Sacred Economics: Money, Gift, and Society in the Age of Transition (16 page)

The problems start with interest. Because interest-bearing debt accompanies all new money, at any given time, the amount of debt exceeds the amount of money in existence. The insufficiency of money drives us into competition with each other and consigns us to a constant, built-in state of scarcity. It is like a game of musical chairs, with never enough room for anyone to be secure. Debt-pressure is endemic to the system. While some may repay their debts, overall the system requires a general and growing state of indebtedness.

Constant, underlying debt-pressure means there will always be people who are insecure or desperate—people under pressure to survive, ready to cut down the last forest, catch the last fish, sell someone a sneaker, liquidate whatever social, natural, cultural, or spiritual capital is still available. There can never be a time when we reach “enough” because in an interest-based debt system, credit exchanges not just “goods now for goods in the future,” but goods now for
more
goods in the future. To service debt or just to live, either you take existing wealth from someone else (hence, competition) or you create “new” wealth by drawing from the commons.

Here is a concrete example to illustrate how this works. Suppose you go to the bank and say, “Mr. Banker, I would like a $1 million loan so I can buy this forest to protect it from logging. I won’t generate any income from the forest that way, so I won’t be able to pay you interest. But if you need the money back, I could sell the forest and pay you back the million dollars.” Unfortunately, the banker will have to decline your proposal, even if her heart wants to say yes. But if you go to the bank and say, “I’d like a million dollars to purchase this forest, lease bulldozers, clear-cut it, and sell the timber for a total of $2 million, out of which I’ll pay you 12 percent interest and make a tidy profit for myself, too,” then an astute banker will agree to your proposal. In the former instance, no new goods and services are created, so no money is made available. Money goes toward those who create new goods and services. This is why there are many paying jobs to be had doing things that are complicit in the conversion of natural and social capital into money, and few jobs to be had reclaiming the commons and protecting natural and cultural treasures.

Generalized, the relentless pressure on debtors to provide goods and services is an organic pressure toward economic growth (defined
as growth in total goods and services exchanged for money). Here’s another way to see it: because debt is always greater than money supply, the creation of money creates a future need for even more money. The amount of money must grow over time; new money goes to those who will produce goods and services; therefore, the volume of goods and services must grow over time as well.

So it is not just that the apparent limitlessness of money, observed since ancient Greek times, allows us to believe in the possibility of eternal growth. In fact, our money system necessitates and compels that growth. Most economists consider this endemic growth-pressure to be a good thing. They say that it creates a motivation to innovate, to progress, to meet more needs with ever-increasing efficiency. An interest-based economy is fundamentally, unalterably a growth economy, and except for a very radical fringe, most economists and probably all policy makers see economic growth as a demonstration of success.

The whole system of interest-bearing money works fine as long as the volume of goods and services exchanged for money keeps pace with its growth. But what happens if it doesn’t? What happens, in other words, if the rate of economic growth is lower than the rate of interest? Like the people in the parable, we must consider this in a world that appears to be reaching the limits of growth.

Because economic growth is almost
always
lower than the rate of interest, what generally happens in such conditions is no mystery. If debtors cannot, in aggregate, make interest payments from the new wealth they create, they must turn over more and more of their existing wealth to their creditors and/or pledge a greater and
greater proportion of their current and future income to debt service. When their assets and discretionary income are exhausted, they must go into default. It can be no other way, when the average return on investment is lower than the average interest rate paid to obtain the capital invested. Defaults are inevitable for a certain proportion of borrowers.

In theory at least, defaults are not necessarily a bad thing: they bring negative consequences for decisions that don’t further the general good—that is, that don’t result in more efficient production of goods that people want. Lenders will be cautious not to lend to someone who is unlikely to contribute to the economy, and borrowers will be under pressure to act in ways that do contribute to the economy. Even in a zero-interest system, people might default if they make dumb decisions, but there wouldn’t be a built-in, organic
necessity
for defaults.

Aside from economists, no one likes defaults—least of all creditors, since their money disappears. One way to prevent a default, at least temporarily, is to lend the borrower even more money so she can continue making payments on the original loan. This might be justified if the borrower is facing a temporary difficulty or if there is reason to believe that enough higher productivity is around the corner to pay back all the loans. But often, lenders will throw in good money after bad just because they don’t want to write down the losses from defaults, which could indeed send them into bankruptcy themselves. As long as the borrower is still making payments, the lender can pretend that everything is normal.

This is essentially the situation the world economy has occupied for the last several years. After years, or even decades, of interest rates far exceeding economic growth, with no compensatory rise in defaults, we face an enormous debt overhang. The government, at
the behest of the financial industry (i.e., the creditors, the owners of money), has done its best to prevent defaults and keep the full value of the debts on the books, hoping that renewed economic growth will allow them to continue to be serviced.
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We will “grow our way out of debt,” they hope.

At the political level, then, the same pressure exists to create “economic growth” as it does on the level of the individual or business. The debtor is under pressure to sell something, if only his labor, in order to obtain money to pay debt. That is essentially what growth-friendly policies do as well—they make this “selling something” easier; that is, they facilitate the conversion of natural, social, and other capital into money. When we relax pollution controls, we ease the conversion of the life-sustaining atmosphere into money. When we subsidize roads into old-growth forests, we ease the conversion of ecosystems into money. When the International Monetary Fund (IMF) pressures governments to privatize social services and cut spending, it pushes the conversion of social capital into money.

