Break the banking cartel
- Ivo Vegter
- 19 Jan 2010 07:58 (South Africa)
In a free country, a government can only exercise such powers as are granted to it by the citizens. But there's a problem. Once ceded, it is very hard to reclaim those powers. Governments aren't too keen to give them up.
It is not surprising to note that most of a parliament's work is in writing new law, as opposed to repealing old law. The only repeals you tend to see are laws that are superceded by updated (and expanded) versions. The result is ever growing government, becoming ever more costly and interposing themselves ever more in the citizen's personal and economic lives.
One of the most insidious powers ever ceded to governments was the power to print money.
Historically, banks issued money. They did so in the form of exchangeable depository receipts for assets (usually gold or silver). They then granted loans with the assets on deposit as collateral. This further increased the supply of currency to the market.
The credibility and value of any one currency was determined by the issuing bank's reputation in the market, the faith depositors had in it, and the value and integrity of the assets against which the currency was issued.
It worked like this until roughly a century ago. The currency was created by the market as a means of exchange, and the amount in circulation would depend entirely on the needs of the market. If governments wanted to do something, they had to obtain consent from the representatives of the people to raise tax for it. They could not spend what they didn't earn in revenue.
However, governments always wanted to spend more than they could raise in tax. Wars, and the occasional bank failure, gave them a good excuse to create this ability for themselves. The result was the concept of the central bank. It has monopoly control over the price of credit, or, interchangeably, the amount of money in circulation. In essence, a government could raise revenue simply by printing money. This deliberate "inflationary monetary policy", had the effect of devaluing the currency in circulation, as well as deflating government debt. So, deficit spending became possible.
John Maynard Keynes formalised this principle during Franklin D. Roosevelt's New Deal era, which was an extreme case of deficit spending mirrored later by programmes such as the Great Society of Lyndon B Johnson (which resulted in the stagflation of the 1970s), and the stimulus programmes started by George W Bush and enthusiastically expanded by Barack Obama (which will result in the stagflation of the next decade or two).
That deficit spending doesn't work, and usually just primes the market for the next big boom and bust, is usually explained away by saying that things would have been even worse without the counter-cyclical spending of the government.
The reality, however, is that the government's policy doesn't ameliorate booms and busts, but causes them. Throughout the 19th century, there was no real inflation. A dollar minted in the year 1800 bought pretty much the same as a dollar minted in 1900. During the 20th century, however, the dollar began to depreciate, consumer prices skyrocketed, and bubbles with their subsequent crashes became not only more common, but synchronised throughout the economy.
Of course, people aren't suckers, and they'd quickly flee a depreciating currency for one that held its value better – such as paper issued by a reputable institution, or gold, for example. To prevent this, governments passed "legal tender" laws, which require one to accept the state's mandated currency in settlement of debts. Retaining monopoly control over the currency is today a paranoid article of faith for central banks and governments.
Last weekend, I presented this at GeekRetreat, a gathering of technology entrepreneurs, educators, venture capitalists, and journalists held in the picturesque surroundings of Stanford in the Western Cape.
Most everyone grasped the notion intuitively, although a few expressed surprise that you seldom hear this argument. That might be because governments, central banks, banks and economists all have vested interests. Government's spending ability relies on the ability to print money. Central banks are mandated to protect the currency. Banks quite enjoy the monopoly they have on an essential service, which permits them to gouge customers for all they're worth. Economists are fed a diet of Keynes at university, and fattening governments that need their data can't hurt.
This is why the SA Reserve Bank is implacably opposed to relaxing deposit-taking laws, which permits only licenced and regulated banks to accept deposits, repayable upon demand.
The Bank's justification is that this protects depositors, and anyway, because you wouldn't trust a telco or a shopping mall with your money, it should be illegal to place it with them.
In truth, regulation does little to protect depositors. Deposit insurance might, but ask anyone who suffered from the collapses of Lehman Brothers, Saambou, Regal Bank, or the Icelandic banks, if their banking regulations served them well.
Besides, if you didn't trust your telco, would you buy pre-paid airtime? You're betting that the telco will be around long enough to make good on its debt, in services. Would you buy a gift voucher from a mall, if you thought the mall would go under before you could spend it? What difference does it make whether the value is repayable in goods or cash? And why outlaw something that the central bank says you wouldn't do anyway?
The real reason there's such a restriction on deposit-taking, is that the central bank is terrified of the rise of alternative currencies. It fears we'd all trade in US dollars using Paypal, airtime minutes issued by a telco, or moola issued by MXit. While the fear is probably overblown (Paypal didn't kill the dollar; the government did), the effect of this restriction is severe.
The restriction on deposit-taking hampers innovation that would make electronic transactions available to the half of South Africa that is currently unbanked. It restricts it to bank-backed solutions. This is why we cannot get cash back out of Paypal to enable sales to foreigners: it doesn't have an alliance with a local bank that would be under Reserve Bank control. This is why airtime, although used as a currency, can never be redeemed for cash.
In Kenya, the M-PESA system, which is telco-led, has been a raging success, and has done more to extend commerce to the poorest sectors of society than any bank ever did. In South Africa, mobile phones – unlike banks or fixed internet access – cover an estimated 75% of the population. It had to shatter some barriers around deposit-taking, but luckily, it managed to survive legal challenges from jealous banks.
It is true that banks are slowly introducing partial solutions to this problem. An example is FNB's mobile banking solution, which works with even the lowliest cellphone, and through which three times more money is transacted than through ATMs and internet banking combined. It is splendid, but it doesn't go far enough. Another is ABSA's CashSend service, which requires a bank account only on the part of the sender. That's one banked customer too many, and works only within the country.
It may be possible for smaller banks, such as Old Mutual or Capitec, to launch innovative, lower-cost, competitive products. But they also have yet to make a big dent in the 50% of South Africans that remains unbanked. And while agile new companies such as Pocit or Wizzit are promising and worth supporting, they need to be allied with a bank to achieve anything truly meaningful.
Mohammad Yusuf, the Nobel-winning founder of Grameen Bank, puts it thus: "The point I try to make to the policy makers is that banking laws are like the architecture of a supertanker that needs to go out to the deepest parts of the ocean. Banking the unbanked requires new institutions that are like a dinghy in shallow waters: they don't need as much support and they need a totally different architecture. Unless these policies are created to help, we will never reach the people we need to. You need the backing of the system in order to succeed."
When someone starts a small business in the informal sector, or one aimed at a small but international customer base, are they likely to have a registered company, or qualify for a costly credit-card merchant account? Hardly. Yet this is where economic growth begins. It doesn't begin in the formal sector, among privileged entrepreneurs with business plans and venture capital and a media profile.
Our own Minister of Trade & Industry, Rob Davies, admits to the shortcomings: "The formal banking sector in this country is not designed to fulfil this role [of banking the unbanked in a largely informal environment]. Our banking laws are extremely conservative."
He added, however, that government would be looking at all regulatory constraints.
If he seeks innovation, it will have to come from companies that are specifically built to reach the poor, the rural, the informal, the second economy.
The key regulatory constraint that prevents this is the restriction on deposit-taking by non-banks. There are others, but this one law makes it outright illegal to create a fully-functional payment system, for anyone other than banks. The very same banks who have proved incapable of addressing rich and poor, banked and unbanked, local and foreign, big and small, urban and rural.
Granted, it might be a bridge too far to expect the government to give up the right to print money whenever it sees a pretty new power station or a cool new warship, or some vote-buying boondoggle.
So let's concede some regulations. Limit the size of transactions or deposit balances with non-banks to a useful, but small, amount. Think R10 000 or R20 000. Disallow fractional-reserve lending for non-banks. Require them to submit to regular audits. Impose rules to keep the tax-man and the money-laundering spooks in business.
But then let innovative firms compete to come up with a complete payment system for all South Africans. One that allows cash deposits, transfers and withdrawals of any size, local and foreign, and regardless of whether you're a big shot with your own company and a business account at a bank, a labourer seeking to remit wages to his rural home, or a rural woman making cute things for rich foreigners.
The ability to trade and grow prosperous requires the ability to freely transact and exchange money with anyone, anywhere. Until we have that, free trade and prosperity will remain the preserve of the rich and privileged.
That this is so by law is monstrous.
- Which principle: precaution or progress?
- How to kill a baby, naturally!
- Miserere mei, the Ebocalypse is here!
- Advanced technology or magic?
- Tourism: Still doing okay? Let’s fix that!
