Most people believe that interest is natural to money. However, the way in which money is created determines whether interest is applicable or not.
Two forms of money creation have dominated over the last 5000 years — creating money out of credit and creating money out of gold or silver – with humanity going back and forth between centuries-long domination of credit money and centuries-long domination of gold and silver-backed money.
Credit money is newly created on the back of borrowers’ creditworthiness. It is debt obligations enforced by civil law and backed by provisions for bad debt. Since credit money is legal agreements that require only paper and inexpensive credit risk insurance to create, credit money doesn’t have to be borrowed from anyone and therefore doesn’t attract interest – credit money is interest-free.
On the other hand, gold-backed money cannot be created as required by the demands of trade – the supply of gold-backed money is limited to the amount of gold in the world. Therefore there’s not enough for everyone to trade their goods and services with. Those that are short of gold-backed money have to borrow it from the few that hold the world’s gold-backed money and pay them interest for doing so. Gold-backed money bears interest.
The amount of credit money created matches what borrowers can afford and hence matches the amount of goods and services traded in the economy. Credit money is also backed by provisions for bad debt. Therefore the creation of credit money does not contribute to inflation. The gold supply, on the other hand, has no relation to the amount of goods and services traded in the economy. Gold-backed money is therefore inflationary and deflationary.
Many centuries ago, when taxes became payable in gold and interest-free credit money was outlawed, we were forced to abandon interest-free credit money and use interest-bearing gold-backed money instead. Those that were short of money now had to borrow it at interest from the few that held the gold supply instead of creating it interest-free and inflation-free. Once the generations forgot that we were forced to start using a form of money that continually and unreasonably Transfers Wealth, through the mechanism of interest, from the vast majority to a wealthy minority, we accepted interest as being natural to money and believed interest-bearing money to be the only option.
Although banks haven’t used gold-backed money since the 1930’s and only use credit money, we still pay interest on credit money even though it’s mathematically illogical. The seeming complexity of our banking system — called the fractional reserve banking system – obscures the fact that banks do not effectively lend out deposit holders’ money but issue borrowers with newly-created credit money. 500 years of gold-backed money has apparently conditioned society to believe that interest-bearing money is the only option and that interest is due on the money lent out by banks.
Banks are not in the business of lending out deposit holders’ deposits, as society purports them to be, but are actually credit clearing houses that clear our credit money of credit risk. In exchange for this service banks should only receive a credit risk insurance premium and an administration fee but on top of this banks charge interest to pay over to deposit holders.
Luckily it’s again legal for people to create their own credit money systems. As long as we pay our taxes in our interest-bearing official currencies. The only significant interest-free credit money system in place in the world today is one in Switzerland which is used by 25% of all Swiss businesses. No wonder Switzerland has had one of the most stable economies in the world since a group of Swiss businesses created this interest-free credit money system in the 1930’s to help themselves out of the Great Depression.
Go to The U.S. Dollar Will Collapse to learn more.
Still don’t believe that banks don’t lend out deposit holders’ savings but issue borrowers with debt obligations / IOU’s / credit money? Read the surprising reports issued by the Bank of England during the 1st quarter of 2014: