Engine of Destruction
Thomas H. Greco, Jr. Revised May 7, 2002
The Magic of Compound Interest
Take a dollar bill and bury it in the ground. Leave it there for 50 years, and then dig it up. What do you have? Depending on the precautions you took to protect it, you have either a dollar bill or a wad of soggy paper fragments. In the best possible case, you can go out and spend that dollar bill, although it probably won't buy much if inflation continues as it has in the past.
Now take another dollar bill and deposit it in a savings account at a bank. Leave it there for fifty years, then withdraw your money. What do you have? Assuming an interest rate of six percent per year, you have $18.42. Amazing, isn't it, how money can grow? Even more amazing, if the interest rate had been ten percent, you would have $117.39. How can this be? Well, that's the magic of compound interest. By leaving the interest earnings in your account, you earn more interest on the interest.
This kind of growth is called exponential. If you can wait a while longer, the growth becomes really astonishing. After 200 years, for example, your single dollar, at 6% interest, will have grown to over $115 thousand, and, at 10% interest, it will have grown to almost $190 million. These growth figures are shown graphically in Figures 1 and 2, respectively. "Is there some mistake in these numbers?" you might ask. Not at all. Any financial calculator will allow you to compute future values. Try it yourself. You see, anyone can become rich; all you have to do is lend a little money at interest – and wait.
"I should live so long," you say. True enough. While these interest rates are pretty ordinary by contemporary standards, two hundred years is a long time for a natural person to wait, but it is not so long for a "legal person," like a corporation, or a government. The government of the United States is more than 200 years old. Unfortunately, the government is not a net depositor, but a net debtor. Debts also grow exponentially in exactly the same way. If you had borrowed a dollar instead of depositing a dollar, and never made any payments on the loan, your heirs would owe debts of these same amounts. Which legacy would you prefer to leave them?
A Sticky Predicament
The federal government has been borrowing for a long time, and its debt has been growing exponentially. At the present time, the accumulated debt of our federal government is approaching $6 trillion. That's more than seven times what it was just 20 years ago. Figure 3 shows how the debt of the federal government has grown over the past several decades. Your share and mine of that government debt is over $19,000. And so it is for every man, woman, and child in America. Whom do we owe all that money to? Don't be misled by the politicians' rhetoric that "we owe it to ourselves." The burden of debt is not distributed evenly. The government debt exists in the form of bonds. It's the bondholders to whom the money is owed, and they are the ones who are collecting the nterest on it.
But that's not the whole story. Besides the direct debt of the government, there are trillions of dollars more in loans made by private banks, which the government has guaranteed. You and I are ultimately responsible for these debts, too. And what about your personal debt? Do you have a mortgage on your home, a car loan, a student loan, and credit card debts? Most of us do. It has been reported that the vast majority of us possess little or no financial net worth. In other words, the debts we owe are greater than the assets we own. Large numbers of us are so deeply in debt that it takes two incomes just to keep a roof over our heads and food on the table and to keep us one step ahead of the bill collectors. When you consider the total debt for all sectors of the United States' economy– the sum of all debts carried by all levels of government, all business corporations, and all individuals--the total now stands at around $20 trillion. It, too, has been growing exponentially, both in absolute terms and relative to growth of the economy. It is now more than five times what it was only 20 years ago. This is shown in the graph in Figure 4.
Some economists argue that this debt growth is not really a problem because both the population of the country and the size of the economy have also been growing. That is true enough, but the rate of debt growth has, in fact, been much faster than the rate of growth of overall economic activity. A common measure of the size of the economy is Gross Domestic Product, or GDP. The fact is that debt has, for a long time, been growing more than twice as fast as GDP.
