Joined: 23 Sep 2008
Location: West Dorset, UK
|Posted: Mon Feb 23, 2009 1:38 pm Post subject: INTEREST by Peter Fennell
|Peter Fennell has sent me some questions and responses concerning interest which I think are informative and useful on the issue of whether banks should charge interest and how the money supply should be provided:
Am I opposed to lending at interest?
There is a ‘monetary reform’ movement highly critical of private bank lending and the School of Economic Science (SES) economics appears to argue similarly.
As for me, I don’t have mastery of the subject. But from what I read I am not confident to endorse the status quo. The following are thoughts which I have met and I pass on in a spirit of unconcluded enquiry.
Why interest might be wrong
Arguments that interest may be morally wrong or unnatural or proscribed by scripture:
Any compounding percentage grows exponentially if unconstrained
Demand for interest is a driver of growth and growth is only good in measure
Interest tends to be earned by the old, well-established and rich. And paid out by the young, starting-up and poor.
The poorest pay the highest rates
Bankruptcy laws offer limited protection where they exist – tacitly acknowledging that debt/interest should at least be limited
Jubilees or periodic wiping of slates seems to be prescribed in some religions
3rd world debt continues a disaster. Nations have repaid multiples of the principle in interest but remain deeply indebted
Some challenge the scriptural interpretation that low interest rates are outside the scriptural meaning of ‘usury’. Christians did originally. Muslims still do.
From some other religious perspectives, if it is wrong to lend at interest to a brother, why would it be ok to a stranger?
Incomes are either ‘earned’ or ‘unearned’ and it is not good for able people to live off unearned incomes
Interest diverts the product from the producers to others who have made no contribution to the production
Interest so separates payer from earner that the conditions of the payer are invisible to the earner creating moral hazard
See also article on money at: http://gladstoneclub.org/reports/20071002230442_1.pdf
Arguments that interest is unnecessary to provision of credit for production:
All production needs credit initially but it need not be interest bearing
Much credit is provided interest free (wages/fees in arrears, trade credit)
Money appears to have negligible cost of production so interest does not appear to be the cost of supply
Money is essentially created as a sovereign act and could be issued interest free by government (notes and coin are)
Money supply must grow when production is growing. Its value is maintained when it is advanced against viable productive projects
Risks are often secured with collateral or export guarantees and therefore interest does not appear to be the cost of insurance
Capital (factories and tools) is provided by firms at market prices so interest does not appear to be the supply cost of capital
Interest is a price charged for access to money credit by virtue of the system we have created but has no basis in necessity or nature
Government borrows because it fails to collect the rent of commons (eg. land)
It offers interest to savers and thereby sets the base rate. Thereafter money must be charged at interest to those who need it
Whether it is meaningful to single out interest for criticism I don’t know.
Land reformers say that if the land monopoly was unlocked people would be much less dependent on credit.
How would I induce people to lend?
The reformers argue for public interest-free credit at various levels
They say that is a fundamental duty of government (as cp. education, health etc which are optional)
What may the lender do with the interest?
If I were opposed to interest it would be with the earning not the spending
How should people be supported in retirement?
There can be accumulation of capital without interest.
Also I think an investment which shares in profit (and loss) may be different in kind from interest on money.
All present subsistence is provided out of present production. The more that can be provided in the family the better – it is better for your own children to provide out of love than someone else’s children to do so for money.
Institutions treated differently
Some pay interest and some collect it. Is it better that it be collected by a ‘good cause’ than by a family?
From the payer’s point of view the ultimate beneficiary is unknown so it’s not consciously given with pleasure.
According to some of the arguments above, if interest were not demanded then the payer would not be burdened with interest on his credit.
So from the point of view of the good cause institution, does it want to be part of that pressure? Do we know who the payer is? And what are his conditions of life and work?
The institution likely pays interest directly or indirectly. Can it be viable if it does not collect any?
Free subscription and endowment from families is the right form of income for a charity.
But the burdens of tax, interest and inflated land prices make business more precarious (especially small ones) and therefore employment and family life more precarious. They leave less for the family to subscribe consciously with pleasure to good causes it believes in. The problem affects the institution but does that mean it can’t afford not to be part of it?
Your comments and observations are welcome