Money and Banking
“The banking system — which is also the system that creates money — should be under democratic control.”
Within a capitalist economy, work and money interact to ensure that power and economic value are shared unequally; a perfect tool for those with wealthy to grow richer at the expenses of the rest of us. So understanding the money system is of basic importance to any understanding of political economy. And the first requirement we should insist on is that the banking system—which is also the system that creates money—should be under democratic control.
Reforming the Global Financial System
We aren’t going to be able to stabilise the economy and stop it trashing our planet without some high-level financial interventions. I’ve written about some of these in the past and summarised some of that in my recent pamphlet. We need a new international agreement that substitutes a neutral currency for the dollar as the global reserve currency, and we need a democratic body to replace the Bank for International Settlements, which allows the bankers to mark their own homework.
Finance & Sustainability
UK Banking: A More Democratic System
These are high-level changes that will need to be negotiated between countries (more details on this page), but there are plenty of things we can do as the UK to improve out banking system and, in fact, make it look more like the German banking system. In the UK, over 80 per cent of mortgages are in the hands of the top five banks, as are over 90 per cent of Small and Medium Enterprise (SME) accounts. In comparison, 70 per cent of the German banking sector is in small or community banks.
UK
80%+
UK mortgages held by the top five banks
90%+
UK SME accounts held by the top five banks
Germany
70%
German banking sector in small/community banks
Stronger community & regional banking network
What could the UK learn from Germany?
This won’t just help to ensure that banks focus on the needs of individual and business customers rather than the greed of financiers. It will also mean that control over a large portion of the money supplies passes back into community hands. German also gives us a model for how a national development bank might work, in the global beacon of KfW.
Who Controls the Bank of England?
We are lucky in the UK because we have control of our reserve currency, backed up by the Bank of England.
The UK monetary system is a public-private partnership in which privately created credit functions as money due to public support from the central bank. Public underwriting of credit creation is the source of banks’ profitability.
– Simon Youel, Positive Money
Bank Of England
Public Support
Bank Profitability
So if we are backing up the Bank, we should be in control of it, right? The report provides an excellent insight into the key questions, as do many other reports from Positive Money.
The Bank of England should adopt a policy of credit guidance
We need to change the Bank of England’s mandate
So that funding the sustainability transition becomes a central objective, alongside the maintenance of price stability. The Bank should also be required to mainstream the climate crisis into its strategic thinking and to produce a carbon-neutrality roadmap for the financial system, including forward planning scenarios consistent with a 1.5oC warming limit and the equity obligations of the Glasgow Accord. The Bank of England should adopt a policy of credit guidance that will direct lending towards a just and urgent sustainability transition. This means politicians guiding bank lending so that it follows their objectives with credit bans/ceilings for unsustainable activities. Private banks rely on the Bank of England as a ‘lender of last resort’, i.e. it will bail them out if they get into difficulties. In return they should be required to follow sustainability targets for their lending.