Ann Pettifor

Are bankers intermediaries between savers and investors?

Ann Pettifor: September 3rd, 2009

I have just listened to the excellent Dr. Paul Woolley on Radio 4’s the Today programme…He of the aptly named Centre for the Study of Capital Market Dysfunction – like it.  But what bothered me was his remark that the finance sector only acts as ‘intermediary’ between those with savings and those needing investment….

The truth that will not speak its name is that banks do not even do that….I learned all this at the feet of Dr. Geoff Tily, author of an important book on Keynes as first and foremost a monetary economist.

Because banks are licensed to create credit, and because bank money is such a wonderful human invention – there is no need for an investor to dip into someone else’s savings – or to  hire an agent to act as an intermediary… I explained in a recent letter to the Guardian. (below my unedited version). I was responding to a piece by J Freedland, urging us all to join Zopa, and share our savings with those needing to borrow…..

“While I welcome Jonathan Freedland’s determination to sideline the banking sector, his remedy – the exchange of savings and loans via Zopa at interest rates in the region of 8% – is based on a profound misunderstanding of bank credit (Don’t howl with rage. Try an idea that does away with banks altogether, 19 August).

Furthermore, given the deflationary context in which Zopa loans are made, interest rates of 8% (plus its fee) strike me as very high, even usurious.

Freedland assumes that the dispensing of credit or new loans by banks depends on the existence of savings. It does not. Thanks to the magic of bank money – in existence since the founding of the Bank of England in 1694 – banks do not need a penny of savings in their vaults before they are able to extend credit. Nor do they need “reserves”. Bank money or bank credit does not exist as a result of economic activity – it does not exist because careful producers/savers have squirreled their surpluses/savings away in bank accounts.

Bank money exists independently of savings and creates economic activity. Credit issued by banks creates deposits.

All that banks need in order to wield this power is first, a licence from the Bank of England; second, a contract with a borrower pledging collateral and repayment; and third, a ledger/computer into which to enter the loan amount – which is then charged to the borrower’s bank account. Given the ease with which this credit is created, the interest on private bank loans ought to be very low. Instead, the deregulated and secretive cartel that is the British Banking Association sets the price of credit – or real rate of interest – high.

Freedland is not alone in misunderstanding the power of the banking sector – a power not granted to ZOPA. As Joseph Schumpeter noted back in 1954 “it proved extraordinarily difficult for economists to recognise that bank loans and bank investments do create deposits.”

However  the  ability to create credit – effectively out of thin air – was one of the great civilisational advances. (Without it, ‘quantitative easing’ would not be possible.) With this advance, it was no longer necessary for peasants, e.g. to rely on the gift of a loan from the lord of the manor – and it was no longer possible for the lord of the manor to fix usurious rates of interest. As Marx noted in Das Kapital (1894), “the development of the credit system takes place as a reaction against usury….it robs usurer’s capital of its monopoly……”

However, it only does so if this power is properly regulated and accountable to all sectors of society – industry and labour in particular. Thanks to de-regulation the private finance sector can now use these immense powers to hold society to ransom. It will take more than a co-operative website to re-regulate these powers, to lower rates of interest and hold banks accountable to society.

It will take more than a co-operative website to re-regulate these powers, to lower rates of interest and hold banks accountable to society.

Ann Pettifor


6 thoughts on “Are bankers intermediaries between savers and investors?”

  1. So what are the core principles of such regulation?

    This is a genuine question. I am a

    psychologist. If you could boil the arguments down to general principles, as you did here, I’d be grateful.

  2. I only awoke to the nature of Bank money a year or so ago. That this appears to remain such an open secret is in itself

    fascinating. The vast majority of people will just assume they have misunderstood what is meant.
    The system of money is man-made and has more

    in common with computer software and virtual reality than any natural system, and yet so called financial and economic experts persist with their

    deluded explanations.
    One idea, why doesn’t Government create all money for expenditure and simply use taxation to control money supply

    inflation? The idea that money can only enter the system by debt just feeds the long-term ponzi scheme that is our banking system.

  3. ‘On the money’ once again. All that has been proffered so far are reasons why some particular action can not be taken. Both here and

    in the US. The only way that the financial system will respond to criticisms is to place its “managers” under siege. It seems that this may be the

    only language they understand. The notion of a cooperative website as a reform or regulatory tool is silly. Power may corrupt, but used properly it

    can also work.

  4. I don’t understand the Marx quote. I thought that to issue credit is to issue money in parallel

    with debt. So credit is usury in the same way as debt. Can you explain?

    Also (this is not rhetorical) why can’t we nationalise the money

    system so that we (the state) issue money (not credit) and the banks are prohibited from doing so? Then we resolve the inequality built into the

    current, dysfunctional credit/debt-money system, with money supply increasing and debt decreasing (mathematical logic proves that issuing credit is

    more inflationary than issuing money).

  5. Banks are credit intermediaries.

    They come between seller and buyer on credit

    terms on the one hand, and between secured borrowers and lenders/depositors on the other.

    In both cases the role of the bank is to provide

    an implicit guarantee of the buyer and the borrower, respectively. It backs that guarantee with a pool of proprietary capital.

    It is quite

    straightforward for banks to be disintermediated. My article for the Carnegie Council covers this

    also a recent presentation in relation to the next generation of money

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