The Reform of the Financial System and Techniques for Debt Cancellation

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Money experiments took place during the financial crises of the 1930s. Although these were repressed by central banks, the need to control the finance sector during and after the world war was recognised so that the 1940s and 1950s was an era of “tamed banks”. It would be possible to write off debts and clip the wings of the banks without collapsing the financial system in today’s world too. In the absence of a political will to do this, other reforms and DIY financial initiatives are possible.

Community finance needs to be part of a solidarity economy

There is little point in analysing in depth the problems arising from the financial sector but then not proposing what is to be done about it. It will not surprise readers to learn that, over the centuries, there have been many attempts to change the money system and many proposals for reform. Some of these proposals have even been tried, in practice, in local experiments and found to work very successfully. To prevent these success stories catching on and spreading they were then closed down by the national monetary authorities.

It is said that the banker Mayer Amschel Rothschild (1744 – 1812) remarked, “Give me control of a nation’s money and I care not who makes its laws” while his son, Nathan Rothschild (1777-1836) is said to have remarked, “I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain’s money supply controls the British Empire, and I control the British money supply.”

The authenticity of these quotes has been questioned but we have enough evidence from our own time to see how impervious to reform and change the financial and monetary system is. The financiers can buy the politicians. They have always been a very powerful lobby and still are. (Protess, 2011) To see that really successful experiments in money reform were closed down in the 1930s thus, comes as no surprise. The financial elite were not going to give up control of the money supply without a gigantic amount of resistance, and will not in our own time either – no matter how much destruction their system wreaks upon people and planet.

Despite the odds, people have repeatedly taken on this challenge and struggled with what, in retrospect, appears to be a labour of Sisyphus – the Greek hero condemned by the gods for his defiance to roll a rock up a hill eternally only to see it roll down again – because the Gods decreed it so.

Money experiments of the 1930s

Given the economic turmoil of the 1930s, it is not surprising that there was considerable interest in money experiments. One experiment in particular had remarkable success at the end of the 1920s and the beginnings of the 1930s, the idea of “Freigeld” (free money), which was tried at a local level initially in Germany and then in a number of other countries. It worked with a negative interest rate called “demurrage” and was intended to be democratically accountable and managed locally. The idea of a negative interest rate was to discourage hoarding and greed. To maintain the validity of the money, a fee had to be paid regularly by buying a stamp to put on the money. In the last chapter, it was explained how the store of value function of money is contradictory to the means of exchange function. If you use it as a value store, you are not spending it. So, to discourage hoarding, holders of “Freigeld” had to pay to maintain its validity and this encouraged people to spend it. (Conaty & Lewis, 2012, pp. 60-64)

These experiments were inspired by the writings of a German entrepreneur called Silvio Gesell who had, in turn, taken his inspiration from reading about the practice of re-minting money in medieval times. In German speaking areas of Europe, as well as in France from the 12th century onwards, rulers would call in local coins for re-minting every 4 or 5 years – but 3 coins would be returned for 4 handed in. The withheld coin was a tax by a local ruler. This depreciating currency appears to have stimulated trade.

The most famous example of the success of the depreciating currency in the 1930s was tried in the town of Woergl in Austria which was suffering from a 30% unemployment rate. In 1932, the local authority introduced 40,000 “free schillings” to pay the salaries of municipal staff. It had to be revalidated every month at a 1% reduction of its value, 12% per year. In the first year, the velocity of circulation was 13 times that of the national Austrian currency.

Within the first year new homes were built and old ones repaired; municipal buildings were improved; streets were repaved; a reservoir, a bridge and a ski jump were built; and forests were replanted. Unemployment ended. A year later 200 Austrian towns were gearing up to adopt the reform. (Michael Lewis and Pat Conaty, The Resilience Imperative, New Society Publishers, 2012, p.63)

Meanwhile, in the United States, economist Irving Fisher thought Gesell’s ideas were a brilliant approach to solving the problems of the Great Depression. In 1932, a number of American towns were also circulating free money and Fisher proposed free money be distributed to each state in proportion to its population. He produced a book to help local communities set up their own local stamp script currency.

The Austrian central bank declared the free schilling illegal. Within a year, unemployment in Woergl was back at 30%. Meanwhile in the United States President Roosevelt banned stamp script money in March 1933. (Conaty & Lewis, 2012, p. 63)

The era of tamed banks

Within a few years of the bankers demonstrating their political power to prevent a rational response
to their destructive system, the world had been tipped into a global war. The failure of elites led to them attempting to “solve” economic problems by increased authoritarianism and by turning mass discontent against scapegoats. However, the subsequent war radicalised many people and, in a number of countries, ushered in a new epoch with a massive expansion of state involvement in the economy and a transformed relationship between state, society and banks. The 1940s, 1950s and 1960s were an era in which bankers appear to have been tamed, interest rates were at or below 2.5%, relatively high taxes were imposed on the rich and a welfare state was introduced in a number of countries. For a time Keynesianism reigned supreme.

This showed that financial reform is possible, but it takes extraordinary times to achieve it. Sadly, the reforms were reversed eventually. There was a cruel paradox in this – the stability made people forget the need for close control of finance.

Self-reinforcing Deflationary spirals

At the time of writing, we are again entering what are likely to be extraordinary times. As we reach the limits to economic growth, the banking and finance sector is becoming increasingly unstable. Without economic growth, there is not the increase in income with which to service the interest on debt finance. The Finance Sector can still make money – but in conditions of stagnation it is only possible to do so by transfers of wealth and income from the rest of society. When the finance sector makes gambles and loses, and when it then become insolvent, it can only be kept alive by transfers of wealth and income from the rest of society, which the rest of society do not have the increasing income to provide except by increasing impoverishment. Central banks are trying to rescue a debt based system by creating more debt and by quantitative easing.

The danger in these circumstances is of a downward debt deflation spiral that is self-reinforcing.
With aggregate demand not sufficient to buy all the produced goods, stocks of unsold goods will rise and companies will be tempted to reduce prices to shift these goods, so as to get the cash that they desperately need to service their debts and pay the bills. There will be an increasing number of “fire sales” of goods and assets as households do likewise. Yet, if the overall price level starts falling, the economic system tips into a vicious circle. Anticipating falling prices, hard up people and cash strapped companies delay their purchases in the anticipation that they can buy what they wanted later, at a lower price. But this delaying reduces aggregate demand even further, reduces incomes further, means more laid-off workers and bankrupted companies and drives the economy deeper into recession. As the price level falls, it means too that debts become more burdensome. Debts are denominated and fixed in money terms. If prices fall in aggregate to half of their previous level, then a £1million debt will have now become equivalent to a £2million debt at the previous price level.

From the summer of 2014, central bankers in the Eurozone have been frightened that such a debt deflationary spiral could start to happen. An article in the German news magazine Der Spiegel said:
Nothing frightens central bankers more than continuously sinking prices. The phenomena can push the economy into a downwards spiral. If people believe that prices are falling then they hold back on purchasing in the expectation that they will be able to get things cheaper later. The consequences are fatal – consumption expenditure collapses, people lose their jobs which means that demand falls even more and so more people lose their jobs.

To prevent this vicious circle taking place the money policy makers regard it as decisive that companies and consumers should have an expectation of a stable rate of price increase. The European Central Bank and the Bundesbank make it known therefore that their inflation goal is 2% per annum.
But prices changes are a long way from that in the Eurozone. The actual rate is a mere 0.5% per annum. Because interest rates are also near zero at the moment the central bankers have little room for manoeuvre. The money policy makers in Frankfurt fear that if expectations of the inflation rate fell even more the downward spiral could start. (Der Spiegel 30/2014: 58-60)

