money tree

The Challenge
Now you see it. Now you don’t.
Inflation and the Economic Cycle
Prosperity: Access Denied

The Reward
A Fair Day’s Pay and a Stable Currency
Work and Pay – Pay and Prices
Deflation – a Rich Reward

The Power
Money – Releasing the Potential
Development Banking History
Regional Infrastructure

The Challenge

Now you see it. Now you don’t.

The older you get, the longer your vision. And that can be good or bad, depending on whether things are getting better... or not. And the fact is: they’re not.

In the 1950s you could buy a house and pay for it over five, or at most ten years. Now many young people are buying a property and simply paying the interest. Paying down the mortgage? Not on.

More young people are not prepared to take on the property challenge, which is largely seen as impossible or a dead-end road. Similarly, saving for your old age is seen by many as a dead loss, since money saved now will be worthless by retirement time. So how do you save for your old age? For many, you don’t. Irresponsible? Yes. But what’s the alternative? The only answer would seem to be: back to Property again. Which partly if not mainly explains why property prices have shot through the roof: people are using property as a way of saving. Back to Square One.

But hold on. Surely money should be something we can save. Pennies in the piggy-bank and all that. And indeed, yes. Check any website which defines money and its functions, even the IMF website... and surely you can’t get nearer Heaven than that. “Money,” say the Pundits blandly, “is useful as a medium of exchange, and a store of value”. So much for Theory.

A medium of exchange: yes. I have tomatoes for sale, I want bread. So now I have to find someone who makes bread, and wants tomatoes. Tedious. But with money as a common trading medium, simple.

But money as a store of value? Forget it. The days of “real” money, of gold and silver coinage, are long past. Indeed the fundamental fact is that our money has no intrinsic value whatsoever. It is simply an academic unit of account.

This raises the interesting, yet rarely asked question: What IS a Pound Sterling worth? Or a Euro, a Dollar? How do you define its value?

Earning, spending, saving, investing, buying, selling... it all passes through one central process, one central commodity or accounting unit in terms of which everything is evaluated, calculated and traded: money.

Money plays such a pivotal, such a crucial role in all our lives that we totally take it for granted. But though it may be difficult to accept at first sight, money, our monetary unit of accounting has no stable, pre-defined value whatsoever.

In its earlier days, money was based on a real commodity, such as gold or silver.

A Sterling was a once a silver coin, and a Pound Sterling was a Pound Weight of Sterlings, or a Pound of Silver. Later the Pound was guaranteed in terms of a specific weight of gold. In 1931 the Pound Sterling broke with gold, but retained its tie with the US Dollar which was itself tied to gold.

Then in 1971 the US “shut the gold window” thus abandoning the fixed relationship between gold and the US Dollar, and the world’s currencies became nothing more than paper and credit, to stand or fall solely on the honesty, reputation and competence of their management. Not one of them now has any scientifically defined value, any structural definition to provide some underlying stability.

Of course our monetary unit does have practical day-to-day value for all of us. Money has real meaning in terms of what you earn (wages), and what you can buy with what you earn (prices). We all use it, we value it in terms of the hard slog of earning it week by week. We value it in terms of what we can buy with it. Money has value in terms of pay and prices.

But then look at pay and prices; both are determined by disputation. The price is as much as the producer can squeeze out of the customer, the wage is as much as the employee can squeeze out of the boss. And since we all want more money for the same work – if we can get it – all of the world’s currencies are subject to continuing upward pressure for higher wages, and higher prices.

Is our money really so baseless, so meaningless that we can simply and with impunity demand more money for the same work or the same product or the same service? Yes it is. And the result is inflation. Even as we bank wages and salaries, or take cash earnings out to spend, in terms of purchasing power our money’s real value is slipping through our fingers.

Inflation is not the complex esoteric phenomenon economists would have us believe. Inflation is simply a matter of human greed – our natural desire to get more reward for the same amount of work.

Inflation and the Economic Cycle

Inflation is an increase in price without a corresponding increase in value. If the price goes up for a better product that costs more to make, that is not inflation. But if a producer asks more tomorrow for exactly the same product he sold for less yesterday, that is inflation.

Similarly with wages. More money for more or harder work is not inflation. But when workers demand more money tomorrow for doing exactly the same work they did yesterday – that is inflation.

How does a nation survive socially and economically using a currency with no defined value, constantly drifting upwards? The answer is that it doesn’t. None of them do. Money, which should act as a store of value, is universally scorned as a savings medium, leading to speculation, largely in housing.

And the longterm effects on the economy and on growth (or any hopes of it) are far-reaching and seriously damaging. A country becomes prosperous when everybody is working, everybody is working productively. Not hard to figure. But not hard, simply impossible to attain, at least in our present econoic and social setup.

Economic growth can never be maximized – the ideal of everybody working, everybody working productively. For growth leads to wage and price increases – inflation – which central banks attempt to check with higher lending rates, thus leading inevitably to recession. The Economic Cycle is hard-wired into our economic fabric.

The Economic Cycle has become a regular, inevitable, and highly destructive feature of everyday life.

Starting at the low point of the Economic Cycle, the economy is slack, unemployment high, interest rates are high, and inflation is low. Producers and retailers find difficulty in moving their goods, so they respond by introducing price reductions, incentives and special offers. Similarly with wages. Employees are naturally reluctant to demand more money, or threaten strike action, in a time of high unemployment with job applicants lining up outside the door.

