Advisory Board Member Steve Baker, MP for Wycombe, yesterday made his maiden speech in the House of Commons. The full text may be found here. The articles which most closely inspired the speech are here and here.
The following section of the speech — which we have annotated with links to relevant articles — made some key points about honest money:
As a trustee of a charity for economic education, I would like to give what is perhaps an alternative perspective on the cause of the banking crisis; I hope that Members will indulge me. I should like to put to them a proposition that is uncontroversial: around the world, the system of money is a product of the state. Our monetary system is characterised by private banking, with a fractional reserve controlled by a central bank, which determines monetary policy and has a monopoly on the issue of legal tender. A Monetary Policy Committee sets interest rates.
The banks have the legal privilege of treating depositors’ money as their own. In the words of Irving Fisher,
“our national circulating medium is now at the mercy of loan transactions of banks”.
In the other place, in the Banking Bill debate of 5 February 2009, the Earl of Caithness explained eloquently the base of 19th-century judicial decisions-and yes, our system of money has evolved since then-that enabled that situation to take place. He called it
“the fault which has led to every major banking and currency crisis during the past 200 years, including this one.”-[ Official Report, House of Lords, 5 February 2009; Vol. 707, c. 774.]
The Bank Charter Act 1844 ended the practice of banks over-issuing notes, but it left them virtually unmolested in their ability to issue deposit currency to be drawn by cheque. That loophole haunts us today. Unlike the situation in respect of any other commodity, in the case of money, price controls do not drive the product off the market. Artificially lowered interest rates increase the demand for credit, and decrease the supply of savings, but the legal privilege granted to banks means that they can meet demand by extending credit that is unbacked by real savings. There is a good argument to say that that causes the boom-and-bust cycle, the misdirection of resources in the capital structure of production, and over-consumption by consumers. That is the biggest problem that we face today.
We could talk about the moral hazard of having a state-backed lender of last resort and state deposit guarantees, and of the socialisation of the cost of failure; I only wish that I had time to touch on the accounting rules on derivatives. Perhaps that is for another day. My political hero, Richard Cobden, spoke on the subject. He held
“all idea of regulating the currency to be an absurdity”,
but I see that time is short; I shall have to save the rest of the quote for another day.
Today, money is a product of the state. The Bank of England controls the price, quantity and quality of money. Perhaps if we were talking about any other commodity, there would be far less confusion over and questioning of the cause of the crisis. If money is a product of the state, we should ask ourselves, “Is this a good idea?”
In the coalition, we have a Government ideally suited to be conservative to preserve what is good, but radical to change all that is bad. If we are to have a once-in-a-generation, fundamental review of the role of government, let us also examine government’s role in the system of money and bank credit.