The Rich Get Richer and the Poor Get Poorer
This ageless aphorism seems more true now than ever, but it is not just the poor who are losing ground, but America's much-vaunted middle class. In a speech entitled "The Unfinished Agenda," delivered on January 9, 1997 , former Labor Secretary Robert Reich stated, "The unfinished agenda is to address widening inequality." He observed, "Over 15 years ago, inequality of income, wealth, and opportunity began to widen, and the gap today is greater than at any time in living memory. All the rungs on the economic ladder are now farther apart than they were a generation ago, and the space between them continues to spread." A chart accompanying that speech (Figure 5) shows that since 1947 the share of the aggregate income received by the bottom 40 percent of families declined from about 17 percent to 14.5 percent, while the share of the aggregate income received by the top five percent increased from about 17.5 percent to over 20 percent.
Another of Reich's charts (Figure 6) shows that "wealth distribution is even more unevenly distributed than income," and becoming more so. The wealthiest 20 percent have, for a long time, owned over 80 percent of the wealth. Reich stated that between 1983 and 1992, the richest 20 percent received 99 percent of the total aggregate gain in wealth, while "households with annual incomes under $10,000 experienced a real decline in wealth of 24 percent."
Is this a sound basis for a peaceful pluralistic society of free, responsible, self-reliant, and happy citizens? Continuation of these trends can lead only to civil strife and widespread misery. To ward off disaster, we need to achieve a deeper understanding of the causes underlying this state of affairs and find appropriate means to improve it. Unfortunately, neither former Secretary Reich nor anyone else in the political or academic mainstream seems to have any grasp on the roots of the problem or a clear plan for solving it.
The Debt Imperative; The Growth Imperative
Mr. Reich could only point to the decline of the implicit social compact "that, for nearly half a century, gave force to the simple proposition that American prosperity could include almost everyone," but he offered little in the way of possible remedies. Economists like to speak of a multiplicity of causes, but seem unwilling to see the obvious. Is there a single fundamental cause that makes all others pale into insignificance? I think there is. What I hope to show is that the economy is built upon a foundation that contains a debt imperative, that the debt imperative is the cause of the increasingly lopsided distribution of wealth, and, even more importantly, that the debt imperative causes a growth imperative that is forcing us to destroy the life-support systems of this planet.
The debt crisis and the increasingly lopsided distribution of wealth are the more visible facets of the financial iceberg that threatens everyone's security and our supposedly unsinkable Titanic economy. To understand the full extent of the threat and the root cause of the problem we must look beneath the surface. What this investigation reveals is that the cancerous growth of debt is caused by the very nature of our modern monetary system, which is built upon a foundation of usury. My years of studying the matter have convinced me that the evolution of money during the twentieth century and the incorporation of usury into its creation as bank credit money has placed an engine of destruction at the head of the global economy.
The mounting pressure of debt and the scarcity of money with which to repay it creates destructive competition among debtors, resulting in the rapacious exploitation of the Earth's resources, environmental destruction, and social degradation. None of these problems can be adequately addressed until the monetary problem is solved. We need to understand the fundamental flaw in our current monetary system and adopt a better alternative.
Interest or Usury?
The word "usury" has long since become a taboo in academic and financial circles, and it is almost never mentioned in the media anymore. But if we are to remedy the obvious flaws and inequities in the economy and discover a sustainable way of life, it is vital that we reexamine this concept and understand its role in our present monetary and financial structure.
An obvious clue that there may be a possible problem with usury is the fact that its practice has been prohibited by three of the world's major religions, Judaism, Christianity, and Islam. Of these, only Islam today makes any mention of it, although its opposition to it, in practice, seems rather confused and feeble. But religious prohibitions do not explain anything. Are they arbitrary and based on superstition, or is there some rational reason for them? I will not attempt to answer that question about usury in general. My purpose is to show how the inclusion of usury in the creation of bank credit money skews the entire economic game toward inequity, destructive competition, and cancerous growth.
But what is usury, and how does it differ from interest? Is there really a difference, or is the word "interest" simply a euphemism? Is one malevolent and the other benign? How can we distinguish between them?
Both words are derived from Latin. As Sidney Homer describes it in his book A History of Interest Rates,
The Latin word usura means the "use" of anything, in this case, the use of borrowed capital; hence usury was the price paid for the use of money. The Latin verb intereo means "to be lost." A substantive form interisse developed into the modern term "interest." Interest was not profit but loss.
