Our Flawed Economies

“Interest-free banking, if applied consistently, would regenerate communities and the benefits would be felt instantly. If Britain (and America for that matter – my insert) would borrow nothing else from Islam but this economic model, she would prosper and put behind her economic troubles in no time.”
I have written of the fundamental flaws in our Western Economy before, and extolled the virtues of interest free banking. But these are the words of Sahib Mustaqim Bleher, a German-born Islamic convert who lives in Britain, in an article I found in the Digital Journal, Op-Ed: The West v Islam? At Far from being a threat to Western civilisation, Islam can be its salvation, he writes, and nowhere more so than through Islamic economics.

As we continue to witness unfolding crises in our economy and on our streets, isn’t it time for the economists and our leaders to at least have a serious look at how other economies operate, and whether we could learn from them? Perhaps they are but how do we know?

So here again is what I have written previously about the flaws of interest in the economy. Is any one out there of influence listening?

Loans for interest are made out of fiat money
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry. (from Lord Polonius in Shakespeare's Hamlet, 1603)


Money can be created out of nothing. (See for example Darryl Schoon,  The United States Fiat Money & The Federal Reserve System, June 23, 2008) This happens when it is created by bank debt against the payment of interest. It is fiat money. This is not widely understood by the general public outside the banking world and usually comes as a surprise. A Canadian journalist has estimated that only one person in a thousand really understands how money is made! (Cited on the Forum for Stable Currencies website ) It is certainly not something that is widely publicized. What is more each bank also has what it calls its Reserve Ratio. This means the proportion of cash invested into its bank deposit accounts that the bank estimates it needs to retain in case the customer wishes to withdraw again against their deposit. If for example £1000 is put on deposit with the bank and they calculate their Reserve Ratio to be 10%, then they reserve £100 and the remaining 90% of the deposit or £900 is available for the bank to lend on. And it does. The bank sets up a loan of £900 to another customer for interest, neatly increasing the supply of money available in the economy by a simple accounting entry in its books. The bank has not only made money out of nothing but it is also making an interest profit on that money that it has created out of nothing. And the bank almost certainly charged a fee for arranging the loan as well. The more times the same money can be recycled and recreated in this way the greater the arrangement fees and the interest profit that the bank can make, all from the creation of illusory money out of nothing. What is more, the amount borrowed by the customer is likely to be placed on deposit again elsewhere and the creation of further debt out of nothing can continue in another bank. The multiplier effect of this exponential increase in debt is astounding and very dangerous. Money has to continue to grow to maintain this system and to avoid financial collapse, even though actual standards of living may remain stagnant. With consumer spending the lifeblood of the economy and a personal consumption now nearing 75% of GDP, which truthful and brave politician will urge us to spend less? It is not hard to see that such a system is unjust and unsustainable. A government can and does make money out of nothing also, but this is only to the extent of new notes and coins it issues. As long ago as 1939 American President Abraham Lincoln was clear in his warnings: ‘The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest.’( Senate Document 23, 1939)

But fiat money is still issued by banks. I was shocked when I read that 98% of the $2 trillion changing hands

in the foreign exchange markets each day is purely speculative and has nothing to do with wealth creation. 

Only the remaining 2% relates to real goods and services.(Bernard Lietaer, The Future of Money – Creating 

New Wealth, Work and a Wiser World (2001) As Edward Cahn observes: ‘Money has taken on a life of its

own: its function is to produce for the sake of reproducing – regardless of the impact on the health of the

human community… increasingly what we are witnessing in the world’s money markets looks more and more

like cancer.’(Edgar Cahn, No More Throw-Away People: The Co-Production Imperative Washington 

D.C.: Essential Books, 2000, p. 68).

Cancer is dangerous and often fatal, requiring unpleasant treatments along the way.
In such loan systems there is an impersonal relationship between the borrower and the lender with a minimal flow of information needed between them. Such loans are therefore cheaper to administer. In addition the tax system favors such business fund raising by allowing tax relief on the related interest.
Because such loans are not linked to the success or otherwise of the business, there is no reward to the lender if the business is successful and conversely the lender can foreclose on an ailing business that can no longer afford to repay. This makes the problems of the business worse and it may need to curtail its production and make efficiencies of staff by laying-off, with all the inherent human and social consequences that then arise. This is of course harmful to the economic cycle, and means that interest based economies have exaggerated cycles of ‘boom and bust’.
One of the most harmful aspects of this interest on loans is that it is almost invariably charged by compounding year on year. Typically a home ‘owner’ with a mortgage will pay at least 2-3 times the original loan before the mortgage is fully paid off.
Our debts on credit cards have also reached massive amounts and many regularly pay double figure interest rates on their cards each year. A significant number of college students and undergraduates have credit cards and amass debt on these as well as on their other student loans. This encourages an extravagant attitude of spending among students who no longer need to budget expenditure within their means.
When I first wrote of these imperfections in our debt system a few years ago I was saying that alarm bells should ring. I was far from alone. In 2001 Bernard Lietaer predicted a 50:50 chance of a global money meltdown within 5-10 years unless steps were taken to heal what he called the global foreign exchange casino.It feels as I write this in 2009 that we have drifted perilously close to that meltdown.
Unfortunately those in charge of our finances do not appear to consider alternative economic models. They want us to spend and consume our way out of recession. The problems and dangers of debt, at personal, corporate, national and international levels, are the cause of huge social disease. Such debt involves the transfer of wealth from the poor to those who are already wealthy. The system does not reflect the skill or the labor of the participant and encourages short termism.(for further discussion and explanation of the flaws in our money system and ideas for change to support community and sustainability, in an interview with Bernard Lietaer, Summer 1997: Money: Print Your Own! Beyond Greed and Scarcity, )
Interest based economies cause unemployment, social violence and pollution.(The Campaign for Interest Free Money) Sabine McNeill, organizer of the Forum for Stable Currencies, and co-founder with John Courtneidge of the Campaign for Interest-Free Money, observes that ‘compound interest is for the monetary system what carbon dioxide is for the earth’s atmosphere: man-made and unsustainable.’

There is a beautifully sustainable cycle within nature. Dead bodies provide food for living creatures, plants photosynthesize and produce oxygen from carbon dioxide and animals use that oxygen in their respiration of which the by-product is carbon dioxide. At school we learnt all about this and called it the Carbon Cycle. We can learn so much from nature if we will only listen to her!