Jeffery Tucker is a man of great many talents, energy and vision. He has set up an online pro-liberty community: This will be one for all of us free market, pro-peace and anti-excessive-state people to get involved with.

You can find out more about Jeff via his Twitter feed.

Here’s a brief introduction, taken from his Wikipedia page:

Jeffrey Albert Tucker is CEO of[1] and publisher of Laissez Faire Books.[2]Tucker is also a Distinguished Fellow of the Foundation for Economic Education,[3] an adjunct scholar with the Mackinac Center for Public Policy[4] and an Acton Universityfaculty member.[5] He is past editorial vice president of the Ludwig von Mises Institute and past editor for the institute’s website,

Tucker compiled an annotated bibliography of the works of Henry Hazlitt, entitled Henry Hazlitt: Giant For Liberty, which is now in print. A Foundation for Economic Education review described the book, which “includes citations of a novel, works on literary criticism, treatises on economics and moral philosophy, several edited volumes, some 16 other books and many chapters in books, plus articles, commentaries, and reviews,” as “an apt eulogy of Henry Hazlitt.”[7]

As a writer, Tucker has contributed scholarly efforts and humorous essays to, the Ludwig von Mises Institute, and elsewhere. Examples of the latter essays include his defense of morning drinking,[8] his advice on “How to Dress Like a Man”,[9] his attack on shaving cream,[10] and his admiration for the speedy-service haircut.[11] He is a critic[12] of the Grameen Bank which, along with its founder Muhammad Yunus, was awarded the Nobel Peace Prize in 2006.[13]

Tucker was editor of from 1997 until late 2011 when he was hired by Addison Wiggin as executive editor of Laissez Faire Books.[2]

He is now CEO of[1]


The Selfish Gene and human cooperation

It took me until my 43rd year to read The Selfish Gene, written in 1976 by Richard Dawkins. In many respects, it is a testament to its success that I felt no compelling desire to read it. What I perceived to be its central message had been absorbed into the very fabric of our culture. I thought the message was simply put. To summarize: we are driven to survive by our genes and via competitive and selfish natural selection; we follow our own self-interest in order to survive and procreate; genes that adapt more quickly and better to the competitive world survive at the expense of the others, and so forth. The state of nature is a Hobbesian nightmare of there being “no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.” It is survival of the fittest for most, but armed with this knowledge, we could overcome some of these rough edges of life.

This message became his new self-christened “meme” that has seeped into our own cultural way of thinking. Also, armed with this knowledge, Dawkins concludes we should restrain our biological drive and build a more cooperative world.

Needless to say, the book is rich with information on Darwinian evolution and easily communicated to the intelligent layperson. However, I think that he has at least one thing the wrong way around: we should not restrain our genes to build a more cooperative world, but embrace them and their phenotypic effects. As I will suggest, successful phenotypic effects are not as he assumes them to be when it comes to the catallactics of the market place.

The view of Dawkins — that we need to put restraint on our genes to effect a more cooperative outcome for all — would imply that if we do not, we get what is called social Darwinism which is as natural as the selfish gene itself. In the closing lines of The Selfish Gene, Dawkins urges us to rebel against this natural disposition.

It is possible that yet another unique quality of man is a capacity for genuine, disinterested, true altruism. … We have the power to defy the selfish genes of our birth. … We can even discuss ways of deliberately cultivating and nurturing pure, disinterested altruism.

Dawkins then concludes that this ability to force ourselves to work well with others is “something that has no place in nature.”

Being new to biology, I thought I should read some Darwin to see if it really does follow that if you accept natural selection you must move, as night moves toward day, to the whole of human society running itself as a group of individualistic selfish replicators.

Social Darwinism has nothing, seemingly, to do with Darwin himself. He never advocated a social policy of promotion of the natural tendency to the survival of the fittest. He thought that appropriation by others was the key in advancing man in society.

The Descent of Man is his book that touches most on these issues. Darwin himself imagines that primeval man was “influenced by the praise and blame of his fellows,” and that for individuals, there were many social rewards in avoiding purely selfish behavior since the “tribe would approve of conduct which appeared to them to be for the general good, and would reprobate that which appeared evil.” Primeval individuals knew that the acceptance of the group was important to survival, so, Darwin concludes, “[i]t is, therefore, hardly possible to exaggerate the importance during rude times of the love of praise and the dread of blame.”

Moreover, that which strengthens the group rather than the individual, Darwin reasoned, led to greater survival for the groups that avoided selfish infighting:

It must not be forgotten that although a high standard of morality gives but a slight or no advantage to each individual man and his children over the other men of the same tribe. … A tribe including many members who … were always ready to aid one another, and to sacrifice themselves for the common good, would be victorious over most other tribes; and this would be natural selection.

It would appear that Darwin very much did not advocate anything that has come to be associated with the term “social Darwinism,” if we mean by this that we should relish in the economic survival of the fittest at the expense of our fellow compatriots. Dawkins sits firmly in the same tradition as his great inspiration on these matters: Darwin no less. From this I conclude that social Darwinism is more of a “straw-man” style argument, used by people unfamiliar with the works on Darwin and market catallactics.

Concerning the social implications of social Darwinism, liberalism plans for eternal peace, social Darwinism for a war of all against all and, as discussed, neither the great master Darwin and his most modern advocate, Dawkins, would agree with the former extrapolation from biology to social science. I am sure — as Ludwig von Mises notes in Human Action — that what applies to relations between men and microbes are very different indeed, as we have the power of reason and they don’t. Thus, he says:

It need not always be a war of extermination such as in the relations between men and morbific microbes. Reason has demonstrated that, for man, the most adequate means of improving his condition is social cooperation and division of labor. They are man’s foremost tool in his struggle for survival.

Ancient man — maybe even Nick the Neanderthal — must have rationally had to think: “if I do X service(s) or provide Y good(s) to my fellow man — stone-age Sid — he will in return give me X service(s) or Y good(s) which he is doing/producing that I want that he can make/do better than me.” The ability to reason this is our key distinguishing feature from the rest.

Mises posits three conditions that satisfy the need for the social cooperation entailed in the division of labor. First, man is unequal; second the resources of the earth are unequally distributed over various geographies and climates. If neither of these distinctions existed, the division of labor would not offer any advantages to man. The third and most important point is that cooperation is needed for man to work with his fellow man to produce things more productively. A lasting society is built on permanent cooperation. A war of all against all or a violent competitive struggle is anti-societal.

We must always remember that one of the phenotypic effects of our genes — to aid procreation and successful multiplication — is the undeniable fact that if you cooperate with others, satisfy their most urgent needs, and seek the same in return, you will prosper and multiply.

Seventeen million people walk though the doors of Tesco Plc, voluntarily, each and every week in the UK because Tesco gives them better goods and services at more affordable prices, when they want it. This is voluntary cooperation writ large and no coercion abounds in this model. Their competition with the others is peaceful and driven solely by the wishes of the consumers expressing their sovereign choices by spending their money where they do. From the consumer preferences down, the management shapes its offer to serve them.

Wherever you see disharmony, if you look carefully, you will see government intervention, or a strongman/bandit at work, to favour one party over another party, or a court ruling to do the same. All intervention is anti-social and thus anti-cooperative and we should be very wary of it as some one, or some class of persons, is usually being exploited at the expense of others.

Reject social Darwinism, as it has nothing to do with Darwin or his modern apostle Dawkins. Dawkins has stimulated me to show how potentially the phenotypic effects of cooperation could coherently link biology with economics. This is a magnificent thing!

This allows us to lift ourselves out of autarkic or small hunter gatherer groupings in order to seek to cooperate, in peaceful social harmony with our fellow man. Then I say, in the language of Dawkins: embrace and glorify our genes. Don’t rebel against them.

This article was previously published at and in expanded form at


In Defense of the Euro (An Austrian Perspective)

Professor Jesus Huerta De Soto sent me a copy of his new film called “In Defense of the Euro (An Austrian Perspective)”. You can watch it here.

For those truly interested in the Gold Standard as a potential solution to our monetary crises, whilst the Euro is a very weak imitation of it, it does force governments in the euro area, in the absence of any ability to mint up money out of nowhere, to confront their profligate over-expenditure and move towards being honest with their citizens over it.

We who sit in nations that can mint up new money from nowhere – the UK, USA, and Japan – can seemingly avoid the pain of confronting our profligacy, but we wither on the vine; the pain is required to and grow and prosper again. The eurozone area will be on a stronger footing, with governments living within their means, much quicker than in the nations where monetary nationalism rules the day.

To all those who trash the Euro and Euro-style solutions, you should listen to what the Professor has to say, reflect on this contrary view, and challenge your perspective. You may find that, surprisingly, the Euro could lead to smaller governments and more honest money.


Reforming fractional reserve banking

This article was included as an expert submission to Ron Paul’s Monetary Policy Anthology.

“When you’re one step ahead of the crowd you’re a genius. When you’re two steps ahead, you’re a crackpot.”[1]

-Rabbi Shlomo Riskin

Lincoln Square Synagogue, February 1998

“I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency and managing the currency I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks to have what is called the management of the currency.

