In recent years there have been many attempts to avoid having to use money. The most high profile is Bitcoin but there are also barter schemes around the country. Just last week there was a news article that regulation is planned to be introduced which would allow bankers’ bonuses to be recalled up to seven years later if they are found guilty of any wrongdoing. The response of the banking community was that talent would go abroad and millions in taxation could be lost. What’s so special about money anyway? Isn’t it just a product like any other? Gold, oil and diamonds are other examples of products which don’t conform to normal market economy rules.
Let’s think about what money really is. It’s actually a service to facilitate bartering. A normal bartering system only works if everyone wants the goods and services on offer. Money is the interface to make it easier. This is why traditionally there were very few money “products”. A good banker was someone who had a room with a really big lock to keep the money safe and was prudent enough to make sure they always had money on hand if someone wanted to withdraw their deposit. This is why the Bank Manager was a respected and trusted character in the community. Gambling was frowned upon and there were examinations which needed passing. Banks made their money by charging for their services or by making a margin between the rate of interest they could make on deposits and the interest they offered savers. If you wanted a mortgage you needed to bank with the same bank for a while so that they could assess your creditworthiness. Britain’s reputation for banking wasn’t based on its plethora of whizz kids who could make money out of thin air. It was the world leader based on its stability and professionalism.
This is where the economics of supply and demand come in. The old system of banking was dull by definition and it was a local business. It was also an industry where there could be enormous economies of scale – the greater the size of the deposit, the greater the interest rate which could be earned. Individual branches and small chains couldn’t achieve the same rate of interest as large chains. This is no different than any other industry with one exception. Whereas a car manufacturer can make a cheaper version of their car with fewer extras and a shorter warranty, no-one wants an unreliable bank. They were stuck in a dilemma. The solution was for the banks to merge and specialists started to emerge – we got Building Societies specialising in helping people buy houses. All the little bank branches became part of a small number of high street banks…just like the supermarkets merged and grew. In retail the same principle applied because merging allowed them to wield bigger buying power.
Then, not so long ago, something weird happened. Up to the late 1970s people expected to make their money through hard work and inheritance. Shares were something for the very rich or for someone who knew what they were doing. When the first nationalised industries were privatised millions of people became shareholders and at the same time people made substantial amounts of money from living in a house in the right place at the right time! The population if Britain was introduced to “magic money” for the first time. You didn’t need to know the detail but every time you got shares from the Government you made money and the value of your house went up by more than you could earn in a lifetime of work. When there is change and imperfect knowledge it creates opportunity in any industry and the financial services industry took advantage. They realised that the way to compete was to create more “magic money” products – it was what the customer wanted just as the automotive industry produced SUVs, hybrid fuel vehicles. They also realised that the big brand could be used to sell other products and services. Just as Richard Branson’s Virgin went from music to airlines, weddings and broadband, the banking companies got into insurance, endowments, share dealing, and new financial investment products. The problem banks had was that there was only so much money, supply is strictly limited. What they need to do was find ways they could get a greater share of it. The thing about money is that for every pound that someone gets, someone has to lose a pound – the Government, companies, other investors or the customer themselves.
So when people talk about “bankers” they don’t mean “bankers”. The bad guys are the thousands of people who work for banks pedaling the myth of magic money in all these ancillary services. The staff in the branches aren’t blameless – they introduced unwitting customers to “consultants” who pedalled the dodgy endowments and PPI-riddled products that they are paying back now. Magic Money is as much of a myth as alchemy because it can’t be, and never could be, created. There are only three ways of creating wealth for an individual – by finding something which is tax efficient (reducing the cost), cheating (by insider trading or price fixing) or finding something which offers a greater return in exchange for risk. The key for the bad guys is to make sure that the investor carries the risk while they collect their commissions. The stock market and the insurance industry is no better than horse racing. No punters make money in the long term without cheating. They can study the form and hang around stables to get the inside track but the bookmaker always wins. The smart punters are the ones who keep their own money in their pocket and make a living out of selling tips. Unfortunately we are also complicit in this. Common sense says that you can only make money out of working for it but the promise of a big return makes people do silly things. The “bankers” are like the dodgy bloke selling a “Rolex” in the pub. You know you shouldn’t touch it but it’s such a good deal and everyone else is doing it.
Ultimately the Government of all colours is just as guilty. They are the ones who are encouraging the guy to sell his Rolex. Financial Services is not something we should be proud of any more than we can be proud of the tobacco industry. It creates billions of pounds for the treasury but if it disappeared tomorrow we would still cope perfectly well. Many communities have lost key industries and, after a period of pain, they recover. There’s nothing special or different about money despite what the Financial Services Chief Executives will say. Those people earning the large bonuses aren’t “bankers” in the way you or I would think of them. They are gamblers who are being paid by investors to gamble. They may have a bit more knowledge than the man in the street but they are still guessing like everyone else and in the long run they can’t win. Let’s face it, if they were so clever we wouldn’t be in the financial state we are in – and they wouldn’t be wasting their time investing someone else’s money.
We could do worse as a nation than to take away all the bonuses and let the gamblers emigrate leaving us with a much smaller set of people who go back to true banking. Let them have big rooms with great big locks on the door again. As a nation let’s get back to trying to make our way in the world by doing a hard day’s work for a fair day’s pay making real products and providing genuine services. It may mean that we consider banking as a utility like electricity and water. We need to pay for it but in return we get something which works and never let’s us down. And maybe money is just a product like electricity: we all need it but if you take risks with it you’ll always come off worse!