BANKING VS DEMOCRACY: How Power Has Shifted from Parliament to the Banking Sector

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Whenever major decisions are taken about the future of the UK, news cameras will be aimed at reporters standing in front of Parliament. But is Parliament really where the key decisions are being made today, or has power shifted down the river to London’s financial sector, the City?

This report from Positive Money finds a banking system that has more ‘spending power’ than the democratically elected government, no accountability to the people, and a massive concentration of power in the hands of a few individuals.

 

However, the greatest concern is that government has surrendered one of its most important powers—the power to create money and control the money supply— to the private sector, which has exploited this power to blow up housing bubbles and indirectly transfer wealth upwards and inwards, with disastrous results. There has been no democratic debate about this transfer of power, and no law actively sanctions the current set-up.

 

As the last few years have shown, the banking sector can have a serious negative impact on our lives. Leaving it with such a huge and unaccountable degree of power is no more likely to work in the best interests of society or democracy in the future than it has in the past.

 

An Overview:

Ceding the Power to Create Money to the Banking Sector
In the current system, banks create the vast majority of money in the UK, in the form of the electronic bank deposits that appear in your bank account. They create this money without regard to how much is needed for the economy and society as a whole to operate effectively, and they put over 90% of this money towards activities that do not contribute to the growth of the real economy.

This power to create money causes inflation that insidiously transfers wealth from savers and those who hold their wealth in cash (i.e. the poor and those on medium incomes) to those who are rich enough to hold their wealth in other assets (such as property). Giving private sector banks a monopoly on the creation of money also means that whenever additional money is needed in the economy, only private banks can provide it. In effect the entire money supply must be rented from the banking sector, at great cost to the economy. The creation of electronic money is a service that could be provided by the government at no cost to anyone.

The business model that permits banks to create money—so far from the popular perception of banks as simple intermediaries between savers and borrowers—is inherently unstable and will systematically require periodic taxpayer-funded bailouts. The cost of these bailouts diverts revenue from the activities that the government was elected to do, compromising its ability to fulfil its democratically mandated objectives.

Leaving this power to create money to the private sector creates a serious democratic deficit: a process that many would consider to be the sole prerogative of the state is in the hands of corporations who have no accountability to the wider public and whose interests are completely at odds with those of society as a whole.

Overstating the True Contribution of the Banking Sector
Politicians and policy makers are misinformed about the true contribution of the banking sector because they are only shown the positive side of the sector’s contribution to government finances, i.e. the taxes they pay. The overall contribution of the UK banking sector to the Exchequer is about 6% of overall tax revenues. In the year that the banking sector paid its highest ever tax, the manufacturing sector paid over three times more.

Society is now acutely aware of the direct cost to the taxpayer of bailing out banks but less attention is directed to the hidden subsidies they benefit from, even in the good times. Firstly, because of both implicit and explicit government guarantees, when a bank borrows money it does so at an interest rate lower than it would be able to otherwise. Secondly, by giving up the power to create money the government forgoes an important source of revenue, which results in higher taxes, lower spending or a bigger national debt. Conversely, the banks benefit financially from the power to create money. These hidden subsidies more than outweigh any taxes paid by the banks.

No Accountability to Customers
Unlike pension funds, banks are not required to disclose how they will use their customers’ money. As 97% of the UK’s money supply is effectively held with banks, this allows them to allocate a larger sum of money than either the entire pension fund industry or the elected government itself. Consequently the UK economy is shaped by the investment priorities of the banking sector, rather than the priorities of society.

Just five banks hold 85% of the UK’s money, and these five banks are steered by just 78 board members whose decisions shape the UK economy. This is a huge amount of power concentrated in very few hands, with next to no transparency or accountability to wider society.

The Close Relationship Between Banking & Government
It is impossible to know how much influence the financial sector has over policy but they certainly devote substantial resources to getting it. The financial sector makes large donations to political parties: the Conservative Party is 50% financed by donors associated with the financial industry, and it offers a ‘backstage pass’ to meet the Prime Minister in exchange for a £50,000 annual donation, raising the question of whether ‘cash for access’ is subverting the political process.

Lobbying is a fact of political life and only the most naïve politician would fail to take account of their naturally biased agenda. However, the resources of banking sector lobbyists far exceed those from other sectors and therefore the views of the banking industry may be drowning out those of civil society.

