In the next installment of our financial section, Muslim Bitcoiner continues off his first essay in issue one where he discussed the history of usury:
In our previous essay in the first issue of Qawwam, we briefly went over how Riba manifests itself within the current global monetary system. We demonstrated how interest-based lending is involved in the production and distribution of money both at the commercial bank and central bank levels. We also noted that Muslims need to understand the reality of Riba in the current global financial system before haphazardly looking for solutions. However, before entertaining solutions, it’s first necessary to understand the consequences of the presence and pervasiveness of Riba in our money.
As a side note, we recognize that Riba encompasses more than just “interest” or “usury”, and there are different types of Riba. While these distinctions are useful for understanding the nature of Riba itself, it is not necessary for the present discussion, as “interest” will suffice in understanding Riba’s widespread negative effects on society.
Recall from the first essay that, under the current fractional reserve banking system, Riba is inextricably tied to debt issuance, and hence, money creation. Therefore, in almost all instances, we can equate the process of central banks and commercial banks creating fiat money to Riba. Essentially, fiat money can be called “institutional usury”, as Jörg Guido Hülsmann notes in his book, The Ethics of Money Production. This point will prove useful in the discussion below, as the negative effects of fractional reserve banking are necessarily caused by the usury operating at the base layer of fiat money. But before venturing further, we first need to understand the concept of time preference.
Time Preference
The inherent scarcity of time compels individuals to make continuous choices throughout their lives, and this introduces what’s called “opportunity cost” that comes with each decision where we can only choose one action at the expense of other actions that would have taken place. We know that once an action is taken, we cannot go back to reverse it. We also know time is uncertain; Allah can end our life at any moment, and he tests us with trials that increase this uncertainty. But as Muslims, we know that the occurrence of death is a certainty, Allah (SWT) says in Surah Al-Anbiya verse 35 in the Quran:
كُلُّ نَفْسٍۢ ذَآئِقَةُ ٱلْمَوْتِ ۗ وَنَبْلُوكُم بِٱلشَّرِّ وَٱلْخَيْرِ فِتْنَةًۭ ۖ وَإِلَيْنَا تُرْجَعُونَ
Every soul will taste death. And We test you ˹O humanity˺ with good and evil as a trial, then to Us you will ˹all˺ be returned.
Because of the opportunity cost and uncertainty associated with the nature of time, we can assume, all else being equal, that man prefers the present over the future, and of course this ratio varies from person to person. The ratio of preferring present consumption and satisfaction over future consumption and satisfaction is called ‘time preference’, or the rate at which the future is discounted. So a short-term thinking person who prefers to enjoy satisfying his present needs and desires is someone who has ‘high time preference’, and conversely, someone who is long-term thinking and prefers satisfying his future needs and desires is someone who has ‘low time preference’.
What’s important to understand about time preference is that it’s always positive; it can never truly approach zero, or be negative. Conceptually, this makes sense, as we’re always discounting the future to some degree since we live in the present and we’re constantly taking purposeful actions each moment. However, as Muslims, we should always strive to lower our time preference as much as possible. After all, we are not living for the satisfaction or enjoyment of this present life, but for a life to come afterwards.
This concept of time preference is extremely critical to understanding human actions and conditions in modernity, and it directly influences people’s dispensation to save and allocate capital and resources for the future. Without the high time preference influence of the Shaitan and his minions, humanity naturally gravitates and marches towards a process of lowering time preference. This natural process of humanity’s advancement toward lowering time preference is what Hans-Hermann Hoppe, in ‘Democracy: The God that Failed’, calls a “process of civilization”.
Therefore, we could say that the continuous lowering of time preference, economically speaking, is at the center of the development and advancement of civilization. As we’ll see in the next section, the institution of usury and banking actually heavily influence people’s time preferences, thus affecting all aspects of civilization.
Consequences of Riba
As of the time of writing, the United States is currently 34.2 trillion dollars in debt, and the yearly payments on the interest of this debt is quickly approaching a staggering 1 trillion dollars. The US, along with nations that hold on to US treasuries, are on a path of constant debt issuance and a consistent policy of monetary supply expansion. We don’t need to show a chart illustrating this fact; everyone instinctively knows that the central banks all around the world are printing money. In light of the discussion above, we must ask ourselves, knowing that Riba is the main driver in the production and distribution of our money system, how does this Riba induced monetary supply expansion affect people’s time preferences?
Firstly, it should be noted that money, being the most salable and liquid good, is the main tool people use for saving wealth. Imagine trying to transport wealth temporally over the next 20 years using iron or wood. These commodities would rot or degrade over time, making them less ideal for saving wealth, and one would need to find someone who needed these materials for exchange. In addition, commodities like wood or iron are very easy to make more of, which makes them poor stores of value. Thus, money, given its high degree of salability across space and time, is the perfect technology that allows humanity to continue their natural progression of decreasing time preference.
