In the 2012 edition of Occupy
Money released this month, Professor Margrit
Kennedy writes that a stunning 35% to 40% of
everything we buy goes to interest. This interest
goes to bankers, financiers, and bondholders, who
take a 35% to 40% cut of our gross domestic
That helps explain how wealth is
systematically transferred from Main Street to
Wall Street. The rich get progressively richer at
the expense of the poor, not just because of "Wall
Street greed" but because of the inexorable
mathematics of our private banking system.
This hidden tribute to the banks will come
as a surprise to most people, who think that if
they pay their credit card bills on time
and don't take out
loans, they aren't paying interest. This, says
Kennedy, is not true. Tradesmen, suppliers,
wholesalers and retailers all along the chain of
production rely on credit to pay their bills. They
must pay for labor and materials before they have
a product to sell and before the end buyer pays
for the product 90 days later. Each supplier in
the chain adds interest to its production costs,
which are passed on to the ultimate consumer.
Kennedy cites interest charges ranging from 12%
for garbage collection, to 38% for drinking water
to, 77% for rent in public housing in her native
Her figures are drawn from the
research of economist Helmut Creutz, writing in
German and interpreting Bundesbank publications.
They apply to the expenditures of German
households for everyday goods and services in
2006; but similar figures are seen in financial
sector profits in the United States, where they
composed a whopping 40% of US business profits in
2006. That was five times the 7% made by the
banking sector in 1980. Bank assets, financial
profits, interest, and debt have all been growing
By 2010, 1%
of the population owned 42% of financial
wealth, while 80% of the population owned only
5% of financial wealth. Dr Kennedy observes that
the bottom 80% pay the hidden interest charges
that the top 10% collect, making interest a
strongly regressive tax that the poor pay to the
Exponential growth is unsustainable.
In nature, sustainable growth progresses in a
logarithmic curve that grows increasingly more
slowly until it levels off (the red line in the
first chart above). Exponential growth does the
reverse: it begins slowly and increases over time,
until the curve shoots up vertically (the chart
below). Exponential growth is seen in parasites,
cancers... and compound interest. When the
parasite runs out of its food source, the growth
curve suddenly collapses.
People generally assume that if they pay
their bills on time, they aren't paying compound
interest; but again, this isn't true. Compound
interest is baked
into the formula for most mortgages, which
compose 80% of US loans. And if credit cards
aren't paid within the one-month grace period,
interest charges are compounded daily.
Even if you pay within the grace period,
you are paying 2%
to 3% for the use of the card, since merchants
pass their merchant fees on to the consumer. Debit
cards, which are the equivalent of writing checks,
also involve fees. Visa-MasterCard and the banks
at both ends of these interchange transactions
charge an average fee of 44 cents per transaction
- though the cost to them is about four cents.
How to recapture the
interest The implications of all this are
stunning. If we had a financial system that
returned the interest collected from the public
directly to the public, 35% could be lopped off
the price of everything we buy. That means we
could buy three items for the current price of
two, and that our paychecks could go 50% farther
than they go today.
to the people is a hard system to work out, but
there is a way we could collectively recover the
interest paid to banks. We could do it by turning
the banks into public utilities and their profits
into public assets. Profits would return to the
public, either reducing taxes or increasing the
availability of public services and
By borrowing from their
own publicly owned banks, governments could
eliminate their interest burden altogether. This
has been demonstrated elsewhere with stellar
results, including in Canada,
among other countries.
In 2011, the US
federal government paid US$454 billion in interest
on the federal debt - nearly one-third the total
$1,100 billion paid in personal income taxes that
year. If the government had been borrowing
directly from the Federal Reserve - which has the
power to create credit on its books and now rebates
its profits directly to the government -
personal income taxes could have been cut by a
Borrowing from its own central bank
interest-free might even allow a government to
eliminate its national debt altogether. In Money
and Sustainability: The Missing Link (at
page 126), Bernard Lietaer and Christian Asperger,
et al, cite the example of France.
Treasury borrowed interest-free from the
nationalized Banque de France from 1946 to 1973.
The law then changed to forbid this practice,
requiring the Treasury to borrow instead from the
private sector. The authors include a chart
showing what would have happened if the French
government had continued to borrow interest-free
versus what did happen. Rather than dropping from
21% to 8.6% of GDP, the debt shot up from 21% to
78% of GDP.
"No 'spendthrift government'
can be blamed in this case," write the authors.
"Compound interest explains it all!"
More than just a Federal
solution It is not just federal governments
that could eliminate their interest charges in
this way. State and local governments could do it
Consider California. At the end of
2010, it had general
obligation and revenue bond debt of $158
billion. Of this, $70 billion, or 44%, was
owed for interest. If the state had incurred that
debt to its own bank - which then returned the
profits to the state - California could be $70
billion richer today. Instead of slashing
services, selling off public assets, and laying
off employees, it could be adding services and
repairing its decaying infrastructure.
only US state to own its own depository bank today
is North Dakota. North Dakota is also the only
state to have escaped the 2008 banking crisis,
sporting a sizable budget surplus every year since
then. It has the lowest unemployment rate in the
country, the lowest foreclosure rate, and the
lowest default rate on credit card debt.
Globally, 40% of banks are publicly
owned, and they are concentrated in countries
that also escaped the 2008 banking crisis. These
are the BRIC countries - Brazil, Russia, India,
and China - which are home to 40% of the global
population. The BRICs grew economically by 92% in
the last decade, while Western economies were
Cities and counties could
also set up their own banks; but in the US, this
model has yet to be developed. In North Dakota,
meanwhile, the Bank of North Dakota underwrites
the bond issues of municipal governments, saving
them from the vagaries of the "bond vigilantes"
and speculators, as well as from the high fees of
Wall Street underwriters and the risk of coming
out on the wrong side of interest rate swaps
required by the underwriters as "insurance."
One of many cities crushed by this Wall
Street "insurance" scheme is Philadelphia, which
has lost $500 million on interest swaps alone.
(How the swaps work and their link to the LIBOR
scandal was explained in an earlier article here.)
This month, the Philadelphia City Council held
hearings on what to do about these lost revenues.
In an October 30 article titled "Can
Public Banks End Wall Street Hegemony?",
Willie Osterweil discussed a solution presented at
the hearings in a fiery
speech by Mike Krauss, a director of the
Public Banking Institute.
was to do as Iceland did: just walk away. He
proposed "a strategic default until the bank
negotiates at better terms". Osterweil called it
"radical", since the city would lose its favorable
credit rating and might have trouble borrowing.
But Krauss had a solution to that problem: the
city could form its own bank and use it to
generate credit for the city from public revenues,
just as Wall Street banks generate credit from
those revenues now.
A solution whose
time has come Public banking may be a
radical solution, but it is also an obvious one.
This is not rocket science. By developing a public
banking system, governments can keep the interest
and reinvest it locally. According to Kennedy and
Creutz, that means public savings of 35% to 40%.
Costs can be reduced across the board; taxes can
be cut or services can be increased; and market
stability can be created for governments,
borrowers and consumers. Banking and credit can
become public utilities, feeding the economy
rather than feeding off it.
Brown is an attorney and president of the
Public Banking Institute. In Web of Debt, her
latest of eleven books, she shows how a private
cartel has usurped the power to create money from
the people themselves, and how we the people can
get it back. Her websites are
http://WebofDebt.com, http://EllenBrown.com, and
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