The close relationship between the banking sector and its chief regulator, the FSA, should be worrying, especially given the record of the last few years.  The revolving door between the banks and their regulators revolves faster in the UK than in any country other than Switzerland and a former Prime Minister now consults for one of the world’s largest investment banks, for a salary approximately 12 times more than he earned as Prime Minister.

Policy Implications
A few economically simple changes to the banking system would return power back to the people and restore some level of democratic control over the economy. These changes are:

  • Make banks ask for permission from their customers before they lend out their money.
  • Make banks disclose how customers’ money will be invested, so that members of the public can refuse to fund activities that they are not ethically comfortable with.
  • Remove the power to create money from the banks and return it to a democratically accountable body.

Making these changes would help redress the democratic deficit in banking and limit the ability of the banking sector to damage society. After the experience of the last few years, these are changes that urgently need to be made.

DOWNLOAD THE REPORT HERE:

 

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  • CM

    I am not an
    economist, just an amateur in this field, and I have only scanned the full
    report, but the overview above raises enough questions.

    The statement that banks’ power to create money has blown up “housing bubbles”,
    and has “indirectly transferred wealth upwards and inwards, with disastrous
    results”, is incontrovertible. I am not sure, however, that the policy to
    “remove the power to create money from the banks and return it to a
    democratically accountable body” would prevent inflation in general, and
    housing bubbles in particular. It sounds like the wrong solution to a correct
    diagnosis.

    Democratically elected governments love inflation. Inflation is a kind of stealth
    tax; it lowers the debt burden of the state; it pushes incomes into higher
    taxation brackets, and it makes everyone on a salary believe they get pay
    increases. That’s the way to go, if you want to play with bigger budgets, and
    not antagonise voters, right?

    In that sense, housing bubbles perform the same function for governments as
    stock options do for shareholders. With stock options, the interests of
    salaried managers become aligned with those of capitalists; and with house
    bubbles, the middle class comes to love governments’ inflationary
    policies. 

    There is no place here to comment on the many issues raised in the
    report. Just this point: I would like someone from Positive Money to clarify what seems a contradiction (if it is indeed
    clear in their own mind). One of the report’s prescriptions is that the power
    to create money should be taken away from banks (OK with that), and “returned
    to a democratically accountable body”.

    Is that so? Ben Dyson, the report’s author, mentioned at a screening of “97%” last Tuesday (my first contact with Positive Money) that monetary policy should
    be the responsibility of a “fully independent committee”. Even more
    categorically, and “in plain English”, the excellent paper “Full Reserve Banking” I downloaded from the site states: “To maintain international credibility and
    avoid ‘economic electioneering’, the MPC would be completely separate and
    insulated from any kind of political control or influence – in other words, the
    elected government would not be able to specify the quantity of money that
    should be created.”

    Hardly democratic, is it?

    But that’s the way it should be. Not democratic. In order for us to be all
    equal vis-à-vis money, it should not be the creation of anyone, not of a state,
    not of a minority of bankers, or a majority of voters. And, by the way, not of
    an “independent committee” (how could that body ever be “independent”?).

    I would like to see a divorce between money and politics. I have been impressed
    by the quality of analysis on this site. I am learning a lot here. The
    diagnosis is spot on. But, in my unenlightened opinion, the solutions offered
    will not cure the patient. 
    CM

  • Alistair

    There is no contradiction re the phrase “democratically accountable”. This means the people in the MPC will be accountable to our democratic representatives in Parliament. It does not mean that Parliament votes to decide the amount of money to be created. Parts 3 and 4 of the Bank of England (Creation of Currency) Bill, outline this in more detail.

  • Peter Kellow

    CM writes ”
    Democratically elected governments love inflation.”

    You have put your figure on the problem of governments creating money and this must be confronted. On the other hand you cannot hand it over wholly to an independent professional body because you don’t know whose pocket they might be in

    You cannot construct a workable body without having it fully constituted in a republican constitution as advocated by the Democratic Republican Party. Anything called “independent” within the current system will just be a quango designed to do the governments bidding (as the MPC is now)

    Monetary Policy Committee is a misnomer because they do not set policy, that is done by the Chancellor. We need a constitutionally protected Monetary Control Board which is subject to republican checks and balances by having the overall policy set by a separately elected president and the appointment of its members down to Parliament

    That way you keep the elected politicians at arms length while allowing a democratic input

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  • RLH

    I have a somewhat different set of reservations.  Accepting as common ground that our present banking system has been the source of enormous distortions and that the power that has been put by it into the hands of financiers and speculative interests must be curtailed, for the common good, I don’t think that it’s going to be possible – nor necessarily desirable – to try to reverse 5000 years of human history merely with a bit of social engineering called “monetary reform”.

