Ripple is an attempt to (re)design society: our interactions will no more based on the fact we all agree money (generated by banks and governments) exist but on how much we trust other people. Each participant indicates which other participants he or she trusts, by offering to accept their IOUs up to a certain amount, like a line of credit: your peers become the generators of currency. In short, Ripple lets everyone act like a bank.
Now, in such a society, is interest needed? Do we want to implement as a feature of the system the fact you can make money from money? This was the question posed in the Ripple-users mailing list.
There was some google video circulating a while back that started out very informative and then spun off into batshit insanity, claiming that it’s mathematically impossible to pay off debts with compound interest, etc..
A thought experiment that has helped me is to pretend there is no money and just look at movement of wealth. Remember the distinction: wealth is the actual stuff we want, money is just a way to transfer it. So the question “how can I repay a loan with interest; where does the extra money come from?” becomes “how can someone give back more wealth than they were loaned; where does the extra wealth come from?”.
Well that’s easy to answer. The same place all wealth comes from: people make it. They build things, do work, cough up valuable property.
Say you have a beautiful painting (= wealth) that I want and I have nothing to offer you for it except the promise to return it to you later. That’s a big favor I’m asking you. To keep things fair, I might offer you a small thing of my own in return (say, doing your dishes). So there you have it, I borrowed the painting and paid it back, plus interest (doing your dishes). Everyone’s happy.
It really is, fundamentally, as simple as that.
And, by the way, there’s nothing magical or mathematically insidious about compound interest either. In fact, the concept is already implicit in this “extra favor” conception of interest.