A moral case for bank money

Finance is a skeleton that supports the development of a healthy society, not a utility that plumbs the economy together. The justification for this observation is historical. Richard Seaford has argued that the culture that emerged in Greece some two and a half thousand years ago, creating a unique approach to science and democratic politics, was a consequence of a peculiar Greek invention; money, a token that signifies trust between citizens. The flowering of European culture, and the genesis of modern science, in thirteenth century Europe followed, and some argue was a consequence of, a period of rapid monetisation of society that initiated the end of feudalism. Similarly, western Europe’s development accelerated ahead of the rest of the world in the seventeenth century powered by financial innovations in the Netherlands and Britain.

Charles Mackay in his classic comparison of England’s South Sea Bubble and France’s, almost simultaneous, Mississippi Bubble, emphasises the different reactions in France and Britain to the credit bubbles. In the aftermath of the crises, the French inhibited the development of private banks but maintained the autocratic political system, whereas the British reformed the political system and enabled the development of finance. The results of Britain’s Financial Revolution were Agricultural and Industrial Revolutions along with the eclipse of France as a global power. For France, dependent on taxation to fund the state, there was the ultimate collapse of the political system in bloody revolution.

Getting the structure of our financial system right is not a trivial matter.

One argument gaining support is that the root of recent problems in finance is the private creation of money by banks, and so the solution is to strip banks of this ability. What this would entail is not clear but a core theme is that transactions would involve minted cash (physical or electronic), not bank money. We can visualise the practical consequence of this in little brown envelopes on pay-day containing coins and Bank of England notes. No bank transfers, certainly not in the foreseeable future, meaning no debit cards at the supermarket checkout and the replacement of cyber-crime by good old-fashioned robbery. This makes concrete part of the problem  Martin Wolf identifies when he makes the observation that "The transition to a system in which money creation is separated from financial intermediation would be feasible, albeit complex."   It might prove impossible to get through the Christmas binge, when there is widespread short-term demand for cash.  Could a computer system cope with the funds transfers associated with Black Fridays and Cyber Mondays without the ability to create money? Banks, in this environment, would come to resemble peer-to-peer lending facilitators and the consequence would be that people who have wealth, or are connected to wealthy networks, could buy expensive things, but for the majority it would be harder to get a mortgage.  While this might sound a bit draconian to the British, Germans still have a preference for cash and traditionally live in rented accommodation, having long connected debts (schulden) and guilt (schuld) and, after all, they have done well economically.

Unfortunately it is not certain that German economic success rests on the German preference for cash. An equally plausible explanation is the structure of the German banking system, which, unlike the British and U.S. systems, is not dominated by private profit seeking banks but has a significant sector of not-for-profit, regional, financial institutions. An IMF paper highlights how countries with this type of financial system, including France and Spain, did not require the massive government bailouts that British and U.S. banks did in 2008-2009. Mutuals and public banks create money in the same way as privately owned banks and so preventing banks from creating money seems to be a rather extreme solution when the problem might be elsewhere.

Calls to prevent banks from creating money to ensure financial stability resemble calls to ban the internal combustion engine to prevent climate change. It would clearly go a long way to solving the problem, in theory, but is totally impractical. One group who would like to see the debate on banking reform focus in on money creation are the banks themselves, because they can be confident that if this is where the debate is centred, nothing will change. Most voters need bank credit just as they need cars.

I cannot offer a straightforward alternative to preventing banks, or anyone else, making money. I do have an alternative idea of where the problem lies though. If you read about eighteenth century finance it is striking how engaged people were with financial innovations. Well before the South Sea Bubble Daniel Defoe wrote about the problem of banking

Money has a younger sister, a very useful and officious Servant in Trade ... Her name in our Language is call'd CREDIT… This is a coy Lass ... a most necessary, useful, industrious creature: ... [and] a World of Good People lose her Favour, before they well know her Name; others are courting her all their days to no purpose and can never come into her books. If once she is disoblig'd, she's the most difficult to be Friends again with us … for as once to want her, is entirely to lose her; so once to be free from Need of her, is absolutely to posses her.

Lady Credit was seen as a coy mistress, much as Boethius had perceived Fortuna

I know how Fortune is ever most friendly and alluring to those whom she strives to deceive, until she overwhelms them with grief beyond bearing, by deserting them when least expected

Right up until the mid twentieth century credit was represented in this way, with John Strachey writing

The banks are essentially feminine institutions. They create the new money which sets the wheels of production turning again. But they cannot procreate without a spouse. The newly born money must have a father as well as a mother. Someone must take the active, positive role of borrowing, spending, and employing, or the banks will remain barren.

In this conception commerce is a marriage between credit and opportunity with the objective of producing growth. However, Lady Credit is attractive and, as Defoe observed in 1709, sometimes her relations are not so benign

The first Violence they committed was downright Rape ... these new-fashion'd thieves seiz'd upon her, took her Prisoner, toss'd her in a Blanket, ravish'd her, and in short us'd her barbarously, and had almost murther'd her

If women run the risk of sexual assault, the civilised response is not to lock them away out of harm’s reach, but focus on the perpetrators. The problems of finance are not in creating money but in lending money to unsuitable projects.

