Britain and banking: Back to the 1830s
Unparalleled levels of imprudent lending; corrupt banking practices; soaring inflation and rising unemployment; government bank bailouts and an economy dependent on increasing levels of debt to sustain growth. Sound familiar? It would have done to Britons in the 1830s. The fact is that we have been in a remarkably similar economic crisis before and the reasons for it could be almost identical.
In Britain during the early 19th century, paper money was not as we know it today – all reassuringly bearing the head of the Queen and the stamp of the Bank of England. Back then, the Bank of England had the monopoly on the creation of metal coins but private banks – literally – had a license to print money of the paper variety and stick whatever images they liked on it. The result of the bank’s power to print money had disastrous consequences: inflation, as too much money flooded the economy and unsustainable lending, as banks lent out more in paper money than they could possibly back up with real reserves.
When the bubble finally burst in the late 1830s, catalysed by a similar crisis in America (sounding familiar again?) the ensuing lack of confidence in the system led to a run on the banks which had to be hastily curtailed by the Bank of England bailing out a prominent northern bank (how about that one?). In 1839 a similar predicament forced the Bank of England into the ignominious position of having to borrow £2 million from France.
The problem was ultimately resolved by an act of parliament. In 1844 the Bank Charter Act curbed the private banks’ ability to create paper money and ultimately phased it out altogether. The power to create money was now solely in the hands of the Bank of England, a situation which today we think of as the norm, so much so, in fact, that money being created willy-nilly by any private organisation with sufficient (or even insufficient) funds is pretty much unthinkable.
But wait a minute, because, unthinkable as it may be, that’s exactly what is going on today. The causes of our modern banking crisis may be uncomfortably similar to what happened in the 1830s. Today it’s not paper money that the banks have a license to print, but electronic money.
The incredible situation happening today is that banks effectively create money out of thin air when they lend it to customers. This means that the numbers which magically appear in your account when your bank agrees to give you a loan are just that – magical. The idea that the bank has somehow taken this money from some other existing fund or account is unfortunately a myth. The truth is that those numbers have just been typed into a computer. They have literally appeared out of thin air and don’t correspond to any ‘real’ money anywhere.
Okay, you may say, the odd loan here and there isn’t too much of a problem. The banks must surely have a handle on it, right? The banks wouldn’t be stupid or irresponsible with this creation of money thing… … would they?.. Banks?… … Stupid and irresponsible?… … Oh dear.
According to the campaign group Positive Money, over 97% of all the money in the UK economy is electronic. Less than 3% of money is in the form of hard cash. That means that less than 3% of UK money has been created by the Bank of England in the interests of the state. The vast majority has been created by private banks in the form of lending, in the interests of their own profit – 97% of the money in this country is essentially debt.
But surely the banks have the reserves to back up all this magical, invisible money somewhere… surely? Sadly not. According to a report by Positive Money based on information taken from the Bank of England database, as of 31 January 2007 banks held just £12.50 of real money for every £1,000 shown in their customers’ accounts. That’s just over 1% of the banks total ‘money’ backed up by reserves. And that is exactly why banks need bailouts of billions of pounds of taxpayers’ money when they fail – because they don’t have the money themselves.
No wonder the exponential growth of the last few decades has proved unsustainable. No wonder the bubble has decidedly burst. No wonder businesses, banks and even whole economies are going under. The vast majority of money in the economy exists in the form of debt with nothing of real value to back it up. Furthermore it has been created by a bunch of people whose sole interest is shareholder profit and who are not endowed with the keenest sense of moral rectitude, to put it politely.
The problem, essentially, is the same as in the 1830s. Back then the banks had the power to create paper money, now they have the power to create electronic money. The problem is that legislation hasn’t kept up with technology.
Surely then the solution is simple – create new legislation updating the Bank Charter Act of 1844 to cover electronic money. Take the power of money creation out of the hands of private banks and put it back into the hands of the Bank of England.
This is exactly what groups like Positive Money and Money That Works are now campaigning for. They are calling for the government to take back the power from the City and enact similar legislation to the Bank Charter Act. They want the Bank of England to have the sole power to create any form of money, be it physical or digital.
This all sounds like common sense but would it actually work? I don’t know. I’m just a layman and only have my common sense to go by. But it seems to me that common sense is exactly what’s been lacking in our banking system for some time now. Maybe a good dose of enforced common sense is exactly what our banking system needs.Tagged in: 1830s, Bank Charter Act, bank loan, bank of england, banks, debt, economic crisis, electronic banking, finance, inflation, interest rates, lending, paper money, recession, unemployment
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