On Saturday Sir John Vickers, chairman of the ICB, yesterday gave the clearest sign yet that the commission could recommend to the Government a fundamental reform of the UK's high-street banks, including the option of splitting their retail and investment banking divisions.
He said "Not for the first time in history, banks and borrowers in the last decade took risks that went bad, systemically, and imposed huge costs on the rest of the economy and society," said the former Bank of England economist, adding that more must be done to curb excessive risk-taking, and limit the damage it does. http://www.independent.co.uk/news/business/news/highstreet-banks-face-breakup-under-commission-plans-2192043.html
The problem with Sir John's analysis is he does not challenge or seem to understand the fundemental flaw in the current debt based money system, which is 97% of our 'money' is debt owed to banks.
The trade union and labour movement must come to a new understanding of our money system if we are ever to uncoil the constriction the banks have over us all.
The reason our financial system has routinely gotten into trouble, with periodic waves of depression like the one we're battling now, may be due to a flawed perception not just of the roles of banking and credit but of the nature of money itself.
We have regarded money as a "thing"-something independent of the relationship it facilitates. But today there is no gold or silver backing our money. Instead, it's created by banks when they make loans.
Virtually all money today originates as credit, or debt, which is simply a legal agreement to pay in the future. It is this burden of debt plus interst that drives the clammer for economic growth and the rising costs of things we consume through inflation.
Money as Relationship
Money has never actually been a "commodity" or "thing." It has always been merely a "relation," a legal agreement, a credit/debit arrangement, an acknowledgment of a debt owed and a promise to repay.
The concept of money-as-a-commodity can be traced back to the use of precious metal coins. Gold is widely claimed to be the oldest and most stable currency known, but this is not actually true.
Money did not begin with gold coins and evolve into a sophisticated accounting system. It began as an accounting system and evolved into the use of precious metal coins.
Today, paper money is no longer redeemable in gold, but money is still perceived as a "thing" that has to "be there" before credit can be advanced. Banks still engage in money creation by advancing bank credit, which becomes a deposit in the borrower's account, which becomes checkbook money.
In order for their outgoing checks to clear, however, the banks have to borrow from a pool of money deposited by their customers. If they don't have enough deposits, they have to borrow from the money market or other banks.
As British author Ann Pettifor observes: The banking system . . . has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine. The banks suck up cheap money and returns it as more expensive money, if they return it at all. The banks control the money spigots and can deny credit to small players, who wind up defaulting on their loans, allowing the big players with access to cheap credit to buy up the underlying assets very cheaply. http://www.huffingtonpost.com/ann-pettifor/the-broken-global-banking_b_748628.html
The bankers have engaged in what amounts to a massive fraud, not necessarily because they started out with criminal intent (although that cannot be ruled out), but because they have been required to in order to come up with the commodities (in this case real estate) to back their loans. It is the way our system is set up: The banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending.
Instead, they are vacuuming up our money and lending it back to us at higher rates. In the shadow banking system, they are sucking up our homes and lending it back to our pension funds and mutual funds at compound interest. The result is a mathematically impossible pyramid scheme, which is inherently prone to systemic failure.
What needs to be done to banking?
The flaws in the current scheme are now being exposed in the major media and by the various commissions and invesitgations into the so called credit crunch, and it may well be coming down. The question then is what to replace it with. What is the next logical phase in our economic evolution?
Firstly, the rules governing banking are changed so that banks can no longer create bank deposits (the numbers in your bank account). Currently these deposits are considered a liability of the bank to the customer - after the reform, they would be classified as real money and only the Bank of England would be able to increase the total quantity of them.
The Bank of England would then take over the role of creating the new money that the economy requires each year to run smoothly, in line with inflation targets set by the government. In order to meet these targets, the decision on how much or little money needs to be created would be taken by the Monetary Policy Committee.
To maintain international credibility and avoid 'economic electioneering', the MPC would be completely separate and insulated from any kind of political control or influence - in other words, the elected government would not be able to specify the quantity of money that should be created.
The Monetary Policy Committee would decide how much money needs to be created in order to meet the inflation targets by analysing the economy as a whole - not the spending needs of the government, nor the needs of the banking sector.
They would use 'big picture' statistics to judge whether meeting the inflation targets requires more or less money injecting each month. They would also have access to all the research resources that they require to make an informed decision.
Upon making a decision to increase the money supply, the MPC would authorise the Bank of England's Issue Department to create the new money by increasing the balance of the government's 'Central Government Account'. This newly-created money would be non-repayable and therefore debt-free. The newly-created money would then be added to tax revenue and distributed according to the elected government's manifesto and priorities. This could mean that the newly-created money is used to increase spending, decrease the national debt, or replace taxation revenue in order to reduce taxes, although the exact mix of these options would depend entirely on the elected government of the day.
Consequently, the decision over how newly-created money is initially spent would be made by the government, but the government would have no control or influence over how much money is created.
Implications for Customers of Banks
To the average person, banks will appear to operate very much as they do now. However, the necessary 'behind the scenes' changes required to prevent banks from creating money will mean that there a few subtle changes to the terms of service on current accounts and savings accounts.
The Public Credit Solution
By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.
A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners.
For capital, a local authority bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the investments where it is parked now into the community owned bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment.
The Bank of North Dakota, currently the USAs only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see www.public-banking.com.]
We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance.
But to get the type of real reform we need to campaign and have a sound view on money and banking, which we should demand the Labour Party takes up.
A new organisation has sprung up to help with this role. Its called Positive Money - sign up today! http://www.positivemoney.org.uk/get-involved/
