ev. After the last great financial crisis of 2008, discussion and reflection on economic and financial relations arose which raised hope – hope for an emancipation from the (pseudo-) economic beliefs which had dominated the last decades. These had repeatedly failed to lead to an improvement but time and again brought about the contrary instead. Nevertheless, the mantra of neo-liberal economy – deregulation, liberalization, privatization and a general opening of the markets – was enforced with an iron fist.
Belief in an alleged need for loans was the key lever to enforce this ideology. And this has remained the official credo, although whereever it was applied – whether in the former communist countries, in developing countries or also in Europe – it led to government debt and credit addiction, to the sellout of regional economies as well as to an increase in social inequality. This ideology has also led to an increase of banking and financial crises instead of reducing their number; and an increasing number of economists are beginning to cast doubt on its efficience.
In the course of the Rhodes Forum 2015* Professor Richard Werner moderated a plenary session on “a common prosperous future: financial and economic policies for an equitable development for all”. In his introductory speech he briefly demonstrated that the currently prevailing economic theory of the so-called free market – known as neoliberal or neoclassical theory, Chicago School of Economics – was not suited for explaining different economic problems. Rather, it is based on incorrect axioms – Richard Werner discusses this thoroughly in his book “Neue Wirtschaftspolitik. Was Europa aus Japans Fehlern lernen kann” (New Economic Policy. Japan’s Mistakes and their Lessons for Europe)1 – and from these assumptions, which cannot withstand an empirical examination based on reality, all the other corresponding erroneous conclusions are derived in a purely deductive manner. In other words: The whole theory of free markets, of the effects of liberalisation, deregulation and privatisation collapses, when it is shown that the underlying axioms and conditions are incompatible with the reality of the human being as well as of the economy. This is also documented if we take a look at history. There is another aspect of special interest to Richard Werner: Hardly any of the prevailing economic theories adequately include the process of money creation, and also the role of banks is not displayed realistically. And yet these are crucial for developing countries, as the following interview will show: Once the mechanism of money creation and the particular role and position of banks are adequately focussed on, new horizons for growth and (national) economic advancement are opened up.
Werner, who originally coined the concept of “quantitative easing” in 1994, points out that money or credit creation is not in itself a problem as long as it is used for the benefit of the peoples in being introduced into the productive industry, where added value is created by use of human labour and creativity, so that development is made possible. However, this requires an economically oriented monetary and economic policy, which is primarily oriented towards local development and should be committed to its protection. Richard Werner accordingly criticises the centralisation and monopolisation of the monetary system in powerful central banks, especially the Federal Reserve, the Bank of England (as well as its home, the City of London) and the ECB, which apply quantitative easing in a way completely contrary to the original concept by not allocating funds to real economy but largely to the financial industry.
Richard A. Werner is a German economist and Professor for international banking. He obtained his first degree in economics from the London School of Economics with first class honours. His doctoral thesis at the University of Oxford was on monetary economics and economic policy. From 1990 under a postgraduate programme studies at the University of Tokyo including studies at the Research Institute for Capital Formation at the Japanese Development Bank, Visiting Researcher at the Institute for Monetary and Fiscal Studies at the Ministry of Finance in Tokyo. Further working experience in Japan and with the Asian Development Bank as well as chief economist at the British Investment Bank Jardine Fleming Securities (Asia) Ltd. Among others he published his studies about the backgrounds of the Japanese crisis in 2001 in his book “Princes of the Yen”, which became a no. 1 bestseller in Japan.
In 2004, Werner accepted a chair at the University of Southampton, Great Britain. Presently there he is professor of international banking and director of the Department of International Development as well as Director of the Centre for Banking, Finance and Sustainable Development; from 2009 to 2012 Richard was Visiting Professor at House of Finance, Goethe University Frankfurt.
Furthermore Richard Werner is the founding chairman of Local First Community Interest Company, which introduces not-for-profit community banks in the UK, following the example set by German cooperative banks and savings banks (“Sparkassen”).
Current Concerns: In your presentation you pointed out that in the wake of decolonisation, a specific economic model was imposed on the developing countries so they might further be kept under control. What are your points of criticism concerning this model?
Professor Richard A. Werner: In my presentation I addressed myself to only three points. First, that these countries are told: “You want to grow, to develop. So what do you need in this case? Savings are what you need. But in the developing countries you do not have enough savings. Well, in that case we can help you. You can lend money from our banks.” That is precisely what Keynes’ general theory of 1936 says: you need savings first. Incidentally Keynes changed his view by 180 degrees, because earlier he had said that loans could take the place of savings, but in his 1936 theory he says, no, you need savings, and he no longer speaks of loans. I do not know what happened in between, but it often happens that economists change their mind and then never again speak of what they thought formerly.
