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An interest-free economy or interest free economy is an
economy An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
that does not have pure
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s. An interest free economy may use either
barter In trade, barter (derived from ''bareter'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods ...
,
credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
, or
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
as its
medium of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. Most forms of money are categorised as mediums of exchange, i ...
. Historically, there has been a taboo against
usury Usury () is the practice of making loans that are seen as unfairly enriching the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in e ...
and charging interest rates across many cultures and religions. In some contexts, "interest-free economy" may refer to a
zero interest-rate policy Zero interest-rate policy (ZIRP) is a macroeconomic concept describing conditions with a very low nominal interest rate, such as those in contemporary Bank of Japan, Japan and in the Federal Reserve System, United States from December 2008 t ...
, a macroeconomic concept for describing an economy that is characterized by a low nominal interest rate. The total interest rate typically consists of four components: pure (risk-free) interest, a risk premium, expected inflation or deflation, and administrative costs. In an interest-free economy, the pure interest rate component of the total interest rate would not exist, by definition. Depending on how the economy is structured, the other three components of interest of the total interest may or may not remain, so an interest-free economy does not necessarily have to be free of all types of interest. Banks could still profit from loaning money in an interest-free economy, if they are paid by the administrative costs component of the total interest rate.


Rationale

Freiwirtschaft economist argues that the growth imperative of modern economies is caused by interest burdens on debt, inflation, and opportunity costs created by the existence of interest.
Bernard Lietaer Bernard Lietaer (7 February 1942 – 4 February 2019) was a Belgians, Belgian civil engineer, economist, author, and educator. He studied monetary systems and promoted the idea that communities can benefit from creating their own local or compl ...
and have argued that the existence of interest has negative impacts on
resource consumption Resource consumption is about the consumption of non-renewable, or less often, renewable resources. Specifically, it may refer to: * water consumption * energy consumption ** electric energy consumption ** world energy consumption * natural ...
and the environment. As an example, Lietaer wrote: "When it pays more to cut a tree, sell the wood and let the proceeds earn interest than simply let the tree grow, it is predictable that "economic pressures" will be felt to cut more trees than is optimal from an ecological viewpoint. Stamp Scrip would reverse that process." Interest free economies are usually free of inflation and deflation. There tends to be some interest cost that is built into the goods and services that consumers tend to purchase, so if interest rates are eliminated, then prices are less likely to increase. Interest free economies are often supported for moral and religious reasons. Historically, there has been a taboo against
usury Usury () is the practice of making loans that are seen as unfairly enriching the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in e ...
and charging interest rates across many cultures and religions.


