Ban compound interest to save the planet

Compound interest has been with us so long that we take it for granted. We borrow money and accept that we must pay interest to compensate the lender.

But look what happens. If we pay 3% on £100 then at the end of the first year we should pay back £103. If we fail to repay that then we must also pay 3% on the £103. This seems innocuous but the debt increases exponentially. A debt left unpaid, at 3%, doubles every 24 years. At 6% it doubles in 12 years.

Developing countries know all about this. "All that we borrowed up to 1985 or 1986 was about $5bn," said Nigeria's president in 2000. "So far we have paid back about $16bn. Yet we're being told that we still owe about $28bn. If you ask me what is the worst thing in the world, I would say it is compound interest."

The governments of rich nations, as Colin Tudge wrote recently in Resurgence magazine, have declared a war on poverty while presiding over an economic system in which the rich are bound to grow inexorably richer while the poor grow poorer.

You might ask: What has this to do with the environment? A great deal - because in order to repay debts businesses and whole economies must grow, and that usually involves consuming ever greater quantities of non-renewable resources. If a moneylender at the time of Christ had lent an ounce of gold at 5% it would today require an amount of bullion weighing several planet Earths in repayment.

Is there another way? There certainly is. Until relatively recently, the charging of interest was called usury - it was a sin. (If that word makes you feel uncomfortable, remember that it only means something that most people considered deeply wrong.)

And doing without money that was lent at interest didn't stop our predecessors trading, or building incredible monuments, from Westminster Abbey to the colleges of Oxford and Cambridge.

Even now, Muslims are taught that lending at interest is wrong. "There is no such thing as a 'usurious' rate of interest," writes the Islamic financier Tarek El Diwany in the same issue of Resurgence, "because all rates of interest are usurious." He describes alternatives to interest-bearing loans, such as the sharing of profit and loss, and points out that the universities, hospitals, welfare systems and infrastructure of great civilisations in Iraq, Spain and the Ottoman empire were all built without interest-bearing loans. "Interest-based finance is not a pre-requisite for society's sustainable advancement," he writes. (For more detail, see his site, The Problem with Interest.)

We'd do well to give it up. As the great Richard Douthwaite puts it in The Ecology of Money, "if we wish to live more ecologically, it would make sense to adopt monetary systems that make it easier for us to do so." But how?

POSTSCRIPT (Monday 28 July): The debate continues. See new post, comprising a dialogue with Douthwaite, "Is interest-free lending inevitable?"

Comments

[Anders Kouru]

"Fake money" grows much more rapidly than anything in our real world.

Some of the critics seem to lack the will to understand this as a real problem.

[Dominiq]

Wow the level of ignorance of nearly every single commentator on this post is woeful, not to mention some of the xenophobic tangenital statements about muslims and their system of finance not to mention culture, but I've come to expect it.

Dealing with the issue of ignornace, some of the less well informed have argued that compound interest is necessary to deal with the devaluation on the return of monies lent by the lender (inflation), yet it is the ever increasing money supply through amongst other things (such as money creation by banks, due to our current financial system being based on fiat money) compound interest that requires money creation which creates inflation which devalues a currency further and so requires even more money creation. Nevertheless compound interest does not of itself cause rampant growth, increasing production and consumption, but a global population that increases exponetially does, things like compound interest (or any artefice that unnaturally creates money simply 'compounds' the problem).

For those of you that like to base your opinion on facts and whose view of the world is not skewed by self interest, perhaps you'd like to have a gander at any graph that measures population growth, extraction and consuption of oil, creation of money supply, extraction and consuption of raw materials, production of carbon dioxide, extinction of wroldwide species, etc etc over the last 200 years and where you can find them 400 years, will notice a really quite worrying bell curve.

I think the artcile raised an interesting point that seems to be regularly over looked by the mainstream media albeit indirectly, namely the current financial system does not work and hasn't for well over a century now, it may increase growth but does it really increase prosperity when taking into account both boom and bust cycles. The reason the system is kept is because it is favourable to those richest amongst us who have the power to influence government policy, but also because it has an allure to the middle classes in that it offers the possibility of opportunity that they too might strike it rich if they can adapt to market conditions quickly enough (I should think there are plenty of people that can achieve this during a boom, but how many do when the bust comes). It seems the 20th century mantra that pervades the 21st: " survival of the fittest" will continue to blind "entrepeneurs" to the fact that the financial systems are stacked in one social groups favour.

By the way I have 2 degrees and am proud enough of them to sing that fact from the roof tops if I wish.

[Basil, London]

This is one of the most ignorant articles I ever read! The rate of inflation is compounded as well. That's why houses that used to cost 5,000 pounds in the seventies cost 500,000 now. If I was an investor and knew my return wouldn't be compounded, I wouldn't lend to anyone for more than 1 year!!

[Sabine K McNeill]

Well written, dear Thinking and Reading Author!!!

May I ask the various commentators to consider lending at different levels and over different time frames?

The fact that Governments borrow and that interest payments are in every annual budget must be contributed to flawed thinking or poor institutionalisation. See Debt Management Office.

Who generates the interest required for any governmental, private or corporate loan?

Let's think 'money supply' as the fuel for an economy! Credit is not the only 'money tap'. In fact, it's the worst!

That's what we're trying to get across with our Public Credit Petition targeted at the Treasury Select Committee.

Maybe you feel like clicking on http://tinyurl.com/666rwd ?

With 'globally warm' regards,
Sabine
Organiser, Forum for Stable Currencies

[Brian Davey]

To Dennis Smith - you are quite right I should not have mentioned my two degrees. It was wrong to do so - in mitigation I was getting worn down emotionally by the continual insult that the point of view I put arose in ignorance. Paragraph break To David: It seems to me that your conclusion arises out of the viewpoint expressed in this comment: "but I'm not sure I can afford to be very high-minded when I'm making a decision that could readily turn out badly for me, compared with choosing b)." Paragraph break Ethical judgements are of that type - they do involve some personal inconvenience because they involve looking at it from the other person's point of view. In fact, your decision not to be high minded means that you foist all the risk on him or her. Paragraph break Now in conditions typical of predatory lending - where the power relations are heavily in favour of the lender (he is the money lender and trader in a village and others are landless labourers faced with little work and rising food prices so in desperate need of cash) such contracts are made and the borrowers have to put up with them - but they get into worse and worse bondage to a moneylender as a result. Or again, in more developed economies, predatory lending typically arises our of information asymmetry - a power imbalance in available information and the ability to understand the terms of the loan. In these conditions loans lead to shift of more and more economic power to lenders in a socially corrosive fashion. Secondly a key part of the context is that I am assuming that the future is an economy in energy descent - one that can no longer grow. So investment will be, if anything, riskier than now. In those conditions lenders will be unwilling to risk taking out loans for productive investments unless the risk is shared - although in difficult times there may be a lot of predatory lending by unscrupulous people because a lot of people are desperate for cash. Paragraph break How the financial system will work when growth no longer occurs is again dealt with in the latest piece by JPF which takes the form of an interview with Richard Douthwaite of Feasta. Paragraph break Finally, I should add that these are matters that causes much misery. The financial and debt system appears to be highly dysfunctional from a mental health point of view. http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html Among other things it is now well documented in academic studies that self reported anxiety increases with the ratio of credit card debt to personal income; that the onset of mortgage debt has a negative impact on mental health on males; that, of people receiving debt advice, a high proportion (62% in a UK study) reported that their debt led to stress, anxiety and depression - which they are likely to consult their doctor about; that there is a relationship between debt and post natal depression; that debt is the strongest predictor of depression; that difficulties in repaying debts are strongly connected with suicidal ideation and self harm; that debt is associated with feelings of shame, social embarrassment, a sense of personal failure, negative self identities and is implicated in isolation, social exclusion and strained relationships. (Chris Fitch, Robert Chaplin, Colin Trend, Sharon Collard, " Debt and mental health: the role of psychiatrists" Advances in Psychiatric Treatment (2007), vol. 13, 194–202 See also) Paragraph break What's more its not even as if they people who lend are happier - Drugs and alcohol are commonplace on Wall Street. A 2001 study of brokers by Florida's Nova Southeastern University found that 23% were clinically depressed, compared with 7% overall among American men..... Paragraph break New York newspapers have revelled in stories over the past year of stressed-out traders reaching breaking point. One broker, Christopher Carter, has been charged with assault for throwing a hedge fund manager, complete with an exercise bike, at a wall in an upper east side gym. The hedgie's offence? He grunted and shouted, "you go, girl!" too loudly during a spin class. Paragraph break In London, a hedge fund manager, Bertrand des Pallières, made news last summer because he was so busy shorting stocks that he didn't notice for three months that his £80,000 Maserati had been towed away. Paragraph break Jim Cramer, a hedge fund manager turned television stockpicker, told the New York Times that drugs tended to reinforce traders' inability to spot a looming downturn: "Prozac and all those other drugs banish the 'this is the end of the world' thoughts. Which means you are not as anxious as you should be about an obvious downside.” http://www.guardian.co.uk/business/2008/jan/05/useconomy.usa

