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The most important element in any economy is finance, money or credit. Without what may broadly be called a monetary system, an economy is reduced to barter. We need a monetary system simply to trade goods for goods. And we need a monetary system to provide loans for business investment. All over the world there are millions of unemployed people. A few, a tiny minority, are unemployable, due to mental or physical disabilities. For the rest, they want and need to consume, and they are both willing and able to produce. Money, or credit, is the vital link that can set the two, producing and consuming, into motion.
In developing countries thousands sit around idle for want of a monetary system which can give them credit in the form of small startup loans. Others sit around in markets in front of their produce, each wanting to buy from others but lacking an adequate exchange medium. In most countries the situation is likely to continue indefinitely; yet the answer is simple, as proven in Bangladesh by the Grameen Bank, now well-known in financial circles for its innovative outlook and dramatic success. Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and has created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral, yet the repayment rate is higher than in most developed countries. These small loans are sufficient to unleash potential creativity and begin an upward movement of increasing prosperity. Professor Muhammad Yunus, the founder of "Grameen Bank" and its Managing Director, reasoned that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, "these millions of small people with their millions of small pursuits can add up to create a development miracle." GB provides services covering more than 60 percent of the total villages in Bangladesh. Grameen Bank's positive impact on its poor and formerly poor borrowers has been documented in many independent studies carried out by external agencies including the World Bank, the International Food Research Policy Institute and the Bangladesh Institute of Development Studies. The same broad principles can be applied with equal success in any developed country. The highly successful Mondragon cooperative group in Basque Spain combines the simple business loan into an ongoing relationship between investment banking and recipient business. The Mondragon Bank's operation is formally divided into two halves. One deals with finance. The other half comprises specialist sections, providing skilled commercial, architectural and technical advice either to assist existing enterprises or to promote new ones. Once launched, the new enterprise manages itself but the Bank guarantees continuing support in return for a flow of data from which the new enterprise's progress can be monitored – production, sales, profits and so on. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate. Another feature of this system, a feature it shares with the Grameen Bank, is that the total project, from design through production and management to sales, becomes the loan collateral, rather than the personal assets of individuals. In Germany, the Regional Banks, or Landesbanken have traditionally provided low-interest loans to local firms, both as startup capital and as on-going investment. Smaller businesses provide a flow of data, confirming agreed projections, or providing timely warning in cases where projections are not met. In the case of larger businesses, the investing bank may well appoint a Director to the Board. The banking-industry partnership offers investment at a relatively low cost, backed by the on-going monitoring of the recipient business ensuring safeguards for the investing bank, the recipient business and all those involved with and dependent on it. All of these examples illustrate one salient point: the provision of capital as an exchange and investment medium unlocks the stalemate of unemployment, so that those previously unemployment now have jobs, earn wages, and complete the circle as they become new consumers. Thus the prosperity of the region and ultimately the nation, is improved. But these are isolated cases. Which raises the question: why are we so reluctant to loosen the flow of investment in order to create new business and reduce unemployment? The answer lies deep in the distant recesses of history. As so often happens in human affairs, we base today's decisions on yesterday's conditions, even though they no longer exist. Gold is Gone, but the Memory Lingers on The roots of the modern banking system lie deep in the vaults of the world's first bankers, who simply stored gold and issued tradable paper receipts to the owners. Soon however, these gold-storers came to the realization that not all their depositor-customers would be likely to claim all their gold deposits at the same time. So the gold-storers became bankers as they began to issue the same tradable paper receipts, not to actual depositors of gold, but to traders and businessmen needing temporary loans. Since these tradable "receipts" were not actually backed by gold, it was vitally important to make these loans only to borrowers who could be relied upon absolutely to repay them – or who could provide security in the form of assets which could be claimed by the banker in case the borrower might default. This tradition has persisted today. So even though our banking system is now founded wholly on revolving credit loans, we remain in a situation described by the late Bob Hope: a bank is a place that will lend you money if you can prove that you don't need it. Gold, solid metal sitting in vaults, demanded discipline. Sure you could lend fake "receipts" over and above the total value of the gold you held, but only up to a limit, and with absolutely rock-firm guarantees that the loans would be repaid. The revolving credit system we have now bears only a very tenuous relationship to any form of reserves. It is virtually free of physical limitation or discipline, and as such brings with it enormous potential for good or for harm, for use or mis-use on a massive scale. On the one hand it has the potential to create growth and prosperity in rich and poor countries alike. On the other hand, it carries an equal potential for economic ruin. In the worst cases money is printed until it resembles worthless confetti; even in the best-run economies, banks play casino games with their allotted funds, dabbling in high-risk derivatives markets and speculative ventures, often involving complicity in accounting malpractice. The scandals are never-ending; as one dies in the public view, another comes up. We need to re-visit the whole concept of money, of revolving credit, how it all works, how we can prevent mis-use, and how we can release its enormous growth potential, unleashing talents and creativity, and revealing unemployment and our current inability to release the full capabilities of human talent for the unnecessary waste and stupidity it most surely is. The Regulation of Money or Credit Quantity Let's start on familiar