Money creation for interest : A truly insane system

A couple of days ago, I used my blog to show that allowing commercial banks to create money and charge interest is a sure recipe for disaster (see "The Money Creation Racket must end").  I gave the example of an island where a commercial bank is allowed to create €1,000,000 of money, which it lends to the population at 5% interest. Irrespective of how things are run, the inevitable consequence is that after 20 years or so, the bankers control the economy. Either they use the interest payments to pay themselves huge salaries, which they can then spend back into the economy, or their create more money every year to provide the population with enough new money to pay the interest on the previous loans.

I mentioned one further variant in which the bankers not only create enough new money every year to both cover the interest payments, and give people enough extra money to give them the impression that things are improving.

To make the story clear, I decided to fill in the details of this. The table shows what would happen if the bank loans out enough money to allow the interest for the previous year, but in addition provide a roughly 2% increase in the free money - what I call "People's Money".

You can see that the population does indeed get an increase in the amount of available cash - increasing from €950,000 at the end of year one, to over €1,350,000 after 20 years. This would allow them to get a 2% increase in salary every year. Great! But, at the same time, the total money supply is going through the roof - increasing from €1,000,000 in year one to €3,335,961 after 20 years. The really critical feature is that nearly €2 million of that money has been paid to the bank in interest charges - meaning that the bank now has nearly 60% of the entire economy.

The consequences of this will depend on what the bank does with all the money it rakes in. If it spends the money back into the system, then the automatic consequence will be inflation. Goods that could be bought for €10 in year one, will probably cost nearly 3 times as much after 20 years. Alternatively, it could just hoard the money or transfer it to some other island.

But perhaps even more importantly, having all that money gives the bank the power to pay anyone who might threaten to derail the gravy train by exposing the scam. That allows them to keep the system going for their benefit. You can imagine that it would be particularly important to pay the politicians, economists and journalists enough to keep the scheme out of the spotlight.

I would just love to hear anyone trying to defend the current money creation system - a system in which the money supply is created by commercial banks with interest attached. I am certain that anyone who tries to convince us that it makes sense to do things that way is either (a) stupid, or (b) being paid to keep the gravy train going.

It is definitely time to put an end to this fiasco.