Money, Banks and Finance in the New Economy
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New economy series Booklet 4 Money, banks and finance in the new economy Savings accounts, investments and loans: the financial sector provides essential services at the heart of any modern economy. Some people view it as the oil that allows the wheels of the economy to turn effectively. Yet, as most recently shown by the 2007/8 financial crash, the system is also highly volatile and when it goes wrong can wreak havoc across society. This booklet explores the financial system and money creation, asking how they could be reformed to help create a more stable, equal and just economy. This booklet, the fourth in QPSW’s new economy series, is not for passive consumption! Full of questions to aid reflection and discussion, it asks you to imagine for yourself what a different type of economic system could look like. We hope you will contemplate these questions on your own or explore them in reading groups in your meeting. For more information about reading groups, or to sign up to the programme, visit www.quaker.org.uk/new-economy. We’d also like to hear what you think and invite you to share your feedback, questions and reflections with us directly or by posting them on the Quakernomics blog at www.quakerweb.org.uk/blog. 2 The Quaker Peace & Social Witness (QPSW) new economy project responds to minutes made by Britain Yearly Meeting between 2011 and 2015. These present a strong critique of our current economic system and commit Friends to working towards building a different type of economic system - “an economic system in which Quaker testimony can flourish”. Throughout these booklets we refer to this as the ‘new economy’. QPSW believes that while Friends are, for the most part, in unity about what’s wrong with the current system, we are still corporately discerning both what a better economic system might look like and how we might get there. The new economy project exists to support that discernment. The new economy series is intended to stimulate debate and reflection. The ideas here do not necessarily reflect the policy or positions of Quaker Peace & Social Witness or Britain Yearly Meeting. Find out more at www. quaker.org.uk/neweconomy. Introduction and industry to take salaries and The British economy is highly bonuses that are many hundreds dependent on the financial sector. of times larger than those of their Yet bankers have not been popular employees. Deepening economic in recent years, with only four per inequality cannot continue cent of the British public saying that indefinitely without a risk of violence they believe that banks observe and oppression.” 1 high ethical and moral standards . This booklet goes further in its Perhaps this is hardly surprising analysis of how finance is failing us. – the financial crisis exposed all It argues that our current banking kinds of misconduct at the heart of and monetary system not only fuels British finance, and yet since then inequality, but is inherently unstable the sector seems to have continued and ties us into an unsustainable with business as usual – largely economic model dependent on unreformed and unchecked, with endless economic growth. Put many senior bankers still enjoying simply, without transforming finance huge annual bonuses. we cannot transform our economic Quakers have already spoken out system. This is why our Quaker against aspects of our financial commitment to building a more system. Britain Yearly Meeting’s equal, stable and sustainable society 2012 Statement on Equality reads: leads us to consider how we can “We challenge the culture and ethos reorganise banking and money that enable the leaders of finance creation. In 2015, following conversations Banking and money today 3 with Friends across Britain Yearly Money is one of the fundamental Meeting, Quaker Peace & Social building blocks of our financial Witness created Principles for a system. But what is money? This is new economy, which offers ideas a fundamental question worthy of a for how an economic system in paper of its own and one which it is line with Quaker testimony might important for us to consider. work. Principle number six suggests that, in the new economy, “Let me issue and control a money could be created “under Nation’s money and I care not who democratic control, for positive makes its laws”. social benefit” and that debt will be Popular quote attributed to Mayer “less needed, less prevalent, and Rothschild, an influential banker in often remitted”. 19th-century United States. This booklet will unpick what this One important feature of money is means and some of the ways it that it can make it easier for us to could work in practice. No expertise exchange or trade in goods and in finance is needed to read these services without having to directly pages or engage with the questions barter and swap. With money, you and suggestions they offer. Indeed, can exchange an hour of specialised those readers from outside the labour (as a hairdresser, let’s say) financial sector may offer fresh perspective and solutions on its for cash and then use that cash systemic problems. After all, we to buy any number of things. should not judge the success of Shops and sellers wouldn’t accept our financial sector only on its payment in your haircuts, but they own terms, but also in relation to will readily swap their products its effect on wider society and for your cash. So a haircut can be our natural environment. With this traded for a train ticket, a meal in in mind, it is vital that we ground a café or even a jumper made and our consideration of banking and shipped from China, using cash as money in relation to our spiritual an intermediary. As long as trust in values, Quaker testimony and our the value of money remains, money recognition that equality, integrity, facilitates exchange between people sustainability, community, simplicity who don’t know or trust each other, and peace must be embodied in our and makes long-distance trade economic system. possible. To begin this endeavour, let us turn Money also acts as a ‘store of to banking, money and finance as it value’: cash earned from a haircut currently operates. given today can be saved and used 4 Glossary Deposits – a sum of money paid into a bank or building society. Assets – an item of property (like a house, shares or a gold bar) In Zimbabwe in 2009, money lost so owned by a person or company much of its value that one hundred (e.g. a bank), regarded as having trillion dollar notes were issued. value and available to meet to get a meal in two years’ time. debts or commitment. Thirdly, money is used as a ‘unit of Capital – wealth in the form of account’, allowing us to compare, money or other assets owned in a common currency, seemingly by a person or organisation disparate things like haircuts, meals, (e.g. a bank), usually used for train tickets, piano lessons or rent. production. The value of money depends on Bank reserves – the deposits the faith that it will be accepted and the physical cash banks by others. When that faith in a hold in their vaults plus deposits currency is lost, as has happened they hold with the Bank of on numerous occasions in history England. (most recently in Zimbabwe, but notoriously in Weimar Germany), “It is well enough that people of then hyperinflation results, with the nation do not understand our devastating consequences. Clearly banking and money system, for we should tamper with our money if they did, I believe there would supply only with great caution. be a revolution before tomorrow morning.” Where does Henry Ford money come from? Although money plays such an The vast majority of our money important role in our economy, few (97 per cent in fact) exists only in people understand how it is created. digital form – the figures you see on In Britain it is often thought that the screen when you check your bank 2 Bank of England creates money. balance . This money is created by It does create physical money, the commercial banks issuing loans. coins and notes that we use, but † In recent years, it has also created money this only amounts to about three per through quantitative easing (more on this later) † but this is an exceptional response to recession, cent of the total money supply. rather than normal practice. In the words of Sir Mervyn King, the Governor of the Bank of England Questions for discussion 5 from 2003 to 2013: “Commercial [i.e. high-street] banks create money • Do you think it’s right that […] by making new loans. When a commercial banks have the bank makes a loan, for example to power to create money? someone taking out a mortgage to • How do you feel about the buy a house, it does not typically topic of money? Does it interest do so by giving them thousands of you? Does it perplex you? pounds worth of banknotes. Instead, • Why do you think money it credits their bank account with creation is so rarely mentioned in a bank deposit of the size of the public debate? mortgage. At that moment, new money is created.” In this way they create money and Bank loans expand the money supply since the It is often thought that banks wait for money they issue as loans doesn’t savers to deposit money and then, correspond to money that savers when the bank has enough money have deposited in the banks. The in its saving accounts, issues loans banks do need some deposits to to borrowers.