I should never contemplate any remedial measure, which left to the discretion of individuals to regulate the amount of currency by any principle or standard whatever… I should be sorry to trust the Bank of England again, having violated their principle [the Palmer rule]; for I never trust the same parties twice on an affair of such magnitude.”[2]

-Richard Cobden

Report from the Select Committee on Banks of Issue

British Parliament, April 1840



It is a great privilege to write this essay on money and banking reform to mark the retirement of Dr. Paul from Congress. We in the United Kingdom have much to thank Dr. Paul for his tireless campaigning on these issues, especially those raised in the full public glare of two Presidential campaigns, making money and banking reform resonate here as well more than it otherwise would have.

At the Cobden Centre, we have two great parliamentarians, like Dr. Paul also inspired by the Austrian School of Economics: Steve Baker, Member of Parliament (MP) for High Wycombe (my co-founder of the Cobden Centre); and Douglas Carswell, MP for Clacton. Taking the idea of full-reserve free banking, currency competition, honest accounting, and full open liability for bankers, they have produced four bills in Parliament which we will discuss next in summary.

The Financial Services (Deposit and Lending) Bill – 2010

Carswell describes the Deposit and Lending bill as follows:

My bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes. Banks would remain at liberty to lend on money deposited in the investment accounts, but not on money deposited in the storage accounts. As such, the idea is not a million miles away from the idea of 100% gilt-backed storage accounts proposed by other hon. Members and the Governor of the Bank of England.[3]

Currency and Banknotes (Amendment) – 2011

Carswell describes the Currency and Banknotes Amendment as follows:

That leave be given to bring in a Bill to amend the Currency and Banknotes Act 1954 to allow banknotes in addition to those issued by the Bank of England to be legal tender; and for connected purposes. … My Bill would amend the Currency and Banknotes Act 1954 to enable a range of different currencies to be used as legal tender in Britain. The idea comes from a 1989 Treasury paper from when John Major was Chancellor. What the Treasury proposed as theoretically possible 22 years ago, the internet now makes practically achievable.

The internet has given people unprecedented choice. We have access to a greater range of music, financial services, groceries and books than ever before, so why do we have legal tender laws that create a monopoly currency?[4]

In an email to me, Carswell expressed the influence Congressman Paul has had on his work:

Reading Ron Paul’s End the Fed gave me the confidence to speak out.  I suddenly realised it wasn’t just a few of us Brits who doubted the whole fiat money/candy floss currency scam.  He has given hope to those of us throughout the West.

Financial Services (Regulation of Derivatives) Bill

Steve Baker compiled the Regulation of Derivatives Bill with the help of Gordon Kerr, Tim Bush, and Kevin Dowd. [5] When he introduced the legislation on 15 March 2011, he described the Bill as requiring “certain financial institutions to prepare parallel accounts on the basis of the lower of historic cost and mark to market for their exposure to derivatives; and for connected purposes.”[6] Baker explained how the accounting rules for banks incentivize trading in derivatives by enabling unrealized profits to be booked up-front, leading to large but unjustified bonuses and dividends.

More broadly, banks are producing accounts that grossly inflate their profits and capital in three ways:

(1)     Using mark-to-market and mark-to-model accounting, banks record unrealized gains in investments as profits.

(2)     International Financial Reporting Standards (IFRS) prevent banks from making prudent provision for expected loan losses by allowing recognition only of incurred losses.

(3)     IFRS encourages banks not to deduct staff compensation from profits.

Taken together, these flaws mean that banks’ accounts under IFRS are at once rule-compliant and dangerously misleading. The Regulation of Derivatives Bill[7] deals with this broad problem. For much more detail, see Gordon Kerr’s Adam Smith Institute pamphlet, “The Law of Opposites.”[8]

Financial Institutions (Reform) Bill[9]

Baker compiled the Financial Institutions Reform Bill with the help of Gordon Kerr and Kevin Dowd. The bill was introduced on Wednesday, 29 February 2012. The key provisions of the bill would:

(1)     Enforce strict liability on directors of financial institutions;

(2)     Enforce unlimited personal liability on directors of financial institutions;

(3)     Require directors of financial institutions to post personal bonds as additional bank capital;

(4)     Require personal bonds and bonuses to be treated as additional bank capital;

(5)     Make provision for the insolvency of financial institutions; and

(6)     Establish a financial crimes investigation unit.

The purpose of this Bill is to minimise moral hazard within the financial system by ensuring that those who take risks are held personally liable for the consequences.  Since rules can usually be gamed by financial institutions, a principle underlying this Bill is to minimise scope for evasion.

Baker said,

The public are rightly incensed at the injustices we see across the financial system but our economy must have responsible, innovative and enterprising financial services.  It is essential that commercial freedom is maintained while creating a system in which remuneration is a just reward for success, not the unjust product of unrealised profits and bailouts.

My Bill would make directors of financial institutions personally liable for losses.  It would ensure that losses came first out of institutions’ bonus pools then directors’ personal bonds before hitting equity.  Directors would also be exposed to unlimited personal liability long before any suggestion of taxpayer bailout.

With key decision makers’ own wealth at risk, they would take responsible decisions instead of expecting rewards for failure.

It’s time to tell bankers, “Yes, innovate. By all means earn large rewards for providing valuable financial services. But bear your own commercial risks. Don’t expect the rest of us to bail you out.”[10]

Public Attitudes to Banking: A Survey Commissioned by the Cobden Centre (2010)[11]

When we started the Cobden Centre, we all thought we knew about money and banking and all thought we knew what our fellow Brits thought about it all. To the great credit of Prof. Anthony Evans, he said let’s do some empirical testing. And so the Cobden Centre commissioned a survey. This research formed the basis of much of the work our parliamentary friends have embarked upon.

The survey was conducted by the market research company ICM with 2,000 participants.  The results offer us a rather confusing array of views as to what people think banking is about.

  • 74% of respondents thought that they were the legal owner of the money in their current account, as opposed to the bank being the legal owner.
  • 66% of respondents answered “don’t know” when asked what proportion of their current account was used in various ways by their bank.
  • 15% wanted safe-keeping services.
  • 67% wanted convenient access.
  • 8% knew correctly that they had lent money to the bank.
  • 33% think it is wrong that the bank lends out what they view as their money.
  • 61% said they would not mind the bank lending if it was done safely.
  • 26% wanted reserves to match deposits.

It would seem a sizeable minority percentage would want some form of safe-keeping services.  Most would want easy access, which would imply short-term borrowing matched with short-term lending, so as to avoid runs, rather than the current practice of lending long and borrowing short.

The needs of savers and borrowers would be better aligned by requiring depositors to choose, at the time of making a deposit, how much money they wished to put into plain saving (i.e., savings set aside for safe/precautionary holding as opposed to investment purposes — a distinction made by the Austrian scholar Ludwig von Mises) and how much into capitalist saving (i.e., savings set aside for investment gain as opposed to safe/precautionary savings). This would provide the setting for, and lead to, much more stable and substantial growth.

In a modern setting, the ability for banks to distinguish between plain savings, those savings that people want for safe keeping, and savings for capitalistic investment via the normal savings bonds, time deposit accounts, and so on and so forth, would allow the banking system to mediate more accurately the diverse time preferences of all savers and borrowers.  (The Manchester/Lancashire system of full reserve banking and private money creation that we will discuss in the last part of this essay is a good historical example of how mediating only capitalistic savings, and not plain savings, created a system of safe credit—until it was interfered with by the Stamp Act.)

The ICM survey showed all of us that there is a need to sort out what people actually think happens with their money and banking and what actually does happen—as the two things are very different.

The Jesus Huerta De Soto Monetary Reform Proposal in Summary

Some three years ago I was fortunate enough to introduce both of our Parliamentarian friends to the greatest of all the living Austrian School economists in the full reserve tradition, Professor Jesus Huerta De Soto.  His 1998 book, translated into English in 2006 as Money, Bank Credit, and Economic Cycles, is the seminal treatise on the matter.

In chapter nine, he outlines his reform proposal. (All quotes in this section are taken from chapter nine and the full book can be downloaded at The aims of the reform, as summarized by Prof. Huerta De Soto himself, are as follows:

[O]ur proposal is based on privatizing money in its current form by replacing it with its metallic equivalent in gold and allowing the market to resume its free development from the time of the transition, either by confirming gold as the generally accepted form of money, or by permitting the spontaneous and gradual entrance of other monetary standards.

This second element of our proposal refers to the necessity of revoking banking legislation and eliminating central banks and in general any government agency devoted to controlling and intervening in the financial or banking market. It should be possible to set up any number of private banks with complete freedom, both in terms of corporate purpose and legal form. …

Nevertheless the defense of free banking does not imply permission for banks to operate with a fractional reserve. At this point it should be perfectly clear that banking should be subject to traditional legal principles and that these demand the maintenance at all times of a 100 percent reserve with respect to demand deposits at banks. Hence free banking must not be viewed as a license to infringe this rule, since its infringement not only constitutes a violation of a traditional legal principle, but it also triggers a chain of consequences which are highly damaging to the economy. [12]

The crux of his reform proposal is as follows (the description is mine and made UK-specific by me — read chapter nine in full for the complete version in the Professor’s own words):

(1)     All demand deposits are immaterial money, and are not the depositor’s money but a liability from the bank they deposit with to pay them back money in the same amount as deposited, on demand.

