In this tenth in our series on money structure and function we summarize the process and implications of interest bearing transactions.
Summary of Current System Operation and ResultsTo sum up, and add a few details, our current bank-authority money system leads to the the following results
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The inclusion of interest and unearned income in the monetary system is the driver of economic cycles.
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For system stability the money supply has to grow at an exponential rate.
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As a result of interest, more and larger sums must continually be borrowed by members of the user community or there won't be sufficient money in circulation for all users to pay both principal and interest.
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When the money supply can't keep up with exponential growth, so that both principal and interest can be paid by everyone to prevent system break down, a recession or major depression occurs.
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When this occurs some members of the user community are forced to declare bankruptcy or default on loans in order that other users have sufficient money to make our payments.
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The major money-authority community members buy the collateral of failed loans at bargain-basement prices, using the surplus they have gained, moving wealth from the user community to the major money authorities.
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Limited inflation can to some extent offset the need for growth in the economy, as more money is created to chase the same amount of economic activity. This is the functional reason that economists accept and promote limited inflation in the economy.
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Inflation is another form of tax on the productive user community. Its effect is that over time money loses its value. If inflation becomes high, it can be an aid to debtors, as they can pay existing debts with money that has less value if it is available to them.
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Money, growing exponentially over time through interest, can have more future value than the future value of goods traded for it in the present.
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Goods traded must grow in value as fast as the rate of interest-based exponential money growth to even maintain their value.
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Real stuff tends to depreciate, rather than appreciate like compound- interest money consistently does, making money a preferred instrument for savings and increasing money authority wealth.
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Especially in the down side of the business cycle, scarcity in the user community leads to the felt need to take care of self without concern for the needs of others, fighting for the scarce money available. Community is destroyed in this process.
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The major money authorities always win: gaining money in good times or assets in bad times, and the power to control the economy all the time, so long as the system continues.
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Because long-term infinite growth is not possible in a finite economy, this organization of the economy ultimately leads to major failures like the fall of the Roman Empire, and the incipient disintegration of the present world economy.
In short, the system transfers money, physical property, and power from the user community to the major money authorities because of its structure.
Users are encouraged to join the money-management community in a small way to assure our comfortable retirement, because the political system does not assure that this will occur.
Small investors (including myself) are thus unwitting participants in this system, brought into the money-management authority community by saving money at interest, loaning money and/or investing money (a form of loan of money with limited repayment possibilities and variable but potentially higher income).
In doing so, we become supporters of the system, assuring its perpetuation even though the system is ultimately not in our best interest over the long term.
At the same time this looks good to us small savers and investors for near-term unearned income in the economy of scarcity that has been introduced. It justifies in our minds the continuation of the whole system that structurally moves money from us to the money-authority community, and ultimately concentrates it in the hands of the major money authorities.
The Current Predicament
The major money authorities were bailed out in 2008, after a bubble they had created burst. This bubble had no inherent value because it was not earned. It's money was gained through unearned income received through bets, and bets on bets, that were structurally created to produce winnings. This same group is again being bailed out now, with massive amounts of money and credit, while the productive community is getting comparatively little aid, and is still living in an economy of scarcity.
The exception to scarcity in the productive community is that companies and industries that are tied in with the money authority community and politicians, are receiving funds while minority and small businesses as well as individuals, are largely being left out.
The major reason we have not had an inflationary breakdown currently is that most of the added money created to maintain the necessary exponential money supply growth required by the system to prevent breakdown has been directed to the financial community, which is a growing cancer on the economy. This has prevented short-term breakdown, but makes the future final system failure potentially more catastrophic.
The result is that the current money authorities are left the opening to take advantage of a massive number of loan foreclosures and bankruptcies, buying up the assets of money users, and consolidating their power over the economy and polity.
Some Possible Corrections Within the System
Credit unions, while they are usually centrally managed with little user input, are structurally owned by their patrons and operate in their patron's interest. They operate as non-profits. As a result they don't cause the condition of scarcity in the user community current account created by for-profit money authority institutions. Claims on commitment return to the user commons. Exponential growth in the user-economy money supply is therefore not structurally required over time by the money creation process where these institutions are in place even though they practice the use of interest.
A national government money system does not necessarily contribute to exponential growth in the money-creation process. To the extent that its spending is for goods and services that provide paid work for the citizens, it keeps the money in circulation among us.
Spending that does not benefit the citizens, like military and other interventions in other countries and spending for the benefit of bureaucrats and their friends in big business and finance, remove money from the user economy. In addition the still-existing private for-profit banks receive unearned income from interest, and corporations receive money as unearned income, moving money from the current user account to the money authority equity account and its members.
As noted earlier, in the medium to long term, government money leads to increased power for the for-profit banks and corporations. It is still a top-down system, authority based, rather than democratically operated.