Barter economies

Barter In trade, barter (derived from ''bareter'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods ...
economies are usually free from interest and usury. In Part V of ''
The Natural Economic Order ''The Natural Economic Order'' through Free Land and Free Money (, in short ''NWO''; published in Bern in 1916) is considered Silvio Gesell's most important book. It is a work on monetary reform and land reform. It attempts to provide a solid ba ...
'', the German-Argentine
Freiwirtschaft (German for "free economy") is an economic theory and proposal founded by the German-Argentine economist Silvio Gesell in his 1916 book, ''The Natural Economic Order'' (). Some of the basic economic ideas of Freiwirtschaft were also independen ...
economist
Silvio Gesell Johann Silvio Gesell (; 17 March 1862 – 11 March 1930) was a German-Argentine economist, entrepreneur, and social reformer. He was the founder of (German language, German for "free economy"), an economic model for market socialism. In 1900, ...
wrote a
parable A parable is a succinct, didactic story, in prose or verse, that illustrates one or more instructive lessons or principles. It differs from a fable in that fables employ animals, plants, inanimate objects, or forces of nature as characters, whe ...
featured on the island of Robinson Crusoe as a thought experiment for demonstrating how the existence of hoardable
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
causes the existence of
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s. In the parable, a stranger got shipwrecked on Crusoe's island and persuaded Crusoe to loan him a chest of clothes, a mound of wheat, a plough, a cart, and tools, all free of interest, while Crusoe would be busy building a canal around the mountain for the next three years. The stranger was unwilling to agree to any transaction that involved charging interest to one party or the other for religious reasons. Although Crusoe was initially unwilling to loan the stranger any of these provisions without interest, the stranger reasoned that Crusoe would actually be worse off if he did not loan of any of his possessions at all. If Crusoe did not lend the stranger the
buckskins Buckskins are clothing, usually consisting of a jacket and leggings, made from buckskin, a soft sueded leather from the hide of deer. Buckskins are often trimmed with a fringe – originally a functional detail, to allow the garment to sh ...
in the chest, then no one would regularly air or rub them with grease, which would cause them to become hard and brittle. If Crusoe did not lend the stranger his mound of wheat, then mildew, mice, and beetles would consume the wheat instead. And if Crusoe did not lend the stranger his tools, then the stranger would be unable to build a shed for storing the rest of the wheat. In return for being lent all these possessions without interest, the stranger promised that he would repay the loan at the end of the three years by giving Crusoe fresh buckskins, fresh wheat from the stranger's harvest, and the construction of a shed. In the first footnote, Gesell also considered a different situation where there were two Crusoes living on the island, instead of just one when the stranger arrives. In a situation where there were two or more loan-givers (Crusoes) on the island before the stranger's arrival, and both of them had accumulated stores of capital, there would be a bidding war between the two Crusoes to see who could win the privilege of lending their capital to the stranger, since the losing bidder would see his capital consumed by insects, rats, mold, etc. In the second footnote, Gesell noted that although
Proudhon Pierre-Joseph Proudhon (, ; ; 1809 – 19 January 1865) was a French anarchist, socialist, philosopher, and economist who founded mutualist philosophy and is considered by many to be the "father of anarchism". He was the first person to ca ...
opposed the existence of interest, not even Proudhon realized that lenders benefit even when they loan without interest (in the absence of hoardable money). At the end of the parable, Crusoe asked the stranger what his theory of interest was. The stranger replied: Silvio Gesell concluded from this thought experiment that in order to create a monetary system that is completely free from interest, it is necessary for society to use
demurrage currency Demurrage currency, also known as depreciating money or stamp scrip in its paper money form, is a type of money that is designed to gradually lose purchasing power at a flat constant rate. Unlike traditional money, demurrage is designed to only b ...
, a form of money that cannot function as a long-term store of value. Gesell's theory of interest also later influenced
John Maynard Keynes John Maynard Keynes, 1st Baron Keynes ( ; 5 June 1883 – 21 April 1946), was an English economist and philosopher whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originall ...
's theory of liquidity preference.


Credit economies


Local exchange trading system

A local exchange trading system (also local employment and trading system or local energy transfer system; abbreviated LETS) is a locally initiated, democratically organized, not-for-profit community enterprise that provides a community information service and records transactions of members exchanging goods and services by using locally created currency. LETS allow people to negotiate the value of their own hours or services, and to keep wealth in the locality where it is created. LETS networks facilitate exchange between members by providing a directory of offers and needs and by allowing a line of
interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...
-free credit to each. By Michael Linton's definition, LETS are generally considered to have the following five fundamental criteria: * Cost of service: from the community for the community * Consent: there is no compulsion to trade * Disclosure: information about balances is available to all members * Equivalence to the national currency * No interest


