Introduction part 3: Interest-free loans from the National Credit Bank
In part one we discussed how the government of a space colony could create debt-free and interest-free money. Subsequently we saw in part two that full reserve banking in combination with government created money is not only possible but would be in fact a better system than the current system of fractional reserve banking. We also saw in that part how lending and borrowing of money under such system would look like. In this part we will discuss the subject of interest-free loans.
What are interest-free loans?
This question might sound stupid, but is not. Technically a zero-coupon bond is an interest-free loan, though this is not what we mean with a interest-free loan. A zero-coupon bond is a bond issued at a lower price than its face value, while at the moment maturity the bond is repaid at face value. For example a certain bond has a face value of 1000 USD, but it is issued at, for example, 75% of this value. Instead of receiving interest, a bond owner makes money by receiving a higher price at maturity.
Though zero bonds pay no interest in a formal sense to their owners, one can argue that we can speak of “implicit” interest instead of explicit interest. (For an interesting discussion of “exclusive” versus “inclusive” percentages, see this article by Steven Dutch.) In fact from the perspective of the issuer of zero bonds there is no difference between such bonds and interest-bearing loans, since he has still to “repay” more than he originally borrowed.
What we mean with interest-free loans instead, is the following: suppose that Bob needs five hundred dollars and he is able to convince Alice to lend him this amount of money. If Bob has only to repay the 500 dollars he lent from Alice, then we speak of an interest-free loan.
The National Credit Bank
Save for loans to friends and family, no one will “invest” in interest-free loans. The primary reason for charging interest is to compensate for inflation, secondly interest is a compensation for the risk taken by the lender (e.g. the possibility of defaulting by the borrower). Thirdly, investments are made in order to make a profit. For these reasons interest-free loans are not interested for investors.
Since the government is the creator of money, as we have seen in part one, it is capable of offering interest-free loans. In case that the borrowers will default, the government will not be bankrupted as a result hereof. Therefore we believe that space nations should have a National Credit Bank. The National Monetary Authority will determine how much money the NCB is allowed to lend (this in order to control inflation), while the NCB will administer to loans themselves.
Why interest-free loans?
The National Credit Bank should act as the lender of last resort. Though the full reserve requirement as discussed in part two, will significantly reduce the risks of bank runs, if not eliminate, it might happen that commercial banks cannot attract enough savings to make loans to the public. In this case banks could lend money from the National Credit Bank, or the NCB can give loans directly to those who are in need of credit.
A more important reason for interest-free loans is their use as a tool for social policies. There are categories of people who have difficulty with getting a bank loan, not because they have a bad credit rating but because they bank might estimate the risk of such loans too high. For some reason the government might decide that these categories should nevertheless be able to borrow money.
One of these reasons might be the idea of a property-owning society, in particular a society in which most citizens own their own home. The government of a space colony might decide, for example, that homes up to a specified price are eligible for a interest-free loan. Another possible reason is that the government believes that people should be self-employed as much as possible, therefore the government could provide interest-free loans (again up to a certain amount) to new enterprises. A third possibility is giving interest-free loans to students.
Unlike the national government, local governments do not issue their own currency. Therefore local governments are in that respect equal to private individuals and corporations. However, local governments have to make public investments from time to time, whilst they might not have enough funding to finance these investments. Without interest-free loans, local governments should have to borrow money at interest. This will increase the costs of such public investments. By making interest-free loans available to local governments the costs of public investments will be reduced significantly.
This was the last part in our series “Space colonies and monetary systems”. In this series we have focused on the aspects of the monetary system of a space colony. As we have seen in the comments on the previous parts, there is a lot of concern about the subject of equality and related social issues. We will address these important topics in other posts, since these are social issues rather than monetary ones.