Environment and money Introduction Charging of interest can impoverish the poor and enrich the wealthy. Another of interest's effects is that it enables lenders to build up huge amounts of capital and the need to invest this has a major influence on the direction economic development takes. And, as we will see below, it is the investment of this capital that enables the economy to grow. Savings and growth Students are often introduced to economics with a discussion of the story of Robinson Crusoë who, you will recall, is shipwrecked on an uninhabited island and has to live off the fruits he can pick and the fish he can catch. Most of the time he has barely enough food to keep him alive, so in times when he has a surplus, he puts the excess fish and fruit aside to dry and builds up a modest stock. Once he has this stock, however, he no longer has to go fruit picking and fishing every day and has time to harvest ropegrass and make a fishing net which enables him to catch in half an hour the amount of fish he used to catch in an entire day. This gives him the time to collect seeds, sow grain, build a shed and so on. The economic moral of the story is clear. It is that those who do not consume everything they produce but save some of it to invest in improving the means of production will be rewarded by greater yields, economic growth and affluence. By investing we produce more and bring new products to the market. This puts the call from many environmentally aware people that we should consume less, into a new light. Of course consuming less is good for the environment but what happens to the money that remains if we spend less on food, clothing and other consumer items? Suppose we deposit it on a savings account or invest in a pension fund. The banks and pension funds will lend our savings to companies to invest in new machines, larger production facilities, more efficient equipment, the development of new products, improved marketing and so on. In other words, our savings will enable companies to make investments which lead to increased output and sales. Since the money we save with conventional financial institutions is the money used for financing growth, if we want our lower level of consumption to really benefit the environment, we need to look for other ways of using it. Finding these, presents no difficulty. We could, for example, invest our savings in the development of renewable energy sources, or in eco buildings, or in long lasting, energy saving products so that what we set aside leads to a more sustainable, lower input economy rather than an increase in total production. But what about the savings of those who have reached great wealth
because of the interest they are receiving from previous investments
and are now benefiting from a self perpetuating cycle of investment
producing an additional interest income which is re invested
to produce an even higher interest income, and so on, with money
continually accumulating and being reinvested in means of production
that lead to further growth? The sources of growth Private savings Interest Profits Speculative profits on real estate and raw materials Again, it is companies and the very rich who benefit from high land prices because, although the rest of us might have a stake in city centre property through a pension fund, we pay more to support its value through the three types of payment itemised above than we will eventually gain when our pensions are paid. Exactly the same argument applies to the profits derived from the ownership of mineral deposits. Intellectual property Production growth leads to compulsive consumption Companies and the well off therefore have a wide range of sources of savings which need to be ploughed back into profitable investments. As a result, factories are torn down and new ones are built, machines discarded and new ones bought, new products conceived and sold And if no profitable investment opportunities are readily available, they have to be created. No one ever asks if it is necessary or desirable to build new factories and introduce new products since the investments are not made with the aim of improving the quality of life or making products more durable. The only criterion is profit and to ensure that profits arise, the extra goods and services the investments generated, have to be sold. Companies therefore put a lot of effort into seducing the consumer to even more consumption. One way used is to exploit our need to express our personalities
and so encourage us to do this by displaying our status by using
their product. Our tendency to imitate is also exploited. Keeping
up with the Joneses means that if they buy a new car, we must
follow; if they upgrade their VCR, we must too, etc. No one likes
to be left behind, under penalty of
becoming a social outcast. The engine of growth is therefore fuelled by yield upon yield upon yield. because as soon as an investment yields a profit, there is more money that can be invested in even further expansion. This produces the ever accelerating renewal process we notice everywhere. Functions of money and interest If, as we have seen, the charging of interest causes serious environmental problems and a redistribution of wealth from poor to rich, can we eliminate it? To find out, we need to look at the nature of money itself. Money is one of mankinds most important inventions as it lubricates the economy by enabling exchanges of goods and services between large numbers of people to take place in a flexible way. However, money is not just a means of exchange, but a store of value a way in which one can hold ones wealth. This creates a problem when these two functions of money conflict with each other and the money needed for trade disappears from circulation because too many people are hoarding or saving it. True, this rarely happens in the capitalist economy because practically all accumulations of money find their way back into circulation through commercial loans and investments. This is because money can earn interest, which can be seen as a reward for allowing ones savings to stay in circulation. Expansion or crisis So if people need to be encouraged to get their money back into circulation to avoid too little currency being available for trading to go on, are we stuck with paying interest and having an economic system that puts the achievement of growth ahead of everything else? We certainly can not pay interest and have no growth, as the diagram below shows. If the capitalist system does not grow, it immediately enters a crisis because the financiers cease to invest, leaving the community with