Debt-Free Money is Better than Debt-Based Money,
Even if the Latter is Interest-Free

Ardeshir Mehta
Ottawa, January 16, 2011

I used to think, not long ago, that credit-based money, as long as it was issued by public banks, was not essentially dangerous socially, and that as long as the interest on the money comes back to the public via the public banks, there would not be a problem even with the charging of interest on loans.

I now think differently, however. I now believe that banking, and its main function, the creation of credit-based money, should eventually be eliminated, at least partially; and money - as a medium of exchange only - should largely be spent into circulation by the government. Some of it, however, may be lent, but not by private entities like banks.

Public banks, as proposed by Ellen Brown, are definitely a good first step. However, they are not the final answer, in my view - and, I imagine, also in Ellen Brown's view. Even public banks create money solely by way of loans - that is, the money they create is debt-based money, not debt-free money.

In a world in which all money is created via debt, it stands to reason that if all debt were gone, all money would be gone too. However, from the perspective of each person individually, the best thing is not to incur any debt, but live within one's means; and if one is in debt, to get out of debt as soon as possible. Surely no one in his or her right mind would incur debt unless they have to. (Does anyone think that Bill Gates takes out loans or mortgages? Does he even need to? Don't answer that - it's a rhetorical question. I rest my case!)

So what is really desirable is for everyone to get out of debt as soon as possible; but if all money were created via debt, then achieving that desideratum would eliminate money from society altogether. This would be disastrous for society as a whole, of course. So it is clearly inadvisable socially to have money which is all created via debt. That would create a conflict of interest between society and its members: it is in the interest of society to have money circulate within the economy, while it is in the interest of its members to get out of debt as quickly as possible.

Banks, by creating debt-based money, do perform an important function in society: they provide a way for people to obtain loans for items which they cannot pay for all at once, such as cars and homes. Banks also (though only secondarily) help one to keep track of one's money, by providing monthly or - nowadays - on-line bank statements which tell one where one has spent one's money; but this is not the major function of banks. Nor do banks issue credit cards: that function is performed by specialised companies (mainly three of them worldwide, namely VISA, MasterCard and American Express), and even if a bank does issue a credit card, it issues it through one of these companies. It is mainly for the issuance of loans and mortgages that banks exist in our society.

However, loans and mortgages are simply ways to pay for something over time, because the purchased item is too large to be paid for all at once. In a sensible world, or even in a sensible nation, I don't see why this function should not be taken over by the government, especially since it is one of the functions of government to "promote the general Welfare" (in the words of the Preamble to the US Constitution); and encouraging the exchange of goods and services certainly plays a big part in promoting the general welfare.

So in a rationally-governed nation, the government would establish a special department (they could call it the "Economy Department", for example, and have a Minister for the Economy - or Secretary of the Economy - in charge of it); and the explicit purpose of this department would be to keep the economy strong and vibrant. One of the ways to do so would be to help those who wish to purchase large items such as cars and homes which they cannot pay for all at once. This department would help such buyers by paying the producers of the big-ticket items directly, using money created by the government for this specific purpose, and then recouping the money from the buyers over agreed-upon periods of time.

This would, in effect, be the government performing the same function as banks perform today; but there would be no interest charged on these "loans", and no service fees either: it would be done as a public service, to "promote the general welfare" by, as it were, greasing the wheels of the economy. If the buyer cannot pay back the money for the purchased item, be it a home or a car or a piece of large machinery, the item would revert to the government, which then would offer it to others who can pay for it over time - so no actual wealth would be lost to society even if "defaults" were to take place. It goes without saying of course, that none of these "loans" would be sold to third parties (in fact, being free of interest, no one would buy them anyway: what would be in it for the buyer?), and as a result, the huge "gambling casino" of today's financial world, in which the big financial houses gamble against others, by buying and selling mortgages and "derivatives" and so on, would cease to operate, or at least operate at a much reduced level.

For public works and services, such as building roads, streets, hospitals and and bridges, paying all the judges and polices, paying all the doctors and nurses, and so on and so forth, the government would simply create the money and spend it into circulation. It goes without saying, of course, that education and health care would be paid for by the government, up to any and every conceivable level. (This, to varying degrees, is already done in most first-world nations today anyway.) If too much of such government-created money gets spent into circulation, the government would periodically destroy some of the money it received when the people who bought homes, cars, etc. on deferred payment schedules paid this money back.

As a result, there would be no need for taxation of any kind, since money would be created for the same purposes for which taxes are spent today; nor would the spending of money into circulation result in inflation, since excess money could be "retired" whenever necessary.

