Have you ever considered a world without interest?

Aristotle said interest is theft, in which case bankers must be criminals.

Civil law refers to interest as the usus fructus of “money”, a “fruit” in the same way that the labour of the slave was his usus fructus and apples are the usus fructus of the tree.

But ancient philosophers, the Christian church and Islam are right. Interest cannot be a fruit because money cannot produce anything. It is dead, like a dead slave or a dead tree. So why is this not understood? Although historically official religions and the state were both hostile to interest, interest always persisted in a variety of forms.

Why do we accept the idea of interest?

Nobody questions the legitimacy of interest today. It exists because you have contracted for it. But why then do you pay interest on default? Why do all codes assume that there is a minimum interest rate of about 4% even if there is no contract to pay it?

The voluntarist theory that interest creation arises from the free will of the parties is  superficial and as misconceived as the idea that money has intrinsic value (as was wrongly assumed to be the case with gold). Today we know that money is information. If so, then interest is also information, but information about what?

The theory of interest as arising from free will has pushed aside any deeper insights into the nature of legal obligations.

Does Human will create interest?

Questionable – as Kelsen pointed out, we attribute free will to the obligations we have and to what we find necessary. That is also the insight of neurology, which asserts that the will is the execution of certain pre-dispositions.  In the case of interest, we know that the free will theory is not applicable because interest also exists as a legal obligation without the intervention of free will as legal interest.

If we do not understand money, we cannot understand interest. Money is an obligation which is so powerful, as well as being legally enforceable, that it can be assigned to somebody else who can then assign it to someone else who then uses it to “pay” a debt.  So money is a circulating obligation. Why does a third party accept it as money? Because the money obligation has value. 

Why does it have value?

Because it is underpinned by the (real) wealth or labour of the debtor who is able to produce something of social value. In short, because the debtor promises to be productive.

Money is the expression of the value of goods and services which are produced or have been produced and have the potential to be bought because they are needed. If I need the cooperation of others in the form of their machinery, help, labour etc., I must draw on the value of the product I am about to produce. So taking out a loan is possible because I am productive and the money I borrow helps me to further this productivity.

But why then interest?

Because the money I have borrowed helps me to produce greater value than the recognised value of the money I have borrowed. The product will be of greater value than the components of my productive process. This is also true when what I produce is myself and my labour and I am buying a car to take my children to kindergarten in order to be able to work in the university. 

The use of the frozen labour of others through the purchase of goods such as this from them, using money I have saved (which represents production processes I have already completed) will in turn increase the capital value of my labour. So the labour process is a growth process. It is like the tree and not like the apples. I will have a surplus amount of money at the end of that process. This difference between the original capital and the increased capital is called profit (or gain). In order to incentivise people who work to save the products of their labour and enable me to work with those products, I share my profit with them. This is precisely what lies behind the concept of a shareholding company, in which the shareholders make a loan by purchasing shares, and that loan is thus received in the form of a participation. This is also what underpins an interest-bearing credit relationship. Interest represents the shared profit derived from the assumed growth of capital in a productive process, and socialises it. It is supposed to be available at any time, even at night, when everyone thinks about it, and even for people who themselves have not been productive in the sense that a profit arose. You even pay interest when you make a loss.  But credit overall must create an average profit (this socialisation of profit/loss into an average guaranteed stable profit called interest revolutionised savings. Now everybody is able to save without being afraid of losing their money).

This is why Aristotle, the Koran and the Bible had a wrong picture. Productivity is not restricted to living entities who are able to produce fruits. Productivity is enhanced by all forms of horizontal and vertical cooperation. Cooperation is the secret of economy. Without it there is not such a thing as an economy. Money is not productive by itself but it helps to render processes productive in that it organises cooperation with past labour. Interest is necessary to reward this cooperation, but it requires at least the chance that, on average, the extension of credit will lead to an increase in capital.

From a debtor’s perspective, this is disadvantageous. He or she alone carries the risk of a lack of productivity. The socialisation of profit favours investors, not borrowers, despite the fact that borrowers are key to their ability to earn interest.

Since 1800 (forget about debtors’ prisons before, which were not linked to credit but to the withholding of public contributions - the legal history of bankruptcy sticks doggedly to the superficial view of equal debt), the law has done much to remedy the fundamental contradiction between interest as profit-sharing and the fact that it fell due even without a profit having been created. Caveat locator – borrower beware.  Bankruptcy and the existence of the legal personality, through which the wealth of the individual is separated from risk, return part of the responsibility for the debtor’s productivity to the creditor.  At the same time, bankruptcy morally and physically punishes the debtor for not being productive and for putting the borrowings in question to bad use etc.

Do you want to undertstand anatocism?

Go back to Aristotle. If money itself cannot be productive, how much less productive is unpaid interest, which has neither been handed over to the debtor nor produced from productive investment of the sum due. But this, again, is the wrong question. Anatocism is only an insignificant element of productivity.  It is part of the interest rate if you look at the mathematical formula how to calculate growth: c *(1+i)t . Interest must be compounded on an equal basis to enable calculation of a true interest rate. This formula is now legally binding to calculate interest.

What does it have to do with responsible credit?

So the issue for our times, after we have understood why interest exists and what it is and how we calculate it (= shared profit, average, growth rate), is the principle of responsible lending which I explain as doing everything possible to make investment productive on the borrower’s side. High interest rates often have the opposite effect. They are speculation, not on the productivity of the investment, but on other wealth owned by the borrower. This is why anatocism and usury should be understood as the ancient predecessors of responsible lending today. Bankruptcy procedures should take account of the quality of the claims registered by creditors.  If a bank has speculated from the outset through the imposition of high interest rates and has extended unproductive credit, it is a crime to give them a share in profits which never arose and never could have arisen. (Udo Reifner)

For more information see Reifner, Die Geldgesellschaft, 2nd ed. 2015 Chapter 2).