Tag Archives: debt

The Usury Conjecture on the centralized, interest-based, debt-money system

The Usury Conjecture on the centralized, interest-based, debt-money system
Revised June 2, 2022
Thomas H. Greco, Jr.

The Usury Conjecture in a nutshell
The central banking, interest-based, debt money system that is dominant around the world today is neither stable, nor sustainable, nor fair. The creation of money based on bank lending with interest creates an imperative for debt to grow exponentially with the passage of time. That debt-growth imperative drives artificial economic growth as borrowers compete with one another to acquire enough money from the always insufficient pool of money to service their “loans.”

When I first began my intensive inquiry into money, banking, and finance more than 40 years ago, it did not take long for me to discover the essential nature of money, where it comes from and how it is created, allocated, circulated, mismanaged and abused. I was astonished that this system has been allowed to become such a dominant force in the world, that it has wreaked such enormous devastation upon the world, and that it has been allowed to go on for such a long period of time. What has led me to those conclusions has been thoroughly documented in my many books, articles, and web posts.

I have long wondered why there seem to have been no serious attempts to model the monetary system that predominates today throughout the world. Then, in November 2011, I again met up with a well known economist at a conference in Michigan where we were both presenters. In his presentation he reported having conducted such a simulation in which the results showed an equilibrium state being reached. I was dubious about his conclusions but in the context of the conference there was not sufficient opportunity to raise pertinent questions or to discuss them in any depth. I later wrote to him with my questions and asked him to respond to my assertion that some of his underlying assumptions about the system that he used in his simulation might not have been realistic. That was the beginning of my attempts to more fully articulate my “usury conjecture” which over the subsequent years has gone through several revisions. I think my arguments are sufficiently well developed at this point to be useful to others in understanding the system and in designing realistic simulations and mathematical models that are able to reveal its inherent flaws. 

In my critique, I did not say that his model was “wrong,” only that some of the underlying assumptions were unrealistic and his model too limited to adequately describe the system as it presently exists. Here are the points that need to be considered:

Free banking. He stated at the beginning of his presentation that his model was a simulation of the monetary system as it existed during the “free banking” era in the United States around the mid-eighteen hundreds. But we no longer live in that world, money and banking have undergone a great many changes since that time and the free banking model does not describe today’s reality. Among the very significant changes have been:

  1. The centralization of credit allocation power in the hands of a few huge banking companies. During the free banking era, that power was greatly decentralized, there was much more competition among banks and their asset portfolios consisted mainly of loans to businesses in the bank’s own geographic region, and much less in US government bonds or loans to massive diversified corporations which did not exist at that time.
  2. The imposition of forced circulation (by means of legal tender laws) of a unitary national currency under the Federal Reserve System that ultimately decoupled the currency from any objective measure of value (like a fixed weight of gold or silver). During the “free banking” era, each bank issued its own “brand” of bank note denominated in dollars.
  3. The gradual elimination of the redeemability of currency for specie (gold or silver) obliterated the objective measure of value, disconnected the money economy from the real economy, and opened the door for extreme monopolization of credit and the abusive inflation of the currency.

What happens to a bank’s interest income? As I understood his presentation, he made the assumption that the banks spend all of their interest income back into the economy, but that is clearly not the case. While a portion of a bank’s revenues are used to pay employees, and cover other expenses like equipment and facilities, it seems that most of the bank’s interest income is added to capital or re-enters the economy, not as consumption spending but in the form of additional loans or as reserves deposited with the central bank that enable further loans to be made, or as payouts to bank owners who, rather than spending it on consumption, use it themselves to lend it out, adding a secondary layer of debt and interest to the economy which creates a further shortage of money available for debt repayment. All of that requires a further expansion of lending (debt) by the banks to keep the money supply expanding enough to prevent too many defaults and subsequent bankruptcies, unemployment and economic depression.

Savings and investment. What does the bank do with peoples’ savings? In his reported simulation he did not describe the accounting entries that accompany the deposit of peoples’ savings, but savings and investment are two sides of the same coin. A bank, in its role as depository (as opposed to its primary role as “bank of issue”), reallocates surplus money (savings) from those who wish to save to those who need to use it now for capital formation (expansion of production capacity), or to spend on consumer goods when there are lulls in their income streams (consumer finance). The interest banks charge on these loans far exceeds the cost of providing the service and the interest they pay to savers, which creates further imbalances in income and wealth distributions.