The response to the threat of deflation has been “Quantitative easing”. This means that central banks have created money to buy bonds, driving down the interest rates to ultra-low levels for the banking sector itself. At the same time, and on the other hand, over the last few years many nation states that have been tipped into economic crisis have had to pay very high interest rates when they want to borrow. This is really rather extraordinary when you consider that governments could, in theory, get central banks to create new money and make it available directly to the government without the government’s having to borrow it and pay an interest rate to the banks. What prevents this happening is pure economic ideology. We are told that if central banks print money for governments it will create inflation. Yet, when private banks create debt money and it is used to bid up house prices, creating inflation in the housing and asset markets, this is, for some reason, quite acceptable. The Treaty of Maastricht was written in such a way as to ensure that it is the private banks who get to create new money, not governments. Nor is it true, if there is widespread unemployment that creating new money for government programmes would create inflation. It is more likely that it would reduce unemployment – although rising energy prices are something to be concerned about in current circumstances. At any rate, what has happened several years into this policy has been that central bankers have pushed stagnant economies closer to serious depression. Their policies have done nothing to address the real long term cause of stagnation. In the “real economy”, the cost of energy has risen because of depletion of oil, gas and coal. As energy costs enter into everything we do, this has held economic activity back and the financial system has been more precarious as a result. Without growth, there is no extra wealth being produced for the financiers to share in. As they are belatedly waking up to this, some governments are panicking and going hell for leather in favour of forms of “extreme energy” like fracking for shale gas that do more damage to the environment, communities and society, than they do good. The elite have run out of ideas and are disorientated as to our true collective dilemmas.

In the meantime, central banks have created cheap money to bail out the private banks. The banks have then used the ultra-cheap money for a new round of speculation – driving up asset prices and putting a lot of money in risky ventures that seemed to promise high returns, like fracking for shale gas and oil. The risks of this became evident when oil prices fell towards the end of 2014. No doubt the finance sector will expect to be bailed out again, but not their customers. In so far as there are collateral assets to be claimed the transfer of wealth will continue but not the underlying problems. That’s the game being played by the elite.

Such policies must be turned on their head for social justice and for long run sustainability. The politics to aim for, against incredible odds, is to cancel a substantial portion of the debts of bank customers – but in a way that does not completely collapse the banks. At the same time, it is important to address the crisis in the energy system.

“and forgive us our debts, as we forgive our debtors” matthew Vi 12, King James Version

Given the nature of debt and its use as a tool of oppression by elites there are records at least as far back as the Bronze Age of protest movements aimed at cancelling unjust debts – for example in Mesopotomia, ancient Greece and ancient Rome.

In more recent times there have been several international campaigns aimed at cancelling debts by the governments of the poorest countries of the global south. These have not been without success – in 2006 Norway cancelled the debts owed to it by 7 countries. In 2007 Ecuador’s Public Credit Audit Commission conducted an audit of Ecuador’s debt and declared the debt to be illegitimate.

Government debt audits sometimes have civic participation and there are also cases of purely civic audits of debts. The aims of the audits are to determine how debts came about , who was responsible and what effects the debts produce. In Spain a Citizen’s Debt Audit Platform performs general analysis of Spanish national debt at different administrative levels and in regard to different sectors. All parties are allowed to request information, not just “experts”, demand government explanations, share relevant information, denounce irregularities and propose alternatives. (Cutillas, S. Llistar, D and Trarafa, G 2014)

These audits apply to government debts. But what about the cancellation of private debts?

How to write off debts without collapsing the banking system

The first thing to say about this is that, merely writing off debts for bank customers would leave a few problems and isn’t even that fair. As a simple solution on its own, it would it leave the banking system broke. If the banks were broke, they would have to suspend payments and there would be no money coming out of the cash machines. What’s more, people like me, the author, who have never been in debt in our lives, would wonder why people who had been reckless and imprudent with their money were being rewarded and not those who had been more cautious.

Despite reservations and problems there is, however, a way that debt cancellation can be done fairly. There is an approach that would leave the banking system to some degree intact. Although after the banking system has been cut down to size through a jubilee, wiping out most of the debts, it should have its wings permanently clipped through a thorough going reform so that it cannot get us into the same mess again.

However, before describing this solution, let us get a proper understanding of what the problem is. Why is it not possible to just unilaterally cancel all debts?

The answer, simply, is that a large part of the bank sector would go bust. Since almost all of the money in circulation is created by banks, when they lend, it follows that almost all the money is backed by debt. If you cancel the debt, this bank money is backed by nothing. The banks would go bust and would not be able to pay out when you put your card in the machine in the wall. Notes and coin would still be available but they represent a very small proportion of the money in circulation.

There seems to be a “Catch 22” here which has politicians and officials going around in circles. If we want to have a functioning finance system, then at the present time we must keep the banks healthy. That’s a nice situation for them to be in and they are using this dilemma at our expense. They can gamble in international finance markets and if they win they keep the profit. If they lose then we pay – because they have to be bailed out by taxpayers.

