The rise of global banking
From the late 1970s until the present day a ‘free market’ approach has dominated the economic and political landscape. Apart from the occasional dissident voice such as that of Jeremy Corbyn, both the Conservative Party and the Labour Party have adopted this economic thinking. A key feature of this approach was the rise of banking and finance to the forefront of the economy, with a corresponding decline in manufacturing. In the UK, as elsewhere, what was referred to as Big Bang spelled the deregulation of financial institutions. This was the catalyst for the financialisation of economies across the globe, with the world’s financial system dominated by just a few very large international banks, having head offices in New York’s Wall Street and London. Some of these global banks have branches in Bradford: NatWest, Lloyds, HSBC and Barclays, along with a number of smaller ones such as TSB, Metro and Santander. The City of London Corporation is the local authority that governs that part of London which houses many of the City’s leading financial institutions; it remains more or less a law unto itself. This undemocratic secretive body, which looks after the interests of Britain’s mega rich, has been left to its own devices by both Tory and Labour governments. Keeping these mega rich financiers sweet, in the early 2000s then Labour chancellor Gordon Brown announced the banks were only to be subject to “light touch” regulation. As some readers will recall, within a few years there followed a banking collapse. Far from being disbarred, or going to jail, in 2007/8 these bankers had their institutions bailed out by Alistair Darling, the new Labour chancellor, and were allowed to help themselves to fat cat bonuses.
How the banks make money
One way in which the banks make money is by offering loans to customers. As well as repaying the sum borrowed, a bank’s customer is required to pay interest on the loan. Simple interest refers to a fixed annual repayment, such as 15% of the sum borrowed. Compound interest, on the other hand, means that the borrower not only pays interest on the outstanding sum but also, where the loan is to be repaid over several years, interest has to be paid on the interest that has accumulated in previous years of the loan. Were you to say that this sounds like a nice little earner, you would be quite right. An obvious question is: where do the banks get the money from in order to make their loans to customers? One source is customer deposits; most workers have their wages, salaries, state benefits or pensions paid into one of the high street banks. Needless to say, the rate of interest paid on depositors’ savings accounts is paltry as compared with that charged to lenders, with most current accounts paying nothing, or next to nothing. As many readers will know to their cost, if they overdraw on their accounts without prior notice, they will be charged a high rate of interest plus administrative costs.
Economics textbook writers and other apologists for the banks tell us that linking savers with borrowers is a legitimate source of profits, being generated by the difference in interest earned from borrowers as compared with that paid to depositors. Given the importance of this service to the smooth functioning of capitalism, apologists argue, bankers should be rewarded with handsome salaries and eye watering bonuses. Some years ago, I taught monetary economics to bank employees and this was the story I was supposed to tell my students. Whilst there is some truth in this tale, it is at best a half truth. A good deal of the cash deposits paid into the big banks, often via their overseas subsidiaries, are the proceeds of such criminal activities as selling drugs, prostitution and the like. Despite the lax nature of the regulation of banks in the UK, tigers with few teeth, most banks have been fined for money laundering; although the fines are paltry sums as compared with the banks’ turnovers. For the most part, however, banks do not rely on depositors to finance their loans: they simply create the money for borrowers by crediting their accounts. We may note here that the Private Finance Initiative (PFI), Gordon Brown’s controversial idea in the early 2000s, has proved to be highly profitable for the banks. Mindful of criticisms of the then Labour government’s level of spending, PFI was intended to fund NHS hospitals and state schools by means of “off the books” borrowing from the banks. The high rate of interest on these risk free bank loans is still a significant part of government spending which, given our regressive tax system, the less you earn the bigger proportion of your income you pay, falls disproportionately on lower income workers.
Bank regulation
The UK’s regulatory authorities, weak though they are, place limits on bank lending, insisting that they keep a portion of their lending as cash, or so called liquid reserves, i.e. that can easily be converted into cash. Following the near collapse of the banking system in 2008, the level of these reserves was increased, but are currently being reduced so as to increase bank profits, but in so doing increase the risk of another collapse. All banks are required by law to maintain accounts at the Bank of England, known as the Bank, which in theory at least both regulates and exerts financial pressure on them. For instance, if the Bank increases the rate of interest it charges banks to borrow, which they do from time to time, then the banks will pretty much always increase the rate it charges borrowers, as mortgage holders know to their cost. However, the banks will be either slow to increase the rate of interest paid to savers, or they will not increase the rate at all; hence their current record profits. As regards the alleged neutrality of the Bank of England, the present governor Andrew Bailey, as reported in the Guardian (4th February 2022), put his political cards on the table by urging workers to show “clear restraint” in their pay claims. At the time inflation was over 10% so, in effect, he was asking workers to take a pay cut. The Guardian article reported that Bailey’s annual salary is £575,538, 31 times that of a care worker for example, reporting further that average pay growth for workers in the last ten years is the worst “since the Napoleonic wars”.