It was from exception to the canon law against usury that the medieval theory of interest slowly developed. Compensation for loans was not licit if it was a gain to the lender, but became licit if the compensation was not a net gain but reimbursement for loss or expense. The doctrine of intention was overriding. 
It is not surprising that lenders would seek to justify all of their charges as interest to avoid being labeled usurers and incurring sanctions under law. Although there has never been an adequate scientific case made to support the practice of usury, it has become a generally accepted norm, of which we all partake. Indeed, in the orthodox body of economic thought it is now considered to be a necessary element in the allocation of material resources among competing uses in the economy, and an important lever in the management of the monetary system.
The principle of the time value of money is now an unquestioned axiom of business and economics, and almost everyone supports the belief that any rational "economic man" would prefer a sum of money now to the same sum of money later. But this applies only in situations in which money can command an interest return, and an interest return is only possible when there is no free market for money.
The absurdity of time preference can be seen if we think in terms of real value rather than money. A person can eat only so much at one time. Once your hunger is satisfied, would you prefer more food now or more food later? The answer is obvious. Your concern is not just to satisfy your present need for food but also to satisfy your future need. Why should money be any different? If I feed you today and you promise to feed me tomorrow, is that not a fair bargain? On what basis am I justified in demanding two meals for one?
But the error becomes truly egregious when it is applied at the point of the very creation of money – when money takes the form of monopolized bank credit that can only be created by members of the banking cartel by making “loans”on which they charge interest (usury).
What is money?
There are various ways to define money, but for our purposes, it is enough to define money as anything that is generally accepted as payment. We have grown accustomed to using the familiar paper currency issued by the Federal Reserve Banks, or writing checks, or using credit and debit cards. But these are relatively recent innovations, and not all of them are actually money.
For thousands of years, even up to the founding of the United States, money took the form of valuable commodities. Most commonly, money was coins of gold or silver. Later, paper currencies were introduced, but they themselves were not money, only symbolic representations of real (metallic) money, i.e., the notes were promises to pay money. When a trader accepted a paper currency note in payment for goods and services that he or she sold, the trader could take that note to the issuing bank and “redeem” it for actual money, that is, gold or silver coins.
When the constitution for the United States was written, it simply recognized the monetary standard that had already been established by popular usage. That was the Spanish milled dollar, a silver coin that circulated widely throughout the American colonies. The only problem to be resolved was to specify the exact weight and fineness of silver contained in the dollar, since dollar coins issued at different times varied slightly from one another. This was easily accomplished by commissioning a committee to survey the money stock and assay a representative sampling of dollar coins. It was quickly settled that an American dollar should be a silver coin containing 371.25 ounces of fine silver.. Gold coins, valued in dollars, were also issued.
As the country developed, various expedients were implemented to make money more abundant. These measures, unfortunately, were also used to concentrate economic and political power into fewer hands. First came fractional reserve banking, which allowed banks to issue more paper notes than the gold and silver they had to redeem them. Later, legal tender laws decreed that the paper had to be accepted as if it were gold or silver.
Today, money takes the form of bank credit that must be borrowed into circulation. This kind of money, sometimes called “checkbook money,” commonly exists as bank deposits, that is, balances in checking or savings accounts. The use of checks and debit cards is simply a way of ordering the transfer of bank credit money from your account to someone else's account. They are not themselves money. Credit cards typically allow you to defer payment, but they also provide for pre-authorized loans. If you carry a balance beyond the grace period for payment, money will have been created. Federal Reserve Notes are simply physical tokens of the money that was first created as bank credit. The main point that needs to be understood is that in order for money to come into circulation, someone must go into debt to a bank. If there were no such debt, there would be essentially no money.
Does that mean that debt is good? Hardly. When you borrow money from a commercial bank, the bank charges usury (called interest) on the "loan." It is this usury feature of bank credit money that is causing debt to grow exponentially throughout the world. The exponential growth of debt, in turn, puts pressure on the economy also to grow exponentially, which, of course, cannot be sustained for very long. Among the consequences of this cancerous growth of debt are the voracious consumption of natural resources, the production of superfluous goods, destructive competition for markets and scarce money, and the maldistribution of wealth. (This subject is treated more completely in my book, Money and Debt: A Solution to the Global Crisis.)
