Saturday, September 27, 2008


The five of us that founded the UK Libertarian Party come from different parts of the very wide political spectrum that is libertarianism; as such, we all had slightly different concerns—hobby-horses, if you like—that we particularly championed.

As you might have guessed, your humble Devil has always been particularly interested in the area of personal freedom—drugs, etc.—as well as reform of the education system ("teach a man to fish, etc."). In essence, I have always described myself as a Consequentialist: I believe that freedom produces the best outcomes.

Our Treasurer, Patrick Vessey, on the other hand, has always been far more towards the Rights end of the spectrum but, additionally, one of his bugbears has always been the fiat banking system. Although we have never really argued about this bone of contention, your humble Devil has never seen it as a priority.

On the other hand, as Patrick argues at the LPUK blog, perhaps now is the time seriously to reconsider that position.
What [President] Jefferson was writing about wasn't purely related to government loading up the public debt, but rather about private bankers creating debt amongst the public via the magic of fiat currency.

Jefferson was right. And, were he alive today, he would find that one UK political party shares his view that: "The issuing power [of money] should be taken from the banks and restored to the people to whom it properly belongs". And you're reading the blog of that party.

LPUK want to take back the power of issuing currency from the commercial banks. It must return to being a Crown privilege, not something to be done at the whim of private enterprise. Of course banks have a right to exist, and a right to make profits. But a 'right' to create inflationary spirals which affect not just their own customers, but every single one of us using the national currency?

Perhaps it is time to rethink our banking system...


Tristan said...

You'd trust government with the ability to create money?
Then government would just behave as it always had, debase the currency to raise money for its schemes.

Instead we should move to free banking. Let banks issue their own currency, public trust would determine the extent of use of their currency.

Rather than having a monopoly we'd have a free market.
(historically such arrangements have existed, notably in Scotland and I believe Canada)

jd said...

Time to rethink the system possibly, but Mr V is going in completely the wrong direction. Give him a copy of Hayek's Denationalisation of Money, explain to him about competing currencies, and tell him to stop being such a statist.

Mike said...

Congratulations! You are now a Level 22 Libertarian! You need only 3 more levels to become a proper Anarchist!

Henry Crun said...

Gadzooks, and here's me thinking the function of a central bank was to keep hold of the reins on money supply.

It would appear that the BoE has moved away from it's traditional role of lender of last resort, supervisor of the banking system, holder of the countries reserves, and overseer of monetary policy.

WTF happened? Looks like someone who doesn't know the first thing about economics has been....oh hang on.

Hugo said...

"here's me thinking the function of a central bank was to keep hold of the reins on money supply"

What? There's no need for a central bank. Private banks will have to use commodity money in order to compete. And then there will be no problem with inflation.


Giving the government a monopoly on money is thoroughly dangerous. Even if you don't inflate, a future government will.

Private banks cannot create long-term inflation. They must keep reserves to be able to meet any liabilities they accrue, e.g. with gold. Yes, they can do fractional-reserve banking, where they can issue currency worth, say, 2 arbitrary units of gold, when they only hold 1 unit of gold, and still remain solvent as long as everyone doesn't try to remove all their money at once. But this is a one off process.

Long-term inflation can only be done with fiat currencies. If the government have a monopoly, we can't do anything about it. If a private bank uses fiat currency, we can choose not to do business with them, and use currency backed by bank with gold reserves.


That said, there is much to agree with at the lpuk policy page on this.

Mark Wadsworth said...

I think it is useful to try and understand the actual subject in hand, in this case banking, before you come up with a solution.

Banks do not create money, they are middlemen between depositors/bondholders and borrowers. A quick glance at a bank's balance sheet will confirm this.

There is nothing wrong with fractional reserve banking, provided you don't let it get out of hand, i.e. the gummint ought to have enforced much higher minimum capital ratios.

The idea that you can prevent banks from taking deposits or lending in Sterling is fanciful. There is nothing to stop them taking deposits or lending in USD or JPY or any other currency.

For example, I am perfectly entitled to buy somebody's car for £1,000 or $2,000 or any other currency. We are perfectly entitled to agree that I will pay up in a month's time. The vendor's 'balance sheet' now shows £1,000 as an asset rather than a car. My 'balance sheet' shows a car (asset) and a liability (what I owe the borrower).

Have we somehow 'created' £1,000 out of thin air? No of course not. The vendor's receivable is equal and opposite to my liability.

Where the whole thing went wrong (above and beyond banks lending so much that their capital ratios fell to negligible amounts, or negative in the case of NR, B&B), is that everybody was gambling on house prices rising for ever, which is complete tosh, of course. We have these house price booms and busts every 18 years or so.

One way to keep house prices low is to raise interest rates, but that is counter productive as all businesses have to pay higher interest rates so this is a drag on the rest of the economy (who are thus innocent victims in all this).

Thus by process of elimination, the most sensible way to keep house prices low and stable is land value tax - the reason why house prices were stable until about 1970 was that before then we had Schedule A taxation and Domestic Rates (which are vaguely similar to Land Value Tax). Once they got rid of these taxes, all hell broke loose.