    Credit (“debt” if you want to be pejorative) preceded the existence of money by a millennium or more.  On at least one authoritative view dating back to 1913 (and subsequently adopted also by Keynes among others) all money is in reality credit.  On this view there need be nothing vicious about its creation by private agents called bankers, nor is fractional reserve banking inherently the work of satan; on the contrary “leverage” as we have learned to call it may well be the single most essential prerequisite for the proper functioning of a capitalist system.  100% reserve banking is a pivotal element of Austrian school dogma and as such ought to be regarded with intense suspicion – unless one is an adherent of course and eager to apply all the rest of the dogma as well.

    I share CM’s misgivings about the proposed monopoly of credit-creation (dubbed “money-creation” by PM) in the hands of the state.  This is what PM’s proposal amounts-to because financial intermediation – which is all that would be left to banks – is NOT credit-creation, whereas issuing notes and coins (or e-money) is, regardless of whether the issuer is the state or (as in the past) a private agent; there is no difference.  In the past it was private credit-issuers (bankers and merchants) whose money-instruments (tallies, bills of exchange, banknotes) were generally held in far higher regard than those of rulers whose coinage – despite savage punishments for doing so – was habitually exchanged at less than its face value.  That changed only when central banks were invented and became an arm of the Crown.  Central banks as lenders of last resort and FRB are tweedledum and tweedledee.

    The money-supply can be controlled by the government sector (ie Treasury plus central bank) by a combination of fiscal measures (counter-cyclical public-sector deficits or – rarely – surpluses) and increasing or decreasing taxation, together with control over interest-rates by the central bank.  Given that this is done intelligently (with the unvarying aim of achieving full employment with price-stability) the banks can be allowed to do the job they do best – provided the system is first purged of its present gross abuses.

    Effective regulation together with (most vitally) transparent accounting-standards, rigorously enforced – eg “off-balance-sheet” operations prohibited – plus no siphoning-off of taxpayer-funded deposit-insurance to cross-subsidise speculation by banks for private gain, would be a must.

  • RLH

    I have a somewhat different set of reservations.  Accepting as common ground that our present banking system has been the source of enormous distortions and that the power that has been put by it into the hands of financiers and speculative interests must be curtailed, for the common good, I don’t think that it’s going to be possible – nor necessarily desirable – to try to reverse 5000 years of human history merely with a bit of social engineering called “monetary reform”.

    Credit (“debt” if you want to be pejorative) preceded the existence of money by a millennium or more.  On at least one authoritative view dating back to 1913 (and subsequently adopted also by Keynes among others) all money is in reality credit.  On this view there need be nothing vicious about its creation by private agents called bankers, nor is fractional reserve banking inherently the work of satan; on the contrary “leverage” as we have learned to call it may well be the single most essential prerequisite for the proper functioning of a capitalist system.  100% reserve banking is a pivotal element of Austrian school dogma and as such ought to be regarded with intense suspicion – unless one is an adherent of course and eager to apply all the rest of the dogma as well.

    I share CM’s misgivings about the proposed monopoly of credit-creation (dubbed “money-creation” by PM) in the hands of the state.  This is what PM’s proposal amounts-to because financial intermediation – which is all that would be left to banks – is NOT credit-creation, whereas issuing notes and coins (or e-money) is, regardless of whether the issuer is the state or (as in the past) a private agent; there is no difference.  In the past it was private credit-issuers (bankers and merchants) whose money-instruments (tallies, bills of exchange, banknotes) were generally held in far higher regard than those of rulers whose coinage – despite savage punishments for doing so – was habitually exchanged at less than its face value.  That changed only when central banks were invented and became an arm of the Crown.  Central banks as lenders of last resort and FRB are tweedledum and tweedledee.

    The money-supply can be controlled by the government sector (ie Treasury plus central bank) by a combination of fiscal measures (counter-cyclical public-sector deficits or – rarely – surpluses) and increasing or decreasing taxation, together with control over interest-rates by the central bank.  Given that this is done intelligently (with the unvarying aim of achieving full employment with price-stability) the banks can be allowed to do the job they do best – provided the system is first purged of its present gross abuses.

