In the past when borrowers couldn’t pay their debts with interest they became the serfs of money lenders. That’s why interest was often forbidden and called usury. Most people have forgotten about that. But nowadays most money is debt on which interest must be paid. And that is the reason why there are so many problems in the financial system like instability, increasing debt levels, inflation, and central banks having so much power.
Incomes fluctuate but interest payments are fixed. And interest is a reward for risk. So the less a debtor can afford to pay interest, the higher the interest rate will be. The lender is rewarded with a higher interest rate to take that risk. It is therefore not surprising that the financial system is unstable.
Even more importantly, money is loaned into existence and must be repaid with interest. So if the interest rate is 5% and there is € 100 in existence then € 105 must be returned after a year. But where does the extra € 5 come from? There are a few options:
Lenders spend some of their balance so borrowers can pay the interest.
Some borrowers default so a part of the balance is not returned.
Borrowers borrow more.
The government borrows more.
The central bank creates the shortfall out of thin air.
All these things happen and often at the same time. Lenders on aggregate let their capital grow at interest. A few defaulting borrowers are acceptable but too many defaults can easily cascade into a financial crisis and create an economic crisis. The cost of letting the financial system fail is so big that this option is not acceptable. So if no-one else is willing to borrow then the government or the central bank steps in.
That’s why debts continue to grow. That’s why there is inflation. That’s why we have economic crises. That’s why governments are running deficits. That’s why there are financial crises. That’s why we need central banks to save us. That’s why all fixed positive interest rates on money and debts are usurious, even when they are low. The following example can demonstrate that.
Suppose that Jesus’ mother had put a small gold coin of 3 grammes in Jesus’ retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose now that the account was kept for this eventuality. How much gold would there be in the account in 2020? The answer is an amount of gold weighing 12 million times the mass of the Earth.
A mere 4% yields an incredible amount of gold after 2020 years. Someone has to pay the interest, in this case the people who borrowed money from the bank. If Jesus doesn’t come back to spend his money, that’s impossible. At some point the debtors can’t pay the interest, let alone repay their debts. They can only borrow more or default. Lowering the interest rate doens’t solve the problem. It only postpones the reckoning.
Ending usury by banning interest was never possible. Lending and borrowing would stop or go underground. The capitalist economy requires lending and borrowing so without interest it would never have been possible to build a modern capitalist economy. But interest rates are poised to go negative so it may soon become possible.
Natural Money is interest free money with a holding fee. The holding fee on money makes it attractive to lend out money at negative interest rates. For example, if the holding fee is 10%, lending out money at an interest rate of -2% will save you 8%. Once most interest rates are negative, positive interest rates can be forbidden. That can end reckless lending without producing a financial or economic crisis.
What does ending usury mean? Interest is everywhere. Interest is hidden in taxes, rents, the price of all the products and services you buy. Most pay more interest than they receive. Ending interest will benefit most people as 90% pays interest on balance while only the to 10% richest people receive interest on balance. But there is more to it. A few consequences:
You can’t borrow if your finances are in dire straits. Lending money to people in financial distress shouldn’t be left to the markets.
People and businesses will become less leveraged as there is no incentive to that. Risky ventures will be financed with equity.
The business for banks does’t change much. Borrowing money at -2% to lend it at 0% is as profitable as borrowing money at 2% to lend it at 4%.
Financial engineering will be reduced as financial engineering schemes like LBO’s often involve great leverage.
The economy can find support in the negative interest rate so governments don’t need to go into debt to stimulate the economy.
The maximum interest rate can curb debt creation for as soon as the economy recovers equity investments become more attractive relative to debt.
It can be a blow to political corruption because borrowers need to be trustworthy, and that includes governments, so taxes must cover government expenses.
This is not austerity as governments don’t pay interest on their debts but instead receive interest on their borrowings.
Ending interest reduces leverage and this can stabilise the financial system and the economy. The holding fee help to make the economy flourish. Money with a holding fee has brought the economy of the Austrian town of Wörgl back to life in the midst of the Great Depression. Ancient Egypt had a financial system with this money for more than 1,000 years. Usury can end very soon and it may never come back.
If you like this post, then you might also like:
The miracle of Wörgl
During the Great Depression people were desperate. In the small Austrian town of Wörgl a new form of money was introduced. This produced an economic miracle.
For centuries Jews have lived as a minority in the lands of others. Their relationship with the majority has often been problematic. What to do with the Jews? It was a question asked by thinkers and leaders alike. Martin Luther and Karl Marx felt the urge to express their opinion on this matter, sometimes called ‘The Jewish Question’. Adolf Hitler sought a definitive solution of the issue, which was exterminating them. Jewish people are still blamed for many things. A few examples:
People who oppose interest and usury often blame the Jews as they have been money lenders for centuries and many are still working in finance.
Jews have taken a piece of Arab land that is now called Israel. They expelled most of the Arab inhabitants. That’s why a lot of Arabs don’t like Jews.
It is sometimes said that the Jews determine what you hear on the radio and see on television because they control the media.
Perhaps you have read that Jews cause wars and revolutions, often with a little help from the secretive Freemasons and the elusive Illuminati.
Jews have been accused of harvesting organs without consent and being involved in the illegal organ trade.
Some people believe that Jews can’t be trusted because they are more loyal to Israel than the country they live in.
The political corruption in the United States is caused by a poor political system, but the Jews seem to profit from it, so follow the money.
Same goes for poor quality Hollywood movies. The Jews did it.
And Jews can be blamed for a lot of other things too, of course not the ‘good Jews’, only the ‘evil Jews’, but it is hard to tell the difference, so don’t trust them.
This is a difficult history to tell. Closer inspection reveals that things aren’t always what they seem. There allegedly has been a long Christian tradition of intolerance towards Jewish people. Only Christians were even more intolerant towards all other religions, including other versions of Christianity. Only Jews were tolerated, first because the Pope said so, and later because they proved to be useful for trade, tax collecting and money lending, which were activities Christians found to be morally reprehensible and didn’t like to do themselves. In fact, Christians have been exceptionally tolerant towards the Jews.
Muslims were even more tolerant. Apart from Jews they also tolerated Christians. Despite that, Christianity and Islam were amongst the most intolerant religions that ever existed. That proved to be crucial for their success. Apparently the owner of this universe didn’t provide us with ample proof of existence, so convincing people by argument wasn’t an option. The Jews didn’t get that. They preferred to hold on to their exclusive relationship with the all-powerful creator of this universe, and didn’t try to forcefully convert others.
The plight of Jewish people was not much unlike that of other minorities that didn’t adapt and integrate into society. Being beaten up from time to time is the least you can expect from peasants if you are not like them. And it was often worse than that.
Between 1200 BC and 900 BC a few small nation states emerged in an area that is now covered by Israel, Palestine, Jordan, Syria and Lebanon. Among them were Israel and Judah. These small states appeared because Egyptian power in the area was waning. It took a few centuries before new strong powers emerged and these small states were overrun. Israel fell into the hands of the Assyrians in 720 BC. Judah was destroyed in 587 BC by the Babylonians who had taken over the Assyrian Empire.1
These small kingdoms came with a national deity to provide them with protection. Their kings may have adopted a deity to promote a sense of a nation in order to assert their authority. Yahweh was the national deity of Judah and probably also of Israel. Originally, the worship of Yahweh may not have differed much from the worship of other national deities like for instance Chemosh the god of Moab.1
After Israel and Judah had ceased to exist, their inhabitants faced an identity crisis. Their uprisings were defeated. A lot of Jews were taken into exile in Babylonia. Jewish priests then began to write down the Torah (Old Testament) to define a sense of nation around their national deity Yahweh without the need for a king or a territory. In this way the Jews became a people without the need for a land.1 Their promised land Israel or Zion remained a central pillar in their religion nonetheless.
