Counting the Cost

Money for nothing

From Lehman to Libor – are the bankers and the banking system out of control?

From Lehman to Libor, scandal and even criminal activity have stalked the banking sector. Despite taking taxpayers money to survive the North Atlantic financial crisis, there is very little evidence the banks are actually using that money to help bolster economic growth.

That has many questioning the role of the banks, and it surprised us that our commercial banks are actually responsible for creating 97 per cent of money. The way they do that, they create money into existence with a few taps on a keyboard.

So, who is actually in charge of all the money? Are the bankers and the system out of control? And with banks failing the West, does Islamic finance have some answers to the world’s money troubles?

Joining Counting the Cost to discuss these issues are: Professor Jem Bendell of the University of Cumbria and Tarek El Diwany, a senior partner at the Islamic investment and finance consultancy Zest Advisory.

Having taken taxpayer money, the banks have been reluctant to loan money out. A problem entrepreneur David Fishwick had to deal with, as his clients could not buy his minibuses because they could not loan money from the banks. When he decided to turn his hand to opening a bank in his home town of Burnely, he quickly ran into a lot of red tape.

We speak to David Fishwick about his experiences and his decision to take on the banks and the system which regulates them, to set up his own small-time bank for everyday people.

He says: “It [trust] doesn’t exist any more [in the banking sector], but it does if you put social responsibility back into people, they do pay …. My little ‘bank’ is completely different from most banks …. We keep it in one big circle, a community bank that works for the community, that serves the community, that we get a 98 per cent payment rate on because it’s for the community.

If a bank is too big to fail, then it’s just too big to exist and it shouldn’t be there in the first place. If banks are kept small and they are run by capable people who are very comfortable with the amounts of money that are going in and out, we would have never gotten the problems that we have got at the moment. But the big problems that lie at the door of the banks: When people rob banks they go to prison, when banks rob people they get bonuses. That has to stop.”

The role of banks in society

By Tarek El Diwany

Calls for radical reform of the commercial banking system are as old as the banking system itself. Since the modern form of banking was established in England during the late 17th century, politicians and economists of many shades have held it responsible for inflation and the boom-bust cycle. Some have gone so far as to equate commercial banking with institutionalised fraud.

In most countries, the laws and regulatory standards which have been developed to address these concerns have been little more than a palliative and banking crises have thereby become an endemic feature of the modern capitalist system. Likewise, the trillions of dollars that have been injected into banks over the last few years have come with few meaningful conditions attached, and the system will most likely live on to create further crises in years to come. It is no small irony that the wealth of ordinary taxpayers should have been used to bail out the very system which has so hopelessly indebted them.

Of the many driving forces behind our dysfunctional financial system, one has been given far less attention than it deserves. The majority of people believe that the business model of a commercial bank is to lend out money that someone else has deposited a little while earlier.

While this may appear to be the case from an inspection of a single bank’s balance sheet, it is nevertheless true that most of the money loaned by the commercial banking system is money which the banks themselves have created out of nothing.

The fact of money creation was most apparent in olden times when commercial banks had the legal right to print paper bank notes, holding only a fraction of their face value as coins in the bank vault.

It was British prime minister Robert Peel who first moved to end this privilege with the Bank Charter Act of 1844. His reforms largely failed because the Bank of England sidestepped the new regulations almost as soon as they were enacted. In due course, most money would be created not in the form of paper bank notes, but as bookkeeping entries in customer accounts.

Almost a century later, American economist Irving Fisher again took up the cause of a sound monetary system with his call for “100 percent Money”. Though well reasoned, his arguments had little impact on an increasingly powerful banking lobby, and the issue of money creation once again slipped from the public consciousness. Today the essential question of who creates our money is lost amidst talk of fiscal cliffs and triple-dip recessions, or answered with the less than half-true statement that all money is created by organs of government.

In Counting the CostMoney for Nothing, three reformers examine the monetary role of commercial banks and some of the wider questions surrounding the role that banks should play within society as a whole. Professor Jem Bendell from the University of Cumbria, focuses on understanding how businesses and communities are creating their own means of exchange, rather than waiting for national monetary reform. He reports that there are now thousands of alternative currency and credit clearing systems worldwide that enable people to transact without a bank being involved.

Tarek El Diwany is a specialist in Islamic finance with 20 years of experience in the field of monetary reform. He runs the London-based consultancy Zest Advisory and is the author of the academic text The Problem With Interest.

David Fishwick is the founder of the Bank of Dave which shot to prominence in the United Kingdom as an attempt to improve banking practices by actions instead of words. David explains the ingredients that go into making a bank genuinely useful to the public, and talks about the problems he encountered along the way.
Since the programme was first broadcast, more banking scandals have come to light but the political momentum for effective reform seems to be receding. This contrasts with the popular mood for radical change that was in evidence only a year or so ago.

In the midst of the Great Depression, the Governor of the Bank of England, Montagu Norman, rebutted his critics with the Arab proverb “the dogs may bark, but the caravan moves on”. If today’s calls for reform are met with similar arrogance, then serious questions need to be asked as to whether our present system of government is capable of bringing the necessary changes.

If it is true, as some allege, that politicians have less power than banking elites, then the democratic process may in fact be one of the means by which genuine change is delayed or prevented. And if this is true, then the only obvious alternative is for the people to create their own solutions.


Watch each week at the following times GMT: Friday: 2230; Saturday: 0930; Sunday: 0330; Monday: 1630. Click here for more Counting the Cost.

Follow Kamahl Santamaria @KamahlAJE and business editor Abid Ali @abidoliverali