territory. The Commercial, or local banks themselves create credit by making loans to their customers; the loans are eventually repaid, and more loans are made. It is a continuous-flow process, as credit flows out and back, and is then recycled out again. It is this revolving flow of credit which finances the entire economy, buying and selling, earnings and savings, longterm investments and retirement pensions. The Commercial Banks are private corporations, whose sole objective in present circumstances is to make a profit for their shareholders. The Nation's Central Bank attempts to regulate the total quantity of credit in circulation so that it satisfies the needs of the economy in its current or potential level of activity. To expand the economy the Central Bank lowers interest rates, thus encouraging business investment and personal credit-spending. To slow down the level of economic activity the Central Bank raises interest rates, thus discouraging business investment and personal credit-spending. The Central Bank, in conjunction with government economic policy, regulates the quantity of credit flowing through the economy. But the actual translation of a potential credit facility into real industrial and consumer loans is left wholly to the discretion of the private Commercial Banks, whose motives are solely shareholder-profit oriented. Government regulatory involvement in the Monetary System, the revolving flow of credit which empowers investment and lubricates the entire industrial and commercial machinery of the nation, is concerned solely with the quantitive issue of how much credit is available in the system at any given time, and exhibits no interest in, nor exercises any influence over, the selective issue of how the available credit is used. Just as governments still carry a residual aura of absolute monarchs ruling by divine right, bankers too like to maintain a residual mystique harking back to the days when their vaults were filled with gold, and major banking groups even printed their own banknotes. The reality today however is quite different. Today's Commercial Banks are creating credit within the overall framework of, and under the ultimate control of, the national monetary system. They are simply acting as agents handling a national resource, a resource moreover of extensive proportions and of vital import to the economy both nationally and at local community level. And yet this resource of the nation, this System-generated Credit is created and channeled by the commercial banking sector with little reference to the overall needs of the economy and often with insufficient financial responsibility. In the pursuance of profits, banks frequently take substantial risks in financial speculation, or in unproductive ventures operated by relatives or thinly disguised associated companies. The history of banking makes frequent reference to major banking scandals where banks have made substantial loans to dubious real estate companies, or, more recently, where banks have played the foreign currency markets using complex high-risk gearing techniques. The situation remains unchanged, and a new major banking scandal can break at any time. Clearly there is insufficient control over commercial banks' investment activities. Furthermore, there is no current mechanism for directing the flow of credit into economically depressed areas or regional infrastructure requirements. These investment demands are therefore met by government as grants out of current income. This is an improper accounting practice which only serves to distort government accounts. In addition, since companies and projects in economically depressed areas generally receive outright grants rather than repayable loans, this distorts their own costings creating a sense of false profits which cannot be sustained when the grants are spent. Unleashing the Potential Once it is recognized and accepted that System-generated Credit is a national resource, it becomes a matter of importance to consider how this vital – and limited – resource could be used to the greatest benefit of the overall economy. First, appropriate controls and guidelines must be established to ensure that banking resources are not misused for speculative purposes in property, stock markets,derivatives and foreign currency speculation. The next step is to ensure that the National Resource of System-generated Credit is used for the benefit of the economy as a whole. There is an ongoing need for investment in major infrastructure projects and environmental protection measures, as well as industrial development in backwater areas or areas experiencing major unemployment. These projects are presently funded, either not at all, or by government as non-returnable grants out of taxes. Grants lack the financial discipline which applies to loans which must produce a repayment, and the use of taxpayers' funds for what should be investment only succeeds in further enlarging and obscuring government accounts. Regional Development Banks, centrally coordinated and having access to a proportion of overall credit availability, making open decisions based on nationally-debated priorities, could deploy their credit resources to make repayable loans for infrastructure and local development on a more businesslike footing, with the object of maximizing the overall nation's and each region's productive and employment potential. The flow of credit created by the banking system is a national resource, not a resource of any specific bank or investment institution or individual saver. It is a resource having a substantial potential for the enhancement of prosperity, and it is moreover a scarce and finite resource. It is therefore entirely appropriate that this resource should be directed purposefully and publicly into projects which will improve employment, productivity and thus prosperity. Full employment is one of the basic essentials of a civilized society, but it will not come about by chance. There is a tremendous potential for creativity in the world; most people want to do a useful job of work, and to do it well. Unemployment is not for most people a natural or preferred condition. System-generated Credit can be used to expand employment on a powerful scale, but only if it is guided by overall priorities. Without selective criteria, System-generated Credit will not be used productively, and may well serve only to inflate property and stock market balloons which will eventually burst with the disastrous effects only too familiar in historical, recent, and indeed current banking experience. If on the other hand System-generated Credit is recognized and accepted as a national resource, both valuable in its potential and limited in its quantity, Economic Policy can begin to exercise, first protective disciplines, then certain directive criteria so that credit can be channeled into infrastructure projects, areas of high unemployment, and productive investment at regional and local level.
Regional Development Banking |
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