There has long been a radical critique of banking that revolves around the question of how money works – in particular, how interest works and how new money is created.
The idea that money is something we have created and that could be organised in different ways is not easy to get hold of. Even so, as David Boyle has charted in books from “Funny Money” to “The Tyranny of Numbers”, we have had no shortage of creative alternatives – local currencies, transition town pounds, negative interest scrips and ideas for carbon-backed money systems to align economic incentives with climate realities.
The debate has moved into the open in a welcome way with the recent references by Mervyn King on the limits of ‘fractional reserve’ banking.
James Robertson and Joseph Huber have estimated that the free income granted to UK banks from this model – termed seignorage – adds up to around £20 billion pa.
Shann Turnbull, the great radical theorist, puts it simply. Unlike co-operative credit unions that lend out money that members save, he says http://www.ethicalmarkets.com/wp-content/uploads/2009/04/mysteries-of-the-financial-system.pdf“the Bank of England was formed with the extraordinary privilege of issuing currency notes redeemable into one pound weight of sterling silver when it only held a small fraction of silver it promised to provide on demand to its note holders. This legal fraud of fractional banking is now hidden by paper money not being redeemable into anything to allow paper money to be created by a stroke of pen or computer mouse.
When we use our overdraft or credit card to pay for goods or services, our bank creates a deposit. It is this feature that makes bank different from credit unions that redeem an existing deposit.
There is no sound reason to allow banks seeking a profit to have the privilege of creating public money for private profit. The practice of governments then borrowing money from private banks, and paying interest funded by taxpayers for money that the government could create itself, cannot be justified or explained. Mervyn King has got it right.”