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L ike Andrew Jackson and Abraham Lincoln, Benjamin Franklin
was a self-taught genius. He invented bifocals, the Franklin
stove, the odometer, and the lightning rod. He was also called “the
father of paper money.” He did not actually devise the banking sys-
tem used in colonial Pennsylvania, but he wrote about it, promoted it,
and understood its superiority over the private British gold-based sys-
tem. When the directors of the Bank of England asked what was
responsible for the booming economy of the young colonies, Franklin
explained that the colonial governments issued their own money,
which they both lent and spent into the economy. He is reported to
have said:
[A] legitimate government can both spend and lend money
into circulation, while banks can only lend significant amounts
of their promissory bank notes . . . . Thus, when your bankers
here in England place money in circulation, there is always a
debt principal to be returned and usury to be paid. The result
is that you have always too little credit in circulation . . . and
that which circulates, all bears the endless burden of unpay-
able debt and usury.
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Chapter 42 - The Question of Interest

A money supply created by banks was never sufficient, because
the bankers created only the principal and not the interest needed to
pay back their loans. A government, on the other hand, could not only
lend but spend money into the economy, covering the interest shortfall
and keeping the money supply in balance. In an article titled “A
Monetary System for the New Millennium,” Canadian money reform
advocate Roger Langrick explains this concept in contemporary terms.
He begins by illustrating the mathematical impossibility inherent in a
system of bank-created money lent at interest:
[I]magine the first bank which prints and lends out $100.
For its efforts it asks for the borrower to return $110 in one year;
that is it asks for 10% interest. Unwittingly, or maybe wittingly,
the bank has created a mathematically impossible situation. The
only way in which the borrower can return 110 of the bank™s
notes is if the bank prints, and lends, $10 more at 10%
interest. . . .
The result of creating 100 and demanding 110 in return, is
that the collective borrowers of a nation are forever chasing a
phantom which can never be caught; the mythical $10 that were
never created. The debt in fact is unrepayable. Each time $100
is created for the nation, the nation™s overall indebtedness to the
system is increased by $110. The only solution at present is
increased borrowing to cover the principal plus the interest of
what has been borrowed.1
The better solution, says Langrick, is to allow the government to
issue enough new debt-free Greenbacks to cover the interest charges
not created by the banks as loans:
Instead of taxes, government would be empowered to create
money for its own expenses up to the balance of the debt shortfall.
Thus, if the banking industry created $100 in a year, the
government would create $10 which it would use for its own
expenses. Abraham Lincoln used this successfully when he
created $500 million of “greenbacks” to fight the Civil War.
In Langrick™s example, a private banking industry pockets the
interest, which must be replaced every year by a 10 percent issue of
new Greenbacks; but there is another possibility. The loans could be
advanced by the government itself. The interest would then return to
the government and could be spent back into the economy in a circular
flow, without the need to continually issue more money to cover the

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Web of Debt

interest shortfall. Government as the only interest-charging lender
might not be a practical solution today, but it is a theoretical extreme
that can be contrasted with the existing system to clarify the issues.
Compare these two hypothetical models:

Bad Witch/Good Witch Scenarios

The Wicked Witch of the West rules over a dark fiefdom with a
single private bank owned by the Witch. The bank issues and lends
all the money in the realm, charging an interest rate of 10 percent.
The Witch prints 100 witch-dollars, lends them to her constituents,
and demands 110 back. The people don™t have the extra 10, so the
Witch creates 10 more on her books and lends them as well. The
money supply must continually increase to cover the interest, which
winds up in the Witch™s private coffers. She gets progressively richer,
as the people slip further into debt. She uses her accumulated profits
to buy things she wants. She is particularly fond of little thatched
houses and shops, of which she has an increasingly large collection.
To fund the operations of her fiefdom, she taxes the people heavily,
adding to their financial burdens.
Glinda the Good Witch of the South runs her realm in a more
people-friendly way. All of the money in the land is issued and lent
by a “people™s bank” operated for their benefit. She begins by creat-
ing 110 people™s-dollars. She lends 100 of these dollars at 10 percent
interest and spends the extra 10 dollars into the community on pro-
grams designed to improve the general welfare “ things such as pen-
sions for retirees, social services, infrastructure, education, research
and development. The $110 circulates in the community and comes
back to the people™s bank as principal and interest on its loans. Glinda
again lends $100 of this money into the community and spends the
other $10 on public programs, supplying the interest for the next round
of loans while providing the people with jobs and benefits.
For many years, she just recycles the same $110, without creating
new money. Then one year, a cyclone comes up that destroys many
of the charming little thatched houses. The people ask for extra money
to rebuild. No problem, says Glinda; she will just print more people™s-
dollars and use them to pay for the necessary labor and materials.
Inflation is avoided, because supply increases along with demand.
Best of all, taxes are unknown in the realm.


