Why interest and war are two sides of the same coin

0

Last Updated on 18th December 2020

Ahmed Danyal Arif, MA Economics and Politics

It has become a truism to say that war benefits no one, not even the victors. The question then arises: why have so many conflicts plagued mankind, especially over the course of the past century? Victory over the enemy appears to be the main purpose of war.

However, to achieve this, states must encounter numerous problems. Finances and the provision of war resources are of paramount importance.

In essence, the state must both incur expenses to procure the necessary goods and it must also obtain funds to cover these expenses. The war must be financed. Financing a war requires a plan. The financial sector is the only capable entity of fulfilling the immense financial requirements for wars, since taxes alone are insufficient.

Increasing the tax burden upon the general population often also results in social unrest and instability. It is not an understatement to affirm that the victor of a war is the one who can best finance it.

Indeed, the eternal victor – the one who funds the war and benefits the most, no matter who wins – rushes to its mortuary ground to collect the lion’s share, benefiting from the blood of its victims.

The Holy Quran, revealed 1,400 years ago to Prophet Muhammad, peace and blessings of Allah be upon him, speaks in depth on both subjects – finance and war. The Quran also explains the intimate link between flawed and corrupt economic systems and armed conflicts.

This article will analyse the interest-based capitalistic system in the Western world and examine how the greatest wars in human history have been created and propagated by modern economic thought. Moreover, it will discuss the remarkable predictions that the Quran makes on this subject and the solutions it suggests. Surely, without economic justice, there can be no peace.

How interest and war intertwine

The interest-based system of credit prevailing in global economy today is destructive to the peace of the world in two ways.

On the one hand, it helps the accumulation of wealth in a few hands, while on the other, it facilitates war. Moneylenders are always creating circumstances that may cause conflict between one nation and another so that war can break out and the belligerent nations may be compelled to borrow money from them.

The concentration of money in the hands of fewer individuals and multinational corporations, through banking interests, creates tensions between the interests of different economic actors and a constant pressure for large scale investments (atomic power plants, arms, etc.).

Why is this? Because inequality secreted by an interest-based financial system creates insecurity. In any society where the rich control a huge proportion of the country’s wealth, they end up controlling, even taking hostage, the political system.

Many of the wealthy somehow own shares in the military-industrial complex. They then demand that state policy expand the military sector. So the insecurity caused by the increase in inequality feeds the insecurity inherent in the status of a heavily armed military giant attacking other nations on the planet. It functions as a spiral.

Military production is the only area where the “saturation” point can be postponed indefinitely as long as the “enemy” is equally able to develop faster and better weapons. Profits in the military sector are far greater than any profits made in the civilian sectors of our economy.

Similarly, Margrit Kennedy’s research showed that one penny invested at the birth of Jesus at 4% interest would have bought, in the year 1750, one ball of gold equal to the weight of the earth. In 1990, however, it would have been raised to 8,190 balls of gold. At 5% interest, it would have bought one ball of gold by the year 1466. By 1990, it would buy 2,200 billion balls of gold equal to the weight of the earth.

The example shows the enormous difference 1% makes. It also proves that the continual payment of interest is arithmetically, as well as practically, impossible. The reason is quite obvious. The economic necessity and the mathematical impossibility create a contradiction, which, in order to be resolved, has led to innumerable feuds and wars in the past. (Interest and Inflation Free Money, p. 7)

Islam’s warning

Surprisingly enough, the Quran makes precisely the same link in the following words:

“O ye who believe! Fear Allah and give up what remains of interest, if you are truly believers. But if you do it not, then beware of war from Allah and His Messenger; and if you repent, then you shall have your principal; thus you shall not wrong nor shall you be wronged.” (Surah al-Baqarah, Ch.2: V. 279-280)

In these verses, the Quran begins by identifying “true believers” as those who shun interest entirely. According to Islam, goodness and beneficence towards the poor and needy, as well as fair and equitable distribution of wealth among people and nations, are essential.

Both on an individual and on a societal level, concepts of charity and moral economics are tantamount to a true Godfearing society. When these concepts evaporate, the entire structure of society falls.

The verse continues by warning those who propagate unjust economic systems that a corresponding reaction is inevitable. When a society sinks to immorality and wealth gaps between rich and poor grow exponentially, the natural result is, quite literally, war.

As a matter of fact, no government could ever imagine entering into a great war unless it relies on its ability to raise money by means of loans carrying interest. Long and devastating wars are made possible only by the institution of interest.

