*Community economist

Mohamed Yunus’ Nobel Prize is all about a deeply controversial topic – money and the money system. That is not how it is presented. The story we are given is about a rich, compassionate man who invents a system of credit for poor people  that changes their lives, while not losing money for the lender. And that is true, but not the whole truth

Apparently the Grameen Bank idea started when Yunus sought to buy a number of small items from some women hawkers; and was told they had to sell what they had before they could buy more raw materials to make more. He realized that with a tiny amount of credit, the women could build volumes and hence their livelihoods.

The principles of the Bank he set up contradicted two bedrock principles of the banking fraternity: that loans must be backed by collateral assets which can be sold if the borrower defaults;  and that the lender should get the highest rate of interest – to maximize the ‘market rate’ of capital.

First, instead of collateral, Grameen requires its borrowers – at first all women – to ask for loans as an affinity group based on friendship and trust. All the members undertake to see that all the others repay the loans. No collateral is asked. The repayment rate is over 98% - way higher than that achieved by conventional banks. The system of honour and trust prevails, and works better than individual responsibility backed by collateral. The result is that a much wider, and poorer, section of a nation has access to credit than conventional banking delivers.

Second, Grameen’s rate of interest is set at the lowest rate consistent with cost recovery and a tiny profit for expansion. When it started it was well below 3%.  Conventional banks set interest  at the highest possible rate, because profit maximization is the unquestioned objective. If the rates differ, that is because different markets can support different rates.

The result of this conventional system of credit for profit is that people have access to credit in direct proportion to their existing wealth (collateral). So the banked section of the population is by definition limited. When conventional banks seek markets among poor people, it is as an investment in those individuals becoming rich.

All that is perfectly understandable because banks operate as commercial entities; and  profit (shareholder value) is the purpose of capitalist enterprise in the market. The question is whether money should be treated as a commodity and traded for profit.

Money is not a commodity: you cannot eat or drink or wear it. It is the means by which we trade with each other and a way to save for spending later. The sensible way to deal with money would be to ask ourselves how much of the stuff we need in any period to enable trading and saving. If you create too much money, there will be inflation; if too little, trading will dry up.   If half your population is without money and therefore cannot either produce or consume, you have done it wrong

But the way that the banking system developed has turned money into a commodity – to be bought and sold, borrowed and lent with interest – among people with money. New money is made – not by governments with an eye to how much money is needed – but by commercial banks for the sole purpose of lending for profit.  New money is made in the form of debt. Commercial banks create new money when they give a loan – which, although having been made out of nothing, must be repaid, and with interest. So money is made not by reference to its purpose but as a bye-product of a commercial venture.

Note that almost all new money creates debt – banks do not issue money without debt. The exception is the 5% of the money supply which derives from government printed notes and coins: these are spent into the economy by the government as part of its payments. They are not lent, they are spent.  There is no reason why the government should not also issue every year whatever new money is requires – as part of its normal expenditure, rather than giving banks the job.

The theory that prevents this is that there is some objective ‘market rate’ for capital, based on the usual laughable academic assumptions that everyone in the market has equal knowledge of, access to, and power within all markets. On the contrary banks are semi-monopolies; and individuals have access in proportion to their existing wealth. The fact is that there is no natural or objective market rate; and banks and governments and individuals can choose the rate they charge.

In fact money can be created by citizens, and without debt. We can choose to trade in an invented currency, provided that those who trade with us accept its worth.  The SA New Economics (SANE) Network trades publicly on the internet in a currency called Talents. You can buy and sell everything from car services to holiday accommodation, organic food to computer lessons, advice and repairs; health products and treatments to carpentry, books galore, skills training of all kind. And more.

Go into www.sane.org.za for information about SANE; and www.ces.org.za for the Talent exchange. Over 6,000 of us use it and so can you. You will also gain a real understanding of the way that money should work. Talents come into existence only through a trade: there is no debt, no inflation and no recession.