Banking Sleight of Hand
Banking has evolved over centuries, and it has always charged interest twice because it claims that the interest it charges is money produced by the loan. The sleight of hand is that interest did not create profit to be repaid. The borrower's use of the money created the profit, not the money itself. Money does NOT increase in value over time.
Banks have a license from the Government to lend out new government money. Interest is a service fee the bank charges the borrower for the work it has to do to organise the loan and collect the repayments. Interest is not profit for the bank but is a charge to the borrower to ensure the money is repaid.
Banks take their service fee by taking the interest from the loan account and putting it into their capital account. It should have gone into the borrower’s loan account to repay it. The bank later collects a payment — part of which is claimed to be interest, and the other part is repayment of the loan. The bank has collected its interest fee twice. This false claim that money generates money is widespread throughout the finance industry and the economics profession, and it directs profits from the use of money to those who did not earn it.
All loans operate the same way. It is not the banks or interest that is the problem. It is the double charging of interest by the use of compound interest. The assumption is that when interest is charged, it is repaying money that the lender has given. This is untrue. It does this by assuming that interest is a return of money that had been borrowed, and it does this by increasing the loan by the interest but not reducing the amount borrowed. It is “invisible” to the borrower because it hides it as compound interest.
If banks used the same idea with their depositors, they would not subtract the withdrawal of interest from the balance saved when it became due. Rather, they would add it in again. They don’t do this for depositors, so why should they do it for borrowers? It means that cycling money around as loans will create profits because ownership changed - not because the money was used to increase the value of goods and services. This has led to the belief that loans create money. They create profits, but the money is existing money, except in the case of bank loans, where the money created is government money, and the government is happy to allow it because it is the borrowers who pay it.
There are many ways to change the accounting to fix the generation and payment of double interest. The simplest is for Banks (and other lenders) to acknowledge that interest is a service fee with a second transaction to reduce the loan balance.
Another way is to allow compound interest but to share the profits between borrower and lender. This also works for businesses that profit from capital use who can share the profits with the buyers of goods and services.
Figure 2 shows the same loan of $10,000 over 5 years with a typical credit card interest rate of 20%. The interest on the double payment is higher than on the single payment because of interest on interest, and the single interest payment saves $6,718 on a $10,000 loan.
Treating Interest as a Service Fee
Halving the interest paid means that the minimum cost of a loan repayment with new money is the interest paid. If the bank lent existing money, the cost of the loan will be the interest cost, which is usually lower than the capital loan. The savings can be shared by increasing the returns on savings and reducing the amount of interest because the repayment time is less.
The Reserve Bank will have greater control over money as it can vary the amount of money circulating by limiting the amount of new money allowed for loans in different markets. The single-interest payment change will increase or decrease the circulation rate of money in those markets. That has the same effect of altering the amount of money in the system but without changing interest rates. The Reserve Bank can restrict new money available for home loans and reduce the money needed in the economy. They can increase investment money for areas of the economy the government wishes to encourage by requiring new money.
Changing to a single payment of interest will improve the profitability of all lenders and borrowers and lead to a dynamic, productive economy. Today, countries with high wealth have low productivity because profits go into the financial system. In contrast, in an economy where investment is less costly, productivity will improve because more money is invested in productivity improvements.
Governments can ask banks not to require the repayment of new money bank loans on projects or payments that cannot make sufficient profit to repay the loans. This stops the need for governments to collect money from taxes to pay for such investments.
For example, there will be less need for taxation for infrastructure loans and income redistribution. This gives governments greater scope to direct the economy by removing the need to collect money before spending it. However, it requires more control over the accounting of expenditures.
A single payment of interest will halve the cost of many home loans and the cost of most credit cards. Banks can increase their interest rates, but they will find it difficult to justify a 40% interest rate on credit card loans. Those banks that do not change their advertising and do not move to a single interest payment will be guilty of fraud.
Some businesses will likely start to share their profits and use that as a point of difference in the marketplace for goods and services. Legislators will likely require monopolies and oligopolies to share profits as an alternative to regulation.
Markets will likely become localised and better reflect the cost of providing services. Governments can compensate different communities by keeping prices the same and allowing banks to use new money in areas of disadvantage where the loans do not have to be repaid in full.
Insurance will likely be replaced by low-cost loans where the government money does not have to be repaid.
Capital markets will likely disappear as they are no longer necessary.
The distribution of wealth will likely be more like a Poisson distribution with a low mean. That means it is like a normal curve with the top pushed to the left. It means fewer rich or poor people.
It will likely lead to funding for the arts, research, common assets, education, public services, investment, and all the things that we want but are not for sale or that most people cannot afford.
It is likely to dramatically increase the GDP of all countries adopting the approach as less money will be tied up in overpriced assets, and money will circulate rapidly, increasing GDP.