Economy and social affairs

The dilemma with interest rates

( Published in GralsWelt 6/1997)

A Biblical Commandment and the Practice of Economics

The world economy is apparently inexorably on the road to globalization, which brings with it transformations at all levels of the economy. Seemingly sacrosanct principles of the welfare state and the trade union movement are being shaken up, forcing discussions about new forms of economic activity, the organization of human coexistence and, of course, the monetary system, where the euro will bring changes that are not yet foreseeable today.

Debates become particularly heated when one dares to question the current form of the capitalist economy and recalls, for example, the Bible's prohibition of interest:

"If your brother becomes poor and declines beside you, you shall receive him as a stranger or sojourner, that he may live beside you, and you shall not take interest from him nor usury..." (Deut. 25:35).

The extent to which this commandment was followed by the ancient Jews is disputed, especially since it applied only to orthodox Jews: "From strangers you may take interest, but not from your brother..." (Deut. 23:21).

The ancient Jews were not alone in their rejection of interest. Aristotle (384 - 322 B.C.) also saw lending money at interest as usury, and the New Testament attributes the word to Jesus: "Lend without expecting anything from it." (Luk 6:35).

The church fathers sought theological justifications for rejecting interest on capital, and in the Roman Empire as in medieval Europe there were legal prohibitions on interest, but these were never permanently enforced.

Even in the Middle Ages, when the biblical prohibition of interest was still taken seriously, some ways were found to circumvent it, not least in the form of Jewish moneylenders helping out Christians with interest-bearing loans.

In medieval Germany, the loan rate was 10 to 12 %, then declined to 7 to 8 %, and by the mid-16th century ranged between 4 and 8 %.

Islam, too, despite various approaches, has not managed to develop an interest-free monetary system and enforce the Prophet's commandment:

"Ye faithful! Do not take interest, in which you take back in multiple amounts what you have lent!" (Koran, Sura 3 verse 130).

People are often willing to pay more for a good if it is available to them immediately instead of in a few months or years. -

It was not until modern times that the prohibitions on interest gradually fell, and only the rate of interest was limited by regulations, a rule that still echoes in court rulings today.

Interest was not given complete legal freedom until the 19th century. But this freedom of interest was abused and had to be restricted again, so that courts still distinguish between permissible "interest" and punishable "usury," which is not easy in borderline cases. -

It is impossible to imagine our economy without the interest on capital; it demands growth and is considered the driving force of the acceleration of the economy, since interest acts as a more or less strong pressure on every company, demanding increasing sales and growing profits in order to avoid the ever-present threat of a liquidity gap. The entrepreneur has to work hard to pay off his debts....

However, a simple mathematical relationship stands in the way of the widespread economic doctrines of the necessary return on capital: interest and compound interest grow in geometric progression and gradually or surprisingly quickly overshoot all limits.

Surely you have already heard that with a (modest) interest rate of 3 % one DM with interest and compound interest becomes more than 6 trillion DM after thousand years, and after 2,000 years the unimaginable sum of 4.7 x 10 to the power of 25 (47,000,000,000,000,000,000) DM! With a gold price of DM 18,-/g one could buy a ball of 637 kilometers of diameter from pure gold with it, if there were so much gold!

It is also interesting to ask how long it takes for the capital invested to increase tenfold, i.e. for 1 DM to become 10 DM:
Interest rate: time to multiply tenfold:
3% approx. 78 years
5% approx. 47 "
7% approx. 34 "
At 7 percent interest, 1 DM becomes 10 DM after 34 years, after 68 years 100 DM, but after 102 years 1,000 DM and after 136 years 10,000 DM. The million is reached after 6 x 34 = 204 years. (You only need to multiply the desired power of ten, for the million the 6, by the tenfold time.)

Does anyone believe that capital can be increased tenfold (depending on the interest rate) every 78, 47, or even 34 years?

At present, large corporations are aiming for a profit of 12 % on capital employed (keyword "shareholder value"); this corresponds to a tenfold increase of a good 20 years! (In a century, 1 DM would become 83,000 DM!).

Certainly, the compound interest calculation does not run as smoothly in practice as it does on the calculator: The tax office collects a large part of the interest, not everyone reinvests the interest immediately, or perhaps does not even leave their capital lying around for longer. But the calculations can show that our ideas of capital interest cannot be sustained in the long run; unlimited material growth is impossible on a limited earth!

Were the ancient Jews, with their prohibition of interest, perhaps smarter than our learned economists after all?

Should we even create a money that loses value when it is hoarded? For Swiss investors, there was already the "negative interest" and in the Middle Ages there is also said to have once been something corresponding, which is said to have contributed to economic and cultural prosperity. (For the medieval call for money, see "The Miracle of the Cathedrals" in "Short, Concise, Curious" page 199).

There are some suggestions about this from alternative thinkers. I don't dare to decide whether one or the other idea would be practically useful. One implication, however, is that our current interest rate system leads to inflation, and one or two (or more) financial crises per century seem to be programmed into it. -

Read about it too "More, always more, still, more: The wrong approach of our economy"