In Britain, the Bank and other regulatory authorities tend to turn a blind eye to the illegal use of “price sensitive information”, i.e. insider knowledge not publicly available which is used to make money in financial markets; as a result prosecutions are rare. The motion picture Wall Street suggested that insider trading in the US is exceptional; but Americans do go to jail for this offence from time to time. However, it is clearly difficult to determine what price sensitive information the mega-rich in the know talk about in their homes, the gents’ lavatory and elsewhere out of earshot of the regulatory authorities. Many of those involved in financial markets argue that insider trading should not be a criminal offence; one dealer arguing: such trading “is notoriously difficult to prove…(and) almost impossible to enforce”.
Trouble at the Co-op bank
One of our city’s high street banks was the Co-op which, despite its socialist beginnings and ethical policies, shut its Bradford branch down in order to save on wage and other costs. Prior to its closure, its tellers and back-room staff told me they were frightened of losing their jobs; one older worker was worried she would not be able to get alternative employment. Workers at the Leeds branch, which remains open at the moment, are similarly concerned about their futures. The Co-op bank’s reputation was dragged through the mud in 2012-13 when the colourful chairman of the bank Paul Flowers, a former Labour councillor and Methodist minister with strong Bradford connections, was convicted of class A drug offences and found to have some unorthodox sexual preference. It was later discovered that the bank was making trading losses and had insufficient capital reserves due to a dubious merger, a failed takeover bid and some toxic property deals. The bank was eventually taken over by a number of hedge funds, see below, and other “investors”, i.e. speculative money grabbers; with the result that the Co-op ethical policy, which never amounted to much, was dropped. When the Bradford branch closed, those customers who are not interested in telephone or digital banking, or are fearful of being the victims of online fraud, closed their accounts and, according to some reports, turned to the Nationwide Building Society, which offers current account services.
The bank of Dave
Just across the Pennines, Burnley is the home of Dave Fishwick, whose book is a rollicking good read, being spiced up with lots of street talk. He has much of value to say regarding the high street banks. Unfortunately, Fishwick records his admiration for the Coca Cola company and Richard Branson, the latter typically described as an entrepreneur, though some less flattering descriptions come to mind. Nevertheless, Dave’s text features himself as a working class hero who became a millionaire by buying and selling cars, vans and houses. If you believe his making of a saint storyline, Dave earned his money by being honest, hard-working and a creator of wealth for his local community. In an attempt to give some of his fortune back to the people of Burnley, Dave sets up, what is in all but name, a bank. Offering significantly higher interest rates to savers than the banks and charging lower rates to borrowers, he gives any profits to charity. Whilst showing how much better he treats customers than the big banks, Dave’s book explains quite a lot about the world of high finance to non-specialist working class readers. Regretting the advent of big bang, i.e. the decline of the high street bank branch network with managers who took an interest in their customers, Dave points out that the big banks now use computer algorithms to assess the credit worthiness of would be borrowers, taking little or no interest in their personal circumstances. Despite his lack of understanding of the essentially exploitative core of the wage labour system, Dave is quite right to stress the importance of us all supporting the wellbeing of our local communities.
What are “the markets”?
“Business” new items, in which working class people are either air brushed out or reduced to “footfall” or “consumers”, bombarded us with graphs, tables and the like, showing the ups and downs of the prices of company shares, international currency exchange rates and more. These news items feature repeated references to “the markets” which, according to journalists, are sometimes “buoyant”, or “concerned”, or even “worried”. Rather like the ancient Greek gods, it seems that “the markets” are superhuman, enabling them to exercise power over us all. Demystifying this journalistic nonsense, “the markets” are nothing more or less than real people, typically rich individual owners of financial institutions employing desk-bound “traders” who buy and sell financial assets. Thus the term “the markets” refers to the spectacle of this buying and selling, indicating the lack of involvement by working class people, who are reduced to passively watching the results of the daily buying and selling frenzy on the screens of their TVs and digital devices. Despite the apparent anonymity of “the markets”, the key drivers of the prices of the financial assets are those rich men, rarely women and often hedge fund managers, who typically meet at private clubs in Mayfair, such as 5 Hartford Street, and other fashionable London addresses. The extreme wealth of these people enables them to promote their interests by funding such so-called think tanks as the Adam Smith Institute, the Institute of Economic Affairs and the Tax Payers’ Alliance, which are given lots of uncritical air time by the BBC et al. In short, these people are key players amongst the elites that run our country. One hedge fund manager, said to be the richest Tory MP, is current prime minister Rishi Sunak, whose fund is based in the Cayman Islands tax haven.