[david of fox lake]

Brian Davey:
You definitely have a worldview that is different from my own, as witness your postings, which are no doubt perfectly clear to you, but seem convoluted to me. ¶ Your reasoning seems (to me) akin to that found in Zeno's Paradox: it sounds reasonable enough, and the conclusions seem inescapable. But, Zeno's Paradox is a paradox, precisely because its seemingly inescapable conclusion does not, in fact, align with reality. ¶ The problem posed by JPF really comes down to this: If I have managed to save some amount of legal tender, and I want to do something with it, I have several options that have nothing to do with any banking system. Let's consider four of the options: a) I can donate it to charity, which provides me with a good feeling and possibly reduces my tax liability for this year; b) I can put it in a safe deposit box, which assures me that the numerical value of my stash neither grows nor declines. Given the universal presence of some level of inflation, we know its real value will decline, but at least it's "safe"; c) I can loan it to someone with a contract to repay, at a negotiated rate of return. That rate of return can be negative or zero, if I'm inclined to charity, or it can be some positive value, agreed to by the lendee and myself; or d) I can purchase some equipment, or perhaps an animal, with which--adding some operating funds and 'sweat equity'--I can generate some income. ¶ Now, I'm only really interested, in the context of this discussion, with its topic set by the article we've all read, in choosing between options b), c), and d). As the possessor of the legal tender, and responsible for myself and my own future, with no external coercion, my choice will be to use the legal tender in the way that provides me with the best balance of return on investment (ROI) and risk. If the question comes down to making a loan to a goatherd to enlarge his flock, or to buy a goat to care for myself, the loan would be the better choice for me. As an engineer with no animal husbandry experience, the risk for me to care for a goat would be high, and the return on a single goat would not offset the losses due to my reduced time for engineering. Speaking personally, while I have ruled out d), in this example, I am disinclined to choose c) over b), unless there is some clear advantage to me for doing so. Simply "sharing the risk and return" with the goatherd, on a 'best efforts' basis, may seem high-minded, but I'm not sure I can afford to be very high-minded when I'm making a decision that could readily turn out badly for me, compared with choosing b). So, I'm likely to propose a positive rate of return on my investment, with some form of security. ¶ Hmm. It appears we have arrived back at our dear friends, interest and collateral. By substituting "any reasonable person" for "me" in the discussion, we have a rudimentary proof. Having gotten here, it is rather simple to extend the "proof" to compound interest. ¶ I leave the balance of the proof to the student. ¶ While I prefer--cruel streak in me, I suppose--to use a reductio ad absurdum proof, I figure Point A to Point B is still a proof: and the author's suggestion is still absurd, by definition. And I still don't know what to make of your prose. Mea culpa, no doubt.
Peace to all.

[Dennis Smith]

Thanks to John-Paul Flintoff for a sensible, insightful, intelligent and well written article. I won't start boasting about how many degrees I have. As has been well proven in the comments above, any such claims are no guarantee of anything. As for all the rest, it is not worthy of comment.

[c-may]

GREAT parody piece! You must be loving all these comments taking it seriously!

[Stephen]

Mr Davey,

I find what is common about the supporters of this article, is the style of reasoning they employ.

1. "The president of Nigeria says interest is bad, and he should know, he owes billions"
2. Some guy named Colin Tudge says X, (where X is paraphrased in a vague and content-free way).
3. Tarik El Widani says 'X'.
4. The "great" Richard Douthwaite says (I have no idea if he is great or not. Is this great like Alexander, or some other great)
5. I have real world experience that you can Google for, if you bother to do it.

The only debatable claim made is:

1. Certain historical monuments and civilizations were built with use of interest paying loans, and therefore we should do this too.

The content of 1 and 2 have been refuted numerous times, from several different approaches. How about rebutting any of the points made, such as:

1. no-usury societies used legal fictions equivalent to charging interest
2. the historical data demonstrates to the contrary that the mentioned historical data do NOT demonstrate effective investment of capital
3. the practical benefits to the concept of "interest" greatly outweigh the disadvantages

But, you choose not to do that. Your comments seems to be:

1. I'm offended because I'm illiterate
2. The laws of thermodynamics limit the growth of the economy.
3. The backlash is a knee-jerk reaction to a non mainstream point of view.
4. Professor Daly says "garbled paraphrase of whatever he said, that he would probably be embarrassed to have attributed to him"
5. Again, Professor Daly says that it is impossible for realy money to grow without limit. So what, everybody knows this, it is irrelevant to the discussion at hand. As the ultimate philosopher of our times, the tremendous intellect, the wise beyond normal human means, the awesome, the truly huge beyond words Douglas Adams once proposed, one can pay their restaurant bill at the end of the universe with a penny deposited today.
6. People are being exposed to ideas they haven't been exposed to before, and they are having a knee jerk reaction. Personally, my knee jerk reaction was to give the author more credit than he deserved. Just read previous comments.
7. I have two degrees in economics.
8. Something about "social networks" and "group-think" that makes me too nauseous to think about seriously.

I accuse you of deliberately obfuscating the discussion with irrelevancies that you think will intimidate people. As it stands, I challange you to:

1. Post a NUMBER quantifying the solar flux on the surface of the earth. And the "lunar energy inputs" too, since you seem to think it's important. Then, compare with our usage and tell me what you think about that.
2. I know all about thermodynamics. I can calculate the efficiencies of steam engines, refridgerators, the entropy contained in an ideal gas, and if you call now, you get a ginzu knife for free. Please, specifically explain how ANY thermodynamic principle applies in this case, and the chain of logic you use to apply it. Tell me if you think that chain of logic is anny different from grade school common sense, that nearly everyone has, and whether or not you should puff it up under the label of "thermodynamics".

Finally, please. Describe the simplest model you can imagine. One good, one currency, any relationship you choose between production, capital, and labor and describe what you think the equitable time value of money is. Then we'll have something to talk about.

[Liz]

Civilizations that "thrived" without usury had either slaves, satellite colonies with slaves, and/or caste systems identical to slavery. Perhaps there's a reason for that?

[Brian Davey]

Jason, Gosh! Please try not to bang the door on your way out!

[Jason Van Steenwyk]

No, John. You are getting absolutely nothing right. Nothing at all.

The reason there isn't a point-by-point refutation of your reason is that your column is so stupid it defies all reason. Life is too short, as Anderson writes at Opinio Juris, to deal with ignorance as deep as that on display in your column.

You're the economics equivalent of a flat-earther or a UFO-worshipper. Just not worth engaging on the issues.

I don't have a lot of time to waste on 7th-grade level economics reasoning either.

I guess you don't have to be very smart to write for the Times these days.

This is the dumbest economics column I have EVER read.

[Brian Davey]

