I felt compelled to respond to a group email, of which I was a recipient, contending that it is immoral to receive interest on any type of loan. My argument is simply that people place a premium on present goods over future goods. No one would pay the same amount for title to an apple 10 years from now as for an apple today. The two goods are not equally serviceable to him. But if we pretend there’s no premium on present goods, we would be willing to pay the same amount for both. We would be willing to pay an infinite amount for land, since the temporal dimension of the flow of services it yields us would not be discounted to correct for their distance from us in time. And as Gary North says: if we ignore the premium on present goods, then if presented with a mine that can yield its 1000 ounces of gold one at a time each year for one thousand years, we would be willing to pay 1000 ounces of gold for that mine. But only a fool would do so.
If all this is true, then the justice of interest payments follows naturally. It would be unjust to expect me to treat an apple today and an apple 10 years from now as if they were the same good. Well, likewise, if I borrow 50 cents today (to buy an apple, say) and 10 years from now I repay 50 cents (assuming away inflation), I have not in fact repaid what I borrowed. I borrowed a present good and repaid a good in the future. As we have seen, no one values these things the same. Therefore, strict justice demands that my principal payment be accompanied by interest.
(Note that I leave out other factors: risk, the temporary illiquidity of the lender, etc., that might also justify interest payments.)
4:40 pm on March 12, 2011