    Effective regulation together with (most vitally) transparent accounting-standards, rigorously enforced – eg “off-balance-sheet” operations prohibited – plus no siphoning-off of taxpayer-funded deposit-insurance to cross-subsidise speculation by banks for private gain, would be a must.

  • Ironsides

    These 5 banks and all financial institutions in all countries involved should be sued for the damage caused since 2008.

  • Designafuture

    It is not banking or banks which are the problem nor is money an issue. What lies at the heart of the problems is the process by which money enters the system. The productive capacity of nations have grown and because the ‘money’the system needs to distribute and consume is based on a debt mechanism the only way to expand the money supply is to keep increasing the debt base. The stage has been reached again where the costs of servicing the accumulating debt has become in itself a barrier to progress and prosperity and countries are in a catch 22 situation of needing to expand their productive capacity in order to afford the costs of servicing their debts. The money supply in most countries is made up of around 95 percent interest bearing debt created by the lending activities of the banks 
    The only way to expand production and consumption is to get more money which means, under the debt as money system, incurring more debt. It is an un-merry-go-round and no-one can find the switch to stop it.
    Because the debt mechanism is owned and operated by the banking industry it is obvious the more debt the productive sector requires the greater the advantage to the banking sector. Simple really!
    The solution, and this is where our democratically elected governments come into play is for them to introduce into the equation a parallel mechanism which creates funding streams for essential infrastructure such as health, education and community services etc free of debt and interest. 
    Such a mechanism would provide an opportunity to back debt out of the productive economy, reduce the burden of debt servicing, stabilise prices, create jobs and reduce tensions in society.
    The reality of the current solutions being put forward is that they ensure further growth of the current debt base and history shows that nowhere in the history of the world has a debt driven problem been solved by a debt based solution. 

    Designafuture    

    • RLH

       “The solution, and this is where our democratically elected governments
      come into play is for them to introduce into the equation a parallel
      mechanism which creates funding streams for essential infrastructure
      such as health, education and community services etc free of debt and
      interest. 
      Such a mechanism would provide an opportunity to back debt
      out of the productive economy, reduce the burden of debt servicing,
      stabilise prices, create jobs and reduce tensions in society”.

      Surely that “parallel mechanism” is already there, and always has been.  It’s known as “running a budget deficit” (counter-cyclically, of course) and (contrary to popular belief) it’s financed not out of taxation but by printing money.  If/when inflation threatens it can be reversed via budgetary and/or interest-rate management and/or by draining excess demand through raising taxes.  None of these need involve any “debt” at all (unless you count the National Debt, which serves other purposes – eg supplying gilts to pension funds).  To repeat – at all times in accord with the over-riding policy-aim of full employment with price-stability over the economic cycle.

      (None of this is my idea, just regurgitated (see “neo-chartalism”))

  • David

    As usual, people recognize a problem, but offer no better solution. “Creating money” out of thin air is bad whether it is done by a private bank or a public government. Until people understand what a medium of exchange is, why it came about, and what qualities make for good and bad mediums of exchange, things will never get better.

    http://mises.org/books/whathasgovernmentdone.pdf

  • Decadoblue

    the lawful bank is definitely worth a research…. 

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  • Alistair

    There is no contradiction re the phrase “democratically accountable”. This means the people in the MPC will be accountable to our democratic representatives in Parliament. It does not mean that Parliament votes to decide the amount of money to be created. Parts 3 and 4 of the Bank of England (Creation of Currency) Bill, outline this in more detail.

  • CM

    I have read that, Alistair

    Given that members of the MPC are appointed by the BofE and by Parliament
    through the Treasury Select Committee, and given that the MPC has “to report to
    a cross-party Treasury Select Committee, and to lay itself open to such
    scrutiny as this cross-party group shall require, on a regular basis as shall
    be established by Parliament”, it would take very brave human beings to stand
    up against the whims and vagaries of the political crowd.

    When viewing the film “97%” last Tuesday, and reading more stuff on this site, I
    understood better what “seigniorage” means.  What a temptation for politicians to increase “their” money
    supply! Probably just as much as bankers’ incentives to do the same. 

    Governments should finance expenses through taxes only. Taxes are tangible.
    They hurt. So that’s the democratic way to finance the national budget.

    The pressure will be immense on the MPC to increase the money supply, as this
    will give more seigniorage revenues to the government to launch projects,
    without having to explicitly ask voters to pay for them.

    CM

  • Ironsides

    These 5 banks and all financial institutions in all countries involved should be sued for the damage caused since 2008.

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