are ‘barren’, they have no powers of generation, any interest paid in them must originate from some other source or process. The result, in many societies, was chronic indebtedness.
In the ancient Greek city states lending of metal-based money gradually turned a class of free small farmers into slaves or servants. Thus in the 4th Century BC Aristotle formulated the classical view against usury, the practice of charging excessive interest, calling it the most hated sort of wealth getting.
Consequently usury has been universally condemned by all the world’s cultures as an anti-social misuse of the money mechanism. In India interest was traditionally limited to the full amount of the loan. In medieval Europe the Christian church placed strict limits on interest. Christian tradition also observed every 50th year as a Jubilee year, during which all outstanding debts were dissolved. Islam forbade interest altogether. The Quran considers interest as war on Allah and exhorts Muslims to spend whatever is surplus to their needs, ensuring circulation of wealth.
During the 12th and 13th centuries in Europe many regions had the brakteaten monetary system which operated with a negative interest rate. In this system currency was issued by local lords in the form of silver plaques that were called back about twice a year and re-issued a bit thinner. Like the earlier Egyptian system this one had an in-built dis-incentive against hoarding of currency. It was also conducive to ambitious local community enterprises, like the building of grand cathedrals -- which in turn drew economic activity into that area. This brakteaten system collapsed when centralised kingdoms emerged and the kings claimed a monopoly on the creation of currency.
This not to suggest that these systems were any where near perfect or entirely just. But certain political and economic activists are drawing clues from these historical experiences which could help to build better monetary systems than we have at present. More recently, in the 1930s, there were successful alternative currency experiments in both Europe and the USA. These will be discussed in more detail in the next column. There has also been theoretical work on this concept in modern times.
In the late 19th century the case for a negative interest rate was strongly argued by Silvio Gesell, an Argentinean businessman and economist. Gesell suggested that money be used primarily as a medium of exchange and a public service good on which a small user fee can be levied -- a sort of demurrage charge. Later, the 20th century’s most influential economist John Maynard Keynes supported Gesell’s idea of a demurrage charge. Keynes went so far as to predict that “the future would learn more from Gesell than from Marx”.
Some people believe that the time has now come to build on such ideas. There are at least two obvious incentives for moving in this direction. One, is the grave instability of the conventional currency system. The other is the alarming ecological damage being caused by the existing economic system. This remains true even after the adoption of corrective measures by many governments and corporations.
Thus the idea of a “Green Convertible Currency” , as proposed by Lietaer, is bound to appeal to all those who worry about losing the race to save the planet. Such a currency would be backed by a basket of commodities, like grains, minerals or petrol, and also carry a negative interest charge. Such a monetary system would be “one of the few true long-term structural measures that can spontaneously help to achieve ecologically sustainable growth within a market economy” says Lietaer who is based at the Centre for Sustainable Resources of the University of California, Berkeley, in the USA.
Just how this will happen is not clear but the basic aims are clear -- to create forms of a currency that are within the control of local communities, not scarce and thus naturally interest-free. This in turn would help create livelihood for far more people than the prevailing economic structures. This alone would not ensure ecological sustainability but it would help.
Of course there can be interest-free lending which does not raise fundamental questions about the existing conventional currency structures. Some Islamic countries have led the way on such lending. Small-scale interest free banks have operated in Egypt since 1963 and are now common in Malaysia, Philippines, Denmark, Australia and South Africa. In India there are reportedly 200 small Islamic banking institutions in Kerala alone. The deposits of each of these banks ranges from Rs. one lakh to Rs. 10 lakhs and they do not restrict their lending to Muslims alone.
In many Western countries mainstream banks are now opening special no-interest divisions to cater to Muslim clients who refuse to either pay or earn interest. But this is clearly the response to a niche-market of clients with special needs. There is still a long way to go before the idea of an interest-free money is taken seriously by conventional bankers and policy makers.
As most activists will themselves admit, loads of work still has to be done to connect the possibilities raised by local successes with the macro challenges of a troubled global economy. Thus the importance of looking at the workings of diverse experiments with community currencies. The increasing proliferation of such currencies all over the Western countries is a signal of the stirrings of change.