- Green-left messiah desperately seeking spin-doctor
- The gun genie and its bottle
- On energy, environment, and regulatory independence
- South Africa’s schools of witchcraft and wizardry
- Grab shale gas opportunity, but avoid opportunism
- It’s about who you don’t vote for
- Free markets as a moderate position
- Voting: there’s still time to change your mind
- Green tech is cool, but not because it’s green
- How Mmusi Maimane swindled a vote out of me
- The case to elect Malema to Parliament
- The intellectual gnome, Chomsky
- If Malema isn’t Pol Pot, is he still dangerous?
- Do Malema's followers understand ‘agrarian reform’?
- Look ma, I'm defending Shell's record in Nigeria!
- Any weather is evidence for global warming
- U-turn prof finds his fracking fears are avoidable
- Ramphele et al: The world according to angry feminists
- On HIV/Aids and scary-big numbers
- Cherry-picking ‘grey literature’ on rhino horn
- 350,000 reasons to kill a black rhino
- Eight myths about libertarians
- New Year’s resolutions for other people
- All I want for Christmas is a fire pool
- In defence of Donald Trump
- My old South African flag
- Fearful Fukushima fiction fatigue
- Do we tolerate private sector corruption?
- In defence of a lion killer
- Save the rare wine and endangered craft beer
- Forever blowing bubbles: shale gas economics
- Promotion and Protection of Investment Bill: When “certainty” means “wait and see”
- This land is my land: a revolution
- The launch of SA's Libertarian Party: herding cats in time for 2014
- The African case against the ICC
- The fossil fuel subsidy myth
- Think of the little fishies!
- The hilariously misunderstood libertarian
- The sickly history of sweeteners
- Pants on fire, but they’re not mine
- The obstructionism of shale gas activists
- How mind-numbing numbers whip up fear
- Why pick on Khanyi Dhlomo?
- Half-measures will fail the rhino
- Malema’s righteous anger... and naïve confusion
- Lottery licence to go to one lucky winner
- Vaccinations: when the state stabs the people
- Do reusable shopping bags kill people?
- The long walk to serfdom
- The Karoo desperately needs development
- The trials of Samson Shuttleworth
- The girl who kicked the hornet’s nest
- Raping the discourse about rape
- Who is the reasonable man?
- Fracking: Debating a big deal
- Who needs the Queen’s English?
- Electric cars: Taking from the poor to give to the rich
- Business Licensing Bill: An indefensible defence
- Red-tape tourism
- The Big Business Bribery Bill
- On Thatcher and society, Vavi and the market
- Extinction: Let’s make up numbers and panic!
- Feeding the world is getting easier
- Stop talking shit: Build your own toilet
- Climate change is pseudo-science
- Anti-competitive competition law
- The Department of Less Government
- An open letter to President Zuma
- In defence of Kim Kardashian
- The world’s weirdest wildlife sanctuary
- Boycott calls are simple-minded
- In defence of vegans
- The population explosion implodes
- Environmental backpedalling picks up pace
- How Mangaung can help and hinder entrepreneurs
- The elusive libertarian enclave
- The Gathering: Ivo Vegter
- The hidden overemployment crisis
- The case for constructive environmentalism
- Privatise the Western Cape's shacks
- Tenders: Not open to employees or their families
- Hurricanes fuel climate sensationalism
- Next: Gross-out warnings on food
- No new deal: The failure of Zumanomics
- Benoni has a bright idea
- Was I wrong about acid rain?
- Public food gardens: Where dumb ideas thrive
- Rethinking the costly food label madness
- Give hunting a chance
- Fracking gets green light, but here's the risk
- Socialists, bless 'em, visit Cape Town
- Buy a 1Time ticket now
- Give the ANC credit where credit is due
- The myth of the competent apartheid government
- It's a disaster that 'peak oil' is not a disaster
- No Gravy: a label for sustainable business
- This lightbulb's going to blow
- Smokers? Get 'em up against the wall!
- Inflating the obesity scare
- Bring a Shotgun to School Day
- GMOs: Hacking genes to feed the world
- The hidden dangers of charity
- Fracking: the unread paper debated
- Fracking: The “U-turn” paper nobody has read
- Eco-cronyism is as dangerous as any other
- SKA: Be grateful Karoo residents didn't object
- Energy: Get cracking on fracking
- Fair trade, unfair trade-off
- Casual labour is only bad for Vavi's unions
- 'Externalities', the catch-all justification for regulation
- 'Externalities', the catch-all justification for regulation
- How do we fix our dismal education?
