Extreme wealth and extreme poverty have both increased concurrently for the first time in 25 years. The wealthiest 1% of people have more than twice the combined wealth of the other 99% of the world’s population. Economic inequality is the result of the unequal distribution of income and wealth between different groups of people. Oxfam 2024 report
There is a quick way to reduce inequality that will cause little disruption, is available to ALL countries, and can be implemented immediately without increasing taxes. It will also increase the GDP of countries that adopt it, and Central Banks will be able to set and achieve a target rate of zero inflation.
The solution is to provide competition to the bank oligopoly, which produces most of the new money for governments. Banks have a near monopoly on increasing the money supply. The Banks buy money from the government and charge the government a fee called interest to rent the money to the general population. The Banks also collect interest from the borrowers as they operate a two-sided market and charge borrowers for the same interest.
The government could give competition to the banks by allowing any recognised community group (including the government itself) to buy new money at the same price (namely, its face value) as long as they can prove they will spend the money on “the common good.” This competition will save any community group that needs to build assets twice the value of the interest. It will more than halve the cost of public transport, roads, etc.
This idea puts communities on an equal footing with the banks, except communities have an extra hurdle to meet. Banks can still buy and rent money as loans as they do today, where the criteria for a bank is that the loans they make are repaid and lawful. Communities have an extra hurdle that the wider community believes the new money is for “the common good”. Banks will have a competitor, meaning they must consider value to their clients and shareholders.
Government instrumentalities, such as state and local governments, can buy new money from the Government if they can show that the funds will be spent on the common good, such as running an efficient bank or building roads and other community infrastructure now funded through taxes. Other community organisations can purchase new funds to build an asset like a swimming pool if the rest of the community agrees to build the swimming pool.
The Arguments for the Change
Banks give loans to anyone who can guarantee they can repay the loan lawfully. Banks today buy money from the Central Bank and other banks and then lend it. They issue debt and rent out the money. They can still do this with existing money.
What will change is that banks will no longer find that they can borrow money cheaper than they can lend it. In particular, they will find they cannot get away with practices such as capitalising interest and fees and collecting interest twice — once as a capital gain and once as interest.
Competition stabilises the monetary system because there is now a competitor to the banking oligopoly on buying money. Unlike electronic money, anyone can purchase physical cash at the same price as the government. Communities should have the right to purchase electronic money from the government at the same price as banks. Competition will lead to an efficient market. The banks that can distribute it at the cheapest rate will outcompete the banks that today provide wealthy customers with lower costs and better service because they receive double the interest amount from the general public.
This will lead to more competition for government services as a community group could buy money and use it to set up a garbage collection service to compete with a local authority. Governments will have an alternative to taxation and bank loans as a way to raise money to build infrastructure.
Markets and competition keep individuals and companies “honest” because they provide alternatives. Our current financial system is an oligarchy of banks whose primary purpose is to distribute money to the very rich because that way, they make the most profit for their shareholders.
Example of Funding a New Public School
A Community needs a new school at which any child living in the community has the right to attend. It will be built by a private contractor selected by open tender. It will be funded with a loan from a private bank or purchased with money obtained directly from the Reserve Bank but approved by an independent assessor.
The loan will be repaid from taxes on the local community. The interest rate from the Reserve Bank would be the same rate given to the private bank. The Reserve Bank would not approve the loan. Instead, an independent authority outside the local community will perform the same task of evaluating the loan undertaken by a private bank as well as assessing the community's benefit.
The private bank will evaluate the loan on the return and risk to shareholders. The independent authority will evaluate the value to the community.
The community can still borrow from the private bank if it wishes. The community will pay less, whatever the outcome, because the private banks have a genuine competitor that they will have to match.
Controlling the Money Supply
With this system, each day, the Reserve Bank could adjust the payment rate at which the money is purchased, speeding up or slowing down money circulation. This is a direct control of the money in circulation and will be a highly effective way of controlling the money in circulation. The rate at which money is repaid is a direct control and is more effective than changing the cost of money, which is an indirect control mechanism.
Implementing Competition
Governments can start the change by banning the banking practice of automatically debiting the interest and fees on loans. Debiting a bank account with interest or fees is called capitalising interest, and banks should only do it when interest is unpaid. It is unnecessary and will mean that borrowers buy the money from the bank — not rent it as they do today with most loans. Bank interest is a fee and should be paid by the government as it is a cost incurred. As a fee, its payment reduces the amount owed rather than increasing the money supply when capitalised.
This will standardise the price of money. It is easy to implement because banks today are not supposed to capitalise interest and fees unless there is a good reason and the borrower agrees to it. Banks have found accounting ways and deceptive contracts to get around the restrictions imposed by banking codes of conduct. This change makes it harder for banks to use their oligopoly to gain an advantage because everyone is on an equal footing when buying new money.