In any case, after the war the economists Harrod and Domar used this more recent of Keynes arguments for their model of economic growth, and this has been very influential in developing countries. This was then championed by the IMF, the World Bank and the development banks and eventually de facto introduced worldwide. And it actually says developing countries may borrow the money necessary for growth but domestically unavailable from abroad. Then of course the international banks came and lent it to them. But reality is very different: First it is wrong to say they need this money for economic growth, because they do not, they can generate the money by domestic credit creation.
If you have your own currency …
Yes, of course, exactly. But of course, that was the case. Most had their own currency, their own banks and central banks, so they were and are able to create their own money and have no need to borrow from abroad. Because, secondly, you certainly need no foreign money, namely because it cannot actually help the local economy. These external loans were of course almost always awarded in foreign currency by the international banks. As shown by Singer/Prebisch, the currencies of developing countries fall over longer periods, such as 50 to 100 years, and therefore these developing countries’ debts become ever larger, if they have borrowed abroad in foreign currency, of course. You fall into this debt trap very quickly and then they say, “Well, now we have to make a ‘Debt for Equity Swap’2, because clearly you can no longer pay your debts. So now we take hold of your lands and your natural resources and so on.” So that is arranged.
Meanwhile the countries could indeed firstly generate the money themselves, so do not need foreign loans at all. And secondly, these foreign loans given by international banks – where do they come from? After all, the international banks also create them out of nothing. And, even better: The foreign money does not even get into the country. Because the dollars, pounds and euros created by foreign banks remain in the foreign banking system – you can see that quite clearly. That is, the British pounds remain in the British banking system, the Swiss francs in Swiss banks and so on. None of the money actually comes into the developing countries. The whole thing is just a ploy, a sham. And if we follow up on that, credit creation occurs at the moment when the loans, the dollars for example, are exchanged to, say, South African Rand, and this credit creation occurs in the South African banking system, that is in the banking system of the borrower. And this could be carried out without this prior foreign credit.
So the transfer is a great deception.
Yes. The loans must be covered by the borrower’s repayment capacity whether or not. This is always the case. This can be had without taking out external loans.
This is basically what should be recommended to Greece today.
Yes of course, it is always the same.
“Today‘s macroeconomics is more fiction than reality.“ (“Neue Wirtschafts-politik”, p. VIII)
That is, if they had a central bank and their own currency, they could generate the necessary money themselves.
I also told the Greek Ministry of Finance they should issue no more government bonds and take out their loans from the local Greek banks. In this way they would create their credits domestically and solve several problems simultaneously, because banks also need to grow – and they are of course shrinking, and as long as they shrink this is deflationary for the economy, as no growth can take place. Contrary to government bonds, bank loans are not valued at market value. But because the government bonds actually used for financing purposes are constantly being valued at market value, they are always exposed to attacks by bond speculators – and this is what Greece is being extorted with. If the state borrowed from its own domestic banks – what I call “Enhanced Debt Management” – they would get completely out of foreign debt and could indeed avoid deflation even in the eurozone. While bond market interest rates have been driven up to high double-digit percentages, bank loan market interest has remained under 3 percent. So it is hard to understand why the finance ministries of countries such as Greece, Ireland, Portugal and Spain go on issuing bonds and do not simply take out much cheaper credits from their domestic private banks. I have often put this forward throughout Europe, and even before representatives of all ministries of finance of the EU (this was in Brussels in January 2012). Apparently some people here and there even understood what I meant. But then I was told by certain ministries of finance: “We cannot do this; the ECB does not allow it.” But from a purely legal point of view, the ECB cannot prevent this. The Irish, for example, should simply have done it, but they were so much under pressure at the time, and there were perhaps also the wrong people in the respective decision-making positions. Whatever the case, this is my first point.
Then there are two other points I would like to make: The mantra of Washington economic policy also says you need deregulation, liberalisation, privatisation; only then there would be economic growth. There are several counterexamples one could name. Actually all countries that have successfully developed are counterexamples, as they have all managed this development on the basis of strategic government intervention and industrial policy. There is no country which became an economic power due to a free-market policy. Be this England, America, Germany or Japan and East Asia …
You are talking of the time when these countries developed …
Yes, in the UK this already began with the industrialization of the textile industry in the 17th and 18th century. But why was the textile industry already developed and important then? The British managed this only by means of their industrial policy. Earlier, in the 13th and 14th century, England had only exported raw wool and no finished products. Then the rulers understood that exporting products of low value made one dependent on those countries that produce products with high added value. The English kings only understood this when they were already deep in debt to the Hanseatic League. They had even had to pawn their crown jewels to the Hansa. Then they realised: We have to generate value in England and spezialise in products with high added value. So an industrial policy was needed which, once implemented, consistently built up the textile industry, causing England to develop rapidly.
