Some Reflections on Interest
September 21, 2009
By Siegfried Finser
In my book, Money Can Heal, I mention discussions on the subject of “interest” by the early founders of RSF Social Finance. Perhaps it would be helpful if I shared the gist of those founding conversations.
At the time, we (along with other Rudolf Steiner-inspired banks around the world) read an interesting pamphlet by Margrit Kennedy. The author described the consequences interest has had on all of us, and instead pictured an interest-free world. Interest is charged by those having means, or at least by those who had enough wealth to lend to others; as a result, the costs of almost everything everybody needed – electricity, water, fuel, transportation, and machines – increased. One statement in the article was that about 90% or more of the cost of all those things was debt service. From her perspective, all of humanity was being charged an interest that benefited only those who already had enough resources to lend. The conclusion was that “interest” was bad since it burdened everyone to support the few who were wealthy.
I remember us pondering that issue. We considered how the Islamic world viewed interest. Was charging interest inherently evil regardless of whether it was usurious or not? Would the world be better off if we did not charge interest and simply loaned money to those who could make better use of it? Should RSF Social Finance offer investment accounts that paid no return – only the satisfaction of knowing the money was doing good work?
The GLS Bank in Bochum, Germany actually offered certain socially constructive accounts that paid no interest. We might have continued examining different schools of thought and discussing the question of interest for months had we not engaged in some practical transactions. Presented with the task of financing our first project, we needed capital and so we began conversations with prospective investors.
One potential investor wondered whether his investment would gradually diminish and eventually disappear due to inflation if he received no return whatsoever. The reality of this situation suggested maybe some interest was necessary to protect the investor.
Another one of the earliest investors was a retired Waldorf school teacher. He wanted his savings to help Waldorf schools as well as other worthwhile projects. Being of modest means, he needed the interest income for his daily expenses. If we did not charge interest, he could not afford to invest in our worthy causes. We wanted to make sure that people with various levels of income could invest in good work.
These examples influenced our ultimate decision. We began by charging and paying modest interest based on an accepted U.S. federal benchmark. Even though zero interest might be better for the world in the long run, we opted for “freedom.” We felt the question of interest needed to be decided by each person depending on his or her situation and motivation.
If we left it to the individual, then we were counting on something altruistic developing in each person which, in time, could possibly lead to an interest-free world. We supported individual freedom and trusted in the unfolding consciousness in every human being.
We wanted RSF Social Finance to offer every individual the opportunity to act of their own free will for the benefit of others. In other words, we needed to make visible opportunities for giving as well as lending/borrowing.
RSF would pay a modest return to every investor, charge a modest interest to borrowers, and make transparent a modest fee to support operations. As RSF grew in size and complexity, we replaced the fee with a more traditional spread between the interest rate paid to investors and the interest charged to borrowers in order to keep the organization financially sustainable.
To achieve our long term mission of advancing human consciousness, we decided that we would use every lending/borrowing transaction and every giving/receiving transaction to transform how the world viewed and worked with money. This required continuous work to educate our clients about the way that we functioned.
Sure enough, over time, some investors needed their interest for daily living expenses, while others just took it for whatever reason; still others let it accumulate in their accounts, or phoned or wrote us that they wanted some or all to be given to a special project that seemed important to them.
That was how RSF was conceived as a threefold organism: to make transparent the social/spiritual nature of (1) every lending/borrowing transaction and (2) every giving/receiving transaction. A third aspect of our work was advisory and educational activity that would encourage the development of humanity toward social altruism.
Is interest good or bad? Like most things in life, interest (and money in general) can contribute to both good and bad depending on what is done with it. In those early days of RSF, we decided our task would be to facilitate meaningful transactions and to educate investors and borrowers on the social and spiritual consequences of their financial activity. Twenty-five years later, this impulse remains at the core of our mission to transform the way the world works with money.
Siegfried Finser is a Trustee and Co-founder of RSF Social Finance. He is the author of the book Money Can Heal. To read a recent Reimagine Money blog post about RSF’s current thoughts and practices around interest rates, click here.
- Published by Jillian McCoy
- Categories: Economy, Education & Arts, Giving, Investing, Lending, Money, RSF Board & Staff, Social Finance, Steiner
A deeper solution to the fascinating question of interest may come with an understanding of the 670 year old double-entry book-keeping framework of rules.
For the past 30 years or so there has been a near total focus on The Balance Sheet Report. A Balance Sheet reports rights to ownership of entity’s assets.
