My Lords, the Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. The noble Lord, Lord Peston, has just said that it is the fault of the bankers. I agree with him up to a point, but would go further and say that the fault that really needs correcting is our whole banking system. I am therefore grateful to the noble Lord, Lord Eatwell, for bringing forward this debate.
The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.
In March 1997, I warned in this House that our failure then to address the banking system would lead to greater hardship. I said:
"The cycle will continue, but the next time, as before, we will all start deeper in debt and with a burden harder to carry".—[Hansard, 5/3/97; col. 1871.]
We did not act then in the good times. However, I am reminded of Milton Friedman's observation that it takes a crisis for real change to occur. So what better time than now?
By January last year, I could see that the imprudence of bankers had exceeded even my worst fears and I introduced the Safety Deposit Current Accounts Bill to try to defuse the explosion that I could see coming.During the Second Reading debate in April, I asked under which Act of Parliament the current banking system had been established. I got no reply from the noble Lord, Lord Davies of Oldham, whom I am glad to see in his place. I asked again in November, in the debate on the Queen's Speech. Again, there was no reply. I understand that no Act has been passed by Parliament. The current crisis, like previous ones, emanated from a base of judicial decisions. Prior to 1811, title to the money in depositors' accounts belonged to the depositor. However, in that year, decisions in Carr v Carr and, in 1848, Foley v Hill gave legal status to the banking practice of removing depositors' money from their accounts and lending it to others. Since then, title to depositors' money has transferred from the depositor to the bank at the moment when the deposit is made.
Bankers have always seen it as their job to invest as much of their depositors' money as they prudently can, in order to earn income for themselves while, at the same time, maintaining sufficient cash flow to be able to honour depositors' cheques when presented and to meet withdrawals when demanded. If new deposits fail to materialise in sufficient strength or if borrowers fail to repay on time or at all, banks need to be rescued or they will fail. Historically, bank failures then led to a demand for central banks to act as lenders of last resort to save imprudent bankers who got caught short.
These judicial decisions meant that, from then until now, money deposited belonged to the bank and not the depositor, thereby allowing bankers to use customers' deposits as they saw fit, always provided that they could manage cash flow so as to meet depositors' requirements. In good times, that enabled them to take greater risks. Then, with the advent of central banks as lenders of last resort, the bankers soon learned they could take even greater risks with virtual impunity. When their lending became too aggressive and their reserves and deposit receipts were less than required to meet cash flow, they began to lend to each other. Banks with excess reserves would lend on the overnight market to those with a shortfall. With all these supposed safety mechanisms to protect them, bankers came to believe they could become even more aggressive in their lending, enabling them to make increased profits for themselves.
The provision of these safety mechanisms had, in some cases, merely encouraged them to take excessive risks. Further, these two judicial decisions overlooked or failed to consider the fact that when banks lend depositors' funds, more than one receipt for the same deposit is issued. This was not done intentionally by individual banks or it would immediately have been seen as fraudulent. Rather, it was done by the system as a whole. This process continued to the present. It is as a result that our UK money supply has grown from £31 billion in 1971, when President Nixon closed the gold window, to in excess of £1,700 billion today. Let us consider the implications of those last two figures. They mean that every year since 1971 the banking system has created, on average, for its own use, in excess of £44 billion. That is more per year than the entire money supply which had, until 1971, sustained our economy since recorded history and through two world wars. Is it any wonder that we have suffered such serious inflation over that period? It is clear that the normal, everyday onward lending of depositors' funds by retail banks has been the principal producer of inflation.
When paper money was backed by gold, this same production of new receipts by the banking system increased the number of claims for the gold held in reserve without in any way increasing the amount of gold available to meet them. Therefore, the amount of gold available for each receipt became smaller and the value of paper money decreased. The normal, everyday banking practice of onward lending of depositors' funds led to such a continued increase in the number of claims for the gold available that it caused a series of revaluations of paper money with respect to the amount of gold each could claim. The rates of increase varied from country to country, creating complexity in foreign exchange markets and leading to a series of international agreements to try to determine the correct relationship between various national currencies and gold. The last of these was the Bretton Woods agreement in 1944. It was breached in 1971, when the huge increase in the number of dollars created since 1944 forced President Nixon to close the gold window.
The same banking mechanism, which destroyed the gold standard, is now destroying the central banking system. Central banks can no longer cope. The Treasury and the taxpayer have now to try to pick up the pieces. In fact, the failures are so serious and banks have been so imprudent that they are now unwilling to lend to each other and Governments had to ask to kick-start inter-banking lending. In Davos recently, the world looked at the imperilled state of the western monetary system with shock, and there is so little faith in paper money that cries are heard for a new Bretton Woods. All that has occurred because of the failure of Governments, economists, the press and the public to recognise the faults in the banking system that were given legitimacy by those early judicial decisions.
Even today, the Government are striving to save this discredited system with still more legislation that attempts to control the degree to which this fraudulent but legal mechanism can continue to operate. Why are we trying to save a system that, since 1811, has overcome every attempt to harness it? Now is an excellent time to revisit the question of the banking system. We should consider in detail a system to correct the faults that I have identified by creating accounts that do not transfer title to depositors' money from depositors to the banks. Banks must not be allowed to continue to lend depositors' money without the consent of the depositor. This will immediately stop the issuance of two receipts against the same money. Depositors would have to pay for the storage and distribution of their money in accounts and banks would have to compete and earn their income through storage and distribution charges.
For those who wish to earn an income with their money and who wish banks to invest their savings for them, savings accounts are available. With those actions we can completely remove the duplication of receipts from the banking system and stabilise the money supply. Banks will no longer be able to lend depositors' funds. Depositors' funds will then be safe. There will be no further need for lenders of last resort. Taxpayers will no longer be required to bail out future bank failures and inflation can be halted in its tracks. Can it happen? Yes. Will it happen? That depends on the Government's response. My noble friend Lord Eatwell said, when he opened the debate, that we cannot return to the norm. We will, however, unless the Government grasp the nettle and cease throwing taxpayers' money at a faulty system and stop trying to control the uncontrollable. There can be no better time to act than now.