The banks and the “housing market”
In the 1980s, Margaret Thatcher began the selling off of council houses at knock down prices, increasing profits for the banks from their extra mortgage lending. This was intended to create a property owning ‘democracy’ with new home owners, including some non-union workers, more likely to vote Tory. This policy widened the opportunities for financial institutions by creating a growing “housing market”. The resulting rise in house prices was due to the lack of new builds and purchases by bonus happy city-slickers bidding up London and home county property prices. An extra bonus for new home owners was the rise in re-mortgaging facilities, which enabled homeowners to switch to lower rates of interest, build conservatories, have foreign holidays or whatever.
The funds
Given that most workers’ pensions rely on financial funds, they are clearly important to our financial wellbeing. A financial fund is a scheme run by directors, partners or managers in which investors, who may be individuals, companies, or even countries, contribute money in order to earn a regular income. The most discussed, and controversial, examples are hedge funds and private equity funds. Private equity funds are so named because the private companies, with shareholders limited to friends and family, running these schemes are not required to provide as much detail in their accounts as is the case with public companies, whose shares can be bought by any member of the public. Having a particularly bad reputation, private equity funds often engage in asset stripping. This means that they buy up failing or troubled companies which, so the equity fund managers believe, have actual or potential assets that are worth more than the cost of buying the company. So, for instance, a fund might buy a company for £5million, sack the directors, reduce the workforce by 50% and re-employ the remaining workers on inferior terms and conditions. If the profits increase in the next year or two the company might well be sold on for £10million; again a nice little earner.
Also controversial are the above mentioned hedge funds. Although hedging, as in hedging your bets, takes up only a part of these funds’ business, this term requires a brief explanation. Originally referring to dividing up farmland by means of hedges, the financial relevance is to gambling. To hedge is therefore to create a border or limit on a bet. So, if I bet on just one horse in a two horse race then, depending on the amount of the bet, I maximise the size of my winnings or losses. However, depending on the odds, if I bet on both horses I limit both winnings and losses. In short, hedging then means engaging in strategies, often complex ones, which minimise risk and, in the longer run, tend to maximise profits in the various financial markets. Similar to private equity funds, with their limited number of shareholders, hedge funds are notable for their partnership structure, lack of regulation and tax avoidance/evasion schemes. In fact, the banking world is even murkier than the above would suggest, with unregulated shadow banks and dark pools growing in turnover.
Concluding remarks: the abolition of money
…you and Harlow were shipwrecked on a desert island, and you saved nothing from the wreck but a bag containing a thousand sovereigns, and he had a tin of biscuits and a bottle of water…Who would be the richer man you or Harlow?
This quotation is taken from Robert Tressell’s The Ragged Trousered Philanthropists, which makes the point that money, be it in the form of notes, coins or numbers on a screen, will not by itself magically provide us with food clothing or shelter. Let us then address the question of what we can do about the widening gap between rich and poor outlined above where, in a capitalist society rather than on a desert island, access to money determines who gets what. We can note that there are a number of surviving tribes which, insofar as they are allowed, live traditional lives with minimal, or no, recourse to money. Rather than being transactional or bartering societies, they are based on democratic planning with a view to providing for the subsistence and other needs of all members of the community. In fact, most of human history has unfolded without the use of money. In Britain, for example, prior to its privatisation and enclosure, common land was used by the bulk of the population as a source of food and clothing. As their means of subsistence was taken away, more and more landless men, women and children were forced into the hell holes that were the 19th century wool factories and slum housing in growing population centers such as Bradford. There is a substantial literature, dating back to the 19th century Chartist movement, calling for either the abolition of money or alternative means of providing food, clothing and shelter. Clearly, in the early 21st century most people in the world’s richest nations live in or near towns and cities without the means to obtain their own subsistence other than by the use of money. Therefore, forming an agriculture based collective is not really a serious option for most of us.
Some Marxists, and most anarchists, have tended to focus on urban population centers and call for the setting up of workers’ councils, where workers from all industries come together and democratically draw up plans to coordinate production and distribution. We can also note the existence of Local Exchange Trading Schemes (LETS) which alas, critics argue, are little more than accounting systems for self-employed plumbers, electricians and other trades-women and -men. It is difficult to see how the NHS, the rail network and other large scale operations could be run as LETS schemes. Grace Blakeley calls for the socialising of finance which, she argues, “will allow us to transcend capitalism altogether”. She approves of the Labour Party’s 2019 manifesto commitment to create a National Investment Bank thereby taking “on the banks the way Thatcher took on the unions”. Grace also wants to clip the wings of the above mentioned City of London Corporation which is currently “above and beyond democratic accountability” and “turn it into a local authority…with democratically elected representatives”. It is surely no exaggeration the say that the future of life on our planet depends on our will to abolish money, which means an end to the banks, the money markets and indeed the end of the wage labour system; replacing them with relationships in which we care for each other rather than seek to rip each other off.
Simeon Scott
Wake Up Bradford! 
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