Financial “Interest” is a conundrum.

In the many early writings interest was abhorred: possibly because of abuses of lenders. This was as true for the early Abrahamic faiths as it was Shakespearian times – and indeed well into the 19th century and beyond.

But in the earlier years the concept of (for example) ensuring that savings kept place with inflation – and even allow for some increase so that old age without family cover could be bearable – was not considered to be relevant.

Surely we now consider moderate interest desirable, essential and moral? For otherwise would there be any practical reason for people to lend money so that houses can be purchased, emerging businesses be financed and so on?

One could argue that governments, even in extraordinary times, should not borrow money. That the “man in the street” should not buy a house until he has accumulated sufficient savings in full. Or that businesses should only be financed by self-savings or shareholding.

This paper however accepts the need for moderate interest. But the problems is how “moderate” should be determined and by whom.

The present situation is surely unsatisfactory if for no other reason than that it is, at the best, amoral.

Consider from Yahoo! Answers:-

“..The theory is that a rise in interest rates, and the corresponding limitation in money supply, will “damp down” excess demand and “take the pressure out of market”. The intention is to reduce households’ and firms’ willingness to buy goods and services through making credit more expensive… 

“There is something fundamentally unsatisfactory about this process and the theory behind it.
“There are other mechanisms available to governments to control total demand for goods and services including tax changes and rationing. Since the days of Margaret Thatcher, .. these other approaches have not been used in UK or USA.”

Now at its simplest this leads to the situation that when an economy – national or international – starts growing too fast then the decision is made to hike interest rates. i.e. bluntly to take excess money (interest) from those who have to (or it may be said, do) borrow and puts the high level of interest received into the accounts of those who for whatever reason can and do lend the money.

The concept of – simplistically – getting the less well off to transfer funds to the better off for the sole purpose of correcting national economies is surely immoral?

The problem is that this solution – the use of the interest rate as corrective – is easy to enforce and politically not too damaging. Particularly if the decision to do such can be hived off to central banks so that governments can claim no responsibility for the action.

Of course when this method is used it is even worse when governments are in debt: for they (i.e. effectively us) then pay more for their borrowings and help the lenders to become even better off at the expense of rest of us.

We find it difficult to find any moral case for this rather cavalier use of interest rates simply to satisfy the amoral theories of monetarists. And politicians??

Alternative methods for controlling inflation have been alluded to above. One suggestion, rationing, is however probably too impractical in the modern, global world.

More flexible taxation is however surely worth considering.

We argue elsewhere that taxation is inherently a “good thing”. How then should it be considered for use in this context? Surely yes, because the results are to ask everybody to contribute to a good result: just as they do when using taxation to pay for the police etc.

For if “the intention” (of countering inflation) “is to reduce households’ and firms’ willingness to buy goods and services” then surely the best and quickest way to do such is to transfer “surplus” funds from household and firms to Treasury reserves? Provided that such reserves are used as increasing reserves and/or decreasing government debt: and not used for increased government spending.

Of course there will be objections. Industry likes to plan long. But which does it hate worst? Inflation or short-term tax increases? And the individual / household. Is it better (perhaps he/she might not think so!) to have to cancel a weekend break to the sun because tax has risen – or to allow inflation to damage the rest of their livelihood?

And there are practical difficulties. Various international and national treaties. The semi-sacred annual taxation rating periods.

All these surely pale when precedence if given to the ethics in solving dealing with inflation and similar.

World governments have too long hidden behind the convenience of the monetarist interest usage.

However the problem posed at the start: who is to determine fair interest rates?

Conventionally one would say “the market”. But the market is very largely controlled by the rich and powerful. Now IF these can have ethical considerations are primary in their determinations it may be the best solution.

But if not?