What if borrowing and lending was illegal?

Decentralized finance is popular and exciting and if you are earning from it, congratulations. I totally support people taking advantage of whatever financial tools are available to change their financial situation, as long as they play safe. But I can't help but wonder, are we decentralizing some powers that the banks should never have had to begin with?

I never studied finance deeply but I try to familiarize myself with concepts that relate to world news and economic realities, different kinds of investments and markets, words like fractional reserve banking, sub-prime mortgage, quantitative easing, etc. You could say that most of my financial knowledge comes from wikipedia and leofinance, as well as youtube videos explaining certain concepts.

I don't know what a world without borrowing and lending would look like, but I can certainly imagine certain things being a whole lot simpler, and a lot of problems never arising, but perhaps we would have other problems too. It's a lot easier for me to imagine the problems that would disappear.

I am not really a fan of more regulation, but I'm also not against any regulation whatsoever either...This is just a little thought experiment. I don't know many things about finance and so I wanted to get some feedback on it as I play with this idea. I'm not sure which situation works better but I'm considering one of these two....

1 Fiat money is created from debt, no? Let's say we are in a world where governments use digital currencies that are NOT considered debt, but a publicly created utility that can be privately owned, or something like that.

OR

2 Only governments are allowed to issue debt in the form of currency, all other debt is banned.

In both situations personal loans could be made but there would be no law enforcement involved, so all repayment would be based on trust and essentially gifts that are expected to be returned. No one would legally be allowed to force or pressure anyone to pay back money that they borrowed from friends and acquaintances.

What happens when loans are no longer a thing?

The first thing I imagine is that the world economy will look drastically smaller on paper, and a whole lot more transparent, painting a better picture of the realities of each place and organization and individual whose finances are public record.

Perhaps some things would be more difficult without such a robust finance system but I imagine it would be a whole lot more stable and sustainable. There wouldn't be the same propensity for crashes and recessions, and perhaps that silly idea that the economy is supposed to grow forever wouldn't be that silly because it'd be a slow and natural process.

The second thing that comes to mind is...how do people afford houses and university and medical bills and all that (and while we are imagining no loans, let's imagine no insurance. Well houses and education would HAVE to be priced more reasonably if they wanted to attract more tenants and students. Perhaps there would be more competition for actually tenants rather than investment housing and so we would easily be able to house everyone with a job. Schools may compete in the same way or may be treated more casually, with only people of a few professions attending.

The biggest difference I can imagine is that millionaires and billionaires ability to gain from their own wealth would be stifled and so the distribution of wealth would be far more reasonable, there probably would be no billionaires, but the potential billionaires wouldn't mind because they'd still be able to afford all the things that they do. Borrowing and reinvesting money while using other assets as collateral wouldn't be a thing, and so they'd still be rich, but not thousands of times richer than the average person, and their stock prices would likely be a lot lower.

Medical costs (without insurance at play) would also have to be more reasonable. I wonder if they would be able to provide all the same services that they do now....same goes for railway systems. I learned that most railroad systems are not profitable because they rely heavily on debt to fund the projects. Would they have to though?

People would spend much more conservatively, which would contribute to a slower economy, but I think that all technological and other development would influence the markets on a much slower scale, allowing them to rise steadily with much less volatility. The 2008 crisis would certainly never have happened and I imagine with more people as homeowners, more affordable schools and medical care, and less debt to be paid back, it would have been much easier to deal with a pandemic.

People would live within their means because there would be no opportunity to do otherwise. If they had a problem, they'd likely rely on social ties to solve it, or potentially government assistance. I imagine there would be more people who gave gifts of money. Since there would be no "free money" or credit cards to borrow from, trust and relationships be much more important than they are now. People would need to keep good friends who were giving enough, otherwise they'd really be screwed if things didn't go well.

The reward for starting a business would be much lower but the risk would be lower too. It would likely cost a lot less, with land and rent prices adjusting to what people could afford. There would be far fewer people starting businesses but also far fewer failed businesses. Fewer people would be making bad decisions about starting businesses because they wouldn't have the means of gambling on taking a loan.

It's quite hard to imagine actually, because so much of the economy is being propped up by debt, but I also imagine that banks would not have become such powerful institutions as they are now. They may not have become strong enough to have influence over government and so we'd probably have much cleaner politics. Sure there would still be some silly attempts to manipulate peoples opinions through media, but perhaps with a scaled back economy, things would be simpler and less easily convoluted, and so government would have to be a little more accountable for their actions.

I'm not really sure if it would play out as I say or if there are many things I am missing. It SEEMS like it'd be a less exciting but more sustainable world to me, but I don't know much about the benefits of debt (other than the general fact that it stimulates the economy to grow faster) and so feel free to share. This was just a thought experiment that I wanted to get other opinions on.

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