That is why, in America, Democrats and Republicans are equally eager to “open new markets,” “enforce intellectual property rights,” and so on. That is also why any item of the commons that is unavailable to exploitation, such as oil in the Alaskan Wildlife Refuge, local food economies protected by tariffs, or nature preserves in Africa, must endure constant assault from politicians, corporations, or poachers. If the money realm stops growing, then the middle passage between defaults and polarization of wealth narrows to nothing, resulting in social unrest and, eventually, revolution.
Without growth, there is no other alternative when debts increase exponentially in a finite world.

If this growth, this conversion of commonwealth into money, happens at a rate faster than the rate of interest, then everything is fine (at least from the financial perspective, if not the human or ecological perspective). If there is enough demand for chickens and enough natural resources to feed them, villagers can borrow at 10 percent to increase their chicken flock by 20 percent. To use conventional language, capital investment brings a return in excess of the cost of capital; therefore, the borrower gains wealth beyond the portion that goes to the creditor. Such was the case in frontier days, when there was plenty of the unowned ripe for the taking. Such is still the case in a society where social relationships are not fully monetized—in economic parlance this is called an “undeveloped market.” Only with economic growth can “all boats rise”—the creditors get richer and richer, and the borrowers can prosper as well.

But even in good times, growth is rarely fast enough to keep pace with interest. Imagine now that the villagers can only increase their flocks by 5 percent a year. Instead of paying a portion of new growth to the bankers, now they have to pay (on average)
all
of it, plus a portion of their existing wealth and/or future earnings. Concentration of wealth—both income and assets—is an inescapable corollary of debt growing faster than goods and services.

Economic thinkers since the time of Aristotle have recognized the essential problem. Aristotle observed that since money is “barren” (i.e., it does not leave offspring like cattle or wheat do), it is unjust to lend it at interest. The resulting concentration of wealth had been seen many times already by 350 BCE, and it would happen many times thereafter. It happened again in Roman times. As
long as the empire was expanding rapidly, acquiring new lands and new tribute, everything worked passably well, and there was no extreme concentration of wealth. It was only when the growth of the empire slowed that concentration of wealth intensified and the once-extensive class of small farmers, the backbone of the legions, entered debt peonage. It was not long before the empire became a slave economy.

I need not belabor the parallels between Rome and the world today. As growth has slowed, many today, both individuals and nations, are entering a state similar to Roman debt peonage. A larger and larger proportion of income goes toward the servicing of debt, and when that does not suffice, preexisting assets are collateralized and then seized until there are none left. Thus it is that U.S. home equity has declined without interruption for half a century, from 85 percent in 1950 to about 40 percent today (including the one-third who own their houses free and clear). In other words, people don’t own their own homes anymore. Most people I know don’t own their own cars either but essentially rent them from banks via auto loans. Even corporations labor under an unprecedented degree of leverage, so that a large proportion of their revenue goes to banks and bondholders. The same is true of most nations, with their ballooning debt-to-GDP ratios. On every level we are, increasingly, slaves to debt, the fruits of our labors going to our creditors.

Even if you carry no debt, interest costs factor into the price of nearly everything you buy. For example, around 10 percent of U.S. government spending (and tax dollars) is devoted to interest on the national debt. If you rent your home, most of the rental cost goes to cover the landlord’s highest expense—the mortgage on the property. When you eat a meal at a restaurant, the prices reflect in
part the cost of capital for the restaurateur. Moreover, the costs of the restaurant’s electricity, food supply, and rent also include the interest that
those
suppliers pay on capital, too, and so on down the line. All of this money is a kind of a tribute, a tax on everything we buy, that goes to the owners of money.

Interest comprises about six components: a risk premium, the cost of making a loan, an inflation premium, a liquidity premium, a maturation premium, and a zero-risk interest premium.
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A more sophisticated discussion of the effects of interest might distinguish among these components, and conclude that only the latter three—and particularly the last—are usurious. Without them, concentration of wealth is no longer a given because that portion of the money doesn’t stay in the hands of the lenders. (Growth pressure would still exist, though.) In our present system, however, all six contribute to prevailing interest rates. That means that those who have money can increase their wealth simply by virtue of having money. Unless borrowers can increase their wealth just as fast, which is only possible in an expanding economy, then wealth will concentrate in the hands of the lenders.

Let me put it simply: a portion of the interest rate says, “I have money and you need it, so I am going to charge you for access to it—just because I can, just because I have it, and you don’t.” In order to avoid polarization of wealth, this portion must be lower than the economic growth rate; otherwise, the mere ownership of
money allows one to increase wealth faster than the average marginal efficiency of productive capital investment. In other words, you get rich faster by owning rather than producing. In practice, this is nearly
always
the case, because when economic growth speeds up, the authorities push interest rates higher. The rationale is to prevent inflation, but it is also a device to keep increasing the wealth and power of the owners of money.
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Absent redistributive measures, the concentration of wealth intensifies through good times and bad.

As a general rule, the more money you have, the less urgent you are to spend it. Ever since the time of ancient Greece, people have therefore had what Keynes called a “liquidity preference”: a preference for money over goods, except when goods are urgently needed. This preference is inevitable when money becomes a universal means and end. Interest reinforces liquidity preference, encouraging those who already have money to keep it. Those who need money
now
must pay those who do not, for the use of their money. This payment—interest on the loan—must come from future earnings. This is another way to understand how interest siphons money from the poor to the rich.

One might be able to justify paying interest on long-term, illiquid, risky investments, for such interest is actually a kind of compensation for forgoing liquidity. It is in keeping with gift principles, in that when you give a gift you often receive a greater gift in return (but not always and never with absolute assurance; hence, risk). But in the present system, even government-insured demand deposits
and short-term risk-free government securities bear interest, allowing “investors” to profit while essentially keeping the money for themselves. This risk-free component is added as a hidden premium to all other loans, ensuring that those who own will own more and more.
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