To recap a few points made in A bird's eye view of Capitalism: a commons bank is a bank established by the commons (the people of a country, collectively speaking) which not only issues the currency but also holds monopoly rights to credit creation, i.e. private banks, as we know them, don't/can't exist. All loans, and all deposits, go through the commons bank.

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Please bear in mind, that along with the items discussed below, a commons bank will not loan money to the share owned corporations, favouring cooperatives instead; and that a commons bank will not loan money to private parties to buy land, but instead loan to a common loans trust which will rent out the land (not improvements) and use the land rent to pay off the loan.

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The practices of a commons bank bear very little resemblance to capitalist banks or even current 'community banks' or mutual banks. Commons banking is not simply capitalist banking practices plus common ownership. This article explores how radically different it is. There are four key points:

1. No-collateral-required loans

​2. The replacement of financial guarantee with ‘social guarantee’ on loans

3. Lending money only for the purchase of goods and services.

4. Factoring in externalised costs

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No-collateral-required loans
In the capitalist banking system, people can only get bigger loans if they put up collateral such as real estate. Therein lies one of the great source of inequality in capitalism because this condition attached to loans means that richer people get better access to loans. The rich, for instance get loans to buy ‘investment properties’, and in the process make land and rent more expensive for those who have no property. As the late comedian Bob Hope quipped, “A bank is a place that can lend you money if you can show you don’t need any”.

 

To get a loan from a commons bank will not require the loan applicant to provide collateral. If we want to create a real productive economy, our business loans must be matched up with the people we deem most capable for the various undertakings. It should not matter if a loan applicant has no asset or money at all. If say, a person knows and loves books, knows the book retail industry and has good character references, she should get a loan to start a bookshop – other things being okay – without being asked to provide any financial collateral. By the same token,  less-than-ideal or dubious business people do not get financed just because they have assets behind them. If as a bank we care for the whole economy (the commons), the overall health of the economy will lead to, amongst other things, more commons revenue, and this revenue will more than offset the occasional failed loan.

 

The replacement of financial guarantee with ‘social guarantee’ on loans

Requiring collateral on loans may be called a financial guarantee. If we do not require financial guarantees, borrowers are not required to provide collateral on loans (at least not for business loans) but they must still be ‘screened’ in other ways. Firstly, it goes without saying that all loans should be assessed to determine if the borrower really will have the future capacity to repay the loan. An elderly person who lives on an old age pension cannot be expected to be able to pay off a house building loan that would take a young, high income person years to pay off. This modicum of prudence should be taken for granted.

 

The principle of social guarantee then comes in, which can be roughly described as follows: if a person applies for a loan, say for a work vehicle, the commons banks will look for ‘social guarantors’ who will vouch for the person. This may be customers, friends, business associates, and so on, of the loan applicant. They attest to his character and quality of his work, and his goodwill in the community. The word ‘credit’ has its origin in the Latin credere – to believe. Credit should be connected to a person’s credibility in the community, not to his accumulated assets. Part of the reason that Capitalism breeds psychopaths is that the moral character of a person does not play a part in the assessment of his loan application. In a commons bank loan, an applicant with psychopathic qualities will find that they are neither loved nor trusted enough to get a loan.

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People will not go in lightly as guarantors for a loan - not even for a friend. People will have a 'credit history' as guarantors. If one backs a loan which fails on account of wrongdoing by the borrower, one's credit history - 'credibility in the community' - is diminished along with the borrower. If the borrower does fall seriously behind in his repayments, the social guarantors have a responsibility to follow it up. The borrower, if he fails to repay his loan, is not failing a huge capitalist enterprise; he is failing his community. No social guarantor would like her standing in the community to be unduly diminished by her endorsement of a failed loan. By the same token, a person who has earned from others a deep trust and faith in, should get any reasonable loan approved.
 

