By Luke Parker (@coinosphere)
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” — Albert Einstein
Throughout the various cultures of the world, the primary difference between the rich and the poor, for much of our history up to and including today, has come down to who understands how to use their money to work for them. The least affluent class across cultures are known for spending their entire earnings each pay period on consumables and entertainment, then scraping by until more income is earned. Meanwhile, the richest among society are not merely earning more income or making wise investment decisions… they typically develop a lifelong habit of putting their earnings to work for them by searching for the highest rate of interest on their savings. In a best case scenario, they never even have to touch the principle; Only opting to withdraw some of the earned interest when they need it.
The most convenient vehicle for this practice over the ages has been earning interest in some form of a bank savings account, one that immediate withdrawals are permitted yet still offers a high level of safety. Sure, the interest rates on such accounts are not going to make anyone rich overnight, but when some or all of the interest earned are reinvested back into the account, the accumulation of wealth becomes extremely easy. This concept is known as compound interest, where wealth automatically grows exponentially over time. This concept of compound interest is so ingenious that Einstein is often attributed with the quote,
“The strongest force in the universe is Compound Interest.”
The story of interest is recorded as far back as writing itself. According to historian Paul Johnson’s 1976 book “Civilizations of the Holy Land,” records have been found as early as 5,000 B.C. that describes interest on loans, sometimes in accounting ledgers and others in religious texts, including the Bible.
The first historical arguments in favor of deploying interest rates regarded them as legitimate because the borrowed money was used for living property, typically livestock or seeds, that multiplied by “reproducing themselves.” Therefore, any growth, or interest, on top of the principal is balanced out by the growth of the property. Linguistic evidence strongly points to the ancient Sumerians as the origin of the idea of charging interest on loans as detailed in Yale professor William Goetzmann’s Financing Civilization.
“If you lend someone a herd of thirty cattle for one year, you expect to be repaid with more than thirty cattle. The herd multiplies — the herder’s wealth has a natural rate of increase equal to the rate of reproduction of his livestock. If cattle were the standard currency, then loans in all comparable commodities would be expected to ‘give birth’ as well. The idea of interest seems to be a natural one for a pastoral society” -Professor Goetzmann
Meanwhile, many religious texts in antiquity up until modern times caution against unfairly charging interest. Some described the practice of lending at a high-interest rate as ‘sinful,’ which is also known as usury. Much of the Middle East’s history could be read as a historical account of which interest rates are considered a sin depending on the dominant religion in each time period. Today, of course, there is much more tolerance as we understand how useful lending is in society.
Mankind has learned a lot about interest in recent times through the science of human behavior, otherwise known as economics.
In his 1949 classic ‘Human Action,’ Ludwig von Mises calls interest a “homogeneous phenomenon,” with one single purpose for any situation; to place a higher valuation on present goods or money than future goods or money. It accounts for a “time preference” that often manifests as a discount of the price of future goods or money. In this light, it is easy to see why interest rates are effective as a tool for creating monetary fairness over time, a concept often misunderstood previously.
Thousands of years after the creation of interest, another financial tool emerged that is applauded for creating fairness: Bitcoin. There is a lot of evidence that Bitcoin’s creator, Satoshi Nakamoto, whoever he, she, or they may be, created Bitcoin in order to replace the unfair banking system that brought us the 2008 financial crisis.
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” — Satoshi Nakamoto, written in the genesis block, referring to the Times newspaper headline
Not only is this strong clue embedded in the first block of the blockchain, but some of the social media profiles that he used in 2009 had an interesting birthdate listed: April 5th, 1975.
At first glance, this date seems unrelated, but a closer look reveals that April 5th is the anniversary of Franklin D. Roosevelt’s infamous gold grab, and 1975 is the year gold was legalized again while the current fiat-based financial system was more or less deployed. Considering that the immediate predecessor to bitcoin was “b-money,” the 1998 attempt to make ‘internet Gold’ by admitted crypto-anarchist Wei Dai, Nakamoto would have been more than well aware of the date reference when he modeled bitcoin after it.
More significant than Nakamoto’s intentions, however, are bitcoin’s capabilities. A bitcoin is designed to be an open source software that requires consensus from the masses of bitcoin users to make any changes to its protocol. There is no way for a centralized institution, including a corporation or central bank, to gain control over it. Therefore, if people prefer to use bitcoins instead of fiat currencies, these institutions would be powerless to stop them. For the first time in history, the playing field of institutional finance is being leveled, with economic power shifting to the hands of the people with the power to invest as we wish.
When combining Bitcoin, a tool for economic empowerment, together with compound interest, a tool for accelerated wealth growth, an ideal pairing emerges. Wealth can be safeguarded from even banks and governments while simultaneously growing hands-free. Very few financial products have ever offered this pairing before.
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