Is Interest the Opiate of the Masses?

This is the title of an interesting article examining alternatives to interest bearing debt including Islamic finance.

Now, looking at the website on which the article appears, I must emphasise that I am not of any religious persuasion and I’d be wary when it gives voice to some rather dubious – to me anyway – scientific views.

But ideas are interesting wherever they are found and this, it seems to me, is one such occasion. The title is the ironic wake up call of course, because Marx suggested that religion was indeed ‘The Opiate of the Masses’.

But in twenty first century Britain I’m sure money as debt at interest is a better target. Many seem to accept that borrowing is part of their ‘lifestyle’, without somehow realising that they are really improving someone else’s lifestyle to the detriment of their own…

The article emphasises the importance of indebtedness to our economy – which unfortunately is no more than the truth. And of course, with so much of earnings going on private debt servicing this is the main reason for the stagnation within it.

The author states:

The practice of interest ensures that a significant part of the wealth produced by a nation falls into the hands of a few….the obvious inequity interest creates threatens the stability of the entire economic system. At the psychological level, it imposes a business climate characterized by stress… An excessive accumulation of capital occurs, creating a capitalist rentier class. This phenomenon transforms our society into a plutocracy, prone to economic monopolization; so much so that the principles of free competition and free enterprise are in practice greatly reduced. Interest is the real opiate of the masses because the working classes need a powerful narcotic (bank credit) to withstand the social sufferings inflicted on them by this deadly system. Like an abuser to whom one keeps returning for comfort, interest is wielded expertly as both poison and treatment. Access to credit gives the downtrodden the illusion that they can access the same goods as the rich, and ultimately get the same status as the rentier capitalist…

The piece goes on to criticise Marx for not promoting change to capital at interest. But I think that is a little unfair – his arguments were ‘dialectical’ so. as the narrative changed so did the arguments. The fact that he didn’t forsee the future 150 years ago is expecting rather too much, though his more ardent devotees, if there are any left, do often consider what he wrote as too sacred to question.

The author then explores the Islamic alternatives to lending –  on the basis that whereas Christianity eventually permitted interest Islam still forbids it. Islamic financial lending involves an equity partnership so the bank is actually taking a risk in the business itself. If it succeeds it makes a share of the profits and if it doesn’t it loses. This certainly seems preferable to a bank loan where interest is payable regardless of whether the business is thriving or failing, and, for a small business anyway, probably the bank will only grant a loan if they take a charge on a partner’s or director’s house which, in effect, protects them from the vicissitudes of the actual business itself.

So Islamic finance would appear to be more commited to a business than any Western bank and the article thinks it would favour greater stabilty in the economy. I tend to agree.

We then get a look at the Sweedish cooperative JAK Bank, which provides its members with interest free loans by requiring a system of ‘savings points’, which takes account of what monies (at no interest, note) have already been deposited with them. In the event that you have saved £1,000 and want a loan for £10,000:

The amount required to be saved is offset against the existing deposit made in the JAK bank — in this case, £1K. Thus, this individual would be required to save £9K with the JAK bank in addition to repaying £10K over the course of the same repayment period. The JAK bank then uses this extra £9K during the course of the repayment as liquidity for other loans.

In effect all the ‘interest’ you pay through the period of the loan becomes compulsory saving which you have the right to access yourself on completion of the loan. The scheme certainly substantially and neatly redresses the balance in favour of the lender from the borrower.

This seems to me a good alternative ‘recipe’ for credit unions but I doubt whether, with UK average house prices around £200,000, there will ever be enough capital saved to make it workable on any proper scale. Big banks have the supreme advantage of creating their loan capital out of thin air.

I fear we come back to local co-operative banking, which is now, very gradually being established. Because they will be so called ‘hybrid’ co-operatives with both lenders and borrowers having stakes they would be well placed to use the equity route for some of their lending. As they will be local they are, once up and running, likley to have a far better knowledge of their prospective customers than our existing corporate big banks, which seem to rely principally on remote and bureaucratic credit scoring.

Whilst interest will indeed still feed upwards, the rewards will be co-operative and local – there will be no big bonuses. There will be no syphoning off to the City of London, because the head office will be local.

I don’t think interest should ever be the opiate of the masses, but we might gradually have to worry slightly less about loans at interest when local banking finally arrives. Once local banks achieve scale in the locality the big banks will, themselves, have either to change or just retreat to the City and  their ‘financial products’. Even if gradually there are likely to be fewer of those too…