SPECIAL FEATURE

This article is about financial infrastructure solutions for the Welsh Economy and Welsh Business. Originally published (in edited form)  in agenda the magazine for the Institute of Welsh Affairs ( summer 2010 No.41).

Adolf Hitler rose to power during the Great Depression of the 1930s because of fear and loathing of bankers coupled with racism and economic collapse. We all remember nightmare images of people paying for bara brith with a wheelbarrow load of paper Reichsmarks. It is a vision embedded in the collective unconscious of Europeans such as ourselves, or, to use modern parlance, it’s in our DNA.

Karl Marx clearly recognised how Capitalism is built on the flow of money and this, in turn, puts the ‘levers of power’ in the hands of people who understand this or are in positions to control it: i.e. the banking systems. Communism and its many re-interpretations by the likes of Lenin was built on this understanding.

Two main factors helped the USA emerge from the Great Depression, where a hatred of the depredations wreaked by banks, especially in rural farming communities, was more than equal to that of Europe. These were US President Franklin Delano Roosevelt’s New Deal infrastructure programmes and the huge re-employment provided by an emerging military-industrial complex at the outset of WWII. To a certain extent the New Deal programme saved America from a descent into demagoguery and the equivalent of German National Socialism. For those interested in the history of the implementation of New Deal structures and their political and socio-economic ramifications, Robert.A.Caro’s immense Pulitzer Prize winning biographies of Robert Moses and Lyndon. B. Johnson are a ‘must read’. There are lessons here that those in power both in the UK and in Wales, need to learn.

It is clear therefore, that an awareness of the political zeitgeist, history and what has worked before and is working now, is intrinsic to any sustainable regeneration of the Welsh economy. Our current governing class appears to show lamentable ignorance in these matters, is far too parochial in outlook or vision and seems also to be hell-bent on ‘re-inventing the wheel’. But the wheel has already been invented; what is needed now is fuel for the engine and suitable lubrication – which brings us back to … money.

How money is used, and how it flows is the only key to any solution that can unlock our economy and thus enable the realisation of any kind of social or public service agenda to which we may wish to aspire to as a Society.

Apart from historically endemic problems of a small, poorly managed, and unentrepreneurial  private sector, the over-riding constraint on the Welsh economy currently is the inability of money to flow to business – the so-called ‘credit squeeze’. This lack of ‘business finance’ is due to business’s foolish over reliance on globalised high street banks such as LloydsTSB, HSBC, Barclays and the like. Nobody in their right mind should consider banks to be ‘business friendly’ – they may spout the fine words but, in the last two years, their actions – and inactions – have spoken volumes. So what can business do? What suitable business finance models are there for the businesses of Wales?

I believe there is a way forward, and that a better business finance model already exists, and this is based on my understanding of the way SME businesses are financed in the USA. Whilst I fully acknowledge that I am no expert in this field, this article is written to encourage and help point those with responsibilities for the Welsh economy in the direction where solutions may be found. To illustrate this, I will try to explain the role that American-style Savings & Loans and Credit Unions play in business finance.

During the Great Depression a variety of different banking paradigms/mechanisms, including Credit Unions, were set up to mitigate the financial situation and to act as conduits for New Deal federal funds used to build dams, roads, electrification and other forms of basic infrastructure. Some of these have flourished and still survive, others have fallen away. For the sake of simplicity, I will place them all under the generic heading of credit unions (CU). The basic fact is that SME business in the US gets its business finance, not from high street banks, but from CU type entities. Now this is in total contrast to how Welsh business is financed – and we can see the consequences.

The defining factors for all these CUs is that they are ‘locality’ (regionally) based, professionally managed, often capitalised by Federal and State payroll money flow and, critically, business lending is tied to some form of a turnover model of repayment. Although as far as I am aware, interest rates and credit scoring are comparable to those of high street banks, the difference is that CU managers, being regionally based, have more knowledge of local economic situations and have much more discretion and responsibility about how they manage their lending.

The other highly beneficial aspect to business of CU lending is that it can be tied to a turnover repayment model. At its most basic, if there is no turnover there is no loan repayment. For example, a business may have a bad month of trading where its turnover goes below an agreed threshold that would normally trigger a loan repayment. In this case, the loan payment is rescheduled automatically until the agreed threshold is reached or the loan term period is extended, and there are a variety of penalty-free agreements that can be negotiated. Most of us in business here in the UK know that if you borrow from a high street bank then your monthly repayments have to be met, come what may, regardless of the economic situation. In addition, the penalties for default are often sufficiently onerous to cause business failure.