What is particularly offensive about this entire debate is the way in which those who agree with Jean Paul Flintoff are accused of being ignorant and illiterate. Truth adheres in the ideas of conventional economics it is claimed and not in those of ecological economics. Paragraph break Actually the word ignorance is constituted like this ignor - ance. And what all of the people who are denouncing JPF as ignorant are themselves ignoring is that an economic system, being embedded in the real world, is subject to the laws of physics, to the laws of thermodynamics. What JPF has written is an intellectually respectable point of view that starts from a different set of assumptions and considerations from the economic mainstream. Paragraph break On my bookshelf I have a textbook called "Ecological Economics" by Herman Daly and Joshua Farley. Daly is Professor of Economics at the University of Maryland and worked as a senior economist at the Environment Department of the World Bank. Among other things that Herman Daly does not ignore is the distinction between use value and exchange value. Use value adheres in real things which obey the laws of thermodynamics (they require energy to produce and deliver them and are subject to decay) while exchange value, and particularly money, is a symbolic unit of account which can be created out of nothing and destroyed into nothing. There is a physical limit to the accumulation of use values because the planet has a fixed size and the solar and lunar energy inputs are limited. There are ecological capacity limits to what the planet can provide. There is however no obvious limit to the accumulation of exchange values as money. It is this contradiction to which the article is drawing attention. This contradiction is being ignored by all the critics in this debate. Paragraph break As Daly and Farley conclude in their chapter on Money: "In summary it would appear that the illusion that money can grow without physical limits results from three things. First, as long as production of real goods and services increases, more money is required to pursue them, so growth in money is justified. But growth cannot, of course, continue forever on a finite planet. Second, as the number or price of financial assets grows, such as speculative bubbles, then the demand for money grows as well, and supply can increase to meet this demand. The fact is however that financial bubbles inevitably burst. Third holders of financial capital see their capital grow because speculation can transfer resources from those who produce to those who speculate. Such transfers of wealth has limits, though the limits are obscured by economic growth. Thus the appearance that money is exempt from the laws of thermodynamics is an illusion that can be maintained while scale is increasing, or the financial sector is expanding relative to the real sector. It remains impossible for real money to grow without limit" (Herman Daly and Joshua Farley, Ecological Economics: Principles and Applications, Island Press, 2004.) Paragraph break What is interesting about this discussion is that people are clearly being exposed to ideas that they have not come across before and they are not only outraged they assume that the holders of another view of the world MUST BE WRONG. Instead of trying to understand that different world view they shout abuse at it and assume that this alternative viewpoint must be because those who hold it must fail the benefits of the education that they have had. As it happens I have two degrees in Economics and in 1970 got the best first in Economics that they had had since World War Two. Having worked in the mental health services since then I know an emotional response when I see it and notice that the overwhelming number of points that I have made, and that JPF made, have been ignored. This does not surprise as clearly there is a powerful element of cognitive dissonance going on here. I know from working in mental health that if you question core beliefs and values then people react emotionally and sometimes violently - this is because you are challenging people's ways of making sense of the world - an orientation that they share with their social and work networks. That isn't an easy thing to do because if people begin to change their orientation to core parts of their world (like attitudes to money) they fear disorientation, they fear not being able to make sense of things. If you live and work in a network where money functions as a collective addiction (in the sense that everything else takes second place to it) then to try to point to the limits of money and to limitations on the rights of money holders, is to risk not only disorientation but ostracisation from social networks. So you stay in with the crowd and assume that the group-think, the ideas that you got from university and that all your colleagues share, must be right. Then you feel that those people less enlightened and less educated than yourself deserve a good old pummelling with abuse for drawing attention to another viewpoint.

[Brock Sampson]

A man bereft of a moral guidance feels that he must explain what a "sin" is. The concept of right and wrong may make the author and his core audience "uncomfortable", but it is the empty promise of moral relativism that is the cause of my discomfort.

[Kenneth Anderson]

Over at Opinio Juris, the international law blog, I've posted up a discussion of this column, interspersed with some other related topics, such as the history of sovereign debt in Europe. We are admirably polite and civil in our posts and comments at Opinio Juris. Still, civility does not prevent the conclusion that this unfortunate column would likely take the prize for most economically illiterate article in the mainstream press of the year.

[Steve Dutch]

Almost all the critical remarks on this thread have been well informed and restrained. The editorial is on an intellectual par with scientific creationism. Saying so is not "abuse." The few defenders of the editorial are the ones dishing out the abuse.

That said, the editorial has one point right that nobody seems to have commented on. If you had taken a minuscule loan out in 1 AD at even tiny interest, there wouldn't be enough gold in the world today to pay the accrued interest. Nothing can grow exponentially in a finite world indefinitely. That's a point that many "conservatives" conveniently ignore when it comes to dealing with population growth, energy use, and even bull stock markets. When it comes to physical growth, there are physical limits that will come into play (We can support 11, 15, 20 billion people on this planet, you say? Great. What then?). When it comes to economic growth, compound interest is offset by mechanisms like inflation, default, or war. This is a point economic theorists realized decades ago.

Compound interest works well when the real growth in the economy is roughly exponential, as it has been since the Renaissance. From the late 1800's to about 1973, we imposed a bit of pseudo-growth in the U.S. in the form of modest inflation ("easy money" it was called by 19th century critics of the Gold Standard) - enough to make debts easier to repay over time, and convince people their incomes were growing, but not so severe that rising prices pinched. That was rudely interrupted with the double digit inflation of the mid-1970's.

The bubbles of the last few years have been wholly fictitious episodes of growth based on nothing - private enterprise equivalents of 1923 Germany cranking up the printing presses. They were economic games of hot potato, with investors buying worthless instruments and hoping to unload them before the crash. The cure is Darwinian - let the institutions fail, but never, ever, let their officers off the hook for repaying their debts. So that means some banker will be working 16 hours a day until he's 106? Cry me a river.

Much of the Moslem world (and other regions as well) operates on a mind-set the sociologists call "absolute scarcity." To absolute scarcity believers, the world is a zero sum game, a win for you is a loss for me. Your wealth is a result of somebody else's poverty. The freedom and prosperity of the West is largely the result of realizing the world doesn't have to be zero sum, that you can get rich even as I get richer myself. I don't know if we can sustain such a world view indefinitely, but I seriously doubt freedom can long endure in a zero sum world.

[JB]

"He describes alternatives to interest-bearing loans, such as the sharing of profit and loss..."

Among the many jaw droppers in this column is the quote above. John-Paul, do you suggest that such an alternative method of finance is innovative? I would point out that a robust market in such participations exists - it is called "the stock market."

One who requires capital is free to offer risk sharing participation through the sale of equity - or to preserve the upside for themselves by offering preferential returns to a lender. The choice of risk profile is their's.

One with capital to employ is free to choose the higher risk profile of shares profit and loss (equity) in exchange for a higher return, or to offer instead obligations (debt) with interest and with lower returns and lower risk to his capital.

This isn't a field in which suggestions such as those of Tarek al Diwany's for "new alternatives" are likely to be innovative. Innovative details and twists are invented by financiers all the time, but the concepts of risk and return that they repackage are essentially part of the natural order and quite old.

[Dodgy geezer]

"Until relatively recently, the charging of interest was called usury - it was a sin..

And doing without money that was lent at interest didn't stop our predecessors trading, or building incredible monuments.."

Umm... Yes it would have. This inept piece is obviously not researched. Mediaeval kings tolerated the Jews entirely because they operated the loan system which allowed trading, the building of monuments, castles and armies. You can run a feudal system dedicated to conquest and enslavement without a proper debt system, like the Mongols did, but none of the European Renaissance would have been possible without the Jewish and Venetian bankers.

Perhaps Mr. Flintoff wants to return to the nomadic hunter/gatherer existence? I understand this is the idyllic state that Green politics aspires to?

[Richard C]

This is perhaps the most extraordinarily ignorant article ever posted on a major newspaper's website. If I lend money for a year, with interest payable quarterly, is that ethically different to lending for three years with interest rolled up, compounded and payable at maturity? If interest is not payable on unpaid interest how can a lender fund a loan? This article displays a degree of such utter ignorance and stupidity that one despairs it is published in a serious journal.

[lucklucky]

GreenCentral: Inteligent Insights you can Trust....?!

In what part this text is Inteligent...!? Interest is one of the wonderful marvels that make possible that i have my money getting interest and other persons in some continent is using it to build their House or any project they have.
It is the fact that you have compound rate that makes available so much funds to billions of projects in the world.

If i lend my money i might well ask for it what i want, if not i can put it under my bed, why would i risk it? The other part accepts or not. What is necessary is that the agreement is clear.

Please stop attach idioticy to the Green word.

[Brian Davey]

First of all on paragraphs - I try to put them in but somehow the Times Online takes them out - that may be because I used a linux based operating system - anyway it is not for want of trying. Paragraph break The latest crop of abuse: moronic; stupid x 2; arbitrary nonesense; astounding ignorance. Paragraph break A propos " the conflict going on between collectivists, on the one hand, and supporters of individual liberty on the other. I have never been able to uncover a rational logical thinking process in the collectivist approach, just arbitrary nonsense." Then perhaps you should try harder - we live as individuals in society and have a personal interest and an interest in how society as a whole, the collective, operates. In the first we are in the role of consumers and perhaps entrepreneurs in the second we are in the role of citizens. In the first we look after our personal interest and in the second we have to think of the whole. The two have to be held in some proportionate balance - it is not an either or. Paragraph break Public policy in recent years has collapsed the concept of public policy choices that require us to think of the good of the whole into personal consumption decisions and our private interest. In this way of thinking we choose between public policy goals based upon our personal preferences much as we would choose between beans and spagetti hoops on a supermarket shelf. In fact there are lots of situations where if we pursue only a private interest, we get a sub optimal allocation of resources. Because of the free rider effect some goods would never be provided at all if there was not a tax system to pay for them. Other common resources get over-used in the absence of ways of preventing that imposed on all of us - e.g. the earth's atmosphere overused as a greenhouse gas dump. For these we need collective decisions to impose (ecologicalky based) capacity limits for which we need people discussing the issues in a calm way. (Instead of abusing people who happen to disagree). Paragraph break Policy over the rate of interest is also legitimate area for public decision making. This is especially the case as the consequences of too much or too little credit creation have a knock on effect in the wider society - and throughout history predatory lending (the exploitation of information assymetry and social and economic power between borrowers and lends can have powerful corrosive and damaging effect on the social structure - undermining social cohesion. This is even more the case when one notes that whereas ordinary citizens are not allowed to create money bankers do this when they give loans - a privilege with enormous consequences. As a result of this 95% of the money supply is in the form of bank deposits. Paragraph break That means that something we all need, our collective means for making transactions, has been privatised. As a result the banks cannot be allowed to go bust because the results would be so far reaching - this makes it a profoundly important matter of public policy. It also enables bankers to operate with the secure knowledge that they will get bailed out - thus privatising interest gains and socialising losses. Paragraph break This is perhaps the reason for the findings of a study by a Professor of Organisational Ethics at the Cass Business School, Roger Steare. He undertook integrity tests on more than 700 financial services executives in several major firms and came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry," says Professor Steare. The results of these tests indicate that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm Paragraph break So the core of the recent British "prosperity" appears to have something not quite right about it - yet another reason why it is a matter of legitimate collective concern.

