This is what interest does

Hindenburg and Hitler during the national day of mourning – Feb 25, 1934 from the German Federal ArchiveI consider the following statement by economist Silvio Gesell, made on the eve of the Armistice Agreement (the end of World War I), to be one of the most prescient assertions in published history.

“In spite of the holy promises of people to banish war once and for all, in spite of the cry of millions ‘never again war’, in spite of all the hopes for a better future I have this to say: If the present monetary system based on interest and compound interest remains in operation, I dare to predict today that it will take less than twenty-five years until we have a new and even worse war.

I can foresee the coming development clearly. The present degree of technological advancement will quickly result in a record performance of industry. The buildup of capital will be fast in spite of the enormous losses during the war, and through the oversupply the interest rate will be lowered. Money will then be hoarded, economic activities will diminish, and increasing numbers of unemployed persons will roam the streets…within these discontented masses, wild, revolutionary ideas will arise and with it also the poisonous plant called ‘Super Nationalism’ will proliferate. No country will understand the other, and the end can only be war again.”

– economist Silvio Gesell, Letter to the Editor of Berlin’s “Zeitung am Mittag” newspaper, November 10, 19181

There are many ways in which we’ve seen loans at interest take a terrible toll on our neighbors. People go into debt for weddings, when trying to start businesses, and for medical expenses. The debts grow quickly, affecting their ability to buy food and get their children an education, and in many cases even forcing them to sell off their land or home. Microloans were lauded as a poverty reduction factor in the 1990s, but in recent years their efficacy has been cast into doubt and they’ve been linked to numbers of suicides. Farmer suicide specifically is a notorious issue with debt listed most often as the driving factor. Farmer indebtedness in general is a major issue, and has led to many farmers losing their lands to agribusiness.

But in this essay, I want to focus less on the individual toll that loans at interest take (of which we all know personal examples no matter where in the world we’re from) and instead look at how an economy based on interest has changed the world we live in.

We are now 100 years past Silvio Gesell’s fateful letter, which accurately predicted the Roaring ’20s, the Great Depression of the 1930s, the ‘Super Nationalism’ that then took over in places like Germany, Italy, and Japan, and World War II that followed.2 But in the 21st century we can say, “Never Again”, right?

Yet once again we have seen record economic performance and buildup of capital (1980s-2000s) followed by hoarding and default and recession (2007-2010) followed by the emergence of extreme nationalism across the globe (2014-present). This cycle is an inherent feature of the interest-based monetary system. And we don’t appear to have learned anything from it.

My previous two posts demonstrated that the Bible and the Church forbid taking interest on loans. Some commentators have suggested that the situation is different now that interest is an accepted part of the economic system. Yet logic and experience have taught me that when individual sin becomes systemic, the resultant problems are even greater. If you justify personal violence, you end up with war. If you justify personal power dynamics, you end up with systematic oppression.

And if you justify profiting off interest, you end up with an economic system that devours the world.

In order to show how interest has corrupted our economy and our lives, I will quote a long passage from Charles Eisenstein’s insightful Sacred Economics. Eisenstein recognizes how our ignorance of ancient understandings of economics and money, especially our rejection of Biblical insight, have resulted in an economic system that causes a lot of damage. In Chapter 6 Eisenstein places his attention on interest, borrowing from and expounding upon a parable created by the Belgian economist Bernard Lietaer.

You may be aware that the world’s money supply is constantly increasing, but you may not know how it’s created. In our banking system, new money is moved from the Central Bank to the commercial banks to the people via loans at interest. You ask the bank for a loan, it provides you that loan via money that didn’t exist before, and then demands that you pay back even more money than you were given. That constant creation of new money attached to demands to pay back more than the principal is what it means to have an monetary system based on interest.

This is how Eisenstein and Lietaer explain what interest has done:3

Usury both generates today’s endemic scarcity and drives the world-devouring engine of perpetual growth. To explain how, I will begin with a parable created by the extraordinary economic visionary Bernard Lietaer entitled “The Eleventh Round,” from his book The Future of Money.

“Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone’s barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.

One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. “Poor people,” he said, “so primitive.” The farmer’s wife overheard him and challenged the stranger, “Do you think you can do a better job handling chickens?” “Chickens, no,” responded the stranger, “But there is a much better way to eliminate all that hassle.” “Oh yes, how so?” asked the woman. “See that tree there?” the stranger replied. “Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I’ll explain the better way.”

