Chapter 18: Time and Interest
Updated: 1/13/20
Christian Economics: Teacher's Edition
He also who had received the one talent came forward, saying, ‘Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, so I was afraid, and I went and hid your talent in the ground. Here, you have what is yours.’ But his master answered him, ‘You wicked and slothful servant! You knew that I reap where I have not sown and gather where I scattered no seed? Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest' (Matthew 25:24–27).
This passage has to do with point four of the biblical covenant: judgment. The wicked steward negatively judged the moral character of the coin owner. The coin owner in turn negatively judged the moral character of the steward. The issue dividing them was this: the right of the coin owner to demand payment for the use of his coin by the steward during the period of the owner’s absence. The coin owner informed the steward that the steward owed him for the use of his asset over time.
This was Jesus’ final parable. He presented it immediately preceding His description of the final judgment. Matthew 25 is devoted entirely to the final judgment.
This parable is about good stewardship of God’s property. It is known as the parable of the talents. A talent was a weight of either gold or silver. The parable is the story of a wealthy man who goes on a long journey. He distributes money, meaning talents, to three servants. One servant receives five talents. The second servant receives two. The third servant receives one. The owner selects them in terms of their past performance: “to each according to his ability” (v. 15). When he returns, he asks for an accounting. The results were consistent with their prior performance. The first servant doubled the owner’s money: five for five. The second servant doubled the owner’s money: two for two. The third servant returned the lone talent. For this performance, he was condemned. The owner gave this talent to the best-performing servant.
The third man was condemned. Why? He did not lose the talent. He returned it. The owner had not lost anything, correct? Wrong. The owner had lost whatever the talent would have generated in interest. The owner understood this. Jesus assumed that His listeners would understand this.
Most listeners today, hearing this for the first time, would understand this. Those who believe that Jesus would not mislead them accept it. But there is a small group of listeners who are appalled. This passage clearly justifies the giving and taking of interest on loans. Some of these people think of themselves as Christians. Some do not. But all of them condemn interest under all circumstances. This places the anti-interest Christians in a difficult position. They prefer to ignore this passage.
There are passages in the Mosaic law that condemned interest on loans to the poor, if (1) the borrowers were covenant-keepers, or (2) they were resident aliens in the holy land. But these zero-interest loans were limited in terms of time: the next sabbatical year, at the beginning of year seven in a seven-year cycle. They were also collateralized by the borrower’s labor. If he defaulted, he could be sold to pay off his debt, and kept in bondage for six years.
If your brother, a Hebrew man or a Hebrew woman, is sold to you, he shall serve you six years, and in the seventh year you shall let him go free from you. And when you let him go free from you, you shall not let him go empty-handed. You shall furnish him liberally out of your flock, out of your threshing floor, and out of your winepress. As the Lord your God has blessed you, you shall give to him (Deuteronomy 15:12–14).
The owner in the parable was a businessman. Jesus was not talking about making interest-bearing charitable loans. He was talking about commercial banking practices. So, the owner of the coin deserved this minimal rate of return.
Why? What is it about interest payments that constitutes them as a legitimate source of income for commercial lenders?
Think of yourself. Say that you had enough money to build a deck for your backyard. That would increase the value of your home. You would be able to enjoy the use of it. It is April. You would like to have it for summer. You go to a company that builds decks. The sales representative gives you a price. It seems reasonable. He then says this: “You must pay now. You will have your choice of when we should built it. It takes a week. We can begin next week or in ten years.” You would choose next week. What if the delay were only a year? You would still choose next week. Why? Here are reasons. First, you would like to enjoy it soon. You place a premium on sooner rather than later. Second, the company might go bankrupt before it built the deck. There is a risk factor to consider. Third, you might die at the end of the summer. You will never enjoy that deck, even though you paid for it.
If the deck construction company offered you a 10% discount if you are willing to wait a year, you might consider this. That would mean a 10% tax-free rate of return on your money. If the prevailing interest rate is 5%, you would want to know why the company is willing to offer this big a discount. Is it in financial trouble? Might you lose your money? But this is clear: you would not consider the deal unless you got something extra in return for your willingness to pay now but be forced to wait a year for your deck.
How is the rate of interest established on a free market? The same way that all prices are established: through competition, i.e., through supply and demand. How does this system work? Lenders (buyers of future money) compete against lenders. Borrowers (sellers of future money) compete against borrowers. What is the governing allocation principle? High bid wins.
