Interest as a Means
“Credit costs interest. Interest burdens end-consumers and entrepreneurs who have to borrow money in order to satisfy their consumer and investment needs. Consequently interest takes away money from end-consumers and entrepreneurs, even when they do not have enough of it and gives it to investors who already have more money than they need.”
Dieter Suhr 1
Suppose somebody were to regularly extract a few hundred Dollars or Euros from your wallet every month. You would certainly report it to the police. You would perhaps react no differently if during each of your purchases, a specific share of the purchase amount were collected from you, mafia fashion. That is exactly what happens to us! Every day, at every purchase, only on a larger scale!
We are not talking now about the state that, as is well known, dips twice into our pocket, namely once while earning money and again while spending it. What is meant is another attack, which competes in the same degree with the one from the state, and yet is hardly noticed by us: the claim of capital, better known under the name interest.
How is interest collected?
When the state increases the tax on wages, employees go home with less money. They know to the exact penny, how much less they can afford. On the other hand if the state increases value added tax by the same extent, the incomes of workers remain unchanged. Nevertheless they also become poorer in this case because the price increase due to value added tax means they get less for their money when spending. What has changed is the method of tax collection: instead of at the earning stage, the extra amount is collected while spending, i.e. not while receiving, but while giving. Or stated differently: instead of doing it overtly, the state covertly dips into our pockets. But at least it announces the share of value added tax and we can calculate, with a little effort, the loss in revenue.
Interest is collected in a similarly concealed way, but its proportion of the price is not known. Even if we were to have access to the calculations for the purchased product, we would have no true picture of the level of tribute that has been charged. From these calculations we would have obtained, at most, the interest costs of the final step in the calculation, that is, the interest contribution that is being added at that step. This is because, capital costs – as well as labour costs – are already included in the material costs and other services of the previous suppliers, which enter the calculation as material expenses, thus already containing hidden interest charges. And in contrast to value added tax, where the tax contribution paid at each preceding stage can be shown this is not in the case for interest. Figure 19 shows to what extent interest charges accumulate for a fictitious example where the original and the staged price development of a product has been broken down, from raw material to the finished product.
As can be seen, varying levels of capital and labour costs are added at each of the six stages of development. They are combined together with the previous ones, which contain the buying price of the initial product, to a new total price. The actual share of the capital cost in the end price of a product is difficult to estimate, as is the share of the wages.
Any incidental gain was not taken into consideration in the figure shown, nor were expenditures for tax and insurance etc. The share refers to the two basic cost factors, i.e. capital and labour.
Who receives interest payments?
If the government were to return value added tax to every household to the extent of the payments rendered, it could have spared itself the whole exercise. However, if it were to distribute the collected money mainly to socially weaker sections of society, their lot would have been improved at the expense of the remaining.
The share of interest contained in prices, (which, for example, nowadays in Germany is three to four times larger than the so-called value added tax!), when redistributed, do not benefit all households and least of all the weaker ones. The overwhelming part of it flows towards those who have the most interest bearing assets at their disposal. To put it more precisely: the richer one is, the more interest bearing tangible and monetary capital one possesses, the larger is the share that one gets from the pot of the interests collected. The biggest loss is borne relatively, however by those households that have no interest yielding assets, or at least, none worth mentioning. They only pay in without ever getting anything back. And since interest-demanding tangible and monetary assets clearly increase more rapidly than economic output and state revenues, even the most social state is less capable of making up for the redistribution of money that is conditioned by the flow of interest from the poor to the rich through a tax financed re-allocation.
What is the effect of interest in the distribution
of the national income?
