Thursday, January 11, 2018

A brief history of banking: the link between money and society

Do you know what happens to your money when you put it in the bank? If you are like the majority of the population, including, it would seem, the majority of politicians, then you believe that your money is kept safe in the bank. In fact, quite a number of the people who still use branches are older people coming in to visit their money and check it is all still there.
However, the word bank (with all its connotations of solidity and stability) is in fact rooted in the latin meaning "bench" and refers to the seating in any Roman forum where money lenders used to hang out. Money lenders who could be bankrupted (literally their bench was broken so they couldn't sit there) if their loans went bad. Bankers ancient and modern relied on the confidence of the public to trust in their ability to pick good credit risks from the bad and deposit money with them in return for interest. The ensuing credit crunches which are the result in the collapse of that trust and confidence are as ancient as credit itself.

So where did your money go? Well, in theory, the bank has turned your money from a liability on one side of its balance sheet (an IOU to you as the depositor) into a credit on the other side, such as a loan or bond to a business. This loan or bond, despite it representing money owed to the bank, is counted as an asset and is given a real value on the balance sheet based on an assessment of the risk that it won't be paid back; the higher the risk, the lower the 'book' value of the asset. The loan also provides new money to the bank in the form of interest, a small portion of which is paid to the depositors as reward for their trust in the bank. The rest is profit after the wages of the bankers are taken into account.
This is important because what the bank does with your money really does affect the world around you. It is money that produces the activities and companies (such as those engaged in fracking) whose actions we might fundamentally disagree with. However, you don't need to feel powerless in the face of the big banks and their current dominance over how money works for us in the economy.
In the 21st century we have seen new communities emerging which have done away with the need for increasingly complex banks to mediate between borrowers and lenders, businesses and investors. Peer-to-peer lending and crowdfunding use the internet and social media to bring together people in networks to facilitate lending, donating and investing money.
While the deposits with these new platforms are not covered by government compensation schemes, their aim is not to encourage people to hoard cash, but to invest directly in an individual's or business' ability to repay a loan or make a return on your investment.
When setting up Abundance Generation, around the time of the financial crisis, we started with the goal of creating this more democratic form of finance. Investments in renewable energy infrastructure were a great place to start because they represent a stepping stone towards a revolution in the way ordinary people can invest their money.
We called it democratic finance, because of the control an individual has over how their money is used and what activities it generates in the real world (and the impact of those activities for future generations). With crowdfunding, for the first time people can be sure that their money is being used to not only generate a profit (returns on renewable energy infrastructure investment range between 6-10%) but also do so in such a way which fits the moral choices we face as individuals and as a society.
Renewable energy projects are by their very nature ripe for democratisation. They are decentralised, discrete, local and smaller in scale than, say, the investment required for a new nuclear power station (and its 150 year clean-up bill). They provide an opportunity for people to put their money to work directly in the real economy, generating clean renewable energy and getting a return that is in turn directly linked to the cash earned from selling the energy to the grid. As with any investment there are risks. In the case of Abundance, the investment is in the form of debentures, official IOU's issued by the projects. Debentures are long term investments (lasting up to 20-25 years) and returns are variable which means that you may not get back all of your original investment. The project risks are well known for the established technologies such as onshore wind and solar with estimates based on many years of experience.
Renewable energy investment offers a unique opportunity to change perspectives on money in society, shifting away from the idea that the best place for your money is in an account and reacquaint ordinary investors with the idea of assets and putting their money to work in the real economy.


No comments:

Post a Comment