isIT’S DIFFICULT design a world without banks, in part because they are so visible. Imagine the skyline of any major city, and the skyscrapers in sight are usually banks. Commuters emerge from Grand Central Station in New York City in the shadow of JPMorgan Chase’s Park Avenue base. Morgan Stanley towers over Times Square; Bank of America on Bryant Park. In London, the skyline is dominated by oddly shaped towers in the city and Canary Wharf. In Singapore, the top floors of the Standard Chartered offices and UOB bars on the roofs of the house overlooking the whole city. Even in places like Auckland, Mexico City or Jakarta, the logos on the tallest buildings are those of ANZ, BBVA or HSBC.
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The physical dominance of banks symbolizes their importance. Most people interact with their banks for such mundane transactions as buying groceries. Companies pay their workers, suppliers and owners through banks. Banks are also there for bigger decisions, like buying a home or getting a student loan.
For almost as long as there has been money (be it cowry shells, gold, banknotes, or digital deposits) there have been institutions that provide safe storage. And as long as deposit-taking institutions exist, their leaders have understood that under normal circumstances not all depositors will claim their money at the same time. This means they don’t have to keep cash on hand for every deposit – they can instead use that money to make loans. Thus, bankers finance private investments and earn interest for themselves. It was a wonder for classical economists. “We have completely lost the idea that any business that could pay, and considered likely, can perish for lack of money,” wrote Walter Bagehot, then editor of The Economist, in his 1873 book “Lombard Street”. “Yet no idea was more familiar to our ancestors.”
The “fractional reserves” that banks hold on their deposits, however, have another effect: making them inherently unstable institutions. The history of capitalism and currency is therefore that of incessant economic enrichment, marked by the scars of frequent bank failures and financial crises.
Much has changed in banking since Bagehot’s time. Then the biggest banks were in London; now they are in New York, Beijing and Tokyo. Technological change means that almost all payments are settled digitally, rather than by notes or checks. The banks are also much bigger. The total assets of the 1000 largest banks in the world were worth some $ 128 billion in 2020, or an annual global gross product of $ 84.5 billion.
And yet, a world without banks is also visible on the horizon. As never before, their role is threatened by new technologies, financial markets and even the public sector. Central bankers have watched tech giants develop faster, easier payment systems that could pull transactions out of the banking system. They fear that digital payments will be the end of cash. Financial regulation and monetary policy have traditionally been operated through banks. If this mechanism is lost, they may need to create central bank digital currency instead.
Because technology has disrupted so many industries, its impact on the banking industry may seem like just one more example of a poorly performing, uncompetitive business being obsolete by shrewd tech companies. But money and banking are not like taxis or newspapers. They constitute the interface between the State and the economy. “The deep architecture of the monetary credit system, better known as banking, has not changed since the 18th century, when Francis Baring began writing about the lender of last resort,” says Sir Paul Tucker, former Deputy Governor of the Bank of England and now at Harvard. “Which means that so far it hasn’t depended on technology at all, because Francis Baring wrote about it with a quill.
Now a new architecture is emerging that promises computation. “Economic action cannot, at least in capitalist society, be explained without taking money into account, and practically all economic propositions relate to the operating mode of a given monetary system, ”wrote Joseph Schumpeter in 1939. Yet it is possible to see a future in which banks will play a lesser role, if at all, with digital currency and deposits provided by central banks. , financial transactions carried out by technology companies and financial markets that provide credit.
Bad change or good?
The question is whether such a world is desirable. Banks have many flaws. Many unbanked people are too poor to afford them. They can be slow and expensive. They often make more money through trading and fees, not normal banking. Careless banks can create boom and bust cycles that inflict economic hardship. So it’s easy to assume that bank sidelining may just be another hindrance broken by technological advancements.
However, a world without banks poses certain problems. Today, central banks provide very little to economies. About 90% of the broad money supply is made up of bank deposits, backed by small reserves held with the central bank and an implicit guarantee from the central bank. This makes it easier for central banks to build confidence in the system while staying away from credit. Widely used central bank money would bring them closer to the action, inflating their balance sheets. It creates risks.
Banking and capitalism are closely linked. Economists are still debating why Britain industrialized first, but it’s hard to read Bagehot and not conclude that the alchemy of banks turning dormant deposits into investment engines has played a role. role. The question is what happens if central banks play a bigger role instead. It might be possible for them to avoid giving out loans, but it is difficult to see how they could avoid some interference in the credit markets.
There are also broader social risks. The banking sector is fragmented, with three or four large banks in most countries, plus many smaller ones. But state-issued digital currencies and private payment platforms benefit from network effects, potentially concentrating power in one or two institutions. This could give governments, or a few private bosses, a wealth of information about citizens and make institutions much more vulnerable. A cyberattack on the US financial system that would shut down JPMorgan Chase for a while would be agonizing. A similar attack that shut down a Federal Reserve digital currency could be devastating. And there is the potential use of money for social control. Cash is not traceable, but digital money leaves a trail. Digital-only currency can be programmed, limiting its use. This has benign implications: food stamps could be better targeted or stimulus spending made more effective. But there are also worrying ones: digital money could be programmed to no longer be used to pay for abortions or to buy books abroad.
The scope of the issues this special report will examine is vast. This includes the role of the state in granting credit, the concentration of power in tech companies or governments, the potential for social control, and the risk of new forms of warfare. A world without banks may seem like a dream to many. But it might sound more like a nightmare.■
This article appeared in the Special Reports section of the print edition under the headline “Less, if at all?”