The general opinion is that our economic output is approximately equally divided between the state and its citizens. If the duties for the national social and health system are added to taxes, then it results in a real state’s quota of 50 per cent. Nevertheless, this view of the redistribution is still not correct. In reality, the apportionment of the gross national product is not carried out between state and citizens, but between capital and labour. In this the capital has always the first access, since serving its interests is a prerequisite for having it at disposal. That means that the requirements of capital have to be met at all costs, regardless of whether the economy can afford it or not. The “rest of the pie” remains for labour, however this remainder is divided between employer and employees. The state, as the third party in the alliance, accesses the recipient groups of income only afterwards. In case of the employee’s income its access is direct and inescapable, in the case of capital income, less diligent. Just think of banking confidentiality or the tax havens throughout the world.
The sharing out between capital, labour and state can also be conveyed when the path of all the expenditures from gross earnings is understood, as it is depicted in figure 20 as a schematic flow diagram.
The result for the working population is that after deduction of the shares for capital and the state, only one third pure purchasing power remains. In the end this means that the whole output of the political economy is divided among labour, state and capital, each getting roughly one third. While the state’s share – as described earlier – benefits the general public after all to a large extent, the capital earnings are primarily concentrated on the minority of proprietors.
What role does the interest rate play
The share of interest at all price-levels is calculated by multiplying the capital deployed with the actual market interest rate. It can increase with increasing capital investment as well as with increasing interest rates. The increase in capital investment is connected to savings and is therefore only a relatively slow and continuous process. Increase in the interest rates, however, can occur at relative short notice and can rarely be anticipated. Their effects are therefore particularly serious.
For example, if the interest bearing monetary asset increases by three per cent, then for an unchanging interest rate, the total interest charge also increases by three per cent. If, however, the average interest rate increases by three per cent, (more correct: three percentage points!), from six to nine per cent, then the interest charge escalates, when calculated, by 50(!) per cent. For, a six per cent interest on, e.g. a capital of 100,000 Dollars yields 6,000 Dollars, a nine per cent interest however 9,000 Dollars, that is one half more.
Increasing interest rates have therefore serious consequences for the interest share included in the prices. The consequences of increasing or high interest rates for the redistribution mechanism are also accordingly serious. The most massively and directly hit are all debtors, especially those with little capital of their own but with huge borrowed capital. This can be seen in the high bankruptcy rate among firms following interest rate increases.
Willy Brandt, the former Chancellor of Germany quite aptly called the extremely high interest rates in those days (1982) as “murderous”. Even normal interest ‘murders’ – just more slowly. The number of people, especially in the Third World, who have died due to interest-related burdens, cannot be expressed statistically. It could be running into many millions. The title of the book by Susan George, “They Die of Our Money”, was very appropriate.
Interest as seen by an entrepreneur
“I had the opportunity to observe very closely today’s phenomena of economic life in a single field of an industrial branch… According to the duties arising from my job, I had to observe these phenomena from the viewpoint of an entrepreneur and capitalist. At the same time I had to observe them with the eyes of a worker’s son… That is why I observed these occurrences simultaneously from two very different sides and could make my conclusions from the viewpoint of public interest and public welfare…
As it is only labour that creates value…, there is no doubt, that it is the totality of the workers of a people that has to produce that sum for the totality of proprietors… so that the owners of the objects of national property retain or lend these objects of labour of the entire people as means of production.
Therefore… all workers in all fields of activity have to work on average two days per week for the totality of proprietors, i.e. for those who are co-proprietors of national property and whose interests have to be paid… From an economic point of view, interest is only the sign of a situation of constraint, where labour is opposed to property insofar, as the objects of value of the total property are absolutely necessary as means for productive labour…
Thus the elimination of the institution of interest from the economic system of all peoples is the prerequisite for a lasting economic activity that does not lead to disorganization.”
Prof. Dr. Ernst Abbe, in a lecture given shortly before the turn of the 19th to the 20th century, Excerpt from: Zeitschrift für Sozialökonomie, no. 61
In the same way as problems escalate through an increase in interest rates, so will the problems be similarly minimized with falling interest rates, too. A capital market interest rate around zero would be distribution-neutral. This means, that to a large extent, the returns for work will remain with the productive worker, even though a part of them takes a detour over channels of the state.