Debt repayment. Repayment of principal on loans naturally results in the extinction of that amount of money. As old loans are repaid, new loans must be made to keep the money supply from shrinking which would cause additional defaults and economic stagnation or depression. New loans may or may not be sufficient to compensate and maintain the money supply. There must be both banks that are willing to lend and companies and people that are willing and able to borrower, but when the private sector had taken on as much debt as it can bear, government becomes the “borrower of last resort” in order to maintain or increase the money supply.

The role of a central bank. The central banks in countries around the world may or may not be a nominal part of the government. In the US, the Federal Reserve is an independent entity owned by banking corporations that pursue their own interests. There developed long ago, with the founding of the Bank of England, a collusive arrangement between banking and government. On the government side, the agreement enables perpetual deficit spending; on the banking side, the agreement enables the emergence of a banking cartel that enjoys the privilege of lending the peoples’ own credit back to them and charging interest for it. The advertised role of a central bank is to limit inflation and promote full employment. In actuality, the role of a central bank is to enable inflation sufficient to support government budget deficits while protecting and preserving the bankers’ privilege to milk the productive economy and enlarge their own wealth and political power.

Basis of issue. Besides the need to be free of interest, money needs to be issued on a proper value basis. There have been volumes written about this point, but sound principles of commercial banking have been discarded over the years because the perpetuation of the flawed system requires it, and because those who control the machinery of money use their power to promote their own narrow interests of wealth and power. Thus, some loans that banks make are legitimate while most are not. Banks should create new money to enable the production and sale of goods that are in the market or soon to arrive there. They should not make loans for speculative purposes or to monetize government debts as they commonly do today.[i] Thus, we have a stream of legalized counterfeit that dilutes the purchasing power of all the legitimate money in circulation. This currency inflation leads to price inflation, which amounts to a “hidden tax” that disproportionately harms the middle class who have substantial amounts of savings invested either directly or in pension funds which they do not control, and this “tax” hurts low income people who need to spend the bulk of their income just to survive.  

The economy. Economists and politicians speak about THE economy as if it was a unitary whole, but there are actually many economies depending on geography, social and economic class, and there are the public sector and the private sector. There may be prosperity in some sectors, while others experience recession. Distinction is commonly made between the private and the public sectors, but it is essential to also distinguish between the small and medium sized enterprises (SMEs) and entrepreneurs on one hand, and the large corporate megaliths on the other. In recent decades, banks have gotten ever larger and their lending has been directed mainly toward central governments and large corporations, while at the same time the productive small and medium sized enterprises that are the backbone of every local economy have been starved of the credit they need to finance their operations. By acting in this way, banks limit or eliminate the risks they take. In the case of lending to central government (by buying its bonds and notes), banks enjoy a guaranteed return with no risk at all. During the pandemic years the bulk of the government stimulus money went to large corporations while many small independent local enterprises were forced to close and were never able to reopen.  

“Cash” held by the banks. It is misleading to say that banks are sitting on a lot of cash instead of lending it out. In fact that “cash” has been lent out to the public sector (government) in the form of treasury bills, notes, and bonds, or to the central bank which holds it as “reserves” and on which the banks receive interest.

It seems obvious that the present global money system contains inherent in it a debt-growth imperative because of the interest burden that is attached to the bank loans that form the basis for money creation. I believe that any model that purports to simulate the actual present system of money and banking must account for most of the banks’ interest income as capital which is then loaned into circulation rather than spent, and if that were the case it would show that there can be no steady state but an endless growth in debt which leads to a general growth imperative and destruction of the Earth’s ecosystem as the real economy tries to expand in step with the overall debt.

That is in fact what the empirical data suggests. Any theory in opposition to the usury conjecture must provide an alternative explanation of why the total debt in the world continues to grow exponentially at a much faster rate than population or any measure of growth in the real economy as is show in the following charts.

Figure 1 the Institute of International Finance

Finally, the inherent inequity of this money system is obvious and is becoming ever more extreme year by year. The increasing inequalities in income and wealth are not natural phenomena; they are artifacts of the system architecture and management. Mere policy tweaks cannot correct that. The creation of money as interest-bearing debt by a banking cartel pumps virtually all of the benefits of productivity increases into the hands of the top level bankers and their minions whom we naively trust to operate the system in the interests of the common good.

History is replete with stories of collapse of societies resulting from exponential growth of debts and extreme inequalities among the various classes of the population. I have long argued that since money throughout the world today is based on “loans” made by banks at interest, the exponential growth of debt is required to keep the system going. That is clearly evident in the empirical evidence of debt growth over the past 100 years and especially since 1971 when the last link of money to anything real was severed by President Nixon’s announcement that US dollars would no longer be redeemable for gold.

