Abstract
Under what circumstances are interest-bearing loans compatible with an economy without much growth? The question is becoming increasingly important given a tendency towards declining growth in industrialised economies and increasing evidence that continued growth is incompatible with environmental sustainability. Previous theoretical work suggests that when interest-bearing loans compound, this results in exponentially growing debts that are impossible to repay in the absence of economic growth. We here examine ten historical cases to assess support for this finding. We find that interest-bearing loans have typically resulted in unpayable debts in these non- and slow-growing economies. We further identify four broad category of measures to prevent or alleviate the problem of unpayable debts, and show how they have been employed in the past. Our Appendix compiles sources of debt regulation from across the world over five millennia.
Highlights
Longstanding work suggests a conflict between an economy with positive interest rates where compounding results in exponentially growing debt, and a real economy that is subject to environmental and resource limits (e.g. Soddy, 1926; Daly, 1980; Martinez-Alier, 1987; Douthwaite, 1992, 1999; Grignon, 2009; Svartzman et al, 2020; Arns perger et al, 2021)
Compound interest can result in exponentially growing debts that are unpayable in the absence of economic growth
We have examined ten historical cases and found that, when they become widespread, interest-bearing loans have tended to be accompanied by unpayable debt, dispossession and indenture of debtors, and wider so cial upheaval and revolt
Summary
Longstanding work suggests a conflict between an economy with positive interest rates where compounding results in exponentially growing debt, and a real economy that is subject to environmental and resource limits (e.g. Soddy, 1926; Daly, 1980; Martinez-Alier, 1987; Douthwaite, 1992, 1999; Grignon, 2009; Svartzman et al, 2020; Arns perger et al, 2021). A second purpose of this paper is, to identify the kinds of measures attempted by these different societies to try to avoid or to mitigate the consequences of unpayable debts We place these different measures into four broad categories: forgiving accumulated debts; eliminating the charging of interest altogether; preventing the com pounding of interest; and limitations such as rate caps and setting maxima on the size and duration of loans. Such a measure would at least prevent the exponential accumulation of interest on individual debts, if not in the economy as a whole Such a ban seems likely to have been much easier to police than attempting a broader ban on compounding by trying to prevent lenders lending their interest income. Societies can effectively operate without individuals saving or lending (Hartley, 2019), they tend to be small-scale and, given the absence of saving or lending, will not have experienced the problems associated with interest-bearing loans that we find in the ten cases we describe below
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