The statement of Ernst Abbe, physicist and founder of the Zeiss factory and who had an ordinary family background, is given in Box F. His words are still up-to-date and path setting, even though they were uttered a hundred years ago.
What changes the distribution coefficient?
A pie can be eaten only once. This also holds good for the distribution of the economic output pie between capital and labour. If capital grows and with it the claim for interest in step with economic output, then distribution relations remain constant. If, however, the interest yielding capital grows faster, a shift in the share results at the expense of labour.
In figure 21, such shifts in distribution have been shown schematically for different variations. An initial distribution ratio of 20:80 as well as an unchanging economic growth of three per cent has been assumed.
The economic pie to be distributed shows an approximate 3.3-fold growth in 40 years. If the capital to be serviced grows – as is shown in the top checked area – also year by year by three per cent, then the distribution ratio between capital and labour remains the same. However, a growth in capital by four per cent results in a clear displacement in both income groups within these four decades. It may be true that earnings from work have also gone up in absolute numbers along with economic output, but the distribution ratio between the two groups shifts from 20:80 to 35:65. The small shift in the growth rates by only one percentage point makes the share of labour fall from 80 to 65 per cent!
More obviously, the share of labour drops to 51 per cent, when economic growth increases by three per cent and capital by five per cent p.a. It can be clearly seen from this third distribution curve, how the rise of the labour share diminishes year after year. If one extends this development for a few years, then the curve flips over, even pushing the share of labour into negative territory. This means that not only do the increases in output go completely to capital, but also a continuously increasing share of the earnings from labour.
At a capital growth of five per cent, this problematic flipping over effect starts after 25 years. As a consequence of such a discrepancy in growth, the distribution ratio would almost reverse from 20:80 to 77:23 within forty years. This means that labour would get a mere quarter of the pie and the remaining three-quarters would be taken by capital. Such dramatic changes would also arise if the capital growth remains at three per cent and the economic output declines. From this it is clear why politicians are still so keen on continuous economic growth, even when the shops are overflowing in our country. As the growth rates must inevitably decline in a saturated industrialized nation, an increase in the distribution gap is unavoidable. Even a minor downturn in the economic growth can trigger socio-political problems, especially during phases of increasing interest.
The discrepancies that have already arisen in reality are shown in figure 22, in which the average values of the annual growth rate of monetary assets, of economic output and of net wages in the last decade are entered.
Do interests raise the level
of the gross national product?
Anyone looking at the interest flows in the national accounts, will normally find that the interest earned as well as interest paid out for each of the economic sectors, that is business, state and private households, that result from transactions with the other sectors, are listed out. The resulting net balance in the three sectors vanishes in the final balance. This means that the flow of interest has no influence on the level of the gross national product, however huge it is. Only the balance of interest that flows across borders influences this statistical quantity. If, for example, more interest flows into a country from abroad than flows in the opposite direction, then the aggregate product of that country increases by the difference.
This neutralization of all the inland interest flows appears surprising at first glance. It is however logical: the gross national product or the gross domestic product is the sum of the total net product. Interest however does not represent any value added, but rather only an internal transfer.
A consequence of this is that the increasing or lowering of interest rates and the extent of interest flows do not leave any direct trace in the gross national product. If when “tomorrow”, interest rates (and with them, interest flows) were to be doubled, that would have no influence, mathematically or theoretically, on the said gross national product. The indirect consequences, however, of such an increase , i.e. bankruptcies, unemployment etc., would alter the gross national product.
Many people draw wrong conclusions from the neutrality of interest with respect to the gross national product. They think that for this reason the interest problem should not be given too much thought. Others cling to those statistical quantities, which come under the heading “income from entrepreneurial activity and assets” when the GNP is broken down into its components. There, the quantity appearing under the heading “income from investments” has, in reality, little to do with the actual interest or income from investments. In Germany, for example, only the positive interest flow balance is offset with the negative interest flow balance of the state and added to the “dividend distribution of incorporated enterprises”. The amount resulting from it is only a fraction of the income on investment, which is annually remitted to the creditors as interest by the banks alone.