The global economy is a complex adaptive system, but collapse happens when a system fails to adapt in an effective way. Jubilee or periodic resets have been common throughout history going back before Biblical times. Economist Michael Hudson has had much to say about that in his various writings especially in his latest book, …and forgive them their debts. I have been arguing for “debt triage” and a long term shift of finance away from interest-bearing debt financing and toward shared equity financing but because of the concentration of political power in the hands of the vested interests, and the general lack of understanding and concern about the flaws inherent in the present systems, I see little likelihood that these measures will be implemented soon enough to avoid major economic disruptions and social and political turmoil. That leaves innovative private and community initiatives as the most promising approach to avoiding disaster.

I have taken a functional approach to solving the problems that are inherent in the present global system of money, banking and finance and argued that the supposed functions of money–means of exchange, savings medium, and measure of value, are in fact distinct from one another and must be handled separately. The exchange function which is the essential function of money should be mediated by the use of interest-free short-term credit allocated to producers in proportion to the value of goods and services they are ready, willing and able to sell within the next few months. The savings function and the investment function on the other hand are two sides of the same coin and should be provided for by the temporary assignment of savers’ funds to enterprises that will use them to expand production capacity or develop new capacity. The measure of value function needs to be provided by defining a standard of value and unit of account in terms of some selected commodity or group of commodities.

I have described numerous alternative structures and systems to serve the exchange function, including private, local, and community currencies, and decentralized credit clearing networks of buyers and sellers and have cited numerous historical and current examples. I’ve also described financing arrangements that shift the capital formation function from interest-based debt financing to shared-equity financing that shares both the rewards and the risks of business investment. These are the actions that I am confident have the ability to prevent the disastrous collapse of civilization while enabling the necessary transformation to a peaceful, healthy and regenerative society. All of this has been thoroughly articulated in my books, The End of Money and the Future of Civilization, Money: Understanding and Creating Alternatives to Legal Tender (excerpted here), and in my various articles, presentations, and interviews which can be accessed at https://beyondmoney.net/.

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“The Big Lie” and the tragedy of Europe –Yanis Varoufakis blows the lid on Europe’s hidden agenda

In this interview, former Greek finance minister, Yanis Varoufakis, outlines the nature of the 2008 financial crisis, the reasons for the program of “quantitative easing” and the irrational actions of the western European leaders. The fundamental point he seems to miss is the debt growth imperative that is inherent in today’s global money system, the underlying fact that keeps everyone trapped in a system that is driving the whole of civilization toward disaster.

50 ways to leave the Euro: Greece and the global crisis

My two month visit to Greece last summer prompted me to develop some proposals that might be applied in Greece and other countries where the government has become insolvent. I’ve written these up in an article that was recently published in the online journal, Common Dreams.  You can read it there or here below. It was also republished on Resilience and can be found there.

50 ways to leave the Euro: Greece and the global crisis
By Thomas H. Greco, Jr.

The problem is all inside your head, I told the Greeks
The answer is easy, you need only stop the leaks
The power is yours to claim the freedom that you seek
There must be fifty ways to leave the Euro
(Apologies to Simon and Garfunkel)

Following the resounding “NO” vote by the Greek people on the bailout conditions in the July referendum, the negotiations between the Greek government and “the institutions” resumed with the expectation that a better deal for Greece would ensue. The outcome was quite the contrary. Greek negotiators ended up agreeing to a bailout deal that was far more onerous than the one the voters had rejected. Why?

The harsh reality is that the Greek government is insolvent. Having been lured into the debt-trap and the shared euro currency by western oligarchs using a combination of measures, including outright fraud, Greece was forced to accept the onerous conditions attached to the first two bailouts. Now it has been bludgeoned into accepting a third. The weapon of choice is the euro currency itself which is being wielded by the European Central Bank (ECB). By throttling the flow of euro currency into the country, the ECB last summer created near chaos in the Greek economy. This, and the threat of even more severe punishment in the future, was enough to bring the Greek government to heel.

With sovereign debt up around 180% of GDP, there is no way that the Greek government will ever be able to grow its way out of the current mess. The draconian measures demanded by the creditor institutions will just make it worse. Even the IMF has acknowledged (with apparent reluctance) that some debt relief is necessary for the Greek economy to recover. The new agreement forces the Greek government to yield even more sovereignty and to open its economy and its people more fully to exploitation by corporate interests and transnational banking institutions. Read the entire article…

Growth, more growth, then the end of growth…

If you don’t understand geometric or exponential growth then you don’t understand anything about the magnitude of the predicament that humanity now faces or the fundamental changes that are about to occur, one way or another.