Through the nineteenth century science became confident that it had tamed fortuna and a consequence was the mechanisation of finance. Credit was no longer a prize to be wooed but a servant to be controlled. As finance became de-humanised the morality of the Quakers, who established many of Britain's financial institutions, was replaced by the profit maximising principle. In the process, people have become alienated from finance and lost the capacity to make their own financial judgements; we need to employ professionals to plan our future.

I have argued that profit maximisation should not be at the heart of commerce, rather the norms (virtues, if you prefer) of reciprocity, sincerity and charity. In this framework mutual mechanisms, including peer-to-peer and crowdfunding, are as legitimate as profit maximising private banks. I believe the advantage of this approach is that it takes as given that the economy is capricious and beyond the control of wise men observing nature and pulling controls. Preventing banks from creating money reflects a desire to freeze the economy in order to stop it becoming chaotic. This is a forlorn hope, to which the collapse of Bretton-Woods is testimony.

If you feel my claim that reciprocity, sincerity and charity should be, or even could be, at the heart of finance is as absurd as preventing banks creating money I would point you to Shakespeare’s The Merchant of Venice. One reading of the play is as a study of the four classical loves: friendship (philia), affection (storge), romantic (eros) and unconditional (agape/caritas/charity). Shakespeare personified charity in the form of Antonio, the Merchant of Venice; why did he do that?




I wrote this piece, arguing against removing banks' ability to create money,  for Res Publica's Disraeli Room blog in response to a post Money Creation and Society: The beginning of the debate on how money is created. 

The case I present is not technical but moral,  in the sense of mores/moeurs.  I admire Izabella Kaminska's review of the case to strip banks of their money creation powers, and agree with her analysis of the issues, in particular I support the trilateral monetary system, based on sovereign, bank and private money, that she describes.  Specifically, I like her comment that

A more prudent path [to stripping banks of their ability to create money]might just be encouraging both the central bank and the market to get better at identifying over or under issuance where and when it happens, something which could be made easier if private money’s price signal was detached from the state peg.

This lays the foundation, in part, for presenting a moral case, I don't think the solution to credit bubbles lies in how finance is plumbed together, rather the ethical context under which finance is conducted

A further motivation for presenting a moral case originated in my experience of the Scottish Independence referendum, particularly the dismal performance of Alistair Darling, leader of the unionist campaign, in the final TV debate with the leader of the nationalist campaign, Alex Salmond.  A central issue in the campaign was the currency an independent Scotland would use, and Salmond advocated retaining the pound, controlled by the Bank of England. Darling, as a former Chancellor of the Exchequer had a deep understanding of the technical problems this presented, but Salmond, relying on the public's indifference to these problems and Darling's inability to articulate them, won the debate. 

A common irritant with the Independence Referendum debate was that both parties claimed a vote for them would change everything, but change nothing.  It struck me that the case presented by Positive Money was similar; stripping the bank's of their ability to create money will end the boom and bust cycle, to the benefit of the public, without changing individuals' experience of banking.  The recent Greek election, similarly, centred on the claim that the Greeks can re-negotiate their rescue package, to the benefit of the electorate, without the negative consequences of leaving the Eurozone.  Personally I feel the chance of this turning to tragedy or comedy are about equal, but the most likely outcome will be a yawn: the debt will be re-negotiated, the ECB having had five years to ring-fence the problem.  However, in the context of discussions of bank money it is worth highlighting that the Greek bankruptcy was a consequence of Greek government mis-management, and the austerity was imposed by a troika of public institutions.  Boom and bust is as likely to be caused by public bodies as private banks.

So, my aim in this piece was to side-step the complex technical problems and present a moral argument that might be more accessible to a general audience.

My piece survived on the Res Pubica blog for around two weeks and then was pulled at the request of Ben Dyson, the author of the original piece.  Mr Dyson objected to two 'inaccuracies' in the piece. Since both relate to what might happen if banks are prevented from creating money, and given these are contingent events, I don't think they can, in fact, be described as inaccurate; we have differing opinions. I invited Mr Dyson to engage in public deliberation on the points, through the Disraeli Room blog, but his response was to persuade Res Publica to pull my piece.  An interesting outcome given the claim that the original article was to be the the start of a debate.  What follows, not perfect but an honest attempt to continue the debate, is my original piece. The points of contention were the following in the original,

No bank transfers, certainly not in the foreseeable future, meaning no debit cards at the supermarket checkout and the replacement of cyber-crime by good old-fashioned robbery.  People who have wealth can buy expensive things, but for the majority it would be difficult to get a mortgage and impossible to use a credit card to get through the Christmas binge. While this might sound a bit draconian to the British, Germans still have a preference for cash and live in rented accommodation, having long connected debts (schulden) and guilt (schuld) and, after all, they have done well economically.

which has been clarified in this version.