Others refer to statements of professors of economics, according to whom indebtedness – and thus the interest to be paid for it – is without problems because these debts and interest charges are at the same level as the money assets and earnings on interest. For example, the German economist Robert von Weizsäcker held the opinion in an experts’ conference on state debts that only foreign borrowings are problematic:
Where is actually the burden in the interest burden? The interest burdens that are financed by tax money flow to those who hold the credits. If we assume a pure inland debt, then we owe the debt to ourselves. A real problem comes about when the foreign share of the state debt becomes too large.” 2
What about tax on interest?
A person who makes money through work must pay his pound of flesh in the form of taxes on each and every single Mark. The tax deductions for wage- and salary-earners are made at the time of payment of earnings, i.e. at the source itself. Delays in the payment of taxes, non- payment of taxes or tax evasions are virtually ruled out. A person who receives money without working for it is similarly obliged to pay taxes. But the same state that demands these payments, also guarantees at the same time that these earnings are not controlled thanks to conventions on banking confidentiality which exist in almost all countries. This fact is almost like an invitation for tax evasion. The consequence is accordingly: a very small part of the incomes from interest on monetary assets are declared in tax declarations!
A sufficient number of opportunities exist for a holder of money assets to evade taxes totally. One need only shift one’s savings into one of the many ›tax havens‹ within the EU, to Luxembourg or Liechtenstein, and one is out of the woods! The very careful ones withdraw the credit balance in cash and pay in the money on the other side of the border, thus ensuring that traces of their tax evasion are washed away for all time. This cover-up is itself only possible, at least to a certain extent, with the help of the state, namely with the currency issued by the state and which one can use for any sort of speculative business.
Just imagine a similar course of events were permitted to employees. More specifically: one would appeal to their tax obligation, but at the same time offer the possibilities to evade them, for example, by introducing an ›income secrecy‹ arrangement, that allows the tax authorities access to income lists only under very special circumstances. Or perhaps even by establishing anonymous current accounts abroad. – It is actually incomprehensible that the unions have not demanded long ago equal treatment for income from work or from interest according to the Constitution.
It is not only workers that face injustices regarding the special treatment money receives, but investors in the country are penalised, too. While the holder of liquid assets is able to smuggle all his proceeds from interest, almost without risk, past the tax authorities, proprietors of tangible assets have essentially fewer possibilities. Anyone who, under these circumstances, puts his money in a workplace or in a block of flats, has a clear disadvantage.
Why is the adage “Time is Money” correct?
Interest as the lending price of money is without doubt a charge for a specific period of time. Money that came into existence as a means of exchange, has, as a result to a degree a second dimension. For the moneylender, it becomes a time-related effortless income factor, for the borrower, it becomes a time-related cost factor, which he can pay for only with an additional effort and with it an additional expense of time. With interest, time is turned into money. The proverb “time is money” brings out this fact in the fewest words.
In earlier days, time was a gift to mankind. Today that applies only to the interest-profiteers. All the others – and that is the large majority- must work for these profiteers ‘during that time’. Michael Ende has made this stress-triggering change in the life of people, in an alienating fairy tale like, yet obvious manner the message of his book “Momo”.
Because time is money, i.e. interest money, people must nowadays be always up and about. As for machines, it is best if they worked round the clock. If possible they should run with fewer workers, better still, with none at all. With every laid off member of the workforce, the entrepreneur saves costs, but by shutting down a machine the costs remain, at least those that serve the interests of capital. If he replaces a person with a self-financed machine, he gains additional secure interest revenue.
The head of the union of medium-sized businesses of the CDU, Klaus E. Bregger, put this reality into sharp focus in an interview in 1996 : “Those who earn money with money become rich with little risk. Those who earn money with workplaces become poor with many risks.”
The fatal proverb, “stagnation is regression” can be explained with our money system, too. In view of ongoing interest returns, every kind of standstill means growing losses.