In addition, the government would give to every individual a certain sum of money as his or her birthright, from the very moment he or she is born and until the day he or she dies. The justifications of this birthright are simple (and at least two-fold, if not even more than two-fold), as follows:


The first justification is that natural resources of a nation belong by rights to all those who comprise that nation. Indeed, the natural resources of the entire planet belong by rights - and in equal measure - to all those who inhabit the planet. These resources were not created by anyone; they are a gift to us all from nature (or from The Supreme Being, if you prefer to put it that way). No private party, therefore, has any right to appropriate, for themselves alone, any part of the natural resources of the entire planet, or even of an entire nation. They are the property and legacy of all people on Earth. These resources, moreover, also include the thousands of years of accumulated knowledge - knowledge which provides us with technological advancement. We ourselves did not invent the wheel, or fire, or automobiles, or the light bulb, or even some of the more recent inventions such as the computer: they were invented by our forefathers, who are long dead; and we all are their heirs, and so we all ought, by rights, to have a share in all the wealth created by using this knowledge.

It bears repeating: the totality of scientific and technological knowledge left to us by our forefathers is now rightfully the property of everyone, and as a result everyone has a right to obtain any wealth that results from its use. Car companies, for instance, do not have the sole right to profit from the invention of the automobile, nor do electrical companies have the sole right to profit from the invention of all the electrical gadgets we all use and take for granted today. Just as we take for granted our right to use the gadgets made with the help of these technologies, we also should take for granted that we, the people, own these technological inventions now, and we should be therefore paid the "royalties" on them to which we are due. If we are not paid these royalties, it becomes meaningless to talk about all citizens of a nation being owners of its natural and historical resources. Indeed, those few people who today profit from the use of all this accumulated technical knowledge, are clearly stealing from those who don't profit therefrom.


A second, even stronger, justification for this birthright is that in this day and age it is almost universally agreed that all people born on Earth have a right to life. This right is even enshrined in the US Declaration of Independence and in the UN's Universal Declaration of Human Rights. However, a right to life is meaningless unless it is also a right to the wherewithals that enable one to live.  As Shakespeare pointed out so pithily, "You take my life / When you do take the means whereby I live". So everyone has a right to the means whereby they live: and that, in our world, means a right to an adequate amount of money. This money can and should, therefore, be provided to all the members of a society by that very society, acting via that society's government: the sole legitimate creator of money.

To some extent we do recognise the right of people to enjoy the the wealth of the nation of which they are citizens. We allow everyone the right to use public streets, roads and parks, for example. We allow everyone to swim at public beaches and climb up public mountains. But we don't go far enough in recognising the right of all citizens of a nation to benefit materially from the entire wealth of their nation. To deny the citizens of a nation from fully profiting from its material and intellectual wealth clearly goes against all the principles of fundamental justice.

To distribute this money to all of us - this money which represents the share each of us has in the wealth of our nation - the government could simply issue a debit card to each and every citizen, and credit its account periodically. It would not cost the nation much to do so. Children's cards would be under the control of their parents or guardians, of course. Of course everyone, from cradle to grave, would be entitled to his or her share of the wealth of the nation.

Now returning to the subject of money as such: it is worth mentioning at this stage that money should only be a medium of exchange, and not be used as a store of wealth; and to this end, people who accumulate it should be dissuaded from hoarding it, and thereby preventing its use as a medium of exchange. Several proposals have been made to keep money as a medium of exchange only and not have it become a store of wealth. The way proposed by the Argentine-Austrian economist Silvio Gesell over a century ago is, in my view, the best: there should be a "demurrage charge" for the use of money. Demurrage is essentially a "user fee" of a few per cent per annum - typically, 5% - on the holding of currency out of circulation, intended to prevent the hoarding of currency and to keep it circulating at a rapid pace. As Prof Margrit Kennedy writes in a PDF document which can be found on-line (see Prof. Margrit Kennedy's excellent book on the subject):


Gesell suggested securing the money flow by making money a government service subject to a use fee. And this is the central message of his book. Instead of paying interest to those who have more money than they need and in order to keep money in circulation, people should pay a small fee if they keep the money out of circulation.

In order to understand this idea better, it is helpful to compare money to a railroad freight car which also helps to facilitate the exchange of goods and services. In contrast to governments which issue money, however, the railroad company does not pay the user a premium to unload the freight car and thereby bring it back into "circulation" - instead the user pays a small per diem fee if he or she does not unload it. This is all we would have to do with money. The community or nation which issues "new" money in order to help the exchange of goods and services charges a small "parking" fee to the user who holds on to new money longer than he or she needs for exchange purposes. This change, simple as it may seem, resolves the many societal problems caused by interest and compound interest throughout history.

While interest nowadays is a private gain, the fee on the use of money would be a public gain. This fee would have to return into circulation in order to maintain the balance between the volume of money and the volume of economic activities. The fee would serve as an income to the government [...]


