Riba is Theft

From Islam to Buddhism, nearly all religions and religious ethics have detested the charging of interest. It was always seen as unjust to charge someone, especially if they were poor, for the right to use money. It is seen as a form of charity to give a loan. Islam perhaps has the strongest stance on interest or Riba as it is called in Arabic. Riba is an immoral practice, Ill gotten gain through exploitation. Comparing it to going to war with God and his Prophet. If so many of the world’s sages, religions, and philosophers say that interest is bad, why does it even exist today? To first understand why it exists or even how it exists, let’s talk about what it is. Interest, or usury, as it was once called, has evolved over many centuries.

The strictest definition holds that any amount over and above the value lent is considered interest or usury. This applies to many things, not just money, as it is thought of today. It makes sense if you understand how paper money came into existence in the first place. You can read more about the history of paper money. For Muslims, any transaction where a greater value is received than was given can be considered usurious, regardless of a person’s faith or lack thereof. Trade is permitted, but when it comes to lending, it should be treated as an act of charity, and if one returns the principal value, it can be accepted, but if it is made difficult for people, then to forgive or give more time is considered more virtuous. For Judaism, it is generally accepted to charge non-Jewish interest, and some have argued that it can only be justified for non-Abrahamic religious people. In Christianity, loans should be given as charity, and you shouldn’t expect anything in return. To charge interest was considered a sin equal to that of blasphemy or heresy; however, this did eventually evolve into interest being charged in extreme amounts, taking a lax approach. 

So what caused the shift from anything above the principal amount as interest and not usury? The common explanation is that as money was delinked from assets like gold, the idea of money shifted from a productive thing to an unproductive one. As money evolved, so did people’s idea of usury. Interest used to be something that was mainly for the rich as a means to allow them to speculate. However, with the ease of credit, it soon spread to all people. Fundamentally, interest is the cost of borrowing. It may seem logical that the use of the money should cost something, as it doesn’t serve the one lending. However, this is a flawed logic because ultimately we all pay the price of interest in the form of increased prices or inflation. When money, an unproductive good, can earn more, it distorts markets. A normal market dynamic is that as the price of a good goes up, fewer are able to purchase it, effectively limiting the amount of expensive goods. So what happens when you are able to get a loan or credit to purchase that good? The price of something is no longer linked to what someone is willing to pay. It's linked to how much someone can afford to pay based on the principal and interest payments or the loan they can stomach.

Look no further than the housing market. When interest rates go down, the price of housing goes up as people have more spending power. The reverse is also true, although in a looser sense since housing can only go so low before the whole system can collapse. See the 2008 housing market as an example. So we have this relationship where interest drives inflation and inflation drives a greater need for credit—a reinforcing loop of doom. This dynamic is not an accident; this is exactly what economists want. is ultimately rooted in the idea that consumption is the key to economic growth; the more we consume, the more we grow. But it’s not the fault of the economist; it has more to do with politics. A government wants to smooth economic conditions to avoid major downturns because, with downturns, comes political change.

The problem is that economists think they can control market dynamics without distorting them too much. Some may say a little inflation is a good thing, no? Well, that is what the political class wants you to believe, because it is good for them. It is impossible to control inflation in the long run. That is precisely what we see today. The Fed is attempting to control something it has no say in. Governments have set arbitrary inflation rates in order to avoid deflationary spirals. But the sensitivity of markets is caused by this manipulation of the money supply by governments and an overexuberance of credit because every time we see rapidly expanding money supplies in the long run, we see price growth. Thus, we see “always up,” something only seen in environments where interest exists in a positive sense. Governments attempt to reach this balance between inflation and deflation. This is done through the manipulation of interbank lending rates, or what many refer to as fed interest rates. If we eliminated interest all together, many wouldn’t be able to afford most things, but the unaffordability of these things is driven by the freely available credit, or simply something being created from nothing. So while you are able to buy your house on a 30 yr fixed-rate mortgage to make it affordable, it is also the reason you cannot expect to afford it otherwise. Houses in the 1950s cost 7,354 dollars (inflation-adjusted value: 79,063 dollars); today, we can’t even build one for that price. Even if we consider the inflation-adjusted value of 79,063 Dollars, the typical family could afford to buy in just under 8 years if they saved only $1,000 a month. It would take 43 years if we took median home values today and the same savings. That is why it is rational for individuals to buy now with interest, even if it costs them more in the long run. If the inflation rate is greater than the interest rate, it is more advantageous to the buyer. However, again, the rate is the whole reason prices have gotten outrageous. Everyone can buy a home on credit, so no home is affordable.

Interest is damaging to our economy and to all markets. We like to think it’s unreasonable to think an economy can survive without interest, but it is precisely because of interest rates that we need it to survive. They are causally linked. Without interest, there is no natural inflation. It's entirely unnatural to create something from nothing. It robs us at night when we are trying to make more. Our money is like a melting ice cube. The more you hold on to it, the more it melts. So we lend it to a bank in the form of a deposit, who then lends it out to others so they can buy more stuff, and because more people can buy more things at more expensive prices, we need to seek out rates of return, which inevitably increase prices. The cycle feeds itself. Equilibria is only reached by eliminating interest, and people cannot afford to buy what they cannot afford, so our money stays what it is meant to be: a store of value, a medium of exchange, and a unit of account. Not an asset from which we earn. Assets are tangible and useful beyond storage, not pieces of paper that we use to track our wealth. Assets should be productive. Lending is ultimately a charity when someone is in need and should not be a business because when it is, it becomes bad for business. Real assets are productive; money is only productive when it moves; otherwise, it will collect dust and eventually be eaten by rats.