Post edited 11:18 am – November 29, 2010 by wspademan

Proposal for Project Development document section II(E)(9):

All loans in any Common Good Bank Community will be interest-free in real terms (principal plus inflation at most), to the extent that deposits are held as stock and the borrowed funds are spent within the Common Good Bank system — works ideally too.

For example, suppose member A borrows $100 at 3% nominal interest beyond inflation. Member A uses the loan money to pay $50 to member B whose Community holds 50% of its deposits as stock, $30 to member C whose Community holds 30% of its deposits as stock, and $20 to non-member D. Then $50 of the loan will be at 50% of the usual rate (so 1.5%), $30 will be at 70% (100%-30%) of the usual rate (so 2.1%), and $20 will be at the full 3%.

Why: Lower interest rates on loans encourage borrowing. Since Common Good Bank will be making loans only for socially productive purposes, borrowing is good. Limiting the low rate to expenditures within the Common Good Bank system encourages members to buy locally. Limiting the low rate to communities that choose to hold their deposits as stock encourages stock purchases.

How: Common Good Bank can offer this low rate because:

1. No financial resources are lost, if both (a) the money comes back to the bank (that is, if the borrowed funds are used to pay other members) AND (b) no reserve is required (that is, if deposits are held as stock rather than as insured deposits, enabled unlimited money creation as in D(4) above).
2. There will be a revenue shortfall from making interest-free loans, since the bank must make enough profits not only to back the value of its stock (which appreciates at the rate of inflation), but also to make up for occasional loan defaults and to cover administrative costs. Bringing a certain amount of money back into the bank as stock allows the Community to replace that much outside credit with income-producing assets (as described in E(7) and E(8) above). The income from those assets will more than offset the revenue shortfall.

After the first year, Common Good Bank can even lend at negative interest — that is, it will be able to PAY people to borrow money to do something productive — to the extent that the acquired businesses are profitable.