- Barter: the rebirth of sound money
- Rights are not entitlements
- Debunking 'limits to growth' inanities
- Tax: Why align with "most other countries"?
- Newspaper sensationalism doesn't help rhinos
- Rolling Stone reprises Gasland's fracking fantasies
- Cosatu's manipulative march move
- Why do 16 million people not constitute an economy?
- The age of smear politics
- Does fracking cause earthquakes?
- The Chinese model is morbidly obese
- Green tech: doubling down on a losing bet
- Rape, pornography, and hell's grannies
- Petrol taxes won't hurt the poor
- Jailtime mooted for bad weather warnings
- Let's ban bans, and start with CITES
- In defence of overpaid sport stars
- On the death of Kim Jong-Il
- COP17: Let's ban fire
- Cancer gets you when nothing else can
- COP17: The 'party on' agenda
- COP17: The Blue Line of Death
- New seven natural inanities
- Occupiers' anger is all that makes sense
- The Luddites and Technocrats live on
- Malema marches for economic slavery
- Profitable purveyors of pudendal prettiness
- Sense? Us?
- If they want rhino horn, let's sell them some
- "Stimulate" economy by ending telco abuses
- Executive pay makes nobody poorer
- Malema's real persecution
- Mogoeng: Lock up your daughters
- Don't mandate insurance, deregulate healthcare
- I sympathise with Malema's persecution complex
- Short selling: panicked pols ban proof of failure
- Don't blame those who saw it coming
- What's obscene about profit?
- In defence of Bombela
- Dear president Zuma, you are not above the law
- The economics of love
- Treasure the Karoo? Ban the SKA!
- Malema is right, you know
- Gautrain's PPP: political patronage profiteering
- Kumi Naidoo is no hero
- LeadSA fails to lead when it matters
- No logo means carte blanche
- The drug war: dopey but dangerous
- A response to fracking critics
- Don't vote. It's your right.
- Welcome Walmart
- If you're happy and you know it clap your hands
- Buy local, support poverty
- Ubuntu, the free-market way
- Karoo fracking scandal exposed!
- I'm ashamed for my profession
- The bill of bunkum
- Being gay: a brand new concept!
- Who's afraid of the nuclear wolf?
- The nationalisation canard
- Ogilvy should grow a spine
- The new robber barons
- A classy revolution: Why we cared
- Bombastic Bombela balks
- Liberty is more than mere democracy
- Gautrain has a law unto itself
- The irony of 'services for all'
- How to hire a hitman in SA
- Arrive alive and neurotic
- The oppression of taxis
- Protection of Information Bill and why WikiLeaks is so dangerous
- Fifa, Russia and Qatar deserve each other
- One day, we'll all hate WikiLeaks
- The cycling mafia strikes again
- What Julius got for Christmas
- Let's return the beads
- Away with fascist seat belt laws
- Tintin Mbeki in the Sudan
- How the ANC can make everyone happy
- Currency: the race to the bottom.
- Hurrah for national healthcare!
- Give Zimbabweans citizenship
- Carte Blanche has no carte blanche
- That finger-licking, lip-smacking taste
- Bomb the barbaric lot already
- Green tax: another raid is coming
- Do strikers deserve anything?
- The media will lose this battle
- Global warmism needs a fisking
- A glass half-full
- Go ahead, have a baby
- Stop the handouts - end xenophobia
- The right to fire
- FIFA's heart of darkness
- Have some self-respect
- I ordered an orange skirt
- Secretly, Match blames South Africa
- The stupendous Gautrain: a rare marvel!
- The Fifa conquistadors are coming!
- What's wrong with everyone?
- Leave poor BP alone
- The destructive power of government
- The bonsai economy
- The darkness of Africa
- Who is ripping off whom?
- Anatomy of a whitewash
- While FIFA takes over, we fight
- The pointless pretence of Earth Hour
- Ten reasons to reject climate alarmism
- Really, boycott the FIFA farce
- The climate dominoes fall
- Lessons in ethics from Dick Cheney
- Screw the consumer
- In defence of bankers
- Break the banking cartel
- Julius Malema, the walking contradiction
- Boycott FIFA
- Climate clarity
- In defence of Boney M
- Pray Copenhagen fails
- Capitalism is not unkind
- Climate fraud kills people
- Pop goes the hot air balloon
- Peace, love and schadenfreude
- The irony of the left
- Too late to cool it?
- Going cold turkey