Community Exchange System

The Community Exchange System (CES) is an internet-based global trading network which allows participants to buy and sell goods and services without using a
national currency Fiat money is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, ...
. It may be described as a type of local exchange trading system (LETS) network based on free software. While it can be used as an alternative to traditional currencies such as the
Australian dollar The Australian dollar (currency sign, sign: $; ISO 4217, code: AUD; also abbreviated A$ or sometimes AU$ to distinguish it from other dollar, dollar-denominated currencies; and also referred to as the dollar or Aussie dollar) is the official ...
or
euro The euro (currency symbol, symbol: euro sign, €; ISO 4217, currency code: EUR) is the official currency of 20 of the Member state of the European Union, member states of the European Union. This group of states is officially known as the ...
or
South African rand The South African rand, or simply the rand, (currency sign, sign: R; ISO 4217, code: ZAR) is the official currency of South Africa. It is subdivided into 100 Cent (currency), cents (sign: "c"), and a comma separates the rand and cents. The Sou ...
, the ''Community Exchange System'' is a
complementary currency A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and the ...
in the sense that it functions alongside established currencies. The CES name was coined by an online web service which started in 2003 in
Cape Town Cape Town is the legislature, legislative capital city, capital of South Africa. It is the country's oldest city and the seat of the Parliament of South Africa. Cape Town is the country's List of municipalities in South Africa, second-largest ...
, South Africa, as the Cape Town Talent Exchange (CTTE). From there it spread to 99 countries, with the biggest take-up in Australia, where CES Australia was founded in 2011. This original CES takes the idea of LETS and similar systems a step further by providing the means for inter-community trading; it is a global network of communities using non-monetary exchange systems. The CES is international in scope. It does not have printed money or
coin A coin is a small object, usually round and flat, used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order to facilitate trade. They are most often issued by ...
s but uses computer technology to serve as an "online money and banking system" or alternative exchange system and as a marketplace. It is an advance from an arrangement in which either one good or service is exchanged for another good or service, or commonly called barter, since it uses a digital unit of value (not the same as a
digital currency Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...
). Proponents of the CES argue that it is a superior arrangement because it is free from inflation, deflation, and interest. The CES is also transparent because everybody can see everybody else's balance of credits and debits.


Monetary economies

Silvio Gesell Johann Silvio Gesell (; 17 March 1862 – 11 March 1930) was a German-Argentine economist, entrepreneur, and social reformer. He was the founder of (German language, German for "free economy"), an economic model for market socialism. In 1900, ...
theorized that demurrage currency would lead to an interest-free economy. He believed that demurrage is necessary for monetary economies to operate efficiently without interest rates. Gesell referred to demurrage as ''
Freigeld ( German for "free economy") is an economic theory and proposal founded by the German-Argentine economist Silvio Gesell in his 1916 book, '' The Natural Economic Order'' (). Some of the basic economic ideas of Freiwirtschaft were also indepen ...
'' 'free money' — "free" because it would be freed from hoarding and interest. If the liquidity preference theory of interest rates is correct, then interest rates would disappear when money cannot be used as a long-term store of value, so demurrage money would theoretically have no interest rates. Under a demurrage monetary system, banks would be incentivized to loan money to avoid paying demurrage fees. This new incentive would lead to a further incentive for bankers to lend demurrage money without charging
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s, in order to reduce the disincentives for borrowers to borrow demurrage money. Borrowers would also be incentivized to use the demurrage money as soon as possible before the purchasing power decreases due to demurrage. Since demurrage money would theoretically increase the velocity of money, eliminate interest rates, and lower the
opportunity cost In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...
s to borrowing
credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
, demurrage money could theoretically lead to greater economic efficiency and prosperity.


Zero interest-rate policy

In some contexts, "interest-free economy" may refer to a zero interest-rate policy. A zero interest-rate policy (ZIRP) is a
macroeconomic Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/ GDP ...
concept describing conditions with a very low
nominal interest rate In finance and economics, the nominal interest rate or nominal rate of interest is the rate of interest stated on a loan or investment, without any adjustments for inflation. Examples of adjustments or fees # An adjustment for inflation (in contr ...
, such as those in contemporary
Japan Japan is an island country in East Asia. Located in the Pacific Ocean off the northeast coast of the Asia, Asian mainland, it is bordered on the west by the Sea of Japan and extends from the Sea of Okhotsk in the north to the East China Sea ...
and in the
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
from December 2008 through December 2015 and again from March 2020 until March 2022 amid the
COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...
. ZIRP is considered to be an unconventional monetary policy instrument and can be associated with slow
economic growth In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...
,
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...
and deleverage.


In religious contexts


Judaism

Jews are forbidden from usury in dealing with fellow Jews, and this lending is to be considered
tzedakah ''Tzedakah'' ( ''ṣədāqā'', ) is a Hebrew word meaning "righteousness", but commonly used to signify ''charity''. This concept of "charity" differs from the modern Western understanding of "charity". The latter is typically understood as ...
, or charity. However, there are permissions to charge interest on loans to non-Jews. Several historical rulings in
Jewish law ''Halakha'' ( ; , ), also transliterated as ''halacha'', ''halakhah'', and ''halocho'' ( ), is the collective body of Jewish religious laws that are derived from the Written and Oral Torah. ''Halakha'' is based on biblical commandments ('' mit ...
have mitigated the allowances for usury toward non-Jews. For instance, the 15th-century commentator Rabbi Isaac Abrabanel specified that the rubric for allowing interest does not apply to Christians or Muslims, because their faith systems have a common ethical basis originating from Judaism. The medieval commentator Rabbi David Kimchi extended this principle to non-Jews who show consideration for Jews, saying they should be treated with the same consideration when they borrow.


