Imagine a world where basic needs such as a home, fridge, TV and car can be bought without having to pay interest on your purchase.
What is Interest?
The price of borrowing money is called the interest. And those who lend money say they are justified in this because they are giving up the advantage of having that cash- the liquidity advantage of money. So they charge a percentage on the principal loaned to compensate for the loss of cash and the risk of not getting it back.
Compound interest rates give little incentive to lenders to have their loan (the principle plus interest), paid off quickly. So the borrower may end up paying back at least double what was originally borrowed. This is the compounding effect of interest - principle plus interest earned is added to the principle for the next period.
Natural Law
According to the Greek philosopher Aristotle, usury or lending money with interest violates natural law. This theory says that humans are part of nature, and as such, humans have an innate sense of what's right and wrong for ourselves, others and the natural world.
The financial economy operates on the basis of compound interest, whilst nature works in harmony with simple interest which is interest calculated on the original principle amount only.
An example of simple interest working under natural law can be found in the apple tree. If a grower wants a healthy crop of apples he understands the need to water, fertilise and tend the soil to ensure a good return. The grower expects to put in some effort- but not more time and money and effort than the crop is worth to him.
That's the difference between compound and simple interest. The grower instinctively understand simple interest and so does the apple tree - hence an amibacle arrangement that ensures ecological sustainability.
Both grower and apple tree would baulk at applying compound interest to their situation. The grower would see no value in paying the apple tree double his time, money and effort to get a crop of apples. And the tree could not increase its output each year beyond the simple interest equation. If it is expected to do so, both the tree and the grower are part of the slippery slope of ecological unstainable practices.
According to M. Ponti and F. Biondi, there is disjuncture between the natural and financial economies. Simple interest is common-sense and based on natural law, compound interest is abhorrent to our sense of justice.
The result, they say, is the progressive destruction of nature and the lack of socially and ecologically sustainable practices- both of which are at the root of financial crashes throughout history.
Alternatives to Paying Interest
There are other alternatives to compound interest. Under Islamic law, charging interest is not permitted. Wealth should be generated only through legitimate trade and investment in assets.The Islamic financial model works on the basis of risk-sharing. The customer and the bank share the risk of any investment on agreed terms, and divide any profits between them.
Customers who lend their money risk losing it if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.
Community Currencies
Community currencies are enjoying resurgence across the world because they offer ecological and socially sustainable ways to buy and sell in a local economy. Community currencies are run as a cooperative, owned by its members and run entirely for the benefit of the community.
Goods and services are exchanged for their intrinsic value as decided by those trading, and money can be in any form such as paper notes, tokens or electronic ledger balances. As with Federal currency, these community currencies are based on a fiat or common agreement.
It may be more challenging to buy a home or fridge with community currency, but what about bartering items or buying cooperatively? There are other ways to run our economies, and now is a good time globally to look at alternatives that may offer a glimpse into a more equitable way to do business.
sources:
M Ponti & F Biondi. Illuminating the dark corner of the financial system. www.henciclopedia.org.uy/autores/MarinaPonti/Financialsystem.htm
Caroline Fisher - Caroline is a freelance journalist and writer with extensive experience writing for a range of Australian magazines and ...