Three Aspects of the Money Problem
Bank-credit money malfunctions in three primary ways. First is its artificial scarcity. There is never enough money to allow every debtor to pay what is owed to the banks. The debt grows simply with the passage of time but the supply of money to pay those loans, plus the interest, can only be maintained by the banks making additional loans. These new loans have the same problem. Thus, businesses and individuals are forced to compete for markets and scarce money, in a futile attempt to avoid defaulting on their debts. Like the game of musical chairs, the system requires that some must fail. Capital wealth becomes ever more concentrated in corporate conglomerates that must seek higher returns on their investments. They are driven to expand their markets and dominate economies, often enlisting the support of governments to apply military power both overtly and covertly to ensure the continued flow of low-priced raw materials, the availability of low-cost labor, and access to markets.
Second, the requirement that interest be paid causes a net transfer of wealth from the debtor class to the moneyed class, or from producers to non-producers. Besides the direct payment of interest on their own debts, the poor and middle-class majority pay the cost of interest that must be added at every stage of production to the price of everything they buy. It is easy to show statistically that lower income households, because they are net debtors, pay much more interest than they receive, while those in the highest income brackets receive most of their income as interest returns on investments.
Third, the money created as bank credit is mis-allocated at its source. Much of it goes to finance government's deficit spending for weapons, military interventions, and transfer payments to corporate clients, sometimes referred to as "corporate welfare." Another large chunk is provided to the well-connected few who use it to finance such things as real estate developments, which are presumably well collateralized but are often supported by inflated land values and over-blown prospects of profitability. Thus we find an abundance of hotels, resorts, and upscale residential construction but a chronic shortage of affordable housing.
What Is the Answer?
How do we solve the money problem? How do we put an end to the debt crisis? How do we create an exchange system that will not destroy the Earth? This is a problem that must be tackled at every level. There are effective measures that can be taken at each level from city neighborhoods and rural villages to the global economy of transnational corporations, and everywhere in between. At the grassroots level, people have always done what they could to remedy their discomforts, but they have often failed to see the deeper problem beneath the felt symptoms. During the Great Depression of the 1930's, when the banks made money too scarce, hundreds of communities created their own local currencies, called scrip, to provide the necessary exchange media.
More recently, as the negative impacts of the debt crisis and economic globalization have begun to be felt more widely, people have been organizing mutual credit systems like LETS (Local Employment and Trading System), local currencies like Ithaca HOURS, and service credit systems like Time Dollars. All of these have helped communities mobilize their available resources and link their people into mutual support relationships. The result has been greater community self-reliance, healthier personal interactions, and more effective satisfaction of basic human needs. There are now well over two thousand such exchange systems operating in various parts of the world, with new ones being started every day. Within the mainstream business sector, the commercial “barter” industry has been experiencing explosive growth over the past 30 years. This trend is almost certain to continue.
Each type of alternative exchange system provides its own particular range of benefits. Primary among these is the ability of people to get more of their needs met, and businesses to prosper, despite the scarcity of official money. These systems provide exchange media that are abundant and supplement the official money supply. Since they bring people together to help each other, they promote local self-reliance, and build community and mutual-support networks, and, since there are no interest payments required, they provide for greater fairness in trading. Besides the direct benefits, the emergence of diverse local systems like these provides experimental evidence of what works best, contributing to the evolution of better wide-scale systems of exchange.
The Emerging Global Exchange System
For the past several decades, if not longer, there has been a relentless march toward a single global exchange system. The implementation of the Euro, a single European currency, in 1999 was just one more step along this road. Since the Bretton Woods agreements following World War II, the industrial nations and central banks have been increasingly bound together in cooperative monetary and economic arrangements, which for the most part have been conceived and orchestrated by an inner circle of bankers and politicians without public debate or citizen input. Assuming the best of intentions on their part, it is still evident that they lack sufficient sensitivity and concern for the effects of their decisions upon the ordinary person, nor have they shown adequate regard for either the physical environment or the social impacts of their decisions. The subsequent development of NAFTA, GATT, and the World Trade Organization have placed the idol of international trade before all else. Unfortunately, the global system results not in dispersing power and wealth more equitably among the Earth's people, but in further concentrating them in the hands of the few.
