The architects of our financial system invented the double-entry accounting system to ensure the perpetual need for debt. Making debt essential was the cage to ensnare humanity. Interest was the key that locked the cage door. Justifying interest would ensure that the issuers of debt could perpetually collect a private tax on the total value of all of the assets on earth. Even money itself originates as debt and must be entered on both the asset and liability sides of a balance sheet. In a nutshell, these are the secrets of our debt-based monetary system.
Charging interest on loans makes it easy to convince people that too much debt is a bad thing. It also teaches them to expect that the amount of debt they can access will be limited by their income level. If you are rich, you can borrow a lot to become even richer. If you are poor, you are stuck with whatever meagre income you can earn from your own labour. This unequal access to money lays the foundation for capitalism.
The poor have few choices and must remain dependent on those who have capital. The poor cannot afford to invest in the education needed for a high paying job and must remain dependent on those offering minimum wage positions. The poor cannot afford to buy their own home and must remain dependent on those who offer rental housing. The rich, on the other hand, can rely on these disadvantages of the poor and capitalize on them. The rich can use borrowed money to exploit the productivity of minimum wage workers and make huge profits for themselves. The rich can use borrowed money and the rental income from their tenants to acquire apartment buildings and housing properties for themselves. By denying the poor access to capital, the rich can control markets and acquire fabulous wealth for themselves.
But with our double-entry accounting system, to say that too much debt is a bad thing also implies that too much wealth is a bad thing. Under our accounting system wealth and debt are simply opposite sides of the same coin. Wealth cannot be created without debt, and debt cannot be eliminated without destroying wealth. It is curious then that those who demonize debt never suggest whose wealth should be obliterated. To strive to limit the amount of wealth that society can produce by cultivating an exaggerated fear of debt is pure skullduggery. It is as ridiculous as saying that, although we have the human and natural resources necessary to produce new wealth, we simply can't afford to be any richer.
It is not the amount of debt itself that is the problem, it is the cost of servicing our debt that gets us into trouble. Interest payments rob income from people with too little wealth and reward people whose wealth is already more than adequate. If interest was abolished, people with too little wealth could afford to borrow to develop their potential and the artificial need for a planned scarcity of money would disappear.
Throughout history we have been warned repeatedly by presidents, popes and bankers alike that a privately-owned, interest-bearing, debt-based monetary system would enslave humanity, control governments and make a mockery of democracy. Our forefathers fought and died to free us from the grip of usury that the Bank of England used to control the colonies. Yet despite their ultimate sacrifice, early in the 20th century, the governments of North America simply gave away their sovereignty and the most precious right and sacred responsibility of any government, the right to create and control the currency and credit of a nation. One simple act of treason quietly returned the most precious power on earth to the private banking system.
If governments exercised their right to create interest-free credit for the nation, society could rebuild and enhance its infrastructure immediately. Without the burden of interest, the cost of restoring our national asset base of roads & highways, airports & seaports, schools & hospitals and government buildings & equipment, would never have to be repaid any faster than the rate at which the assets actually depreciated. Our double-entry accounting system requires it to be that way. To keep our assets and liabilities equal, we do need to pay down our debt as our assets wear out, but it is totally unnecessary to reduce our liabilities any faster than our assets depreciate. As long as the value of an asset exists, a corresponding liability must also exist. So if a public hospital was built to last 100 years, without interest payments, taxpayers would only need to pay back 1/100th of the cost of building the hospital each year. With interest payments however, taxpayers must pay the cost of building two or three hospitals before the loan is complete, regardless of how fast the building is actually wearing out.
The Relationship Between Profit & Debt:
Although the public is beginning to understand how harmful interest and usury can be, most people haven't even thought about questioning the desirability of profit. Interest is under attack primarily because people are starting to recognize that interest itself is totally unproductive. The rewards of interest go to people who produce nothing themselves. The vast majority of loans are created instantly out of thin air. Nothing more than a few keystrokes on a computer are required to create a new credit. No new tangible assets are produced when the loan is created, but existing tangible assets are encumbered as collateral. If the loan is used to increase productive capacity, then the principal amount created may not be inflationary, but the interest always is. Interest inflates the price of everything that it touches, yet it produces nothing itself. It simply transfers purchasing power from borrowers to lenders.