But this cannot go on. In the recent past, taxpayers in many countries have been on the hook for so much money that states have come close to going bust too – and the next stage in this game has been that banks have gambled against those states going bust.

To let this continue to happen is crazy. As Steven Keen argues in the second edition of his book
Debunking Economics:

When borrowing is undertaken to speculate on asset prices debt tends to grow more rapidly than income. This growth causes a false boom while it is happening, but results in a collapse once debt growth terminates – as it has done now. Though borrowers can be blamed for having euphoric expectation of sustainable capital gains, in reality the real blame for Ponzi schemes lies with their financiers – the banks and the finance sector in general – rather than the borrowers. That is blindingly obvious during the Sub-Prime Bubble in the USA, where many firms wilfully wrote loans when they knew – or should have known – that borrowers could not repay them.

These loans should not be honoured. But that is what we are doing now, by maintaining the debt and expecting that debtors should repay debts that should never have been issued in the first place. (Keen, 2011, p. 354)

But Keen then recognises that this would not be easy to implement as it would bankrupt much of the finance sector. So is there a way out?

The answer is “yes”. As I have just explained – the current dilemma is that if you cancel debts then the bank deposit money created by lending is no longer backed by anything and the banks goes bust. However, this is solvable if the central bank creates an equal amount of non-debt money to replace the deposits that are no longer backed by anything.

In order to solve this dilemma, my colleague, the late Richard Douthwaite, devised an idea that he called “deficit easing” which is an alternative to “quantitative easing”. Put simply, he proposed that the European Central Bank (or any other central bank) create non-debt money and give it to governments to spend. (Douthwaite, 2011) As part of this idea, he suggested that some of the money might be given straight to individuals so that they could either pay down their debts or use it to invest in green projects. This is the core idea which I wish to propose here.

Note the idea that some of the money could be used by households to invest in green projects. This is important both for reasons of social justice and of ecological efficiency. It is not only the banks who would not be happy if ALL debts were simply cancelled. While some people are very much in debt, some people have little debt and others have none at all – like me for example. There are many reasons for this disparity and I dare say that, in my case, it was partly good fortune. For example, I completed my higher education at a time when there were student grants and not loans. However, I am not in debt because I do not own a house, I do not own a car and in fact I own very little. I do not have a consumerist lifestyle. I don’t mean to be “holier than thou” but, at least in part, the reason some other people are deeply in debt is surely because they took on the consumerist values which are so damaging to the ecology of the planet and also because some of them burned their fingers speculating. To use the more moralising terminology of Adam Smith, some of the debt is by “Prodigals and Projectors” and their use of finance has not been good for the economy or the environment. Bailing each individual out for up to the full amount of their very different levels of debt does not seem to me very fair either – and might even be seen to reward prodigality and recklessness.

Instead, we need a scheme with a pattern of rewards and incentives that is more appropriate to the times that we live in. This could be achieved by giving people the wherewithal to reduce their debts, if they have debts, and additionally, giving the same amount to people who have no debts, or have low debts, which they could use too – not on a consumption binge, but on green investment to bring down our ecological debts (the carbon intensity of our lifestyles).

So how would this be organised? Here’s how it might work (in the UK – you could adapt it to your country if you don’t live in the UK).

Every adult individual gets a voucher for, say, £25,000 (in the UK) – or some other sum…

On the voucher it explains that the voucher can be used by the person to whom it is addressed in one, or both, of two ways:

To repay debts or money owed to any lender organisation or company in the UK registered with the financial authorities (Prudential Regulation Authority) – all such lenders will be obliged to take early re-payment on receipt of a voucher up to the whole value of the voucher, or whatever percentage of it that the voucher holder wishes to use for debt repayment purposes. PRA registered lenders receiving re- payments with the vouchers can then claim cash from the central bank, which will be paid into accounts set up for them at the Bank of England.