Islam

The following quotations are English translations from the
Qur'an The Quran, also romanized Qur'an or Koran, is the central religious text of Islam, believed by Muslims to be a revelation directly from God ('' Allāh''). It is organized in 114 chapters (, ) which consist of individual verses ('). Besides ...
: The attitude of Muhammad to usury is articulated in his Last Sermon:


Christianity

The
Old Testament The Old Testament (OT) is the first division of the Christian biblical canon, which is based primarily upon the 24 books of the Hebrew Bible, or Tanakh, a collection of ancient religious Hebrew and occasionally Aramaic writings by the Isr ...
"condemns the practice of charging interest because a loan should be an act of compassion and taking care of one's neighbor"; it teaches that "making a profit off a loan is exploiting that person and dishonoring God's covenant (Exodus 22:25–27)". The first of the scholastic Christian theologians, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. St.
Thomas Aquinas Thomas Aquinas ( ; ; – 7 March 1274) was an Italian Dominican Order, Dominican friar and Catholic priest, priest, the foremost Scholasticism, Scholastic thinker, as well as one of the most influential philosophers and theologians in the W ...
, the leading scholastic theologian of the
Roman Catholic Church The Catholic Church (), also known as the Roman Catholic Church, is the List of Christian denominations by number of members, largest Christian church, with 1.27 to 1.41 billion baptized Catholics Catholic Church by country, worldwid ...
, argued charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. Outlawing usury did not prevent investment, but stipulated that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all, which is usury. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out, for example, any fair administrative charges. The Catholic Church, in a decree of the
Fifth Council of the Lateran The Fifth Council of the Lateran, held between 1512 and 1517, was the eighteenth ecumenical council of the Catholic Church and was the last council before the Protestant Reformation and the Council of Trent. This was the first time since 1213 t ...
, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as " montes pietatis". In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral. The most important of these was ''lucrum cessans'' (profits given up) which allowed for the lender to charge interest "to compensate him for profit foregone in investing the money himself". This idea is very similar to opportunity cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of ''lucrum cessans'' profits (for example, Pierre Jean Olivi and St. Bernardino of Siena). However, Hostiensis' exceptions, including for ''lucrum cessans'', were never accepted as official by the Roman Catholic Church. The
Westminster Confession of Faith The Westminster Confession of Faith, or simply the Westminster Confession, is a Reformed confession of faith. Drawn up by the 1646 Westminster Assembly as part of the Westminster Standards to be a confession of the Church of England, it becam ...
, a confession of faith upheld by the
Reformed Church Reformed Christianity, also called Calvinism, is a major branch of Protestantism that began during the 16th-century Protestant Reformation. In the modern day, it is largely represented by the Continental Reformed Christian, Presbyterian, ...
es, teaches that usury — defined as charging interest at any rate — is a
sin In religious context, sin is a transgression against divine law or a law of the deities. Each culture has its own interpretation of what it means to commit a sin. While sins are generally considered actions, any thought, word, or act considered ...
prohibited by the eighth commandment. The Roman Catholic Church has always condemned usury, but in modern times, with the rise of capitalism and the disestablishment of the Catholic Church in majority Catholic countries, this prohibition on usury has not been enforced. The Congregation of the Missionary Sons of the Immaculate Heart of Mary, a Catholic Christian
religious order A religious order is a subgroup within a larger confessional community with a distinctive high-religiosity lifestyle and clear membership. Religious orders often trace their lineage from revered teachers, venerate their Organizational founder, ...
, teaches that:


Notes


References

"LETSystems Training Pack", (1990) W.A. Government. {{reflist


Further reading

* Full text o
''The Natural Economic Order''
Interest Banking Debt Credit Renting Mutualism (movement) Freiwirtschaft Broad-concept articles