At this point, you will realise that the Credit Unions we are familiar with in Wales bear no comparison with American US-style Credit Unions. CUs in this country are fine for the purposes for which they have been set up: to provide small loans and act as a savings’ vehicle for a local populace, but they are not designed or set up for a business finance role as they are in the US. I am also aware that pan-national business support organisations such as the Federation of Small Business (FSB), the National Farmers Union (NFU) and even The Post Office have a CU entity associated with the organisation. However, the fact remains that very few businesses are aware of its existence or use its services in the same way as is done in the US. Nevertheless, as far as I am aware, there are no particular legal or constitutional impediments to converting an existing local CU or those attached to organisations like the FSB into one that uses the American model thus making it ‘business friendly’.

The main barrier that has to be overcome is the issue of scale of capitalisation. In order to lend to business, a CU needs to have a capital base that is an order of magnitude larger than currently available to small UK-style CUs. But how can this be achieved? This is where national and local government plays a part and where the concept of ‘money flow’ needs to be understood. To illustrate how a CU can be ‘capitalised’ to the extent where it can afford to be managed professionally and have sufficient funds to lend on a business scale, let us look at the following – highly simplified – example. In America, it is often a ‘condition of employment’ for federal or state employees to have a credit union account in addition to their ordinary high street bank account. It can be realised that a big institution, such as a hospital or police force, will have a monthly payroll in the order of many millions of dollars. This payroll is paid into an employee’s credit union account. Before the employee can withdraw this money the CU has ‘sight’ and nominal use of this money. So a CU has funds to the tune of hundreds of millions of dollars regularly channelled through its systems each and every month. The CU then uses its professional management resources to earn money from this ‘money flow’. This in turn constitutes its earnings and contributes to the lending fund availability.

The other side of the coin is the turnover-based model for business lending. Assuming that a CU is sufficiently ‘capitalised’ by money flow from institutional payrolls, it then has a fund to lend to businesses. The business asks for a loan for whatever business purpose (in rural areas for instance it may be a farmer buying seed against a future crop). The condition of the loan is that the business turnover must be passed through the CU. This requirement enables the borrower to benefit from favourable and structured repayment agreements (described above), and the lender to monitor the financial performance of the business and the day-to-day risk involved.

On a macro-economic scale, the financial model provided by US-style CUs is, for instance, clearly a major factor contributing to the astounding success of the area in North Carolina known as the Research Triangle Park. Some 30 years ago, this area, incidentally the size of Sir Gaerfyrddin, was a huge snake-ridden swamp containing legions of insects, flotillas of monster large-mouthed bass and populated by a few banjo playing gun toting residents who wouldn’t have been out of place in the cast of the movie Deliverance!

Today, this small area generates more wealth and GDP than the entire economy of Wales. How was this rapid economic regeneration achieved, and why cannot experts from the Welsh Assembly Government study this model? I call on them to do so and also to consider that it was the Federal and State governments that ‘seeded’ the area with their institutions channelling payrolls through the local CU, which in turn required roads and basic infrastructure to be built across the swamp, and helped set up a business environment that has led to a transformation from wilderness to economic powerhouse in just three decades.

Finally, on a note of encouragement, it requires just one County Council in one Welsh county to pass its payroll through one properly constituted US-Style credit union to initiate a fundamental and beneficial change in Welsh business financing at local level. Wales too can be part of the quiet ‘Move your Money’ revolution currently sweeping America. Instead of stringing the bankers up, people and businesses are bypassing Wall St, bypassing Main St and returning to financial systems that survived the Great Depression and are far more suited to their individual localities. We can do this too.

Ackowledgements: I would sincerely like to thank Cris Tomos, Adam Price, Jonathan Edwards MP and Henry Jones-Davies for interesting and helpful arguments/discussions on these matters. I’d also like to thank John Osmond of the IWA for asking me to put some of these thoughts down on paper in the hope that someone more knowledgeable and competent than I can carry forward this baton. To quote ‘Dirty Harry’ Callahan in Magnum Force:“A man gotta know his limitations”.

Useful link: Robert Peston on the nature of Money