(2)     Let the government back all these demand deposits for physical cash and place them as reserves against the existing demand deposits. This is virtually a costless activity on behalf of the state. It is also not inflationary, as the backing, the physical cash, cannot be spent, as it sits in reserves.

(3)     The money supply can neither expand nor contract at this specific point.

(4)     The banks, where they had current liabilities, now no longer have them as they are fully reserved.

(5)     This generates a one-off gain to the banks in terms of their net worth. In short, so much as they had these current demand liabilities, now they have these backed with paper notes for the same value, so their net worth has gone up by the equivalent amount.

(6)     The asset side of the balance sheet, their loan portfolio, stays intact.

(7)     As there are over £1 trillion of demand deposits in the UK banking system, the banking system’s net worth would have risen by £1 trillion.

(8)     Why give this one-off gift of largesse to the shareholders and bonus-hungry bankers? Well, don’t. Form special purpose vehicles to hold the asset side of the balance sheets of the banks to collect on these outstanding loans and you can contract out the management of this to the existing banks.

(9)     By doing this, the banks’ net worth on the day after the reform is still the same as the day before the reform, but the £1 trillion loan repayments are now paying off our national debt obligations. This is a unique one-off gain and is a byproduct of this reform.

(10)     The gold price would need to rise to back all the deposits with gold and then you fix all money in one of its historic anchors: gold (you could also use silver or other successful monies). Since gold increases in physical supply at the rate of approximately 2% per year, if productivity gains run at about this rate you will have stable prices; if productivity rates are greater, then a benign price deflation.

(11)     Let the people spontaneously discover what their most favoured money actually is.

I have suggested my own reform proposal along this line of reasoning here:

In short, I would have no-reserve banking, not 100% reserve. By this, I have suggested that all demand deposits should actually be swapped out for physical cash and the current liability of the bank just rubbed out. Then the people would actually own their own money on deposit and not be current creditors, thus I would question the need to perform point number two and substitute along the lines of what I just suggested.

Would 100% Reserve Free Banking be the End of Lending and the End of Commerce as We Know It?

This is the question that gets asked when most people have understood that 100% reserve banking would be the end of bank-created credit. Many credible and distinguished people attribute the creation of bank credit as the source of the Industrial Revolution itself. Such a powerful thing is alleged.  The noted Daily Telegraph writer Ambrose Evans-Pritchard says in his 21 October 2012 column:

One might equally say that this opened the way to England’s agricultural revolution in the early 18th Century, the industrial revolution soon after, and the greatest economic and technological leap ever seen. But let us not quibble.[13]

For those followers of Dr. Paul and those generally interested in monetary reform in this tradition, I did some research into the genesis of the Industrial Revolution to see if this assertion held any merit. I have focused my research into the County of Lancashire and what became the first industrial city of the world, Manchester.[14] In this concluding historical section, I will show that in the first third of the Industrial Revolution, private credit, bills of exchange, backed by the goods and services that were being traded for and by gold and silver, was the preferred modus operandi. The taxation of this private money by the 1815 Stamp Act led to their slow decline in favour of the privileged note issue of, in particular, the Bank of England. However, by late 1874 some 45%[15] of all credit was still private credit in the form of bills of exchange. Private credit was the preferred medium of the Industrial Revolution, and not bank-created fiduciary credit.

Early Banking in Manchester

The historian Arthur Redford in his book about merchants and foreign trade in Manchester described the early bankers of the town:

The first Manchester Bank, that of Byron, Sedgwick, Allen, and Place, was opened in 1771, in combination with an insurance office, and the Mercury welcomed it with the comment that “from the general Approbation the Scheme has met with amongst all Ranks of People, it is not questioned that it will be of infinite Utility to the Trading Part of the Town, and to the County in general.” …. It was not the only Manchester banking business, for in 1772 John Jones and Co. were “Bankers and Tea Dealers” and within thirteen years were to have offices in London from which Jones Lloyds sprang. In Liverpool also most of the early bankers, says their historian, “arose out of general merchants, some few from tea dealers, and one from linen merchants.” Even after declaring themselves bankers, the banking business was usually continued along with trading. But the use of the term banker was late, and until almost the end of our period the commerce of Liverpool, with its complex dealings in foreign exchange, and the internal trade of Lancashire seem to have been carried on mainly through the bill discounting side of the merchants’ and traders’ businesses. In Liverpool marine insurance broking was closely allied.”[16]

The key thing I observe here is that in the first part of the Industrial Revolution the issue of notes (which were the chief means of bank fiduciary credit) was a side issue and bills of exchange were the main mechanism to facilitate this massive explosion in trade. Also, this first bank in the UK’s main industrial area was nearly 100 years behind the establishment of the Bank of England and the Scottish public banks.

Data supplied by Prof. Angus Maddison shows us that from 1700 to 1820 there is 338.38% growth in measured economic activity. The next 130 years saw 960.06% growth when the Industrial Revolution was in full flow.[17] Nevertheless, with the initial explosion of activity in the mid- to late-1700s, to the early 1820s, we see the prime industrial county in the world exist with few or no banks and banks not providing credit services as we know them today, and clearly not to its detriment.

Economic historian T. S. Ashton quotes William Langton (a driving force behind the founding of the Manchester Statistical Society in 1833) writing later in the 19th century:

“It is exceedingly natural,” said Langton, “that those banks which still retain the privilege of issuing their own notes should desire to retain it, since it naturally adds to their profits; but it has always been recognised in the great industrial district of Lancashire that it is no essential condition to the wielding of manufacturing and commercial enterprise, and that the banks not possessing this privilege have not stinted their customers of any legitimate accommodation.”[18]

Langton also notes their usefulness vis-a-vis other modes of money:

My personal memory of trade only extends back to the year 1820; but at that time the Liverpool merchants received nothing but bills in payment from Manchester of their cotton invoices; every such payment, if in what was called promiscuous paper, requiring a calculation of interest to make a settlement per appoint. This practice gradually disappeared with the resumption of cash payments by the Bank of England and the lowering of the standard rate of interest; but if economy of interest of money is to be taken as the special recommendation of any particular kind of circulating medium, this one surely ought to bear the palm![19]

W.T. Crick and J.E. Wadsworth note the significance of Manchester and the nearby City of Liverpool by observing:

Yet, in spite of Lancashire’s advanced industrial organization, banking was rather later to develop than in some other areas. No banks are recorded in Manchester until 1771 or in Liverpool until 1774, and when eventually they were formed, they do not appear to have acquired note circulations except in a few unimportant instances.[20]

Ashton describes the special preference for bills of exchange over notes:

These are reasons explaining the ubiquity of bills of exchange at this period. The special preference of Lancashire for bills rather than notes is a matter deserving of research. It arose, no doubt, out of a high degree of commercial confidence, no less than out of a low degree of trust in note-issuers, and the fact that Lancashire bought raw material from distant places and sold products in distant markets must also have engendered a preference for a document the circulation of which was not confined to the sphere of operations of a local bank. As time went on the domestic bill came to play a smaller part in commercial transactions: the increase of the stamp duties after the Napoleonic War dealt a blow to the system; and the growth of large banks of deposits with many branches, together with the shortening of the customary terms of credit, led to a substitution of cheques for bills in inland trade during the later decades of the nineteenth century. But in the period with which we are concerned cheques were in their infancy and the bill had no serious rival as a medium of exchange between traders.[21]

Ashton also gives us clues as to why they have almost vanished today from the commercial idiom as the stamp duty applied to them was less advantageous vis-a-vis note or chequebook issue as the latter provided quicker redemption in money possibilities.

If we dig a bit further into the historical record we see that these bills arose spontaneously to fulfill a need to be able to facilitate the smooth transmission of trade. A wonderful book written by Alfred P. Wadsworth & Julia De Lacy Mann, The Cotton Trade and Industrial Lancashire 1600-1780, documents this history quite thoroughly:

We have seen Marsden as a manufacturer, putting out cotton and yarn through his agent and debiting the materials and wages against the value of the finished goods. On the other side he maintained a London house, through which he bought his raw materials and sold his fustians, and in connection with which he conducted extensive operations as a bill discounter. Between 1688 and 1690 he was involved in a maze of lawsuits, from which some account of his business may be constructed


Having “constantly great and considerable sums of money in his hands” [Marsden] lent money to other dealers in return for their bills on London; or he “furnished them with bills of exchange for payment of considerable sums of money at London to them or their order, or to such persons as they appointed to receive the same,” either receiving cash, or, generally, giving them credit at an agreed rate of interest. When they failed to pay him for the bills he had given them, he would take an assignment of their goods at Liverpool —cotton or linen yarn, promissory notes, or bills drawn on their London debtors. But apart from his own trading credit, he had “for many years past been intrusted or employed with greate parte of the monies retorned out of the county of Lancaster to London.”[22]

Marsden the industrialist had become the banker as well as the chief remitter of revenues back to Lancashire and the principal collector of taxes. Daniel Defoe, trader, writer, and journalist, remarked in 1727, that:

[A] very great part of the bills drawn out of the several counties in England upon the tradesmen in London, such as factors and warehousekeepers, are made payable to the General Receivers of the several taxes and duties, customs and excise, which are levied in the country in specie, and the money is remitted by those collectors and receivers on account of those duties; this generally appears by the bills or endorsements, which often mention it in these words for his Majesty’s use.[23]

Thus credit was granted and discounted bills accepted and paid with specie, not with notes or other such fiduciary credit. The Crown accepted these bills!