Even though every one knows that one cannot become poorer with a constant output, we cannot allow a stabilization of output in our interest system – it would be stamped as ‘zero growth’. In an economy without interest or with a distribution of neutral interest around zero, we could, in contrast, convert all the increase in productivity arising from technical developments into shortening of working hours for the same income. For a fixed positive interest rate, we have only a choice between economic growth or lowering the income from work, whether by wage reductions or layoffs.
Our fixed positive interest rate forces us not only to produce and consume without pause, but even to constantly expand both. And that too at the same pace as money assets and debts which, so to speak, grow further on their own ‘over time’ because of interest related redistributions. But we have internalised this to such an extent that we permit ourselves to be hounded to achieve and consume more and more without question.
Does interest alter the nature of money?
With the economy increasingly being determined by capital, the actual purpose of money, namely, to be nothing other than a help to facilitate exchange of service and commodities, is being increasingly displaced by the time factor. This original purpose of being a means of exchange seems to be of only secondary importance to the experts in the field of money matters, the bankers. A question was put to the former chief of the Executive Board of the Deutsche Bank, Hilmar Kopper in an interview in a TV network in the spring of 1991: “What is it that gives money its actual value?” One might have expected Kopper to refer to the performance of the political economy that provides the cover for our money. But the reply of the banker was short and to the point: “The time factor means that it (money) increases through interest”, and to the inquiry of the astounded interviewer: “Money without time is then nothing?“, he confirmed the same in more detail: “Money without time means nothing, of course it can be spent right away. But that does not multiply money, money is then turned into something else.”
This definition of a former banking expert is significant. According to him, our money is not primarily for the purpose of mediating an exchange of goods and services in the economic system, but more for self-propagation!
This concept shows not only the extent of the malady of our money system, but also of our way of thinking about money, which is expressed in the title of the book, “The Money Syndrome”. The German-Dutch economist Hugo Godschalk commented on the above interview at a congress in May 1991 with the words, “One might think that the role of money as a means of exchange was against its function“.
The question as to how money multiplies with time was unfortunately not put to Kopper. It would have perhaps revealed the absurdity of his statement. Because, it is not money that multiplies in time, but rather it is the excess income and thus, the excess savings of the rich at the expense of all others that multiplies. And this again leads to an increase of exploitation and injustice in our societies.
Is there a just interest system?
In a true free-market, every price development is, in the end, always fair. It reflects the value-estimation of the commodity on which the participants have agreed upon during their transactions.
If one buys a shirt in a shop for twenty Dollars or Euros, then it is more valuable to the person than the money he paid for it. For the seller, it is just the opposite. Otherwise he would not have parted with the shirt for that amount. The transaction would not be fair if the seller had a shirt monopoly and could dictate the price.
This is precisely the case with the scarcity price of money, interest. Even this is fair, if it is an outcome of supply and demand, that is, when it solely reflects the ratio of money surplus on the one hand and money demand on the other. If both the sides are balanced, then the interest as the scarcity price (disregarding the bank margin) should go down towards zero. In contrast to the shirt, the production of which is associated with costs, the money holder does not have any expenses to be met for the production of money. Money is made available, free of charge, by the participants in the economy to clear and settle their exchanges and payments. One receives it, to a certain extent, as a transferable acknowledgement for services rendered. He who, under normal circumstances has money left over, has rendered more service than he has asked for. For personal reasons, he should be interested in a borrower who closes this demand gap. Otherwise, a commodity would remain in the market, unsold and without demand, and it could be the excess of commodities produced by him. Because of the existing superiority of money as compared to commodities in exchange, everyone readily accepts money but no one likes to pass it on. This results in a constant shortage of money. Money becomes a monopoly commodity because of this, a monopoly which never allows the lending price of money to decline to a fair and just level.