And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. “Now you can trade and bargain with the rounds instead of the unwieldy chickens,” he explained.

It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.

“Oh, by the way,” he added after every family had received their 10 rounds, “in a year’s time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives.” “But where will the 11th round come from?” asked the farmer with the six chickens. “You’ll see,” said the man with a reassuring smile.”

Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.

So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.

This parable begins to show how competition, insecurity, and greed are woven into our economy because of interest. They can never be eliminated as long as the necessities of life are denominated in interest-money. But let us continue the story now to show how interest also creates an endless pressure for perpetual economic growth.

There are three primary ways Lietaer’s story could end: default, growth in the money supply, or redistribution of wealth. One of each eleven families could go bankrupt and surrender their farms to the man in the hat (the banker), or he could procure another cowhide and make more currency, or the villagers could tar-and-feather the banker and refuse to repay the rounds. The same choices face any economy based on usury.

So imagine now that the villagers gather round the man in the hat and say, “Sir, could you please give us some additional rounds so that none of us need go bankrupt?”

The man says, “I will, but only to those who can assure me they will pay me back. Since each round is worth one chicken, I’ll lend new rounds to people who have more chickens than the number of rounds they already owe me. That way, if they don’t pay back the rounds, I can seize their chickens instead. Oh, and because I’m such a nice guy, I’ll even create new rounds for people who don’t have additional chickens right now, if they can persuade me that they will breed more chickens in the future. So show me your business plan! Show me that you are trustworthy (one villager can create ‘credit reports’ to help you do that). I’ll lend at 10 percent-if you are a clever breeder, you can increase your flock by 20 percent per year, pay me back, and get rich yourself, too.”

The villagers ask, “That sounds OK, but since you are creating the new rounds at 10 percent interest also, there still won’t be enough to pay you back in the end.”

“That won’t be a problem,” says the man. “You see, when that time arrives, I will have created even more rounds, and when those come due, I’ll create yet more. I will always be willing to lend new rounds into existence. Of course, you’ll have to produce more chickens, but as long as you keep increasing chicken production, there will never be a problem.”

A child comes up to him and says, “Excuse me, sir, my family is sick, and we don’t have enough rounds to buy food. Can you issue some new rounds to me?”

“I’m sorry,” says the man, “but I cannot do that. You see, I only create rounds for those who are going to pay me back. Now, if your family has some chickens to pledge as collateral, or if you can prove you are able to work a little harder to breed more chickens, then I will be happy to give you the rounds.”

With a few unfortunate exceptions, the system worked fine for a while. The villagers grew their flocks fast enough to obtain the additional rounds they needed to pay back the man in the hat. Some, for whatever reason–ill fortune or ineptitude–did indeed go bankrupt, and their more fortunate, more efficient neighbors took over their farms and hired them as labor. Overall, though, the flocks grew at 10 percent a year along with the money supply. The village and its flocks had grown so large that the man in the hat was joined by many others like him, all busily cutting out new rounds and issuing them to anyone with a good plan to breed more chickens.

From time to time, problems arose. For one, it became apparent that no one really needed all those chickens. “We’re getting sick of eggs,” the children complained. “Every room in the house has a feather bed now,” complained the housewives. In order to keep consumption of chicken products growing, the villagers invented all kinds of devices. It became fashionable to buy a new feather mattress every month, and bigger houses to keep them in, and to have yards and yards full of chickens. Disputes arose with other villages that were settled with huge egg-throwing battles. “We must create demand for more chickens!” shouted the mayor, who was the brother-in-law of the man in the hat. “That way we will all continue to grow rich.”

One day, a village old-timer noticed another problem. Whereas the fields around the village had once been green and fertile, now they were brown and foul. All the vegetation had been stripped away to plant grain to feed the chickens. The ponds and streams, once full of fish, were now cesspools of stinking manure. She said, “This has to stop! If we keep expanding our flocks, we will soon drown in chicken shit!”

