The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [71]
Usually, banks are trustworthy. In most countries banking is heavily regulated and closely supervised. Even in places where it helps to be the president’s nephew to run a bank, for the most part banks will repay depositors’ trust—otherwise, there will not be any deposits. Sometimes, of course, people are cheated. One example is an elaborate fraud in Uganda involving the creation of a sham bank with an office and printed stationery, which ran an advertising campaign to attract $100,000 in deposits. The crooks then vanished.1 But this kind of scam is surprisingly rare.
For the most part, finance is a high trust business. In its early stages in late mediaeval and early modern times, the trust was personal, between members of the same social or religious group who knew each other personally. The Fuggers and the Rothschilds built banking empires on the foundations of family bonds. Informal finance such as the current hawala system also relies on close-knit groups, many of whom will know each other personally or have strong social and religious ties. The City of London and Wall Street used to be like this too, a close-knit “club,” which unfairly excluded all but a narrow social echelon and aided insider trading; but on the other hand, personal knowledge and the weapon of social sanctions against miscreants acted to keep them more or less trustworthy places to invest money. This is still symbolized on UK banknotes by the printed statement: “I promise to pay the bearer on demand the sum of ten pounds.” It was only in times of boom and bust that the conventional network of trust broke down.
Trust is fundamental to any successful economy, at any stage in its development. The simplest transaction can be thought of as a process as fraught as the handover of Russian and American spies at Checkpoint Charlie in Berlin at the height of the Cold War. There was so little trust between the superpowers that when secret agents were exchanged, their walk between the two entrances to the checkpoint had to be precisely timed so they would pass in the middle and there could be no danger of one side reneging on the deal. This was human barter. Other than the simplest face-to-face barter deal in the economy, when items can be simultaneously exchanged, every economic transaction requires one party to trust the other. And as so few transactions involve simultaneous exchange, that trust is embodied in money or financial instruments, which count and store the value, and allow it to be exchanged.
Figure 10. Without trust, all economic transactions are like Checkpoint Charlie.
It is extraordinary, when you stop to think about it, how extensive and also how delicate the web of trust represented by money has become in the modern global economy. All but a few countries are engaged in international trade and vast amounts of financial transactions cross national borders. Much of it now takes the form of electronic records on computer systems, not even paper money or bonds or shares, which are themselves abstractions. The economy is a pattern of zeroes and ones.
Paul Seabright describes this web in the introduction to his wonderful book The Company of Strangers:
Most human beings now obtain a large share of the provision for their daily lives from others to whom they are not related by blood or marriage. Even in poor rural societies people depend significantly on non-relatives for food, clothing, medicine, protection and shelter. In cities, most of these non-relatives crucial to our survival are complete strangers. Nature knows no other examples of such complex mutual dependence among strangers.2
As he points out, it is almost miraculous that the global economy works as well as it does, so that billions of people can rely without anxiety on the efforts and the honor of complete strangers scattered over the world. Few of us feel the need to grow our own food supplies or dig wells in the garden or keep sheep and spin the wool to make our own clothes. The process of the division of labor and increasing specialization of tasks that first