Likewise, profit inflates the price of everything it touches. However, the legitimacy of profit appears to be shielded from close public scrutiny by the notion that those who receive profits, rightfully earn them by contributing their own productive labour, capital and initiative to society. While there may have been a grain or two of truth to sustain this belief in the past, the purely speculative financial economy of today has destroyed the credibility of that argument completely. Money is deliberately not tied to any fixed, universal constant, so that all values can be subjectively defined. A belief in subjective value (the "law" of supply & demand) is essential in order to justify the theft of wealth, using speculation, usury and profit.
The very cornerstone of investment ideology," buy low and sell high", is merely a crude camouflage for inflation. Simply flipping existing assets for a higher price is totally unproductive. No new tangible assets are created in the process. For example, look at the price of real estate. As the existing housing stock ages and wears out, rather than depreciating its value accordingly, property owners constantly attempt to inflate resale prices to the maximum the market will bear. How does inflating the prices of stocks, bonds, commodities or any other existing asset contribute to building a better, more productive society? It certainly accelerates the need for more debt. In order to keep the value of our assets increasing, the value of our liabilities must also increase. Our accounting system demands it.
The rabid quest for profit is now actually cannibalizing our society. Existing productive assets are intentionally left idle to constrict market supply and inflate prices. Many of today's new investments are simply corporate takeovers of existing businesses intended solely to eliminate competition, consolidate market share and control market prices. The tremendous social costs of profit are now becoming obvious as more and more plants shut down and formerly productive citizens lose their jobs.
Profit and interest are identical twins. Both extract money-for-nothing from workers. The only real difference is that interest rewards lenders at a fixed, pre-determined rate while profit rewards shareholders at a fluctuating, but normally higher rate. Nevertheless, the idea that profit is fair has been deeply planted in our collective consciousness and the mainstream media reinforces the idea constantly. Day after day, it seduces us with the allure of excessive wealth and ever so subtly transfers the responsibility for our failure to reach the top directly onto our own shoulders. If only we were smarter, or more hardworking, or better looking, or more popular, then we too could be successful and earn the fabulous incomes of the rich and famous. But it's all an illusion, the game is rigged and the odds of winning are next to none.
The Stock vs Flow Argument:
A popular misconception that is often repeated, especially among monetary reformers, is the idea that interest itself creates the need for new debt. Their argument suggests that it is impossible for all borrowers to pay back both loan principal and interest when only the principal amount of their loans was created initially. After carefully testing these ideas with economic models created in Excel, I now realize that these arguments are indeed false. They fail to take into account the important distinction between money as a stock (or static fixed amount of purchasing power) and money as a flow (or continuously re-circulating stream of purchasing power).
Profit and interest enables producers and lenders to purchase additional goods and services from other producers and borrowers before the next production cycle begins. This flow, or recycling of profit and interest within a single production cycle, has exactly the same effect as increasing the stock, or quantity, of money in the economy. During each production cycle, production inputs are sold to businesses and consumer goods are sold to workers. These initial sales generate profits which can then be re-spent to service debt or purchase additional goods and services. These secondary sales in turn generate additional profits which can again be re-spent. Each repetition of this sequence is a flow. Each time a portion of the same physical money stock re-cirulates, it constitutes a flow.
As long as all of the interest and profit continues to be fully re-spent in the local marketplace, all local merchants will be able to service their debt and sell their entire production. If, however, anyone decides to either save a portion of their profits, or repay a portion of the principal amount of their loans, or purchase goods and services from outside the local marketplace, then a need for new debt will arise. If for any reason, any portion of the total volume of money is not re-circulated completely in the local marketplace, this reduction in the flow of money will adversely affect one or more of the local producers. All of their goods and services will not sell and some may not earn enough profit to cover their loan obligations. If one merchant fails to sell all of his goods and services, his profits will be reduced, and the drop in his purchasing power will affect other local merchants who rely on his purchasing power to sell all of their own wares.
In today's global economy, these ideal conditions are rarely achieved. So much money is constantly moving in and out of any local market that it is highly unlikely that flows can provide the even and consistent income levels that all businesses need to avoid new debt. And of course, flows do nothing to help workers. Workers cannot pass along price increases to anyone else. They are stuck with paying both business borrowing costs and business profits, plus their own debt servicing costs. When all this accumulated interest and profit leaves them with insufficient income to cover their basic living expenses, they MUST borrow more money in order to survive. Despite the magic of re-circulating money, it is still the distribution of money that really matters.