The other primary report that the book-keeping framework supplies is the Statement of Profit [loss]. Over the past 30 years, the technology that built the worlds industrial base, which centered on a deep cost accounting, which is reported in The Statement of Profit [loss] has been largely abandoned.
The Balance Sheet differs from the Statement of Profit [loss] as a hierarchy of control differs from a network of producers. If we were to return to a focus on the network of producers that naturally occur in the production of Profit [loss] as value, parties interested in repairing the damage that excessive interest doing to cultural life would be pleasantly surprised.
The cost accounting that was essential to Industry 50 years ago was a difficult task to do well. Only the best got it correct. Should deep cost accounting be programmed into computer software — which to my knowledge has never been done other than a prototype that I have build showing it can be done — our culture would see a near perfect solution to fair and equitable interest management.
I have read Mr. Finser’s book Money Can Heal. His philosophy would easily translate into a deep cost accounting program with surprising results.
Comment by Dan Palanza — October 6, 2009 @ 8:03 am
When I was on the board of the Homer Morris Loan Fund (nurturing businesses based in intentional communities) we loaned at no interest, but added an inflation surcharge based on the Consumer Price Index. This was in the 1970′s.[The HM fund was transferred to Fellowship for Intentional Communities in the 1980′s). As inflation surged we capped the surcharge at 9%. Within my family individuals have loaned to each other, charging 5% and then returning the interest as an annual gift. The IRS is very suspicious, I understand, of “interest free loans” in the for-profit world.
Comment by Don Hollister — October 6, 2009 @ 8:22 am
What a fascinating topic. Yes, a return to accountability in book-keeping is long overdue. When reading the news yesterday and learning that companies like Goldman Sachs stand to make ridiculous amounts of money on failing businesses, that they over leveraged–while also hedging against them–makes it apparent that a new approach is desperately needed. I can only imagine the negative impact on the lives of all those people who work in those soon to be bankrupt companies. Combining a “true” double entry book-keeping system with a sensible approach to managing interest, sounds like a win-win approach to me.
Comment by Laurie Iseman — October 6, 2009 @ 3:28 pm
I have read Money Can Heal. I am currently reading The End of Money by Thomas Greco. He suggests that our current system is a usurpation of what is a credit commons belonging to all created by what each individual brings as value to the greater society. The large banks create money when they loan it and then charge interest. His argument is that the money to pay back the interest is not created by the loan so there is always an insufficient supply for everyone to pay back his/her loan with the interest. In addition, the monetization of government debt creates money that has no associated value and is thus inflationary and functions like a hidden tax on ordinary people. The whole system seems to me to be cancer like and is actually anti life and anti peace.
I am interested in how ordinary people can work to empower themselves and disempower this larger system. I see how RSF through loaning, for example, at a reasonable rate to a group of people who want to start a Waldorf School is empowering community. I agree that most things can be positive or negative or perhaps both but it seems that the overwhelming effect of our current system is negative.
Comment by Kent Magner — October 6, 2009 @ 11:12 pm
What stimulating comments by Kent Magner and Laurie Isaman. It is interesting to note how conscious we are all becoming of the short comings in our financial system as well as in ourselves as humans gradually maturing to take responsibility for our future and that of the earth.
The comment by Dan Palanga about “deep cost accounting” is very interesting. What it would do of course, is create a great deal more transparency. It may not fix the whole problem because its roots are in human motivation and intentionality, but it would make visible the causes of our ills and effects on social life in general. As a result it might actually stimulate corrective action by some if not all. So much depends on the development of human awareness of the worldwide community of which we each are a part. I like the quote from Steiner, known as the Motto of Social Ethic:
“The healthy social life is found
when in the mirror of each human soul
the whole community finds its reflection,
and when in the community
the virtue of each one is living.”
The reason RSF Social Finance also focuses on Education, particularly Waldorf Education is to allow what is born as a healthy relationship to all there is in a life to develop supported by the curriculum and the colleagueship of caring teachers.
In the long run systems can be very helpful if they support a “healthy social life’ but we humans need to develop beyond egoism to a spirit of world wide altruism. Both you and I will be around again and again to help bring it about.
Loved the comments by Don Hollister. It is so great when individuals and organizations work on this problem. Even if success seems illusive, nothing is ever truly lost as we all struggle to bring about a better future.
It seems we have more and more colleagues coming out of the woodwork! Where have you been?
Comment by Siegfried E. Finser — October 7, 2009 @ 3:46 pm
Kent Magner:
“I am interested in how ordinary people can work to empower themselves and disempower this larger system. I see how RSF through loaning, for example, at a reasonable rate to a group of people who want to start a Waldorf School is empowering community. I agree that most things can be positive or negative or perhaps both but it seems that the overwhelming effect of our current system is negative.”
