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You can clearly see what is going wrong at the moment, if you just look at how money is created. Imagine an enonomy in which there is only 1000 dollars moving around, and that they are in the hands of one person who deposits them in his bank account. Say that the bank will lend out 900 dollars and keep 100 dollars in "fractional" reserve. These 900 dollars will have to be repaid to the bank, plus say, 5% i.e. 50 dollars in interest.
Say that the borrowers will deposit these 900 dollars in their bank accounts. The bank will lend out 810 dollars and keep 90 dollars in reserve. The bank will expect 5% of 810 =40.5 dollars in interest/riba. That process will go on, until the bank has lent out 1000 / 0.1 - 1000 = 9 000 dollars, while holding 1000 in reserve, expecting to receive 5% of 9000 = 450 dollars in riba/interest. These 9000 dollars is to total amount of money in circulation. For each dollar in reserve, 9 dollars will be in circulation.
There is a serious problem in this economy. The borrowers will have to repay 9500 dollars, but there is only 9000 dollars in circulation. If nothing happens, it is obvious that these borrowers must default on their loans, because how can they pay back 9500 dollars if there are only 9000 dollars around?
It means that at least 500 new dollars must be created, before it is too late. Otherwise, the economy must default on its debts. Hence, the central bank injects 500 / 9 = 55.55 dollars. That solves the problem of the missing 500 dollars, but since these 500 dollars are also being lent out at 5%, there will be shortage of 500 x 5% = 25 dollars. Every dollar injected by the central bank will create shortages in the money supply and cause defaults and bankruptcies, unless the central bank keeps injecting new money.
There is another important factor. The value of money depends on what you can buy with it. So, imagine that these 9500 dollars change hands 3 times in a year to buy a production of 3 x 9500 = 28 500 dollars. If the amount of money grows, but the production does not grow, more money will be chasing the same amount of goods and services. That means that the prices will go up. Therefore, the growth of the total volume of money must not exceed the growth of production. In order to spare the borrowers from going bankrupt, they will force up the prices and end up making the money worthless.
What we have here, is a system in which production and income must keep growing, or else large numbers of people go bankrupt and/or the money becomes worthless; and all of that automatically. That kind of system is not sustainable, and it is the principle of riba/interest itself that sits at the core of the problem. Borrowers in that kind of economy do not default, NOT because they do not want to pay. Borrowers default because it is impossible that they would collectively be able to pay.
Imagine that people borrowed and paid interest in gold. A large-scale riba system would pretty much immediately collapse, because there will never be enough gold to pay back the loans and their interest. With paper money, it will work a little bit longer, because the government can print new money, but it will not work forever, because the growth in the total amount of paper money will end up rendering it worthless. Keeping the existing riba/interest-based economy afloat will become harder and harder, until the inevitable will happen, and a complete collapse will destroy it.
Say that the borrowers will deposit these 900 dollars in their bank accounts. The bank will lend out 810 dollars and keep 90 dollars in reserve. The bank will expect 5% of 810 =40.5 dollars in interest/riba. That process will go on, until the bank has lent out 1000 / 0.1 - 1000 = 9 000 dollars, while holding 1000 in reserve, expecting to receive 5% of 9000 = 450 dollars in riba/interest. These 9000 dollars is to total amount of money in circulation. For each dollar in reserve, 9 dollars will be in circulation.
There is a serious problem in this economy. The borrowers will have to repay 9500 dollars, but there is only 9000 dollars in circulation. If nothing happens, it is obvious that these borrowers must default on their loans, because how can they pay back 9500 dollars if there are only 9000 dollars around?
It means that at least 500 new dollars must be created, before it is too late. Otherwise, the economy must default on its debts. Hence, the central bank injects 500 / 9 = 55.55 dollars. That solves the problem of the missing 500 dollars, but since these 500 dollars are also being lent out at 5%, there will be shortage of 500 x 5% = 25 dollars. Every dollar injected by the central bank will create shortages in the money supply and cause defaults and bankruptcies, unless the central bank keeps injecting new money.
There is another important factor. The value of money depends on what you can buy with it. So, imagine that these 9500 dollars change hands 3 times in a year to buy a production of 3 x 9500 = 28 500 dollars. If the amount of money grows, but the production does not grow, more money will be chasing the same amount of goods and services. That means that the prices will go up. Therefore, the growth of the total volume of money must not exceed the growth of production. In order to spare the borrowers from going bankrupt, they will force up the prices and end up making the money worthless.
What we have here, is a system in which production and income must keep growing, or else large numbers of people go bankrupt and/or the money becomes worthless; and all of that automatically. That kind of system is not sustainable, and it is the principle of riba/interest itself that sits at the core of the problem. Borrowers in that kind of economy do not default, NOT because they do not want to pay. Borrowers default because it is impossible that they would collectively be able to pay.
Imagine that people borrowed and paid interest in gold. A large-scale riba system would pretty much immediately collapse, because there will never be enough gold to pay back the loans and their interest. With paper money, it will work a little bit longer, because the government can print new money, but it will not work forever, because the growth in the total amount of paper money will end up rendering it worthless. Keeping the existing riba/interest-based economy afloat will become harder and harder, until the inevitable will happen, and a complete collapse will destroy it.
