ONE OF THE THINGS that I love about Scotland is our cultural tradition of thinking creatively. We seem to be blessed with a distancing that is not available to more urbanised communities living with more pressing overheads than us.
I was reminded about this when I saw commentary suggesting an independent Scotland might choose to ban compound interest. I suppose the driver for this is from the other form of Scottishness; stout Presbyterian Calvinism, which when let loose among small town thinkers produces a form of thoughtless totalitarianism. It’s a trend a lot of us watching the antics of the SNP find deeply troubling.
However, there is a long Islamic and Christian tradition that is against making money from money; Jesus drove out the money-changers from the temple in Jerusalem, calling it a den of thieves. A condemnation of usury driven by the sin of avarice is a perfectly reasonable moral stance.
In the post-Scottish enlightenment world, however, hellish punishment for the wages of sin should really be replaced by discovered logic based on evidence. Liberality in actions in this tradition should be presumed until a coercive harm is collectively agreed; objective law is then designed to constrain damage by some on others, using blind justice applying to all as its means of control.
Those who feel morally revolted by usury are free to choose not to engage, as Polonius in Hamlet tells us “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.” but what interests me is why some feel it necessary to act to constrain others. Jesus turned over the tables in the temple to eject money-traders and merchants, but he did not say they should stop trading.
We are back here to the intrinsic totalitarianism of leftist thinking.
Something tells them it is not a good thing to make money from money. Some would point to a Utopianism that leads to socialists ignoring all natural incentives in favour of high moral aspiration.
The fact that compound interest applied by a lender provides a geometric ratchet on borrowers that constrains over-indulgence is ignored.
The fact that savers are able to lend a surplus, thereby made unavailable to them for their own purchases, and use re-invested interest to extend that personal parsimony for the benefit of borrowers is ignored.
The pragmatic evidence that compound interest actually works within human self-interest incentives is thereby discarded.
The lens used by the left here is more subtle; it lies in their fetish with egalitarianism. For them, it is de facto wrong that one person can gain at the expense of another. Society must be organised to engineer social justice through enforced equity. The use of money must therefore be designed by them; totalitarian control matters.
The error here lies in their view of what is meant by “money”. Traditionally, economists offer money as a medium of exchange and/or a store of wealth. For the modern world, these definitions are extremely limiting because these uses of “money” can now be realised in so many ways, from plain vanilla savings accounts, through instant share dealing accounts, to millisecond trading in derivative options.
In that sense, modern money has a multitude of exchanges and storage methods, surrounded by an information system that lubricates exchanging and storing through varying timescales and understandings about present and future value. A shorthand way of describing “money” in modern society is to call it a capital liquidity spectrum based on dispersed knowledge.
A simplistic view of “money” as cash is useless as a policy tool if it provides no basis for policy decisions. Any policy action will be so crude – e.g. banning compound interest – that it will not work and almost certainly create unintended adverse outcomes.
Why am I so pessimistic? Because any policy applied without real knowledge of the human relations that it impinges on will create unintended consequences. In money markets these can be very large. A great deal of wealth can be destroyed, wealth that can be shared. 100 per cent of zero, is zero after all.
The left always have a blind spot when it comes to money, which they see merely as cash. Cash is important to them in their limited egalitarian world, they are famous for squandering it, spending too much of it (often on themselves) and denying others they don’t like from having it. More fool them, when those they are attempting to control do not see “money” as cash; but an information tool for identifying and evaluating enumerated contractual arrangements that create future value.
And this is where the real damage can be done; anyone who interferes with those numbers risks traders not just leaving the temple – but going somewhere outside the jurisdiction of the controllers. That’s why we have tax havens, and tax dodges, and complex toolsets that preserve capital. It’s not greed for wanting more that drives these decisions; it’s the fear of loss through arbitrary prejudicial confiscation. Socialism makes everyone poor through its blind aspiration because it forgets that imposing equality is always deeply unfair to some.
Paradoxically, if creative Utopian Scots on the left want to dispense with what they see as usury and greed in the world of finance, the way to achieve this is to do everything they can to automate the finance industry. It’s a process that is already well underway within the digitised fintech sector.
Speak to someone in the City of London and you will be told that two thirds of those working in finance are over-qualified for the work they do. Tens of thousands of well-educated graduates are really only working as glorified clerks. Why? Because government has imposed swathes of control and compliance regulations, tortuously documented in near impenetrable legalese that needs graduate brains to interpret and manage.
Finance markets don’t need more rules, they need fewer; with money exchange and storage made simple and, crucially, plural across the thousands of channels that digitisation allows at low entry and operational cost. Rates of profit earned through interest are thereby lowered. Scotland’s left would do far better to stop worrying about old-fashioned parochial notions of “interest” on cash borrowings and savings and focus on engineering competition across money-handling services. That is what will curtail the margins of any usurers.
Photo of compound interest equation by MarekPhotoDesign.com from Adobe Stock