Interest Is Not the Culprit

Many people sense that the economic system redistributes from the bottom to the top. Compound interest is often named as the cause. We have tested the thesis. It is half right, and the wrong half obscures what would have to be changed.

I. An old unease

Distrust of interest is as old as money. Aristotle considered it unnatural for money to beget money. The Church forbade Christians to take interest for centuries; Islam forbids it to this day. In 1916 the merchant Silvio Gesell designed a money that loses value over time so that nobody would hoard it. In 1932 the Tyrolean town of Wörgl printed such money and built roads with it, until the national bank banned it. In Germany, Helmut Creutz and Margrit Kennedy popularised the critique of interest: compound interest, they argued, permanently redistributes from the majority to a small minority.

The unease can be measured. Across 31 countries an average of 68 per cent of respondents say the economy is rigged to advantage the rich and powerful. In Germany 81 per cent consider prosperity unfairly distributed. Whether people blame interest for it, however, is a question no survey we could find has asked.

II. What is true about compound interest

Compound interest is mathematics. A claim that bears interest and is not consumed grows like a snowball rolling downhill: the bigger it gets, the more snow sticks to it. Whoever has little must spend the returns on living. Whoever has a lot can reinvest them. A control engineer calls this positive feedback, a loop that reinforces itself.

But no snowball rolls forever. The curve of compound interest has been cut off again and again in history: by inflation, bankruptcies, debt write-offs and wars. German savers experienced this twice in one century, in 1923 and 1948. These brakes are brutal, and they hit small savers hardest. A built-in order they are not.

III. The calculation that does not add up

The best-known German calculation of redistribution through interest comes from Helmut Creutz. He divided households in the year 2000 into ten equal groups. According to him, the bottom eight groups paid more interest than they received, the ninth broke even, and the top group gained 36,500 euros per household per year.

The entire calculation rests on one assumption: everything a household buys contains about 42 per cent hidden interest. This has not been measured. Every year the Bundesbank evaluates the accounts of German companies, from industry through construction and trade to transport and services. Since 1997 their interest expenses have amounted to between 0.9 and 1.6 per cent of total output. In 2023 they paid 84 billion euros in interest on sales of 8,749 billion euros, around one per cent. Banks, insurers, agriculture and the housing sector are not covered.

Only those who count everything that owning capital yields arrive at 42 per cent. An example: the rent for a flat contains the interest on the landlord’s loan, but also his profit, depreciation and the value of the land. Creutz calls all of it interest. That is a definition, not a measurement. And it shifts the problem: whoever calls all capital income “interest” is no longer talking about the credit system but about ownership.

IV. Where interest flows today

The state’s interest is paid out of taxes, and it is rising fast. In 2021 the federal government spent 1.5 per cent of its tax revenue on interest; in 2025 it was 7.7 per cent. For 2030 the German Economic Institute expects 18.1 per cent, almost one tax euro in five. The main cause was the interest rate turn of 2022, not the level of debt.

Who receives this money? At the end of 2021 the Eurosystem of central banks held 39 per cent of German public debt, foreign investors 30 per cent, domestic banks 16 per cent. Domestic insurers and pension funds accounted for 1 per cent; private households held practically nothing directly. In the past the Bundesbank’s share flowed back to the federal government as profit. Since the rate turn, the Bundesbank pays banks more interest on their deposits than it earns on its bonds. It is making losses; the last profit transfer was in 2019. It follows from the figures that part of the interest raised by taxpayers ends up, via the Bundesbank’s balance sheet, with commercial banks.

And yet interest does not redistribute permanently in one direction. From 2010 to 2021 it lay below inflation. According to an estimate by the economist Ulrich Busch, private households lost around 250 billion euros in interest between 2010 and 2017, while the state saved around 300 billion. In those years interest redistributed from savers to debtors, and the largest debtor was the state.