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Chapter 42 - The Question of Interest

A Practical Real-world Model

It sounds good in a fairytale, in a land with a benevolent queen
and only one bank; but things are a bit different in the real world. For
one thing, enlightened benevolent queens are hard to come by. For
another thing, returning all the interest collected on loans to the
government would require nationalizing not only the whole banking
system but every other form of private lending at interest, an alternative
that is too radical for current Western thinking. A more realistic model
would be a dual lending system, semi-private and semi-public. The
government would be the initial issuer and lender of funds, and private
financial institutions would recycle this money as loans. Private lenders
would still be siphoning interest into their own coffers, just not as
much. The money supply would therefore still need to expand to
cover interest charges, just not by as much. The actual amount by
which it would need to expand and how this could be achieved without
creating dangerous price inflation are addressed in Chapter 44.

Interest and Islam

Instituting a system of government-owned banks may sound
radical in the United States, but some countries have already done it;
and some other countries are ripe for radical reform. Rodney
Shakespeare, author of The Modern Universal Paradigm (2007),
suggests that significant monetary reform may come first in the Islamic
community. Islamic reformers are keenly aware of the limitations of
the current Western system and are actively seeking change, and oil-
rich Islamic countries may have the clout to pull it off.
As noted earlier, Western lenders got around the religious
proscription against “usury” (taking a fee for the use of money) by
redefining the term to mean taking “excessive” interest; but Islamic
purists still hold to the older interpretation. The Islamic Republic of
Iran has a state-owned central bank and has led the way in adopting
the principles of the Koran as state government policy, including
interest-free lending. In September 2007, Iran™s President advocated
returning to an interest-free system and appointed a new central bank
governor who would further those objectives. The governor said that
banks should generate income by charging fees for their services rather
than making a profit by receiving interest on loans.2
That could be a covert factor in the persistent drumbeats for war
against Iran, despite a December 2007 National Intelligence Estimate

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Web of Debt

finding that the country was not developing nuclear weapons, the
asserted justification for a very aggressive stance against it. We™ve
seen that a global web of debt spun from compound interest is key to
maintaining the “full-spectrum dominance” of the private banking
monopoly currently controlling international markets. A paper titled
“Rebuilding America™s Defenses,” released in September 2000 by a
politically influential neoconservative think tank called the Project
for the New American Century, linked America™s “national defense”
to suppressing economic rivals. The policy goals it urged included
“ensuring economic domination of the world, while strangling any
potential ˜rival™ or viable alternative to America™s vision of a ˜free
market™ economy.”3 We™ve seen that alternative models threatening
the dominance of the prevailing financial establishment have
consistently been targeted for takedown, either by speculative attack,
economic sanctions or war.4 Iran has repeatedly been hit with economic
sanctions that could strangle it economically.