So the government and/or the Central Bank feels safe in expanding the economy by lowering interest rates, thus making borrowing and expansion cheaper for business, and loans cheaper for consumers.

But in times of economic expansion the banks, mortgage brokers and credit card purveyors collectively use every device at their disposal – while constantly inventing new ones – to make hay while the sun shines, to magnify and maximize profit from the boom, the upward cycle.

And it seems that every major store is constantly pushing its own Credit Card, backed up with mail shots and telephone promotions. With attractive initial offerings – a cash bonus, discount on first purchase, a chance to win a dream holiday... it’s hardly surprising that so many people sport a wallet- or purse-full of assorted credit cards all encouraging you to spend, spend, spend – with profitable (to the card issuer) penalties for the inevitable late payment.

Similarly, as the economy expands and consumer demand expands, producers and retailers find they can increase prices without losing sales. And so also with wages – as the economy approaches near-full employment and staff are hard to find, now’s the time to demand that raise you’ve been wanting!

The process quickly becomes self-generating, as staff demand more wages to keep pace with higher prices, and prices are pushed up by higher wages and bigger profits.

Clearly, a steady and prolonged upward movement in wages and prices cannot be allowed to continue if the national currency is not to become worthless. When the economy is booming and inflation is increasing, the standard economic wisdom dictates that the economy should be “cooled down” by increasing interest rates. So well before the economy can reach full capacity, government and/or central bank attempts to control inflation by slowing down growth of economic activity, both production and consumption, with increased interest rates.

This increases credit costs for consumers who reduce their purchases, thus prompting producers to lower their prices and bring out the special offers. And on the wage front, the combination of lower prices plus higher borrowing costs squeezes producers, forcing them to resist employee wage demands.

And as the economy turns sour and begins its downward slide, those same financial institutions which had been so free to lend now rapidly withdraw their support, thus accelerating the collapse. Banks reduce or call-in personal and business loans, and mortgage lenders repossess the homes and investment properties of defaulting clients whom, perhaps only months earlier, they were persuading to take on more debt than they could reasonably afford.

And so, despite the damage and distress of downturns, and the clear desirability of full productive use of all economic resources, the ability to expand an economy to full capacity can never be realized, for as the economy expands to near-full employment, the danger of inflation causes the Central Bank to put the brakes on, despite the yet more damaging possibility of another serious recession.

Near-full employment with inflation, or a degree of permanent unemployment with recession? The “art” of economic management as currently practiced lies in attempting to compromise between the two.

But this generally accepted economic truism ignores the unseen consequences which cause longterm structural damage to our economy and eliminate any hopes of maximizing prosperity.

Prosperity: Access Denied

Interest rates up, wages stable or down, prices down, inflation tamed. Mission accomplished. Or at least, this is the classic economist’s view. But real-world manufacturers see it differently. In reality, recession actually increases production costs and therefore, ultimately and inevitably, prices.

Most manufacturers rely on loans to some extent or another, as capital investment, or to cover daily cash-flow fluctuations. So an increase in interest rates immediately increases their costs. And that’s not all. Every factory has fixed costs: capital equipment write-off, rent of premises, local taxes, the wages and social costs of essential workers. These costs must be paid every day, no matter if the factory is producing at full capacity, half capacity, or at a standstill. Fixed costs must still be paid out.

If the total of monthly fixed costs is £50,000 and the factory is turning out 50,000 units a month, the fixed-cost element per unit produced is £1. But if the factory is only turning out 25,000 units, then the fixed-cost element per unit produced is doubled at £2.

The simple fact is that unit production cost is minimized when output is at maximum. At anything less than maximum output, the unit production cost progressively rises as output falls. This factor combined with higher interest rates substantially increases a factory’s unit production costs.

Certainly recession demands that producers reduce their prices simply in order to maintain a minimum sales level – and indeed, to stay in business. But the combination of rising production unit-costs and lower prices places enormous pressure on manufacturers which simply cannot be tolerated indefinitely. So yes, recession can act to force a general reduction in prices, but only for a limited time and at a cost of collateral damage to industry.

If the recession is prolonged, producers must eventually be compelled to increase their prices or go out of business. And as soon as the first signs of recovery appear on the horizon, they can’t wait to increase their prices yet further simply in order to bolster up their battered finances. Business operates ideally and most productively at full capacity in conditions of economic and financial stability, the ideal business climate which our modern, supposedly sophisticated economy is structurally incapable of manifesting.

The Economic Cycle demands a pool of permanent unemployment, mild in the prosperous regions, serious in the economic periphery. Its booms promote financial excesses, its busts produce personal and business bankruptcies, while the on-going climate of uncertainty does nothing to encourage the secure, substantial investment so vital to a productive industry – even if such were available.

The plain fact is that the so-called “economic cycle” of boom-recession-boom (with the occasional “bust”) is damaging to industry, largely ineffective, and it’s no way to run an economy. In addition, the constant aura of pervading uncertainty discourages longterm industrial investment by manufacturers who long ago learned never to trust a boom because it probably won’t last.

And it all comes back to the simple, basic fact: that money has no structural definition. It has real meaning solely in terms of what you earn (wages), and what you can buy with what you earn (prices). And both wages and prices are open to continuing dispute, leading to on-going upward pressure, which is let loose in boom times and cut back towards the top of the cycle leading to a downward slide.

