Gold price fix: enter the lawyers

First we had a glut of gold. “We Buy Your Gold” on every street corner.

Then the accusations of price rigging (having a “spot fix” with five banks on conference call doesn’t exactly inspire confidence that there won’t be collusion).
Continue reading “Gold price fix: enter the lawyers”


Timely call to open up UK legal tender laws

According to some media sources Douglas Carswell MP is today bringing a bill to the House of Commons that aims to demonopolise the UK’s legal tender laws. Very much a sign of the times, I believe you will hear a lot more about this idea in the days and weeks ahead. Already, the BBC has picked it up here.

A Conservative MP is to call for a basket of foreign currencies to be made legal tender in the UK.

Such a move would protect savers by allowing them to hold the currency least likely to be devalued, Douglas Carswell will argue in the Commons.

And it would allow consumers to shop around for the best currency deal – perhaps via a smart phone application – when buying goods in shops or online.

Read the whole article.


Stephan Kinsella goes from strength to strength

Back in 1995, I came across this fabulous journal article written by Stephan Kinsella called Legislation and the Discovery of Law in a Free Society. It made a huge impression on me and I will never forget its insights and teachings.

Sixteen years on, I am not only in contact with Stephan but I have just become aware of his latest book, Louisiana Civil Law Dictionary, described here.  No doubt having an esoteric interest for Louisiana practitioners and lawyers, my understanding is that this work will also be of interest to anyone interested in the continental, Roman, civil, Spanish and French legal traditions.


Libertarian Legal Theory

We are pleased to promote this upcoming course from the Mises Academy:

Stephan Kinsella, a libertarian attorney and writer, Senior Fellow with the Mises Institute and editor of Libertarian Papers, is teaching his second Mises Academy course later this month, entitled “Libertarian Legal Theory: Property, Conflict, and Society.”

This is a 6 week course to be held on Monday evenings, 9pm-1030pm EST (New York time) (Jan. 31-Mar. 11, 2011), with “office hours” later in the week for followup questions at an earlier time more suitable for students in Europe and elsewhere.

Kinsella describes the course in his article “Introduction to Libertarian Legal Theory,” Mises Daily (Jan. 3, 2011), and what the Mises Academy is like in “Teaching an Online Mises Academy Course,” Mises Daily (Jan. 10, 2011).

His previous Mises Academy course, Rethinking Intellectual Property: History, Theory, and Economics, was very popular with students, one noting:

Thank you so very much for all the excellent work — very few classes have really changed my life dramatically, actually only 3 have, and all 3 were classes I took at the Mises Academy, starting with Rethinking Intellectual Property (PP350) (the other two were EH476 (Bubbles), and PP900 (Private Defense)). …The IP class was a total blast — finally (finally) sound reasoning. All the (three) classes I took dramatically changed the way I see the world. I’m still digesting it all, to tell the truth. Very few events in my life have managed to make me feel like I wished I was 15 all over again. Thank you. …

Further description of the Mises Academy may be found in Daniel Sanchez’s Mises Daily article The Significance and Success of the Mises Academy.

More information on the Libertarian Legal Theory course may be found at


What is the Legal Relationship Between the Banker and his Customer?

In Parliament this Wednesday, there is a Ten Minute Rule Bill being introduced into Parliament by the inspirational and principled MP for Clacton, Douglas Carswell, with support from my co-Director at TCC, Steve Baker, the Member for Wycombe.  Carswell described the proposal in a post on Friday entitled ‘How should we reform the banks?‘, and Steve promoted it earlier today on CentreRight.

This web site has had many articles on this matter and a survey, conducted on our behalf by ICM, showed great confusion on the part of the British public concerning the legal relationship between banker and customer.

The Current State of the Law

The key case is Carr v Carr 1811 (reported in Merivale (541 n) 1815 – 17). A testator in making his bequest said “whatever debts might be due to him…at the time of his death”, the key question in this case being whether “a cash balance due to him on his banker’s account” passed by this bequest. The Master of the Rolls, Sir William Grant held that it did. He reasoned that it was not a depositum; a sealed bag of money could be, but this generally deposited money could not possibly have an ‘earmark’. Grant concluded on this point, “when money is paid into a banker’s, he always opens a debtor and creditor account with the payor. The banker employs the money himself, and is liable merely to answer the drafts of his customers to that amount.” For the legal scholars among you, Vaisey v Reynolds 1828 and Parker v Merchant 1843 both affirmed this position.