The man in the hat pulled her aside and, in reassuring tones, told her, “Don’t worry, there is another village down the road with plenty of fertile fields. The men of our village are planning to farm out chicken production to them. And if they don’t agree … well, we outnumber them. Anyway, you can’t be serious about ending growth. Why, how would your neighbors pay off their debts? How would I be able to create new rounds? Even I would go bankrupt.”

And so, one by one, all the villages turned to stinking cesspools surrounding enormous flocks of chickens that no one really needed, and the villages fought each other for the few remaining green spaces that could support a few more years of growth. Yet despite their best efforts to maintain growth, its pace began to slow. As growth slowed, debt began to rise in proportion to income, until many people spent all their available rounds just paying off the man in the hat. Many went bankrupt and had to work at subsistence wages for employers who themselves could barely meet their obligations to the man in the hat. There were fewer and fewer people who could afford to buy chicken products, making it even harder to maintain demand and growth. Amid an environment-wrecking superabundance of chickens, more and more people had barely enough on which to live, leading to the paradox of scarcity amidst abundance.

And that is where things stand today.4

It is true that interest-based capitalism has created an abundance of commercial products. But they have come at great expense. They come at the expense of selfless generosity, at the expense of trust between neighbors, at the expense of security about the future, at the expense of non-monetized human interactions and non-exploited natural resources. Even if there are some good things that have been brought about by loans at interest, by this point it must be recognized that a continuation of this constant-debt constant-growth system will eventually destroy everything. Such a economic system must incessantly consume more and more, or die. There is no endgame where it will be satisfied and stop unless we cut interest out of the picture.

  • Our modern economic system demands unceasing growth, thereby encouraging ever-growing greed, in part because of the constant demands of interest
  • People hoard money, and are afraid to share, in part because of the constant demands of interest
  • Environmental destruction will continue indefinitely, there will always be someone desperate to exploit the last undeveloped spot, in part because of the constant demands of interest
  • The economy cycles dramatically, with alternate cycles of spending and hoarding leading to depressions and recessions and turmoil and fear and nationalism, in part because of the constant demands of interest

And that’s all besides the fact that the rich become richer, and the poor fail to move up, in part because the wealthy are profiting off of the interest being paid to them by the poor. Plus I got all this way without even mentioning the crushing burden that national debt has placed on developing nations! Or the manner in which loans-at-interest inflate housing costs to the point where hardly anyone can afford a home without taking out a huge mortgage, or how student loans dramatically inflate college costs. I sure there are so many more issues that can be added on.

So long as we insist on a system based on loans-at-interest, we insist on those perpetual problems in our world. All in addition to the problems we already noted about profiting off of the poor, driving people into bankruptcy and depression, choosing to devote one’s money to greed and growth rather than giving, and all the other personal issues that loans-at-interest bring about.

The Bible’s injunctions against loans at interest are not outdated, they have not been rendered obsolete by the economic brilliance of modern money-makers. They are as crucial today as they have ever been, perhaps moreso because failure to listen to them has placed the entire world at risk.



Postscript: I originally planned to talk more about “alternative options” here, but in the end it didn’t quite fit into the flow of the piece. Personally, I recommend avoiding taking loans at interest at all times. It is possible to do (I have been completely out of debt for 9 years), though of course not easy in a world which expects that you become indebted to the banks. Some major life choices have had their cost enormously inflated by the loans-at-interest culture, which then makes them that much more difficult to afford for anyone who does not wish to partake in that system.

Yet it really is possible to live without debt, at least more often than people think. Not always easy, but possible. And working to avoid debt is easier than living a life handcuffed by debt. Even when you can make the payments (and no one knows what their future situation will be), large-scale indebtedness locks you into life choices that may not be what you feel God wants you to do with your life five years down the road. Over and over I’ve seen people reluctant to follow a new way because they had a mortgage, car payments, student loans, etc. that demanded they focus on money rather than service in their life. For anyone seriously interested in this path I can give personal alternatives to taking on different kinds of debt, though of course I only have a fraction of the wisdom out there on the issue.

Second, I recommend to avoid profiting from the loans-at-interest system. Let the money you make from your own work be enough, don’t force others to work for you while you profit off the fact that you have excess money. Instead, use that excess money to do good, to serve others and the poor. If you really want to help someone start a business, then look into investing in the business rather than loaning. Put your money in so that you share the risk and not just the returns. In the same way, if you want to start your own business look for investors who will share the risk with you, not moneylenders who will profit whether you succeed or fail. Sadly, I’ve seen people’s lives ruined by businesses that went under, leaving them with crushing debt that continued to grow long after their business had failed.

