This is a book about commercial banking, the demands of justice, and the common good. But while it speaks more of morals than of money, it insists that an area traditionally regarded by many as a necessary evil, is a sphere in which people can morally flourish as human beings. The art of creating, managing, loaning, and investing money has always been fraught with a variety of moral hazards. Unfortunately, the widespread less-than-positive view of banking has contributed to a lack of understanding toward a field of human activity that has not only made a profound contribution to human prosperity but has created a sphere of endeavor in which people can genuinely pursue virtue.
The need for a short introductory book on the moral demands of banking became apparent to me during a conference for financial practitioners in, most appropriately, Geneva, Switzerland. Perhaps nothing is more symbolic of the new order of a global market-orientated economy than the spread of the modern international bank and the associated financial industry. Yet along Lake Geneva's quiet shores, in a city that has been home to such disparate individuals as John Calvin, Saint Francis de Sales, and Jean-Jacques Rousseau, where discreet buildings house banks that manage the financial futures of countless investors, one could only be impressed by the atmosphere of stability that Swiss banks convey in a world rife with risk, creativity, toil, and everyday shifts in market prices.
Attending this conference, I expected to encounter bankers who were morally at ease with managing and expanding the monetary sinews of commercial progress. Instead, I was surprised at the predominance of two attitudes.
The first can be loosely described as apologetic. According to this view, while banking might be necessary for economic prosperity, it is at best morally neutral. The apologists seemed to believe that bankers would be morally better off working in non-government organizations, preferably those accredited to the United Nations complex not far from the Geneva conference site. Underlying this position is the unspoken assumption that life as a banker tends to divert the soul from more fruitful activities. This mindset contains more than a hint of an anti-commercial attitude and a certain lack of ease when dealing with questions of wealth in which the usurer looms large in the popular and historical imagination, especially in the West.
The second attitude at the conference was a strange hybrid of pragmatism and legalism. This attitude regards banking as nothing more than an exercise in acquiring material wealth. To people who hold this position, the fact that banking works is sufficient testimony to its morality. The notion that banking can allow people to flourish in a truly human way or that banking in itself can contribute to the common good is foreign to this audience. As for any deep concerns about the goodness or evilness of particular actions, the pragmatic-legalist tends to believe that if there is no law specifically prohibiting an action, then that action is appropriate.
Curiously enough, the two very different mindsets have much in common. Both profoundly misunderstand the nature of justice and morality. One group associates morality with the promotion of particular causes, perhaps best popularly characterized as politically correct. The other group reduces questions of good and evil to issues of what the law allows and forbids. A more significant commonality is a shared skepticism toward the proposition that if human choices, actions, habits, and institutions are probed in a practical and reasonable way, people can know the difference between good and evil and organize their lives accordingly.
In short, a considerable number of Europeans and North Americans working in the highest levels of the banking industry do not think that the human mind, with all its limitations, is able to discern the difference between justice and injustice or good and evil. This attitude is hardly confined to people working in the financial world; it currently dominates Western culture.
Upon returning to the United States, I decided to examine the contemporary literature on banking and, more specifically, the morality of banking. I soon discovered that while there is no apparent shortage of texts on financial strategies and techniques, very few deal with the moral dimension of banking. Most authors of the literature seemed relatively unaware that something as essential to banking as charging interest had been the subject of highly charged moral debates in the West for centuries. This is still the case in many Islamic nations. Even if one holds, as I do, that the just interest rate on loans is normally determined by the processes of supply and demand for capital in the conditions of a free market underpinned by the institutions of private property and rule of law, most of the available literature does not explain why charging interest on capital loans is just.
Nor does the same material indicate how ongoing debates about issues such as usury and the morality of various activities associated with banking were the primary means through which essential categories for thinking about banking were examined, discussed, and clarified. If awareness of history is the great teacher of life, then many people working in the banking industry are missing the lessons. They do not have a sense for how the tools of the trade have evolved—credit, money, interest, liquidity, deposits, checks, and speculation—not to mention the discussions that determined what constituted reasonable and unreasonable uses of such tools. In various ways this book seeks to place these matters into their original context in order to assist bankers and to help them more fully comprehend the justice or injustice of different actions associated with using these tools.