“A realistic description of the economy may seem politically unattractive. But in economic research, as in natural science, to do scientific work is to recognise reality. The rhetoric of the market prevents the recognition of the facts. Only a realistic economy has a chance to contribute to the solution of the problems of our world. Because these problems can usually be actually solved.” (“Neue Wirtschaftspolitik”, p. IX)
This took some time?
Yes. This process spanned more than a hundred years. But there was a clear industrial policy. For example, initially laws were introduced which specified that you were no longer allowed to export raw wool. Then there was state support for exports of products with high added value and also for imports of raw materials with low added value. After that the English brought in the related technology by attracting Flemish people to the country, who were made to settle in England as “Flemings” and whose expertise was then assimilated. Then there were laws made to increase the demand for domestically produced wool, like for example, that all the dead had to be buried wearing woollen caps. Foreign wool was banned. Thus, an industry – the wool-processing textile industry – was conjured up out of nothing.
Secondly, England built up its own fleet. There had been no government-owned vessels in England before, but afterwards they had the largest fleet in the world. And here the government had also carried out the necessary interventions by law. For example, it was forbidden for foreign vessels to move goods back and forth in English ports. Previously, this had been done mainly by foreign vessels. But afterwards, permission was only given to English ships. This then also increased the entire production of ships and so on. Friedrich List describes all this very well.
So both local and international industrial policies were pursued, and trade restrictions were issued to protect the new industries. There are numerous counterexamples to this: countries that deliberately did not allow free trade were successful, while countries that adopted free trade under IMF guidance – in Africa, for example – suffered from a deteriorating domestic economy which was ruined by the foreign goods supplied by international competition. The country falls into poverty and gets ever deeper into debt – and then everything goes downhill.
Where do you see alternatives for countries which would allow them to break out of this vicious circle?
Under no circumstances should TTIP be signed. Countries should maintain their sovereignty. Then of course they will also be pressured and therefore they have to find their own economic bloc. That is what the BRICS countries are doing – which are excluded from TTIP in any case. Because actually, under the pretext of free trade a trade bloc is formed which then closes off its market against the other countries.
That much is clear …
And therefore the other countries must organise themselves. Russia, India, China, Brazil etc.; that is what they are doing. They do not want to be susceptible to blackmail in the existing money mechanisms, so they are developing their own payment system. This is necessary, of course.
Then, at the same time, it is important for every country to maintain as much self-sufficiency as possible, because otherwise you are susceptible to blackmail. When your economy is self-sufficient, other countries can threaten as much as they want, “we won’t trade with you any longer!” – All right, then don’t. You can react in this way as long as you produce the most important goods domestically or are able to obtain them from partners with whom trade is possible. It is important to lay the emphasis on the local and regional economy; then it is all right. And better use decentralised money creation in regional banks; thus, the region will become very independent economically.
What you are saying corresponds with the conclusions of the World Agriculture Report, which also recommends building up the local and regional economy.
“The enormous economic power of achievement belonging to China, Japan and other countries of the Far East is not due to free markets, not to campaign for liberalisation or deregulation, as they were represented by neoclassical economics.“ (“Neue Wirtschaftspolitik”, p. 7)
And the regional banks then create their own money …
And they are independent. One would therefore have to promote the small regional banks …
So it was done in the past in Germany. In Germany there are 1,500 small municipal banks, and they generate most of the money supply in Germany. This is loaned to small and medium businesses in the form of credits. That is why the small firm sector is so strong. This is possible thanks to these regional small banks, the “Volksbanken”, Raiffeisen Banks. They are all independent, these are individual banks, although under the same label, “Sparkasse” or “Volksbank”, but they are legally independent and make their own decisions, and that is rightly so. Previously every village, every town, had its own banks, often even three of them: a savings bank, a “Raiffeisenbank” and “Volksbank”. In the last 20 years the supervisory authorities, in particular those belonging to the EU, have been exercising a lot of pressure on these good local banks in order to force them to give up. Therefore there have since been many mergers. Today there are usually only two banks, and these only in the cities or market towns.
