There is some tendency among defenders of loaning at interest to describe it as merely the renting of money. After all, they say, interest is merely charging for money while the lender (the creditor) is deprived of its use. On its surface, this is true, for renting and loaning at interest are reasonably similar beasts; similar enough that many can confuse them. At their core, both are an agreement to make use of some resources in exchange for a continuous return of other resources (primarily money) while the original resource is in use. That, however, is where the similarities end. Loaning at interest is profoundly different from rent, and to conflate the two is at best ignorant and at worst actively malicious.
Let us consider a hypothetical: if renting a shovel was like taking a loan. If renting a shovel was like taking a loan, the most readily apparent difference would be that our rental payments would increase over time, based on how much we had paid in rent before. Egregious enough — after all, we are still getting the same use out of the shovel (in reality, slightly less as the shovel becomes worn and damaged) but are paying more for it — but suppose we were to conclude that renting the shovel was no longer worth the increasingly large payments we were making for its use. We could return the shovel, but if it was like getting a loan this would not be the end of things; if we had any unpaid rent payments we would be suddenly obliged to make payments on the payments. Our debt to the shovel renter would increase despite the fact that we no longer even have use of the shovel — justified, perhaps, since we have not given the renter what we owe him, but if it is just then no rental business has yet caught onto it. Moreover, very few people throughout the world have much considered the notion of debts increasing over time due to their mere existence to be just; perhaps they could be wrong, but it is doubtful that many people would agree. Worse yet, consider if we became unable to pay our installments or, even more daunting, if we no longer possessed the shovel (say that we sold it). Our installments would keep coming at the same rate and amount and would continue growing, regardless of our ability to pay them to say nothing of making use of the shovel, without any end.
Given this description, perhaps it is obvious why no rental business has yet adopted this model. It is difficult to see that anyone would choose such a rental agreement given almost any other alternative. It should be just as easy to see, given this hypothetical, that loaning at interest and renting are two very different beasts that cannot be treated the same way.
To be clearer, loaning at interest differs substantially from renting in several areas, even from our hypothetical. If our hypothetical were to be truly accurate we would have to make and measure our payments in shovels, just the same way loaning is. This is an intrinsic problem with loaning, and it makes scenarios we considered all the more vague. How can we return a loan the same way we returned our shovel? When can we be considered to be no longer making use of the money? After all, it is entirely possible to repay the loan’s original amount (the principal) several times over with loaning at interest; would we not have finished making use of the money the second we remade its exact amount? Worse yet is that the nature of money is profoundly different from anything else we might rent. Renting anything aside from money would keep what we rent in our possession necessarily while we seek to use it; money, on the other hand, only has the use of being gotten rid of, of being exchanged for things we can actually use separate from their tradability. This, by its nature, makes “renting” money far more risky than renting anything else; the possibility of a destroyed shovel is far lower than the possibility of a poor investment, after all. Moreover, it makes the notion of “returning” the rented item all the more confusing.
Worse still, loaning cannot properly considered “loaning.” When we loan a friend our car we are getting the car back; not a similar car or something of equivalent value, but the very same car. With a “loan” of money this is impossible because, as stated above, the only function of money is to be exchanged. We cannot consider this to have been a loan anymore than we can, technically, consider “borrowing” food to have been a loan. The “loaned” item has been totally consumed and is non-returnable; what is instead happening is that we are making a delayed trade. We are selling something in exchange for receiving something else in the future.
This “non-renting” of money is best illustrated by making the observation that interest “decouples” debt from the “real economy.” That is, in the real economy there is some amount of growth and contraction; some wealth is created and some is destroyed. In primitive systems (where debt is unformalized) debt is totally tied to the economy; men owe what they have rather than what they don’t, for to primitives there is no use for things which don’t exist. This might express itself, for example, in a neighbor asking for one’s calf, rather than wheat from a harvest that failed (and which, therefore, does not exist). In more advanced economies debt becomes formalized and along with it the concept of “future wealth” — i.e. that one might not be able to pay back a debt immediately but will be able to do so in the future. While this means that debt becomes decoupled from economic growth (the debt will remain even if one never produces the wealth to pay it off), the debts do not grow and so problems are minimized, as economies are almost always growing and so the debts tend to be paid.
