What if Money Had No Time Value? A Thought Experiment on Interest-Free Economics

I asked Gemini to wonder about the economy if the money had no time value. If I can lend $1 dollar to my relative and do not expect interest after 1 year, what would happen if the whole economy would be based on this idea? Most of the article is written by Gemini, with some of my edits.
P.S. I do NOT suggest going this way it is just the thought experinment I wanted.

In a world without interest, the fundamental concept of the Time Value of Money (TVM) would disappear. TVM is the bedrock of modern finance, built on the principle that $1 today is worth more than $1 in the future because of its potential earning capacity.

Removing interest would trigger a seismic shift in how we save, spend, and value everything from homes to businesses.

The Death of "Passive" Saving

In our current economy, people save money in banks or bonds to earn interest, which compensates them for delayed gratification and inflation risk. Without interest:

• Hoarding vs. Investing: There would be no incentive to keep money in a standard savings account. People might hoard physical cash or gold, or conversely, spend money immediately since it doesn't "grow" by sitting still.
• Wealth Preservation: To preserve wealth, you would have to buy productive assets (like land, stocks, or a business) rather than "renting" your money to a bank. This shifts the focus from passive income to active participation in the economy.

Lending and the "Equity" Model

If a bank cannot charge interest, the traditional loan model dies. Instead, the economy would likely shift toward Profit and Loss Sharing (PLS), similar to modern Islamic Finance.

• Equity over Debt: Instead of a bank giving you a loan for a 5% fee, the bank becomes your partner. If your business succeeds, the bank takes a share of the profit. If it fails, the bank shares the loss.
• Risk Assessment: Lending would become much more selective. Banks wouldn't care just about your credit score; they would care about the actual viability of your business idea, as they are now co-owners of your risk.

Impact on Asset Prices (The Real Estate Shift)

Interest rates are the "price of money." When interest rates are low, house prices usually go up because borrowing is cheap. If interest is zero forever:

• Price Discovery: Houses would be valued based purely on their utility (shelter) or their rental yield, rather than as a leveraged financial play.
• Installment Sales: Instead of a 30-year mortgage with interest, you might see "cost-plus" models where you buy a house for a fixed premium paid over time, or "rent-to-own" structures where your ownership stake grows with every payment.

Inflation and the "Cost" of Holding Money

One of the biggest problems with a zero-interest world is inflation. If the cost of living goes up by 3% but your money earns 0%, you are effectively losing 3% of your wealth every year.

• The Velocity of Money: People would likely spend money faster to avoid losing purchasing power. This could lead to a very "fast" economy with high consumption but potentially low long-term stability.
• Currency Depreciation: Without interest rates to attract foreign investors, a country’s currency might weaken, making imports more expensive.

Interest vs. No Interest

A Radical Alternative: "Demurrage"

Some economists have proposed the opposite of interest: Demurrage, or a "carrying cost" for money. In this system, money loses value if it isn't spent (like an expiration date). This is the ultimate "no-interest" scenario, designed to force money to circulate constantly, though it makes long-term saving for retirement extremely difficult.

Modern Islamic finance

Modern Islamic finance operates as a values-based alternative to the conventional debt-heavy system, moving the "engine" of the economy from interest to risk-sharing and tangible assets. In this model, money is not treated as a commodity that can be "rented" for a fee (interest); instead, it is a medium of exchange that must be linked to productive economic activity.

Banks don't simply "loan" money; they enter into partnerships. If you want to start a business, the bank may use a Mudarabah (profit-sharing) or Musharakah (joint venture) contract, where both parties share in the profits and, crucially, the risks. For home purchases, they might use Murabaha (cost-plus financing), where the bank buys the property and sells it to you at a transparent markup paid in installments, or Ijarah (leasing), where you rent the property from the bank while gradually buying out their share. By strictly prohibiting speculation (Gharar) and gambling (Maysir), and avoiding "sin" industries like alcohol or weapons, modern Islamic finance aligns itself with contemporary ESG (Environmental, Social, and Governance) investing, positioning it as a resilient, ethical framework for the global economy.

Bitcoin case

In the context of an interest-free world, Bitcoin offers a unique case study because it is programmed to move from a slightly inflationary asset to a strictly non-inflationary one. Currently, new Bitcoins are "minted" as rewards for miners who secure the network, but this supply is capped at 21 million.

The Transition to "Digital Gold"
Around the year 2140, the last Satoshi (the smallest unit of Bitcoin) will be mined. At that point, the "block subsidy" disappears, and the economic model of the network undergoes a fundamental shift:

• Security via Transaction Fees: Miners will no longer be paid in "new" money. Instead, they will be compensated exclusively through transaction fees paid by users. This creates a "security budget" that must be high enough to incentivize miners to keep their hardware running. If the fees aren't sufficient, the network's hash rate (and thus its security) could drop.
• Absolute Scarcity: Unlike gold, where a massive price increase can lead to more aggressive mining and new supply, Bitcoin's supply is mathematically inelastic. In a world without interest, such an asset becomes the ultimate "anchor." If the economy grows but the money supply stays fixed, the value of each Bitcoin naturally increases—a phenomenon known as price deflation.
• The Velocity vs. Hoarding Problem: Because Bitcoin's value would likely rise over time (as it becomes scarcer relative to goods and services), people might be incentivized to "HODL" (hoard) it rather than spend it. In a traditional economy, this is seen as a "deflationary spiral" that kills growth. However, in an interest-free economy, this might simply serve as the natural way for individuals to save for the future without needing a bank.

Comparison: Bitcoin vs. Fiat in a No-Interest World