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Saving Together

Interest is among the most pernicious causes of concentration of wealth and devaluation of the future. What if we got rid of it?

Oscar Kjellberg of Sweden is not your normal banker. But then, the bank he heads is not your normal bank. Oscar's bank has the unthreatening name of JAK—the initials stand for land, labor, and capital in Swedish—but it is founded on a revolutionary premise: it doesn't charge interest.

Besides the Swedish JAK, there are a dozen or so small interest-free banks in Denmark. In both countries, JAK banks are run as co-operatives. When you open an account, you become a shareholder. As everyone holds just one share, each shareholder has equal influence in the annual vote for the board of directors.

Oscar's JAK is doing well. Its 24,000 members have around $50 million deposited with it. Membership is growing by 1,000 a year. “Many rural households and small enterprises are being excluded by the commercial banking system, which is completely dominated by four big banks in the urban areas,” Oscar says.

The JAK movement was started in Denmark in 1931 by Kristian Englebrecht Kristiansen, explains Inger Marie Ebbesen, a leader in the Danish interest-free banking movement who set up an interest-free bank in her village. “As a child, Kristiansen had seen the difficulties his parents had faced in paying interest on their farm, which was on poor, heather-covered heath. He believed that real capital was created when barren, worthless land was made fertile, just as his parents had done, and that money in itself produced no return,” says Ebbesen. “The charging of interest leads to the concentration of wealth, the increase of indebtedness and the growth of unemployment.”

While the Danish JAK banks are prevented by law from accepting deposits and making loans to people outside their local areas, Oscar's bank serves all Sweden from a single office in Skovde, a town in the center of the country 180 miles west of Stockholm. This does not mean that account holders have to travel long distances to visit the bank. With no public office (a notice on the door informs would-be robbers that no cash is kept on the premises), all business is done by post, telephone, or the internet. If anyone wants to take money out, the bank sends a check by post for cashing at a normal commercial bank. A lot of Oscar's work is done from a small Stockholm sub-office, or from his home on a tug boat docked in Stockholm harbor.

The bank's public face and local roots are provided by hundreds of unpaid volunteers around Sweden who spread the interest-free message out of personal commitment—playing the same role that Oscar did before he was hired by the bank. Eva Stenius, whose husband, Per Almgren, had established Sweden's JAK 25 years earlier using the model developed in Denmark, discovered Oscar when he organized a JAK study circle in his district and invited her to speak. They found they shared a lot of ideas.

“Interest causes unemployment, inflation, and environmental destruction,” Oscar says. “Every hike in interest rates means that businesses have to pay more to service their loans. To counteract this financial strain they must either cut labor costs, which worsens unemployment; or raise prices, causing inflation; or re-engineer their work to increase output, which leads to increased use of natural resources.”

Most of us imagine that money is created by the government. In fact, over 95 percent of all the money in circulation in a typical industrialized country is created by banks lending it into existence. Conventional banks usually lend out more money than they have received in deposits, confident that, as other banks are doing the same thing, each will get enough of the new money its rivals create to balance the outflow of funds resulting from its own excess loans—creating money through a kind of musical chairs game. JAK, by contrast, does not play this risky game. It never lends out more money than its members have saved with it. As a result, it plays no part in the money creation process.

With a normal commercial bank, one bank's loan ends up as a deposit in another bank, enabling the second bank to make another loan, which in turn enables bank number three to make another loan, too. Building most of a country's money supply on this debt pyramid makes the economic system inherently unstable. Moreover, charging interest transfers wealth from the poor to the rich and from declining areas to more prosperous parts.

“That sort of transfer doesn't happen with JAK,” Oscar says. “People save with us because they either want to borrow themselves or because they want to assign the right to an interest-free loan to a relative—a son or daughter, perhaps—or to an organization they support. This means that most money is lent out in the same area that it was collected, and, if not, it's only loaned in a place and for a purpose that the saver has approved.”

Instead of being paid interest, JAK savers are rewarded with savings credits that entitle them to a basic loan—they can use other people's money for as long as they've already given other members the use of theirs. Thus, if they save the equivalent of a thousand dollars for a year, they can then borrow a thousand dollars for a year, or two thousand dollars for six months, or five hundred dollars for two years.

But that's only the basic loan. Depending on the balance between members wanting to borrow and wanting to save, the bank will offer an additional loan perhaps nine or ten times larger than the basic loan to which a saver is entitled. If too many members want to borrow and too few to save, that figure will come down. If savers outweigh borrowers, it will go up.

Members who take out more than the basic loan must continue making payments after the loans have been repaid, until the number of months they have let other members have the use of their money equals the number of months they had the use of other people's. Only then can they take out their cash.

“This system works extraordinarily well for people buying houses. About 80 percent of our loans are for that purpose,” Oscar says. “Someone opens an account with us and saves for a while. We then give them a house loan which they repay over, say, 15 years. Before we will hand back the deeds to their house, however, they have to carry on making the same monthly payment for another 12 years, to give other people the use of their money. Then they can stop and, if they wish, take their money out. It means that they have a good big lump sum ready for their retirement. With other banks, that sum would have been swallowed up by interest payments.”

Most banks make their profits from the margin between the interest rate they pay savers and the much higher rate they charge borrowers. As JAK doesn't charge or pay interest, it covers the salaries of its 25 employees and its other operating costs by charging fees for the services it provides to both households and other enterprises. Members pay 200 Swedish kronor (about $20) annually towards the cost of operating their account and for a magazine which keeps them in touch with the bank's activities and the educational workshops it organizes. In addition, there are arrangement fees for loans and annual management fees while the loan is outstanding. If these charges were levied as interest, they would amount to about three percent on a typical loan.

“Community projects find it difficult to get loans, so we have recently created community reinvestment accounts to support them,” says Oscar. There are six so far and several more in the pipeline. One is for an eco- village, another for an eco-slaughter house that won't accept cattle more than three hours' travel away. The bank has helped open an eco-tourism railway and a community business center, and funded the re-creation of a Viking village from year 1000 for historical and tourism events. All of these enterprises are run by volunteers supported by local firms and the local government. “They would have found it almost impossible to get funding elsewhere,” says Oscar. “Their economic impact is small, of course, but word is spreading, and they have given hope to people trying to develop their communities all over the country.”


For more information, visit www.jak.se. Richard Douthwaite helps communities devise their own currency and banking systems. He is the author of a number of books, including The Ecology of Money, Short Circuit, and The Growth Illusion.

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