At first pass the question “Are banks necessary?” strikes a macroeconomist as absurd. Of course, we say. But what does the empirical record say? It actually happened in Ireland some 35-45 years ago. From Wikipedia:
Irish bank strikes 1966-1976
From Wikipedia, the free encyclopedia
The Irish bank strikes between 1966 and 1976 were three strikes of about a years total duration which closed down all the clearing banks in the Republic of Ireland. The strikes provided economists a unique opportunity to study the functioning of a modern economy without access to bank deposits.
The strikes affected all the associated banks which comprise of the Bank of Ireland, the Allied Irish Banks, the Northern Bank and the Ulster Bank. The strikes lasted from:
- May 7 – July 30 1966
- May 1 – November 17, 1970
- June 28 – September 6, 1976
The longest strike was of six months in 1970. The Central Bank made limited facilities available to non-associated banks to issue cash. Not just financial transactions were affected, many property deals were also affected because the documents were kept in the banks. The country came through reasonably well in business terms despite the bank strike, a large firm Palgrave Murphy failed when the strike ended and settlements were made but its failure was probably inevitable anyway. The strike had little effect on the main economic concerns which were unemployment and industrial unrest caused by inflation.
Turns out that while the banks were on strike, people developed their own paper notes and circulated them as currency. Pubs were main clearinghouses for clearing personal notes (equivalent of checks). The economy kept moving largely despite the absence of functioning banks. So how did they do it? Umair Haque of the Harvard Business Review tells us:
This is no fairy tale, so we don’t have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome. Instead of Ragnarok ripping prosperity to shreds, the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt.
How? People created their own currencies, to substitute for the collapsing money supply. They kept using checks to pay one another, but then, people’s checks began trading within communities. Here’s how Antoin Murphy, one of the few scholars to have studied these strikes, which took place in the 1970s, describes it: “a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system.”
The country in question was Ireland — today, in deep crisisbecause of profligate banks.
So why were the Irish of yesteryear able to trade notes with one another, in lieu of credit issued by banks? Well, Ireland was curiously well situated for this kind of resilience. It was an economy full of a very special kind of institution: what I’ve termed in my book, The New Capitalist Manifesto, Value Conversations. Antoin Murphy notes in no uncertain terms that the Irish economy was characterized by intense, frequent, conversational personal contact: tight, dense, solid local knowledge circulating at high velocity within and across communities. Result? Borrowers and lenders could build solid microfoundations of trust. In other words, when you’ve been chatting with Bill every night at the local pub for twenty years, you probably know whether his note is a good bet or not (and further, just how much to discount it to earn a sustainable and fair return, that neither fleeces Bill, nor robs you). Furthermore, if you’re the publican, and you’ve been chatting with me and with Bill, then you’re even better positioned to become a de facto arbitrator of notes — a bank. And that’s exactly the role that pubs began to play
So maybe we need the functions that banks sometimes provide, but we need personal-level banking relationships built on knowledge and trust. Hmm. Institutions do matter and large corporations do not necessarily represent “the market process”. Fascinating reading and I suggest people read the complete link to Umair’s blog.