Such a demurrage charge was applied during the Great Depression of the 1930s in many issues of "stamp scrip", which became a popular way of compensating for the insufficiency of official money then in circulation. It was also initially applied to balances in the Swiss WIR credit clearing system, but was abandoned. On the whole, it proved unworkable at that time; or else it was "made" unworkable due to the machinations of the big banks. However, with electronic money, using the appropriate software to "time-stamp" all units of money automatically once they are received, and to measure the time period it is kept unused, it would be relatively easy, and very inexpensive. I think the time has come, a hundred years after Gesell proposed it, to apply this "demurrage charge" in the real world. Such a demurrage charge would discourage hoarders, and keep money functioning only as a medium of exchange.

There's much more on demurrage at <>. It is also mentioned in some detail in Prof Kennedy's above-mentioned book.

Opponents of a demurrage charge include people who are accustomed to earning interest on savings, and who don't like to see their savings depreciate over time. However, those who save money can always buy things that don't depreciate with their saved money, such as gold, and keep it for as long as they like. The money used to buy the gold would then re-enter the economy, and resume performing its intended function as a medium of exchange - while the savers would retain the value of their savings.

The advantages to the general public of all the above proposals would be enormous. First of all, no one would be paying any taxes, which today amount to about a third of most incomes. Nor would they be paying interest on car loans and mortgages, which would reduce the monthly payments for those items to around half of what the payments are today. Besides, the prices for almost all other items on sale in the marketplace would also drop drastically, because, as Prof Kennedy points out, interest is included in the price of virtually everything we buy, and the elimination of these interest costs would lower the prices of all items: indeed, of some items up to 70%, or even more (see Fig.3 in that document). And in addition, everyone would be guaranteed an income as a birthright, and this income would be over and above what they earn from their regular work; and which would make it possible for everyone to find the kind of productive work they really want to do and are good at doing, or else keep on searching for appropriate work, rather than take any old nasty job they are offered simply because nothing else is available.

One may ask: What would banks already in existence do? Of course they would not actually be prevented from issuing loans and mortgages; but who would go to them for an interest-bearing loan or a mortgage, if they could pay over time for the car or home they want to buy, free of interest? Well, if no one will come to banks for loans or mortgages, they can certainly switch to other financial activities. Most of them already are providing other financial services, like insurance. They can also keep track of people's money, for a fee, by providing them with the same sort of debit cards and on-line statements they provide today. Most people would be happy to get this sort of service for a fee. Yes, the banks' profits would drop, but since they have been gouging people for ages, I feel little sympathy for them.

As for credit cards, they would still exist, and the companies which issue them - VISA, MasterCard and American Express, plus a few smaller fry - would still function; it would be up to each individual to decide whether he or she wants to use them (and pay their exorbitant interest charges) or not. My guess is that many people won't want to use them, since with government-created debt-free money as described above, their net income will increase hugely - perhaps even double; and as a result they will not need to borrow. However, if they want to buy more stuff than they can buy with their already-adequate incomes, they may well choose to use credit cards, and pay the heavy rate of interest on purchases made with them: it will be each individual's choice, even if inadvisable! (Of course no private party will issue credit cards that don't charge interest, and also don't charge service fees: what would be in it for them?)

An objection to my plan might be raised by saying that it would be unfair to those who today earn incomes from interest on savings. It's a valid objection; however, I think that for most such savers, the alternative savings from their increased net incomes, and reduced prices of the items they buy in the marketplace, would be more than enough, in real terms, to offset the loss from the interest on their savings. Some calculations would have to be made, of course, before saying so with certainty. It is also possible to phase out debt-based money over a period of time, and phase in debt-free money over that same amount of time.

There are other proposals also. One is made by the Japanese economist Yoshito Otani. As Prof Kennedy writes:


According to Otani's proposal, [...] the technical side of the reform, based on the payment modes of today, would make a "use-fee" on the new money a much simpler issue. Ninety percent of what we call "money" are numbers in a computer. Thus, everyone would have two accounts: one checking account (in Europe this is called a current account, in Australia an access account) and one savings account. The money in the checking account, which is at the disposal of the owner continually, would be treated like cash and might lose as little as 1/2 % per month or 6% per year. Anyone with more new money in her or his checking account than needed for the payment of all expenses in a particular month, would be prompted by the small fee to transfer that amount to a savings account. From there, the bank would be able to lend this money without interest to those who needed it, for a certain amount of time, and, therefore, the savings account would not be debited with a fee.


This too would work.

One last point: my above-outlined plan is bound to be resisted by banks, especially the mega-banks, because it means an end to their near-monopoly on the creation of debt-based money. In fact Gesell's ideas, when put into practice in Austria and America in the 1930s, were, according to Prof Kennedy, torpedoed precisely by these big banks. So whoever embraces the program I have outlined will have to be prepared for a long up-hill battle! But hey: nothing ventured, nothing gained, what? I don't suppose Gandhiji thought that getting the Brits out of India using non-violent methods would be easy, either.

I welcome comments.