Until we acknowledge this basic problem and take steps to provide some basic definition for our monetary unit, we will always have inflation (money useless as a saving medium), unemployment (essential to tame inflation), and the low productivity of an under-utilized economy – together with the continuing climate of uncertainty which is definitely not conducive to investment. Money, its lack of definition and inherent instability, is indeed the root of all economic evil.

Property explosions, credit overhang, booms and busts, unemployment, austerity, bankers who’d rather gamble than invest in industry... it’s a ‘Wild West’ roller-coaster world, economically dysfunctional and worse still – unproductive.

But we do have a choice.

The Reward

A Fair Day's Pay and a Stable Currency

There are people who work hard all their lives, contributing usefully to the collectivity, yet who end up with little or nothing for their old age.

There are people who produce nothing of real value for anybody, yet so manipulate the power of shadow-finance and governance that they can retire early as millionaires.

There are people who retire early as multi-millionaires, having brought their nation’s economy to near-destruction, and placed their government and its people in debt for years to come.

This is not the opening gambit for a socialist manifesto. It is plain simple fact, with debilitating effects on social stability, economic growth, and any prospects for future prosperity. Social consciences may indeed fret at the injustices, but the deeper consequences are far more pervasive and damaging, consequences of which we are now becoming increasingly aware both on a collective and a personal level.

The absence of any meaningful relationship between work and reward has indeed produced gross inequalities of wealth, and at the more mundane level, it results in industrial disputes, inflation with its ‘correcting’ recession, loss of productivity, permanent under-employment, and a total block on prosperity maximization. It represents a facet of anarchy, since it is a process of settling differences by unregulated dispute rather than by a system of debated and agreed guidelines. And its damaging effects on the economy and prosperity are substantial, on-going, and far-reaching.

What, if any, are the alternative options?

While economists and politicians debate the challenges of recession, growth, investment and financial stability at high-profile economic conferences, popular instinct remains firmly and unassailably convinced of certain fundamental beliefs rooted in common sense and common justice.

First, there should be some demonstrably fair and just relationship between work and reward. And second, as human invention and creativity develop ways of making products better and cheaper, so prices should also fall and life get progressively easier. But as of right now, wages stagnate, profits rise, and inflation slowly edges up the cost of living. Far from getting easier, the days of an increasing standard of living and guaranteed pension are long gone.

In fact popular instinct reaches right to the heart of our basic economic fault line. Yes, the absence of any defined relationship between work and reward is indeed a failure of social justice. But more seriously, it is also the root-cause of our structurally unstable monetary unit, which is, in turn the cause of our on-going economic cycle, with its demands for a permanent degree of structural unemployment, its inherent instability and uncertainties for business planning and investment, and its block on the maximization of economic development and overall prosperity.

And quite rightly, in an “ideal” economic environment where work and reward are structurally related, increases in productivity, making goods with less work, should translate directly into lower prices, raising purchasing power and thus prosperity across the social spectrum. But in reality the benefits of productivity gains have gone almost entirely to the “top”, leaving the average standard of living unaffected. The resultant near-static or falling purchasing power, combined with inflation and the mounting demands of taxation combine to place an increasing economic and psychological burden on contemporary generations, forcing an increase in hours worked and the rise of dual-earner households.

Is it possible to establish a more stable, just and meaningful relationship between work and reward, leading in turn to a measure of social justice and a structural, stable definition for our monetary unit? Fortunately, as with so many human problems, what might appear to be an insuperable challenge already has its solutions, up-and-running, working successfully and in widespread current use.

Work and Pay – Pay and Prices

For many years, several systems of job evaluation have been established, now well tried and working successfully in major corporations and departments of government, systems which analyze, define and measure with considerable accuracy the work contributed by each employee in the organization.

Job Evaluation links pay with the requirements of the job, rational criteria such as skill, education, experience, responsibilities, hazards, etc., offering a systematic procedure for determining the relative worth of jobs. An equitable wage structure is a natural outcome of job evaluation.

The job “value” is then directly linked to remuneration. In this way, pay is fair, both in relation to the work done, and in relation to the pay and the work of others.

An unbiased job evaluation tends to eliminate pay and salary inequities by placing jobs having similar requirements in the same salary range. Employees as well as unions participate as members of the job evaluation committee while determining rate grades for different jobs. This broad participation ensures a basic stability, and helps in solving any wage related grievances quickly.

Job Evaluation may sound like something from the now-defunct Soviet Union, but its very practicality, and the stability it brings to remuneration structures has made it a virtual imperative. And the ‘ultra-conservative’ USA was in fact a pioneer in the field, as the American Economic Research Institute records.

“Formal job evaluation began in the United States with the Civil Service Commission in 1871. The first point system was developed in the 1920s. During World War II, the National War Labor Board encouraged the expansion of job evaluation as a method of reducing wage inequities.

“As organizations became larger and more bureaucratized the need for a rational system of paying employees became evident. Wage structures became more complex and needed some way to bring order to the chaos perpetuated by supervisors setting pay rates for their employees on their own. Job evaluation became a major part of the answer.”