Around 450 BC many Jews who lived in exile were allowed to return. From 164 BC there was an independent Jewish state for 100 years until the Romans conquered it. At the time of Jesus tensions were growing between the Jews and their Roman overlords. These tensions led to several uprisings between 66 AD and 136 AD. During these revolts the Jewish temple was destroyed. Over time the majority of the inhabitants of the area became Christians and later Muslims. Jews remained in scattered communities around the Mediterranean.
In ancient societies knowledge and education were reserved for the elite. The Jews introduced mass education for the people. The Torah became the pillar of their national education system. Divine knowledge, rules, and regulations were open to the public. The value of education became strongly embedded in Jewish culture.1
Nations came and went but the Jews still exist, so becoming people without the need for a land turned out to be a successful long-term survival strategy. The Jewish people are around for more than 2,500 years, while being without a homeland for nearly 2,000 years. Their religion became the basis for Christianity and Islam. As a consequence Christianity and Islam both see Judaism as a legitimate religion. Christians and Muslims allowed Jews to live in their lands, albeit as secondary citizens.2
Living together wasn’t easy. For instance, Christians blamed the Jews for killing Jesus. The Jewish high priests had accused Jesus of blasphemy as he claimed to be the Son of God. According to the Gospel the Jewish high priests and a Jewish mob demanded the crucifixion of Jesus. Also according to the Gospel, the blood of Jesus may be on the hands of the Jews forever:
When Pilate saw that he was getting nowhere, but that instead an uproar was starting, he took water and washed his hands in front of the crowd. ‘I am innocent of this man’s blood,’ he said. ‘It is your responsibility!’ All the people answered, ‘His blood is on us and on our children!’3
It is written in the Gospel that Jesus’ crucifixion happened according to the plan of God as Jesus’ sacrifice takes away the sin from the world. That makes God responsible for what happened to Jesus.
In the Middle Ages rumours spread from time to time that Jews abducted little Christian boys for their secret rituals. This is commonly known as the blood libel. So if a boy disappeared, it was often time to kill some Jews. There was no basis for these beliefs but little did people know about the Jewish religion and its practices.2 Medieval people could freak out quite easily because they lacked proper education. And so witches were burnt on the stake whenever the harvests were poor.
Many people disliked Jews or even hated them. Jews were often involved in trade and finance. These activities were often seen as reprehensible as trade and finance often coincide with questionable ethics. Some languages still reflect this. The English language has the term Jewish stock take, referring to a shopkeeper destroying his or her own shop in a self-lit fire in order to claim insurance. The Dutch language has the word ‘jodenbod’, which means Jew’s bid, to indicate a bid below the market price which people in a desperate position may be forced to accept.
After the French Revolution of 1789, Jews in Western Europe received citizenship, but in Eastern Europe, and most notably in Russia, they faced persecution and pogroms, which are violent riots that included robbery, destruction of property and sometimes killings. Around 1870 the first Jewish settlers entered Palestine. In 1896 Theodor Herzl published The Jewish State in which he claimed that the solution to The Jewish Question was a Jewish state. This marked the beginning of modern Zionism.
In 1873 the Vienna stock market crashed. The event was followed by the long recession of the late nineteenth century that lasted until 1896. It was the first global economic crisis. Economic growth was lower than previously. Anti-Semitism was on the rise in German speaking areas and France as Jewish bankers and industrialists were blamed for the situation. It was also the time when Silvio Gesell was a businessman. He experienced the poor economic conditions first-hand. It made him investigate the underlying causes.
In 1894, Captain Alfred Dreyfus, the only Jewish member of the French general staff, was convicted of spying for Germany. It turned out that he was innocent. He was rehabilitated a decade later after vigorous protests. During World War I many Jews fought for their nation states, but after the war a myth emerged in Germany, suggesting that the war was lost because of leftists, republicans and a Jewish conspiracy, which is rather ironic as the Jews had been inclined to support Germany in its fight against Russia.
In an effort to gain Jewish support for Britain during World War I, the British offered Palestine to the Jews. The Arabs already living in Palestine had no say in this, which soon led to tensions and violence. After a revolt of the Arabs between 1936 and 1939 the British restricted Jewish immigration. In 1946 Zionists started a guerrilla war against the British while large numbers of Jews were entering Palestine. Many of them were Holocaust survivors.
The Holocaust is a major trauma in the collective memory of the Jewish people. Nearly six million Jews were killed during World War II, most of them systematically exterminated in concentration camps and mass executions. The Holocaust vindicated the Zionists who believed that the Jewish people can only be safe if they have a country of their own.
In 1947 the United Nations planned to divide Palestine between the Jews and the Arabs. The Arabs didn’t agree and tried to expel the Jews. The war that followed was lost by the Arabs. Many Arab Palestinians were expelled from their homes and Israel was founded. The Arabs tried to reconquer Palestine but failed due to superior Israeli intelligence and military tactics, support from European countries and the United States for Israel, and a bit of miracle.
Over time the Arab nations lost interest in attacking Israel and Israel started colonising Palestinian land. The Palestinians resisted. There have been numerous terror attacks on the Israeli military and civilians. This made Israel seal off the border with Palestine. In recent years rocket attacks from the Gaza strip were sometimes answered with Israeli incursions that killed thousands of Palestinians. Major obstacles to peace currently are the unwillingness of militant groups like Hamas to make a final peace settlement in which Israel is recognised as well as the desire of Israel to colonise Palestinian land.
Conspiracy theories range from crazy rumours to well-documented allegations. Despite being such a small people the Jews have had an enormous impact on world history. This fuels speculation. Before going into the conspiracy theories, it might be a good idea to come up with a few general explanations for the remarkable successes of the Jews:
The Jews invented mass education twenty-five centuries ago (it took twenty-four centuries before Western Europe followed suit) because they came to believe that they all had to read their scriptures to discuss them in an intelligent manner.
In the past Jews were often pushed into occupations like trade and finance, which are activities that can make you rich without a lot of toil.
For centuries the Jewish people lived under marginal and uncertain conditions which required resourcefulness that may have become part of Jewish culture.
There might be a script running all that happens in this universe, and the Jews may be God’s chosen people after all, even though that was not always a blessing for individual Jews themselves.
The conspiracy theories have done tremendous harm as they helped to make the Holocaust possible. It may nevertheless be better to view them more objectively as theories that could be reviewed against the evidence. That may require taking some emotional distance as the truth is not always pleasant.
There is a joke that goes like this. Why doesn’t Israel become a state of the United States? Well, if Israel does, the country will have only two Senators. Somehow Israel has the unconditional support of the United States. Senators and members of Congress who don’t agree face the powerful Israel Lobby, which often means that the lobby will fund the campaign of his or her opponent, so that he or she may not be re-elected. Jewish interest groups have a lot of power in the United States and there is a book that claims that there is a secret Jewish plan to gain world domination.
The Protocols of the Elders of Zion is a forgery made up by the Russian secret service around the year 1900. It subsequently became a guidebook for blaming Jews for everything. The Protocols claim that the Jews form a secret cult that is conspiring to gain world dominance. Adolf Hitler believed it and so did many others like the auto maker Henry Ford. Somehow the work became a bit prophetic. That’s the irony of history, or perhaps the plan of God.
The main themes of the Protocols and related conspiracy theories are Jewish control of world finance, Jewish organisation of radical movements and Jewish manipulations of diplomacy to cause wars in which white Christians are killed. There are racist, political and religious aspects to these claims. It is sometimes argued that anti-Semites use so-called whistle words, which means that they secretly mean ‘evil Jews’ even when they don’t say that. That may be true but it can also be a way to dismiss legitimate concerns.