In commenting upon the various inaccuracies with traders being bankers, after an extensive investigation into the disputes listed in the court records, Wadsworth and Mann conclude:

Much might be said of the use of the bill in the general system of credit, but enough, perhaps, has been suggested in earlier pages to indicate its importance. The bill on London, then as a century later the dominant form, entered at every stage, and into every form of transaction, ran from the smallest to the largest sums, and passed even more freely than cash. The financial mechanism which turned on the bill, the promissory note, and other credit instruments, and has here been summarily illustrated, bulks large in all the commercial manuals of the time. … It is apt to be forgotten that the credit machinery of industries like the textile trades was hardly less extensive before the foundation of the country banks than it became after.[24]

Unwin, Hulme, and Taylor did a fantastic investigation into the affairs of Samuel Oldknow and his mill at Mellor. There is also some evidence to show why Lancashire rejected bills vs. notes:

Enough has been said to show the almost desperate condition of Oldknow’s affairs at the beginning of 1793. He had invested an immense capital—for those days—in the fixed forms of land, buildings, and machinery which could not yield any return without the assistance of commercial credit—and owing to the outbreak of war commercial credit had almost ceased for the time being to exist. No fewer than 872 bankruptcies were recorded between November 1792 and July 1793. The problem of credit currency became acute. The country banks, which had multiplied greatly during the previous decade, had produced an over-issue of notes, some of them for such small amounts as to provoke the derisive issue by a Newcastle cobbler of a note for two-pence. But the notes even of the sounder banks were now returned on their hands and many were obliged to close their doors.[25]

The instability that these free banks issuing fiduciary credit afforded the industrialist in the times of crises was very destabilising, as you did not want to become a creditor to a bankrupt banker. This is one way to accelerate your own potential to become bankrupt. So commercial credit, or bills backed by real goods, was sought in preference.

Why did these Lancashire Bills Decline?

Henry Thornton, an economist, banker, and Parliamentarian, commented on the demise of bills to the favour of notes in 1802: “Some Bank of England notes have also been recently employed in the place of small bills on London, the use of which has been discouraged by the late additional duty on bills and notes.”[26]

Redford discusses the response of Manchester merchants to the duties and taxes imposed on bills of exchange:

A much more protracted struggle, extending throughout the second quarter of the nineteenth century, was waged by the Manchester merchants against excessive stamp duties on various kinds of legal documents. … Bills of exchange and promissory notes were first subjected to stamp duties in 1782; a general Stamp Act of 1815 had increased the duties, which thenceforth discriminated between short-dated and long-dated bills. In the post-war period the average duty on all bills of less than £50 was 1/2 per cent.; but this charge was felt to be prohibitive, and had in Manchester caused bills to be almost completely replaced by bank notes. Bank notes, however, were considered to be a much more inconvenient and risky means of payment, since they were payable “to bearer” and not “to order.” The Manchester Chamber of Commerce therefore moved in 1822 for the reduction of the duties, and sent up several petitions on the subject, to the Prime Minister, the Chancellor of the Exchequer, and the Houses of Parliament. The petitioners described the serious inconvenience to business which had resulted from the virtual extinction of “a description of currency of great convenience and security”; they suggested a greatly reduced scale of duties, and argued that, if this were adopted, not only the business community but also the revenue would benefit greatly, because of the increased use of bills of exchange.[27]

The Bank of England (BoE) was still a private bank at the time. However, as the government’s favoured bank it had certain privileges and was always lobbying for more. The 1815 Stamp Act made the reissue of bills of exchange virtually impossible. Some were taxed up to 460% higher than Bank of England note issue, or subject to great penalty that made the issue of private credit by other banks more expensive than BoE note issue. In 1825 the Bank of England set up a branch in Manchester specifically to take advantage of the terrible taxation placed on private bill issue and make sure that those pioneers of the Industrial Revolution had to take BoE credit.

The significance of Manchester as the prime industrial area of the world at the time does make it a meaningful and worthy study area from which we can extrapolate, hopefully, our findings to the wider canvas of today and I submit that in the absence of bank-created credit we, like our ancestors, have nothing to fear. Indeed, like the pioneers of the Industrial Revolution, we should embrace private money solutions such as bills of exchange and rely on the lending of real savings to provide real capital to entrepreneurs and not bank credit created out of nowhere. Full-reserve systems are not only stable, but growth enhancing. Lending does not die as many advocates of fractional reserve banking dread.

[1] Arizona Jewish Post, 18 September 1998

[2] Report from Select Committee on Banks of Issue, Ordered, by The House of Commons, to be printed, 7 August 1840.

[8] Gordon Kerr, “The Law of Opposites: Illusory Profits in the Financial Sector.”

[12] Huerta de Soto, Jesus. Money, Credit, and Economic Cycles. 2nd edition. Auburn, AL: Ludwig von Mises Institute, 2009, pp. 739-740.

[14] Although the City of Manchester is now part of Greater Manchester or the Greater Manchester Urban Area, prior to 1835 it was part of the Salford Hundred of the county of Lancashire. By 1853, it had reached full City status.  So for the majority of this essay’s focus, when Lancashire is referred to, it certainly should be read to be synonymous with what is the heart of Manchester City today. Also, you will see Liverpool mentioned as well, often in the same light as Manchester. This is due to their close geographic connection and the Port of Liverpool being often the import and export venue for the Manchester manufacturers.

[15] Dun, John. British Banking Statistics. London: E. Stanford, 1876, p. 87.

[16] Redford, Arthur. Manchester Merchants and Foreign Trade. Manchester: Manchester University Press, 1934, p. 248.

[17] Maddison, Angus. Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History, Oxford: Oxford University Print, 2007. (Table can also be found at

[18] Ashton, Thomas Southcliffe. Economic and Social Investigations in Manchester, 1833-1933. London: P.S. King & Son, 1934.

[19] Langton, William qtd. in Ashton.

[20] Crick, W.F., and Wadsworth, J.E. A Hundred Years of Joint Stock Banking. London: Holder & Stoughton, 1936, pp. 142-143.

[21] Ashton, Thomas Southcliffe. An Eighteenth-Century Industrialist: Peter Stubs of Warrington 1756-1806. Manchester: Manchester University Press, 1939, p. 139.

[22]Wadsworth, Alfred P., and Mann, Julia De Lacy. The Cotton Trade and Industrial Lancashire, 1600-1780. Manchester: Manchester University Press, 1931, pp. 92-93.

[23] Defoe, Daniel, qtd. in Wadsworth and Mann,  p. 93.

[24] Wadsworth & Mann, p. 96.

[25] Unwin, George, Hulme, Arthur, and Taylor, George. Samuel Oldknow and the Arkwrights: the Industrial Revolution at Stockport and Marple. Manchester: Manchester University Press, p. 79.

[26] Thornton, Henry An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802), London: George Allen and Unwin, 1939, note to p. 214.

[27] Redford, p. 209.


The best opportunity for the rehabilitation of Austrian economics

In a recent email, Sean Corrigan highlighted the following excerpt from Ludwig M. Lachmann‘s essay Austrian Economics in the Age of the Neo-Ricardian Counterrevolution. It was written in 1976.

The best opportunity for the rehabilitation of Austrian economics today is, I regret to say, to be sought in the permanent inflation the Western world has suffered since the Second World War. This is certainly not the fault of Austrian economists; there has been no lack of warnings from their side.

We live in a world in which prices can only rise and never fall, because the public has come to believe that a widespread fall of money wage rates in the face of a falling demand for goods and services would be intolerable. A world, however, in which all relative price adjustments have to be made against a background of continuously rising money prices and wages is one in which money is no longer a store of value: it can only depreciate, never appreciate. The process of inflation must accelerate once everybody understands what is happening.

Faced with this situation neoclassical economists, on the whole, have (predictably?) behaved badly. Some have distinguished between cost-push and demand-pull inflations as though we were dealing with a succession of historical processes of inflation and not one indivisible process. Some would have us believe that there is a choice between a little more unemployment and a little more inflation. The facts of the inflation now accelerating all over the Western world speak for themselves, though the econometricians may not understand the language. A mind for which the economic world is a complex system of given variables seems quite unable to grasp a kaleidic world. The facts of a world of accelerating inflation elude it.

Some neoclassical economists have shown themselves to be rather uninhibited inflationists. According to Kenneth J. Arrow:

The rates of inflation with which we have had to contend impose no insuperable problem or even major difficulty to the operation of the economic system, nothing comparable to the major depressions of the past. Individuals will learn and have learned to deal with inflation making their plans to take expected inflation into account. The economic system and the government will create and are creating methods of mitigating the effects . . . . Some analysts feel that inflation will inevitably accelerate, but others will note that in the past peacetime inflation has tapered off.

