We need to take a long hard look at interest

By Hani Hamdan, Engage Minnesota

With the Occupy Wall Street movement gaining momentum and showing some promise of reform, there is a need to identify the issues that need fixing within our financial system. The phenomena that OWS protesters are decrying, such as the growing socioeconomic inequality, are not simply an act of wealthy bankers. They are a result of these wealthy bankers’ utilizing existing flaws in our system to their benefit. These flaws are what really needs to be addressed.

The OWS movement is certainly not unique – protests are being waged in hundreds of cities worldwide for similar reasons. This is an indication that the sources of the problem may not be strictly American, but rather global. Which is why interest comes to mind.

I know that interest on money is something we all grew up with and that criticizing it would be reaching too far into the core of not only Capitalism, but our values as modern people. Unfortunately, however, such a critical look is long overdue – and here is why:

Suppose person A inherits $10 million or wins that amount in a lottery or a contest, then places that money in a savings account with an interest rate of 3%. This means that he will earn $300,000 in interest in the first year – more than an average doctor’s salary. But there is a problem here: person A is being paid this hefty salary by virtue of nothing but being rich. If his $10 million principal remains untouched, it is perpetually paying him $300,000 a year.

In other words, being rich in and of itself, pays, without an equal effort on behalf of person A to earn.

And where does the bank get this interest money it’s paying person A? It comes mostly from interest on loans that the bank gives to people who need to borrow money because they do not have enough capital to pay for what they are about to spend. In other words, people who need the money end up paying interest when they borrow, and the rich gain money in interest simply because of their being rich. Can there be a better recipe for growing the gap between the rich and the poor?

No matter what the arguments for interest on money are, there is something clearly wrong with the picture above. More importantly, there doesn’t seem to be a need for an interest-based system where money is treated like merchandise that can be bought and sold instead of its proper age old position as strictly a value for goods.

Of course, there is the argument that interest on savings is important for many people to retire comfortably and that it makes up for inflation rates. But this is only true because interest has become very pervasive in our system. If interest is abolished from both savings and loans, and money becomes a representation of a fixed, tangible commodity (the gold standard being one example), people will have much less to worry about for retirement.

More importantly, abolishing interest will take away the perpetual advantage that the rich have over the poor. When everyone is taking the same risks on investments, and when money stops being a source of increasing wealth, the gap between the rich and the poor is very likely to shrink significantly.