This article is particulary interesting now considering that oil production is peaking globally and natural gas production has already peaked in North America. (see http://www.globalpublicmedia.com/#200402Simmons.) Oil and gas consumption accounts for the lion's share of work that is done worldwide.  Once global oil production starts declining, it is likely that we will enter an era of sub zero growth if not economic collapse. Give the optimal pegging of interest rates to productivity gains, what happens when productivity decreases because of oil and natural gas scarcity? 

I am interested in the transition to a sub growth economy; existing loans will continue accruing interest in the context of a contracting economic system; this seems a disaster in the making???

The question should be, "Does the author understand economics?"  In my opinion, the answer is clearly no.  Like many before him, he uses some complex math to cause readers to submit to his seemigly superior knowledge of the topic.  Yet, though the author cites some interesting historical statistics, even basic economic explanation  is lacking from his article. 

The first thing that is missing from the article is a fundamental understanding of what interest is and why it exists.  Interest is the compensation that a lender receives from a borrower for lending money.  Why is compensation necessary?  Simply, because lending would not occur without it.  Lending money is a risky undertaking.  The money may never be repaid.  Even if repaid in full, inflation may cause the money to be worth less when it is repaid than when originally lent.  Finally, the lender may have tempting current uses for the money, so the borrower must persuade the lender with interest to forego using it for consumption.

So what is the right rate of interest to be paid.  Well, luckily, in a free market, many borrowers and lenders come together in a broad market for lending/borrowing and a rate is set which lets allows all willing lenders to make loans acceptable to all willing borrowers.  If the rate were higher, some borrowers would walk away leaving some lenders with extra money to lend.  The rate naturally falls to satisfy these individuals.  If rates were lower, some lenders would rather spend than lend, and some borrowers needs would go unmet.  Again the rate would rise to satisfy the unsatisfied.  So the prevailing interest rate in the market is implicitly agreed upon by all.

What is the moral end of all of this borrowing and lending?  I submit that it is the improvement of the standard of living of both borrower and lender.  And thus if broadly utilized, interest based lending raises the standard of living for the entire society.  What is the basis for this claim?  Well think about it.  We're talking about a voluntary transaction here, right?  A borrower is looking to buy a house or a car or hire new workers or buy a machine to increase his business.  Now, if he had adequate savings, there'd be no problem.  But given that he needs to look elsewhere for the money, that is when the lender steps up with the cash.  The lender pays a small interest rate and the deal is done.  Now both have higher standards of living than they otherwise would:  the borrower has a bigger house, or can get to a new job, or has expanded his bussiness.  And the lender has made extra money from the loan, i.e. interest.  Contrary to the author's assessment that interest causes injustice, a greater good has been created on both sides.  Without interest, these transactions would not occur.  Would the author, were he alive, really believe that these individuals would be better off without the ability to make these advancements?

So why would the bible prohibit lending for interest?  Perhaps the author should have supplemented his limited knowledge on the topic by consulting with a priest, minister, or rabbi.  What the bible prohibits is usury, or predatory lending.  Usury consists of charging outrageously high interest rates to a person whose circumstances give them little choice in accepting the terms.  In other words its kind of like charging someone on a sinking ship for access to the lifeboat.  The bible expects that, when one lends money to a fellow man who's down on his luck, repayment be flexible and interest not be charged.  Misinterpretations of this have abounded over time.  Perhaps this is why economic growth was so limited throughout the ages, until a modern financial system was developed.

So what can the government do to reduce the level of interest rates?  They can control the factors, previously mentioned, that contribute to the interest rate. Inflation, the reduction of the value of money over time, is created when governments print new money faster than the economy can grow, thus causing more money to chase less goods and services, driving up prices, or by borrowing money to fund government spending, which reduces the amount of money available to other borrowers.  The interest rate rises, just as the price of oranges rises when a late freeze destroys a portion of the crop.  The government can control inflation by limiting money supply growth to the rate of real economic growth (population + productivity) and by refraining from other activities that cause businesses to raise prices, such as imposing large tax burdens.  Finally, government can reduce the risk that the money will be repaid, by creating a stable business environment, enforcing the laws, and keeping the nation secure.  Higher interest rates do not result simply because they are legal, but generally because government action causes them.

Finally, the author's factual "examples" don't illustrate his theme at all, but merely show that the Canadian economy has experienced broad growth and broader inflation over time, as the scale of borrowing (especially by the government) and lending increased dramatically and the farm sector declined due to changes in farm productivity.  It is much more an example of how government borrowing causes inflation and why it should be avoided than what is wrong with interest per se.  Hopefully, current standards of economic analysis are higher than when the article was written.