How a Truly Interest-free Banking System Might Work

While the threat of a viable interest-free banking system could be
a covert factor in the continual war-posturing against Iran, today that
threat remains largely hypothetical. Islamic banks typically charge
“fees” on loans that are little different from interest. A common
arrangement is to finance real estate purchases by buying property
and selling it to clients at a higher price, to be paid in installments
over time. Skeptical Islamic scholars maintain that these arrangements
merely amount to interest-bearing loans by other names. They use
terms such as “the usury of deception” and “the jurisprudence of
legal tricks.”5
One problem for banks attempting to follow an interest-free model
is that they are normally private institutions that have to compete
with other private banks, and they have little incentive to engage in
commercial lending if they are taking risks without earning a
corresponding profit. In Sweden and Denmark, however, interest-
free savings and loan associations have been operating successfully
for decades. These banks are cooperatively owned and are not
designed to return a profit to their owners. They merely provide a
service, facilitating borrowing and lending among their members.
Costs are covered by service charges and fees.6
Interest-free lending would be particularly feasible if it were done
by banks owned by a government with the power to create money,

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Chapter 42 - The Question of Interest

since credit could be extended without the need to make a profit or
the risk of bankruptcy from bad loans. Like in China, a government
that did not need to worry about carrying a $9 trillion federal debt
could afford to carry a few private bad debts on its books without
upsetting the economy. A community or government banking service
providing interest-free credit would just be a credit clearing agency,
an intermediary that allowed people to “monetize” their own promises
to repay. People would become sovereign issuers of their own money,
not just collectively but individually, with each person determining
for himself how much “money” he wanted to create by drawing it
from the online service where credit transactions were recorded.
That is what actually happens today when purchases are made
with a credit card. Your signature turns the credit slip into a negotiable
instrument, which the merchant accepts because the credit card
company stands behind it and will pursue legal remedies if you don™t
pay. But the bank doesn™t actually lend you anything. It just facilitates
and guarantees the deal. (See Chapter 29.) You create the “money”
yourself; and if you pay your bill in full every month, you are creating
money interest-free. Credit could be extended interest-free for longer
periods on the same model. To assure that advances of the national
credit got repaid, national banks would have the same remedies lenders
have now, including foreclosure on real estate and other collateral,
garnishment of wages, and the threat of a bad credit rating for
defaulters; while borrowers would still have the safety net of filing for
bankruptcy if they could not pay. But they would have an easier time
meeting their obligations, since their interest-free loans would be far
less onerous than the 18 percent credit card charges prevalent today.
Interest charges are incorporated into every stage of producing a
product, from pulling raw materials out of the earth to putting the
goods on store shelves. These cumulative charges have been estimated
to compose about half the cost of everything we buy.7 That means
that if interest charges were eliminated, prices might be slashed in
half. Interest-free loans would be particularly appropriate for funding
state and local infrastructure projects. (See Chapter 44.) Among other
happy results, taxes could be reduced; infrastructure and sustainable
energy development might pay for themselves; affordable housing
for everyone would be a real possibility; and the inflation resulting
from the spiral of ever-increasing debt might be eliminated.8
On the downside, interest-free loans could create another massive
housing bubble if not properly monitored. The current housing bubble
resulted when monthly house payments were artificially lowered to

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Web of Debt

the point where nearly anyone could get a mortgage, regardless of
assets. This problem could be avoided by reinstating substantial down-
payment and income requirements, and by shortening payout periods.
A home that formerly cost $3,000 per month would still cost $3,000
per month; the mortgage would just be shorter.
Another hazard of unregulated interest-free lending is that it could
produce the sort of speculative carry trade that developed in Japan
after it made interest-free or nearly interest-free loans available to all.
Investors borrowing at zero or very low interest have used the money
to buy bonds paying higher interest, pocketing the difference; and
these trades have often been highly leveraged, hugely inflating the
money supply and magnifying risk. As the dollar has lost value relative
to the yen, investors have had to scramble to repay their yen loans in
an increasingly illiquid credit market, forcing them to sell other assets
and contributing to systemic market failure. One solution to this
problem might be a version of the “real bills” doctrine: interest-free
credit would be available only for real things traded in the economy
-- no speculation, investing on margin, or shorting. (See Chapter 37.)
What would prudent savers rely on for their retirement years if
interest were eliminated from the financial scheme? As in Islamic
and Old English systems, money could still be invested for a profit. It
would just need to be done as “profit-sharing” -- sharing not only in
the profits but in the losses. In a compound-interest arrangement, the
lender gets his interest no matter what. In fact, he does better if the
borrower fails, since the strapped borrower provides him with a steady
income stream at higher rates of interest than otherwise. In today™s

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