For instance, Mearsheimer and Walt investigated the power of the Israel Lobby. They claimed that if you criticise Israel in the United States you will be branded an anti-Semite, which means that you are a racist Jew-hater. Major newspapers subsequently published editorials calling their research anti-Semitic. Their book might be criticised for ignoring the pro-Israel viewpoint but that was not the aim of their research. AIPAC is the most prominent organisation in the Israel Lobby. Mearsheimer and Walt concluded:
AIPAC’s success is due to its ability to reward legislators and congressional candidates who support its agenda, and to punish those who challenge it. AIPAC makes sure that its friends get strong financial support from the myriad pro-Israel PACs. Those seen as hostile to Israel, on the other hand, can be sure that AIPAC will direct campaign contributions to their political opponents. The bottom line is that AIPAC, which is a de facto agent for a foreign government, has a stranglehold on the U.S. Congress. Open debate about U.S. policy towards Israel does not occur there.4
Several powerful lobbies operate in the United States, some of them represent ethnic and foreign national interests, but few attract so much attention as the Israel Lobby. So why is the Israel Lobby so powerful, visible and aggressive? There are some possible answers:
Unlike other foreign interests, the Israel Lobby has tremendous popular and financial support. Anti-Semitism led to the Holocaust, so the Israel Lobby can more easily claim the moral high ground than many other lobbies.
Jews don’t feel secure because of the Holocaust and because Israel is founded on land that has been taken from the Arabs. Criticism on Israel and Zionism provokes the fear that the legitimacy of the Jewish state is at stake.
Israel is ignoring international law by colonising Palestinian land. The unconditional support of the United States helps Israel to do that. Keeping this support may require suppressing dissent.
The Israel lobby is the most powerful in the United States but it has significant influence in some other countries as well. Powerful lobbies undermine democracies, most notably when they suppress dissent, which is something most lobbies don’t do.
The Jew as usurer is a well-known theme. The Roman Catholic Church forbade Christians to charge interest to fellow Christians. During the Middle Ages Jews were excluded from a wide range of professions and were pushed into activities that were considered reprehensible. One of them was money lending. The Torah allowed Jews to charge interest to Christians. Interest is one of the least understood economic mechanisms in modern times. It can destroy people, nations and even entire civilisations. The ancient Israelites knew this and believed that interest works like the slow poison of a serpent:
Usury does not all at once destroy a man or nation with, as it were, a bloody gulp. Rather, it slowly, sometimes nearly imperceptibly, subverts the victim’s constitution until he cannot prevent the fatal consequences even though he knows what is coming.5
In the Middle Ages interest rates were high, sometimes as much as 20% to 30% annually, so the insidious nature of interest was more visible than it is nowadays. And Jews were often blamed because they were the money lenders. Persecuting Jews was profitable for their debtors. For instance, in 1290 king Edward I expelled the Jews from England, confiscated their assets, and defaulted on the loans he had received from them.
With the advent of modern banking things changed. In the 16th century short-term interest rates dropped to around 10% per year because financial markets became more developed and efficient. Because interest rates went down, and because of the Protestant reformation, religious objections against charging interest waned. As Christians were allowed to charge interest on fellow Christians the Jewish role in money lending was reduced but it remained significant. Interest became an essential part of the capitalist economy and Western culture became ignorant about problematic nature of interest charges.
Jews still play a prominent role in the financial sector in the United States. Several Jews have served as chairmen of the Fed, including Alan Greenspan, Ben Bernanke and Janet Yellen. The apparent parasitic nature of the financial sector and the bailouts feed the conspiracy theory of Jewish usury. Real wages in the United States have hardly risen for decades but the US financial sector comprised only 10% of total non-farm business profits in 1947 but grew to 50% by 2010. Among those who profited were many Jews. While many ordinary people in the United States are struggling to make ends meet, the top 1% is doing very well. Many of them are Jews too.
Some anti-Zionists claim that Zionism equals Nazism. The idea that Jews are God’s chosen people is somewhat similar to the Nazi claim of Germans being superior people. The Nazi ideology held that Germany had the right to reclaim its lost territories. Zionists intend to reclaim the lost territories of the Jews. Zionism stresses that Jews should return to Israel while Nazism stresses that ethnicity is based on descent and homeland.
These are all common themes in nationalism, even the superiority thinking, so the parallels are not very telling. And there is at least one difference Zionism and Nazism. Even though Israel committed war crimes like most parties in armed conflicts, Zionists did not exterminate the Palestinians or any other people so far. The situation in Israel and Palestine can be compared with apartheid in South Africa.
Some Zionists claim that anti-Zionism equals anti-Semitism. If the anti-Semitism is about denying Jews the right to their own state in Israel then this is justified. But if it is about opposing the colonisation of Palestinian land in violation of international law then it is not. It isn’t always clear what is meant.
Arab anti-Zionism is sometimes called Islamic anti-Semitism. Before Jews migrated into Palestine there was no Islamic anti-Semitism. After Israel was founded, Jews were expelled from several Arab countries. Many Arabs and Muslims believe that the Jews have the right to a state, but not on land they consider their own. This is what many Arabs still believe. As a consequence, Israel’s security remains dependent on repression of the Palestinians.
Islamic anti-Semitism emerged when Arab anti-Zionists took over existing anti-Semitic conspiracy theories. There are tensions between Arabs and Jews. Jews living in Europe are harassed. The conflict between Israel and the Palestinians is often mentioned as the reason, and bringing the conflict to Europe is seen as a goal. Meanwhile, colonists on the West Bank are harassing Palestinians and destroying their property too.
If denying the Jews a homeland is reprehensible then the same is true for denying the Palestinians their own state and colonising their land. If international law still has any meaning then a peace settlement would be based on the 1967 borders. Preferably relocations would be minimised, meaning both people can live peacefully in each other’s country. That is only possible in a climate of mutual respect and friendship. This seems a remote possibility at present.
Influence on the media and opinion
In 2012 six major corporations own 90% of the mainstream media in the United States. Most of these corporations have Jewish CEOs and owners. Journalists are often Jewish too. Philip Weiss noted from his 30 years of experience in journalism that Jews made up the majority of the important positions in the publications he worked for. Weiss contends that this may have implications for the way the news is covered, most notably if it pertains to the Israeli-Palestinian conflict.6
On the other hand J.J. Goldberg wrote in The Forward that, although Jews do hold many prominent positions in the US media, they do not make a high priority of Jewish concerns and that Jewish Americans generally perceive the media as anti-Israel.7 That suggests that with fewer Jewish journalists not much will change about the reporting on the Israeli-Palestinian conflict.
And what about the Jews dominating Hollywood? Joel Stein of the Los Angeles Times mocked the efforts of the Anti-Defamation League (ADL), which is another part of the Israel Lobby, to misinform the American public:
I have never been so upset by a poll in my life. Only 22% of Americans now believe “the movie and television industries are pretty much run by Jews,” down from nearly 50% in 1965. The Anti-Defamation League, which released the poll results last month, sees in these numbers a victory against stereotyping. Actually, it just shows how dumb America has gotten. Jews totally run Hollywood.8
The Internet is more difficult to manage. Anti-Semitic as well as anti-Zionist messages can be found on many message boards. Efforts are made to counter that with pro-Israel messages on social media using students on Israeli university campuses.9 It is part of a general and continuous public relations effort named ‘hasbara’ that some call propaganda.
In October 2007 about 300 academics issued a statement calling for academic freedom from political pressure, in particular from groups portraying themselves as defenders of Israel. In 2009, after sociology professor William Robinson sent an email to students comparing the Israeli occupation of Gaza with the Nazi-controlled Warsaw Ghetto during World War II, the ADL started a campaign to discipline him for violating the faculty code of conduct. Other activist groups have copied these methods. This is called cancel culture.
Linguistics professor Noam Chomsky said during an interview that the ADL had compiled a 150-page dossier on him, apparently to find information it could use against him. Chomsky told that an ADL insider sent him the file. It included conversations, correspondence and other materials.10 Chomsky said that it read like an FBI file. He further noted that:
It’s hard to nail this down in a court of law, but it’s clear they essentially have spies in classrooms who take notes and send them to the ADL and other organisations. The groups then compile dossiers they can use to condemn, attack or remove faculty members. They’re like J. Edgar Hoover’s files. It’s kind of gutter stuff.10
In recent years, the influence of the Jewish lobby on public opion in the United States waned, because of the rise of both left-wing wokism and right-wing nationalism. Wokism favours the marginalised and oppressed, and supports the Palestinian cause while right-wing nationalism is open to anti-Jewish conspiracy theories. Woke people use some of the tactics the Jewish lobbies used before, for instance, cancelling those with opposing views.