[anonymous]

I am below the poverty level but thanks to compound interest I have saved nearly $10,000 in a savings account towards purchasing a home. But people like the OP don't save money, they blow it on nweed.

[Howard]

"You might ask: What has this to do with the environment? A great deal - because in order to repay debts businesses and whole economies must grow, and that usually involves consuming ever greater quantities of non-renewable resources."

What a moronic statement. The idea that businesses wouldn't be growing if there wasn't debt is stupid to begin with. Also, what if these new businesses were producing solar panels or some other "green" technology?

You might as well advocate genocide as a solution to climate change. Fewer people means fewer non-renewable resources being used, no? It would even be more effective than your stupid suggestion.

[anonymous]

here is scary idea. If you can't pay it back DON'T BORROW IT! And if you can pay it back PAY YOUR DAMN BILLS!

I don't have a brand new HDTV, or a new car. I live in a trailer and have no debt. Why? Cause I don't borrow money I can't repay. Cut up your credit cards and live like you can afford to, save money and maybe when you are old you will BE rich and can afford the lifestyle you are "paying" for with credit cards.

[Raquel Baranow (666isMONEY)]

The principle plank of the National Socialist Party Program (and Adolph Hitler) was to abolish the "Thralldom" ($lavery) of interest.

Me? I (along with many others including Jesus & Karl Marx) believe in abolishing money.

Barter is unnecessary when there's an abundance . . . modern machinery helps too. Very few people today are actually producing anything. Most workers in industrialized society are paper or material pushers. (Bankers, accountants, sales, cashiers etc.)

[Bob Thompson]

There is more than enough abuse and fraud going on in financial transactions without introducing the ultimate in ignorance as well, not to mention a total incompatibility with any concept of personal liberty as understood in most of the western world.

This would certainly turn back the clock. which seems to be a main goal of Islamists. If we have a consensus that we don't support personal liberty (the freedom to invest personal resources as we see fit), and we want to reduce our standard of living by shutting down economic growth, then this is the way.

This represents in some ways the conflict going on between collectivists, on the one hand, and supporters of individual liberty on the other. I have never been able to uncover a rational logical thinking process in the collectivist approach, just arbitrary nonsense.

[Bob Thompson]

There is more than enough abuse and fraud going on in financial transactions without introducing the ultimate in ignorance as well, not to mention a total incompatibility with any concept of personal liberty as understood in most of the western world.

This would certainly turn back the clock. which seems to be a main goal of Islamists. If we have a consensus that we don't support personal liberty (the freedom to invest personal resources as we see fit), and we want to reduce our standard of living by shutting down economic growth, then this is the way.

This represents in some ways the conflict going on between collectivists, on the one hand, and supporters of individual liberty on the other. I have never been able to uncover a rational logical thinking process in the collectivist approach, just arbitrary nonsense.

[JB]

I'm truly not certain whether to be more surprised by the astounding ignorance of the author, or of the fact that his ideas can make it past editors who job's one would think include noticing it.

[JB]

None of us know how to debate the author's proposal because there is none in his column. We are all assuming he wishes to ban lending at interest, which it seems he is.

His use of "compond interest", as if this is somehow distinguised from simple interest in practical applications, only obscures whatever points he wishes to make.

A proposal to ban either is no more intelligent than a proposal to ban addition and subtraction. Or the concept of rent.

[Dave]

If you don't want to borrow money at interest, don't.

If you don't want to lend money at interest, don't.

But if you do, who should stop you?

[David]

Brian Davey:

One word for you, buddy: PARAGRAPHS. Use them; they're your friends.

[Karl]

There are a lot of people not actually noticing the rather important word 'compound'.

Many comments come down to saying the author is wrong because without interest there is no incentive to lend (see for example the tractor analogy). However the author never says to ban interest, simply to ban 'compound' interest.

Banning interest will obviously cause dire consequences as the protesting comments here state, but that is not what is suggested.

When people take the time to actually consider the article rather than engage in knee-jerk reactions to a perceived challenge to their viewpoints, some might realise that they are objecting to something that was never actually said.

[ltk]

The article seems to propose some kind of policy change, but I'm not sure that even the author knows what.

Do you propose to permit a lender to charge interest, but somehow forbid compound interest? That makes no sense. It opens the arbitrage opportunities described below; no one is better off except some traders.

Or do you propose to forbid a lender from charging interest at all? In that case, no one will lend. Islamic banking is not a counter-example; they use repo instruments that are functionally equivalent to a loan (and therefore compound in the usual way).

So perhaps you would like to see no debt, and only equity investment. The investor must now distinguish a legitimately unprofitable business from a fraud. The cost of such an audit is large compared to the amounts that many small businesses borrow; so why would the investors waste their time?

The charitable micro-finance organizations are a good example. Lots of groups are making micro-loans, but micro-equity seems to have gone nowhere. I suspect that there are very good practical reasons for this.

[Alex]

Presumably the effects of "banning" compound interest would be one of two:

1. Lending institutions charge a crippling rate of simple interest instead, and insert tough clauses on loan acceleration, foreclosure etc. I fail to see how this would assist anyone.

2. Lending institutions stop lending. Cue gloabl depression. Incidentally, I wonder how all of the "green" or "sustainable" projects are being funded? If I wanted to build a wind farm and went to a business lender proposing that he lend me money without charging interest, what do you think my prospects are?

[Brian Davey]

Once again it is very striking that various defenders of interest in this debate are unable to discuss without abusing people with a different point of view. What is striking to me is that the original article focused on the effects of interest on two issues - matters to do with the environment and sustainability and matters to do with the distribution of income (social justice). In all of the stream of abuse there is no attempt to address these issues in the original article. The point as I see it is that a very unequal global economy has reached its ecological capacity limits and we need monetary arrangements that will be able to cope with the very new situation that we face. A financial system based on compound interest will not do that job. If oil has not already peaked it will do soon. Gas will peak shortly after. Using more coal will accelerate a green house gas crisis when the climate system has already crossed thresholds and is into positive feedback (reinforcing feedbacks - like the release of methane from Arctic tundra and the sea bed). There is a global water crisis and a crisis of top soils and deforestation. Food and energy prices are rocketing draining consumers of the purchasing power to buy other things. At the same time the banking system globally has been pumping up a massive speculative credit bubble that has popped, partly because in this vastly unequal world this was the only way of getting demand to expand when wages everywhere are being kept down. There has been a massive amount of fraud and speculative gambling and now all these processes are coming to a head. That is the situation now. We need a monetary regime for THIS situation and one based on compound interest will not hack it. There is a need for a massive restructuring of our financial arrangements. There is a serious danger of a debt deflation which any positive rate of interest may prove to be too high for - Japan has been in such a deflation for nearly two decades and when the Bank of Japan reduced its interest rates to zero it had shot its bolt. So perhaps the negative interest rates of Gesell money may be a local solution for the problems likely to face us. There will still be a need mechanisms to channel resources from those with surplus savings to those who think that, in these very different conditions, they have a business idea that will work - around the very different technologies and ecological design principles of a future society. However, in troubled times, and with very new technologies, risk will be a major issue so financial arrangements that focus on risk sharing will be rather better. As it happens Islamic finance embodies that principle - but acknowledging the value of those arrangements does not mean that one endorses all aspects of Islam. Instead of abusing people they do not agree with as being ignorant of economics it would be better to try to understand the very different assumptions of the world that they are starting from.

[Andrew C]

This a teachable moment as to the dangers of socialism.

