Interest Enables Transactions Across Time

Interest rates are a technology that allows people to transact across time. Without the concept of interest, it’s only possible for two parties to transact with what is immediately in front of them, in that very same moment.

For example: two people could barter apples for cows at a marketplace with no problem, but what if the seller of apples wanted to use the cows for one month? How should the cow owner be compensated?

Over the course of a month, the cows have value that the owner forgoes. Maybe the apple seller will reimburse for the milk the cows produce during that time, but can only pay for it once the cows are returned. Why should the cow owner wait a month for money they could have been receiving right away?

To make it more enticing, the apple seller agrees to pay more than the value of the cows over that period. The apple seller paid interest—the price of time. Now they can transact over time and not just when they happen to both be at the market with their goods.

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