Finally is the hope that we can work for systemic change. Charles Eisenstein’s Sacred Economics, building off of the ideas of earlier economists like Silvio Gesell as well as modern thinkers, puts forth suggestions such as the negative interest rate that could bring about a new economic era in our world, one that works for the good of people rather than the good of profit. Helping to pass laws which restrict crushing interest rates, regulating mortgage companies that abuse their clients, regulating creditors, forgiving third-world debt, forgiving student loans, and making college, public transport, and a home more affordable for the poor are all important short-term goals.

And if you really want to get radical, Tyler Durden has an idea about what we could do with those credit card records. 😉

Footnotes:

[1] By 1918 this was in no sense a new realization for Gesell. In 1891 he wrote a dissertation on the need to reform the money system, after having emigrated to Argentina and observing firsthand the lead up to and consequences of Argentina’s famous depression of 1890. Gesell would continue to speak on the debilitating effects of a money system based on interest for the next 40 years. He died in 1930, having observed the first few months of the global depression he had predicted 12 years earlier. After his death, the legendary economist John Maynard Keynes would refer to Gesell as an “unduly neglected prophet” and devoted considerable time to his work, which he believed legitimate though he never fully accepted all its implications.
[2] There is another connection between usury and World War II. The most devastated victims of the “Super Nationalism” in Europe were the Jews, demonized in large part due to their long-standing position as moneylenders. Just after Kristallnacht, the “Night of Broken Glass”, Hitler broadcast Shakespeare’s The Merchant of Venice over the radio, reveling in the portrayal of a greedy, moneylending Jew at a time when many other Shakespeare plays were banned. Profoundly racist stagings of the play were performed in multiple German cities throughout the war.
[3] As I do with my own site, Eisenstein places a Creative Commons license on all of his work, making it free to share and build upon so long as there is attribution to the source.
[4] From “The Economics of Usury”, Chapter 6 of Sacred Economics by Charles Eisenstein, EVOLVER EDITIONS/North Atlantic Books., 2012. http://sacred-economics.com/sacred-economics-chapter-6-the-economics-of-usury/

3 thoughts on “This is what interest does

  1. Yes, I have also repeatedly seen people who were not able to leave for their calling due to student loans, credit card debt, or a mortgage.

    Interesting insight on the difference in wealth distribution from then and now. It’s something I think of frequently when I read the words of the early Church fathers. The sacrifices they are asking their congregations to make, the manner in which they critique the wealthy among their members….very sobering considering how much more wealthy we are today, how much more funds are available within the church body, how much further any of us is from destitution, and yet how little we do comparatively to rise to the call.

    I don’t have a settled view of why the bankers are mentioned. As you say it could complete the picture of a harsh and demanding king (the very least he demands is in itself intolerable). It could be because they were most associated with the idea of those who “harvest where I didn’t sow and gather where I didn’t scatter”, as they profit off of the work of others. Or it could just be a means of doubling down on the imagery that immediately follows – “the one who has will be given more, and he will have more than enough. But the one who does not have, even what he has will be taken from him” – which is likely an image that would be associated with the moneylenders. All three of those options rely on it being a peripheral mention that is only there to build imagery rather than any deeper point, but I don’t really see a way to make a deeper point from it.

    I always want to hear more from you! Please write as often as you can.

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  2. Catherine D

    I totally agree with your overall point and arguments about interest and the great harm it has done (and continues to do), and the compromise/ sell-out it represents for Christians and the church at large. I have managed to avoid getting into debt and needing to pay interest. But having money invested means I’m part of the system, receiving interest because others are paying interest. I really love conversations I hear about restorative economics, and whole alternative economic systems … but it feels beyond my time and capacity to pursue it very much.

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  3. I agree that it’s a difficult issue for most of us to pursue deeply, especially as an alternative system is something that we can’t really do on our own. I think the main this is to spread some degree of awareness of the need for a new system, so that when serious change becomes possible there is a body of people who understand why and will push for it. Until then, we just have to do our best to eliminate the abuse in our own financial actions.

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