Herald of Steel

Alexander thought about the details of the two types of banking for a while- trying to figure out which was the best method for the current situation.

Because although might sound like there were a lot of benefits to the interest free banking system, then again, the fact was it was the traditional banks that dominated the global finances, leaving the other to exist only in the barest fringes of the market.

So surely they had to be doing something right.

Now popularity did not necessarily mean better.

And if you asked Alexander why there was such a huge difference in scale between the two, he would frankly admit he had no idea, after all, he was no expert in economics or finance.

But he could make a few educated theories as to why interest free banking was not as popular.

First and foremost, it might be because the theory of interest free banking itself was flawed and reality did not work like that at all.

A similar example would be communism.

'The people' owning all the factors of production might sound very good on paper, but that was done disregarding very real things like human nature and the potential for corruption. 'The people' were not a single entity, and the leaders at top were much too prone to be fallible.

Similarly perhaps the profit and loss model in the interest free banking could not generate the expected returns to keep the banks and their investors afloat.

….

Secondly, the model might not have been too attractive to either the bankers or the depositors.

Now the reason why bankers found the agreement distasteful was of course obvious.

Under the traditional banking rules, whatever money they gave, they were sure to get the amount plus interest.

So who would exchange the guarantee of money in favor of a risk and reward scheme?

But then why did the depositors also not some times favor them?

Well Alexander guessed it was largely due to the same reason as the bankers- the risk of losing all their hard earned money.

Sure they also had the chance of making a lot more money, but when presented with the chance of also losing a lot of their savings, many chose to take the much safer option of getting a small but fixed amount over the risky, larger amount.

This was basic human psychology.

In fact, there was even a famous social experiment which tested something very similar.

There every one in the group was given 1,000 dollars and presented with the following two choices:

1. A 50% chance to double the money. Or

2. Get a guaranteed 500 dollars.

As there was no catch, most chose the first option.

However when the first option was changed into a double or nothing, the choice instantly became the second one for every single one.

Even when the bet was changed to just losing 500 dollars but potentially getting 1,000 dollars if they got lucky, the choice remained the same.

Everyone preferred to get the guaranteed 1,500 dollars rather than attempt to get 2,000 dollars and be left with just 500.

And you can even try this example for yourself.

If a stranger came up to you with 10 dollars and asked you for a double or nothing deal based on a coin flip, would you take it?

Unless you are a very aggressive gambler, most likely not.

Risking 10 dollars for a 50% chance to earn just 10 dollars would be seen as too risky.

Now, what if the stranger raised his offer to 20 dollars but you only had to give 10?

So now you a 50-50 chance of winning double the amount you risk.

Who would take it?

Still, most likely not.

Even though on paper a 50% chance to double the money should be obviously the 'correct' move- you risk 10 but stand to gain 20.

But humans were hardly logical creatures. Habits, instincts and gut feelings played a far more important role than they should have in many of their decisions.

Thus somehow a 50% chance to get a 100% return on investment was still not seen as a good investment opportunity for most… especially if it meant losing all their capital.

In fact, this experiment was done many times over and it was observed that unless people were given a 3 times advantage, they rarely changed their decision.

A 5 times return finally got a majority to move, while the most stubborn ones asked for as much as a 10 times advantage.

Scientists call this 'risk aversion', where we perceive losses far more proportionally than gains, usually double or more.

Thus to make risking 10 dollars worth it, you will have to give them at least a 20 dollar gain.

It is thought we developed this trait during our evolution.

For our ancestors, it was far safer to hoard the food they already had instead of risking it for more gain. The possibility of starvation was simply not worth the extra luxuries winning the bet could get them.

And even after being separated by millions of years, we continue to think the same way.

And is not just risks where we show this trail.

Even in our everyday life we display it, such as in the fact that we remember the pain of losing something far more than the joys of gaining something.

So it could be said, by nature humans are very pessimistic creatures.

Thus a loss profit model was just not that attractive for them.

….

The third reason Alexander guessed the reason for this type of banking's unpopularity might ge because the countries willing to follow this type of banking were mostly Muslim majority countries and they were simply unable to compete with the far more dominant traditional banks that had their roots in far richer, powerful countries and hence had the muscle to strongarm these profit and loss driven models out of the market.

This would happen because…. at the risk of antagonizing some people, the vast majority of Muslim countries were financially quite weak.

Some of them were indeed very rich, like the Gulf states and they did practise their religious banking systems there, but in the grand scheme of things, even if you took them into account, all the GDP of the Muslim majority countries combined got you a number of around 13 to 15 trillion dollars…depending on your source and how generous they were willing to be.

This amount of money was not nothing.

But when compared to the 100 trillion dollar global GDP, this was just 13% to 15%.

Hardly anything to write home about.

In fact, if you wanted to turn the number even more pessimistic, their GDP was even less than the European Union, whose population did not even cross 500 million.

And they alone were able to roughly match the combined wealth of 2 billion people.
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Let us not even speak about the titan of the financial world- the United States.

That 'awakened giant' alone was twice as bigger, while its rival China was 1.5 times.

So even if the muslim system was perfect, as they claimed, they would naturally get bodied by their infinitely more powerful rivals.

…..

Lastly, as a sort of a conspiratorial note, it was thought the traditional banks were kept because they unfairly benefitted the rich. And it was after all they who controlled the financial world.

This might have some merit.

After all, it was no secret that guaranteed interest rate returns made the rich richer, while the poor poorer were forced to work three jobs to be able to barely afford those same loan repayments.

It also indirectly caused inflation as the government had to keep printing money to keep up with the repayments.

Now this might sound very weird but take this very simplified, slightly wrong example.

We know the US's total household debt is close to 18 trillion dollars, while the total GDP of the country is around 25 trillion dollars.

So if that value was left to continue to accrue interest, eventually it would exceed the total amount of cash in the market.

Debtors would simply be not able to repay their loans because there would be no dollar in the market to repay their loans with.

Thus the US treasury prints around roughly half a billion worth of new money everyday… just to keep up with all the demands.

The existence of interest rates also benefits the powerful house owners, who see their houses appreciate out of nowhere, at the cost of first time home buyers.

It might be the same house, the same brick and mortar, the surrounding area might also be the same as they bought it 50 years ago… but due to the acquired interest rates- a 100,000 dollar house might go for 300,000 or even 500,000.

While people's wages have certainly not risen by that much, certainly not when taking the ever present inflation into account.

This was one of the main reasons so many very wealthy and sophisticated countries had such a disastrous housing market.

Now, it should be noted that all these problems being the fault of interest rates were presented by the pro interest less group.

As for their validity, there were certainly some.

But to exactly what extent… well that was for the economists to debate and decide.

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