All Cyprus banks were closed until Thursday, having been shut since March 15. There is a real risk of collapse for the country’s banking system, which has gambled with both small savings and ‘money of uncertain provenance’. It is a cardinal principle of the economy that the financial system must be protected at all costs.
It is tempting to ask, “Why not just let it crash?” The answer is: because it would be irresponsible. It would accelerate a tremendous economic crisis not just in Cyprus but in much of Europe. This threat has induced populations to put up with tremendous social misery in order to bail out the banks.
What does the banking system do that we need? Commercial banks operate as a clearing house for bills of exchange. They mediate between savers and borrowers and, by providing credit, help overcome imbalances between production and consumption. Investment banks enable companies to raise capital, and thus direct investment to growth areas of the economy.
Necessarily, these banks are organised in a hierarchical system under a State-mandated central bank, which preserves the quality of national money, and enables the competing banking institutions to regulate their dealings with one another.
In the international system, the quality of money is guaranteed by a de facto ‘world bank’. On the face of it, if there is to be production, trade and consumption on a global level, such byzantine hierarchies are unavoidable — and with that, all the concentrations of power, the State-corporate alliances, and the veils of secrecy that are entailed by such arrangements.
In practice banks do a lot more than this. Commercial banks have shifted from direct lending to selling financial products based on the securities markets. Investment banks have developed increasingly labyrinthine techniques to enable investors to generate more profit from less ‘real’ economic value — betting on high-risk derivatives. In a booming market, this all looks splendid. In the aftermath of 2007, it looks like a racket.
One response to this is to favour a public utility banking system: instead of credit and investment being dependent on secretive organisations operating in a global casino, they should be allocated by a set of nationalised institutions responsive to popular needs. This would be a step forward. It would undermine the institutional basis for a particular form of ruling class power, and it would, in principle, place in the hands of the population the means to undertake massive, but necessary, restructuring, such as the enormous investments needed to create a ‘green’ economy, solve the housing crisis, fix public transport and create a viable pensions system.
This would be most effective as a transitional measure towards a more radical transformation. This is because a nationalised banking system is not necessarily a more democratic one, particularly if the same managers and owners remain in charge, and if they possess the same private interests.
Such a bank would have to be capable of challenging private capitalist power, because private investment decisions are not for the public good. It is not just corporations externalise costs and maximise profits, with as much disregard for the public good as they can get away with.
It is that the system of competitive accumulation produces irrational outcomes: unemployment, overproduction and waste production. This suggests that we would need to aim to go beyond public utility banking. What we today know as banks would have to become instruments of popular control and democratic planning, and for that we would need to democratise not just the banking system, but the productive base of the economy.
It would require taking as much of the economy out of the market as possible and placing it under direct popular control. It would require a sustained popular challenge to capitalist power, with a flourishing of grassroots democracy. To paraphrase Karl Marx on religion, the demand to abolish banking is a demand to abolish the state of affairs that needs banking.