I return to the parable. Say that the man originallyhanded over the coin to the frightened steward. He asked the steward to take responsibility for keeping the coin safe. Why would the steward accept this legal responsibility? Why would he supply something for nothing? At the same time, why would the owner surrender his coin to someone so foolish as to accept the responsibility free of charge? Would he lend the coin, get it returned to him, plus interest, just before the owner was scheduled to return, and pocket the interest money for himself? It would make no sense for either of them to agree to such an arrangement.
Whenever a voluntary arrangement makes no sense on the surface, look below the surface. There is something going on that is not obvious. Maybe there is a special situation. Investigate.
I think there was a special situation. The parable reveals it. The owner was testing the performance of the three stewards. He entrusted each of them with greater responsibility than before. He wanted to know how they would perform when he was absent. There would be a day of reckoning, but that was far off. He took three separate risks in handing over his money to them. But he thought this was worth it. There was something more at stake beyond the day of reckoning. In Luke’s version of this parable, it becomes more clear.
The man was made king and came back. At once he ordered his servants to appear before him, in order to find out how much they had earned. The first one came and said, ‘Sir, I have earned ten gold coins with the one you gave me.’ ‘Well done,’ he said; ‘you are a good servant! Since you were faithful in small matters, I will put you in charge of ten cities.’ The second servant came and said, ‘Sir, I have earned five gold coins with the one you gave me.’ To this one he said, ‘You will be in charge of five cities’ (Luke 19:15–19).
Those stewards who performed well received far greater responsibility. This is the essence of God’s system of stewardship: a constant increase in personal responsibility, with wealth to match. The biblical goal is to increase responsibility. The stewardship of wealth is the test. A covenant keeper does not take on added responsibility in order to obtain greater wealth. He takes on added responsibility because he has proven to God, men, and himself that he is capable of bearing it. Greater wealth is a success indicator. But the essence of success is this: exercising dominion over a greater range of decisions.
Part of this extension of dominion is the extension of credit. Why? Because every extension of credit is an extension of debt. The Bible says: “The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7). Therefore, God told Moses, and Moses told the generation of the conquest:
The Lord will open to you his good treasury, the heavens, to give the rain to your land in its season and to bless all the work of your hands. And you shall lend to many nations, but you shall not borrow. And the Lord will make you the head and not the tail, and you shall only go up and not down, if you obey the commandments of the Lord your God, which I command you today, being careful to do them (Deuteronomy 28:12–13).
A buyer possesses money. He must decide what to do with it. This is his inescapable responsibility. He is a steward, either for God or mammon.
He can buy consumer goods. Or he can buy production goods to become a businessman. He will thereby move from buyer to seller. He can lend money at interest. He can give it away. He can bury it. Money is most marketable commodity. The range of choices is huge.
If he deposits it in a bank, he wants a positive rate of return. If the bank pays no money, then it is providing some kind of service at no monetary charge. Find out what it is. In the United States, the crucial service is a guarantee by the U.S. government that your money is 100% insured up to $250,000, or $500,000 for married couples, per bank. If the bank goes bankrupt (bankrupt = bank + rupture), the depositor gets his money back. This is a major guarantee. There have been no exceptions since 1934.
A bank performs useful functions. It allocates the depositors’ money over multiple borrowers. This reduces the risk of bankruptcy by any one debtor. It spreads the risk through diversification. The bank also does background checks on borrowers. The depositor is buying the bank’s system for investigating borrowers’ risk. A bank is paid for providing this service. It receives more money from borrowers in interest payments than it pays depositors in interest payments.
Back in the days when money was mostly currency and precious metals coins, it was possible for a depositor to go to his bank and receive gold coins or silver coins or paper money on demand. This was a major restraining factor on the banks. They could not safely lend out money long-term to borrowers. They lent money only short-term. Why? Because they could be bankrupted by depositors who demanded immediate conversion of their deposits into currency. This was the famous bank run. The lenders/buyers were in charge. Today, this conversion on demand into currency is no longer possible for large depositors. They are not allowed to make large withdrawals of currency. Large depositors can legally withdraw funds at a moment’s notice by transferring digital money to another bank, but the banking system as a whole is not threatened by withdrawals. Governments have changed the law, and central banks have changed rules, beginning late in the Great Depression in the 1930's.
Banks make a lot of money by lending money to high-risk borrowers at high rates. These borrowers are willing to pay credit card rates as high as 80% per annum. This was tested in 2010 in the United States. There were applicants for credit cards with this rate. This was at a time when the average rate was 14%. Meanwhile, banks pay low rates to depositors: as little as a fraction of a percent per annum. The depositors are future-oriented. They want the return of their money, but not much more. In contrast, the borrowers are highly present-oriented. They want to spend money today. They pay dearly for this privilege. Wealth is transferred from present-oriented borrowers to future-oriented bankers. Depositors do not gain much for their willingness to save money at a bank, but they stay out of debt to bankers. This is vital for anyone desiring to build wealth.