Alongside it ran a second current, and it was larger. In the summer of 2021 a family building a house paid 1.32 per cent effective interest on its loan, secured by the house. In the same summer the housing company Vonovia borrowed 5 billion euros at an average of 0.49 per cent, some tranches at zero per cent, without collateral, and used it to finance the takeover of Deutsche Wohnen. Whoever is already big gets the cheapest money. At the same time cheap money drove up the prices of houses and shares. From 2011 to 2018 property owners in Germany became up to 2.8 trillion euros richer, adjusted for inflation. More than half of that went to the richest tenth, over 1.2 trillion to the upper middle, where most family home builders stand, and less than a tenth of the top tenth’s gain to the poorer half of the population. The losers were savers and tenants: the poorest fifth now spends almost 40 per cent of its income on housing. Here too, redistribution did not run through the interest someone received but through the ownership whose price rose.

V. What actually redistributes upwards

The direction of the thesis is nevertheless right. According to the Bundesbank’s wealth survey, the richest ten per cent of households own 56 per cent of net wealth. This has not changed in recent years.

What matters is what the wealth consists of. Imagine two households. One has 20,000 euros in a savings account. The other owns an apartment building, shares and a stake in a family business. The first receives interest that in some years lies below inflation. The second receives rents, dividends and profits, and its wealth grows with the prices of houses and shares. Poorer households hold around 60 per cent of their financial wealth as cash and deposits, the richest tenth 44 per cent, plus 31 per cent in securities. Returns are therefore graded by wealth.

The mechanism has been measured most precisely in the United States. The economists Atif Mian, Ludwig Straub and Amir Sufi evaluated tax data from 1963 to 2019. After 1982 the saving rate of the richest one per cent rose from 43 to 54 per cent, while that of the remaining 99 per cent fell from 14 to 7 per cent. With its savings, the richest one per cent financed the debts of the middle class, and after 2008 increasingly those of the state. The rich save, the others borrow their money and pay for it. According to our research, there is no comparable study for Germany.

The French economist Thomas Piketty turned this into a general rule: if the return on capital stays above the growth of the economy, the share of capital owners in income grows. This return, however, comes mainly from businesses, shares and property, less from interest on safe investments.

VI. The right unease, the wrong cause

This names the core of the matter. It is not interest that redistributes upwards but capital income, and interest is only part of it. Interest-free money, as the free-economy movement demands, would leave dividends, rents and profits untouched. The owner of the apartment building would hardly notice. The saver with the savings account would.

The public seems to see this more clearly than some critics of interest. In a 2023 survey for the Friedrich Ebert Foundation, 72 per cent of respondents considered it unfair that earned income is taxed more heavily than gains on the financial markets. 71 per cent considered the lower taxation of very large inheritances unfair. That aims at ownership and its returns, not at interest.

Switzerland has shown how quickly unease about the monetary system falls apart when it becomes concrete. In a 2015 survey, 57 per cent said they would vote to ban money creation by banks. In the 2018 referendum, 24 per cent did. Most found the proposal hard to understand and the change too risky.

VII. What follows

A control engineer would say: the system has positive feedback and no negative feedback. Wealth generates returns, returns generate wealth. So far the loop has been braked only by catastrophes: inflation, crises and wars. The task is to build in negative feedback instead of waiting for the next catastrophe.

There are several starting points. The taxation of capital income can be brought into line with that of labour, as a majority considers fair. Large inheritances can be taxed as large inheritances. And money itself can be designed so that new money arises where something is being built, rather than where wealth already lies. That is the idea of the types of money in our draft “The Cybernetic Economic Model”.

One question remains open: who raises the taxes from which the interest on public debt is paid, broken down by income group? It can be answered with data. Until that has been done, nothing certain can be said about redistribution through state interest within Germany.

Interest is not the culprit. It is a tool placed in the hands of those who already have. Whoever bans only the tool leaves the hands untouched.

Further reading: Must States Go Into Debt? · The Bill Nobody Draws Up · Money — Tool or God? · The Primacy of Politics · The Cybernetic Economic Model