Job evaluation is now widely used throughout the world. England and Canada are showing increases in the use of job evaluation, while Holland has had a national job evaluation plan since 1948 as a basis for its national wages and incomes policy. Sweden and Germany have a number of industry-wide plans. Australia and some Asian countries have installed some forms of job evaluation.

The concept of Job/Remuneration Evaluation already exists, in widespread current use, and though there are differing approaches, they are all basically dedicated to measuring the work involved in a job, so to determine the appropriate remuneration. The establishment of a national standard, applicable at all levels and incorporating a maximum remuneration differential between top and bottom earners would create a climate of economic stability, and the industrial peace of social justice, to the economy.

But pay has value only in terms of its purchasing power.

A Fair Day's Pay and a Stable Currency

A Standardized Job and Pay Evaluation System would stabilize remunerations at all levels. Can prices also be stabilized?

The total costs of a factory's output consist of three elements. First, the cost of bought-in raw materials and components; second, the direct labor added in the factory; and third, the costs of capital write-off, overheads and finance.

These are the costs of making a product, or supplying a service. From these costs a Unit Production Cost can be calculated for each product or service supplied. If this Unit Production Cost then becomes the Selling Price there would be a direct and fair relationship between cost and price, and therefore between pay and purchasing power.

But the Unit Production Cost is not normally equated with the Selling Price. The difference between the two is commonly referred to as the net profit.

Part of the net profit is distributed as dividends to investors, and in many companies, as bonuses to employees. Net profits are also used for re-investment, either in research and equipment or to provide increased working capital.

There is one more claimant to a share in the profits, and that is the customer. It is the customer who pays the price and generates the profit; with this view a further claim on profits would come from the consumer in the form of lower prices.

The stabilization of prices would require the establishment of public policy for profit distribution. This policy might first establish an overall profit ceiling. Profits could then be applied using an agreed formula of percentage shares. Such a formula should be established by social consensus. It should recognize the claims and contributions of consumers, investors, co-workers, and the future security of the business itself.

If pay at all levels, and prices were stabilized, based on mathematical definition and social consensus, there would no longer be any danger of inflation. The economy could then be expanded steadily to a condition of permanent full employment.

Your traditional ‘capitalist’ will no doubt recoil in horror at the very idea of handing over even a small share of ‘his’ potential wealth to the customers. But this approach totally misses the huge potential benefits waiting to be gained.

In 1914 Henry Ford, without question one of the world’s great capitalists, instituted industrial mass production, thereby substantially lowering his production costs. He also understood that mass production requires mass consumption. Forgoing further potential profit he reduced the price of his cars, thus substantially increasing sales and indeed creating a whole new market in ‘affordable’ family cars.

Consider a business, well managed, forward-thinking, always researching both in terms of design,mechanics and management. Productivity is improving, which means that more goods are being produced at less unit cost. Profits are up, too. So. Pay a dividend to your shareholders, who after all, put up your starting capital in the first place. Re-invest in some mechanical improvements. All of this is normal. But... you also ‘invest’ in lower prices.

The result: your sales increase, first to those ‘marginal customers’ who fancied your product but couldn’t quite justify the expense. Then, your lower prices attract some of the competition’s customers, who defect to your product. And a ‘virtuous circle’ is set in motion. More sales lead to increased production with lower costs derived from better use of capital equipment, and fixed overheads are spread over greater sales.

It all makes sound business sense.

Then consider the broader implications, if this principle is extended widely across the nation’s producers. Internationally, exports thrive, imports diminish further boosting domestic industry and employment.

But most significantly, as productivity rises, prices fall. And with a gradually falling cost of living, your money in the bank or under the mattress slowly increases in value and purchasing power, rather than deteriorating as it does now. And money really IS a store of value.

Deflation – a Rich Reward

Money which increases in value over the years.... an ideal which most “ordinary folks” with ordinary common sense would heartily applaud. And yet governments and central bankers actually promote a degree of inflation, despite the fact that inflation represents a debasement, a devaluation of our currency.

Coinage debasement has occurred regularly throughout history, as governments and kings replaced the gold or silver content of coinage with a base metal such as copper. The continuing debasement of our currency by governments and central banks by promoting inflation is as bad and damaging as any in our financial history. Why do they do it?

One reason is that debt-laden governments can issue five-year bonds, happy in the knowledge that with a currency deteriorating in value by 3%-5% a year, the real debt will be that much lower in five years when repayment time comes up.

Another, rather more obscure reason, is that governments actually tax inflation. Yes really.

Buy a £100 Bond yielding 3%, and a year later you’ll get £103. Actually you haven’t gained anything as there has been 3% inflation over the year, so you’re now paying £103 for the same superstore trolley of goodies which cost £100 twelve months ago. No gain there. But the taxman sees it differently. As far as he’s concerned you’ve made £3, either as income or a capital gain. And he’ll tax you on it. So you’re actually paying tax on money you never made.

Of course there’s an alternative. Dedicated Investment Banking expands economic activity. This raises government tax revenues without raising tax rates, as higher incomes generate more income-tax revenues, more spending generates more sales revenues, and fuller employment reduces welfare claims, thus progressively reducing the dependence on debt issuance to finance government operations.

But the fact remains: inflation is a permanent feature of every world currency today, and though economists and politicians are quite comfortable with its existence, even promote it, inflation is a manifestation of gross monetary mismanagement, for it is a denial of one of the basic purposes of money known to every first-year economics student: money should serve as a store of value.

