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5/18/15

What is Gandhian banking?

The banking system is raw power, like horses, bullocks, steam or electricity, that may be used for evil (as it has so far in modern times) or for good (as I propose). The principal tool of this magnificent system of unrivaled power is interest.

The banking system flows capital to various channels and receives a reciprocal flow called interest. That is natural and the way it should be. Interest is ever flowing in the opposite direction of the flow of capital. 

However, interest has been misused so far to create poverty rather than wealth, to drain communities of wealth rather than build communities. This has happened because of the misuse and abuse of the concept of interest. 

A Gandhian banking would involve the simple proposition:

That interest is ever flowing as a reciprocal flow to capital and that interest should be paid on productive loans but be unpaid on use loans. 

When money is borrowed for productive purposes, to start or expand a business for instance, a profit is expected to be realized, new wealth is created in the world, and so the paying of interest is the most natural thing in the world. It is simply sharing of the new wealth so created.

When money is borrowed for use, to buy food or shelter for instance, no profit is expected, no new wealth is created, and so the paying of interest would be the most unnatural thing in the world. In this case interest if paid would lead to the impoverishment of the borrower and would make the world a poorer place. 

For much of the history of the modern world interest has been charged and paid for both productive loans (where it is natural to do so) and use loans (where is is unnatural to do so). The result of this is that wealth has multiplied (as a result of the former) even as people have been impoverished (as a result of the latter). 

Understanding the difference between productive loans and use loans is crucial and has so far been ignored in the modern economy since the industrial revolution. But the ancients understood this distinction perfectly, always allowing interest on productive loans while frowning upon interest on use loans. The ancients called this latter practice usury, meaning 'wearing down'. 

Let us summarize the economics of Gandhian banking:

1. Interest flows always as a reciprocal flow to capital.

2. In the case of productive loans interest is borne by the borrower. This is a business transaction. The profits are shared out of new wealth created.

3. In the case of use loans interest is borne by the lender. This is a social transaction. There are no profits involved and to charge interest drains the borrower. By charging no interest wealth is maintained and not drained. 

4. The system of Gandhian banking is a sustainable system of banking. Like the ancients we recognize that charging interest on productive loans is simply sharing profits while refraining from charging interest on use loans keeps wealth from being drained from those in need.

The banking system is indeed raw power, like bullocks, horses, steam or electricity. Together let us use it for good.  

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