To start the process, the government only needs to pass a regulation preventing banks from capitalising debiting interest and fees on their loans. The next step could be to allow government instrumentalities to buy money directly from the Reserve Bank. The experience will determine how best to extend the ability to purchase new money to the rest of the population.
Barriers to Implementation
Implementation is straightforward as it enforces existing systems and policies. The “common good” definition is already handled by governments today by how they justify the expenditure of tax dollars. For example, today, the criteria for giving a loan is “Can the loan be repaid?”. When buying money, the question is both: Can the money be purchased from the income generated by the money plus the value generated as a “common good”?
Adding other reasons, such as whether the money reduces the costs to the whole community outweighing the price of the funds, brings more competition to government spending. Governments do this with their expenditures of taxes. The change is that there is an alternative to bank loans where the banks have the conflicting need to gain the highest return for their shareholders.
The main barriers are resistance from the banking sector, the wealthy, and others — like politicians, lawyers, and other service providers who make their money from the complexities of the current system. They will spread disinformation, hence the need to leave the current system and evolve it over time through natural selection by introducing competition.
Reasons Given Against Introducing Competition to Banks
It is a Don Quixote Waste of Time
The most common reaction to increasing competition is — “The current system works well enough, and why rock the boat because the outcome will probably be worse? Besides, the banks and politicians won’t let it happen”. The argument against this is that the current system worsens inequality, reduces the economy's efficiency, and hence should be changed.
It will hurt Superannuation and Returns on Investment
A response to this assertion is that a more efficient financial system increases overall wealth. What competition does is distribute a larger pie fairly and increase superannuation returns on investment — particularly when the superannuant wants a retirement income.
It must be Wrong Because Governments would not Allow It
Unfortunately, the evidence is that it is accurate, and governments allow it.
The Government Can Fix the Problem by Taxing Unfair Gains
It can be alleviated with taxes, but unscrambling eggs is difficult. It is best to prevent the unfairness before it happens.
It fits the Standard Economic Theory
Much of economics is built on the idea of compounding capital. Think Discounted Cash Flow Analysis, Levelised Cost of Energy, Cost-Benefit Analyses, Guaranteed Rate of Return, and Target Rate of Inflation.
In so many ways, economics, as taught and practised, implies that money today is worth more than money tomorrow, interest and profit increase wealth, and that we can solve the allocation of resources by varying the price of goods and services while leaving the value the same. These beliefs are incorrect. Money today should have the same value tomorrow, and profits and other forms of capital gain redistribute wealth — not increase it.
The science of economics models money transactions. The financial system describes a model where money generates more money, which causes many of our problems today. Better modelling techniques used by the natural sciences will make economics more of a science and better serve the community.
The Unfairness of Capitalism
Bank loans with capitalized interest turn income into a capital gain. This means borrowers pay for a service, while the bank treats it as a capital gain, requiring the borrower to pay again. Consequently, the borrower pays for the same service twice, and the bank benefits with an untaxed capital gain where the tax is passed to the shareholders. This pattern is prevalent in many aspects of capitalism, as the ability to generate more money gives the wealthy an advantage over others. Overall, the financial system does not provide a level playing field.
We know that capitalism results in an explosion of goods and services. We also know that unfair capitalism produces obscene wealth distribution and much lower productivity. We can change how capitalism works so it retains its benefits of creating abundant goods and services while distributing them fairly across society.
What You Can Do
Unfair Capitalism works by “accounting sleight of hand”. What you see is not what you get. When we see it, like crime stoppers, we should report it and ask our political representatives to level the playing field because money and finance are a government responsibility. Governments can correct most issues by examining “capital gains” and finding and then acting on alternatives that turn capital gains into income and expenditures that reflect the sharing of goods and services.
What is Likely to Happen
This article has discussed allowing community groups to buy new money with additional rules associated with repayments and interest. This was done for purposes of illustration.
The more likely scenario is that community banks will negotiate with the Reserve Bank and the government to give loans where repayments to the government are in the form of community assets rather than destroying the money from the loan. The community owns the money, and the community owns the assets. The bank is a community asset owned by the borrowers and depositors who can share profits.
Summary
Today, new money comes into the community via bank loans. The banks choose what is funded and how much it will cost the borrower, giving the wealthy 1% advantages at the expense of the 99%. We can add competition by introducing new money via governments and other community organisations representing 99% of the population. Competition means that banks will treat the 99% the same as the 1%. Experience shows competition leads to lower costs of goods and services. Money and banking are services, and providing competition to the banks will lower the cost of money.