Yet a currency which loses – at the very best – 3% of its value every year is about as effective a store of value, as a bucket with a hole in it. And no one, economist, financial advisor, banker... would ever suggest putting coins and notes under the mattress and hoping that by the time you retire they’ll be worth anything. We can all remember “how things used to be”, and the older you get, the more you see the rapidity with which money – the economists’ store of value remember – is losing its value.

Indeed the word “inflation” is hardly an appropriate term. “Depreciation” would be a lot more accurate. Instead of talking of “3% inflation this year”, it would be more realistic to speak of “a 3% depreciation in the purchasing power of our currency”. Inflation is a word with a good connotation; it means “bigger”, and that in turn has to be good. But “depreciation” reflects reality: our currency is slowly deteriorating in real value – and by the time you need to spend your pension savings, your money will at best be worth only half what it is now.

Likewise, instead of “de-flation” we should talk of currency “appreciation”. Much more encouraging! Money which increases in value over the years… an ideal which most “ordinary folks” with ordinary common sense would heartily applaud.

A nation which saves has more money available for investment. And when people can be confident that their money is naturally increasing in value, they will be less inclined to seek refuge in dubious investment schemes or property speculation.

The longterm result of productivity maximization, combined with the stability of a labour-based monetary system, is negative inflation. Your money buys more each year, not less. This would in fact become a completely normal, natural process. As productivity increases, the labour-content decreases, and it becomes possible for goods and services to be produced and offered at lower prices, thus progressively lowering the cost of living.

Evidence can already be seen in the field of computers and other electronics. Buy a computer today, and it is almost guaranteed that in three months’ time the price will be lower for a faster machine with more storage space on its hard drive.

This in turn means that as we get older we can look forward to increased purchasing power for our savings. A wild dream? No. This is as it should be, the normal course of events. We should be increasing productivity, producing more and better at less cost. And with a stable monetary unit, increased productivity involving less labour is reflected in lower prices.

Currently we are forced to rely on pension schemes defined in terms of inflating currencies, and government schemes which are already heading for deep deficit. So we console ourselves with inflating home prices, ignoring the warnings that bust can follow boom.

Indeed, the dream of retiring with a comfortable pension is becoming increasingly faint. With the stockmarkets in the doldrums and interest rates at rock bottom, how can you make your savings grow? And remember, any scant percentage points of growth are then eroded by inflation.

The young and early middle aged workers are already aware that their State pension may get swallowed up in government near-bankruptcy. But the private schemes may not fare much better either. This is not just excessive pessimism.

That’s life, living, saving and retiring in a country with a continually deteriorating currency.

Ultimately the idea of living in a society where the cost of living goes down slowly, year by year instead of up, where your savings are not only safe but increase in value, where your domestically produced goods get progressively better and cheaper, where a fair day’s pay for a fair day’s work in decent conditions is an accepted norm rather than an on-going battle... it may all seem utopian.

But it’s possible. And we can begin right now.

The Power

Money – Releasing the Potential

Social justice in commerce and industry is an essential ingredient of a civilized and a stable society, and it provides a basis of stability in which growth can take place without fear and limitations of inflation. But in addition to what might be called this passive framework of stability, the nation’s economy requires an active stimulus in order to ensure that its full potential is put to productive use.

Job-creation requires capital – in sufficient quantity and with guaranteed longterm financial reliability to ensure a business is properly set up, and able to maintain the highest international standards in design, production and marketing. Our current banking system does not provide this.

The fact is simply stated: banks are private institutions whose function is to make money for their directors and shareholders. Serving the needs of the nation’s economy is not their prime concern. In fact quite the contrary. Bankers tend to shrink from involvement in an economy suffering downturn or recession. As bank loans are reduced or refused many a business has found bitter truth in the old saying that ’banks lend you an umbrella when it’s sunny, and take it away when it rains’.

Small firms with less than 250 employees are particularly vulnerable as they rely heavily on bank loans. This is a major problem; in the EU for example, they account for 66% of jobs. They often supply components to larger manufacturers who would otherwise source from abroad. The financial demands of larger companies, too, for research and capital equipment are increasing to keep pace with technical sophistication, and to stay ahead of international competition.

Many of today’s successful businesses grew over a number of years and a long hard climb, starting with minimal capital, operating on a shoestring probably in cramped premises, and reinvesting every penny of profit. Others are surviving on day-to-day credit card manipulation or a capricious bank manager.

Development Banks can provide sufficient capital for a good business venture to start at full operation from Day One, properly equipped for maximum productivity.

A dedicated Development Banking sector can spread growth across the nation, creating jobs and providing the wherewithal for existing companies to increase their competitiveness, as well as for infrastructural improvements. Investment targeted regionally can bring industry and growth to traditionally backward areas.

The two broad principles of Development Banking focus on analysis, and commitment.

Development Banking secures the loan, not on the borrower’s personal property, but on the industrial or commercial project itself thoroughly researched and costed, and by making a long-term commitment based on an intimate involvement with the business or project in which it is invested. Involvement in the business ensures longterm commitment.

This facilitates the creation of new business and new jobs, as well as providing secure finance with which existing business can maximize its quality and productivity. Local infrastructure can also be financed. By setting up Development Banks to operate at regional level, focusing on regional and local needs, the benefits can be spread widely and uniformly, avoiding the usual pockets of non- or under-development.

