Interest is Unethical and Expensive

Kevin Cox
4 min readApr 7, 2017

The 1998 article History of Usury Prohibition traces the ethical reasons for removing interest. Of the many reasons in the article two show why interest is both unethical and expensive.

One reason is that interest payments are double billing. As well as being unethical double billing increases the costs of investments.

The second reason is that interest leads to discounted cash flow analysis as the way to choose between investments. Instead of giving the lowest cost for the highest value interest leads to higher costs for lower long term value. Discounted cash flow analysis discounts the future and prevents intergenerational equity which is the foundation of sustainable development. Discounted cash flow analysis is both unethical and expensive.

Extracts from the “History of Usury Prohibition”.

Usury as Double Billing

A slightly more obscure rationale was employed by the Church later in the Middle Ages to strengthen its anti-usury doctrine. Drawing on some of the concepts of Civil Law, it argued that money was a consumable good (fungible), for which the ownership passed from lender to borrower in the course of the loan transaction (mutuum), with the fair price of ‘sale’ therefore being the exact amount of the money advanced. Hence to ask for more in the form of interest was illegal and immoral, like selling a loaf of bread and then charging also for the use of it. Or, as Aquinas intimated in his Summa Theologiae, it would be to sell the same thing twice.

Usury as Discounting the Future

The last reason cited for condemning usury relates to the concept and practice of discounting future values. Because compound interest results in an appreciation in invested monetary capital, it is presumed rational for people to prefer having a specified amount of currency now than the same amount some time in the future. This simple and rarely questioned logic has several disastrous implications. For instance, Pearce and Turner (1990) note that discounting affects the rate at which we use up natural resources — the higher the discount rate (derived partly from the interest rate), the faster the resources are likely to be depleted. Daly and Cobb (1990) take this observation to its logical conclusion and show that discounting can lead to the “economically rational” extinction of a species, simply if the prevailing interest rate happens to be greater than the reproduction rate of the exploited species. Another consequence of the discounting principle, argued by Kula, is that “in evaluating long-term investment projects, particularly those in which the benefits and costs are separated from each other by a long time interval, the net present value rules guide the decision maker to maximise the utility of present generations at the expense of future ones” (1981: 899).

In this context, it is fitting to observe that a key feature that distinguishes financial economy from nature’s economy is that the one operates on a compound interest basis, whereas the other is based on simple interest. Money deposited in the bank may yield 10% plus interest on the compounded sum next year, but in nature, if you leave this year’s crop of apples on the tree, you are unlikely to pick a compounded heavier crop next year! Accordingly, usury permits a disjunction between financial and ecological economy. The result is either the progressive destruction of nature or in the absence of redistributive social justice, an inbuilt necessity for periodic financial crashes throughout history. The point is well made by the illustration that if Judas Iscariot had invested his thirty pieces of silver at just a few percentage points compound, repayable in silver as of today, the amount of silver required would be equivalent to the weight of the Earth.

The implicit ethics, or dearth thereof, of discounting can be used to illustrate why usury corrupts the natural world as well as social relations. For instance, consider the impact of net present value discounted cash flow methodology in appraising the trade-off between natural and human-made capital which, over the fullness of time, can usually be justified if the utility of future generations is discounted. This violates intergenerational equity — a key principle of sustainable development recognised by both the 1987 Brundtland Commission and the 1992 Rio Earth Summit of the United Nations. It also violates an age-old precept of right livelihood which flies in the face of the presumption of the time value of money on which interest rates are based. It violates the presumption of many traditional land users that the land should be handed on to the next generation in at least as good heart as it was inherited from the forebears. Discounting, as the counterpoint of usury, can be thus exposed as a rueful device employed to justify theft of the children’s future. Exploration of the theoretical basis and practical illustrations of this argument perhaps provides much scope for future micro and macroeconomic research in ecological economics.

Daly, H.E. and Cobb, J.B. (1990) For the Common Good, London: Greenprint.
Kula, E. (1981) ‘Future Generations and Discounting Rules in Public Sector Investment Appraisal’, Environment and Planning A, 13: 899–910.
Pearce, D.W. and Turner, R.K. (1990) Economics of Natural Resources and the Environment, London: Harvester Wheatsheaf.

--

--

Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income.