Finance — the world’s most inefficient industry

Kevin Cox
3 min readJan 14, 2017


David Pitt-Watson of the London Business School says

“If you distill it down, there are essentially four functions of the financial sector — keeping our money safe, allowing us to transact, allowing us to share risk and intermediation; that is taking our savings and giving them to someone to invest.”

The finance industry does all these things but at a cost. The cost is at least 100 times more than it needs to be. Why is the cost so high and why have we allowed it to remain this way?

Michael Hudson in his book “Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy” chronicles the history of the Finance Industry to its present state. He makes a compelling case that the finance sector is a parasite and is killing host economies through debt repayments.

The finance industry is an information industry. It produces and deals with information. Who owns what, what value does it have, and how to move and protect the information. The finance industry does not produce goods and services directly. What it does manufacture is money. It creates money by lending it and it creates more money through interest and dividends and what we call capital gains. It works by turning information, which is value, into a product called money tokens. Money tokens themselves become valuable even though they are only symbols.

We do not have to operate the financial system with money tokens that have value. Money symbols are information about value. The do not have a value in and on themselves.

There is a consensus amongst most pundits and economists that the problem lies in debt. There are thousands of suggestions on how to fix the debt problem. Most propose ways to make it harder to create a debt or ways to make it more likely a new debt is repaid by reducing old debt through austerity measures. This article outlines a lower cost way by changing the way we repay loans.

The problem of debt repayment is subtle and difficult to see and understand. The problem started with double entry bookkeeping. With double-entry bookkeeping, we make the assumption that money tokens have value. In our balance sheets, we have an asset that has a value, and to balance the books we balance it with a liability. Let us say the liability is a loan. The loan tokens (money) now have value because we define it that way. We then say because it has value the lender is entitled to receive interest, and so we need to generate more money than we borrowed to pay the interest. How we generate the extra money to pay the interest is not needed for our bookkeeping. This approach has the advantage that money tokens can represent value created in any way, and it makes it easier to do manual bookkeeping. It means the finance system can meet the Pitt-Watson promises.

The cost of giving money tokens a value is a minimum of the cost of interest. To meet the Pitt-Watson promises the financial system generates other costs such as insurance, depreciation, and the cost of protecting the value of the money tokens.

There is a lower cost way to handle the information represented by money.

With modern technology, we can still keep double-entry bookkeeping, retain the idea that money represents value, give investors a return on their money. But, we do it without requiring money tokens to have value. We do it by keeping the information of why we borrowed money. We then repay the loan plus a return from the value of goods and services generated from the borrowed money.

One relatively easy way to do this is to repay a loan with goods and services created with the use of the loan money. By doing this, we remove the need to pay for the use of money tokens, and that eliminates interest. We can change our bookkeeping and agreements so that money tokens are information about value. If we do this we remove the need to accumulate money tokens for the purpose of insurance and replacement of assets.

With modern computing and communications technology this approach of accounting for and repaying loan money is less than one hundredth of the cost of providing the information delivered by the existing finance system that uses interest, insurance and depreciation to provide the same information.



Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income by profiting from savings nor increasing prices.