Banks Have A Monopoly On Wealth Creation

Deborah Orr The Guardian June 2, 2011

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We must hope the banks become less sick and less mad, and realise that to save themselves they must save everyone

Entrepreneurs, it has been said so many times over the past 30 years, create wealth. Right this minute, the foolish government is sitting around, waiting with bated breath, for glamorous entrepreneurs to get on with doing just that. But there are no signs that a great boom in business ingenuity is on its way.

So why are entrepreneurs being so shy? Don't they want to create wealth? They probably do. But the fact is this: the entire entrepreneurs-create-wealth thing is a fallacy, and the government is wrong to place its faith in it. Entrepreneurs don't create wealth. Banks create wealth, only banks. If you wonder why politicians seem so powerless to "rein them in", then wonder no more. It is for this simple reason: banks have a monopoly on wealth creation.

Banks, it is true, need entrepreneurs to provide the most dynamic links to the real economy in the real world. Banks could sit in front of computer screens creating electronic money all day and all night if they liked (and they do like. They did exactly this during the last "boom"). But without a solid outlet into transactional reality (such as an invention, or the discovery of a natural asset, or even, for a time, an unsolid one, such as a housing bubble), their electronic money is worthless, figures on a flickering screen, no more meaningful than if you or I opened a text file, typed in some gargantuan number, shoved a pound-sign in front of it, and said: "This is mine." The velveteen rabbit, in the eponymous children's story by Margery Williams, needs love to make it "real". In a similar sort of way, the banks need borrowers to make their money "real".

But not just any old borrowers, of course. That's why the banks are so cavalier about ordinary customers and their savings, and even ordinary businesspeople and their relatively meagre profits. The banks crave borrowers who can take lots of their money and use it to attract lots of other people's money, so that the money they created has a profitable link to actual stuff that has actual value, such as solid investments, belongings that hold or increase their own value, labour and skills. Entrepreneurs provide not wealth, but new money-circuits, so that money can be distributed through a long chain of people, preferably nice and fast, picking up more value as it travels through. Essentially, it's like money laundering, except that instead of turning illegal cash into legal cash, the money-circuit turns abstract cash into real money, then delivers it back to the banks.

In one way or another, the real money tends to end up with the banks, along with the abstract money. Sure, there are lots of banks, in lots of countries, all of them able to create wealth as long as they have borrowers, all of whose debts are counted as assets (which is how they create wealth). But even though the banks do compete with each other, they also are "all in this together", because their monopoly on money creation makes them an international cartel.

Those "financial instruments" that created the banking crisis of 2008 were designed to take the smallest possible amount of value in the real world and transform it into the largest amount of value possible in the bank world. They allowed the abstract values held by banks to become so distantly and dysfunctionally related to real-world values, that no one within the cartel had the least idea what relationship the debt-assets of individual banks, even their own, had to reality. The banks are still going about their daily business. But they know that a lot of things, such as houses, say, have the vast value that accrued to them in recent years only because they made it happen. The abstract wealth of banks escaped into the real world, upsetting the balance of their game, and now these institutions are utterly uncertain about what's real and what's not.

In the actual world, there should be no such problems, because people here deal with real money all the time. Most of us rely on entrepreneurs, or at least on businesspeople, to direct it our way, so that we can pass it on, in exchange for goods and services, or in gifts, or, of course, deposit it in banks. (Lots of us liked the way our property made money in recent years too, even though that was one of the main outlets whereby the abstract wealth of the banks seeped out, and contaminated the entire system.) But we are also charged for the privilege of taking part in the process of making abstract money real. That's tax.

What is our tax spent on? It is spent on just one thing. It is spent on ensuring that our potential for taking part in money-circuits is maximised, by educating us, keeping us healthy, maintaining the civic structures around us, providing some civilised amenities as incentives to make us feel that life is worthwhile and enriching for its own sake, and generally keeping the order we need to get out to work and play our small part in the process of giving the abstract wealth of the banks a place to go, so that it can rumble along collecting real value, like a snowball collects snow. In that respect, government spending is itself an investment in banking.

Tax is also used to provide subsistence for those who for some reason or another are unable to extract cash from the money-circuits that are the sole creators of wealth.

This creates resentment, especially from the people closest to the pinnacle of the system. But it shouldn't, because this too is a way of protecting the money-circuits. It helps the population to sleep at night, less troubled by the unfairness of this system, so that we can get up and out, refreshed in the morning, doing the things we do to help the bankers create wealth.

Even the entrepreneurs are dependent on banks, contrary to what the government seems to think (although with a really successful entrepreneur the relationship becomes symbiotic). Upset the banks, and everything gets upset.

They seem untouchable, because they are. At present, the very weakness of the banks makes them untouchable, just as in the recent past they were protected by their strength. The banks are sick, mad despots, corrupted by the easy, unsound money of recent decades. But all we can really do is wait, hoping that they become less sick and less mad, and come to the realisation that to save themselves they must save everyone. Not just the glamorous entrepreneurs.

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Banks Have A Monopoly On Wealth Creation

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