Think of money (or capital) lent just as a product that others may want to use -- such as a car for rent. We would pay a rental fee for the use of the car. It's a trade. We get to zoom around town or where ever and the owner (to stay in business for the next time you need a car) makes a profit. Both parties are happy yes? Lending and borrowing money is the same thing.

Without banks and capital we would be back to bartering (which is still done in places) which is pretty cumbersome.

Going forward we don't actualy need bank notes, credit cards and costly transfer fees. This is kind of already happening and the bank on every street corner like gas stations will be a thing of the past. But don't be mistaken, the flow of capital is essential to our well being.

In your story of friends on the island, the capital borrowed isn't doing anything. If precious gems were discovered however, it could be used to buy a few spades, get the stones to market, pay the interest and hopefully have something left in the pocket.

I agree though Jared A. Brock, banks are awful.