Second, we may have some reasonable hope that economic research and experimentation in policymaking, between them, will evolve more sophisticated means of managing the overall economy.[9]

Solow expressed an even more striking view:

In a monetary economy, it is natural to amend the definition of a steady state to require a constant rate of inflation; since everything else is growing exponentially, the price level ought to be no exception. [10]

Neo-Ricardians have been far more cautious about inflation. Hayek and Joan Robinson not merely agreed on the substance of the matter but actually, though no doubt unwittingly, used the same metaphor:

An inflationary economy is in the situation of a man holding a tiger by the tail.[11]

Faced with this terrible but challenging situation Austrian economists today have a triple duty. They must tell the public that:

1. The real cause of the accelerating inflation lies in a change in the social climate that, engineered by the left intelligentsia, took place about a half-century ago and resulted in a taboo on downward adjustments of money wage rates.

2. A market economy requires a money that can serve as a store of value, a money in terms of which prices are as likely to fall as they may be to rise. (An absolutely stable price level is impossible.) No such money exists today.

3. None of the nostrums peddled by economists in many countries today involving price and wage controls will work, and they may well paralyze the market process.

[9] Kenneth J. Arrow, “Capitalism, for Better or Worse,” in Capitalism: the Moving Target, ed. Leonard Silk (New York: Quadrangle, 1974), pp. 105–113.

[10] Robert M. Solow, Growth Theory: An Exposition (Oxford: Oxford University Press, 1970), p. 66.

[11] Joan Robinson, Economic Heresies (London: Macmillan & Co., 1971), p. 95; Friedrich A. Hayek, A Tiger by the Tail, ed. Sudha R. Shenoy, Institute of Economic Affairs, Hobart Paper 4 (London, 1972), p. 112.


AEP and “The Chicago Plan Revisited”

Towards the end of last year, Ambrose Evans-Pritchard discovered the IMF working paper “The Chicago Plan Revisited” (PDF), which “revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression”.

He was perplexed:

Arguably, it would smother freedom and enthrone a Leviathan state. It might be even more irksome in the long run than rule by bankers.

Personally, I am a long way from reaching an conclusion in this extraordinary debate. Let it run, and let us all fight until we flush out the arguments.

One thing is sure. The City of London will have great trouble earning its keep if any variant of the Chicago Plan ever gains wide support.

In the spirit of the second paragraph, I intend in this essay to outline a more accurate history of the antecedents of this plan advocated by the Chicago monetarists.  I show the Austrian heritage that predates this, and show how and why the Austrian proposal of Jesus Huerta de Soto is actually freedom-enhancing. On the way, we will also suggest where Ambrose Evans-Prichard may wish to revise his views on the origin of money.

The Austrian School settings of what has become known as the Chicago Plan

I draw to your attention this letter between Prof Jesus Huerta de Soto and the two IMF authors, sent on the 9th of October:

Dear Michael and Jaromir,

After reading the e-mail between my disciple working in the Stability Department of the Bank of Spain Dr. Antonio Pancorbo and Michael Kumhof (August 29 and 31, 2012) I would like to stress the point that the 100 per cent proposal was launched for the first time by Ludwig von Mises in the 1912 first edition of his “Theory of Money and Credit”, as recognized by the Chicago School economists of the 1930’s (see specially Albert G. Hart, “The Chicago Plan of Banking Reform”, Review of Economics Studies 2, 1935, footnote p. 104). Of course, in 1912 the Gold Standard was still in force, but this should not be interpreted as if there should be a necessary link between the 100 per cent proposal and the reintroduction of the Gold Standard. Although Austrian economists generally support both reforms, they would be happy, as a second best, with the 100 per cent proposal for the reasons originally given by Mises in 1912 (specially the need to avoid artificial credit expansions not backed by previous real genuine savings). In my opinion your most interesting paper would be improved in its part dedicated to the history of the 100% proposal with the recognition to the Mises original contribution.

Furthermore, if you should have considered in your model the huge malinvestments induced through each cycle by credit expansions financed by the current fractional reserve banking system (which are analyzed in detail by the Austrian Business Cycle Theory), the introduction of the 100 per cent reserves reform would produce output gains significantly higher than the 10 per cent you mention in your paper.

Finally you probably will be interested to know the growing political and popular debate on the 100 per cent reform that is taking place in Europe. To show this see enclosed the “Hayek Memorial Lecture” I delivered at the London School of Economics in which I mention the piece of legislation proposed by two Tory MP’s at the British Parliament aimed at the establishment of 100 per cent banking for demand deposits, as well as the English version of the movie produced by my department of economics at King Juan Carlos University that was showed at the Spanish TV defending the 100 per cent proposal and which got 7 per cent of total audience (!__english ).

Sincerely yours,

Jesús Huerta de Soto

Catedrático de Economía Política

Universidad Rey Juan Carlos

P.S.: From the methodological point of view I think we should be a little bit more humble regarding both the evaluation of the historical “evidence” (that Michael Kumhof believes shows “unequivocally” a pure fiat money system is far superior to a gold standard) and the “evidence” obtained from your model (that should not be considered more than a “potentially illustrative abstraction”).

A full video and the speech of my 2010 Hayek Lecture at the LSE where Prof Huerta de Soto spoke are available here.

Prof Jesus Huerta de Soto’s 1998 book, translated to English in 2006 as Money, Bank Credit and Economic Cycles, can be downloaded here (PDF).

Chapter 9 discusses all the 20th Century proposals for reform on these lines and the Nobel winners who have supported proposals in this tradition. Huerta de Soto then discuses his proposal and the implications for a free society. Ambrose Evans-Prichard may learn much from these links to serious scholarship.

In short, Huerta de Soto swaps immaterial demand deposits for physical cash. He does not use bonds. The physical cash is a one-off printing of notes by the state in direct exchange for ownership of these bank liabilities (the demand deposits), which it can promptly destroy, thus leaving the banks and their customers owning what they think they own: their own money. And the banks, being liberated from having these current liabilities, now have the asset side of their balance sheet intact with no demand deposit liability. The increase in bank net worth should be able to pay off the national debt, which of course is simply a byproduct of this reform. The real aim is to fix money to gold and abolish the central bank, which would then remove monetary socialism from our system. With stable and honest money, redeemable in a commodity once more, and with governments nowhere near it, freedom and liberties would be massively boosted. However, it is best to read the actual proposal rather than my quick and dirty summary.

Evans-Pritchard’s Telegraph colleague, Daniel Hannan, MEP, asked me to put forward this proposal in no more than 1200 words and offer a reward for anyone who could refute it. I did, the link is here and no one has refuted it. If you read through the comments thread, you will see various attacks and rebuttals and points of clarification.

Fantastical as this all may sound, in the cold light of day it does stack up and it may well be the only solution left to the authorities should the system collapse again. After all, not much good can come from nationalising an already state-dominated money and banking system.

The origins of money

Ambrose Evans-Pritchard has a different view as to the origins of money from myself. He disagrees with the account of Adam Smith and he claims that Aristotle says, in Ethics, that money was fiat and derived its value from the state. I will see if his assertions can withstand scrutiny by going to the texts themselves, and I will take this in chronological order.


The claim:

Anthropological studies show that social fiat currencies began with the dawn of time. The Spartans banned gold coins, replacing them with iron disks of little intrinsic value. The early Romans used bronze tablets. Their worth was entirely determined by law – a doctrine made explicit by Aristotle in his Ethics – like the dollar, the euro, or sterling today.

In all of the works of Aristotle, at best we may find 20-30 pages of economics. I find nothing on the origins of money in Ethics. I am happy to be proved wrong, but I do find the relevant points in his Politics which I reprint in full from “The Complete Works of Aristotle , Vol 2″ – John Barnes (Princeton / Bollingen Series LXX1.2, 1257 a1, Book 1, 9, line 18 to line 10 of 1257b1, pages 1994-1995)

In the first community, indeed, which is the family, this art is obviously of no use, but it begins to be useful when the society increases. For the members of the family originally had all things in common; later, when the family divided into parts, the parts shared in many things, and different parts in different things, which they had to give in exchange for what they wanted, a kind of barter which is still practiced among barbarous nations who exchange with one another the necessaries of life and nothing more; giving and receiving wine, for example, in exchange for coin, and the like. This sort of barter is not part of the wealth-getting art and is not contrary to nature, but is needed for the satisfaction of men’s natural wants.


The other or more complex form of exchange grew, as might have been inferred, out of the simpler. When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use. For the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value.

When the use of coin had once been discovered, out of the barter of necessary articles arose the other art of wealth getting, namely, retail trade; which was at first probably a simple matter, but became more complicated as soon as men learned by experience whence and by what exchanges the greatest profit might be made. Originating in the use of coin, the art of getting wealth is generally thought to be chiefly concerned with it, and to be the art which produces riches and wealth; having to consider how they may be accumulated. Indeed, riches is assumed by many to be only a quantity of coin, because the arts of getting wealth and retail trade are concerned with coin.

