Diluting Self Restraint: A View from Lombard Street

Banks are like governments, you can’t altogether do without them, however often you wish that you could. So when I read that one of the banks of which I am a small and unimportant customer had been engaged in the fraudulent manipulation of interest rates, fined accordingly, and denuded of its top management by involuntary resignation, I can’t say that I was altogether surprised.

Not that I am completely without cognitive dissonance when I think of this bank. It is clear to me that the friendly and helpful tellers in the branch just round the corner from my house in England would go to the stake rather than commit a dishonest act. It is only on dealing with higher levels of the bank’s administration that I experience the kind of fury that drove Hitler to chew carpets.

However, I now recall with the detachment and even amusement that time imparts to memories the bank’s explanation of why it cost so much for me to pay a US cheque into my US dollar account at the bank, for small cheques (as most of mine, alas, are) often amounting to 10 per cent of their value. The charge, said the bank, was interest.

‘Interest!’ I exclaimed. ‘But I am paying money into the bank.’

‘Ah yes,’ replied the bank, with the calm of the practiced swindler. ‘But you see, we credit your account immediately and it can take up to six weeks for us to get the money from the States.’

‘In that case, I don’t mind if you don’t credit my account immediately. I’ll wait the six weeks.’

‘Yes,’ replied the bank, ‘you can do it that way. But then there’s a charge.’

And the charge, by happy coincidence, was almost exactly the same as the interest.

It is as well to recognise defeat when it stares you in the face, especially when you are tiny and your opponent is vast. Still, I came away from the bank with several questions buzzing in my mind:

a)    Does it really take six weeks in the electronic age for money to be transferred from one country to another?

b)    Why did the bank charge interest before it knew how long it would take for the money to arrive from America, and why would it not refund me if the money came earlier than anticipated?

c)    Why was the rate of interest it charged, in an era of low interest rates, so stratospherically high?

d)    Why did the bank lie to me?

e)    Why did the bank think that it could lie to me?

I will not enumerate further the high crimes and misdemeanours of my various banks, except perhaps to mention one, in order to raise an interesting metaphysical question. I transferred what for me was a large sum from an English to a French bank, in order to buy a house in France. The money disappeared instantaneously from my English account, at the mere touch of a computer key; but it did not reach my French account for ten days. Where was the money, in what ethereal sphere did it exist, in the meantime? It is as much a mystery of that of Agatha Christie’s disappearance in the 1920s.

Whenever, over a glass or two of wine, I discuss the matter with my friends, who are as ignorant as I of matters of high finance, the name James Burnham comes up. He it was who first pointed out, at least for a general audience, that the owners of companies, that is to say the shareholders, are no longer the controllers of companies. Where ownership is dilute, the owners have unknowingly and inevitably ceded power to a managerial class that, like all classes, seeks its own advantage. It appropriates to itself shareholders’ funds: and thus the expropriators are expropriated, but not by the proletarians. (Not for nothing was Burnham an ex-Marxist). This was all said nearly three quarters of a century ago.

The expropriation takes place under cover of legality. It is all above board and according to prescribed form. And there is always the argument that top executives have to be paid so much because if they were not they would take their invaluable services elsewhere. In the case of more than a few banks, however, these services turn out not have been so very valuable, at least not to the institutions to which they were lent. In the case of the first-mentioned bank, the man in charge appeared to think that he was paid tens of millions of dollars a year in order to hear no evil, see no evil and speak no evil.

It is true, of course, that a man cannot reasonably be expected to know what each of the tens of thousands of employees under his supposed direction are doing. As Mr Bumble said when told that the law supposes that a man’s wife is under his control, ‘If the law supposes that, the law is an ass – a idiot!’

This being the case, however, it is a reasonable question as to why anyone should be paid so astronomically, at least if he is not the actual owner of the company.

In our slightly alcoholic reflections upon James Burnham’s Managerial Revolution, my friends and I raise another question: why now? After all, the dilution of ownership has been a fact for many years. The scandals, however, are coming to light only relatively recently, at least in such numbers.

It might be, perhaps, that nothing has changed except our awareness of what is going on. But I think the statistics are against this. And if, after an extra glass of wine or two, I were forced to answer the question Why now? I would answer two things.

First there has been a profound cultural shift in the direction of the abandonment of self-control as a virtue. Thanks to the cultural revolution of the 50s and 60s (of which I am a product), people have fewer self-patrolled boundaries than they once would have had. Managers who once would have felt ashamed to deprive shareholders of their funds no longer do so. One sees this loss of self-control in all walks of life. In the public sector, for example, in which I have spent much of my adult life, the public purse is now shamelessly looted by those who work in it in a way that was inconceivable when I started my career (inefficiency is another question entirely). I could give many other examples, from obesity to gambling to drug-taking and binge-drinking.

A second factor that I think has been much underestimated in the promotion of the most naked self-seeking is the now more-or-less permanent unsoundness of money as a store of value. No one can trust a dollar – or any other currency – to hold its value, bearing in mind that asset inflation is inflation like any other. Therefore, in order to secure ourselves against future impoverishment, we need to accumulate vastly more than we should if money were a real store of value. We must all speculate if we do not want to condemn ourselves to poverty. The unsoundness of money shifts the bell-curve of greed to the right, so that more people become what would formerly have been thought of as extremely greedy; while even the other-worldly now fall into the category of speculator.

When bell-curves shift to the right (I assume greed is distributed normally in a population, admittedly quite an assumption), extreme behavior becomes more common. As the French say, Voila!