A loan is where a bank gives a person money, and the person promises to repay the money in the future. When a bank provides a loan, it creates new money, and the bank agrees to repay it if the borrower doesn’t. The government also agrees to accept the money when people use it to pay taxes or buy things from the government.
The banks take on the risk of loaning money and need to be paid for this risk and for arranging for the new money. The payment for taking on the risk and for loan administration is called interest, but it is better called a fee.
When a loan is repaid, the repayment cancels the loan and removes the money from the economy.
The money system is unfair because the bank asks the borrower to pay the interest. This is unfair because wealthy people can repay the loan quickly, costing them less. Poorer people are slower in repaying loans, and paying the fees to the bank means they take longer and pay more for the same money.
The solution is for the government to allow the bank to keep the interest money instead of cancelling the repayment that pays the interest. This does not cost the government anything and reduces the money needed in the economy. The change is easy and will make the economy more efficient, so why isn’t it done?
There are two main reasons. The first is that banks find it easier to charge more to borrowers than to get governments to agree to allow them to keep more money. Governments don’t mind borrowers paying more because they believe they can collect more taxes from banks than the general population. Banks know that borrowers paying interest gives them a capital gain if they can capitalise interest, so they will continue to charge borrowers until they stop capitalising interest.
The second, more important reason is the inertia of large human systems, such as the money system. The money system works well, and changing it can have unintended consequences, extra costs, and difficulty in implementation.
With the advances in computing and communications, the money system should become efficient as moving money is a computing and communications problem. Yet, we have endemic inflation and economies where a few own more than the rest. Both of these are symptoms of an inefficient money system.
Governments with an inflation target have lost control of the money supply as they have acknowledged that too much money is added to the money supply. If asset prices increase, there is too much money in the economy. If the distribution of money follows a Zipf distribution, there will be less trading and less investment, and the economy will decline. All these symptoms of a dysfunctional money system are painfully apparent in most economies. The change to fair loans is long overdue and should start as soon as possible.
A Solution
A solution is to make the money system fair with fair loans where the money system itself pays for its operation and where money is preserved and not destroyed if the money creates a new asset. This is done by:
- Banning all capitalisation of interest where interest is added to the amount purchased from a bank through a loan. Instead of the borrower paying the money, the interest is paid using some repayments. The payment of interest reduces the amount owing. It means everyone pays the same price for new money.
- When the interest is paid from the repayments, the interest rate on deposits should equal the interest rate on the loan.
- Using the money repaid minus interest to create further assets of the borrower’s community and decided by the community will increase productivity for no extra cost.
- Large communities should be divided into community market cells. Investors, buyers, and workers exchange a defined set of goods, services, and assets using a fixed amount of money that cannot be increased or decreased within the cell. The money in the cell can grow, but only if there are more loans, and it decreases if the investments lose their value.
- Money can move between cells if there is too much or too little in a cell.
- Individuals can move to different cells at no cost.
A bank and a community that follow these rules will use a near-minimum amount of money on finance. Interest is still paid on savings, but money in the bank will remain the same value. Everyone in a community will be treated equally, and the community will produce the goods and services it needs at the lowest cost.
If a cell has more money than it needs, it can invest its excess in another cell in the fractal of cells. Money in this system flows wherever necessary, guided by the cell members. It is dynamic and self-adjusting to meet demand and is driven by the cell structure's top, bottom, and middle. It looks like a living, self-regulating organism.
Effect of Changing to Fair Loans
Fair loans with local communities around a given product dramatically reduce the cost of buying and selling assets like housing. The communities can use the houses as collateral for loans that the community can use to build assets; instead of the bank taking the increase in the money supply with capitalising interest, the community shares the increase. The banks still receive interest and profits from it.
Fair loans release the value of stationary local assets and put that value to work for local communities. The amounts are staggering and will pay for most community infrastructure, as the value of community assets is used as collateral for loans to build, maintain, and operate infrastructure.
The investment estimate in the table above is for new investments and does not replace existing investments. It removes capital gains from banks, but bank capital gains do not produce extra wealth; instead, they transfer wealth from borrowers to bank shareholders, who have had an extraordinary increase in wealth over the past forty years.
Extra wealth comes from the increase in the money supply from loans. Wealth is stored in assets as they are built or maintained by continuously transferring value through fair loans. Extra money is removed from the economy when assets decrease in value or governments remove money with taxes.
The rationale for governments selling government assets is that they utilise static capital. Fair loans do the same but keep the ownership and income generated by the community that uses government assets. It provides a way for any community to acquire wealth from their efforts on the assets they use and create.
As Aristotle pointed out, capitalised interest is not a good idea. The difference between Aristotle and fair loans is that fair loans get the producer of the money to pay for the distribution of money (interest), not the borrower of money. Interest is necessary, but it is a cost of creating money, not a way for money to earn income.
