Tuesday, 4 December 2012


               In the UK there has been a series of investigations into the workings of the banking system trying to identify why the system collapsed in 2008.
The Independent Commission into Banking, known as the Vickers Commission, produced a report that insisted there should be a distinction between retail banks and wholesale banks.
The retail banks are to be designed to provide customer services such as cash deposits, savings, payments/salary and pensions , over drafts, cheque books, cash cards, credit cards, as well as house buying and mortgages. 
The wholesale banks are to continue to be involved in trading books, securities,  derivatives, hedge funds, investment funds, currencies, bonds, sovereign funds, and corporate loans: all forms of financial speculation.
Most personal customers assume that their local bank fulfils retail functions, using deposits and savings to provide loans. Since  the 1980’s most banks have become involved in wholesale functions, and speculation, with traders sitting in front of computer screens not personal customers. 
The Vickers Commission emphasized that retail functions are to be strictly ring-fenced from all wholesale functions. It concluded that the collapse of banks resulted from the demands of the wholesale sections invading the retail sections by consuming all their capital, and then calling on the Government to cover their losses. In future, the Vickers Report concluded all banks are to have enough capital in reserve to absorb any losses. They are to change from ‘fractional reserve banks’ to ‘full reserve banks’.
The most recent investigation is being carried out by the Parliamentary Committee on Banking Standards. It is intended that this committee identifies how best to implement the proposed Banking Reform Act. It has been involved in interrogating John Vickers, and the Governor of the Bank of England, and his deputies, about the best ways to implement the recommendations of the Vickers Report. The committee is determined to reform the system so that the tax payer will no longer be subject to demands for bail out by banks. The UK banks generate over GBP6 trillion and must be designed to cover their own losses.
These investigations are involved in identifying the rules and procedures that will be required to allow the banking system to operate efficiently. They assume the relations between savings and loans, debit and credit: that deposits provide the loans. They seem indifferent to the fact that most ‘money’ is digital not cash, and that it is not possible to place GBP6 trillion on a table for inspection, and verification! Nor to inspect the $600 trillion generated by the derivatives market. These sums exist as entries on a balance sheet or in a trading book, and are presented as summaries on a computer screen. They are ‘digital money’.

