Wealth and Income
Once upon a time, before banks and before even private lending, there was only one way to prepare for retirement. People had to hoard something durable. Every week, they would set aside part of their wages to buy salt (later, it was silver). Assuming it didn’t get wet, the salt accumulated until they couldn’t work any longer. Then, they would begin selling it off to buy groceries.
Prehistoric piles of retirement savings
Photo credit: Alicia Nijdam-Jones
This was the best they could do. By modern standards, it wasn’t a very good method. Stockpiling a commodity does not finance business growth, so the hoarder contributed no capital to the economy. And, it carries a very big risk: what if you run out before you die?
The development of lending was a revolutionary breakthrough. Lending allowed the retiree to do business with the entrepreneur. The retiree has wealth, but no income. The entrepreneur is the opposite, with income but not wealth. The retiree lets the entrepreneur use his wealth, in exchange for an income. The entrepreneur is happy to pay interest, in order to grow his business and increase profits.
At times throughout the centuries, governments prohibited lending at interest. They called it a pejorative