Causing wars and revolutions
The French revolutionaries decided that Catholics, Protestants and Jews all became full members of society. In 1797 and 1798 a French Jesuit and a Scottish physicist published two remarkably similar books. Both claimed that secret societies were undermining the social order and had started the French Revolution. Both pointed at the Freemasons and the Illuminati as the main culprits. Jews were also seen as conspirators. Much of contemporary conspiracy thinking still centres around Illuminati, Freemasons and Jews.
Another allegation is that Jews were behind the Russian Communist Revolution of 1917. The idea was introduced by the anti-communist forces during the Russian Civil War that followed the revolution in an effort to make use of existing anti-Semitic sentiments. The allegation was taken over the Nazis in Germany. There was a high number of Jewish Communist party leaders during the revolution. The anti-Semitism in the Russian Empire may have induced them to join radical political movements.
That doesn’t explain why many Jews joined radical movements in other countries. Milton Friedman tried to shed some light on this issue. He found that a significant part of the revolutionary anti-capitalist literature has been written by Jews and that Communist parties in many countries were run and manned to a disproportionate extent by Jews.11
Friedman didn’t believe that Jews are seeking world domination. He gave two reasons as to why Jews have been attracted to radical movements. First, the left provided the Jews with equal citizenship while the Christian right did not. Second, the stereotype that Jews are profiteers and usurers may have persuaded them to show themselves and the anti-Semites that they are not selfish and heartless, but public-spirited and idealistic.11
After 1968 the left gradually abandoned its traditional base of workers in favour of disadvantaged groups like ethnic minorities, women, and LGTB people. This shift is sometimes attributed to the Frankfurt School. The Cultural Marxism conspiracy theory claims that Marxists of the Frankfurt School try to undermine Western civilisation with civil rights movements, feminism, Islam, LGTB propaganda, and pop-music, causing a breakdown of traditional Christian values. Many prominent Marxist thinkers were Jewish so Cultural Marxism is seen as an anti-Semitic conspiracy theory.
The recent wars in the Middle East are the work, at least to a significant extent, of the neoconservatives. Their ideology is a practical implementation of The Clash of Civilisations of Samuel Huntington. Huntington stated that Western nations will lose predominance if they fail to recognise the irreconcilable nature of cultural tensions. Huntington believed that Islam is a fundamental problem for the West.12
Leo Strauss was the founder of American neoconservatism. He proposed a restoration of the vital ideas underpinning Western civilisation such as classical Greek philosophy and the Judeo-Christian heritage and he promoted faith in the moral purpose of the West. Huntington was more cynical about the moral purpose of the West as he wrote:
The West won the world not by the superiority of its ideas or values or religion […] but rather by its superiority in applying organised violence. Westerners often forget this fact; non-Westerners never do.12
Both Huntington and Strauss were Jews while the neoconservatives are a predominantly Jewish movement. Neoconservatives advocate the promotion of democracy and the American national interest in international affairs, often by military force.
The Jewish connection, combined with the neoconservatives being preoccupied with the Middle East and Islam, gave rise to the suspicion that the wars they promoted were for the benefit of Israel. In the run up to the 2003 invasion of Iraq, Jewish neoconservatives were accused of dual loyalty. The controversy continues because of the neoconservative stance towards Iran, Israel’s main adversary. The response of the Israel Lobby was to accuse people who raised these issues of anti-Semitism.
Blood Libel 2.0
In 2009 the Swedish newspaper Aftonbladet ran an article about Israeli organ harvesting with the sensationalist headline ‘Our sons are plundered of their organs’. The allegations bore some similarity to the blood libel. Dead Palestinian children had been returned to their families by the Israeli army with organs missing.13 In the 1990s skin, corneas, heart valves and bones from deceased Israelis, Palestinians and foreigners had been taken without permission.14
Organ trafficking is widespread. China, India, Pakistan, Egypt, Brazil, the Philippines, Moldavia, and Romania are among the world’s leading providers of trafficked organs. In China organs have been harvested from political prisoners. Trafficked organs are either sold domestically or exported to be transplanted into patients from the US, Europe, the United Arab Emirates, Saudi Arabia and especially Israel.15 Israel faces a shortage of organ donors because Jewish religious law requires the body to be intact in burial.16
Organ trade isn’t murder. It can save lives. For poor people the choice may come down to selling a child or selling an organ. Not allowing organ sales may make their situation even more miserable. Stealing organs from the dead is reprehensible because the deceased nor the family have given permission. These practises may have existed in Israel on a wider scale even though they probably have ended by now. It is at least telling that a stolen heart may have been used in Israel’s first successful heart transplant.17
The allegiance of Jews has been a theme in anti-Semitic conspiracy theories. As is the case with every minority, there is always the question of allegiance. Most minorities don’t have a lot of influence so their allegiance isn’t a big issue, but Jewish people have a lot of influence in the United States. In his book By Way of Deception Victor Ostrovsky, a former operative for the Israeli intelligence service Mossad, claimed that the Mossad recruits helpers among the Jews outside Israel for its operations.18
One of the most well-known helpers was Jonathan Pollard. He sold a large number of classified US documents to Israel. He also sold documents to South Africa and attempted to sell documents to Pakistan. Many highly sensitive documents stolen by Pollard have been handed over to the Soviet Union, putting the lives of US intelligence assets at risk. A few other cases of Israeli espionage in the United States have attracted publicity, such as the arrest of former AIPAC officials Steve Rosen and Keith Weissman.
A New York housewife spotted five Israelis filming the attacks on the World Trade Center from a rooftop. She noted that they were already there just after the first strike had hit the Twin Towers. The Israelis were dancing and appeared to be full of joy as the World Trade Center burned and crumbled. They were arrested with $4700 in cash, foreign passports and a pair of box cutters of the type used by the hijackers. Two of them were Mossad agents. The FBI believed they were spying on Islamic extremist networks.19
The FBI interrogated them for weeks and concluded that there was no evidence of them having foreknowledge of the attacks. But the Israelis were uncooperative so it wasn’t possible to extract a lot of information out of them. Later some of these men discussed the events on an Israeli talk show. One of them said: “We come from a country that experiences terror daily. Our purpose was to document the event.”19 In August 2001, the Mossad gave the CIA a list of 19 terrorists living in the US which they suspected were planning an attack.
Influence on the United States government
A Christian desire for returning the Jews to the Holy Land has promoted the Zionist cause. Some Christians believe that the gathering of the Jews in Israel is a prerequisite for the Second Coming of Jesus. And so there is a strong support for Israel amongst Evangelical Christians and Republicans. Jewish Americans often back Democratic candidates so Democrats pay good attention to their Jewish voters. In this way support for Israel in both political parties is ensured.
The United States political system is corrupt. To get an office, politicians need money for their campaigns. In this way corporations and wealthy individuals buy influence. Wealthy Jews generously donate to political campaigns. In 2006, 60% of the Democratic Party’s fundraising and 25% of that for the Republican Party’s fundraising came from Jewish-funded Political Action Committees.
Several Jewish Americans found their way into influential positions in the United States government. Some were also citizens of Israel. In 1994 the Israeli paper Ma´ariv wrote that the Clinton Administration allowed more Jews in sensitive positions than any government before. The article noted that this was not a design, but that their achievements had brought them there. The Jewish component of the Democratic government was significant but there were also Jews heading for top positions in the Republican Party, for example Paul Wolfowitz.20
Wolfowitz was one of the neoconservatives, a political movement whose ideology played a significant role in American policies after 11 September 2001. In 2000 he was one of the supporters of the Project for the New American Century (PNAC) which promoted the removal of Saddam Hussein. After 11 September 2001, the PNAC pushed for an attack on Iraq. The security of Israel played a role in the considerations of the neoconservatives but there is little evidence that the Iraq war was principally fought for Israel.
