As the bailout of finance capital continues, Peter Johnson's questioning piece has begun to prize open a topic normally subject to the tightest of technocratic seals. If questions aren't asked now in this moment of crisis the Wizard's curtain will descend again and Toto will be left footing the bill. "What an English King has no right to demand, an English subject has a right to refuse" John Hampden argued when Charles the 1st tried to impose a tax without Parliamentary consent in what proved a major trigger to the English civil war. That states only have the right to tax by ceding citizens a right to representation has subsequently proven an engine of democratization across the world, giving voice to American grievances a century later as James Otis declared in Boston "taxation without representation is tyranny". As it was at first, so is it now - fundamentally a question about democracy.
Unfortunately some forms of taxation are more insidious than others, and as the Bank of England declares another 50 billion of quantitative easing isn't it high time we talked about monetary supply? With the 1998 Bank of England Act our Labour Government ceded control over money supply to the Bank assigning it one aim, keeping Retail Price Index measured inflation to target at 2.5% by setting interest rates nationally. Authority was ceded from our elected commons over the supply of our unit of exchange, the Great British Pound. In reality however the power to create pounds has long belonged to banks like RBS, Barclays, and the happy family of Lloyds Banking Group.
Banks are lending institutions, they take deposits from savers and then lend them out at a fee to borrowers. The key institution of modern banking is however the "fractional reserve system", by which only a limited percentage of each deposit needs to be kept on hand. If we imagine 10 pounds to be deposited in a system with a 10% reserve requirement then 9 pounds can immediately be lent out again by the bank. If that 9 pounds is then popped in an account the bank can then lend out 90% of it again, 8 pounds 10 pence in this case, and so on until our 10 pounds has become 100 by the miracle of the money multiplier. By creating debt banks are able to change our initial 10 pounds into 100, and make a tidy fee from interest in the process.
When government prints more money it becomes less valuable in relation to the real goods it can buy, so the logic goes, it's like doubling the number of inches in a foot by making each one half as long - it has no real effect on what you're measuring. In effect the printed money robs value from every other pound already in circulation, squeezing in an extra inch at a time in what is aptly known as an "inflation tax". The point is that through their lending banks create money that takes its value from the money already in circulation. Imagine the chagrin of our 10 pound saver.
Common sense replies that were our initial saver and all the borrowers to try and withdraw the content of their accounts at once we would have a "run" on the bank. (This should be familiar - on the 13th of September 2007 for the first time since 1866 it happened as 1 billion pounds were withdrawn from Northern Rock in one day.) As the money cannot all be spent, we are assured that its effects aren't inflationary. But the inflationary effects of bank lending are still very real. Securitization drove ever-larger mortgage lending activities by banks, and the effects were seen in the doubling of house prices relative to income from 1995 to 2007.
As the economy crashes, loans default, and banks lend less we are also therefore hit by a monetary contraction. Every loan wiped off the books obviates money from our economy, inches, yards and miles at a time. Herein lay an engine of the much feared "stagflation", where growth stumbles while money appreciates in value against goods. Indeed the Bank of England's quantitative easing programme avoids inflationary effects precisely because it is only replacing some of the money rapidly vanishing from our economy.
The bailout has shown just how social the risks of private enterprise truly are. But this democratic deficit runs deeper. By giving banks the authority to create money we gave them the power to tax the money in our pockets. They are private profit making institutions creating "shareholder value" through partial control over our medium of exchange. We live in a post-modern version of Otis's tyranny, its not our tea but our grams that are taxed without consent. We must democratise these bastions of authoritarianism.
But how does one make banks democratic? One way would be the empowering of non-executive directors over the conduct of banks while making them legally responsible as public interest representatives. They should be tasked with ensuring banks broadly serve public interest while executive directors fight for shareholder value by maximising profitability.
One might respond that it is the role of regulators to ensure banks serve the public interest, yet as the Financial Inclusion Centre's report on Reforming the Financial System points out regulators aren't currently powerful enough to perform such a role - they can't even force disclosure on pay and lending practices, and also suffer from a democratic deficit themselves! Only two of the thirteen strong member board of the FSA could be considered public interest representatives, the others are either currently involved in the financial industry or have such a background. Likewise the Court of the Bank of England has only one such representative on a similar board of 13 non-executive directors.
As far as money is concerned we live two if not three degrees away from democracy. Privately owned profit seeking businesses can tax the people while poorly regulated by agencies themselves both undemocratic and untasked with public interest representation, who are then held clumsily accountable before a parliament elected through a deeply unrepresentative voting system. Representation must occur at the point of decision-making: this is supposedly the thrust of "new Tory localism", but also of a much older and more ambitious democratic tradition. For those of us who are democrats, our values dictate the expansion of democracy's frontiers to include the financial sector, the sector that has proven so destructive in its search for shareholder value.