I just wanted to ask you about that. Just now we are experiencing a demise of many small banks in Switzerland …
Yes, that is right. The Swiss National Bank and, more importantly, the European Central Bank (ECB) have planned their monetary policy so as to destroy these small banks, as they are the last bastion of alternative economy in Switzerland and in Germany. That is to be destroyed. We are now trying to put up some resistance by introducing these Community Banks in England. We want to create a network of local banks. The Bank of England is not thrilled, though this is demonstrably conducive to jobs, economic growth and financial stability.
In Germany, the small banks are being well and truly wiped out by the ECB and the EU, by means of their many new supervisory requirements and regulations. Even the smallest banks with only ten employees now need to report in as much detail as the “Deutsche Bank” that hires 1,000 professionals especially for this task. The small banks might need to hire several more people who would then be busy writing reports to the authorities. They cannot afford that. Each position is important in these banks, and if they suddenly have to make two people available for those tasks, they will have to close down.
And the other method of wrecking local banks is of course the interest rate policy. Short term interest rates have been reduced to zero. Through the so-called quantitative easing of bond purchases, long-term interest rates have been lowered to zero. Therefore, the yield curve is flat around zero – like this the real banks that grant productive loans to small companies go bankrupt. And which are the banks that survive? Those are the speculation banks that pump their money into financial markets because the low-interest rate policy is once more generating an inflation of securities.
The City of London has for the last hundred years pursued the policy of allowing only big banks to survive. And who is now the EU Financial Commissioner? A City of London-lobbyist who now officially writes the laws in Brussels. That is officially asking for trouble.
If you say that you are building up that sort of bank in Hampshire in England, you surely have some ideas how to help such small banks along. This would of course be important also for all the other small banks.
We have no new ideas – we want to implement the old ones! Or in other words, the new idea is to return to the origins of the cooperative banks when, 150 years ago, they were founded all over. With respect to these regulations we will try teaming up with other banks to cover them as well. Indeed in Germany you do these things together, jointly. Yet the difficulties will remain. Here it is important to involve politics and to publicly demand equal treatment with America: In the US, small banks have their own supervision, with much lighter requirements than those concerning big banks. The EU and ECB have so far refused – probably following US directives – to allow such equal treatment of small banks in Europe to those in the United States.
“Monetary policy is the most effective creative power in enforcing macroeconomic objectives. Because it affects not only economic growth, but can also cause changes in society. Because of its immense power and scope, which allows for control and direction of the economic resources, monetary policy should be entrusted to an institution that is firmly anchored in the democratic process […]“ (“Neue Wirtschaftspolitik”, p. 451)
But there are attempts.
Yes. But if this kind of municipal bank also existed in England, they might help to alter things politically. The City of London could no longer argue: Oh, those are excuses and so very German; you want special treatment – that is the way it is always being said. But then there would also be municipal banks in England and that could also help in this debate.
Professor Werner, thank you very much for this interview. •
(Interview Erika Vögeli)
* Rhodes Forum 2015: From 8 to 11 October 2015 the annual congress of the World Public Forum “Dialogue of Civilizations” on the topic “The world beyond global disorder” took place in Rhodes, Greece. The World Public Forum or forum of the world’s public sees itself as part of the practical implementation of the resolution “global agenda for dialogue among civilizations” initiated at the UN General Assembly on 9 November 2001. Having been initiated in Russia in 2002, a meeting has taken place in Rhodes every year since 2003 to promote dialogue, exchange and understanding among civilizations and to search for peaceful, non-violent solutions in terms of a future of humanity for all.
1 Werner, Richard A. Neue Wirtschaftspolitik. Was Europa aus Japans Fehlern lernen kann. (New Economic Policy. What Europe can learn from Japan‘s mistakes) Munich 2007. (ISBN 978-3-8006-3247-3).
2 Debt-for-Equity Swap: settlement of a claim by the creditor receiving interests in the company of the debtor – in the case of developing countries the debtor receives participating interests in the resources such as land and natural resources of a country.
3 Werner, Richard A. Neue Wirtschaftspolitik, p. X
“The critics of neoclassical economics are in agreement: The science of economics has to deal with reality; it must prove that it is a serviceable tool for dealing with the realities of economic life. To the layman this must seem obvious. But the problem is a completely different one for the still prevailing mainstream of economic thought. The neoclassical school is based on a deductive approach. According to this methodology we arrive at valid findings by choosing axioms as starting points of our school that are precisely not derived from empirical findings. These are supplemented by theoretical assumptions, which in turn dispense with a sound empirical basis. From these chosen axioms and from a superstructure of theoretical assumptions conclusions are drawn with the help of logical aids like notably mathematics, and these again bring forth purely theoretical results.“
(Werner, Richard A. ”Neue Wirtschaftspolitik“, 2007, p. 22, ISBN 978 3 8006 3247 3)
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