A true and just interest therefore does not only depend on the balance between supply and demand. It depends rather more decisively on overcoming any eventuality of an artificial shortage, thus neutralizing the advantage of money that makes it a monopoly commodity. Only this neutralization can lead to an interest rate that is truly in line with market conditions, regardless of how high it is. And only such an ultimately distribution-neutral interest hovering around zero in line with market conditions can be a fair one.
What does science say about interest?
Economics came to an arrangement with interest about 200 years ago and “tabooed” the set of difficulties associated with it, as the National economist Hans Christoph Binswanger from Sankt Gallen once expressed it. And to live with this situation, a number of theories were developed that presented interest as harmless or indispensable.
“Interest is a reward for renunciation of consumption” is the best known of this reasoning. The fact that this is far from reality does not seem to disturb anybody. The normal citizen does not save in order to be rewarded for renouncing consumption but because he needs money for expenditures at a later time or simply because for the moment, he has a money surplus. And one can hardly accept that people with monetary assets, whose interest yields and fresh savings go daily into the thousands or even millions, would renounce any kind of consumption that could possibly justify a reward in the form of interest.
If interest really were a reward for giving up consumption, those who save their surplus money at home under the mattress would have to be rewarded. The fact that interest will be received only on lending out surplus money, is the evidence for interest being tied to the surrender of money. Interest is therefore a price for lending money, or more appropriately: a premium, linked to the period of lending, for giving up the advantages that are connected with the possession of money, especially for giving up liquidity.
Incidentally, John Maynard Keynes, probably the most noted economist of the last century, had refuted the theory of interest being the reward for giving up consumption by the thirties. Despite this, this impractical academic nonsense is still widely prevalent in almost all the universities today. In his major work “General Theory of Employment, Interest and Money” (one should take notice of the selection of words and the word order in the title!), Keynes defined interest as “the reward for not hoarding money”. This means that interest is the means by which the money hoarder can be induced to lend his surplus money to others.
Of course, there are other explanations and justifications for interest in the science of economics. With regards to interest, however, they do not help to get over the fact, that the money hoarder is in the position today to override the market laws and extort a positive interest at all times.
Critical words on interest are rarely heard from economists, for example, those from Hans-Christoph Binswanger, who has been mentioned earlier. In his book “Geld und Natur” (Money and Nature), and also in the book “Geld und Wachstum” (Money and Growth), co-edited by him, he pointed in particular to interest-conditioned growth compulsions. It was almost the breaking of a taboo, when the economist Wolfram Engels, who was the co-editor of the German weekly “Wirtschaftswoche (Economic Week)” and who died in the nineties, took up the topic and commented on “The Ban on Interest in Religions“ in issue No. 1/93. It is even more valid for his concluding phrases in which he describes a world without interest as “perhaps economically optimal” and expressed his opinion that perhaps “Jesus, Moses and Mohammad”, who are known for condemning interest-taking, might have been “the better money theorists“. It is gratifying in this context to hear again critical voices about interest from church circles, as shown in Box G.
Church and Prohibition of Interest
“The rise of modern capitalism was decisively fostered by the Church’s withdrawal of the prohibition of interest. Now as the interest economy has ruined the community of all human beings in an unprecedented way and the contrast between the poor and the rich has reached global dimensions, a transformation of theologians and economists is indispensable. The tradition of the prohibition of interest has to be brought back to the consciousness of the public in order to establish a counterweight against the financial system and to search for ways and means that lead more efficiently to the realization of an interest-free economy than prohibitions which can be ignored. Today it has become observable, that international financial forces – which have mainly developed in ‘Christian’ surroundings – have established a practice of interest of criminal dimensions…
Economically viewed, the taking of interest is, after a certain point, the increase of money without being linked to production of goods or services. This process must lead to the collapse of any economy in the long run”.
Dietrich Schirmer, Head of the Lutheran Academy in Berlin, 1980
1 Lawyer and Professor for Constitutional Law at the University of Augsburg, in his book “Wachstum bis zur Krise” (Growth Until the Turning Point), 1986
2 ‘Die Zeit‘, Jan. 14, 1999