Interest and profits have very different implications for the parties involved and the system as a whole..

Some of the consequences of an interest based economy are:

1. Exploitation of the needy.

2. Interest is paid by the public even if they borrow no money. Interest is included in the price of everything paid for and there is interest on the national debt extracted via taxation.

3. All are not equally affected by interest rates, which serves as a hidden re-distribution mechanism.

4. Lending money for high returns offers unbacked liquidity, which is the agent of instability and a chief cause of the current crisis.

5. Discounting the future: Since interest results in appreciation of invested capital, it is a presumed rationale for people to prefer having an amount now than the same amount in the future. This rarely questioned logic can have disastrous implications. Discounting affects the rate at which we use up natural resources – the higher the interest rate, the faster the resources are likely to be depleted15.

There is no reason that this cannot be taken to its logical conclusion that discounting can lead to the “economically rational” extinction of a species16, and that “in evaluating long term investment projects, particularly those in which the benefits and costs are separated from each other with a long time interval, the net present value rules guide the decision maker to maximise the utility of present generations at the expense of future ones”17.

The mixing of interest and profits has confused an accurate understanding of their difference in the West. In Islam the distinction is maintained legally. Profits are backed by real output. There are also specific regulations on company structures that can be formed to make profit, which gives substance to the link between profits and outputs.

The historical account of more than 1,000 years of the erstwhile Islamic state stands a brilliant example of stability and prosperity. It is interesting to note that between 1932 and 1933, the small Austrian town of Wörgl started an experiment where the town's mayor convinced the business people and administrators to conduct a monetary experiment in the way suggested by Silvio Gesell, who suggested securing the money flow by making money a government service subject to a hold/use fee18.

The town council issued 32,000 "Work Certificates" (i.e., interest-free Schillings), covered by the same amount of ordinary Austrian Schillings in the bank. The fee on the use/hold of the money was 1% per month or 12% per year. This fee had to be paid by the person who had the banknote at the end of the month, in the form of a stamp worth 1 % of the note and glued to its back. Otherwise, the note was invalid.

This small fee encouraged those who were paid in Free Schillings to spend them before they used their ordinary money. People even paid their taxes in advance in order to avoid paying the small fee. Within one year, the 32,000 Free Schillings circulated 463 times, thus creating goods and services worth over 14,816,000 Schillings. The ordinary Schilling by contrast circulated only 21 times.

Wörgl reduced its unemployment rate by 25 % within this one year, while Europe was struggling with rising unemployment and depression. When over 300 communities in Austria began to be interested in adopting this model, the Austrian National Bank saw its own monopoly endangered. It intervened against the town council and prohibited the printing of its local money19.

15 Pearce D W and Turner R K, 1990, Economics of Natural Resources and the Environment, Harvester Wheatsheaf, London.

16 Daly H E and Cobb J B, 1990, For the Common Good, Greenprint, London.

17 Kula E, 1981, Future Generations and Discounting Rules in Public Sector Investment Appraisal, Environment and Planning A, 13: 899-910.