Mearsheimer and Walt wrote that pro-Israel figures have established a commanding presence at the American Enterprise Institute, the Center for Security Policy, the Foreign Policy Research Institute, the Heritage Foundation, the Hudson Institute, the Institute for Foreign Policy Analysis, and the Jewish Institute for National Security Affairs, and that these think tanks are all decidedly pro-Israel.4
In most cases the US supports the position of Israel but there are a few instances in which the US government did not. The Eisenhower administration forced Israel to withdraw from the Sinai after the Suez Crisis. The administration of Bush senior delayed support to Israel because of the settlements in the Palestinian territories. The Israeli government and the Obama administration differed on the settlements and how to deal with Iran. In those cases the Israel Lobby organised resistance in Congress and the Senate.
The irony of history or God’s peculiar sense of humour
Perhaps the Protocols of the Elders of Zion are worth reading after all, just to see how the most bizarre conspiracy theories can appear convincing if you look at the evidence. If the protocols had been for real then the situation in the United States today may not have been very different. There is no grand conspiracy of Jews aiming for world domination. But what difference does it make? This is the irony of history and perhaps God’s peculiar sense of humour. And so Manny Friedman came to write in the Times Of Israel:
We have, for example, AIPAC, which was essentially constructed just to drive agenda in Washington DC. And it succeeds admirably. And we brag about it. Again, it’s just what we do. But the funny part is when any anti-Semite or anti-Israel person starts to spout stuff like, “The Jews control the media!” and “The Jews control Washington!” Suddenly we’re up in arms. We create huge campaigns to take these people down. We do what we can to put them out of work.21
So perhaps the Israel Lobby has taken some advice from the protocols:
And let’s not forget AIPAC, every anti-Semite’s favourite punching bag. We’re talking an organisation that’s practically the equivalent of the Elders of Zion. I’ll never forget when I was involved in Israeli advocacy in college and being at one of the many AIPAC conventions. A man literally stood in front of us and told us that their whole goal was to only work with top-50 school graduate students because they would eventually be the people making changes in the government.21
Then Friedman draws the following remarkable conclusion:
The truth is, the anti-Semites got it right. We Jews have something planted in each one of us that makes us completely different from every group in the world. We’re talking about a group of people that just got put in death camps, endured pogroms, their whole families decimated. And then they came to America, the one place that ever really let them have as much power as they wanted, and suddenly they’re taking over. Please don’t tell me that any other group in the world has ever done that. Only the Jews. And we’ve done it before. That’s why the Jews were enslaved in Egypt. We were too successful. Go look at the Torah — it’s right there. And we did it in Germany too.21
This is the personal opinion of a Jewish writer but he doesn’t appear to be a fool. And he made his comments in good spirit with regard to his fellow Jews. Friedman could write it but if you seek political office in the United States it is better that you don’t mention this. Jews excel in many fields, ranging from academics to finance, but if the upper class of a society coincides more and more with a small ethnic minority, this can cause ethnic tensions. The situation needs attention otherwise anti-Semitism may continue to attract followers. History has shown that this can end badly.
An important clue with regard to the secret of the success of the Jews can be found in his conclusion. They always lived at the margin and had to be resourceful to survive. These skills may have become part of Jewish culture so that Jews could come out on top once they could operate without restrictions. It is not a good idea to subject Jews to restrictions that don’t apply to others, but it may be a good idea to improve the political system in the United States so that it is less prone to corruption, and to end usury and profiteering in the financial sector at the expense of the public. It may also be a good idea that Jewish citizens fully integrate into the societies they live in, but this applies to every ethnic or religious minority.
There should security for the Jewish people living in Israel and a final peace settlement with the Arabs and the Palestinians. Concerns about the security of Jews living in Israel are the main reason for the Israel Lobby to suppress criticism on Israel and support for the Palestinian cause.
Now let’s get back to the joke. What if Israel becomes a state of the United States? It might solve a lot of issues. The allegiance of Jewish Americans would be to the United States. Israel can make peace with the Palestinians and give up land without fearing for its survival as the United States will defend it. Most Americans are willing to support Israel unconditionally so why not? And Israel will have only two senators from then on. It will probably never come to that but it may be an idea to entertain, perhaps for a limited period of time until peaceful conditions in the Middle East have prevailed and borders do not matter anymore. That may be a lot sooner than most people expect.
Featured image: Blame Jews For Everything For Dummies. Found on Reuvera.hubpages.com. [copyright info]
1. The Bible’s Prehistory, Purpose and Political Future. Jacob L. Wright (2014). Coursera.org. [transcript]
2. Practising Tolerance in a Religious Society: The Church and the Jews in Italy. Bernard Dov Cooperman (2014). Coursera.org. [transcript]
3. Matthew 27:24-25
4. The Israel Lobby and U.S. Foreign Policy. John J. Mearsheimer and Stephen M. Walt (2006). London Review of Books.
5. Usury, Destroyer of Nations. S.C. Mooney (1988). Theopolis.
6. Do Jews Dominate in American Media? And So What If We Do? Philip Weiss (2008). Mondoweiss.net. [link]
7. Jewish power: inside the American Jewish establishment. Goldberg J.J. (1997). Basic Books. pp. 280–281.
8. Who runs Hollywood? C’mon. Joel Stein (2008). Los Angeles Times. [link]
9. Israel to pay students to defend it online. USA Today (2013). [link]
10. Israel lobby descends on UC-Santa Barbara. Committee To Defend Academic Freedom at UCSB. [link]
11. Capitalism and the Jews. Miltion Friedman (1988). Foundation For Economic Education. [link]
12. The Clash of Civilizations. Samuel P. Huntington (1996). Simon & Schuster.
13. “Our sons are plundered of their organs”. Donald Boström (2009). Aftonbladet. [link]
14. Israel harvested organs without permission, officials say. Kevin Flower and Guy Azriel (2009). CNN. [link]
15. Organ trafficking: a fast-expanding black market. Janes Defence & Security Intelligence (2008).
16. A mitzvah called organ donation. Efrat Shapira-Rosenberg (2007). Ynetnews. [link]
17. 40 Years After Israel’s First Transplant, Donor’s Family Says His Heart Was Stolen. Dana Weiler-Polak (2008). Haaretz. [link]
18. By Way of Deception: The Making and Unmaking of a Mossad Officer. Victor Ostrovsky (1990). St. Martin’s Press.
19. Five Israelis were seen filming as jet liners ploughed into the Twin Towers on September 11, 2001. The Scotland Herald (2003). [link]
20. The Jews Who Run Clinton’s Court. Avinoam Bar-Yosef (1994). Maariv.
21. Jews DO control the media. Manny Friedman (2012). Times of Israel. [link]
Is the financial sector overtaking the real economy?
Less than 1% of foreign exchange transactions are made for trading goods and services. More than 80% are made for exchange rate speculation. Every three days an entire year’s worth of the European Union’s GDP of € 13 trillion is traded in the foreign exchange markets.1 So is the financial sector overtaking the real economy?
In the United States financial sector profits grew from 10% of total non-farm business profits in 1947 to 50% in 2010.2 This figure excludes bonuses. It is explosive stuff and the original research has been removed from the Internet. The findings could give us the impression that the financial sector is a big fat parasite that feeds on us. And who would have guessed that?
What a scary monster the financial system has become. This terrible creature could easily wipe out human civilisation as we know it. That nearly happened in 2008. And it can still happen. We are hostage of this monster. It is too big to fail. But what created it? It wasn’t Frankenstein for sure. The answer is already out there for thousands of years. It is interest on money and loans. In the past this was called usury and often forbidden.
The core problem is that incomes fluctuate while interest payments are fixed. This causes instability in the financial system. And if the investment is more risky, lenders demand a higher interest rate, which contributes to the risk. Limiting interest would reduce leverage and make financial system more stable and less prone to crisis.
