Negative Interest and Sharia Law

In 1694, when money was precious metal, the Bank of England was founded in order to raise funds to go to war against France. What was the BoE’s sales pitch? I guess something like this:

“Give us some silver to help us build an army. We’ll invade France and plunder their silver. We’ll return your investment, plus x% interest. Here’s a piece of paper as our promise.”

Interest rates proliferated war. They also created masters and slaves when people borrowed sums they could not repay. In this context it makes sense that major religions of that time forbade the charging of interest. Sharia law still forbids interest.

Now, if the previously-mentioned pieces of paper began circulating so widely that they literally became money, then a central bank could just print more and more pieces of paper that each said, “this is worth x pound silver.”

The central bank could then create and lend money at interest. This would be great for the bank, but it would even be great if the bank could lend money at negative interest.

I mean hey, if I can create “$100" for free, I have no problem lending it to you if you promise to pay me back “$90.” Whatever! Pay me back “$10” for all I care, I made it for pennies! Of course, central banks never talk like this, they talk about how they are saving the economy and preventing unemployment.

Interest is the price of borrowing money. If money can be created for free, then interest (whether positive or negative) is absurd. It is good to ask: “Why should I pay you back more than you loaned if you create it for free?” It is better to ask: “Why should I want your money if you create it for free?”

The answer, of course is because everybody else wants it. Fortunately, this is changing as more and more people understand bitcoin.