And/or

The vouchers could be used to make payments for invoiced services or products for energy efficiency or renewable energy work from companies or organisations already existing as at the point in time when the scheme is introduced. This would be with the proviso that the companies or organisations concerned were part of recognised industry trade associations like the Energy Systems Trade Association, the Federation of Environmental Trade Associations, the Energy Institute and the Renewable Energy Association etc. Some people do not own their homes, so alternatives would be needed too. For example, allowing people to invest in bonds that support renewable energy development. The green economy sector could be invited to submit proposals for what would qualify.

The requirement for these to be pre-existing organisations registered with trade associations is to prevent “cowboys” getting in on a bonanza. Over time, proposals might be worked out for accreditation to allow new firms to set up with suitable skills. Companies wishing to apply for this work, or for a source of capital, will be obliged to register their interest with their trade association and will submit proof of payment of a voucher or part of a voucher to their trade association which will maintain an account with the Bank of England.

Vouchers must be presented for repayment of debts within so many months of receipt of the voucher.
Vouchers (or parts of vouchers) used for energy efficiency, renewable energy work or investment in clean energy can be redeemed over a longer time period – as it would take time for suppliers to gear up and increase their capacity to deliver.

In his original article, Richard Douthwaite suggested that if governments are timid, lest money creation and use sparks inflation, there is the option of doing it in incremental stages. So, in my example, this might mean something like £10,000 per individual now, £10,000 next year, and £5,000 the year after, with the state and monetary authorities feeling their way. If a recession or a depression is starting, the creation of new money would be no bad thing to help to prevent the downward slide. When banks do not lend and people and companies are paying back their loans, they do so by using their deposits to pay back to the bank so the money in circulation actually falls and deflation sets in. The scheme as described here would work against this.

When the central bank redeemed the vouchers, they would do so by paying non-debt money into accounts of financial authority registered lenders at the central bank. So bank assets in the form of loans would fall but bank assets in the form of money reserves at the central bank would rise by an equal amount. There would now be £25,000 more than previously in each individual’s account, equal to the non-debt money created by the central bank.

The bank reserves of newly created central bank money would be inactive and not in circulation unless and until the banks start lending again. On the other hand, households whose debts were reduced would now be paying much less in debt service charges and be more inclined to spend a higher proportion of their income.

So the banks will find themselves with lots of cash but far fewer remaining loans outstanding from households. Because the banks make their money through loans, the profitability of banks would fall but they will still be solvent as they will be sitting on lots of cash. Unlike a straight bank loan write- down, this will mean that most banks would probably survive. However, they would shrink in size and importance as their importance is based on the debt they own. When debt is being paid off, their power would shrivel. Conversely, and at the same time, the burden on households would be reduced. Although those imprudent enough to borrow very large amounts would still be on the hook for some of their earlier borrowing.

Over the last few years, quantitative easing has not led to increased lending to the real economy by
the banks because economic activity and confidence has been low. The banks have feared to lend and businesses have feared to borrow. Households are still too indebted to want to take on new debt given the insecurity. Thus, the part of aggregate demand which was previously based on debt creation is no longer there. However, with this scheme described here, aggregate demand would be lifted because people would be relieved of their debt servicing costs and because of spending some of the vouchers to transform the energy sector. (At the time of writing, the UK government has very stupidly tried another approach to encourage people to borrow more in the housing market which could start another housing bubble).

Having written off a large proportion of the debts – how to clip the wings of the banks

Having brought the banks down to earth, they must permanently have their wings clipped so that we do not have this situation arising again. There is a famous quote that we should take to heart. It is from a 1927 lecture by Sir Josiah Stamp who became Director of the Bank of England in 1928. Although the veracity of the quote has been challenged, it matters not here. The point is, that it accurately tells us what the situation might be if bank debts were paid down by the kind of scheme proposed here without further measures:

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin…. Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again…. Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in…. But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.

Whether Stamp really did say this, or not, is less important than the fact that it is true… If people repay their debts to the bankers but the banking system remains in its current form, within a few years we would probably be back in the same situation again. A permanent solution is needed and that permanent solution is provided by applying and adapting ideas currently being put forward by the Positive Money campaign in the UK. (PositiveMoneyCampaign, 2013)

The Positive Money Campaign makes a number of proposals, but the one which concerns me here is the one that takes away from bankers the right to create money when they lend. What this would mean, if implemented at this time, is that the cash that the bankers now have from repaid debts could be used by them to make loans – but it would not be allowed for them to “leverage” it many times. It could not be used in a fractional system to create ten or twenty times the level of credit and new money that they were left with after the debt repayment Jubilee.