Lending money only for the purchase of goods and services
A corollary of not lending money for asset speculation is that money is loaned only for the purchase of goods and services by members. One cannot borrow money to buy properties or shares, or to trade in the commodities market. Loans from a commons bank can only be used for buying goods and services. This will lead to a much more vibrant economy because it is the spending of money on goods and services that ‘creates’ jobs. Money spent on assets purchases is non-productive and is a drag on the real economy, meaning it creates unemployment and inequality. To be clear what  goods and services include: building a house or doing renovations qualifies, as building materials and contractor charges are goods and services. Land is not a ‘good or service’. 

By not loaning money out for the speculative purchase of assets, the commons will not be creating a boom-bust economy with periodical financial crisis. We deal with this subject in Financial crisis and unearned income. The last major bust was of course the global financial crisis of 2007/8. We take away the power of private banks and investment banks and their sordid and parasitical activities.

 

 

Factoring in externalised costs.

Let's start with a provocative statement: we will never eliminate externalities (also called externalised costs) until we practise commons banking. Externalities occur when the price of a good or service does not cover the social and environmental damage done in the manufacture and future disposal of the good. The real costs are ‘externalised’ onto the environment or society at large, and are not incorporated into the price of a product. Plastic bags for instance can be manufactured and sold for a small fraction of one cent but the damage done to the environment is perhaps several hundred times its price. Raj Patel, a former World Bank economist, calculated in 2010 that the true cost of a McDonalds’ Big Mac was, after taking into account all the damage done to the environment and to consumers’ health, to be US$200, instead of its $2 retail price. Likewise, when food manufacturers are allowed to put monosodium glutamate (MSG), which is a highly damaging neurotoxin commonly used as a flavour enhancer, into manufactured foods, they are externalising the costs onto the consumer and health system. Very little is manufactured within capitalism that does not have externalised costs – transport, relying as it does on oil and coal, is a hugely cost-externalised business; and transport is a huge component of most physical goods.

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As individuals, we have little leeway to do the good when it comes to preventing externalities. For instance, without a (greenhouse gas producing) car, you can be seriously disadvantaged against the rest of society in your range of holidays, commuting travel time, or choice of jobs. Similarly you may have to pay two or three times as much for a carpet whose material is easily recyclable. To do the good will set you back financially and it means, in a capitalist society, you cannot buy a better house or cannot afford an investment property to finance your retirement and so on. Thus, preventing cost-externalisation is not something that consumers should be made primarily responsible for. What about producers? The same story applies. Producers who overstretch themselves on minimising externalities will find that they have to cover the extra costs, which means raising prices, which means loss of sales and profits, which might easily put them out of business. So producers are also not to be held primarily responsible for minimising externalisaties. In short, we cannot expect neither consumers nor producers to minimise or eliminate externalities - so how as a society are we to do that?

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Under capitalism, a number of private banks compete on the market. Each of them can claim that they can’t be held to account for externalisaties. Their argument is that if they make minimising externalities a condition of loans, they will both lose business and jeopardise the borrowers’ profitability, which impacts on the banks profits as well. This is a reasonable argument under capitalist conditions but there is a flaw in the argument which is that in banking, there should not be a market. There should only be one commons (public) bank per currency. If such a condition exists, the commons (i.e. the people as a whole) can set up the terms and conditions of bank loans, and if these conditions include totally ‘internalising’ all costs, then any business which wants to get a loan must really internalise all its costs.

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Let's imagine what banking looks like when externalities are fully considered in loan making. Take for instance the case of making loans for an egg farmer: the commons can ignore the definition of ‘free range’ set by the huge chicken farming companies, and make loans only to farmers who actually have a much more acceptable stocking rate. The commons can make farm loans conditional on it being chemical- and GM-free (if we haven't eliminated them via political legislation already). With food manufacturers, we can stipulate that they never use MSG or artificial colouring, or GM components in any of their products. At every turn we can set higher standards for environmental sustainability and social responsibility. As the commons doesn’t have to make a profit on any loan in particular, we can put the well-being of society and the planet first.

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One final note for now: if these practices were to be implemented by a grassroots 'community' bank, it will only be possible if done in conjunction with a transaction tax. This is what the Fractal Economy Cooperative intends to do when it has a banking licence. See how the Fractal Economy Cooperative aims to implement such a tax (without a banking licence).

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