I own a small mortgage origination firm in the Northeast United States, brokering deals to customers residing in New England and New York State. I personally attend loan closing where the value of the loan is $200k or greater. If a customer doesn't understand something, I explain it to them. If they still don't understand, I advise them to contact either the bank granting the loan or a lawyer/accountant, and tell them I will return when asked to complete the loan transaction.

I recently had a customer default on a mortgage. The value of the loan was $300k+ and the interest rate was variable. This was all explained up front. This customer called my office for three days, begging for help. she had stopped making payments as soon as they had risen (and not by much, they increased a bare $200 before she stopped paying). I told her there was nothing I could do. She said I had lied to her. I had not. She had a lawyer at the closing, who seemed to understand everything just fine. Her ex-husband was an accountant, she said, and he would help her with anything else she might be fuzzy on. I said okay.

Now she is being foreclosed upon, and is threatening to sue me for undisclosed (and poorly stated) reasons. I have already spoken at length with her first lawyer - the one from the closing five years ago - and advised him there was no case. He agreed. She hired lawyer number two, who made one phone call to my office, and was never heard from again. Lawyer number three is what we call an 'ambulance chaser' here in the States - adverts on TV, the radio, the backs of supermarket shopping carts, etc. He has called with bluster twice to my office, denouncing me for doing my job correctly. This woman had all the needed records, good credit history, and income that was easily within the allowable range for the loan. Her property dropped slightly in value, but she is still (at my reckoning) below 80-85% LTV.

Lesson: People need to be responsible for their own actions. This lady was incensed that her payment went up, even though this was clearly explained to her. Now she wants someone else to take the heat and solve her problems for her. I plan to go to court (if needed), and win the case easily. then I plan to countersue for defamation.

Maybe I can win the house I provided her the loan to live in. It's a very nice property, after all.

[Bill]

Actually, if we could somehow get America to reign in its borrowing, we would all be ahead of the game. Unfortunately no one will go through the resulting recession to do it.

[Bill]

There are many factors that create interest, and if they are not accounted for, you end up with bottle necks and the same poverty that afflicts those societies that allow interest. You cannot tell me that the Muslim world is well off, in spite of its prohibition of interest. And its many other prohibitions contribute to an evironment of many angry people, especially those trying to overthrow governments.

Factors that generate interest rates (those above 0%) include inflation, incentives to lend, comparable rates of return on equities (stocks), rental/lease rates on real estate, etc. It is all very intererrelated and to prohibit any one part is to reduce commerce, which is bad for all, including the poor. I would point out that it is the poorer nations that object to interest. Interest does not make them poor. Borrowing does.

[Pietro B]

The concept is so stupendously, epically, monumentally stupid it might even be refreshing - in a particularly twisted and weird kind of way.
But it is not, really: it's like blaming the hammer and nails because we cannot make a picture stand on the wall by force of thought alone. Compound interest is a tool, shaped by the harsh - I would dare say mathematical - realities of money. Real money. In the Real World.

Ah, yes: and the fact that muslim banks do not charge interest? Bollocks!
If I paint stripes on a sheep, it does not magically turn it into a tiger...

[Brian Davey]

The stream of rage continues. Someone asks me "Do I seriously want to invoke medieval times as a modern economy?" and then adds in a reference to slaves, martial violence and feudalism. Talk about setting up straw men! The implication is that, if I point to negative interest rates leading to long term investment horizons, I am somehow an advocate all aspects of feudalism! I was not "invoking medieval times" I was invoking a particular feature of monetary arrangements in economies that do not grow. And I am suggesting that since our economy can no longer grow in material productivity - and is heading to energy descent - so we had better learn about this aspect of economic history. Incidentally I could have used more modern examples of roles for negative interest rates. In the early 1930s the small Austrian town of Woergl was suffering from massive unemployment because of the Great Depression and decided to try out the money suggestions of Silvio Gesell, an economist who influenced Keynes. The local authority introduced a local currency where every month you had to pay a few cents for a stamp so that the currency note retained its validity. This was effectively a negative interest. If you hung onto the money it lost its value so you spent it. (Everywhere else, in the grip of a debt deflation, the opposite was happening and people were hoarding cash rather than spending it, making the depression worse). This "scrip money" worked - it circulated in the town, expenditure rose and unemployment fell. In alarm the experiment was closed down by the Austrian central bank. A further point - it is true that some kinds of Islamic banking are arrangements for interest bearing by another name. However a key idea to get hold of is that channelling savings to business in a way that shares equity involves a sharing of risks between borrower and lender in a manner that an ordinary loan does not. If the business goes well both supplier of capital and business do well - if the business does badly both lose out. So it is still possible to make money (or tractors) available - but within fairer and different kinds of arrangement. I might add that there are interest free savings and loan associations in Sweden and Denmark that have operated successfully for decades. These banks are cooperatively owned and not designed to return a profit for their owners. They merely provide a service borrowing and lending among their members - of course they have to be administered and there are service charges to provide for that - but its not the same as an interest payment.An example is the Swedish JAK bank. http://en.wikipedia.org/wiki/JAK_members_bank

[Dumbfounded]

The depth of economic unknowing in this this article is extremely disturbing, particularly given that it has found a place in the once venerable Times of London.

The answer to failed loans isn't to cut off the lenders at the knees (and, by extension, to bolster a sea of credit-unworthy individuals) by ... "banning" compound interest. (The phrase is ridiculous - let's ban exponential growth or negative numbers while we're at it).

The short term answer is to let losses lie, let markets absorb this, and use targeted regulation to discourage improper lending practices. Lending practices and irrational exuberance, combined with a LACK of market forces -- too much bailout, too little connexion between securities and risk on a day-to-day on the ground basis - brought this about.

I wonder if you realize the depth of the humanitarian harm you would cause by "banning" compound interest. Liquidity constraints ... good God the thought is ... I'm lost for words. You would diminish by orders of magnitude the ability to individuals and institutions to engage in money lending and borrowing. You would disincentivize lenders to take care and borrowers to give a care. Projects wouldn't be started, aid funds would dry up, competition would move elsewhere ...

Okay, I'm done. Honestly, you must have a few economist friends. Consult with them before you write this stuff.

(Unless ... if this is one huge satire, then I've been dupped and I apologize ... is this a satire?

[Alan Forrester]

First the notion that doing away with compound interest is compatible with economic growth is wrong. Compound interest acts as a signal to divert money to where it is most wanted - if you're not willing or able to pay the interest on a loan that means there are enough other people who will pay that interest to make offering the loan at that rate worthwhile otherwise the ban wouldn't do it.

Second the notion that we should be compelled to consume less makes no sense. There are two possibilities (1) We are stuck on this planet with finite resources in which case our days are numbered and it doesn't matter what we do. (2) We will manage to get other resources either by importing them from space or by moving out into space in which case we may survive indefinitely and in that case it does make a difference what we do and we should increase economic freedom so that people can experiment with finding better ways to use resources so that we can survive.

Lastly, Flintoff is wrong about the idea that interest was once considered a sin. Harold Berman wrote a book called "Law and Revolution" about the role that canon law (Catholic religious law) played in the development of Western legal science during the Middle Ages in which he wrote (pp. 530 - 531):

"Also, contrary to what is sometimes supposed, the church strongly favored the charging of interest on loans - indeed the canonists first applied the word "interest" to distinguish lawful charges for the use of money from unlawful charges ("usury")."

So even the Catholic Church in the Middle Ages didn't believe it was possible to do away with interest.

[MARK KLEIN, M.D.]

Probably easier to ban gravity than compound interest.

[tc]

the link with the environment isn't tenuous - all goods are derived from the environment, and its the production and consumption of these goods which generates the income to pay back borrowed money

on a massive human scale of 10+ billion people, this becomes a concern, a cycle which is beginning to spiral out of control

the problem with conventional capitalist thinking is that it insulates itself from real world effects

in biology, there is this a concept called "carrying capacity", i.e. what an environment can sustain in terms of pressures upon resources

capitalism however, sees itself as exempt from this cycle - for e.g. producing products without accounting for the waste stream that is generated, and how this affects the quality of life

our fascination with continued growth, of goods, production and consumption, is very much analagous to how a cancer forms and grows, and eventually kills its "host"

like a cancer, the economy is believed to somehow be insulated against natural, real-world pressures, not because they don't exist, but because they aren't truly factored into the equation

such is the selfish paradigm of a cancer

compound interest is of course the very basis of our capitalist economy, and so no doubt those who have profited from these scheme would find it hard to let it go

but where such huge disparity exists between rich and poor, compound interest only serves to make the rich richer and the poor poorer

in biological terms, this is an all-out assault on biodiversity, and for those of you that use evolutionary theory as your paradigm, wealth concentration is placing the power to evolve within a very limited spectrum of beings - and when has this ever worked in nature?

not that we need to abandon every element of capitalist society, but in my vision, corporations would be held accountable for every aspect of their role in the biological cycle

in this sense, corporations would certainly exist to make money, but they would also "pay it forward" by being responsible for all aspects of their goods and services, and inherently play a role in ecological stewardship

the time has come - the dinosaurs on this comment board complain and whine, directing bile and venom at the author of this article, eviscerating those who devote their lives to social betterment for "chump change"

the current system is crumbling - its happening before our very eyes

now is the time for humanity to make the shift, to blaze a new path to a new economy, based not only on quantitative distinctions, but on qualitative ones

[meredith connell]

are you serious??? this is the problem with free speech: idiotic people say idiotic things and then other idiotic people take it up as their mantle and then destroy the world. this dribble was very poorly researched, to say the least. both you and your editor should be fired.