The Development Banks would be formed to create new business and new wealth where none previously existed, not (in the words of comedian Bob Hope) “to lend money to people who can prove they don’t need it”. The availability of investment credit has enormous potential for growth, and the Development Banks should actively be seeking to maximize the productive use of this resource.

The major distinguishing feature of the Regional Development Bank (RDB) concept is that a total project, from design through production and management to sales, becomes the loan collateral, rather than the personal assets of individuals.

The RDBs would rely for their security on thorough research of loan projects in which they are invested, on a close working and constructive partnership with the loan recipient, and a detailed follow-up of results.

Loans would be made to encourage and develop new startup enterprises large and small, to secure, expand and improve existing enterprises, and for major regional infrastructure projects, the latter in conjunction with local authorities and national planning.

The Development Bank begins by thoroughly researching each loan proposal from design to production, management and sales, calling on outside expert advice and assistance where necessary, followed by a close working and constructive partnership with the successful loan recipient on start-up, then continuously monitored with an ongoing flow of performance data.

Indeed, Development Bank investment would require, and equip recipient business to achieve, the highest standards of product and service quality, which in turn creates real and lasting prosperity. Development investment facilitates the creation of new business and new jobs, and provides secure finance with which existing business can maximize its quality and productivity.

The RDB would maintain a register of specialist firms, contractors, business advisors etc who can be called upon to verify loan clients’ cost estimates and provide setup advice in forms varying from design of factory premises to promotion and accounting. Skilled commercial, architectural and technical advice would be available, either to assist existing enterprises or to promote new ones.

Once launched, the new enterprise manages itself but the Bank receives a flow of data – production, sales, profits and so on – from which the new enterprise’s progress can be monitored and compared with projections. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate.

An investment loan is best secured by ensuring the success of the project in which it is invested.

The partnership concept also assumes longterm commitment, resulting in the encouragement of secure long-range planning and productivity investment, research, and development of new-generation products and services.

In the case of larger businesses, the investing bank may well appoint a Director to the Board, as has long been the practice in Germany. Careful monitoring will be to the advantage both of the investing bank and the recipient business, as well as to the regional economy: bankruptcy is not contributive to economic stability and prosperity.

With a guarantee of adequate long-term finance, the recipient business would be properly set up, equipped and maintained, able to maximize quality and productivity. Indeed the provision of finance for any business or project would be conditional upon the rigorous application of all relevant quality standards pertaining to product design and every aspect of the production process.

By setting up Development Banks to operate at regional level, focusing on regional and local needs, investment benefits can be spread widely and uniformly across the nation, avoiding the usual pockets of non- or under-development.

Most significantly, Regional Development Banks, their loans firmly secured on the assets and ongoing monitoring of thoroughly pre-researched industrial and infrastructural projects, can create jobs and industries NOW, with the guaranteed longterm finance needed to maximize productivity and most importantly, maximize quality. And the availability of genuine, repayable investment loans avoids the need for deficit-increasing grants, now well beyond the means of debt-ridden governments.

The Regional Development Banks would focus particularly on geographical areas of traditional under-development, on Small and Medium Enterprises, and on professional back-up assistance. The British Small and Medium Enterprises sector constitutes a significant area of the national economy: 60 per cent of private sector employment and 48 per cent of private sector turnover, employing 14 million people with a combined turnover of £1,600 billion.

Regional Development Banks would set their own charges based on administrative costs and loan insurance.

While conventional bank loans are subject to a one-size-fits-all interest rate which regulates bank lending uniformly across the nation in line with the prevailing level of economic activity, the total amount and duration of each regional bank’s loan-book would be varied individually according to each region’s specific needs.

This is important. As a nation’s economy expands, the more prosperous areas will begin overheating while the less developed regions have barely glimpsed the economic sunrise. By providing finance precision tailored specifically for each region, the traditionally less prosperous regions with high longterm unemployment, those which for example may have suffered the loss of an entire industry on which they were totally dependent, can be boosted up to match the nation’s better-performing areas.

There is of course an element of risk in any investment. The more useful approach however, is to minimize risk through proper pre-investment research and positive on-going monitoring of physical production, sales, and accounting – precisely the measures which a banking-industry partnership system is able to undertake.

The banking-industry partnership would therefore be in a position to offer investment at a constant, and relatively low cost, possibly 2-3%, backed by the on-going monitoring of the recipient business ensuring safeguards for the investing bank, the recipient business and all those involved with and dependent on it.

A small percentage of the investment charge should also be set aside to fund apprenticeships and on-location training. A major and growing problem today is high and entrenched youth unemployment, largely caused by the mismatch between the skills that young people offer and those prospective employers need.

Indeed, countries with the lowest youth jobless rates have a close relationship between education and work. Germany has a long tradition of high-quality vocational education and apprenticeships,

The RDB could also provide investment finance for regional infrastructure, such loans to be repaid by the relevant local or regional government departments from their own revenues.

Thus the RDB would prove a powerful catalyst at regional level, providing finance and subsequent ongoing supervision for business and industrial development, together with investment capital for regional infrastructure.

