(NB* A ratio known to economists as Marshallian k after the economist Alfred Marshall. Strictly speaking, k is the ratio of the monetary base to nominal GDP.)In the eurozone, the increase has been especially steep, from just over 60 per cent as recently as 1990 to just under 90 per cent today. At the same time, the capital adequacy of banks in the developed world has been slowly but steadily declining. In Europe bank capital is now equivalent to less than 10 per cent of assets, compared with around 25 per cent at the beginning of the twentieth century. In other words, banks are not only taking in more deposits; they are lending out a greater proportion of them, and minimizing their capital base.
Today, banking assets (that is, loans) in the world's major economies are equivalent to around 150 per cent of those countries' combined GDP. According to the Bank for International Settlements, total international banking assets in December 2006 were equivalent to around $29 trillion, roughly 63 per cent of world GDP.
Is it any wonder, then, that money has ceased to hold its value in the way that it did in the era of the gold standard? The modern-day dollar bill acquired its current design in 1957. Since then its purchasing power, relative to the consumer price index, has declined by a staggering 87 per cent. Average annual inflation in that period has been over 4 per cent, twice the rate Europe experienced during the so-called price revolution unleashed by the silver of Potosi. A man who had exchanged his $1,000 of savings for gold in 1970, while the gold window was still ajar, would have received just over 26.6 ounces of the precious metal. At the time of writing, with gold trading at close to $1,000 an ounce, he could have sold his gold for $26,596.
A world without money would be worse, much worse, than our present world. It is wrong to think (as Shakespeare's Antonio did) of all lenders of money as mere leeches, sucking the life's blood out of unfortunate debtors. Loan sharks may behave that way, but banks have evolved since the days of the Medici precisely in order (as the 3rd Lord Rothschild succinctly put it), to 'facilitate the movement of money from point A, where it is, to point B, where it is needed'. Credit and debt, in short, are among the essential building blocks of economic development, as vital to creating the wealth of nations as mining, manufacturing or mobile telephony. Poverty, by contrast, is seldom directly attributable to the antics of rapacious financiers. It often has more to do with the lack of financial institutions, with the absence of banks, not their presence. It is only when borrowers in places like the East End of Glasgow have access to efficient credit networks that they can escape from the clutches of the loan sharks; only when savers can put their money in reliable banks that it can be channelled from the idle to the industrious.
The evolution of banking was thus the essential first step in the ascent of money. The financial crisis that began in August 2007 had relatively little to do with traditional bank lending or, indeed, with bankruptcies, which (because of a legal change) actually declined in 2007. Its prime cause was the rise and fall of 'securitized lending', which allowed banks to originate loans but then repackage and sell them on. And that was only possible because the rise of banks was followed by the ascent of the second great pillar of the modern financial system: the bond market.
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