less money in circulation, which in turn means that less money can be spent. As a result, firms start cutting back wages, the number of employees dwindles, purchasing power decreases and demand contracts, causing a further reduction of production. This in turn causes a further decrease in purchasing power and the economy enters a spiral of decline. The conventional way out of the spiral is for those with capital to start investing again, something they will only do when they see the prospect of an adequate return, perhaps because a new growing market has opened up. Until then, they have ample funds and can wait! Meanwhile, the majority of the population experiences acute financial difficulties. All European governments are aware of the danger that their economies will descend into depression for lack of profitable investment projects which is why the need for economic growth has become a sacrosanct dogma with them and they stimulate it in every way they can. They have not examined the alternative, which is to avoid the growth compulsion by devising an economic system in which interest is not charged at all. Countering the conventional economic arguments for interest Economists justify charging interest by arguing that people need to be rewarded if they are not to spend all their money the moment they receive it and agree to allow others to use it temporarily instead. However, their argument is flawed as most people would still save if they were paid no interest at all because everyone faces financial uncertainty and likes to have something put by for a rainy day. Moreover, everyone grows old and wants to have savings to draw on when they retire. What people need to be paid for, then, is not saving itself but allowing others to use their savings instead of hiding them in their mattresses. After all, there is a real risk if they lend their money that it will not be paid back. In addition, if a borrower benefits financially from investing someone else's funds, it seems right that part of the benefit should be shared with the saver who made it possible. Then there is the question of inflation. While people still wish to save when inflation is rapid indeed, there is evidence that they save a higher proportion of their incomes in order to maintain the real value of their security cushions they will want to put as much of their savings as practical into assets such as land or antiques which can be expected to retain their value in relation to other goods and services and which can be converted back to cash by being sold later on. If people are to agree to keep their wealth in money in order that others might use it, they therefore need to be compensated by the borrowers for any loss of purchasing power. In summary, then, a fair interest rate does three things: it rewards the lender for the risk he or she runs when making the loan; it compensates for any loss in the purchasing power of money; and it shares between borrower and lender the benefits which flow from the way the money is used. In practice, of course, reasons one and three can be rolled into one: the promise of a share in the potential benefits should cover the risk inescapably involved in making a loan. Despite these justifications, the charging of interest was condemned by the Roman Catholic Church until the 1830s and Islam still bans it today. Indeed, many thoughtful people of all faiths and of none continue to have serious reservations. One root of their unease runs back to the time when gold was used as currency. Since gold did not increase itself, and very little was being mined, where, people asked, was the extra bullion to come from to pay the interest when both principal and interest had to be handed over at the end of the year? Obviously, the borrower could only obtain more gold if someone else had less, so lending money at interest meant that either the borrower impoverished himself when he paid over the extra or he impoverished someone else. And, as neither outcome was socially desirable, usury, as all forms of moneylending were called no matter how low the interest rate, stood morally condemned. Even though we now use paper currencies, this source of interest problem has not gone away. As almost all money in circulation is issued on loan, the money to cover interest payments can only be obtained by borrowers if other borrowers have borrowed sufficiently more. Moreover, the necessity to pay interest on these additional borrowings means that the economy needs to expand if the proportion of world income which is paid over in interest to the lenders is not to increase. This in turn explains why the capitalist system is unsustainable: it depends on borrowing money at interest which can only be paid without impoverishing the borrowers if the economy grows. If growth stops, the borrowers find themselves having to service loans which have not generated any return. Their profits fall and they therefore cut back on their borrowing and investing the following year, throwing out of work many of those who would have built the factories, shopping centres and office blocks they would otherwise have ordered. This cuts demand and, unless governments take up the slack by borrowing themselves in order to spend more to compensate, the economy sinks into a depression. In short, the borrowers' need to pay interest means that governments have no choice but to allow growth to continue, despite the damage that the changes involved may well do to the natural environment, to communities and to the social order. Consequently, whether we are concerned with countries or communities, without an economic system which avoids interest we cannot hope to achieve a sustainable way of life. Conclusions The unequal distribution of incomes caused by charging interest
not only leads to one group becoming impoverished but also to
a growing surplus of wealth in the hands of another and it is
because this surplus is pumped back into the economy by being
invested, that European countries are able to generate almost
continuous economic growth. As the extra production generated by each year's investment has
to be sold at reasonable prices if profits on the investment
are to emerge, governments and companies work together on the
consumer to create new demands. Demand no longer creates supply,
as it did in the traditional needs driven economy, but supply
leads to the creation of demand.. In other words, we get the
reverse of what we saw in the previous chapter: here, a surplus
of wealth creates over investment which leads to growth and,
if growth is not halted,
certain ecological disaster. Aktie Strohalm, 1997 |