Interest introduces a debt trap mechanism which leaves the debtor little chance of leaving. Excessive debt at the national and international level creates risks of insolvency and countries affected by it can only get out of this vicious cycle by declaring bankruptcy or by waiting for the unlikely debt cancellation from the money-lenders. If huge loans on interest were not possible, many countries would refuse to enter what appeared to be a long war. If they entered such wars at all, they would certainly hasten to withdraw from them long before they actually terminated, for the treasuries would become empty and their people would revolt in protest against the criminal waste of men and money.

According to Rosella Cappella Zielinski, most leaders care about public opinion and they anticipate how the public might react in different ways to different forms of financing conflict. As most people are not fond of being taxed, leaders attempt to finance wars accordingly. If they think the war is going to get a lot of negative attention, they are going to finance wars in ways that mitigate citizen awareness. This means they will borrow or finance in other ways to make sure that citizens won’t feel that direct sacrifice, that is, direct relationship to the war. (How States Pay for Wars, pp. 5-6)

The system of what appears to be easy loans makes it possible for governments to carry on ruinous struggles as they are able to obtain the sinews of war without having to resort to a system of direct taxation.

During a war, people of belligerent countries do not feel the burden which is laid on their backs. But after the war is over, their backs are bent double under the staggering weight of national debts and future generations are kept busy reducing the weight. (The Holy Quran with English Translation and Commentary, Vol. 1, p. 431)

Exploring history

As Islam correctly and remarkably predicted, interest-based systems inevitably end up in a situation where the nations rise in arms against each other.

Indeed, “those who are familiar with the history of the First and Second World Wars are aware that capitalism played a disastrous role in not only causing but also prolonging those wars.” (Islam’s Response to Contemporary Issues, p. 189)

The Great War (1914-1918) required war-making states to mobilise and sustain the financial resources on an unprecedented scale. Most belligerents used a combination of two methods: taxation and debts. If taxation was important to the theory of war finance and the most direct and traditional way to pay for expenditures on war, we know it played a secondary role for almost every country involved in the conflict.

As an illustration, wartime taxation met between 6% and 15% in Germany and Italy and approximately a quarter of the actual expenses of fighting in Britain and United States (War Finance, International Encyclopaedia of the First World War, 2018). In fact, financial mobilisation plans for WWI were actually premised on the strategic scenario of a few months’ conflict.

Despite the final horrific death toll, even the direst military predictions failed to foresee a conflict lasting more than four long years. As war finance has a temporal component, there was clearly a discrepancy between expectations of a short war and the realities of financing a long-term war. (https://news.sky.com/story/world-war-oneand-the-short-war-illusion-10394372)

The reality is that borrowing was the foundation of wartime finance. There were two dimensions of borrowing that are important in understanding the dynamics of war finance in the First World War.

The first dimension was whether it was a short-term or a long-term plan in government borrowing. The second was whether credit was domestic or from lenders abroad. Foreign borrowing was distinct from domestic borrowing in that it depended on a country’s position in the global economic hierarchy. Incurring debt was certainly the worst move because it forced belligerents to play a dangerous game of cat-and-mouse in the chaos of the war.

One of the driving forces behind this initiative was the American bank JP Morgan & Co – the most well-connected bank who performed a central role in facilitating the belligerents’ war effort in spite of American neutrality.

The ambitious Henry Davison, partner of JP Morgan, presented a blunt argument in favour of loans:

“To maintain our prosperity we must finance it. Otherwise it may stop and that would be disastrous.” (House of Morgan, International Encyclopaedia of the First World War, 2017)

In August 1914, Davison travelled to London to arrange a deal with the Bank of England that made his bank the official sponsor of all credits to the British government issued on American markets. JP Morgan & Co underwrote $1.5 billion in war loans to London over the course of the war.

By 1915, when it became apparent the war was not going to end quickly, the bank decided to forge formal relationships with France. Once Russia also picked JP Morgan as the intermediary for its borrowings on the American market, the House of Morgan had become the credit-broker to the entire Entente Powers (military alliance of France, United Kingdom and Imperial Russia). For its services to the alliance it obtained an 8.3% commission, which netted over $200 million in profits (Collision of Empires: Britain of in Three World Wars, 1793- 1945, p. 291).

JP Morgan’s activity on behalf of the Allies became ammunition for some enemies who accused it of “war profiteering”.

Between 1914 and 1918, the Old Continent was awash in a sea of debt and foreign credit taken out by the Entente totalled $16 billion: “The United States was the largest wartime creditor, lending a total of $7 billion, of which $3.7 billion went to Britain, $1.9 billion to France, and $1 billion to Italy. Britain came a close second with a total credit provision of $6.7 billion, largely to Russia ($2.5 billion), Italy ($1.9 billion), and France ($1.6 billion). France lent $2.2 billion, almost of half of which ($955 million) was to Russia, $535 million to Belgium, and the rest to smaller Allies.