So what happens when the money supply is expanded? As more money floods the system, the purchasing power of each unit diminishes, thus devaluing the money held by savers. This devaluation incites a general increase in prices across the economy as a whole, engendering a situation where a surplus of money pursues a diminished quantity of goods. Consequently, consumers experience a decline in their purchasing power, leading to a pervasive sense of increased instability and uncertainty going into the future.
If people expect their money to devalue over time, this will inevitably lead to the prioritization of spending rather than saving. Why save money when the prices of goods and services will just end up increasing? Rationally, under this scenario, it makes sense to spend the devaluing money as soon as possible for goods that can be consumed for immediate gratification, because that money will not hold its value through time. In essence, under a debasing currency regime, individuals are incentivized to live high time preference lifestyles, where spending for short-term satisfaction and lavishness is encouraged and even glorified over prudent and judicious long-term satisfaction. Individuals are incentivized by the banking sector to open up new credit lines and borrow irresponsibly. The high time preference individual is only concerned with his immediate gratifications, and, living in the moment, he does not concern himself with the debt that must be paid off. Of course, this debt grows through the abomination of compound interest. These incentives created by a Riba infested debasing currency propel individuals to prioritize spending and debt accumulation with little regard to future outcomes and consequences.
This short-termism also extends to the business sector, where the effects are more severe and have far-reaching impacts on the economy as a whole. Typically, in the absence of Riba money, it is the role of the capitalist to allocate resources and adjust business practices in response to market signals. His priority is to utilize the profits from the business in the accumulation, preservation, and nurturing of capital in order to help the business grow and turn out higher quality and cheaper goods and services. The capitalist must exhibit low time preference to successfully run a business. But under a depreciating currency regime, the incentives propel the capitalist to increase his time preference and adopt a short-term strategy. He no longer prioritizes the accumulation of capital, because now his priority has shifted. The operating costs of his business have now increased as a result of monetary supply expansion. To cover his costs, the capitalist must now prioritize the maximization of revenue as opposed to the accumulation, preservation, and nurturing of his capital. The profit from his business is no longer used to grow his capital stock. He is incentivized to get into debt to finance his operating costs, and he needs his profit sooner rather than later. In order to turn out quicker profits, he can cut corners in the production process to speed up production, and use lesser quality materials and resources in the construction of his products without alerting his customers of the resulting quality degradation. Much like the incentives observed at the individual level, businesses tend to operate in a high time preference fashion. The priority now is to seek short-term profits over long-term sustainability and growth.
This short-termism is exacerbated by easily accessible and cheap credit. It no longer becomes necessary to even focus on profit or capital for the business; the capitalist will now focus his efforts in securing low interest rate debt. But doesn’t the capitalist eventually have to pay back this debt with interest? Of course, but now the capitalist adopts the same mentality as the banker who he secured the loan from. Why put in the hard work to earn profit when the capitalist can just earn interest from his business? This trend should sound familiar to the reader, as most large retailers in today’s economy offer and heavily promote lines of credit. Most large clothing retailers in the US, such as JCPenney and Macy’s offer credit cards. Amazon and Walmart offer credit cards. Even tech companies like Apple offer credit cards. Why and how did this trend happen? This is one of the many high preference incentives caused by the high-modernist policy of Riba induced fiat money. Saifedean Ammous, in his other book, The Fiat Standard, explains this phenomenon as “interest rate arbitrage:
“Under the fiat standard, every business model degenerates into interest rate arbitrage. The purpose behind setting up business is increasingly less about making money from serving customers but establishing a creditor relationship with them. Managing to secure debt at a lower interest rate becomes the most significant market advantage. Businesses live and die by their ability to turn over debt at a healthy arbitrage.”
Under normal circumstances in an unhampered free market, businesses that are no longer profitable naturally die out, and this allows for other budding startups to eventually replace the unprofitable and mismanaged established companies. This is a natural market process, as it allows new startups to competitively and fairly thrive and grow in the marketplace as they are able to provide cheaper and higher quality goods and services. But because the Riba money induced high time preference and the pursuit of profit through leverage and arbitraging interest rates rather than capital accumulation and utilization, businesses can still survive, even if they’re technically not profitable. Access to cheap Riba money increases the prevalence of these unprofitable businesses as they’re able to accumulate more and more debt to finance their fiscally irresponsible practices. These businesses are known as “zombie companies”. Seb Bunney, in his book The Hidden Cost of Money, explains the nature of these companies:
“A zombie company is a business that cannot support itself financially but continues to operate through debt accumulation. These still-functioning but debt-dependent businesses play a critical role in disrupting the natural flow of capital. A lack of financial viability in a company often indicates that its product or service fails to generate sufficient revenue to cover operational expenses or that the company has been financially irresponsible, rendering it unable to meet its debt obligations.”
Under this regime, developing startups must now also expend time and resources to compete with these zombie companies, which stifles innovation and makes it difficult for startups to thrive and prosper.