[William]

You've got to be kidding. Interest on capital is paramount to the way markets work. Look what HAPPENED to Spain and the Ottoman Empire. Spain lost its empire sooner rather than later and the Ottoman Empire became the "sickman" of Europe. If it weren't for the world buying oil the Middle East would be just another Arab back water which it was until very recently.
This author may be a good journalist but a 10 Y/O has a better understanding of economics.

[bcb]

Islamic banks do indeed charge interest. They just call it another name. For example when you buy a house, you sell it to the bank and buy it back a little at a time. Is that not a loan with interest? Not according to the sons of Muhammed. Prostitution is also banned. Instead we have temporary "marriage".

[David]

I'm in awe, John-Paul... that may well be the stupidest thing I've ever read. Are you TRYING to destroy the world economy, or is it merely a side-effect?

[goof houlihan]

"like cathedrals". "Spain and the Ottoman empire "

You seriously want to invoke the middle ages as a modern economy? Serfs? Slaves? Martial violence and feudalism? People unable to move off the land or away from the job if they wanted to? Masons and tradesmen who generation after generation were obligated to stay in one place and work on one job?

And, oh yes, in a system where authorities supposedly got their power revealed directly from a deity?

Yeah, that's the ticket. The Middle Ages were morally superior...and they were sustainable...yeah... and people didn't have this pesky freedom thingy. Well, it fits in with the author citing the Islamic system of government and finance.

[Christopher]

John S--what you describe with the tractors is an investment, not a loan. A loan at interest demands the same return regardless of the actual productivity of the capital (the success of the crop). If you believed you could be more productive with the tractor, you would use it yourself. The interest loan is a way of engineering a guaranteed return which is better than what you expect will really be derived from the use of the asset itself--which gives the lie to the idea of "opportunity cost."

[Rob Johnson]

The real problem is the need to reduce the surplus population. If we could only do that in a meaningful way, we could lessen our use of "non-renewable" resources.

[John S.]

This is what the Times gets for letting cartoon characters write columns. Let's see if we can explain it ito Mr. Flintstone in terms a child could understand. Suppose I own two tractors and you own none. I loan you a tractor for a year. Are we "even Steven" at the end of that year if you simply return the tractor to me?

No, we are not. During that year I could have used that tractor to grow a crop. Presumably that's why you want to borrow it! So you borrow more than just my tractor, you borrow its potential to produce. When you return my tractor, you have to compensate me for my lost production capacity. Thus at the end of the year I want my tractor back, plus some fraction of your crop.

Substitute money for tractors and you'll understand interest.

[Brian Davey]

What is most striking to me is the sheer hatred for Mr Flintoff that this article has created. When people question taken for granted things which are key to the orientation of people in their jobs and lifestyle then, unfortunately, such rabid responses are to be expected. After all if there is truth in what they are saying then the consequences for their critics would be far reaching - that is why they respond with such rage. However, there have been long periods in history where interest rates were effectively negative - demurrage this is called. Without positive interest rates being used to discount the future such societies were capable of extremely long term investment projects - like cathedral building - where those buildings are still standing (and bringing in tourists). This long term view is compatible with sustainable economics in a way which our financial system dominated economy appears to be incapable of. It is noteworthy that for Nicolas Stern to make his case about climate change he needed to assume that social discount rates would be very low - and his critics all attacked him on this - with the assumption, which is actually an ethical choice, that interest rates prevailing in the private economy should be used in this profoundly social and public policy choice. Economic circumstances change - from the Industrial Revolution onwards it was possible to use the immense energy density of fossil fuels to amplify the work done previously by human and animal muscle power, and by the wind flowing water, to enhance the production of the economy. Thus a lender of money could share in the rapidly increasing productivity. Now we appear to have reached peak oil and climate change is compelling us to look at the growth imperative. We are thus faced with the prospect of energy descent - we need to try to make the best of an inevitable contraction preserving social cohesion on the way down. If the economy can no longer grow then the only way lenders of money can receive their money back with interest is by the taking a higher proportion of production (i.e. a socially disintegrative process of growing inequality) and through the ruthless acceleration of the exploitation of remaining natural capital (e.g. cutting down remaining natural forests). That way the world will still make sense by continuing to feed some of the rapid contributors to this column. And finally to the person that wrote this "Even 8 year olds understand that: 1. If you lend your pocket money to your mate he doesn't always pay you back. Why bother taking the risk if there's nothing in it for you?" I would ask - in what sense is the other person "your mate" if you don't take this risk? If your personal relationships, and those of your children, are based on these principles then he isn't truly "your mate" in any sense whatsoever. Indeed if all human relationships are reduced to this level there really is no hope for the world.

[John-Paul Flintoff]

JOHN-PAUL FLINTOFF REPLIES: Do please keep the comments coming, but can I ask you to tone down the aggression please? I'm going to have to remove comments calling for people to kill themselves, and the nastier observations about Islam.

If you're really interested in finding out more, I have been in touch with Richard Douthwaite, at the Foundation for the Economics of Sustainability (http://www.feasta.org/about.htm), and will post a question-and-answer with him shortly.

Do let me know if you have any questions you'd like me to ask him.

[Andrew]

Why should I look at the Islamic system of dealing with interest as a proposed model for a future economic model?
A failled social system highly dependant on war and slavery just to keep afloat???
Puhleeeez ... next thing you'll be saying is that the cavemen were onto something because caves were great spaces and well insulated.
A socialist freedom always means that someone else pays the bills.

Turn off the lights on the way out. Save the environment by not producing such twaddle and hot air.

[Andrew]

Albert Einstein was supposedly once asked, what is the most powerful force in the universe.

Everyone expected a lofty answer about strong nuclear forces or suc, but his answer was simply 'Compound Interest'.

[Steve]

Please may I speak in defence of poor 8 year-olds, cruelly maligned in a comment below by "Cat Cup".

Even 8 year olds understand that:

1. If you lend your pocket money to your mate he doesn't always pay you back. Why bother taking the risk if there's nothing in it for you?

2. Bad things happen if you don't pay your bills on time. If you pay your interest on time there is no compound interest to worry about.

3. Mummy & Daddy pay rent. If you ban interest, you effectively ban property letting - borrowing someone's house & borrowing their savings is the same thing?

4. Pocket money today is better than pocket money tomorrow because mars bars can go up in price overnight. Adults call it inflation.

5. Grandma couldn't afford to buy him a birthday present if the bank didn't pay interest on her savings

6. The highest paid footballers aren't the ones sitting on the subs bench where they can't score goals. Cost of capital drives the efficient allocation of capital.

Let's be grateful Mr Flintoff isn't writing in the Beano or the nation's future could indeed be compromised!

[Dan]

...Transport from all the things people want to buy my friend. No one forced you to buy a laptop or drink a pint of beer. Both consume energy and fossil fuels. 6 billion people have to be fed somehow and all that WASTE ends up somewhere. We could all live on a farm but we all want ipods. I bet every poster here has an ipod, a TV, a laptop, a microwave, a fridge, and/or a plasma, and likes hot water and heat in the winter. Oh yeah and the aluminum (or steel) in that nice bike you ride to work was likely smelted using electricity from a coal-fired power plant in China. Aluminum smelting takes a whopping amount of energy. Steel requires coke and coal. Whats the carbon footprint of your bike?

LIFE = POLLUTION.

You always can move to Montana (US) cheaply and start a farm and become self-sufficient. No one forces you to to live your lifestyle.

The problem is not the compound interest , stupid, its human nature

Save the planet, kill yourself and all your offspring. Take 12 of your ecobuddies with you.

