20.9 Richard Werner

In the interview The Greatest Fraud In Human History, the interviewer and Werner draw attention to a central economic paradox. Extraordinary advances in computing, automation, communications, transport and production should have produced rapid growth and broadly rising living standards. Instead, economies around the world experience weak growth while increasing numbers of people struggle to afford ordinary living costs. Werner argues that the problem is not a lack of technology, productive capacity or human ingenuity, but a monetary system that prevents those capabilities from being fully employed for the benefit of the population.

Sustained double-digit growth under decentralised monetary systems

Werner argues that sustained double-digit real economic growth is possible when a monetary system permits many banks to create credit locally and directs that credit towards productive business investment. Among the historical examples he cites are the rapid development of the United States and Germany in the nineteenth century, post-war Japan, and the later high-growth economies of South Korea, Taiwan and Singapore. He attributes their performance in significant part to banking systems that financed new production and smaller businesses rather than concentrating credit creation in a few national institutions.

His most prominent modern example is China after 1978. Werner contrasts its earlier Soviet-style monobank with the thousands of banks created under Deng Xiaoping, many of which made lending decisions locally. He argues that this decentralisation, combined with guidance that favoured productive credit over consumption and financial speculation, enabled China to sustain what he describes as four decades of double-digit growth (see Werner's account of China's banking transformation).

Preferring lots of small banks

Werner argues for a decentralised banking system made up of many small, locally headquartered banks. Because small banks tend to lend to small customers, he says they are better placed to finance small and micro businesses, which provide much of the economy's employment but often cannot access capital markets. He therefore regards a diverse network of community banks as a way to decentralise money creation and support productive local investment, rather than concentrating credit decisions in a few large institutions (see Mkhaiber and Werner's study of bank size and small-business lending).

Werner further argues that central banks and large commercial banks have actively encouraged consolidation and the disappearance of small banks, producing an increasingly concentrated banking system. In his account, this reflects the outlook of central planners: concentrating the power to create and allocate money gives a small number of institutions greater control over the economy and the monetary system. He presents the continued decline of local banks, and the movement towards central-bank digital currencies, as extensions of that drive for centralised control (see Werner's account of bank consolidation and monetary centralisation).

Consolidation over time

Official data show substantial long-run declines in the number of banking institutions in several countries. The categories and periods differ between countries, so the percentages should not be treated as a like-for-like international ranking; each row instead compares a reasonably consistent category within one country. Figures drawn from sources that report rounded values are presented here as approximate:

These declines provide evidence of the consolidation trend to which Werner points. Germany and the United States retain far more institutions than the other examples despite their large reductions, which is consistent with his argument that their comparatively decentralised structures help community-scale lending. Japan also had an extensive decentralised network in 1980: the three local and cooperative categories shown above alone comprised more than one thousand institutions before the consolidation that followed. Institution counts demonstrate consolidation, but on their own they do not establish its causes or prove his further claim that central banks and large banks deliberately promoted it.

Werner's ideas and VoTa

VoTa removes the central planners and their power to favour the consolidation of lenders over time. There is no central bank or banking regulator able to impose barriers that protect large incumbents, restrict entry, direct credit or rescue favoured institutions. Lending is unregulated: anyone may lend their own money, accept money voluntarily entrusted to them by savers, assess business proposals and bear the consequences of their decisions.

This freedom would produce an explosion of small independent lenders, taking Werner's preference for local banks to an unprecedented level. People with a demonstrated ability to recognise promising businesses would be in high demand. Their record would attract savers seeking good returns and entrepreneurs seeking finance for new and innovative ideas. Successful lenders could expand by earning trust and attracting more savings, without requiring a banking licence or access to newly created money.

Competition, profit and loss would determine who allocates savings. The best lenders would prosper by selecting the best business ideas and pricing their risks accurately. Poor lenders would lose their own money and the confidence of savers, causing capital to move towards better decision-makers. The free market would reward good judgement and punish bad judgement, continuously improving the allocation of savings to productive investment.