The natural and spontaneous discovery by man of money, as the final means for complex exchange, that over and above barter, was seemingly explored by Aristotle in Politics and not in Ethics. Also there is no mention of fiat money. There is also the traditional story of the origin of money as a solution to the double coincidence of wants. Another commodity, the most marketable, called money, was used to facilitate indirect exchange. All of this from Aristotle would seem to be diametrically opposed to Evans-Pritchard’s understanding of the great polymath.

Aristotle can be cited as one of the first economists to talk about the spontaneous origins of money, but he has erroneously been presented as an intellectual ancestor to Georg Friedrich Knapp, author of ‘The State Theory of Money’. The phrase “they put a stamp upon it” has been taken to imply that money has value because the state has endorsed it. Some people put their 21st century hats on, and assume the state introduced the quality stamp, but these were private mints stamping money; there is no evidence of state-owned mints at this time. More importantly, the stamp simply gave comfort to users of money that the coins had the requisite metallic content. This prevented deception, supporting the subjective value that money-holders attached to money, but it did not create the subjective value. This is a point lost by many Chartalist thinkers.

Ambrose Evans-Pritchard would have us believe that private money is an aberration:

The conjuring trick [of the Chicago Plan] is to replace our system of private bank-created money — roughly 97pc of the money supply — with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Money was a means to overcome barter. Some two and a half thousand years ago, Aristotle noted how this was a spontaneous, market-driven process. It is true that the notes and coins produced by today’s states form a small percentage of the overall supply of money. Money has always been largely a creature of the private sector, though there is also a long history of government meddling and debasement.  Here’s what Adam Smith has to say on the matter:

From the time of Charlemagne among the French, and from that of William the Conqueror among the English, the proportion between the pound, the shilling, and the penny, seems to have been uniformly the same as at present, though the value of each has been very different; for in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins. The Roman as, in the latter ages of the republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth part of their original value. By means of those operations, the princes and sovereign states which per-formed them were enabled, in appearance, to pay their debts and fulfill their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.

All value is determined subjectively. The politicians in the Weimar Republic could not convince their citizens to accept the value of the money that they were issuing in bucket loads. Like King Canute, they can stand in front of the sea and command it to go back, but the millions of subjective valuations will never respond to a state decree of value.

Adam Smith

Let us now consider Ambrose Evans-Pritchard’s reference to Adam Smith and his views on the origin of money.

It is a myth – innocently propagated by the great Adam Smith – that money developed as a commodity-based or gold-linked means of exchange. Gold was always highly valued, but that is another story. Metal-lovers often conflate the two issues. 

When accusing a scholar of such standing as Adam Smith to be labouring under a myth, you really have to be sure of what you are alleging. Again, we will go to the original source and see if AEP’s claim stacks up to closer scrutiny.

3rd Edition 1784 Pages 33-42



The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry. Many different commodities, it is probable, were successively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce; and, though they must have been a most inconvenient one, yet, in old times, we find things were frequently valued according to the number of cattle which had been given in exchange for them. The armour of Diomede, says Homer, cost only nine oxen; but that of Glaucus cost a hundred oxen. Salt is said to be the common instrument of commerce and exchanges in Abyssinia; a species of shells in some parts of the coast of India; dried cod at Newfoundland; tobacco in Virginia; sugar in some of our West India colonies; hides or dressed leather in some other countries; and there is at this day a village in Scotland, where it is not uncommon, I am told, for a workman to carry nails instead of money to the baker’s shop or the ale-house.

In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce any thing being less perishable than they are, but they can like- wise, without any loss, be divided into any number of parts, as by fusion those parts can easily be re-united again; a quality which no other equally durable commodities possess, and which, more than any other quality, renders them fit to be the instruments of commerce and circulation. The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep, at a time. He could seldom buy less than this, because what he was to give for it could seldom be divided without loss; and if he had a mind to buy more, he must, for the same reasons, have been obliged to buy double or triple the quantity, the value, to wit, of two or three oxen, or of two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in exchange for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for.

Different metals have been made use of by different nations for this purpose. Iron was the common instrument of commerce among the ancient Spartans, copper among the ancient Romans, and gold and silver among all rich and commercial nations.

In summary , the division of labour causes and excess of goods needed for direct exchange, which allows a whole host of other commodities to be used to facilitate indirect exchange until various metals get settled on.

In discussing the use of metals and the control of the abuse of weights he comments as follows:

To prevent such abuses, to facilitate exchanges, and thereby to encourage all sorts of industry and commerce, it has been found necessary, in all countries that have made any considerable advances towards improvement, to affix a public stamp upon certain quantities of such particular metals, as were in those countries commonly made use of to purchase goods. Hence the origin of coined money, and of those public offices called mints; institutions exactly of the same nature with those of the aulnagers and stamp-masters of woollen and linen cloth. All of them are equally meant to ascertain, by means of a public stamp, the quantity and uniform goodness of those different commodities when brought to market.

The first public stamps of this kind that were affixed to the current metals, seem in many cases to have been intended to ascertain, what it was both most difficult and most important to ascertain, the goodness or fineness of the metal, and to have resembled the sterling mark which is at present affixed to plate and bars of silver, or the Spanish mark which is sometimes affixed to ingots of gold, and which, being struck only upon one side of the piece, and not covering the whole surface, ascertains the fineness, but not the weight of the metal.

So money arises from the people, via various commodities, with metals being selected invariably as first choice. The public minting process starts privately and then various despots, tyrants, governments get behind the stamping of coins.  Gold is a part of this process, but is one of many commodities. The key point is that money started its life as a commodity. Further on in this section, Smith gives many examples in history of how various commodities were used and references various texts to prove it.  Pliny is quoted from the Timaeus, Abraham and Ephron are used as examples, along with Henry III, Henry VIII and Robert the Bruce.

I doubt Smith is labouring under a myth. I find his reasoning and examples compelling.

Chartalists who hold, like Evans-Prichard, that money is the creature of the state often cite various examples of credit being granted in ancient empires long forgotton, but upon closer inspection you will see that some good was being exchanged and that the creation of a running tab of credit to facilitate these exchanges only prolonged the act of completing a transaction for commodity money.

A relatively modern example is tally sticks. A notched stick was split, with one half given to the person who advanced money, and the other to the person who had received it.  Matching the unique split between the two parts made sure you could not put more notches (claims to real money) on it as further transactions were embarked upon. Note that in all of this, money was the final settlement and the initial act to kick off the transaction and the credit. All these credit instruments mentioned by the Chartalist School and State Theory of Money School miss out this critical point. Credit was always eventually settled in money. Before fiat money proper, money was always a commodity of some kind or commodity-backed. This is an indisputable fact.

With a correct understanding of money’s origin, we can understand why it has value. Understanding this will enable us to conclude that if the state tries to detach money from the valuations of it by its citizens, it will cease to be an effective money. In a short period of time it will not be money. Ludwig von Mises shows us why in his 1912 book “The Theory of Money and Credit.”



4. The Determination of the Purchasing Power of Money

As soon as an economic good is demanded not only by those who want to use it for consumption or production, but also by people who want to keep it as a medium of exchange and to give it away at need in a later act of exchange, the demand for it increases. A new employment for this good has emerged and creates an additional demand for it. As with every other economic good, such an additional demand brings about a rise in its value in exchange, i.e., in the quantity of other goods which are offered for its acquisition. The amount of other goods which can be obtained in giving away a medium of exchange, its “price” as expressed in terms of various goods and services, is in part determined by the demand of those who want to acquire it as a medium of exchange. If people stop using the good in question as a medium of exchange, this additional specific demand disappears and the “price” drops concomitantly.

Thus the demand for a medium of exchange is the composite of two partial demands: the demand displayed by the intention to use it in consumption and production and that displayed by the intention to use it as a medium of exchange. With regard to modern metallic money one speaks of the industrial demand and of the monetary demand. The value in exchange (purchasing power) of a medium of exchange is the resultant of the cumulative effect of both partial demands.

Now the extent of that part of the demand for a medium of exchange which is displayed on account of its service as a medium of exchange depends on its value in exchange. This fact raises difficulties which many economists considered insoluble so that they abstained from following farther along this line of reasoning. It is illogical, they said, to explain the purchasing power of money by reference to the demand for money, and the demand for money by reference to its purchasing power.

The difficulty is, however, merely apparent. The purchasing power which we explain by referring to the extent of specific demand is not the same purchasing power the height of which determines this specific demand. The problem is to conceive the determination of the purchasing power of the immediate future, of the impending moment. For the solution of this problem we refer to the purchasing power of the immediate past, of the moment just passed. These are two distinct magnitudes. It is erroneous to object to our theorem, which may be called the regression theorem, that it moves in a vicious circle.