I want to try and clarify my thoughts about ‘money’. I realize that ‘money’ is any thing that is accepted in exchange for goods, property, labour, services. In following the ideas of the New Economics Foundation, and Positive Money, as well as the Steady State Economics of Herman Daly, I have found it very difficult to keep focused on the nature of money. For most of my life I have assumed that all my bank dealings are in cash transfers. But most of my financial dealings are numbers on a balance sheet. My monthly salary during my working life, and now my pensions, are not delivered as cash, they appear as numbers. They exist as numbers. My use of credit cards involves the purchase of items on the promise to pay in the future. When I bought a house in 1976, my family did not give the bank the cash price. The bank did not give us cash. Having agreed a mortgage contract, and the collateral, the bank made entries in my bank account, and then transferred the entries to the seller, and charged me for the deal.  When I came to sell the house, the same procedures applied. In all these transactions, cash as coins or notes is not exchanged.
In fact, the only time I use cash is when I go to the local shop. And even then, many shops/restaurants/services do not want cash, they use credit cards - the cashless society.  All of these transactions depend upon the credit entries in your bank account. We are involved in a system whereby customers think cash, but transactions are digital. It is not surprising therefore that in the UK, 3% of money payments are cash, and 97% of money payments are ‘digital’; are numbers; are entries on a balance sheet.
 The implication of this analysis is that most payments and receipts are digital entries on a balance sheet; or in the past were entries made by a bank clerk.  I do accept that the entries ‘represent’  cash/gold/silver/notes.  What is more difficult to accept is that the cash…..notes do not have to exist as ‘real objects’. It is sufficient for people to accept their exchange value, and that they exist as numbers. The ‘numbers’ are ‘money; As long as the numbers balance, we can all carry out money transactions and exchanges, payments and receipts. We are living in a conceptual world of money. And yet we behave as if the money is ‘real’. In fact we do go to the ATM and take out cash, notes. On BBC World recently they chose to represent the $900 million stolen from KABUL BANK with pictures of many packets of money. This underlined the view that money is cash. It is more likely that the theft was made simply by an officer of the bank transferring numbers from one account to another.
The money cycle is that in return for work done; products made; goods sold; numbers are entered into bank accounts as wages and payments. The banks are obliged to convert wages into cash if required. Payments are transferred from accounts of buyers to sellers as entries on statements.
For those who do not have a bank account, all their dealings will be made in coins and notes. In Greece, where I live now, I regularly see BRINKS armoured vehicles collecting and transporting cash, as Securicor used to do in the UK. Many shops and services here do not accept card payments, only cash. Employers have to pay cash to their workers. This is no longer the case in the UK. Payments can be made by Internet and mobile phones.
It is the case that ‘money ‘is represented by number entries on a balance sheet. But how is the new money created? If money was coins/gold/notes, then governments and their Central Banks have the authority to mint coins and print notes to cover their financial needs. For example, a government could print the monies required to finance their health service and education service, etc. instead of raising taxes or taking loans.
 The renowned New Deal developed by President Roosevelt in the USA during the 1930’s marks a classic example of government funding at a time of economic crisis. Faced by mass unemployment, bankruptcy, homelessness, hunger, Roosevelt decided that ‘we must spend money that we do not have!’. If he waited for the recovery and growth, it could be a long wait. The money was needed ‘now’. So the government undertook to develop major schemes of development that led to greatly increased employment such as the Tennessee Valley Authority, and later the Hoover Dam Project. At the same time monies were directed to the Pentagon for the manufacture of military equipment.  The government became the major employer, paying wages, insurance funds and providing equipment. All funded by printing the money.
 This no longer seems to be common practice as the issuance of cash leads to inflation and devaluation. More recently, governments have borrowed the money, not printed it, and paid the interest. Central Banks raise money by buying government bonds and debts for interest. Commercial banks create new money by leveraging their deposits. This means that deposits worth GBP1000 can be leveraged up to GBP 70,000; GBP1 million up to GBP 70million.
The most important way for banks to make new money is by making loans, and charging interest and adding number entries to balance sheets. This is money as debt.  For example, I must spend money that I do not have. What should I do? Borrow it from friends or relatives for free?  Go to the bank, apply for a loan and pay interest.
A bank loan creates new money. In the first place, there is the principal, say 1000. This is created by the bank by entering the sum as a number in an account.  Second, the interest: 20 years @ 8%= 4660.96; or 10years @ 8% = 2158.92; third, the repayment, over time, of the principal + the interest : 1000 + 4660.96=5660.96. The principal sum can be multiplied by 1000, and become 1,000,000, for which the repayment would be 5,660,960…..that is, more than 5 times the original sum. Loans are debt. New money is debt. It is clear that ‘loans’ are a lucrative business for banks and for building societies. If there are no loans, no new money is created, and no profits are made. It is worth noting that the principal and the repayment cancel each other out: 1000 cancels 1000, and leaves the interest as profit. In fact, when the principal is repaid, it is cancelled. It is in the interests of any bank to charge as much interest as possible.
If we consider larger loans, like sovereign loans, it is easy to see that the loan plus the interest can disrupt a country’s finances. For example, Greece may have borrowed  Euros 1 billion and more, but will have to pay back up to 4.6 billion: principal + interest =  a total of 5.6 billion….that is 5.6 times the principal. It may struggle to pay the interest, and go bankrupt, even though the principal has been paid.
At this stage, it is apparent that bankers and financiers are involved in playing a money game. They will create the principal on their key board, creating the numbers and then devising a contract to be signed by the borrower promising to pay principal + interest. No cash is involved. The ‘money’ is digital.
On reflection, banks are involved in speculative lending. It is based on the assumption that you will pay back. The recent sub-prime mortgages scandal in the USA involved banks lending money to people who would have difficulty repayng the principal, no matter the interest. When repayments stopped, banks went bust! And looked for rescue.
We are told that ‘economic growth’ is essential for the creation of new money for profits and investment. Speculative banking is at the root of this banking. The banks identify projects and enterprises with good prospects and invest via loans. The creation of digital money is so simple that these investments will go ahead quickly and economic growth can proceed rapidly. In fact, the development of digital money is closely linked with capitalist growth. It enables money transfers, debits and credits, to happen without trouble and for companies to trade.
Previously, if one wanted a mortgage, or an investment, one had to put forward collateral, a security for the loan. For example, when I wanted a mortgage in 1976, I was required to save more than one-third of the price as a deposit; and  nominate a quarantor.  Saving the deposit took 4 or 5 years, so the whole business was slow and subject to refusal by the bank. More recently, it became more straightforward. Clients were given a mortgage without a deposit, and in some places without any regular income. The banks were much more interested in the interest payments, and the market value of the house so that they could sell it on at a profit later. In fact, banks like Lloyds in the UK entered the housing market, controlled the selling price, bought houses and put them out for rental or sale.
The Vickers report identified mortgages as a legitimate function of the retail bank. Such a ruling misses the point that many branches are actively involved in their local housing market, speculating over prices, and busy making new money through loans, and accruing a lot of interest payments. Their profits depend on selling mortgages, and manipulating the market when necessary. It is known that local banks tied in with surveyors and estate agents so as to manipulate the market.  If we are to avoid a repeat of the 2008 Housing bubble, and credit defaults, a robust regulatory framework needs to be introduced and questions raised as to the best services to be part of a retail bank.

What is money?
It is any item, number or object that is recognized by the banks and the government and the tax authorities as having value, which gives it exchange value. At the present time, numbers on a balance sheet, stamped by a bank, are money. The numbers are versatile, and easy to transfer from one account to others. The numbers are ‘digital entries of value’ and can be created at the stroke of a keyboard by a licensed bank. The money can be wages or pensions. It can be debt, generated by a loan. It can be the result of company growth.
Different numbers in different locations do have different value. For example, as part of the Eurozone crisis over Greece debt, it has been argued that Greece return to the drachma and leave the Eurozone. This is possible if Greece wants to stop international trading. The drachma is a local currency and has no international exchange value. It cannot be used as payment of international credits and debits nor as the basis of any loan contract. Given that Greece depends on international trading and loans, the return to the drachma would serve no purpose. The money a country uses has to be recognized by other countries, and given an exchange value, otherwise it has only a local value. The US$, or GBP or Euro are international currencies accepted round the world. The drachma is not: it is hardly recognized in Greece.

Money Games
The more I think about it, the more I come to realize that we are all involved in the ‘money game’. Currencies are given symbolic significance which has little to do with their value. For example, the drachma as a symbol of Greek independence; the dollar as a statement of US superiority against Japan, China, Europe; the Euro as a symbol of European unity; the GBP was once the marker for Imperial trade and is now promoted as a symbol of British trade and financial security. Money numbers are taken as symbols representing the desirable characteristics of all home countries.
It would be correct to admit that ‘money’ was based on shells, gold/ silver/ copper coins, IOU notes, in the past. But as these have become too cumbersome to handle in response to the increase in circulation, and the globalization of banking, so it has become necessary to make money exchanges simpler and faster.  We are living at a time when trillions of pounds/dollars/euros/yen are in circulation. The sums are too great to deal with satisfactorily, manually.  It is much more straightforward for money to be represented by numbers on a balance sheet on a computer screen and moved according to dealings.