Hi Kent,
Ordinary people will empower themselves with a full understanding of double-entry book-keeping. Double-entry book-keeping is a 670 year old language; it is the de facto language of commercial trade worldwide. It has been refined a number of times in those years to keep abreast of increasing cultural complexity. However, that said, it does not mean that the double-entry language is being properly implemented today. Its books are being fudged by today’s banking sector, similar to how the books at WorldCom and Enron were fudged in the past. The problem is that our leadership, which includes accountants, auditors, and economists do not understand the language as it is being applied incorrectly in today’s software.
Most business users are honest and manage to intuitively keep a correct set of books. But if a company wants to fudge the books today they easily can as Enron and WorldCom demonstrated, and that the present financial services sector is doing on a grand scale. Book-keeping, therefore, as language science, is fundamental to today’s complex culture. Because it is hidden in software code, we have a situation where even accountants and auditors do not understand the rules of the language. When banks mix gambling with investments, then our book-keeping is being fudged on a grand scale. And they are gambling today on a grand scale.
I have been studying double-entry book-keeping for the past 30 years. (I learned the basics of the language 50 years ago on an apprenticeship at the General Electric Co in Lynn MA.) The double-entry language of the quality used in industry 50 years ago has never, to my knowledge, been programmed into computer software in its complete form. Most accountants and merchants are honest persons and do manage to keep honest books. But what passes for book-keeping today in the giant banks our government has created over the past 30 is a complete fraud.
The only way that you or I, as “ordinary people” will disengage this fraud within our midst is by learning how the proper double-entry framework insures honesty in a complex culture like ours is to learn how it works and teach it to our leaders. That leadership today is truly lost in the wilderness.
Comment by Dan Palanza — October 8, 2009 @ 2:59 am
I’ve had an opportunity to be exposed to the work Dan Palanza has been doing in the area of book-keeping. I’ve also had a chance to read Siegfried’s book. I am impressed with the match between Dan’s book-keeping framework incorporates concepts of mind, body, and soul that Siegfried’s book links to financial transactions.
Earlier versions of Dan’s software prototype have been used by the employees in the running of a small restaurant. He reports that the way people interacted and worked with one another were affected by the book-keeping system itself.
I have great hope for the work Dan is doing and suspect that many new realizations about financial transactions (and other types of transactions) will be made more clear once the algorithms he employs can be more deeply understood and studied.
Comment by Andrew Maffei — October 9, 2009 @ 8:08 am
Dan, where can I read more about the double entry bookkeeping that you refer to? Is this system capable of bringing social and environmental costs into the equation, as well as recognizing when the means of production and the resources have essentially been stolen by the powerful?
Comment by Kent Magner — October 10, 2009 @ 12:19 am
I do wish I understood bookkeeping and accounting better. Here I want to make some simple comments on interest. Interest can have a rightful place. It is important when one makes a loan to know what one intends with this loan for oneself and the other, and to be awake to what the consequences are for the flow of money in society with the specific terms of the loan agreement. In earlier times people borrowed from each other and there was no interest and instead as Sigfried Finser says in his book there was reciprocity or a favor. I borrow from you and at another time you borrow from me. This is in fact a type of bartering. A gallon of milk for a loaf of bread. As the concept of money developed and it became a means for acquiring the milk without having to give a thing in return or turned around giving the milk and not having to acquire the bread of the baker in return, the element of freehood entered into the interaction. With the money the seller could buy whatever he wanted whenever he wanted with that amount of money. Interest took the place of reciprocity or the favor. In the economic realm money can be used to invest in an enterprise which will create something to sell, which in turn can make a profit. This enterprise sells something that theoretically serves the needs of the community. Money is then created with the profits and part of this money created goes toward the interest on the loan which formed the basis for starting the enterprise. The investor is part of the team creating the new enterprise and thus shares in the profits. Lending money can create money and thus creates money for the interest. If one lends without interest it is in fact more of a gift and one must be conscious of what this means and what purpose a gift has in the social realm. And one must clearly separate the course and purpose of money in the economic realm and the cultural realm. The evils that are now associated with interest must be addressed and corrected. First using the barter analogy one can not barter a loaf of bread rightfully for a milking cow. It is an unbalanced deal and leads to unhealthy imbalances in any society and exorbitant interest rates are just that. However when the interest is equivalent to the loaf of bread for the gallon of milk then both parties have their respective needs served but with the freehood that money allows. Money of sorts dies when one uses it to consume so if one buys a product of consumption with money borrowed with interest, the interest money is also killed and will not have the enlivening place that money with interest has when used to produce something. We must be very awake when we seek to borrow: are we asking for a gift or a business partner, are we recognizing the rightful needs of the lender, are we using the borrowed money to create new money; where is the money coming from that we pay the interest with? And when we are the lender: do we want to gift or a business partner; are we recognizing the rightful needs of the borrower; where is the money going in the society when we make a specific loan? So interest can be healthy when a loan is used to create production or serve the needs of the lender/borrower. No or little interest can be healthy when it is understood as the gift it is. Interest used to consume means that the society must somewhere else create enough money for the death of that money. Money with interest that buys money with more interest bundled up or alone is very unhealthy.
