A historic day: reactions to the Regulation of Deposits and Lending Bill

The 15th of September, 2010 was truly a historic day.

In response to the bill presented on Wednesday by MPs Douglas Carswell and Steve Baker, Mises.org published this reaction from Jesus Huerta de Soto:

In the cradle of modern democracy, in the parliament of the United Kingdom, a bill was officially presented in London yesterday with a dual objective: first, to fully and effectively defend citizens’ right of ownership over money they have deposited in checking accounts at banks; and second, to once and for all put an end to the recurrent cycles of artificial boom, financial and banking crisis, and economic recession which have been afflicting the world’s (poorly-named) market economies for at least two hundred years.

In perfect keeping with general legal principles regarding property, principles essential to the functioning of a market economy, the bill aims to abolish the privilege the private banking system currently enjoys of operating with a fractional-reserve ratio on the demand deposits (and equivalents) it receives. The idea is to re-establish a 100-percent reserve requirement for money on demand deposit and to bring about the culmination of Peel’s Bank Charter Act of 1844, which correctly diagnosed the problem of a fractional reserve but regrettably exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money. As a result, Peel’s Act failed to achieve its purpose, and banks continued to artificially expand credit against newly-created deposits (mere accounting entries on their balance sheets) and to generate speculative bubbles which, sooner or later, when the market uncovers the errors committed, give rise inexorably to severe financial and banking crises and to profound economic recessions. (Anyone with an interest in an in-depth study of all the analytical and historical details may consult my book, Money, Bank Credit, and Economic Cycles, which has been published in four Spanish-language editions, two English editions by the Mises Institute in 2006 and 2009, and translated into thirteen languages.)

It is exciting that a handful of Tory MPs led by Douglas Carswell and Steven Baker have taken this step. If they are successful, they will go down in history like Wilberforce – with the abolition of the slave trade – and other outstanding British figures, to which the whole world owes so much.

There were a number of encouraging comments on this post, and on Stephan Kinsella’s update UK Parliament Speech Invokes Mises Institute re Honest Money and Sound Banking.

I was also delighted to see the story picked up by Lew Rockwell, who promoted Toby’s superb Telegraph article, The Radical Reform That Would End Boom and Bust in Banking:

What is needed is to let people own their own money, with the banks keeping it safe for those that want complete peace of mind. Let the depositor decide if the money should be lent and for what period, until it matures. Remove all political control from banking. And let’s have more language of the fiduciary rather than the gambler from bankers.

5 Comments

  • In the “bush” of Central Africa, as an adult, I taught myself O level chemistry and physics and A level Pure Maths and Applied Maths, all as separate subjects, I did not find the A levels easy but I stuck with it. For the last few months I have been trying to make sense of finance and must express total surprise at the astonishing amount of terms that need to be understood.

    I would like to see a step by step lucid explanation of what exactly goes on when bank A lends 90% of money deposited with it to bank B who does the same to bank C and so on and so on. To say nothing about broker B lending vast amounts of stock he has control of to “shorter” S who “sells” it via another broker to goodness knows who, maybe another “shorter” and so on and so on. At different stages who actually owns the stock or security involved.

    I cannot say for sure as to who was responsible for the words “Remove all political control from banking” and then
    “Lets have more language of the fiduciary.” That had me reaching for a dictionary, “Law, requiring trust” etc.
    If all political control is removed what control is used and as the saying goes “Who guards the guards?”. Can a “law” be formulated to require trust? I think it still applies on a handshake basis between individuals but between financial institutions it is somewhat different.

    The world has had centuries of failing banks and bursting bubbles. The logical solution is for every country in the world to nationalise its own financial institutions, put a temporary ban on the outward movement of their own currencies, wait for the dust to settle and then join an international meeting to chart the way forward.

    Frederick W Gilling 17:45 hrs Sunday 19 September 2010

    • Please see our literature and downloads through the links above for some of those lucid explanations.