RDBs could also be called upon to finance micro-industries in villages, small loans to open a tea-room, to provide baking facilities in the village hall, or set up a small market garden. The RDBs should be able to focus on any and all opportunities, large and small, to provide investment which will create local employment.

Individual homes could benefit too from loans to install double-glazing or roof insulation, work which itself provides further employment. Such loans would qualify as investments, being repayable from savings derived by the borrower through lower energy bills.

Regional Development Banking provides genuine, repayable investment loans, avoiding the need for deficit-increasing grants.

And the benefits will stretch into the future as a thriving, broadly based economy sends a positive signal to young people offering the prospect of a challenging, well-paid job as the sure reward of education.

To paraphrase Winston Churchill (1941): “Give us the investment, we’ll do the job”.

Everybody working, everybody working efficiently, productively. That’s the key to prosperity.

The need now is for education linked to apprenticeships, with regionally-oriented secure, longterm finance for industrial and commercial development and supporting infrastructure: precisely the job which Regional Development Banks are able to fulfill with Project-Secured investment.

Development Banking History

The Development Banking concept concept, in which the project itself, continously monitored, provides security, is not new. Indeed dedicated banking for development in industry and infrastructure goes back at least 150 years.

Founded in 1956 the now highly successful Mondragon cooperative group in Basque Spain illustrates this ongoing relationship between investment banking and recipient business. The Workers’ Bank serves three mutually inter-dependent functions: it provides investment as a local development bank, offers technical and financial advice for business startup, then monitors production, quality, and financial performance in a process of ongoing cooperation and partnership.

The ongoing partnership concept also assumes longterm commitment, ensuring finance for secure long-range planning and productivity investment, as well as research and development into new-generation products and services, ideally in conjunction with apprenticeships and higher education.

In Bangladesh the Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and has created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral, and has succeeded in improving the lot and the prospects of thousands of the very poor.

At GB, credit is seen as a cost effective weapon to fight poverty and it serves as a catalyst in the overall development of socio-economic conditions of the poor who have been kept outside the banking orbit on the grounds that they are poor and hence not bankable. Professor Muhammad Yunus, GB’s founder and Managing Director, reasoned that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, “these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.” Grameen Bank’s positive impact on its poor and formerly poor borrowers has been documented in many independent studies.

But Germany has long set the pace in investment banking.

In Germany, the Regional Banks, or Landesbanken have traditionally provided low-interest loans to local firms, both as startup capital and as on-going investment. In fact, the regional, industry-sponsoring character of the Landesbanken goes back 200 years to their somewhat extraordinary origins.

In 1818 the Swedish government stunned Europe by offering 160,000 Taler to the German province of Westphalia as reparation for the damages incurred when Swedish and Dutch soldiers marched through the province during the Napoleonic Wars. This money was decreed the property of all Westphalia by its President, Freiherr von Vincke. And through the Westphalian Hilfskasse, or ‘Assistance Bank’ established for the purpose, the funds were used to develop the region’s economy and pay for public-works projects.

This proved highly successful, prompting the King of Prussia to order that a similar bank be created in the Rhineland in 1847. Both banks later became Landesbanken (Regional Banks), and were instrumental in making the Rhine-Westphalia region one of the most productive industrial areas in Europe.

In the post-WW2 years, the Landesbanken again played a major role in the creation of Germany’s ‘Economic Miracle’, in particular through the provision of secure on-going finance to the German Mittelstand (small and medium-sized companies) in their respective regions. With 3 million mid-sized businesses, the Mittelstand industries employ more than 70% of German workers and contribute roughly half the country’s GDP. And Germany continues this tradition of investment support for industry.

The original, the “Big Brother” of German public industrial banks, KfW banking group is a German government-owned development bank based in Frankfurt. Its name originally comes from Kreditanstalt für Wiederaufbau, or Credit Institution for Reconstruction.

It was formed in 1948 after World War II as part of the Marshall Plan. Owned by the Federal Republic of Germany (80%) and the States of Germany (20%) KfW is most certainly alive, well and active today. It is led by a five-member Managing Board which in turn reports to a 37-member Supervisory Board. The Supervisory Board is chaired by the Federal Minister of Economy and Technology.

In addition, Germany’s strong industry-supporting group of 423 savings banks and 1,116 co-operative banks are clear that their business model is focused on working for the public or mutual good rather than for shareholders, and are well suited to the mixture of households and small-medium Mittelstand companies that they serve.

This was borne out by their lending record in the troubled times following 2007. While private banks reduced their medium- and long-term lending to companies and households between 2007 and 2012 in favour of short-term loans, the savings and co-operative banks actually increased theirs, providing timely support which softened the blow of recession and contributed to a sharper recovery. The savings banks and co-operative banks provide over 60% of all lending to Mittelstand companies and 43% of lending to all companies and households.

The concept of loans based on, and secured by the project itself backed by continuing monitoring is basic, and simple. It can create jobs, economic expansion and productivity anywhere.

Regional Infrastructure

Regional Development Banks would be fully equipped to identify and invest in local infrastructure and industry, investing to provide major infrastructure secured by future income, for example from an uplift in business rates.

Applying the model to four live case studies from the cities, a report by accountants PriceWaterhouseCooper has demonstrated that by using this approach, increases of between 50% and 80% can be achieved in housing, jobs and economic output. Note the significant factor here is that we are looking at investments, not deficit-increasing grants.

