Positive Money 1
"Is your money safe? Or is it being used by your bank for risky investments?"
Positive Money (http://www.positivemoney.org.uk/) has been tireless over the last 12 months in putting out its message that British banks need reforming. Their presentations focus on the surprising fact that 97% of the current supply of circulating money (broadly defined) was generated not by the Government, nor by our central bank (The Bank of England; which is a quasi-private company**), but by the major commercial banks — those hotbeds of irresponsible greed.
Rhetorically, that is a great move; it staggers the average reader. Even to a casual glance the system seems flawed. We want to know who 'owns' the 97%, all that virtual money typed into your current account when you are given a loan? And who benefits from it; you, the depositor, or the bank? But, on second thoughts, what exactly is the flaw and what (therefore) the rememdy?
One flaw is that the decision to extend credit (create buying power) is in the hands of the "irresponsibly greedy". Bankers offer credit where they should not, because doing so brings them reward without any penalty from the consequent debt default. Positive Money's remedy is to take from the commercial banks the power to create money by extending credit. Another remedy would be to contrive that making loans was less remunerative to the commercial banks (an idea I develop elsewhere). A third would be to return the penalty for bad debts to the place where the bad lending decisions were made (rectify risk-asymmetry, or 'moral-hazard' as it is comically dubbed). If it be the depositor that initiates the gamble called 'investment', then there would seems to be no requirement to make good his losses. However, if it is the commercial bank that chooses the risk and makes the gamble, then the bank should loose when the debts go bad. They should NOT receive a bailout from the state; perhaps a loan that will cripple the bank until every last penny is paid off.
Another flaw is that there is productive debt and unproductive debt; unproductive debt can never be paid back; except by using money from productive debt. (I have explored this distinction elsewhere, as have others). Unfortunately, unproductive debt (as in house purchase) often appears to the bankers as more attractive, because less risky. The mountain of debt grows ever bigger.
How (we ask) is the Positive Money remedy to be implemented? Their case is fully and clearly laid out in their submission (See: http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf), but that requires 2 hours of concentrated study, and then 10 more hours of debate. Perhaps they should develop the next layer of their argument in the form of explosive rhetorical slogans. What is wanted now is a stream of snappy one-liners like their point about money being 97% virtual, 3% real. Perhaps:
"Is your money safe? Or is it being used by your bank for risky investments (without your permission)?"
Who will push throught this reform?
Not the banks for sure. Nor perhaps the average citizen. We have got so used to free banking that we are likely to resent even a small fee. The expectation that banked money will bear interest is deeply ingrained in our society; we equate "banked" money with "invested" money. Shakespeare's clown, when given a penny asked: 'Would not a pair of these have bred, sir?' ". Sorry, Feste my friend; it is not as simple as that. You must buy a hen, or a field, or some tools if you want 100 pennies to turn into 105 at the end of a year. Or your may let someone else buy the hen, but choose that someone wisely. With the Positive Money plan, banked money is safe, but does not breed; it will sink slowly in value with inflation. 'Invested' money, on the other hand, will rise or fall with the success of the venture; but on average should rise, a little. After 100 years of safe banks (Overend, Gurney & Co crashed in 1866, City of Glasgow in 1878), we came to assume probity and caution in our commercial banks. Alas!
So, who will want to keep their money in the safe bank where they will get no interest and will pay an annual fee; and who will want to lend their money to a 'safe' investment bank, and get interest at 3%, or 4%, or 6%, tempting the banks to offer ever higher rates.
It is true that stabilizing the money supply, increasing competition by allowing customers to swap banks easily, and restoring risk symmetry (eliminating 'moral hazard') are all aims that the government should wish to pursue if it can face down the banking lobby and the voting public. Let us hope.
** The Bank of England, founded by a Scotsman in 1694, is to the Government and the commercial banks more-or-less what the commercial banks are to the man-in-the-street. For 300 years privatly owned and operated, it was nationalized in 1946, but given 'independence' in 1997; it is wholly owned by the Treasury Solicitor on behalf of the Government of the day, but its activites are under the direction not of the government but of a board of independent directors.