It’s the usury, stupid!
Fraud in the financial sector contributed to the financial crisis of 2008. To what extent the fraud or the size of the financial sector are to blame is less clear. Financial crises are not a recent phenomenon. They have caused economic crises in the past. For instance, the stock market crash of 1929 and the subsequent bank failures caused the Great Depression of the 1930s. Back then the financial sector was not as large as it is today and there was no large-scale mortgage fraud. Hence, there must be another cause.
Charging fixed interest rates on debts causes problems as incomes fluctuate. So if some person’s income or some corporation’s profit suddenly drops, interest payments may not be met. When the economy slows down that happens to a lot of people and corporations simultaneously, which makes the financial system prone to crisis. And interest is a reward for risk. Creditors may be willing to lend money to people and corporations that are already deeply in debt, but only if they receive a higher interest rate. So if interest was forbidden, that might not happen, and there could be fewer financial crises.
Banning interest has been tried in the past and it failed time after time. That is because without interest lending and borrowing wouldn’t be possible and the economy would come to a standstill. Until now there was a shortage of money and capital so interest rates needed to be positive, but that may be about to change. The increased availability of money and capital pushed interest rates lower. Money and capital may soon be so abundant that interest rates can go negative. That could be the end of usury.
The scary monsters in the financial system
Apart from exchange rate speculation there are frightening creatures like quantitative easing, shadow banks and derivatives. These things will be explained later in this post. Some experts believe that the financial sector is out of control. That may not be the case. Usury created this monster so Natural Money, which is negative interest rates and a maximum interest rate of zero, could make many of these seemingly hard-to-solve issues disappear, and perhaps shrink financial sector profits too.
Leverage, shadow banking and derivatives make the financial sector so profitable for its operators because of interest and risk. Interest is a reward for risk but interest also increases risk because interest charges are fixed while incomes aren’t. But more risk means more profit for the usurers because all that risk needs to be ‘managed’. That provides opportunities to profit for those who make the deals. Usury is the main cause of financial crises and generates most financial sector profits.
Quantitative easing means that central banks print money to buy debt with this newly created money. Trillions of dollars and euros have been printed so central banks now own trillions in debt. In this way the financial crisis of 2008 was stemmed. Investors and banks wanted to get rid of debts and preferred cash because there was a risk that some of these debts would not be repaid in full. This caused the crisis.
But what if there was a tax of 10% per year on cash and central bank deposits? Losing a few percent on bad debts suddenly doesn’t seem such a bad deal any more. Investors may have kept these debts and the crisis would not have occurred. The losses on bad mortgages turned out to be a lot less than 10% per year. That was also because the crisis was halted with central bank actions like quantitative easing.
If there had been a tax on cash and central bank deposits there would always have been liquidity. The crisis may never have happened in the first place and quantitative easing may not have been needed. And if this tax is going to be implemented in the future, investors may gladly gobble up the debt on the balance sheets of central banks, so that quantitative easing can be undone, and most likely at a profit for the taxpayer.
In order to protect depositors, banks are subject to regulations. Regulations are bad for profits because they limit the risks banks can take. Bankers who were looking for bigger bonuses came up with a scheme that is now called shadow banks. Shadow banks don’t offer deposit accounts to ordinary people so regulations don’t apply. And so shadow banks can take more risk and generate more profits.
A shadow bank borrows money from investors and invests it in products like mortgage-backed securities. A mortgage-backed security is a derivative that looks like a bunch of mortgages. The owner of the security doesn’t own the mortgages themselves, but is entitled to the interest from the mortgages but also the losses when home owners fall behind on their payments. Not owning the mortgages themselves makes trading a lot easier because mortgages involve a lot of paperwork.
Shadow banks can be dangerous because bank regulations don’t apply. Ordinary banks are required to have a certain amount of capital to cushion losses so that depositors can be paid out in full when some loans aren’t repaid. The balance sheet of an ordinary bank might look like the one below:
mortgages and loans
loans to other banks
deposits from other banks
cash, central bank deposits
the bank’s net worth
But shadow banks don’t need to comply to these regulations because they don’t have depositors. And so the balance sheet of a shadow bank might look like this:
short-term lending in money markets
insurance and credit lines
the shadow bank’s net worth
What is so great about shadow banking, at least for bankers? If banks borrow at 2% and lend at 4%, the ordinary bank can make € 1,400,000. The bank’s net worth is € 10,000,000 so the return on investment is 14%. But the shadow bank can make € 10,000,000 and the return on investment is 100%. And you can imagine how great this is for bonuses. Only, if something goes wrong, there is little capital to cushion losses. That’s not a problem for the bankers because by then they have already cashed their bonuses. But it could become our problem as shadow banks can blow up the financial system.
If the loans drop 10% in value because some home owners fall back on their mortgage payments, the capital of the ordinary bank can cushion the loss of € 8,000,000, while the shadow bank goes down in flames leaving an unpaid debt of € 40,000,000. And now we get to the point where financial system blew up. It is the insurance and credit lines part on the balance sheet of the shadow bank. There is no value attached because credit lines so insurances don’t show up on balance sheets or only for a very low amount.
Ordinary banks guaranteed credit to shadow banks just in the case investors like money market funds didn’t want to invest in shadow banks any more. The great thing of credit lines for bankers is that they get a fee for these credit lines while they don’t appear on the balance sheet so that banks don’t have to cut back their lending. When homeowners fell behind on their payments, investors didn’t want to invest in shadow banks any more, and these credit lines had to be used. This means that ordinary banks had to step in and suddenly their capital wasn’t sufficient to cover the losses. Also going down in flames, were the insurers of mortgage-backed securities.
The United States had a government policy of stimulating home ownership. Under the guise of this policy mortgages were given to people who couldn’t afford them. Behind the scenes usury was to blame. If there was doubt whether the borrower could afford the mortgage, a banker could charge a higher interest rate to compensate for the risk. This made the mortgage even less affordable to the borrower. The solution for that problem was giving ‘teaser rates’, meaning that the interest rate was low during the first year so that the home owner could afford the mortgage payments at first. Meanwhile the mortgage was packaged in a mortgage-backed security so the banker was already off the hook when the home owner fell behind on his or her payments.
And there is more. Shadow banks offer higher interest rates to their investors. Shadow banks don’t have a lot of capital so investing in them is a more risky than putting money in a bank account of a regular bank. Investors in shadow banks need a compensation for that risk. That’s no problem because the enterprise is very profitable. It is therefore possible for shadow banks to pay higher interest rates. This might not be possible if interest was forbidden, unless shadow banks had a lot more capital to cover their losses, but that would solve the problem of them being too risky. It is usury that allows for risky schemes like shadow banks to exist.
The multi-trillion-dollar derivatives monster
In 2016 the notational value of all outstanding derivatives is estimated to be $650 trillion. This is the so-called multi-trillion derivatives monster. This figure is more than eight times the total income of everyone in the world.3 Some people are spooked by the sheer size of that number. And indeed, derivatives can be dangerous. In 2003 the famous investor Warren Buffet called derivatives ‘financial weapons of mass destruction’.
Five years later derivatives played a major role in the financial crisis. An improper use of derivatives nearly brought down the world financial system. But derivatives can be useful. Most banks use derivatives to hedge their risks. Banks that managed their risks well using derivatives fared relatively well during the financial crisis compared to banks that didn’t.4 Therefore, derivatives are probably here to stay.
But what about the multi trillion monster? The number is a notational value, not a real value. Derivatives are insurance contracts, often against default of a corporation, a change in interest rates, or home owners falling behind on mortgage payments. You may have a fire insurance on your house to the amount of € 200,000. This is the notational value of the contract. You may pay the insurer € 200 per year. That is the real value of the contract, until something happens, that is.
If your house burns down, the contract suddenly is worth € 200,000. Insurers often re-insure their risks, which is a prudent practice. But re-insurance makes the notational value of the outstanding derivatives increase. So if your insurer re-insures half of your fire insurance to reduce its risk exposure, another contract with notational value of € 100,000 is added to the pile of existing insurance contracts.