I’ve never seen the facts of exponential growth so clearly and elegantly presented as in this video lecture by the late Professor Albert Bartlett. In Arithmetic, Population and Energy, Professor Bartlett shows that even seemingly small rates of growth must ultimately result in a situation that cannot be sustained. He relates the simple arithmetic of exponential growth specifically to human population, peak energy, and resource depletion and blows away the foolish arguments of politicians and pundits who argue that growth can continue as it has in the past.

Bartlett does not mention debt growth, but  I must add that it is an even more immanent problem and the most acute symptom of the “disease” that has infected civilization, that is the global interest-based debt-money system. I urge everyone to view Prof. Bartlett’s presentation, then, if you haven’t already, read my recent article,  Money, debt and the end of the growth imperative.

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No Time to Be Complacent–Fifty Statistics About the U.S. Economy

Global Research provides some interesting facts that make it clear that we are at the end of an era in economics, finance, and the industrial economy.

The article, Desperate Financial Situation, Biggest Debt Bubble in World History: Fifty Statistics About The U.S. Economy, begins with the statement

Most Americans know that the U.S. economy is in bad shape, but what most Americans don’t know is how truly desperate the financial situation of the United States really is.  The truth is that what we are experiencing is not simply a “downturn” or a “recession”.  What we are witnessing is the beginning of the end for the greatest economic machine that the world has ever seen.  Our greed and our debt are literally eating our economy alive.  Total government, corporate and personal debt has now reached 360 percent of GDP, which is far higher than it ever reached during the Great Depression era.  We have nearly totally dismantled our once colossal manufacturing base, we have shipped millions upon millions of middle class jobs overseas, we have lived far beyond our means for decades and we have created the biggest debt bubble in the history of the world.  A great day of financial reckoning is fast approaching, and the vast majority of Americans are totally oblivious.

I should add that billionaire financier George Soros has projected that total U.S. debt will soon reach 500% of GDP. Governments are not going to fix the problem. It is time for people to look to their own resources and creativity and begin organizing in their communities to assure their survival and thrival as we make the transition to a steady-state economy and a more equitable, harmonious society.

Banks Starving Business While Monetizing Government Debt

As usual, credit (money) is being lavished on the parasitic elements of the economy while the productive sector is being starved. A report from James Turk’s Free Gold Money Report draws upon a Wall Street Journal article (Lending Falls at Epic Pace) which includes two charts that make that plain. Here they are below along with a couple quotes. –t.h.g.

What Are Banks Doing with Their Depositors’ Money?

“So if the banks are not making loans, what are they doing with depositor money?

Well, they are still lending, but not to businesses and consumers.  They are lending to the federal government.

Banks don’t lend directly to the federal government of course, but buying US government paper accomplishes the same thing in the end.”

“Instead of depositor money being used to stimulate economic activity in the private sector by lending to businesses and consumers, the banks are helping to fund the growing federal deficits.  This re-allocation of resources has a negative long-term impact on the economy.  Depositor money is not being used for productive purposes like building manufacturing plants and making other investments that will create jobs and grow the economy.  It is being spent by the government, which consumes in the present and does not invest for the future.”

Happy Talk About the Economy–What are the Facts?

Is that daylight we’re seeing at the end of the recession tunnel, or is it the headlight of an oncoming train?

The “ticker guy” shows some charts that seem to answer that question. See it here.

The Great Inflation of 2010

Bill Bonner is absolutely correct in calling the monetization of debt The Grandest of Larcenies. He points out that, “Rather than honestly repaying what it has borrowed, a government merely prints up extra currency and uses it to pay its loans. The debt is “monetized”…transformed into an increase in the money supply, thereby lowering the purchasing power of everybody’s savings.”

As I argue in my new book, The End of Money and the Future of Civilization, enabling governments to spend more than they take in is half of the purpose of the central banking regime, the other half being to give the banking elite the privilege of charging interest on the people’s own credit.

As Bonner further points out,  “Of course, the Fed will not want to do such a dastardly deed; but it will do it anyway.” They are desperate to keep the game going and the only other alternative is to let interest rates rise as government seeks to sell more of its debt to increasingly reluctant lenders abroad.

