Compound interest adds the element of time. The longer you keep my money, the higher my fee. My fee is calculated as a percentage of the loan multiplied by the length of time you need to pay it back. The key is that the interest you owe me is added to the principal. For example, let’s say you borrow one hundred dollars at five percent interest, compounded daily. If you repay the loan in one year, you will pay me a total of $105.13. If you pay me nothing for ten years, and then pay it back all at once, at the end of ten years you’ll pay me $164.87.
One problem with compound interest is that over very long periods of time, the numbers become absurd. That hundred-dollar loan at five percent interest? If you paid me back after one hundred years, you’d owe me $14,836.23. After two hundred years it would be over two million dollars. In 1836, an American lawyer by the name of John Whipple published The Importance of Usury Laws, where he pointed out the impossibility of sustaining long-term usury. He wrote: “If five English pennies … had been … at five per cent compound interest from the beginning of the Christian era until the present time, it would amount in gold of standard fineness to 32,366,648,157 spheres of gold each eight thousand miles in diameter, or as large as the earth.”
The practice of charging a fixed fee for loans did exist in ancient times, and was referred to in the Hammurabi Code of about 1800 BCE. Nevertheless, opposition to money lending was widespread, primarily on the grounds that it was unethical to receive value without labor. Attitudes towards lending in general and the charging of interest in particular varied from culture to culture and century to century.
In ancient India both Buddhists and Hindus condemned lending. According to a law set forth by Vashishta, a Hindu lawmaker who lived around 500 BCE, Brahmin or Kshatriya castes were prohibited from charging interest on any loan regardless of amount.
Other religious systems in the ancient Near East, and the secular codes arising from them, did not forbid lending with interest. Some cultures regarded inanimate matter as living, just like plants, animals and people, and capable of reproducing itself. Hence, if you lent commodity money of any kind, it was legitimate to charge interest. “Food money” in the form of dates, olives, seeds, or animals was lent out as early as 5000 BCE. Among the Phoenicians, Mesopotamians, Egyptians, and Hittites, interest was legal and the rates were often fixed by the state.
Aristotle, who lived in the period 384-322 BCE, was opposed to the practice of charging any interest on a loan no matter how negligible the interest rate. Contemporaries who favored legalizing the charging of interest asserted that usury was practiced by Sumerians, who asked for calves in return for the loan of cows. Aristotle argued that unlike cows, money is inert and does not by itself beget more money the way cows beget calves. Aristotle denounced usurers by saying, “Those who ply sordid trades, pimps and all such people, and those who lend small sums at high rates. For all these take more than they ought, and from the wrong sources. What is common to them is evidently a sordid love of gain.”
Cato the Elder, in his book De Re Rustica, wrote, “‘What do you think of usury?’ – ‘What do you think of murder?’”
Judaism’s view of interest was similarly negative. According to the teaching of the Halakha, or the collective body of the Jewish religious law, which included Biblical, Talmudic and Rabbinic laws, the charging of interest was forbidden.
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