So what went wrong? If suddenly half the houses in a nation catch fire because there is a war, insurers go bankrupt. The cause of the financial crisis was many home owners falling behind on their payments at the same time so that insurers of derivative contracts like mortgage-backed securities went bankrupt. The American International Group (AIG) was the largest insurer of these contracts and it was bailed out with $ 188 billion. The US government made a profit of $ 22 billion on this bailout, but only because the financial system wasn’t allowed to collapse.
In a financial crisis a lot of things go wrong at the same time. The financial system can’t deal with a major crisis. If it happens, it may cause the greatest economic depression ever seen, and in retrospect it may herald the collapse of civilisation.
The usury issue
Money circulation in the economy is like blood circulating in the body. It makes no sense for a kidney or a lung to keep some blood just in case the blood stops circulation. The precautionary act makes the dreaded event happen. It is a self-fulfilling prophecy. A financial crisis is like all parts of the body scrambling for blood at the same time. When the blood circulation stops, a person dies. An if the money circulation stops, the economy dies. Hoarding is to blame for that.
Perhaps big banks are too big to fail. Breaking them up may not help because the banking system is closely integrated. Banks lend money to each other. If a few banks fail then others get into trouble too. And in a crisis all the trouble happens at the same time. So perhaps it is better to address the cause of failure itself, which is interest on money and debts. And it may be possible because interest rates are poised to go negative.
A tax on cash makes negative interest rates possible. It can also keep investors from hoarding money. If money keeps on circulating, there may never be a crisis. The crisis happened because investors scrambled for cash when they feared they might lose money on bad debts. But if they expect to lose more on cash, they might keep their debts. And there may have been fewer bad debts in the first place if there had been no interest on debts as interest is a reward for risk.
Featured image: Graffiti near the Renfe station of Vitoria-Gasteiz. Wikimedia Commons. Public Domain.
1. The rise of money trading has made our economy all mud and no brick. Alex Andreou (2013). The Guardian. [link]
2. The Rise of Finance. Evan Soltas (2013). Economics and Thought. [no link because the information has been removed]
3. Here’s What Makes the Derivatives “Monster” So Dangerous (for You). Michael E. Lewitt (2016). Money Morning. [link]
4. Financial innovation and bank behavior: Evidence from credit markets. Lars Norden, Consuelo Silva Buston and Wolf Wagner (2014). Tilburg University. [link]
When I was eighteen years or so I once read The Limits of Growth. That’s depressing stuff, most notably if you’re young and expect to live for another sixty years or so. Doom seemed imminent and I would probably live to see it happen. That was the moment when my views about the future turned grim. Before that I hardly had views about the future at all. A few years later I became an environmentalist and a member of Friends of the Earth in Groningen. Friends of the Earth does research and tries to convince people that they should change their lifestyles. Friends of the Earth also lobbies with politicians and pressures corporations. And sometimes we protested.
One day we blocked the entrance of Groningen Airport to protest against the government subsidies for the airport. The city council felt that Groningen needed an airport but Groningen wasn’t big enough to make it profitable. When we were sitting there, the police came to remove us, and it suddenly became clear to me that activism didn’t help. Politicians will be voted out of office when they are serious about solutions. Businesses will go bankrupt if they take appropriate action unless all other businesses do the same. The required measures are extremely costly and will affect our lifestyles so profoundly that it would never happen in the current political and economic system.
Once being over a cliff, a cartoon character can only clutch at a straw. And only in cartoons the straw might hold. Friends of the Earth in Groningen worked together with the Strohalm Foundation. The meaning of the Dutch word strohalm is straw. According to Strohalm, the economy must grow because of interest, and that’s destroying the planet. It is ‘grow-or-die’ because interest rates need to be positive. Any solution begins with ending interest, they believed, and interest causes a lot of other problems too, like poverty and financial instability. Strohalm’s idea was banning interest and charging a fee on money as Silvio Gesell had proposed, so that it would be attractive to lend out money without interest.
Economists didn’t take interest-free money seriously. If you can receive interest elsewhere then why would you lend out money without interest? And if you can borrow money at an interest rate of zero, you would borrow as much as you can and put it in a bank account at interest. Therefore, interest-free money with a holding tax would never work, at least so it seemed, and it didn’t take long before I realised that too. Only, that wasn’t satisfactory. Accepting doom is like committing suicide. If interest is the root of many social and environmental problems, and may destroy human civilisation, you can’t ignore that. And perhaps it could work. During the Great Depression it had been tried in a small Austrian village and it was a stunning success.
For years I used public transport as much as possible, but at some point I began to realise that it was all pointless. More and more people started driving SUV’s. They didn’t care. It didn’t matter what I do. A car can make your life more comfortable and I had no higher morals than other people.
A few years later, in 1998, I became a freelance IT specialist. I made a lot of money so I had money to invest. My first investments were small and not very successful. That was because I believed that the profits of corporations matter. But investments in loss-making internet startups did very well while profitable corporations did poorly. And so I came to believe that I had to stay informed about the developments in the financial markets. In 2000 I joined the investment message board Iex.nl.
On the message board was a day trader who shared all kinds of conspiracy theories with us. For instance, if the markets were about to collapse, a secret group called Plunge Protection Team would come to the rescue. He was ridiculed, but after the internet bubble popped, markets often miraculously recovered when they were about to crash.
And gold often crashed because of sudden selling. The day trader believed central banks wanted to keep confidence in their currencies. If the gold price were to rise, he claimed, people would lose trust in central bank currencies. This was new to me, and probably it wasn’t true, but I already had bought some gold because I didn’t trust financial markets and the people operating them. I was not good picking stocks, and I was too risk averse to be very successful in the stock market, but the gold turned out to be a good investment as I held on to it for decades.
In 2001 after the Internet bubble had popped I pitched the idea of interest-free money on the message board. My lack of knowledge was eclipsed by my zeal and lengthy discussions followed. On the Internet people from different backgrounds and different knowledge can be in one virtual room and participate in a discussion. I was rebutted time after time, but as these discussions went on, my knowledge of the financial system increased and I became aware of the issues that had to be resolved in order to make interest-free money work.
As a gold investor I became familiar with the Austrian School of Economics. This group questions money creation by banks and the need for central banks. They pointed at the inflation caused by money creation and central banks. At some point all the debt banks create would eventually collapse the financial system and money would be worthless, they believed.
And so two opposing fringe ideas, interest-free money with a holding tax and Austrian School, were challenging each other in my mind, which may be how Hegelian dialectic is supposed to work. In 2008 this resulted in a resolution and the idea of Natural Money was born. The economy can do better without interest so returns for investors can be higher. As positive interest rates are not allowed, the money may rise in value, so that interest-free money can give better returns. Hence, interest-free money was possible, perhaps even inevitable. In the following decade I integrated modern main stream economics into the theory of Natural Money. This research can be found on the website Naturalmoney.org.
Imagine that Jesus’ mother had put a small gold coin weighing 3 grammes in Jesus’ retirement account at 4% interest just after he was born in the year 1 AD. Jesus never retired but he promised to return. Suppose now that the account was kept for this eventuality. Imagine now that the end is near, and that Jesus is about to return. How much gold would there be in the account in 2018?
It is an amount of gold weighing 11 million times the mass of the Earth. The yearly interest would be a gold nugget weighing 440,000 times the mass of the Earth. There is a small problem, a fly in the ointment so to say. It would be impossible to pay out Jesus because there simply isn’t enough gold.
It might seem that the bank had to close long ago because of a lack of gold, but that isn’t true. As long as Jesus doesn’t show up it can remain open, at least if the borrowers are allowed to borrow more to pay for the interest. If the economy grows 4% it may not be such a big deal. The interest can be created out of thin air by making new loans that allow borrowers to pay for the interest. And if Jesus doesn’t claim his gold when he returns and accepts bank credit, everything will be fine.