Ludwig von Mises used this phrase to describe highly present-oriented people: high time-preference. He called future-oriented people low time-preference people. He argued that the free market makes possible mutually beneficial exchanges between these people. High time-preference people get what they want: immediate gratification/consumption, but at the cost of future gratification. Low time-preference people get what they want: future income, but at the expense of immediate gratification/consumption.
The asset owner in the parable of the talents was a low time-preference person. But he wanted a rate of return above zero. The third steward did not understand this. He suffered the consequences.
A borrower of present money is the seller of a promise of even more future money. We identify him as the seller in the lending arrangement, which is a credit arrangement. For every extension of credit there is an equal extension of debt. Credit and debt are two sides of the same coin.
The borrower believes that he has better uses of present money than future money. This may be because he is a present-oriented person. He discounts steeply the value of future income compared to today’s income. He wants more income today. But if he is a businessman, he may want the loan because he thinks he has an opportunity to make a great deal of money. He needs present money to generate future money. He decides that borrowing money at a fixed rate of interest is preferable to foregoing the opportunity. He also decides that this debt is preferable to asking investors to put up the required money in exchange for partial ownership of the project. So, he may be a highly future-oriented person. But if he is, he will not use the borrowed money to buy consumer goods for himself.
There is no way that a borrower can get ownership of present money free of charge unless he is a charity case. Why would anyone lend him money free of charge? The lender can spend his money in these ways: buy investments, buy consumer goods, give it to relatives, give it to charities, give it to political organizations, or gamble. Why would he want to lend it at zero return to a stranger? People want something in return for parting ownership with their wealth. Lending money to a stranger at zero interest makes no sense.
In effect, this is what the third steward expected the owner to do. He buried the coin, and then did nothing creative with the money to earn the owner a positive rate of return. He betrayed the owner. The owner brought judgment against him. “And cast the worthless servant into the outer darkness. In that place there will be weeping and gnashing of teeth" (v. 30). Verse 31 began Jesus’ description of the final judgment. It ended with these words: “And these will go away into eternal punishment, but the righteous into eternal life” (v. 46).
Conclusion: Better to have put the coin with the money lenders. To do otherwise is to accept a false doctrine: it is possible to get something for nothing. It is the idea that it is possible to get positively rewarded as a steward for producing nothing of value to the owner. Those people who argue that there should be no rate of interest on a loan have adopted this false philosophy.
A firm that produces pencils can show from its accounts that it has a steady income. What if the owner thinks there is an opportunity to expand production at a profit in the future? This will take an investment. Where can he get the money? First, out of present earnings. Second, out of his own savings. Third, from investors who will gain partial ownership in the company. Fourth, from a bank. Fifth, by selling interest-paying bonds to investors. He may prefer borrowing from a bank if rates are low.
This is what the bank wants, too. Here is a company in a very mature market. It can show steady profits, however low. The market is not going to disappear. There will still be buyers of pencils next year and the year after. So, this is an ideal borrower from the banker’s point of view.
What is true of the manufacturer of pencils may also be true of the companies that supply raw materials and equipment to the pencil industry. The owner of any of those firms can go to his bank in search of a loan.
Having good credit is the same as having capital. The pencil company has the ability to expand production if it can make a clear case to a banker that there is a significant opportunity for greater profits available. The banker will probably take the owner’s word for this. The banker knows that the owner does not want to lose his company’s reputation by defaulting on a loan. That would reduce the company’s value. It would lower its credit rating. This would be the same as a loss of capital. The company is a low risk.
This system of credit/debt allows people who have productive ideas to borrow money from people who want steady income in the future. There is an opportunity for a mutually beneficial exchange: present money in exchange for a legally enforceable promise to repay the loan, plus interest.
The rate of interest is the price paid for a borrowed good, including money, which is then used by the borrower to buy goods and services. This rate of interest is set by the free market: supply and demand. Lenders compete against lenders. Borrowers compete against borrowers.
The reason why the rate of interest exists is that there are no free lunches. We cannot get something for nothing. We cannot legally get our hands on money today if we do not promise to return this money, plus more money, in the future. The lender applies a discount to this future income. Surrendering a gold coin to someone without the promise of repayment, plus a little extra, in the future, is irrational in any voluntary business arrangement. We must pay for future income. That payment is either a surrender of ownership (discounted loan) or agreement to a rate of interest. Take your pick. Beggars can be choosers after all. They can choose which kind of payment they prefer.
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