Comment by Dorothy Hinkle-Uhlig — October 12, 2009 @ 10:03 am
Hi Kent,
You ask, “Dan, where can I read more about the double entry bookkeeping that you refer to?”
I am presently writing a book titled Dr. Einstein’s Book-keeper. However, do know that book-keeping is a very tough topic to write up because the story tells of moving a paper driven book-keeping method of 50 years ago onto a computer in a way that faithfully produces a highly refined Industrial Framework that was then in use prior to computer systems. What passes for book-keeping today is a serious fraud relative to book-keeping’s truth. That said, many persons still do an honest accounting with weak book-keeping software. However, the ones who want to cheat, or to use the inferior software to make a bank into a gambling casino can do so with complete freedom, as auditors and accountants cannot properly trace the fraud. Today’s book-keeping software is a far cry from the book-keeping that was practiced in the 1950 and 60s.
The difficulty in telling the story to you is that both the rules of a proper book-keeping framework and the rules of software that drive the proper framework are deeply abstract. Dr. Einstein’s Book-keeper will compare book-keeping patterns to well known patterns in science history. My goal for the book is to connect with scientists, particularly physicists that study thermodynamic theory. Commercial trade is a thermodynamic system. In place of “work” versus “heat” in thermodynamic transformations from one energy state to the other, the book-keeper uses terms like “cash” versus “capital” and “Assets” versus “Liability.” The patterns in thermodynamics and book-keeping are the same.
Where cash measures the value of work, as artifacts in trade, capital expresses the rights to ownership in exchange. Ownership is an intellectual decision that when performed well in the marketplace, the intellectually contributed information adds value of a different type than the work. Holding the two types separate is the reason that book-keeping enters data twice, once for the work value and once for the ownership rights.
And so let me say that it is near impossible today to find literature that tells the story of a proper book-keeping framework.
Since Mr. Finser has taken a deep and diversified interest in financial matters in his book, perhaps his organization can provide an online forum where book-keeping and accounting can be discussed by persons typical of those who have commented on his essay.
You then ask: “Is this system capable of bringing social and environmental costs into the equation, as well as recognizing when the means of production and the resources have essentially been stolen by the powerful?”
Yes. Book-keeping delivers two fundamental reports: (1) The Statement of Profit [loss] and (2) The Balance Sheet. Since the computer took control of accounting we have become a society that puts a huge focus on The Balance Sheet, and very little focus on The Statement of Profit [loss]. Plenty of focus is placed on “profit,” of course, but there is much more to The Statement of Profit [loss] than the final number that appears on the bottom line.
Profit [loss] data focuses the network of contributors that make entity’s business operations profitable. It is only at a deep level of detail does the Profit [loss] report enable one to know who, what, where, why, and when the profits are being earned. Current book-keeping software near completely ignores “deep cost accounting” details.
And, yes, of course, the social and environmental costs can be taken into account with a proper book-keeping framework of rules. And the most important point of all, is that as effective as the Industrial Model was 50 years ago, once the integrity of that model is programmed into a proper computer driven framework, the gains in the effective reporting of facts is many magnitudes more concise and capable than the paper driven system was back then. Finally, yes, this proper framework will place in open view what is being stolen today not only by large financial operators, but buy the ignorance of our President’s financial team. (I was a strong contributor to the Obama Campaign. But his financial team is failing to deal with corrupt financial practices that must be corrected if we are to return to the nation I grew up in.)
Dan
Comment by Dan Palanza — October 12, 2009 @ 12:35 pm
Hi Dorothy,
Your comments are filled with common sense issues. I look forward to a future forum where these questions can be discussed in detail.
Dan
Comment by Dan Palanza — October 12, 2009 @ 12:37 pm