There is a limited amount of gold while compound interest is infinite. As long as bankers can create money out of thin air to pay for the interest and people accept bank deposits for payment, everything is fine. Problems only arise when people demand real gold. A bank can go bankrupt when depositors want to take out their deposits in gold.
Perhaps Jesus’ retirement account isn’t such a big problem after all. Our money isn’t gold but currencies central banks can print. Assume now that Jesus’ mother had put one euro in the account instead. One euro at 4% interest makes 22,000,000,000,000,000,000,000,000,000,000,000 euro after 2017 years. That may seem an intimidating figure, but the European Central Bank can take 22 pieces of paper and print 1,000,000,000,000,000,000,000,000,000,000,000 euro on each of them. And there you are. Something like this happened during the financial crisis of 2008. This is called quantitative easing. You may have heard that word before.
Central banks can print new dollars and euros to cope with a shortfall. In fact, this is what central banks often do. There is always a shortfall because of interest because most money is debt and interest on this debt needs to be paid. To make up for the shortfall, there are two options. First, people can borrow more. Second, central banks can print new currency. Both things can happen at the same time. Central bank decisions about interest rates are also about dealing with the shortfall caused by interest charges.
When central banks lower interest rates, people can borrow more because interest rates are lower. Central banks lower interest rates when people are borrowing less than is needed to cope with the shortfall. If central banks raise interest rates, people can borrow less because interest rates are higher. Central banks raise interest rates when people are borrowing more than is needed to cope with the shortfall and the extra money makes people want to buy more stuff than can be made. And if people don’t borrow at all, this is a crisis, and central banks may print more currency to cope with the shortfall.
Interest on capital versus economic growth
There is a problem central banks can’t fix by printing more currency. Interest is more than just interest on money. Interest is any return on investment. Throughout history returns on investments were mostly higher than the rate of economic growth. Most of these returns have been reinvested so a growing share of total income was for investors. This can’t go on forever because who is going to buy the stuff corporations make in order to keep these investments profitable? A simple example can illuminate that.
The graph above shows how total income and interest income (in red) develop with an economic growth rate of 2% and an interest rate of 5% when interest income starts out as 10% of total income and all interest income is reinvested. After 25 years the economic pie has grown faster than interest income and wages have risen. At some point interest income starts to rise faster than total income, and wages go down. After 80 years there’s nothing left for wages. This graph explains a lot about what is going on in reality.
In the short run it was possible to prop up business profits and interest rates by letting people go further into debt to buy more stuff. In the long run, the growth rate of capital income cannot exceed the rate of economic growth. Interest rates depend on the returns on capital so this can explain why interest rates went down in recent years. In the past interest rates below zero weren’t possible but from time to time there were economic crises and wars that destroyed a lot of capital. This created new room for growth.
Wealth inequality and income inequality
When interest rates go down, the value of investments tend to rise. If savings yield little this benefits the wealthy as most people have their money in savings while the wealthy own most investments. But it is important to know the cause otherwise you might think that interest rates should rise. The graph above shows that wealth inequality causes interest rates to go lower, hence redistributing income, for example via higher wages or taxes on the wealthy, can bring higher interest rates.
There is a difference between wealth inequality and income inequality. Your labour income and the returns on your investments are your income. If you are rich but make no money on your investments, your wealth doesn’t contribute to your income. In reality wealthy people make better returns on their investments than others because they have better information and can take more risk. Still, the graph shows that income and wealth inequality can’t increase indefinitely, and that returns on investments can’t exceed the reate of economic growth in the long run, hence interest rates need to go lower.
Most people pay more interest than they receive. The interest paid on mortgages and loans is the proverbial tip of the iceberg. Interest is hidden in rents, in taxes because governments pay interest on their debts, and the price of every product and service because investments have to be made to make these products and services. German research has shown that 80% of the people pay more in interest than they receive, while only the top 10% of richest people receive more in interest than they pay. Lower interest rates benefit most people despite some side-effects that work in the opposite direction.
Humans are herd animals. They buy stuff and even go into debt to buy stuff when others are going into debt to buy stuff too. Suddenly they may realise that they have bought too much or have gone too deeply into debt, and all at the same time. One day they may be borrowing money, queueing up before the shops, and bidding up prices. The next day, they may decide to pay off their debts, leaving the shop owners with unsold inventories they have to get rid of at fire sale prices. So prices may go up when people are in a buying frenzy and may go down when sales dry up.
When there is a buying frenzy business owners are optimistic and do a lot of investments, and often they go into debt to make those investments. But if suddenly customers disappear, they may be stuck with unsold inventory and debts they cannot repay. Businesses may then have to fire people. Those people are then left without income, and cannot repay their debts too, so sales will go down further. If their debts are not repaid, banks could get into trouble. In most cases the economy will recover. In the worst case banks go bankrupt, money disappears, the economy collapses, and an economic depression takes off.
Interest can make things worse. Assume that you have a business and expect to make a return of 8%. You have € 100,000 yourself and you borrow € 200,000 at 6%. You expect to make 8% so borrowing money at 6% seems a good idea. If you only invest your own € 100,000 you can make € 8,000, but if you borrow an additional € 200,000 you can make € 12,000 (8% of € 300,000 minus 6% of € 200,000, which is € 24,000 minus € 12,000). The balance sheet of your business might look like this:
cash, bank deposits
If sales disappoint and you only make a return of 2% on your invested capital of € 300,000, which is € 6,000, you make a loss because you pay € 12,000 in interest charges. You may have to fire workers. Businesses can go bankrupt because they have borrowed too much and have to pay interest, even when they are profitable overall. Sales often disappoint when the economy fares poorly. This means that more businesses face the same difficulties and make losses because of interest payments. They may have to fire workers and these workers lose their income. This can worsen the slump.
Interest, economic depressions and war
Silvio Gesell discovered that interest rates can’t go below a certain minimum because lending would then stop. Money would go on strike as he put it. Why is that? Low yields make investing and lending money unattractive because of the risks involved. Debtors may not repay and banks may go bankrupt. Depositors then prefer to take their money out of the bank and keep it with themselves.
This can cause economic crises and depressions. Silvio Gesell lived around 1900. Interest rates below zero weren’t possible because of the gold standard. Depositors could go to the bank and withdraw their deposits in gold so that they didn’t have to accept negative interest rates. From time to time there were bank runs, economic crises and wars that destroyed a lot of capital. And this created new room for growth.
There may be a relationship between interest, economic depressions and war. In 1910 the amount of capital income (the red circle in the graph) relative to total income (the two circles together) was close to what it was in 2010. This could have led to an economic depression but then came World War I. The war destroyed a lot of capital so that there was new room for capital growth and interest rates could remain positive.
A few decades later the Great Depression arrived. If interest rates could have gone below zero in the 1930s, the Great Depression might not have happened, Adolf Hitler would not have risen to power and World War II would not have occurred. The currency of Wörgl demonstrates that negative interest rates could have ended the depression. After World War II interest rates never came near zero again. Governments and central banks printed more money. This caused inflation, which eroded trust in money.
People feared that inflation would make their money worth less so interest rates rose. In the 1970s the link between money and gold was abandoned because there was a lot more money than there was gold to back it. In the 1980s governments and central banks started policies to bring down inflation and to promote trust in money. As of 1983 interest rates went down gradually as a consequence of a renewed trust in money and central banks. Debt levels rose and interest rates went near zero.
Promoting inflation might not be a good idea. The end result is unpredictable. The best one can hope for is a poor performing economy and a lot of inflation like in the 1970s. But if interest rates rise because lenders lose their trust in money and debts, people may not be able to repay their debts, and the financial system might get into serious trouble. This can cause another great depression or another great war. But if the alternative is negative interest rates, stability and prosperity, then why not opt for that?
Featured image: Of Usury, from Brant’s Stultifera Navis (the Ship of Fools). Albrecht Dürer (1494). Public domain.