The journey of researching and drafting this short book has been long and at times, difficult. It involved writing between meetings, speaking engagements, and lectures. As each draft progressed I was careful to seek the comments of philosophers and bankers, sometimes with unexpected results. It was often a banker, for example, who pointed out a flaw in my moral argument. And it was not uncommon for a philosopher to correct my understanding of a technical dimension of banking. Both groups were also careful to warn me when they believed the book was becoming something that it was not intended to be: a book on corporate governance or a study of money.
I am thankful to many people for their insights and assistance in writing this book. I would, however, like to highlight the contribution of those working in the banking industry who took time to answer my questions and who, like me, were concerned that this book not be yet another book on business ethics that invariably concludes by telling the reader that everything is relative or depends on the ethical system one uses. The damage done by such books to young minds and people genuinely interested in living the moral life in the commercial world has been considerable.
Thankfully, more scholars and business leaders are recognizing the problems involved with much contemporary thinking about morality in the commercial world and how deeply this has undermined the possibility of serious reflection upon the nature of the good life in banking. A determination to reverse this situation was certainly true of those bankers from the United States, Europe, Southeast Asia, and Latin America who were good enough to offer me their insights, to open doors, and to discuss with great frankness the complexities of their professions. Bankers, for good reasons, are notoriously discreet. Hence, I was not surprised when, without exception, all the bankers who aided in the production of this book asked to remain anonymous. For that reason, I hope it meets their expectations.
A pilgrim journeying to the Holy Land during the twelfth century walked long distances along old Roman roads, the only respite from the loneliness and hardship of the trek being passing through one of the growing number of large towns throughout Europe. Anxious to observe his religious duties, the pilgrim would no doubt seek to visit the primary church of such towns, perhaps hoping to pay homage to the particular saint associated with the city.
As a pilgrim hurried to pray, before seeking shelter for the night in a local monastery, he would possibly observe the marketplace located outside the church. Most days hundreds of merchants, moneychangers, shopkeepers, and craftsmen would gather there to exchange goods. Wandering among shops owned by traders, mercers, haberdashers, and goldsmiths, amid the shouts of “silk,” “wine,” and “French cloth” in an array of languages and accents, the pilgrim may have wondered if he had stumbled upon an eastern bazaar or Baghdad souk rather than a world steeped in Christian belief.
Look beyond the myth of the Middle Ages as a time of ignorance, fear, and misery; it is important to recognize that the first major expansion of commerce in the West occurred during this period of history. Earlier, merchant activity had been confined to small groups of family traders, often Jewish by faith or origin. But in the high Middle Ages, internally autonomous trading towns and cities became a regular feature of the European landscape. These commercial centers varied in size from the great Flemish and Italian cities to numerous small towns of Germany. The commercial population typically included small retailers, independent craftsmen, merchant-entrepreneurs, and producers of luxury goods, as well as many living off the profits of rents.
It was during this period of history that the institutions recognized today as banks first emerged. Then, as now, banking did not respect geographical limits or boundaries of sovereignty. During the sixteenth century, Flemish and Florentine banking houses funded the conquest of New Spain. Now, those who work in the banks of Geneva, Luxembourg, New York, and Brussels routinely take into account what is happening in real-time in the financial markets of Hong Kong and Sydney.
During the twentieth century, the importance of banking was highlighted by different initiatives undertaken by governments, such as the creation of Euromarkets in the 1960s, not to mention governments’ willingness, legitimized by Keynesian economic policies, to borrow foreign capital to pursue expansionist economic policies or to refinance accumulated foreign debt. Since the 1970s, deregulatory policies implemented by governments across the world have ironically provided further impetus to the enterprise of banking. This ranged from countries lifting restrictions against foreign banks entering their domestic markets to the pursuit of policies that reduced banking transaction costs (sometimes called disintermediation).
An associated development was the emergence of new financial techniques such as hedge funds. Traditional divisions have now become blurred through the emergence of mixed financial products that contain both shares (funds) and bonds (debt). This has further corroded the distinction between short- and long-term investments. The rate of return on many such products is much higher than older products, though such investments are also more risky.
For those who work in banking, these developments are part of the world in which they live. The literature on these subjects is extensive and forms the basis of what is taught to those studying banking.
