David Boyle

Does money have original sin?

Green Futures - November/December 2002

A century ago or more, music hall audiences would dab their eyes at the end of the song My Old Dutch - "we've been together now for 40 years/ And it don't see a day too much" - watching the elderly couple separate forever into the Men and Women's entrances of the workhouse.

Pensions may be going through one of their periodic crises - but the whole principle of compound interest and its magical effects on our retirement is one of the primary reasons we don't have to watch scenes like that any more.

Because of this, you would think the way money earns interest might be a blessing to humanity rather than a curse. Yet there's a growing number of thinkers who are increasingly questioning the idea - a fundamental tenet of the whole financial system - and doing so in the name of sustainability.

Of course, the question of whether it's right to charge interest has exercised moralists almost since the invention of money. Both Christianity and Judaism decided centuries ago that the injunction against usury didn't rule out a reasonable percentage - though Islam sticks to the original interpretation. See the Koran chapter 2, verse 278, for the full flavour.

But concern has also been growing from the green end of the political spectrum - thanks partly to the popularisation of a rather frightening statistic by the German architect and environmentalist Margrit Kennedy.

A penny invested at average rates of interest at the time of Christ, she wrote in 1988, would have been worth a ball of gold equal to the weight of the earth by 1750. It would now be worth nearly 9,000 similar balls of gold.

The economic necessity and the mathematical impossibility create a contradiction which - in order to be resolved - has led to innumerable feuds, wars and revolutions in the past," she wrote.

This is scary because that kind of growth is clearly beyond the capacity of the planet - and that's the issue for anyone interested in sustainability.
One leading multinational in the 1970s used to issue senior executives with underpants marked '20% ROI' - reminding them every moment they put their legs through the holes that everything they did must make a 'return on investment' of at least a fifth extra.

And since most of the money in circulation is created in the form of loans from banks, then nearly all money - except the cash in the our pockets - carries with it this burden. It nearly all has to be paid back some day, plus something. That's not how nature works, goes the argument. No wonder the eco-systems are overloaded.

But it's worse than that, because nature actually goes in the other direction altogether. The raw materials that money used to be based on - the pound lost its last connection with gold in 1931 - actually tend to decay not grow. The ancient Egyptians had a money system that recognised exactly this. They would put their grain in a barn, in exchange for a tally stick - like the ones the medieval exchequer issued - and use the stick as money.

But while they did so, the value of their savings wouldn't increase, as ours do. Quite the reverse - the rats would eat it and it would go mouldy, and as the weeks went by, it would be worth rather less than it was before. And as a result, it would be sensible to spend the money quickly into the economy, rather than keeping it lying around in savings accounts collecting the opposite of interest.

You might well say this is all mildly diverting but irrelevant in the modern age. And you might be right, were it not for the fact that one of the fastest growing sectors of financial services is based on the very same idea - that charging interest is actually 'sinful'.

There are now more than 200 Islamic financial institutions spread across the Middle East, with more in the Far East, controlling assets of around $200 billion and growing at around 15 per cent a year. It's a whole other economy that doesn't charge interest when it lends money, but takes an equity stake instead. The difference is that money invested in an Islamic bank keeps working in the 'real' economy. And if you invest in a business that doesn't make money, then neither do you.

It's true that when it comes to getting a bank loan for a car, the difference between equity and interest can be pretty wafer-thin. But in the details, Islamic finance means that money grows by growing things or making things. It doesn't grow all by itself, making money out of money. It also flies in the face of conventional economics by putting religion at the heart of financial decisions.

"If someone is using an Islamic Bank it doesn't mean that he is guaranteed to be moral," Saiful Azhu Rosly, economics professor at the Malaysia International Islamic University warned the investment magazine Fortune. "Good Muslims are still tempted by the devil."

This is true - but, like other kinds of ethical investment, Islamic finance is based on a different kind of world view from the simple bottom line. Islamic economics emerged in the 1940s - no more than an idea until the oil boom of the 1970s and the problem of investing that new Arab wealth. The first Islamic development bank opened in the Gulf in 1973.