The key to ensuring freedom, independence, and an adequate livelihood for ourselves and our posterity lies in the systems of money and exchange that we choose to adopt over the next few years. In this era of high-powered computers and instant global communications, it is now technically feasible, for better or for worse, to establish a global monetary system.
A more honest, equitable, and efficacious global system of exchange has long been possible. What has been lacking is sufficient leadership and the political will to change the status quo. Now, it has become increasingly obvious that money is nothing but information. It's just an accounting system. If that's all it is, why should there ever be any shortage (or, for that matter, over-supply) of money, and why should anyone have to pay interest for it? We need to do only two things to establish an honest, equitable, and efficacious system of exchange, even on a global scale.
First, we need to determine a stable, non-political, universal (international) unit of account, for measuring value. This unit should be based, not on any existing national currency, but on some objective, concrete standard of value, such as a commodity, or preferably, an assortment of commodities. Such a unit of account could be readily defined and published by an independent body. Traders would then be free to use it, if they wished, in specifying the value of the goods and services they trade. It would not be a payment medium, but only a measuring stick for determining value and setting prices. Payment would be made using any mutually agreed medium. National currencies might still be used to settle accounts, but the amount of such currency due would depend upon the market value of the currency relative to the new stable unit of account.
Second, we need to allow traders to make payments using private currencies or credit clearing circles, instead of national currencies. The credit obligations of large companies, particularly utilities, issued in conveniently small denominations, could provide perfectly sound payment media. LETS is an example of a credit clearing circle, or mutual credit system, operated on a local level. Credit clearing circles could also be establish on a global level.
Governments and central banks will undoubtedly resist competition from private paper currencies, as they have in the past, by imposing legal restrictions or taxes. But they can probably do little to impede the cashless clearing of trade balances among members of a private club or clearing exchange. In practice, each member of a credit clearing exchange is allocated a particular line of credit denominated in the new universal unit of account. These lines of credit may be secured or unsecured depending on their size and the demonstrated payment record and financial condition of the particular member. The rest of the details can be drawn from sound banking practice of the past.
The creation of both a stable unit of account and of credit clearing exchanges is both possible and necessary. Besides its direct benefit to traders, the widespread adoption of such a plan will have profound effects within the realms of economics, politics, and international relations. It will go a long way toward reversing the long-standing trend toward the concentration of power and wealth, and the anti-democratic effects of our present monetary and banking systems.
1. Former U.S. Secretary of Labor, Robert Reich, "The Unfinished Agenda." Speech before the Council on Excellence in Government, Washington, DC, January 9, 1997.
2. Sidney Homer, A History of Interest Rates. New Brunswick, NJ: Rutgers University Press, 1963.
3. Edwin Vieira, What Is A Dollar? P.O. Box 3634, Manassas, VA 22110: National Alliance for Constitutional Money, 1996.
4. This point is covered more completely in my book Money and Debt: A Solution to the Global Crisis, 2nd edition. Tucson, AZ: author, 1990.
Thomas H. Greco, Jr. is a community economist, writer, networker, and consultant, who for more than a quarter century has been working at the leading edge of transformational restructuring. A former college professor, he is currently Director of the nonprofit Community Information Resource Center, which provides information access and administrative support for efforts in community improvement, social justice, and sustainability. His articles have appeared in many journals and magazines, and he is the author of three published books, the latest of which is titled, Money: Understanding and Creating Alternatives to Legal Tender (Chelsea Green 2001).
Mr. Greco may be contacted at P.O. Box 42663, Tucson, Arizona 85733. Telephone: 520-795-8930.
Web sites: http://circ2.home.mindspring.com.