    • Frederick, thank you for commenting on our site and well done for your achievements to date.
      I said that banks should regain their fiduciary obligations to us.
      Think of your doctor, he/she swears the Hippocratic oath , see here http://en.wikipedia.org/wiki/Hippocratic_Oath . For the over whelming majority , as they know when they go inside you to operate and or prescribe you medicine that you have no idea what they are talking about, you take this on trust and they know that. They behave professionally no matter what any regulation says.
      The finance industry is broadly speaking in this category of trust with knowledge far superior to their clients. The banks in recent years have adopted the language of gamblers i.e. “we bet on this currency movement and it made is billions,” or “we took this short position and the bank went bust.” This is with the hard earned money of you and me who has overwhelmingly deposited as a matter of trust as we view the bankers as our fiduciary. This is the relationship you have with all of the professions.
      Our site does not advocate nationalisation as a cure in itself as it is the morals of the bankers that need to be addressed and the system, crony capitalism, that leads to this abuse of their fiduciary position i.e. one cannot live without the other. The state needs to be able to force the banks pension funds to buy its debts to fund itself, the banks need the legal privilege in place to keep then solvent and earn commission on doing the government work etc. All is explained by many great articles on this site.

  • First Bravo to The Cobden Centre —– For honest money and social progress. Exceptionally noble ambitions that could be enlarged to include honest living.

    Second Bravo for “Please leave an intelligent and civil reply in your own name”. I am appalled at the crudeness of some of the comments written by persons,over a nom de plume, when expressing their opinions on a site that will be displayed to the world. I have written to the PCC and newspapers about this matter but hold very little hope of any change without yet more “Laws”.

    Third Bravo to Mr Steven Baker MP and Mr Toby Baxendale for responding so quickly to my comment as clarified below, I sincerely thank them for that.

    My comment was published at 19:46 on Sunday 19 September.
    Mr Steven Baker MP replied at 20:28.
    Mr Toby Baxendale replied at 22:46.

    I shall certainly take their advice and look for information available on this site.

    The analogy between the trust that bankers should generate and that followed by the medical profession adhering to the Hippocratic oath is sound in principle. Such parallel paths fall very squarely into the remit of The Cobden Centre, namely Honest Money and Social Progress.

    Another line of thought is prompted by Mr Baxendale’s follow up “The finance industry is broadly speaking in this category of trust with knowledge far superior to their clients”. I can accept this approach if it is, for example,in respect of a very finely tuned mathematically model in which every twist and turn is covered. However, thankfully, I would think that the majority of investments are not in any way so complex. Such complexity is well and truly in the domain of the big players, the banks themselves and the gamblers.

    A year or more ago I had a quick look,on line, at some opinions and writings of and about Karl Marx and I formed the snap judgement that, for some of the assertations made to function, the world needed to be populated exclusively by Saints. Until that prevails I feel that nationalisation is the safest option, I am surprised that it has not happened already bearing in mind the power of money. How many trillions of units of currency are waiting to be deployed, or re-deployed with the aim, come what may, of making more?

    Various bodies are trying to formulate acceptable regulations to encourage the fiduciary behaviour of bankers.
    I think the very fact that regulations need to be written gives strong support, to my contention, that all financial institutions should be nationalised.

    As a matter of interest I am also tilting at windmills in advocating Party Free Politics, that all newspapers should be compelled to publish their readers complaints, about the paper, on page three of the paper concerned and that the PCC should be subject to the Freedom of Information act.

    I have many blogs published that may be seen via http:// blrcfwg.blogspot.com

    I wish to make it clear that I fully support, and admire, the vital roles that entrepreneurs play in the world.

    Frederick W Gilling 16:15 hrs Monday 20 September 2010.

  • Tony says:

    It seems to me that the propose of this bill is to allow fractional reserve banking to be legalised through the back door, so that just before the pyramid system finally crashes, you can change the law to allow it by introducing deposit-taking accounts for investment purposes.

    This is what MPs Douglas Carswell and Steve Baker seem to be saying their future goal is.

    Then you would have open disclosure by the banks, giving them the get out of jail excuse, we told our customers and that’s what they wanted.

    So I think the important question here is, wither you are introducing this bill because it is the right thing to be done or wither you are introducing this bill because this is what the banks actually want?

    To see the truth in this asked yourself this one simply question, who will most benefit from this bill?

    It seems to me it is better to completely get ride of a corrupt system than to merely change its name.

    Also isn’t it interesting that this bill was introduced at the same time as the world’s attention and every single paper in the U.K. if not the world was focused on the Royal engagement!
    Friday 19th November 2010

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