Government, for its part, must either cut its profligate spending or raise taxes, or both. From the rhetoric coming out of Washington, it is clear that social programs, like Social Security and Medicare, are on the chopping block, but not sacred cows like military spending or bailouts for banks and corporate dinosaurs–the empire must be preserved.  Trial balloons for new taxes are now being floated. Is a VAT (value added tax) on the horizon?

As in the Weimar Republic between the World Wars, the politicians and bankers today may decide that hyper-inflation is the least onerous of their available options. The middle-class can say goodbye to their hard-earned savings.

National Debt Clock Needs More Digits

According to the Associated Press, the national debt clock maintained by the Durst Organization on a billboard near Times Square in New York City has run out of digits now that the national debt has for the first time exceeded $10 trillion. That’s more than $86,000 for each American family. Whom do we owe it to? Not to ourselves as the “powers that be” would like us to believe, but to all those who own dollars and U.S. Government bonds, notes, and bills. Yes, some are held by pension funds, but vast amounts are held by foreign central banks, especially China, Japan, and the OPEC countries.

An item that appeared in Yahoo News, dated Wed Oct 8, reports that “The late Manhattan real estate developer Seymour Durst put the sign up in 1989 to call attention to what was then a $2.7 trillion debt.” Two more digits will shortly be added to enable the debt to be tracked up to one quarter quadrillion dollars. One must wonder what the dollar will be worth by then.

The Inevitable End of the Central Banking and Political Money Regime

The present disorder in the financial markets and the cascading failures of financial institutions come as no surprise. Those who recognize the impossibility of perpetual exponential growth and who understand how compound interest is built into the global system of money and banking expect the continuation of periodic “bubbles” and “busts,” each of increasing amplitude until the systems shakes itself apart.

Engineers call this phenomenon, “positive feedback.” Such a system cannot find equilibrium. Imagine a heating system in which the thermostat, sensing a rise in temperature, calls for more heat instead of less. Such is the nature of the debt-money system. The imposition of interest on the debt by which money is created, demands that more debt be created. Such is the debt imperative which gives rise to a growth imperative. Among other things, it prevents the emergence of a steady state economy.

Is this the final round? Who can say? Can the system be saved yet one more time? Maybe.

Under the central banking regime which has become all but universal in countries around the world, money has been politicized. The collusion between politicians and international bankers enables governments to extract wealth from the economy by deficit spending and banks to extract wealth by charging interest on money as they create it by making loans. These two parasitic elements take wealth away from productive members of society and lavish it on military adventures, international intrigues, wasteful boondoggles, and financial finaglers.

When the system spins out of control what will come out of the chaos? It is impossible to predict but here are two strong possibilities. When the dollar collapses the financial and political elite class will certainly try to orchestrate a new global monetary regime based on the same old mechanisms for centralizing power and concentrating wealth in their own hands, seeking to complete the New (feudal) World Order which has been abuilding for the past three hundred years. Another possibility is the emergence of the kind of decentralized, democratic, and sustainable system we have been advocating for a long time.

We had better get ready to seize the opportunity that accompanies this impending crisis.

How? By organizing ourselves in our local communities and affinity groups to reclaim the credit commons, to create interest-free, non-dollar, non-bank exchange mechanisms and payment media. This is not as hard as it seems We already know how to do it. All it takes is organization and will.

Back to the current crisis, we should consider the possible actions of America’s creditors. According to Paul Joseph Watson & Yihan Dai, in and article in Prison Planet (http://prisonplanet.com/) dated Friday, September 19, 2008, “China Finance, China News and Chaobao Financial News, all state owned media outlets, slammed the Fed for taking action that will only make long term economic conditions worse and devalue the dollar by “creating money that does not exist which leads to the inflation of liquidity,” a policy contrary to China’s position as a holder of vast reserves of US dollars.”

Central banks have one true function, that is to manage the effects of the parasitic drain, to decide who will pay the price, who will feel the pain. They can either (1) restrict credit, thus causing recessions, bankruptcies and unemployment; or (2) they can expand credit and inflate the money supply by monetizing debts (either public or private) that are uncollectible.

Given China’s position as one of the United States’ biggest creditors, it is in a powerful position to determine the outcome of the current and future financial crises. If they don’t like the restructuring plan that the financial elite wants to put in place, they can kick over the table by dumping their dollar holdings and causing the value of the dollar to crash through the floor. Organized others acting in cooperation might do the same.

“The king is dead, long live the king.”

My upcoming book, “The End of Money,” due to be published early next year by Chelsea Green, will elaborate these points.

t.h.g.