Yet while much is written about these expanding horizons of banking, there has not been a corresponding growth of literature on the moral dimension of banking, especially compared to previous centuries. Much thought was once devoted to subjects such as charging interest, the nature and permissibility of credit, and the character of money. Such writings were extensive and formed the basis for the moral assessment of a range of activities associated with banking.
In part, this reflected the widespread recognition that while banking is as commercial a trade as any other, it also has peculiar and important implications for what is often described as the common good. In broad terms, the common good is a way of describing those conditions in a given society that assist all of its members to flourish.
The spread of banking across the globe reflects the increasing interdependence of individuals, associations, and nations throughout the world. Banks have played a major role in facilitating much of this integration, especially between the capital-rich economies of the first world and the capital-poor economies of the developing world. Indeed, if the developing world is to transition to conditions of economic prosperity, the emergence of banks in these nations with sufficient reserves of capital and sound credit practices is crucial. This will assist the growth of institutional frameworks and cultures that encourage the prudent risk taking and entrepreneurship that facilitates the sustainable economic growth capable of dragging nations out of poverty.
These developments have only added to the immense responsibility of banks to provide the very fuel of economic development. Yet, despite the scale of such responsibilities, the moral questions that confront bankers and banks have changed little between today and the time of those Northern Italian merchants who began opening offices for the exchange and supply of coinage throughout Western Europe during the twelfth century.
In exploring the demands of justice and the common good upon banks, this book concerns itself with commercial banking rather than central banking. The latter is an immense subject in itself and, to varying degrees, encounters different moral questions. Those questions range from what such banks should consider as they set interest rates and the degree of independence these institutions should enjoy from the state to whether these organizations should have been created in the first place.
The direction of this book is relatively simple. Chapter 2 outlines in some detail the basic moral concepts applied to this discussion of banking. The primary concepts examined are the nature of community, the common good, and justice. The exposition is on the whole elementary and non-technical. It attempts to present specific concepts in a straightforward manner, highlighting the interconnections so as to prepare the way for discussion of specific moral questions facing banks in subsequent chapters.
Having established the basic moral concepts, chapters 3 and 4 place the emergence of banking practices in its proper historical context. This familiarizes the reader with basic facts about banking and permits readers to become acquainted with the critical moral debates shaping banking— the usury issue being the most obvious.
Chapters 5 and 6 examine some of the more pertinent moral issues confronting banks today. Chapter 5 considers the obligation of justice that banks owe to others on a societal level. Chapter 6 analyzes the responsibility of banks with regard to their individual and institutional clients. This division of analysis is not definitive. Readers will observe, for instance, how a problem such as insolvency has as much of a social dimension as an individual one.
A note should be made here about the type of moral questions explored in this book. The bulk of the attention is given to how banks may pursue their legitimate activities without engaging in unjust acts or immoral activities. But the moral life is about much more than the avoidance of evil. Refraining from the choice to do evil, or refusing to cooperate in evil, is only part of what it means to be a morally good person. The next step is to choose the good and, in doing, pursue a virtuous life. Avoiding evil is, however, an essential precondition to the ability to pursue virtue. The conclusion of this monograph does, nonetheless, outline some thoughts about the virtuous life in banking.
Readers should be aware that this short book does not aspire to be a definitive analysis of the demands of moral truth upon banking. It simply attempts to outline a framework for bankers to consider ideas of justice and apply them to particular issues. Likewise, my brief excursions into the history of money and banking are, at most, sketches of areas that have been considered in much greater detail by others. I seek only to provide readers with some basic information so they can reflect upon how man’s aspirations to be just should shape the choices of banks and bankers.
Finally, although the framework and analysis of this book are open to anyone working in the banking industry of any country, I hope that it may prove especially useful for those bankers working in nations struggling to climb out of poverty, or in those countries still overcoming the legacies of socialism or communism. One economist has suggested in recent years that it is not a lack of assets or enterprises that accounts for much of the underdevelopment of some countries; indeed, he maintains, their citizens do have things, but they lack the institutional processes and frameworks to produce wealth. This book, however, not only provides an introduction to the ideas and concepts that make one of the most vital of these institutions work, but attempts to show how banks can function in accord with one of the things that separates humans from animals: the innate capacity for morality and acting justly.