And this leads to another potential problem concerning the incentives for fiscally irresponsible behavior. Consider that, once a business gets large enough, it has the guarantee of always receiving cheap credit and always getting bailed out. This creates a phenomenon known as “moral hazard”. Operating a business with fiscal irresponsibility, short-term goals, and unethical practices is met with increased debt, whereas operating a business in a fiscally responsible, long-term, and ethical manner goes unrewarded. This moral hazard creates incentives for businesses to operate in the most unethical and most short-sighted way possible, as long as the consequences can be covered up. This also creates the incentive for businesses to cooperate in ways that perpetuate and accelerate this recklessness, such as lobbying for regulation to stifle market competition, or securing more subsidies. This cooperation is especially prevalent in the banking sector, which is the first sector to always get bailed out during financial crises. Jörg Guido Hülsmann, in his book, The Ethics of Money Production, illustrates why bankers cooperate to perpetuate this moral hazard:
“It follows that, under fractional reserve banking, the bankers have a particularly great personal incentive to support fellow bankers in times of a redemption crisis. If they cannot extinguish the fire right where it shows up first, it risks spilling over to their own establishment. Thus they are likely to help out fellow bankers in difficulties. And they are the more likely to be so inclined, the more they themselves operate with low cash reserves…. the less responsible bankers know that this incentive exists on the part of their colleagues. They know that the other bankers will pay part of the bill if they, the imprudent ones, make bad decisions. There is therefore a special temptation for them to inflate their note issues in an especially reckless manner.”
Of course, not every company and bank get bailed out. As it gets more and more difficult for prudent and debt-averse companies to compete with Riba funded companies, they eventually go bankrupt, and they end up getting bought out (with leverage) by the Riba funded companies. This leads to the consolidation and centralization of bigger and bigger businesses that end up turning into “too big to fail” corporations. This effect of the toxic centralization to mega-corporations is further exacerbated now that banks are less likely to consider issuing loans to new startups, as these are considered risky investments. So banks are more likely to issue loans to large corporations, often at a discount with low interest rates, that allow these corporations to rapidly expand more than they otherwise would be in the absence of Riba money. Also, as these corporations expand and achieve “too big to fail” status, it is quite literally impossible for them to go completely bankrupt and actually fail, especially when one considers the hundreds of thousands of jobs that are at stake. So the central bank is more likely to bail out these large and unprofitable corporations, which creates a moral hazard, as has been discussed above.
Overall, the aforementioned economic effects of Riba money cultivate a high time preference culture of rent-seeking. Market participants, especially in the banking and corporate sector, pursue rent-seeking positions that do not add any actual value to customers. The goal is to pander to some authority, usually bureaucratic compliance mandated by some government agency, and prioritize acquiring cheaper Riba laced debt to finance their positions. Examples of these types of rent-seeking positions include HR officers, tax specialists, public relations specialists, and any position related to Environmental and Social Governance, or ESG as it’s commonly called. Jimmy Song in his wonderfully titled book, Fiat Ruins Everything, expands on the nature of these rent-seeking positions, and why they’re sought after:
“For rent seekers, there’s a lot to love about these jobs. They’re generally easy to perform, hard to get fired from as they’re often mandated by law, and pay well, especially relative to the amount of value they add, which is to say none. Moreover, there are no fickle customers to satisfy, innovations that displace these positions, or even competitors to worry about. The only people that need to be appeased are the ones in charge, and as long as you stay within their good graces, your job is secure. Rather than fulfilling a market need, rent seekers cater to an authority, which usually translates to less real work. The economics of rent seeking boil down to the fact that someone is printing the money to support them, that is, the masses are being stolen from to fund them.”
These Riba-induced high time preference incentives ultimately culminate in all market participants getting levered up to an absurdly extreme degree. If you’re the owner of a company, and your competitors are completely levered and you aren’t, it’s highly likely that you will be outcompeted, as your competitors have access to cheap capital and higher profit margins, and you do not. In order to survive, you will be pressured, especially from high time preference shareholders, to take on an unsustainable debt load, all in the name of boosting “growth”.
To summarize, the Riba induced global monetary supply policy leads to the increase in time preference and the pursuit of short-term gratification. This results in individuals spending and consuming more rather than prudently saving and preparing for the future, including the hereafter. The market gets completely distorted where businesses are incentivized to get into interest bearing debt, which causes the overall business strategy to prioritize revenue maximization over the accumulation, preservation, and nurturing of capital. Riba money also introduces market distortions including the increase in prevalence of profiting from interest rather than selling goods and services, the increase of moral hazard, unfair competition, more rent-seeking, and the obsession over “growth” that leads to overall capital destruction.
We’ve only scratched the surface of the harmful effects of institutional Riba. In the next essay Insha-Allah, we will explore Riba’s second order effects that include the degradation of food quality, environmental destruction, family decline, decrease of religiosity, and the increased prevalence of wars, among other effects.
Muslim Bitcoiner is the co-founder of Bitcoin Majlis, and can be found on X @MBitcoiner