Under the current monetary system customer deposits provide banks with a cheap source of central bank reserves, which are required to make the payments to other banks that may result from the issuing of loans. (Banks acquire central bank reserves (base money) when payments are made to their customers’ bank accounts.) However, despite helping to fund the loans, depositors have no say and little idea over the use of ‘their’ money. They may therefore be unwittingly helping to fund activities that they disagree with.
The absence of any control by depositors over how banks are able to use the funds they provide means that an environmentalist’s deposits could be funding oil extraction and a pacifist’s deposits could be funding arms manufacturers. It could be argued that environmentalists and activists should take care to bank ethically. However, a large proportion of the population are unaware that banks are not large safety deposit boxes.
A poll conducted by ICM on behalf of the Cobden Centre found that 74% of the public thought that they were the legal owners of the money in their account (Evans, 2010). In fact, all money deposited in bank accounts is the legal property of the bank, leaving the bank free to use the money as it sees fit. Instead, of having ownership of their own money, the customer instead has a claim on the bank, which allows them to request the bank to make payments on their behalf.
Not only are many customers unaware that any money they deposit into a bank is no longer legally theirs, a significant proportion are unaware that the bank uses deposited money to help fund its loans and investments. When told that the bank does not keep their money safe in its vaults but will put at least some of it at risk, 33% most agreed with the statement: “This is wrong – I haven’t given them permission to do so.” (Evans, 2010)
Of course no one is forced to open a bank account or to keep their money in it, and members of the public could refuse to fund banks’ activities by simply refusing to have a bank account and dealing only in cash. However, it is almost impossible to live in the modern world without a bank account, and most employers will not pay salaries in cash.
In this way people are effectively forced to fund the lending and investment decisions of banks, potentially against their own ethics and wishes.
Because of a lack of transparency and depositor control the investment decisions of banks (and therefore of society) are driven almost exclusively by the short-term profit considerations of bank employees. The effect of this is to decrease the cost of funding for certain industries over others, while ignoring society’s preferences as to what is funded.
In the reformed, sovereign money system, individuals and organisations would have a choice over how the money that they save is to be used. For example, each bank would provide a range of Investment Accounts with different interest rates and risks attached to them. Each account would fund a different broad sector of the economy. So, a typical bank might offer a variety of Investment Accounts, one of which funds mortgage lending, another that funds small and medium sized businesses, a third that funds consumer lending, etc. Banks could even market accounts based on their ‘greenness’. For example, a bank could offer an account that funded only ‘green’ businesses, and excluded big energy companies, or companies with a history of pollution. In reality the possibilities are endless. Crucially, individuals would no longer be unwittingly funding activities that they disagreed with. As a result, the investment decisions of banks would start to reflect the investment priorities of society.
See Infographics Current Money system vs Sovereign Money system