No doubt, the banks will do everything that they can to prevent this happening. But what is being proposed is an arrangement where they should be grateful that they would be allowed to receive a pay- back payment for cancelled debt at all. In the reformed banking arrangements, they would have to risk their money if they then lend it out again. If they wanted to lend the “pay-back money” out again, the accounting procedures would be different from before. When they lent it, that money would leave their accounts and enter the accounts of the borrower. The banks would only get the money back when the borrower repaid. It would not be possible to lend a multiple of it as is the case at the moment.

Other reforms and DiY initiatives

Much more needs doing to sort out the financial sector. In particular, the money and the banking sector needs to be localised and become a servant of ordinary people during the difficult period of energy descent and degrowth that lies ahead.

There are plenty of precedents for ordinary people initiating financial innovations. These successfully demonstrate that it is possible for communities to take their destiny into their own hands. While the big financial institutions operate increasingly impersonally with credit scores, and focus mainly on business with corporations or very rich individuals, an increasing range of tools and strategies are being evolved around the world in order to assist smaller financial projects aimed at people and environments in need.

There is nothing new about this. Building societies (savings and loan associations in the USA) emerged out of what were originally financial clubs called “terminating societies” early in the 19th century. (Conaty & Lewis, 2012, p. 59) People saved together and used the money pool to buy houses. The order in which people got the money with which they could buy houses was determined by lottery. When all the member had acquired a house the club disbanded. It was important that the person who received the first houses continued to contribute to the general fund and the last person who got a house was willing to continue paying until he did so. At a 5% interest rate this typically took 14 years. (Harrison, 2005, p. 30)

The economic crisis of the 1930s also generated a great many innovations – some of which have survived and flourished. One example is the JAK bank in Sweden, a co-operative that is fully owned by its members. There are 35,000 of them and the bank has $163 million in assets and $147 million in loans (2012). JAK members agree to pool their savings and then lend them to one another, interest free, for mortgages, home improvement, student loans etc. This is done using a system of “savings points” to balance saving and borrowing. As Anthony Migchels explains:

The JAK has a very low default rate, for which there are several reasons. Interest free loans are obviously much easier to repay. Members are far more committed than “customers”. And JAK requires its members to save to obtain the right to borrow. Savers are known to be good debtors.

How can it be interest free? Well, very simple: instead of interest savers are rewarded with interest free loans for themselves. Most people would rather have interest free loans than interest on savings, especially if they actually did the math. (Migchels, 2012)

Costs are covered by fees and, to keep them low, JAK staff train community based volunteers in interest free lending principles and practices. (Conaty & Lewis, 2012, p. 74)

At the time of writing, in the years after 2008, there are broadly speaking two different trends happening in the world of “alternative finance”. Firstly, there are initiatives from organisations which see their role as evolving and advocating for changes in the existing system of finance, accountancy and money. Secondly, there are those trying to create new approaches directly, for example, peer to peer lending arrangements through the internet and locally based alternative currencies. There is a lively exchange of ideas and approaches between these different groups. For example, the “Finance Innovation Lab” exists as a network of NGOs, financial providers, trusts and think tanks to develop ideas and bring innovators together. (What is the Finance Innovation Lab, 2012)

In a world threatened with collapse as we reach the limits to growth, financial sector innovation at
the local level, combined with reform at the national and international level, will be crucial. This is because, to make profits in a time of collapse, the financial sector has already shown that it will become increasingly predatory, fixing on the vulnerabilities of millions of people whose lives are being thrown into turmoil by the crisis. Credit cards commonly charge compound rates between 20 and 40%. At a 36% compound interest rate you will be paying back double what you borrow in just 18 months. In fact in the UK, pawnbrokers can legally charge 80% for secured loans, while payday lenders can charge 2,000% or more. This is a return to old fashioned usury with a vengeance.

Security through relationship and community building

One dimension of the needed transformation is to fight predation by developing alternative financial institutions based in communities. Their aim is to restore “credit” to the literal and original meaning of the word in the Latin, referred to earlier, “credere” i.e. “belief” and “trust”. Belief and trust can only be based on local and intimate knowledge based in real relationships.