[dom]

Dan, That's over simplistic. The majority of energy demand comes from transport. Transport moving low price, low quality goods into markets increasingly further from where they were manufactured. When a country exports goods it does so in exchange for debt free money. The debt stays in the country the goods were exported to. Hence the importance placed on the "balance of trade" and the original point of floating exchange rates. Exporting finite resources is a prime example of the lunacy of debt based money. OPEC countries are slowly awakening and will eventually realize the idiocy of exchanging real wealth for paper money. They will then reform their own financial systems.

[Dan]

How about: lets ban "compound growth" in the population. I have 3 kids, then they have three kids, then sooner than you can you can say "utter rubbish" you have 5x the global energy demand. Ohh I know. How about lets save energy by banning morons from wasting time on energy-consuming laptops with LCD or plasma displays. Even better, lets legislate PI as 3. That'll save 4.5% right there!

EVEN BETTER: 1. DONT BORROW MONEY IF YOU CANT PAY OFF THE DEBT OR YOU DONT UNDERSTAND THE RAMIFICATIONS. 2. DONT WASTE ELECTRICITY PUBLISHING UTTER RUBBISH.

whatever happened to personal responsibility?

[AR]

Most of the comments on here are utter rubbish. Anyone who thinks compound interest is a good system is displaying their ignorance and lack of knowledge of the accounting transactions involved.

I work in finance and know in detail how loans are accounted for and how the banking system is constructed to give the banks the ability to expand and contract the supply of credit at will (ever wonder why they can never be allowed to go bust unlike normal businesses?)

I don't buy the so called 'green' arguments against compound interest, neither am I a communist or desiring of return to the middle ages. There are sound economic reasons why the current system should be re-built from the ground up.

If some other posters on here could actually think critically for themselves and took the time to learn about the accounting systems involved they would realise this.

[dom]

James Baker,
They have been publishing twittering, bourgeois, status anxious nonsense about the virtues of property investment all the way until the bubble burst.
If this article is rubbish then please explain:
1. why the national debt of all nations is continually expanding? 2. The function of the treasury bond market? 3. The desperate need for perpetual economic growth in a finite world? 4. Why countries compete in export markets for foreign exchange? 5. Where the "money" came from to allow the total UK money stock to expand from £14 billion in 1963 to £640 billion in 1996? 6.
Seeing as you are all sages of twenty first centuary finance this should be simple. You people are the modern equivalent to the flat Earth society. It's called monetary reform by the way, Google it.

[JAMES BAKER]

This article is one of the most absurd pieces of nonsense I have ever seen in a mainstream publication. Stick to polar bears and windfarms.

[Charles C]

Not only is the analysis completely absurd, his understanding of history is utterly devoid of understanding or accuracy. Although usury was a sin, it did not stop European governments or the Catholic church from taking out loans (backed by securities) in order to fund the construction of universities, monuments, wars, etc... The larger loans were usually financed through Jewish communities which would then see an increase in persecution due to the fact that their debtors would rather default.

Even sharia law allows for interest, it just comes in a different form and is called something different.

There have been only two societal forms which have no interest. One is a hunter-gatherers, the other is communism. See how well those turned out.

It is absolutely astounding that a periodical as respected as this one would actually publish a piece of such limited understanding. Either the publishers were asleep or they are operating under the academic delusion that anything anti-capitalism is edgy, cool, and worthy.

[Bob Orr]

This guy wrote for the Financial Times? What a silly article. If you're keen to see the results of Islamic financial practices..look at the decline of Ottoman Empire... or any non-oil producing Islamic country.. financial basket cases... all of them ...sigh. How silly.

[AMcA]

Proof, once again, that what the environmental left really wants is for us all to live in the Stone Age.

You, Mr. Flintoff, are perfectly free to go set up your own Stone Age life somewhere. But don't force me into it.

[Stephen]

Mr. DOM, your comments are so meaningless and content-free, approaching the level of gibberish, that you must just be a pen name for the original author. Come on, just admit it...

[dom]

I agree with the article. There are lots of comments alluding to "growth", "business expansion" and that somehow the current system of debt finance accommodates this. In fact, economic growth and consumer culture are a symptom of debt finance, they accommodate it.
The modern economy makes no sense, only monetary sense. Each new generation must take on more debt than the last to maintain the same standard of living. The same applies to government. The numbers and facts are all there for you to see and they speak for themselves. The system is fundamentally flawed. Do some research before making ill founded comments regarding an issue which is deliberately derided and excluded from mainstream debate.

[Tom]

You've got to be kidding me, I can't believe that some people actually want more and more government intervention in all parts of their lives. If you don't want to pay interest, don't borrow money, their doing you a favor, so get over your self; individual liberty, not collectivism, no man has the right to tell another man what to do, I think it's call free will, yeah that's right...Ohh I forgot the state now determines what freedoms we have...GIVE ME A BREAK!

[Christopher]

To say that the economy would stagnate without interest is untrue. Entrepreneurs would still be able to get funding for new ventures--but as investment based on a share of profit.

Compensation for inflation is a separate matter--like specifying that payment be in 99% gold rather than in 40% debased currency.

The real environmental problem, though, is limited corporate liability, which is the socialization of risk. The shareholders in an enterprise should be fully liable for debts and damages caused by the corporation, proportionate to their ownership, but without limitation to their investment. Otherwise, they benefit fully from the success of risky behavior without being liable for its failure (and environmental effects).

[Stephen]

Total disagreement with you Mr. (8?». The problem is not fractional reserve banking or fiat currency, the problem is Plato's earliest observation that democracy is unworkable in the long term.

What do you are not "borrowing anything" when you take out a loan? The bank gives you actual money that you can go to the store and buy actual stuff. Where the bank gets this money is the bank's problem, if they choose to hold fractional reserves that is their business. Until they fail.

Unfortunately, it's often politically impossible to allow large institutions to fail as 50 year old ladies actually kill themselves over foreclosures on loans they should not have taken out in the first place.

Forgiving 3rd world loans, is contiguous with this kind of thinking, complicated by the genuine ethical concern you bring up that the parent government of the financial institution is politically obligated to enforce that institutions expectations in terms of whether or not a debt obligation transfers from dictator to dictatee. Who knows whether it does or does not in utopia? One can make the argument that a peasant who doesn't rise up and throw off the shackles of an oppressive goverment sleeps in the bed he makes.

The problem is not the bankers. The problem is uneducated peasants. The simplest way to not pay interest, is to NOT BORROW. But who can resist, that plasma TV is so cool!

[Dan T]

John-Paul,

Correct me if I am wrong but if you lend someone 100 pounds at 3% interest and they are supposed to pay you 103 pounds at the end of year and they don't pay you, didn't the amount they owe you just go up? Didn't the borrower just TAKE an additional loan from you for 3 pounds?

If you want to reduce the amount and velocity of money in the world I would definately outlaw compound interest. That way people would use less of those resources because they could no longer,
buy homes
buy cars
buy food on credit cards when there is too much month left at the end of the money.
Soon farmers will be growing less food and the ensuing famine will wipe out those people who aren't killed in the food riots and the world will be 'green' again.

Compound interest is not the cause of the worlds problems.

As far as interest not allowed by the moslem faith, hmmm, you can't lend money but you can kill your sister if she is caught holding hands with a man.

I'll charge or pay interest and let my sister live.

One more thing. If these 3 world countries weren't run buy theives maybe they could pay back the money they borrow. I do.

See Ya.

DT

[(8?»]

The problem isn't compound interest, but the disaster known as fractional-reserve banking in a world of fiat currency.

When a loan is taken out, you aren't "borrowing" anything, you are creating currency in the form of a book-keeping entry on the bank's balance sheet. Your promise to pay is now the bank's asset.

Worse yet, is the fallacy behind the idea of "3rd world debt." Just because a financial entity makes a loan to a dictator, does not make the debt an obligation of the people. This is an illegitimate means of enslaving people to poverty, under the guise of helping them.

Only individuals can make themselves liable to debt by entering into a loan contract. To believe that a collective can do it on their behalf is anti-human. Even Bono promotes this evil by asking for debt "forgiveness," implying that the debt itself is valid.

The debt should not be forgiven, but repudiated, forcing the IMF and others to take the loss, and reconsider just who they give "relief" to. Problem is, the IMF/World Bank operate with stolen money, so moral hazard is standard procedure.

There are also the benefits to society of compound interest to consider. Without this reward for taking risk, people are less likely to pool their scarce resources to create more wealth for society.

Instead of investment in factories, hoarding becomes the primary means of planning for an uncertain future. This leads to a lower standard of living for all, as the economy retracts.

One can wish for a stable enough society where interest rates naturally fall to negligible levels. But to assume that this world can be mandated by do-gooders intentions alone, is to destroy the village, all in order to save it.