And land value tax would be an ideal replacement tax for all existing property/wealth related taxes, like Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax etc etc.

Trooper Thompson said...

Mr Vessey is right. The control and creation of money is the most important issue.

The government should create the money, just as Abe Lincoln did with the 'greenbacks'.

Roger Thornhill said...

jd - the LPUK will enable Bank Money. Where is your problem? Anyone who thinks a State should be collecting taxes in some private organisation's currency is, frankly, naive.

Mark - Banks can lend n times more money than it has on deposit -the days of the true intermediary are long gone. The loans are in fiat and the real deposits are all kept to cover for interbank transfers (banks don't take fiat balances from other banks - they are not daft!) and cash withdrawals. Your car example sheds no light on how the process works, m'fraid. Bank has $1000 on deposit, it then lends $10,000, which immediately goes into local bank accounts, so $11,000 in assets ($10,000 loans, $1000 vault cash or at the BoE) and $11,000 in liabilities ($11,000 deposits). THAT is how it works. Once the lent money is spent the interbank settlement process happens, but then again, banks know it mostly levels out (bi-directional flows from other borrowers paying vendors at that bank) inter-day. If things get tight they can borrow overnight money from the BoE (normally) or other banks and liquidate some of their other assets if need be. Banks needed to have a 10% reserve ratio (deposits to loans), now it only needs Capital Adequacy which involves risk weighting, liquidity factors etc. Not the same thing AFAICT.

Trouper T: Abe's greenbacks were fiat, whereas at the time, the dollar was redeemable in gold or silver (which one escapes me). The greenbacks did not have the promise to pay in gold. The US did close their gold window and removed the promise from US notes some decades ago.

Trooper Thompson said...


I know the greenbacks were fiat. The problem is not fiat currency, the question is; who controls it?

The risk will always be the same - that too much will be created, causing devaluation, (or too little, causing recession) but if the process is under the control of a democratic government and the process is open, then there's a better chance that it will be done properly - i.e. that there's enough money in circulation for the economy to flourish, without too much to cause devaluation.

It is allowing this process to be mystified and controlled by private banking interests which causes the biggest problems (see financial pages of any newspaper for details)

Mark Wadsworth said...

Roger T, in your example we have fractional reserve banking, with a capital ratio of 9%.

The key is, the bank CAN NOT lend out $11,000 on the back of a deposit of $1,000.

The bank can only lend out $11,000 if is has own capital of $1,000!

i.e. bank's own capital $1,000 plus total liabilities $10,000 (whether that's from depositors or bondholders is a legal distinction) = total lending $11,000.

The bank is still an intermediary between depositors/bondholders (who want to be paid interest) and borrowers who have to pay interest.

We can argue that 9% is too low a ratio, but let's say we stick with 9% as in your example, there is then an upper ceiling of $11,000.

If those depositors withdraw their $10,000 from Bank A, then the bank has to call in 89% of the money it has lent out to be able to repay them. Alternatively, the depositors move their savings to Bank B, which is settled by Bank B accepting an IOU from Bank A. So called inter-bank lending, which is something else that is a bit mad.

I explained FRB in more detail here.

I agree, there is a lot of backroom stuff whereby BoE lends money to insolvent banks, different topic.

The BoE ought to be more in the business of telling insolvent banks to fuck off.

That's that fixed.

Roger Thornhill said...


You forget that when the loan is deposited in ANOTHER bank, THAT bank CAN. I skipped a few steps, but if you have $1000 deposit, you can lend $900 which is then deposited in a second bank. That bank can then lend $810 which can be deposited back into bank A and then $729 loaned out.

1. $1000 deposit = $1000 liabilites ($1000 deposit) and $1000 assets ($1000 cash).
2. Loan of $900 created = $1900 liabilities ($1900 deposits) $1900 assets ($900 loan, $1000 cash).
3. Deposit $900 in bank B. $1000 liabilities ($1000 deposit) and $1000 assets ($900 loan, $100 cash). Bank A still has 10% cash vs deposits.
4. Bank b lends $890. B has $1790 liabilities ($1790 deposits) and $1790 assets ($900 cash, $890 loan).
5. Bank B account borrower deposits its loan into bank A. Bank A now has: $1890 liabilities (original $1000 deposit plus the new $890 from Bank B. It has $1890 ($900 loan, $990 cash, being the old $100 plus the new $890 from bank B).

Now, I could go on, but see how the hard cash transfers from one bank to the other results over time in a defacto 10x leverage on vault cash into loans due to the reserve ratio. Loans become deposits somewhere. A simple question, Mark, if your way is right, how can lending have grown so rapidly? If the State had printed the money itself and lent it to the banks, we would have no national debt! Quite the reverse.

richard allan said...

Roger, the state doesn't just print the money, because that would be obvious. What it does is print money and use the printed money to buy government bonds, in order to obfuscate the process. The public debt is just an expression of how much money the government has printed.

Roger Thornhill said...

If, Richard, if, lent to the banks so the banks could on-lend (and explain the increase in money supply).

If banks buy Gilts they have even less money to lend!