The collapse of the banking system was spectacular, but the banks have been failing us insidiously for years. As the Royal Bank of Sustainability report makes clear, they have long been directing money towards environmentally and socially destructive projects instead of investing in a safe future for humankind. As we are now the owners of huge quantities of banking stock, we surely have a right to reorient this investment – but we also need to think more broadly about the role that banks would play in a green society.
At the most basic level, what we want a bank to do is to hold money when we have too much of it and lend it to us when we are temporarily short. Over the course of a human life these times should tend, on average, to balance up.
If, for the purposes of argument, we take a life as 80 years long, we will spend the first quarter in education and the last quarter in retirement. Both periods are ‘in the red’ in money terms. The middle period is when we are economically active, and it is the value of this work that we share, supporting our parents’ generation – and the children who will support us when we are no longer active.
On a weekly, yearly and even a generational basis, this is the sort of service a bank can provide, evening up money across time and between the members of a community. And since the bank’s aim would be to support the welfare of the community, it makes sense that it would be owned and controlled by the community, much as existing credit unions are.
The decisions about how the bank invested our money could be made by a board elected democratically from the membership. If the bank decided to invest money at interest, that interest would be shared between the members of the community, and if it decided to invest money in a wind turbine without charging interest, the community would also see the benefit.
How might we move from the current situation to this halcyon future? Since large parts of the commercial banks now belong to the taxpayer, I would suggest that we should be able to shift these assets into community control fairly painlessly. Breaking up the banks on a regional basis could be one means of reducing their size and allowing more community involvement.
The community banks would be mutually owned and democratically run. The assets that we now only nominally control would come into democratic local ownership. For all the noises about ‘best value’ for taxpayers, what would provide people with the greatest return in the long run would be a banking system that was under their control and served their interests.
The local bank might also choose to handle, or even issue, a local currency. In Stroud, Gloucestershire, the local currency has a form of negative interest (known as ‘demurrage’), which means that it loses 3 per cent of its value every six months. This is intended to speed up its circulation to counteract the recession.
The picture I am painting here is so fluffy that I am reminded of the cracker joke about the riverbank being the place where otters put their money. But let’s move on to the more ferocious aspects of banking: the encounter with the big beasts.
The Glass-Steagall Act in the US, which became so popular with commentators during the rollercoaster of the banking crisis, was designed to separate this sort of local, domestic banking from the higher-risk investment banking. The confusion between the two was what led to so many of the American poor being bankrupted during the 1929 crash, after they had been tempted into high-interest, high-risk investments, much as punters in the UK were in the run-up to the 2008 crash.
This takes us to the very origin of banking, back in medieval Italy, where financial traders would do their business from a bench known as a banco. These were the heady days of expanding trade – remember Shakespeare’s Merchant of Venice? – where those with cash to spare invested it in risky sea-borne ventures. This merchant banking was always a minority sport, with the possibility of high returns – or huge losses.
This high-risk banking is totally amoral and apolitical: money follows the route towards the highest profit, regardless of the social consequences. This is why there is always plenty of money to invest in derivatives and foreign exchange transactions and never enough to build hospitals or insulate school buildings.
The only answer to this is a political one: we must restore our political control over commercial banking that has been eroded over the past 40 years. Governments need to create socially benign frameworks for banking – along the lines suggested by the Royal Bank of Sustainability proposal – and they should have the courage to reintroduce credit controls.
I am not arguing for Soviet-style central control and micro-direction of bank lending policies. But the total amount that can be loaned, and the sectors it should be directed towards, should be subject to political direction. Once these socially benign structures are in place, banks can operate freely within them.
Finally we must come to the role of the banking system, working with the central bank, in determining monetary policy at the macro level. How banks create money through debt is something we teach economics students in their first year, but somehow the political implications of it do not filter into the public consciousness.
We teach them about what’s known as the ‘money multiplier’ – a means by which the banking system as a whole inflates any deposit to ten times its original size, assuming a traditional reserve ratio of 10 per cent. Since the reserve ratio has been effectively abolished in recent years, the only effective constraint on the bank’s ability to create money was our willingness to borrow it. (See Mary Mellor’s forthcoming book, The Future of Money: From Financial Crisis to Public Resource, Pluto Press.)
The exhaustion of willing borrowers led to the collapse of this particular pyramid-selling scheme and a seizing up of the money mechanism – what came to be called ‘the credit crunch’. This allowed governments to reclaim their power to make money, through the policy known as ‘quantitative easing’ – but the money was put into the stock market via the purchase of debt, rather than into the real economy.
A green chancellor would spend money into circulation as and where it was required. This would actually prove less inflationary than the current system, since the government could balance the level of money in the economy by taxing money out if price levels suggested there was too much.
The central aim of monetary policy would become to match the level of money circulation to the rate of economic activity in the economy. This would empower a green government to enable the transition to a steady-state economy, and during that transition it could put the money towards investment in the green infrastructure that we will need.
The first step towards greening our banking system is to challenge and put to rest the lie that gains strength through its constant repetition: that bankers create wealth. As I hope I have explained, banks create money, but that is by no means the same thing as creating wealth.
As John Ruskin so eloquently put it, ‘There is no wealth but life.’
Molly Scott Cato is a reader in green economics at Cardiff School of Management and author of Green Economics. She is also economics speaker for the Green Party, although this article represents her personal views
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