If you want low to no interest, then you need to learn what drives interest rates, which is perceived risk. Lower the risk that society will implode, and the rates come down all by themselves, as people look for opportunities to make the world a better place, by solving others' problems. Increase the risk to society via crazy forced schemes, and watch rates go sky high.

To sum it all up in a Clintonesque phrase, "It's the bankers, stupid!"

Welcome to the crack-up boom.

[Stephen]

Riiiight. That sinking feeling again.

It's suddenly apparent to me that you actually do suggest doing away with interest altogother, and not just "compound interest". I would be in shock, but I have gone numb in the face of such dumbness.

At the risk of triggering an even stupider suggestion line of thought on your part, might I suggest:

barter : money :: individually negotiated loan contracts : interest rates

Although I personally no longer wish you success in your governmental aspirations, I'm sure there's an army of lawyers that do. Gross, net, what's the difference between friends.

[Ian]

Either the writer doesn't know what he's talking about or it's April 1st.

The analogy with gold is also wrong. Gold inherently holds it's value over time as governments can't print the stuff - unlike paper money.
Go to the back of the class Mr. Flintoff

[Alyssa]

"...because in order to repay debts businesses and whole economies must grow, and that usually involves consuming ever greater quantities of non-renewable resources."

Interest is bad because it must be followed by growth? This is the most backward argument I've ever heard. Why don't you just start from where you'd like to be, "growth is bad". Then your readers can remind you how you owe your lifestyle, if not your life, and all of the "green" crap you love so much to the growth of businesses and whole economies.

[Asa]

The blogger expresses a longing for a premodern system of finance, or in other words, a return to the middle ages. In such a system, innovation and prosperity would vanish, and we would be left with stagnation, death, and despair.

Theocrats, fascists, or other thugs would be required to enforce a nonsense economic policy banning compound interest, because, as the previous posters noted, lenders would not voluntarily lend. Force would be the primary motivation for economic activity.
The blogger might consider learning the basic concepts of economics and finance before casually advocating destruction of the only financial system permitting voluntary association and freedom.

[Dan]

Why not write a fear-mongering article on Fractional Reserve Banking next - I'm sure you could sound like a complete moron on that topic too!

Editors, do your jobs and can this garbage before it gets published. I feel stupider for having read this article.

[David]

If I cannot charge interest for lending, why would I want to lend?

What you're prosposing basically amounts a return to mercantalist principles - the idea that there is a fixed amount of wealth in the world, and each transaction is zero-sum. The problems which developing countries have with their loans has a lot to do with the specifics of the countries and loans involved, and not so much to do with the basic principles of how interest is calculated.

[Kleopatra]

"... great civilisations in Iraq, Spain and the Ottoman empire were all built without interest-bearing loans." On the other hand, they were built with slave labor and the spoils of war, and these were not considered wrong. Is it not better to borrow money?

[Ian]

Your riposte displays several fallacies of thinking:

- I must be (getting something) right, because the counter-argument is not sufficient
- The speaker has a vested interest, therefore is wrong

Your idea is so bad it's hard to know where to start. The flippant arguments against your "idea" above are the strongest.

I look forward to "pound of flesh" contracts becoming the norm. It will make bankruptcy hearings more interesting.

[Stephen]

Surely someone who is committed to improving the state of the world will listen to an argument based on facts and reason.

1. The exponentional behavior of compound interest is derivable mathematically as the limit where the loan is paid back and reborrowed in smaller and smaller time periods, in the mathematical limit reaching zero.
2. Any deal not structured in terms of continuous compounding, is a mathematical approximation and is subject to arbitrage.
3. Arbitrage is bad, because it allows people to make money doing effectively nothing productive. In this case, that would be the big bad Man at the nasty Bank. This should bother someone with the lofty goals you claim to have.

Someone who understands finance already knows all this--- it is basic, like the alphabet and arithmetic.

As a concrete example of this, let me spell a hypothetical "non-compound" interest deal. I have to guess at the specific structure you have in mind, since you could be choosing from a universe of stupid ideas. Let's talk about a 100 dollar loan at 5 "percent". For example, you might think:

Borrower pays back 5 dollars per year until principal is paid off, anything in excess of 5 dollars per year being applied to principal balance. Under this structure, there is no point to pay down the principal at all until you are able to pay back the entire 100 dollars. That in itself is bad, human psychology being what it is, but never mind that. To make free money, all one has to do is to lend out the money you borrowed at shorter term loans. Eg, lend out the 100 dollars for 6 months, having 102.50 dollars at the end of 6 months, and lending out the 102.50 for another 6 months, having 105.13 at the end of the year, paying back the original loan and 5 dollars interest, and pocketing 0.13 cents for doing nothing. Neat-o.

I work in interest rate swaps (really). We actually do this thing I describe above (really). I don't care what you think your real world experience is, and I don't care. We would be extremely happy for you to succeed with your ideas! Please run for president and win. Really! The state of the country is not important, as long as I can line my pockets with free money. I could be doing something useful, like medical research or something, but hey, why bother working hard for chump change.

Now if rather than "no compound interest" you are going to change your tune to "no interest whatsoever", again, you would be saying something stupid and uneducated, but we don't all have the patience or time to deal with all of your bad ideas. There are too many of you. I am reminded of an article I once saw titled "Thinking is so over". I'm very afraid that it is. Don't worry about your daughter. My son will be learning math, to take good advantage of her.

[DaveL]

The ability to get capital by borrowing and to use it to improve our future is a major feature of a modern economy. I suppose this author longs of a return to the good old days, where the aristocracy and privileged few held all the wealth while the people were mere serfs at their disposal, a time before people had access to credit or to investing their income in corporations. They never had to save for retirement either. The Arab world has had these weird ideas for thousands of years, that is why they have such little development since 1500 AD.

The way to save the planet is to produce fewer people, to use more renewable energy and attempt to have a smaller footprint on world ecosystems.

[Christopher Marciano]

If you ban compound interest, then both the nominal interest rate will go up and the amount of money being lent will also decrease, hampering the economy.

People who are lend money need to be adequately compensated for the risk. If laws are put in place to restrict their ability to get a comparable return, they will invest their money elsewhere ... like opening a business or sending their money overseas. Lenders aren't forced to lend money.

What is it with people in the media who think they are smarter than the market?

[Sean]

Sorry John but you are showing your ignorance. If a lender isn't able to charge compound interest they either won't lend money or will charge a higher rate.

To avoid this all the borrower has to do is make an interest payment.

The biggest problem isn't compound interest but the fact that individuals, businesses or governments borrow money for the wrong reasons. If a government borrows money to build a power plant that will help grow the economy there will be enough money to pay the interest and principle. If they borrow the money so that the ruler can steal the money they won't be able to pay it. The same goes for businesses and individuals. Borrowing money so that you can go out to eat is stupid.

Your whole connection to the environment is tenuous at best and supports the argument that environmentalists are largely motivated by an anti-capitalism agenda.

[Cinnamon]

Mr. Flintoff's idea about the 'Islamic finance' is rather blue-eyed -- they also take interest, just by a different name(same concept tho), just their money is even more expensive than ye olde evil compound interest, and comes with a lot more ties.

Still quite entertaining, almost like a 3 year old asking why world leaders don't sit down to settle differences with a chess game instead of war. Good idea, shame about reality.

[PA]

I'd like a loan for a million bucks without interest.

[John-Paul Flintoff]

JOHN-PAUL FLINTOFF REPLIES: I must be getting something right. The people who take the greatest exception to this post don't argue with the ideas in it - instead, they accuse me of lacking education, or being eight years old.

As it happens, I get to see the email address of people who comment on this site - in order to check things with them, presumably - and I see that one of my critics has an email address connecting him to an investment company specialising in credit derivatives. Another works for a communications company advising clients in financial services. Hardly surprising that they're threatened by the idea of banning compound interest!

I'm not going to tell you what my education is, nor my "real world" experience. If you can be bothered, I daresay you will find it somewhere on the internet. My critics, evidently, are satisfied that they are much wiser.

[Mike]

Grow up. Get an education. Get some actual real world experience before you start writing columns that contain solutions to the world problems.

Unbelievable that this is a serious comment and even more unbelievable that the editors let it be printed.

I didn't think this was the Daily Mirror or the Guardian - I though The Times took itself seriously.

[Winston Smith]

More nutters looking for for more 'free money' can I have some too?

[Cat Cup]

It's important to understand that inflation isn't a necessary part of the economy - it is created by other parts of the economy: largely interest.

[murph]

Ok, who let the 8 year old write for the Times?

Duh. What about inflation? Lending money without compound interest is losing money. Back when Nigeria borrowed $5bn that was a lot of money. No