When interest is introduced problems become much worse. Suddenly debts are growing, but this growth is entirely unrelated to the actual economy. It is mathematical, based only upon what was already owed, and so will grow and grow in a completely set fashion without end. With interest it does not matter whether the wealth required to pay off the debt even exists, as the debt is there regardless of how much (or little) wealth is actually created. To contrast, if a debt was tied to the actual economy it would demand something that actually exists; it would demand wealth that had been created. An example of this would be a demand for a portion of profit, whatever that profit was; if there is no profit the debt is zero and so it demands nothing that does not actually exist. Ergo, it is totally tied to the actual growth of the economy.
This decoupling (the demanding of wealth regardless of whether it exists), predictably, causes many problems. In the ancient world owed sums would result in ever more steep repayments: family land sold, children sold into slavery, wives sold into slavery, and any number of other extremes. Though one may call it injustice, the far more realistic problem for ancient states was the instability it caused. Beyond the revolts and uprisings from those reduced to poverty for little good reason, it was disastrous for the economy itself. Land went unworked, efficiency declined, and systems of social order decayed as its members were ripped from their places in society and turned into slaves. The problem was obvious: debts larger than wealth that was actually created could never be paid. The solution, therefore, was to declare that they never had to be. It is the same as we have now: bankruptcy; the elimination of debts when they became too much. Debt jubilees every few years where the clay tablets used to record debts were ritualistically destroyed become the norm. Debts were forgiven and unreasonable payments (the slavery of family, for example) were returned. Still an inefficient system, but less plagued by instability and inefficiency.
Decoupling is far more insidious than the naked injustice of being sold into slavery to pay off a debt, however. Naked slavery, then as now, as well as the removal of people from their work is inefficient and undesirable. The debtors are even less able to pay the creditors, and so it becomes desirable for the creditors to keep the debtors paying a debt that never vanishes (or at least lasts a very long time) rather than being a direct slave. With decoupling this is more than possible; so long as debts owed are larger than wealth created the debts can never be paid off. Work interest rates to ensure that this is the case and one has, in effect, created a more efficient slave class; always working for the debtors. The pitfall in this scheme is when debt grows too large; when a few overly greedy creditors begin worrying the golden goose is about to stop laying eggs and try to get what they can before it happens. Dispensing the metaphor, it is the ancient system of debts where payment by a few creditors is demanded in full, triggering a landslide as huge amounts of property are seized but debtors become even less able to make their payments, collapsing the system of quasi-slavery. It is a fine line that must be ridden between ensuring that debt growth outpaces real growth and making sure it doesn’t grow large enough to start a panic*. Do it correctly, however, and one can institute an indefinite and shadowy system of slavery, creating a system of clothed injustice to replace one of naked injustice.
In effect, when debt growth outpaces real growth creditors are declaring that they are owed all created wealth forever. Any new riches are automatically theirs by right without them lifting a finger. Worse still, this claim is disguised and through the hijacking of language (the loaning of things that cannot be loaned, renting that is not renting, and more besides) we are tricked into believing that it is just, moral, and acceptable. That we, in fact, owe what it is claimed what we do, no matter how much it is. We are led to believe that mathematical interest is acceptable through pretty lies and petty appeals. After all, we are told, it is merely compensation for the time they do not have use of the resources they gave us.
* It is worth noting that inflation is a large mechanism for this. Inflation decreases the worth of money, and since accounting does not correct for inflation it effectively makes debts worth less. If a dollar is worth half its value tomorrow, tomorrow one will owe only half of what one did before. This, in effect, means that there must constantly be some small amount of inflation to offset interest; inflation, after all, is much easier to control than interest rates, especially when one considers that interest rates have a floor of 0%. If the debts grow too large and interest rates cannot be lowered enough to solve the problem inflating the currency to decrease the worth of the loans will have the same effect. By playing with interest rates and inflation, debts can be kept at an “optimal” level.
It is also worth pointing out the generalization of “inflation is good for debtors and bad for creditors; deflation is good for creditors and bad for debtors,” as well as its relation to gold-backed currency and its characteristic deflation. This will likely be the subject of a post of commodity-currencies.