Can there be an alternative to Interest banking?
by Krishnarjun on 15 Dec 2014 9 Comments

Political economy has to be an expression of core philosophical outlook of a society. Philosophy not integrated and practiced in life is mere mental confabulation. So the question arises, is modern economic organisation compatible with core philosophy of Hindu dharma? Can our values survive with an economic model opposite to its core philosophical outlook? Many complain about all pervasive moral degradation, insecurity, greed, unstable relationships, pollution, declining general health, but what is the main reason behind these negative trends; would just preaching the population high philosophy and morals through school curriculum ensure a dharmic society?


A few months ago, what has been in the mind of this writer for long came in the form of a shloka from Prime Minister Narendra Modi. At the inauguration of Jan Dhan Yojana, he quoted:

sukhasya moolam dharmam

dharmasya moolam ardham

ardhasya moolam rajyam

The source of happiness is dharma, the source of dharma is ardham (economy) and the source of ardham (economy) is rajyam (state). This verse establishes the direct link between Dharma and Economy. So if people overwhelmingly feel adharma is all pervasive in modern society the search for course correction should also look into the principles of modern economy and state combined as political economy.


The current money cycle

The respiratory system of modern economy is money and banking system. What’s money? It’s an all purpose social contract enforced by state in transactions of goods and services. It doesn’t need to have an intrinsic value or pegged against a single item like gold. No single item can represent the economic output in totality, but the whole economic output can be quantified into symbolic money. Money acquires intrinsic value from social contract and as symbol of share in whole national economic output, not just from its value against single precious metal. So it’s very important to properly manage and enforce this social contract.


If a person has managed to acquire surplus amount of money than required for his needs, the options are to spend, acquire assets, invest in business, or save for the future. He would have perhaps helped the poor in the economy by spending his money, or invest in business, or purchasing assets if not for the institutionalized role of banks. They create incentive to save surplus money by paying interest and channel the savings into economy at higher interest rates to borrowers.


All the money is created as debt, so there is never enough money in the system to repay the debt. A large section of population is destined to fall into debt trap, this has to shoot up social expenditure of government and in the current system it has to again borrow from the banking system. Ultimately it’s the sovereign government that pays interest on all debt created by banks; government debt can only increase continuously in this system.


In essence government pays interest tax to rich depositors. This imposes permanent overhead in economy for any productive endeavor and is the cause of permanent inflation with ever rising costs. All money enters the economy as interest bearing loan and there isn’t enough money to pay back these loans plus interest, so obviously borrowers have to default and lose their assets to banks or big money over time. Can there be an alternative to this vicious self-perpetuating money cycle?


Is interest free banking possible?

Interest free money and economy is possible if we understand the real intent and purpose of money. Ideally there should be no inflation if rate of money growth matches the growth in GDP. Take an independent self sufficient economic group that manages its affairs with transferable agreements. A farmer could make an agreement with a carpenter to pay in grain for services; the carpenter could transfer the agreement to a grocer or a doctor for the goods and services he receives. These transferable agreements, though not sophisticated, are non-different from modern money. In fact these diverse agreements better represent real goods and services than standardized money. The agreements naturally grow in the same proportion of growth in goods and services. As the community grows and if workforce grows proportionately, this automatically happens when skills are passed through families; the balance in supply and demand of goods and services is automatically maintained. This is the simplistic grass root self-sustaining economic model of civilisation before the Industrial age and outside urban centers.


Modern industrial economy is much more complex in scale, reach and diversity compared to this simplistic model, but the idea of money should be essentially the same. It’s an agreement for goods and services; if the agreements are created in proportion to growth in goods and services there shouldn’t be any inflation theoretically. But if agreements produce more agreements without proportionate addition of goods and services we create fiat money and inflation.


Institutionalized interest payment and other speculation instruments from the banking system are essentially money creation without any productive addition to the economy. This creates fiat money and is the reason for permanent inflation. Interest payment enriches idle rent seekers and punishes productive activity. Inflation caused by institutionalised interest is one of the primary reasons for economic insecurity and increasing insolvency of the common population.


Interest free banking is theoretically possible if the banking system passes the same amount of money it lends on productive activities to government treasury after deducting operational costs and unrecovered debts. This debt-free money can be used for expenditure in infrastructure, defence, public education or health. Creating money to lend for productive activities doesn’t create inflation as there is corresponding increase in goods and services, passing same amount of money minus banking costs to treasury for expenditure balances the money supplied as debt in the economy. The money has to be lent proportionately to different sectors to balance supply and demand in goods and services.


The money savers can choose to save their money in banks without expecting interest or lend to private borrowers at their own risk; the interest free banking system wouldn’t depreciate the savings of depositors as money is lent only to add productive value to economy. The basic idea is no productive activity should be denied cheap credit and banking system shouldn’t provide risk-free interest. Private lenders can still exist outside the banking system but they would operate at their own risk and cannot legally accept deposits.


As long as inherent bias of debt-centric banking system is not corrected, the economy and a huge segment of population would become indebted to few elites who could manage to manipulate the biased system to their advantage. Banking system creates money supply in the economy and it has to be done on sound rational principles that align with justice and socio-economic interest. The government shouldn’t delegate crucial money creation and supply to private enterprise for profit; it’s a vital public service that impacts the socio-economic core of society. An unjust monetary system can’t lead to a just and happy society. The dynamics of artha have to be in sync with the principles of dharma for dharmic society to flourish.


The views expressed by the author are personal

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