But, say the critics, this is tantamount to merely pushing back the problem. For now one must still explain the determination of yesterday’s purchasing power. If one explains this in the same way by referring to the purchasing power of the day before yesterday and so on, one slips into a regressus in infinitum. This reasoning, they assert, is certainly not a complete and logically satisfactory solution of the problem involved. What these critics fail to see is that the regression does not go back endlessly. It reaches a point at which the explanation is completed and no further question remains unanswered. If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

But, the critics continue, this means explaining that part of money’s purchasing power which is due to its service as a medium of exchange by its employment for industrial purposes. The very problem, the explanation of the specific monetary component of its exchange value, remains unsolved. Here too the critics are mistaken. That component of money’s value which is an outcome of the services it renders as a medium of exchange is entirely explained by reference to these specific monetary services and the demand they create. Two facts are not to be denied and are not denied by anybody. First, that the demand for a medium of exchange is determined by considerations of its exchange value which is an outcome both of the monetary and the industrial services it renders. Second, that the exchange value of a good which has not yet been demanded for service as a medium of exchange is determined solely by a demand on the part of people eager to use it for industrial purposes, i.e., either for consumption or for production. Now, the regression theorem aims at interpreting the first emergence of a monetary demand for a good which previously had been demanded exclusively for industrial purposes as influenced by the exchange value that was ascribed to it at this moment on account of its nonmonetary services only. This certainly does not involve explaining the specific monetary exchange value of a medium of exchange on the ground of its industrial exchange value.

Finally it was objected to the regression theorem that its approach is historical, not theoretical. This objection is no less mistaken. To explain an event historically means to show how it was produced by forces and factors operating at a definite date and a definite place. These individual forces and factors are the ultimate elements of the interpretation. They are ultimate data and as such not open to any further analysis and reduction. To explain a phenomenon theoretically means to trace back its appearance to the operation of general rules which are already comprised in the theoretical system. The regression theorem complies with this requirement. It traces the specific exchange value of a medium of exchange back to its function as such a medium and to the theorems concerning the process of valuing and pricing as developed by the general catallactic theory. It deduces a more special case from the rules of a more universal theory. It shows how the special phenomenon necessarily emerges out of the operation of the rules generally valid for all phenomena. It does not say: This happened at that time and at that place. It says: This always happens when the conditions appear; whenever a good which has not been demanded previously for the employment as a medium of exchange begins to be demanded for this employment, the same effects must appear again; no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments. And all these statements implied in the regression theorem are enounced apodictically as implied in the apriorism of praxeology. It must happen this way. Nobody can ever succeed in construction a hypothetical case in which things were to occur in a different way.

Mises gives us the theory to explain the subjective value origins of money. It applies to all points in the history of money. Grasp this theory and you are liberated from the state view of money once and for all.

Will Commodity Money be the End of the City of London?

Evans-Pritchard seems to think the Chicago Plan would change the role of the City of London. Here, at last, he’s right. Banks would need to lend real savings, rather than simply extending credit. This is a good thing. Why? When you save, you refrain from consumption and put away money for future purchases.  One day you will buy goods and services made by entrepreneurs who have been lent your savings.  Thus, the right amount of money will be set aside to produce the right amount of goods and services in the future. The caveat is that entrepreneurs need to stay focused on producing what future consumers want. Thankfully, in the absence of quick and easy credit only competent entrepreneurs can survive.

With a sound banking system as suggested by Prof Huerta de Soto, and real savings and investment, we can see a return to the entrepreneurial glory days of our nation. But as long as the government retains the power to create money, our prosperity will be at risk.


Ron Paul’s monetary policy anthology

I received an email the other day from Paul-Martin Foss, Legislative Assistant at the Office of Congressman Ron Paul:

Dear Friends of Dr. Paul,

If you are receiving this email, it is because you are a friend of Dr. Paul, a witness at one of our monetary policy hearings, a contributor to what has become Dr. Paul’s Monetary Policy Anthology, or likely some combination of the three.

To honor and preserve Dr. Paul’s legacy as Chairman of the Subcommittee on Domestic Monetary Policy, we have compiled an anthology containing all of Dr. Paul’s activities as chairman. It contains all of his hearings within the DMP subcommittee, transcripts of our Tea Talk Lecture Series, transcripts of his exchanges with Fed Chairman Bernanke, etc.

As a single document, the anthology as formatted runs to over 5000 pages, so we are splitting it into multiple sections and hosting it on Dr. Paul’s Congressional website. Today is the only day that those files will be available online, because today is the last day of the 112th Congress and our website will likely be taken down by close of business today.

Mr Foss subsequently uploaded the files to Dropbox for posterity. We have also archived them in our Downloads section. Here are the direct links:


Communist approval for western central banking

I received an interesting email recently from a distinguished colleague in Spain. He was looking at the Central Bank of Cuba’s website where they state their monetary policy. He said to me, “you could ask your readers if they can grasp similarities and spot differences (other than that they recognize they are not a market economy) as compared with the monetary policy conducted by the Bank of England or the ECB. I guess that more than one western-world central banker would feel comfy with the Cuban approach.”

Here’s the text:

In dealing with monetary policy, it is necessary to take into account that it adopts particular characteristics in the case of Cuba, since there is not a market economy but a central planning, mainly, of a financial type.

In keeping with these considerations, the instruments of monetary policy carried out by the work of the central bank up to date are the following: controls over exchange rates and legal reserve ratios, among other provisions.

In order to make up and implement monetary policy, in 1998, it was created the Comité de Política Monetaria (Monetary Policy Committee) in Banco Central de Cuba which gathers weekly with various objectives: to analyse money liquidity development; give its opinion on interest rates to be applied on the financial system; examine the exchange market where Casas de Cambio CADECA S.A. operates and, in general, inspect, know and decide on everything concerning the country’s monetary policy.

Since 1999, important progress has been achieved in the formulation and implementation of monetary policy. In this sense, measures and instruments has been put into practice to adequate the monetary situation of enterprises as well as of the population to the development of the economy.

In that year, interest rate policy for the national currency was modified, fixing ceilings of 5,0 percent for the short-term and of 7,0 percent for the medium- and long-terms; this way, the high number of purposes and of interest rates prevailing until then were eliminated. As part of that new policy, banks were given the possibility to move those ceilings to a +/- 2,0 percent, depending on the purpose of the credit, rating of the borrower and other considerations, always taking into account the risk analysis that may be effected. Accordingly, interest rates for credit granting may range from 3,0 to 9,0 percent, without meaning an onerous financial burden for enterprises.

In regard to credit policy, it is based on effecting financing in national currency as well as in foreign currency through financial intermediaries under a strict risk analysis.

In relation to loans made to the population in national currency, interest rates approved by the end of 1998 are still applied for three loan categories: consumer loans with an interest rate up to 8,0 percent; investment loans with a 9,0 percent as maximum and cash loans with an interest rate up to a 9,0 percent, also.

Likewise, as of the 2000, banks are authorised to attract fixed deposits in national currency from natural persons with attractive interest rates shifting from an annual 2,5 to 7,5 percent, according to the term, that may vary from 3 months to 3 years. This measure allows the population to place new resources in this savings method or to immobilise part of the ordinary savings they hold for specific time periods, thus having a favourable impact in monitoring and controlling the money supply.

Interest rates of loans to enterprises in freely convertible currency are at reasonable levels, around 11,0 percent, thus redounding to an acceptable cost of financing to the economy.

Interest rates on deposits in foreign currency are fixed by commercial banks directly and related to international interest rates prevailing in each moment.

At the same time, commercial banks have been authorised to take fixed deposits in national currency from enterprises which are engaged in the entrepreneurial improvement system.

Legal reserve or minimum reserve ratio is continued to be applied on demand deposits of commercial banks. It is fixed at 10,0 percent for national currency and at 5,5 percent for foreign currency. This instrument of monetary policy has enable it to act on liquidity of the banking system and, therefore, on expansion or contraction of credit given to the economy.

Work has been carried on in making a system of monetary aggregates with the objective of gradually improving control over the money supply. These monetary aggregates include national currency as well as foreign currency. Their components are liquidity held by the population, on demand or for a term, plus savings balances from enterprises and other entities operating within the economy. Likewise, it has been determined the monetary base which includes cash in circulation outside the central bank plus commercial banks’ reserves deposited in the central bank.

In this issue, it is important to underscore that, due to the characteristics of our economy, the most important component of the monetary aggregates in order to monitor price behaviour is, precisely, liquidity held by the population which includes cash in circulation and call deposit accounts.

On the other side, work is being done to estimate, among other elements, money demand of the economy by means of econometric techniques, counting on, to that purpose, with the advisory of specialists from central banks of Latin America.

In relation to the exchange market, the CADECA’s informal market exchange rate which had remained stable for two years at about 20 Cuban pesos for one dollar, by the end of 2001, it was depreciated up to about 26 pesos for one dollar. This was mainly due to the international events and the impact of the world economic recession on the Cuban economy.

The existence of a double money circulation is an aspect which makes difficult to conduct Monetary Policy at present. This is an issue where attention is focused on and whose solution is linked to the growth of the country’s economy, the increase in financing of the Current Account deficit in the Balance of Payments, mainly at medium- and long-terms, and to the increase of the International Reserves to acceptable levels. Along these years, specialists from Banco Central de Cuba have carried on different research works in which experiences from other Latin American countries facing a similar situation have been analysed.


The motive powers of destructionism

Its a great pleasure to wake up in the morning on holiday and read something very true, as always, from Mises.