Now it's big business. Even HSBC and Citibank have opened Islamic operations in the Gulf - and HSBC offers Islamic mortgages in New York. There's a Dow Jones Islamic index. Malaysian banks have even started issuing Islamic bonds, much to the horror of some Islamic scholars.

In the UK, things are moving more slowly. Only the United Bank of Kuwait offers Islamic banking products, and the half a million Muslim households here have to wait for the resolution of the remaining regulatory issues to be sorted. They are finally talking to the Bank of England about it, after a bizarre meeting about community banking that brought Sir Eddie George and Muslim community leaders face to face at the Whitechapel Art Gallery in 1998.

And if the multiplication of money with interest threatens the sustainability of the planet, then it follows that interest-free money is more sustainable. The corporate responsibility movement haven't yet taken the problem of interest on board yet - but there are signs that they might.

The Scandinavian JAK Bank provides start-up and mortgage finance without charging interest, often for environmental business. Again, British credit unions are stuck with the old system, because UK legislation actually sets down the amount of interest they have to charge. JAK stands for Land Labour Capital in Danish, and dates from the Great Depression, and was one of Denmark's 20 biggest banks in the 1960s before high inflation took it by surprise. A new JAK has been growing steadily in Denmark and Sweden since the 1980s.

JAK originally went even further, launching a series of non-interest bearing currencies in Denmark, backed - not by the national debt, like the pound - but by the value of farms. By the mid-1930s, JAK notes accounted for over one per cent of the notes in circulation in Denmark.

They were borrowing the ideas of a once-influential Argentinian trader, Silvio Gesell, who - in 1913 - designed a new kind of money that would imitate nature rather than grow unnaturally with interest. His money would 'rust', he said. People would have to buy a small stamp every month for the notes to keep their value.

Gesell didn't have a successful time of it. He was tried for treason in Germany for agreeing to be finance minister of the revolutionary government of Munich in 1919, and he died just before Keynes started praising him and his ideas were put into practice.

But when they were, in the Depression-hit Austrian town of Worgl, they were dramatically successful. To avoid the expense of stamps to stop their notes 'rusting', people paid their local taxes for years in advance and Worgl was able to carry out a series of major projects that kept people in work. Gesell's ideas attracted the attention of one of the most famous economists in the world, Irving Fisher from Yale University - who had himself lost an absolute packet in the Wall Street Crash after assuring everyone that it wouldn't happen.

Irving Fisher's book Stamp Scrip popularised Gesell and meant that the currencies spread all over Depression-hit North America - often all that kept some communities alive when their conventional banks had shut down. But faced with a crisis of confidence in conventional money, Franklin Roosevelt shut them all down in 1933, and Europe followed suit.

And that was that for Gesell. Until now, seven decades later, when the question of interest is beginning to edge its way back onto the agenda. In July, Labour MP Austin Mitchell put down an early day motion in the House of Commons calling for the Bank of England to create a tranche of interest-free money - at a stroke of the pen rather than borrowed from commercial banks in the usual way.

He and the other signatories want the money used instead of private investment in the London underground - and it would save the 30 per cent of the money that would go to lawyers and financiers in the PPP model. Mitchell has been vice-chairman of a ginger group called the Forum for Stable Currencies, which has been meeting monthly in the House of Lords since 1998.

So he isn't a lone voice outside the Islamic world, but he nearly is. And the chances are that he will remain so for the time being. Though a new non-interest ethical sector, based on the JAK model, may well join the Islamic banks. It isn't even clear yet whether charging interest is overwhelmingly bad in all circumstances. But we can expect more non-interest experiments and a much wider debate - as environmentalists ask themselves if there isn't a basic flaw at the heart of the money system that powers unsustainability.

Because if there is, something is going to have to be done about it - and it maybe that the Islamic scholars have at least part of an answer.


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title: books by David Boyle
Broke Voyages of Discovery Money Matters Blondel's Song Leaves World to Darkness The Little Money Book Funny Money The Tyranny of Numbers