"You can never repay all the interest"

The upside of commenting on Reddit is that, every once in a while, you get an insightful reply.

A common complaint about our monetary and banking systems is that "you can never repay all the interest".

The argument goes like this.

Suppose you have a barter society, and someone - representing a central bank - introduces money. But he doesn't just give people money; instead, he loans it. He loans a total of 100 pieces to everyone, at 5% annual interest. The community starts using money to trade, it's convenient, and everyone is happy. But then, after a year, the money issuer comes back, and asks everyone to repay him the money. The total amount due is 105 pieces, but there's only 100 pieces to go around. Someone won't be able to repay. The system forces someone to go bankrupt!

Except, not. The system doesn't force everyone to return all the money all at once, and the same money can be used over and over again to repay debts and interest. Here's an example from Reddit user "selven":
Imagine a 2-person world with just me and a bank, and we're also each other's employers. Only $100 cash exists in the world, at the start all owned by the bank. I want to upgrade my farm equipment, so I borrow $100 from the bank. I have $100, the bank has $0, I'm $100 in debt, with 1% interest owed every month. Now, I go and actually buy said farm equipment from the bank. I have $0, the bank has $100, I'm $100 in debt. Now, let's say that I want to renovate my farm some more. I take out another $100 loan and buy the goods, so I have $0, the bank has $100 and I'm $200 in debt.

What do I do now? I work for the bank. Let's say that I'm not expecting returns for many years, so for now every year I'll just pay interest. I sell my goods for the bank. I go sell him some of the fruit that my farm produces and get paid $2 for it. I immediately pay $2 back in interest. Next month, same thing. Sell fruit, get $2, pay interest, lose $2. Let's say that this happens for ten years, and then my farm finally gets more productive and I pay off the loan. What just happened is that I took out a $200 loan and paid $200 principal and $240 interest all on a $100 money supply. How is this possible? Because the same money circulates between the two of us alternately as payment for goods and as interest many times. The real world is an expansion of this two-person farmer and banker, where the employers and customers and banks are different people, but the same principle applies, just more indirectly.


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