Its also a great pleasure to get emails from fellow Cobdenites. One of our supporters sent me this link to a recent Bloomberg article. In short, it has got on the band wagon of GDP targeting for the central banks. This is when the nine central planner magicians, oh, sorry, I mean economists, of the MPC choose another target to set their monetary goals.

Little thought is given to how wealth is actually created. This should not be expected any more from people who profess to know something about the economy. That requirement went out of the window many decades ago. Granted, this is akin to a doctor not being able to take a patient’s pulse, but this is now the norm.

Anyway, here is a small chapter from Socialism by Mises, written in 1922, when economists were required to know the basis of wealth creation as they fought to show how socialism could never create wealth but only destroy it. Our modern day economists would do well to take note and abandon their futile attempts to manipulate wealth creation.

CHAPTER 33 – The Motive Powers of Destructionism
1 – The Nature of Destructionism

To the socialist, the coming of Socialism means a transition from an irrational to a rational economy. Under Socialism, planned management of economic life takes the place of anarchy of production; society, which is conceived as the incarnation of reason, takes the place of the conflicting aims of unreasonable and self-interested individuals. A just distribution replaces an unjust distribution of goods. Want and misery vanish and there is wealth for all. A picture of paradise is unfolded before us, a paradise which—so the laws of historical evolution tell us—we, or at least our heirs, must at length inherit. For all history leads to that promised land, and all that has happened in the past has only prepared the way for our salvation.

This is how our contemporaries see Socialism, and they believe in its excellence. It is false to imagine that the socialist ideology dominates only those parties which call themselves socialist or—what is generally intended to mean the same thing—“social.” All present-day political parties are saturated with the leading socialistic ideas. Even the stoutest opponents of Socialism fall within its shadow. They, too, are convinced that the socialist economy is more rational than the capitalist, that it guarantees a more just distribution of income, that historical evolution is driving man inexorably in that direction. When they oppose Socialism they do so with the sense that they are defending selfish private interests and that they are combating a development which from the standpoint of public welfare is desirable and is based upon the only ethically acceptable principle. And in their hearts they are convinced that their resistance is hopeless.

Yet the socialist idea is nothing but a grandiose rationalization of petty resentments. Not one of its theories can withstand scientific criticism and all its deductions are ill-founded. Its conception of the capitalist economy has long been seen to be false; its plan of a future social order proves to be inwardly contradictory, and therefore impracticable. Not only would Socialism fail to make economic life more rational, it would abolish social cooperation outright. That it would bring justice is merely an arbitrary assertion, arising, as we can show, from resentment and the false interpretation of what takes place under Capitalism. And that historical evolution leaves us no alternative but Socialism turns out to be a prophecy which differs from the chiliastic dreams of primitive Christian sectarians only in its claim to the title “science.”

In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created. Since a socialist order of society cannot exist, unless it be as a fragment of Socialism within an economic order resting otherwise on private property, each step leading towards Socialism must exhaust itself in the destruction of what already exists.

Such a policy of destructionism means the consumption of capital. There are few who recognize this fact. Capital consumption can be detected statistically and can be conceived intellectually, but it is not obvious to everyone. To see the weakness of a policy which raises the consumption of the masses at the cost of existing capital wealth, and thus sacrifices the future to the present, and to recognize the nature of this policy, requires deeper insight than that vouchsafed to statesmen and politicians or to the masses who have put them into power. As long as the walls of the factory buildings stand, and the trains continue to run, it is supposed that all is well with the world. The increasing difficulties of maintaining the higher standard of living are ascribed to various causes, but never to the fact that a policy of capital consumption is being followed.

In the problem of the capital consumption of a destructionist society we find one of the key problems of the socialist economic policy. The danger of capital consumption would be particularly great in the socialist community; the demagogue would achieve success most easily by increasing consumption per head at the cost of the formation of additional capital and to the detriment of existing capital.

It is in the nature of capitalist society that new capital is continually being formed. The greater the capital fund becomes, the higher does the marginal productivity of labour rise and the higher, therefore, are wages, absolute and relative. The progressive formation of capital is the only way to increase the quantity of goods which society can consume annually without diminishing production in the future—the only way to increase the workers’ consumption without harm to future generations of workers. Therefore, it has been laid down by Liberalism that progressive capital formation is the only means by which the position of the great masses can be permanently improved. Socialism and destructionism seek to attain this end in a different way. They propose to use up capital so as to achieve present wealth at the expense of the future. The policy of Liberalism is the procedure of the prudent father who saves and builds for himself and his successors. The policy of destructionism is the policy of the spendthrift who dissipates his inheritance regardless of the future.


The hope of Osborne and the error of Osborne

The following quote is taken from page 155 of Capital and Production by Richard von Strigl, which you can download in PDF format from our downloads section, or in various formats from H/T to Sean Corrigan for drawing our attention to this note.

The Error

Financing consumption through consuming capital also occurs in what is generally recommended under the title of emergency measures in times of crises. Even though production is directly financed here, this is only done for the purpose of creating values which do not free up the invested capital. If a production integrated in the normal course of the economy is financed, then it creates a product — as we have already explained — from whose sale the further financing of this production becomes possible. If, in contrast, a street is built, then means are employed which produce a street that can naturally be valued in economic terms, too, but not a product whose sale will finance further production processes.

No more shall be said here on the question of when such an expenditure can be justified solely from an economic point of view. There is only one thing to be said: If the neighbours (and other interested parties) attain a greater return after the street is built and save this return; that is, use it for new investments, then in this case the capital invested in the street is set free via a detour. If, however, this increased return is consumed, then from an economic point of view this is a case of freezing free capital. In both cases there occurs, of course, an enrichment of such interested parties at the expense of those who have provided the means for the street (or respectively in the case of inflationary money creation: at the expense of all owners of money). A purely economic calculation of profitability of the street could take place via the formula of comparing the costs with the possible surplus return for the interested parties, whereby naturally in this formula an interest rate would have to be incorporated.

The book is one of the most accessible introductions to capital theory and the Austrian Theory of the Business Cycle in the style of Mises and Hayek. As we know, the ATBC is the only theory that can predict credit booms and busts, so if you get a chance, do read it.

Anyway, the hope of all politicians in a tough economic climate is that they can get some money from somewhere – tax, more debt, or QE – and spend it on something to hopefully create some demand and jobs where the private sector has “failed”.

The Hope

MoneyMarketing – Osborne plans state-backed bank for small businesses:

Chancellor George Osborne is planning to set up a Government-backed bank to lend to small businesses as part of wider measures to prop up the economy…

He said the small business bank would “bring together all the alphabet soup of existing schemes” which provide funding to small businesses.

Osborne said: “The weakness in our banking system is one of the biggest problems we have got. Small businesses are the innocent victims of the financial crash.”

The Financial Times reports the idea has been developed based on similar models from Germany, the US and Ireland.

The newspaper reports the bank would operate online initially, and in future could enter into partnerships with the private sector or access the securitisation market.

The Error Further Explained

Any layman with more than room temperature IQ can understand that he needs to do some useful work for somebody, either in an employed or self-employed capacity, to gain money that he can exchange for goods and services produced and provided by others. He first focuses on his most urgent survival needs, and later on the products and services that provide a “good” life.

When the government taxes, taking money productively earned by Person A and giving it to institution B to spend on person C, this is redistribution only and never new incremental wealth creation. So there is no increase in productivity or more products made for exchange than there would have been. All that has been achieved is that B and C have A’s money to spend.

When the government issues debt, and it is bought by people who have previously produced and earned (e.g. most pensioners and large numbers of savers), all we have is savings spent today on current consumption that would have been spent on tomorrow’s goods and services. So there’s nothing new to lift up the wealth of the nation on a permanent basis.

When the government buys its own debt through QE, there is no new production, just raw consumption (we may see it as stealthy confiscation of the purchasing power of all money-holders). The wealth of the nation is decreased whenever this is done.

In a well-reasoned article for the FT (“Sorting fact from fiction on Bank’s QE” – 3 Sept), Jonathan Davis writes:

You do not have to be a fully paid up member of the Austrian school to believe the long term costs of distorting price signals in the bond market may turn out to be very high, and by inducing the misallocation of capital ultimately potentially every bit as damaging as the short term benefits are positive. QE is a path that leads eventually to zombie banks, zombie property companies and zombie businesses

The corrective process of the market has been stopped. It seems we are destined for a prolonged Japan-style zombie recession that will go on for decades. If we let the corrective process start, then billions of pounds held on corporate balance sheets and in investment funds will be freed up to exercise real demand and sort out these companies – to make them produce things people want at prices they’re willing to pay.

When bank credit is granted unbacked by the real savings of others, the credit it is created “out of thin air”.  As Frank Shostak has repeatedly argued, such transactions do not enrich the nation.  They enrich some at the expense of others, and destroy wealth overall.

Savings, investment, and production are the answer, not credit and consumption.  Osborne’s scheme is especially suspect because credit and consumption will be directed according to the whims of government.

Even with the best intentions, they cannot possibly guess which projects are worthy and which are not.  Only the market can determine this.  Osborne’s project will not achieve what it has set out to achieve.