The potential benefits for many kinds of infrastructure, including transport, are considerable. The combination of largely autonomous Regions established across the country each with its own Regional Development Bank empowered to make loans for industrial and infrastructural needs can provide the means with which we can invest in new businesses, jobs, and productivity-enhancing improvements in existing industry and infrastructure.

Regional Housing Corporations can also be financed.

A major element in the economic and financial disaster of 2008-9 has been the phenomenal rise and catastrophic fall in house prices. Banks and mortgage brokers found ways to make unaffordable mortgages (supposedly) affordable, young first-time buyers were lured into the market, demand increased, values went up, speculators jumped in buying second and third “investment” properties, and so the balloon went up, in more ways than one.

A decent home in decent surroundings is one of the foundations of a civilized society no less important than education and healthcare, and we need a core of affordable, at-cost rental, rent-to-own or leasehold accommodation which will serve first-time buyers, and can act as an “anchor”, a realistic cost foundation which can effectively limit the free property market from excessive inflation and over-evaluation.

Regional Development Banks, through Regional Housing Corporations, can provide low-cost financing for new housing, for rental or lease “at-cost”.

The Housing Corporations should acquire “grey” ex-industrial, or unused agricultural land at its current price, rather than an inflated “with planning permission” price. When owners of land currently valued at agricultural rates sell at a huge, planning-generated profit to developers, the houses they build are already on the way to becoming unaffordable. The object should be the construction of quality, environmentally attractive cluster housing, yet built using techniques of fast-track mass-production. Availability of at-cost housing would make it possible once again for young families to afford that most basic of all needs: a decent home in pleasant surroundings.

In terms of the overall housing market, the availability of at-cost housing would act as a brake on price-acceleration in the open market. A key foundation element of a civilized life must surely include a quality, affordable home in pleasant surroundings within convenient reach of recreational opportunities and commercial facilities. A degree of stabilization in the housing market is essential if this aim is to be fulfilled.

In the general hoopla and jubilation over rising property prices, it is rarely if ever observed that rising property prices and rental costs in urban centres are economically regressive, a fact which classical economists decline to recognize. Prosperity is created by productivity, by increasing value without increasing cost. Rising land prices do just the opposite: they increase the cost of land without increasing its inherent value. And this has a similarly inflationary effect on the services using land, which become more expensive not because they are offering increased value but simply because rents are going up. “Value” in the sense of what buyers get for their money, decreases as land prices increase. This is particularly evident in major cities.

There is little or nothing in the way of goods and services which is not affected by the price of land; rising real estate prices in towns and cities affect everything from offices to retail shops, cafés, and places of entertainment. The escalation of land prices is a major contributor to the high cost of urban living. It can also cause a deterioration in urban quality of life; many of Europe’s old established city cafés which have for centuries been centres for meeting and socializing are now being forced to close as a direct result of escalating rents. Likewise the demise of urban centres in the USA came about when steadily increasing rents finally reached the point where businesses could no longer afford them and moved out instead to cheaper green field sites thus creating new suburbs.

If the city or town centre is to retain or regain and develop its function as a gathering place, it will be necessary to ensure that newly developed areas in city centres, particularly areas reclaimed from public or industrial use, should be subject to price stability so that rents are economic for those low-profit uses such as public markets and cafés which, while lacking high profit potential, provide vitality and enjoyment for the community.

This could be accomplished, for example, by vesting tenure in the hands of a locally administered Urban Trust, which would then ensure maintenance and management of the facility. Regional Development Banks can provide finance to equip public markets, the kind which exist in almost every French town and provide facilities for the exchange of locally made produce, thus in turn creating opportunities for cottage industries and rural market gardening, again financed through the RDB.

Development Banking can spread growth across the regions, creating jobs and providing the wherewithal for existing companies to increase their competitiveness. And the benefits will stretch into the future, as a thriving, broadly based economy sends a positive signal to young people if they can see a challenging, well-paid job as the sure reward of education.

During the Great Depression years following 1929, Britain’s Lord Melchett, prominent industrialist and politician, stressed that banking should be at the service of industry, rather than industry at the mercy of the banking system. His words are even more relevant today:

“While banks take a short-term view for reasons of security and liquidity, business is conducted on a long view. We must alter our banking and economic system to suit the necessities of industry”.

With the basic economic stability of Pay, Profit and Price Evaluation, and a positive strategy for growth and productivity, prosperity can be maximized.

Whatever the machinations of social and political debate and partisannery, the mathematics and economic facts are inescapable. Ultimately the prosperity of a nation, and its citizens individually can only be achieved through full, productive employment.

This in turn requires, first, that the nation’s credit flow, its most vital infrastructural resource, be protected from speculative abuse, and directed specifically towards productivity investment.

The second essential is a direct relationship between work and reward, through standardized remuneration evaluation, and the direct translation of productivity-increases into corresponding price reductions. The resultant economic and social stability allows maximum economic growth, with increased purchasing power and prosperity across the nation, and money which finally reflects its ideal – a stable medium of exchange and a true store of value.

Critics should ask themselves whether the alternative – permanent unemployment, low productivity, boom and bust, on-going uncertainty for business and industry, labour disruptions, and money which fails to serve as a store of value – is really any better.

Productivity in Government
Government takes half the nation's income. It needs to maximize its own productivity.

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