“Britain and France were therefore both big lenders and borrowers at the same time, although the British balance sheet matched debts and assets much more evenly. As the only government that never had to fund itself through external debt, the United States was the backstop of this global credit pyramid.” (War Finance, International Encyclopaedia of the First World War, 2018; War Debts and World Prosperity, p. 426)

Indeed, American entry into the war in 1917 transformed the inter-Allied credits into a set of intra-governmental relations of indebtedness, with the United States at its core as the ultimate global creditor.

This financial pre-eminence caused significant discord, however. European sovereigns had borrowed in the United States on the assumption that they were defending civilisation from the threat of the Central Powers’ aggression and autocracy. They did not expect the Americans to treat their foreign lending as a business investment aimed at maximizing profit. When the loans came due, European countries faced the costs of reconstruction and foreign debt repayment in tandem.

From that moment on, war debts became a major weakness in the material foundations of the “liberal” international order during the 1920s. By the mid-1920’s, interest on Britain’s debt was absorbing 44% of all government expenditure, comfortably exceeding spending on defence until 1937 when, as Second World War clouds drew near, re-armament finally began to get underway in earnest. (Civilization: The West and the Rest, p. 720)

The Allies’ failure to resolve it satisfactorily before the Great Depression commenced was a pre-figuration of further coordination failures in the response to the economic slump itself. This paved the way to a deterioration of global economic relations amidst mutual suspicion and distrust in the 1930s – a precondition for the political instability in the following years and that in due course made a Second World War possible.

In Britain’s case, it was finally in March 2015 that the taxpayer paid off the money the country borrowed to fight WW1 (www.gov.uk/government/news/chancellor-osborne-to-repay-part-of-our-first-world-war-debt). At the end of WW2, the same country badly needed money to pay for reconstruction, and also to import food for a nation worn down after years of rationing. As a result and as if that was not enough, the United Kingdom took an umpteenth loan for £145 million and a further £930 million from the United States (at 1945 exchange rates).

Despite being Britain’s closest ally, the United States did not hesitate to charge them a fixed interest rate of 2%. At that time, the terms of the loan were considered extremely generous, making it supposedly less terrifying. But still, there were British officials, like economist John Maynard Keynes, who detected a note of churlishness in the general demeanour of the Americans after the war (http://news.bbc.co.uk/1/hi/magazine/4757181.stm).

His biographer, Robert Skidelsky, says the economist hoped either for an assistance that would take the form of a grant to cover Britain’s post-war balance of payments, or an interest-free loan. (Keynes: A Very Short Introduction, Oxford, p. 117)

Keynes understood the dangerous passion, which he presented as “the love of money as a possession”. He even came to regret the time when “gold fever” was the target of the prohibitions imposed by the great monotheistic religions: “I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable …” (Economic Possibilities for our Grandchildren, Revisiting Keynes, p. 25)

Beyond a shadow of a doubt, the European belligerents experienced the World Wars as wars of financial attrition. If huge loans had not been possible, the result of the wars would certainly have been the same. But the devastation and the heavy indebtedness of the different countries would have been avoided. Wars themselves might have been avoided; even if they had taken place, the belligerents would soon have been exhausted, peace would have been signed within a year, and the world would have proceeded on its forward march of progress. (The Holy Quran with English Translation and Commentary, Vol. 1, p. 431)

Accepting the reality

Throughout history, debt and war have been constant partners. And as recent history has demonstrated, the concept of interest is not simply damaging to the financial system, it quite literally results in bloodbaths as it enables long, drawn-out wars to occur.

It is remarkable that such a subtle truth, which has proved itself devastatingly true over the past hundred years, was predicted by the Holy Quran. That a seventh century book, revealed to a prophet in the deserts of Arabia, made this link, gives significant credence to its claim of being a divinely revealed text.

It also serves to highlight the timeless nature of the Quran – its teachings and its warnings echoing down centuries. The critics of the current financial system are numerous. If there is a consensus on its anti-economic effects, the analysis of the causes of its defects is not monotonous. But in the tangled tree of mechanisms leading to imbalances in the current financial system, there is one common pathogenic factor: interest.

As long as the financial system is based on this destabilising factor, it will create tensions between the interests of different economic actors. Today, this power relation is in favour of the capitalist class. But being unfair, it is also unstable.

The capitalist system will therefore always try to find effective expedients to preserve this balance of power, even if it means to take on the role of the warmonger. We are therefore faced with the following difficulty, erected in taboo, which is that the legalisation of the interest rate is an obstacle to economic peace.

Let’s not make the same mistake a third time. That would be one time too many. But there is more than a little truth in the idea that those who do not learn from history are doomed to repeat it.

LEAVE A REPLY

Please enter your comment!
Please enter your name here