Financial organisations need to be rooted in and be there to serve local communities – both individual households and community businesses. They need to be part of a wider “enterprise ecology” for social enterprises, co-operatives and solidarity economy organisations. Ideally, they will collaborate with other organisations, so that their lending can be connected to financial, welfare and tax advice, training in money management skills and, where appropriate, business planning and development skills. When finance is an arrangement between people in a community, some of whom are earning more than they are spending while others are at the times of their life where they need to borrow, arrangements can be made which reflect mutuality, enhance relationships and share risk and rewards. They can be part of a community development and building process.

Without the supportive networks and services, things are more likely to go awry. What does not work well is the mixing of systems where different motivations and principles are at play. Features like mutual support arrangements, the sharing of local knowledge and so on are not usual parts of finance services in the mainstream economics way of thinking. Orthodoxy pictures finance in an entirely impersonal way. There is no place for a concept of “trust”, interpersonal feeling or loyalty. The lesson drawn from Smith’s “invisible hand” in the mainstream is that greed is good and that each individual economic actor can make an individual calculation of what is in their own personal interest. Then, miraculously the market will do the rest.

The global market and institutional developments have created ever more institutional, geographical and conceptual space between financial actors. It is totally impractical on a global scale to form trusting relationships based on long lasting interpersonal knowledge. In that sense, there is an inherent “moral hazard” arising out of a spatial dispersion of economic actors. The result is that the finance sector is now driven by people who feel no loyalty to anyone. They take decisions based entirely on mathematical algorithms and rely on computer checked statistical calculations about clients and partners.

However, it doesn’t work very well when you take the personal relationships and trust out of finance – or rather it only works because there is an ability to rely upon the state as a source for a bail out.
If you follow William K. Black’s ideas, (Black W. K., The Best way to rob a bank is to own one. How corporate executives and politicians looted the S&L industry, 2005), the senior managers of the biggest finance institutions do not even feel any loyalty to the organisations they are governing and run them to maximise their personal income, even though this leads these institutions into forms of extreme imprudence and insolvency – control fraud as Black calls it.

Finance as part of a solidarity economy

So, to repeat, in a “solidarity economy”, cheap credit arranged by organisations serving the poor are ideally linked to a variety of services. For example, the SEWA Bank and the Working Women’s Forum in India have developed a broad range of services that go well beyond stand-alone microcredit. Through organising a “horizontal co-operation” they have forged links between trade unions advocating for just pay, market co-operatives for the self-employed, bulk purchasing cooperatives for buying supplies, and community and social finance services to address a number of business and household finance needs. Over 1.6 million members in different urban and rural sub-regions of India have been inspired to collaborate and innovate solutions for a wide range of challenges.” (Conaty & Lewis, 2012, pp. 194-195)

This is far from the approach of the International Monetary Fund and the World Bank which have little to say on community level approaches. Their links have been with global banks that simply provide wholesale capital to micro-finance institutions without any links to supportive services and institutions. The result is a reproduction of usurious lending practices, high interest rates and borrowers who end up killing themselves.

Standard economic presentations of interest rates present the issues as a purely abstract issue of supply, demand and the “price” of borrowed money as if the issues are entirely impersonal. On the contrary, the practice of lending and capital provision is a relationship between people in which ethical and moral choices are being made in conditions of shared uncertainty and risk. The fact is, there is nothing abstract or impersonal about an interest rate – the medieval Christian theologians who, up until Calvin, regarded usury as moral failing saw things clearly.

So too did Mohammed who regarded profit sharing as permissible as long as a capital provider was prepared to share losses with the capital user if a venture did not go well. In the Islamic religion, the relationship between borrowers and lender who both face an uncertain future is interpreted as being connected to the relationship with Allah [God]. The taking or giving of interest, Riba, is forbidden because it is:

… sometimes understood to infringe upon Allah’s sovereignty. In this view, the charging of interest is said to guarantee a rate of return in the future. This is considered blasphemy since only Allah can guarantee or know the future. To set a fixed interest rate upon a loan is to put oneself in the place of Allah. (Wilfred J Hahn quoted in Pettifor, 2006, p. 132)

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