Now that we are being engulfed by the LIBOR scandal and find that the Bank of England was heavily involved (shock horror), perhaps it is worth revisiting one of the most important speeches given by a politician in recent memory and which couldn’t be more relevant to the latest outrage.
In June, 2010, Steve Baker MP took to his feet in the House of Commons to spell out, in plain language, why our banking system has become so corrupted and address the central economic issues that are seldom touched on in mainstream debate.
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.
A Soviet-style committee at the centre attempts the impossible job by setting interest rates – perhaps the most important price signals in the entire economy – in the same manner that Stalin’s planners picked the price of bread, and with the same catastrophic results.
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.
On top of this, private banks “have the legal privilege of treating depositors’ money as their own.”
The Bank of England subsidises and supports a fractional reserve system where private banks lend out depositor’s money for a profit – money that was left with them specifically for safe-keeping. This is in breach of the depositor’s claim on that money and their fundamental right to their own property. Some might call this theft.
And that’s before we even get on to 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”.
Price controls on interest rates, the expansion of credit unbacked by savings leading to boom and bust, the destruction of property rights through fractional reserves and more moral hazard than you can wave your increasingly worthless pound notes at. Truly a tour de force in blundering interventionism.
And yet successive policy makers still fail to connect the dots. Steve makes it easier for them:
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?”
Perhaps instead of holding an enormous and costly inquiry into the causes of the LIBOR scandal and the wider problems in the banking industry, Westminster politicians could simply swallow their pride and start listening to what Steve Baker has been saying for the last two years.