In Davaynes v Noble 1816 it was argued in front of Grant that a banker is a bailee rather than a debtor. Rejecting that argument, Grant said “money paid into a banker’s becomes immediately a part of his general assets; and he is merely a debtor for the amount.”

In Sims v Bond 1833 the Chief Justice of the Queens Bench Division affirmed in judgement “sums which are paid to the credit of a customer with a banker, though usually called deposits, are, in truth, loans by the customer to the banker.”

The House of Lords, then the highest court in the land, had its say on the matter in Foley v Hill and Others 1848, duly reported in the Clerk’s Reports, House of Lords 1847-66 (pages 28 and 36-7). In summary, the appellant in 1829 opened a bank account with the respondent bankers. Two further deposits we added in 1830 and in 1831 interest was still added. In 1838 the appellant brought proceedings against the respondent bankers seeking recovery of both the principle and interest. The counsel cleverly tried to argue that it was the duty of the respondent bankers to keep all the accounts up to date at all times and thus there was more to this relationship than that of debtor and creditor.

The Lord Chancellor Cottenham said the following in judgement

Money, when paid into a bank, ceases altogether to be the money of the principal; it is by then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into a banker’s is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor.

Thus the settled position of the law is that when you deposit, the bank becomes the owner of the money deposited and you become a creditor to the bank.

The Carswell Bill

This seems to seeks to align the law to mirror what people actually think happens: that they deposit money and it is theirs. It also seeks to allow savers to save in a term deposit, by which they knowingly and indeed willingly allow the bank to lend their money to borrowers. This relationship will then be that of a depositor lending to the bank and the bank being the debtor to the lender.

The honesty of this approach is refreshing indeed. The economic consequences are that credit granted to borrowers is from real savings and the leveraging of loans (multiple on-lending of the same deposit) that has caused such financial destruction ceases to happen. Real savings lent to borrowers will produce goods and services, and once the loans are repaid, the lenders will be in a position to buy the goods and services. This will have the very positive effect of smoothing out the credit-induced boom and bust cycle, providing us with greater sustainable financing. Credit created out of nothing only supports activities that could not get funding out of real saved resources. Think of all those nutty projects, and more recently the nutty finance projects embarked upon.

I hope this Bill gets a second reading so that Honest Money can become a major taking point in the banking reform debate.


Labour laws should be abolished

In 2006, the European Court of Justice ruled that the Department of Trade and Industry has misinterpreted clauses 3 and 5 of the Working Time Directive. Clause 3 states: “Member states shall take the measures necessary to ensure that every worker is entitled to a minimum daily rest period of 11 consecutive hours per 24-hour period”. Clause 5 says that workers are additionally entitled to at least one uninterrupted rest period of 24 hours every week.

The tricky word here is “entitled”. The DTI interpreted it to mean entitled. They instructed employers that they must allow, but need not require, employees to take these rest periods. According to the ECJ, however, “entitled” actually means obliged. Employees may not choose to take shorter rest periods, and employers must not give them this option.

The European judges are surely correct on the matter of interpretation. If the words of European legislators are open to several interpretations, then deciding which was intended is simple; it must be the one that most restricts freedom of choice. And if you think that obliged is not a possible interpretation of “entitled”, then there is much you could learn from the judiciary about post-modern semiotics.

If not surprising, the ruling may still seem unfortunate. British employees already enjoyed the right to these rest periods. When it suited them, however, they were free to take shorter breaks – perhaps to earn overtime or to negotiate a longer break for another occasion. This option was surely valuable to them. Why should the manufacturing union Amicus have asked the ECJ to eliminate it? And why should the TUC have welcomed the ECJ’s ruling?

To see why, note that in the labour market employees are the suppliers and employers are the consumers. Employers buy the labour offered for sale by workers. The Working Time Directive, as now interpreted, is a regulation about the kind of service workers may offer for sale.

Product regulations usually impose minimum standards. When it comes to labour, however, we get maximum standards. The ECJ’s ruling means that, with respect to the flexibility of hours worked, employees may not offer a product exceeding a certain quality. And that is precisely why unions support this interpretation. Maximum standard regulations are required by suppliers attempting to fix their prices above the market price.

Consider a different example. Suppose you manufactured a basic type of bicycle. If the most efficient bike-maker could produce such a bike at a cost of £100, then this would soon be its market price. In a free market, price competition between suppliers drives the price of goods down to the cost of producing them. This is nice for consumers but not for suppliers. How might you avoid this unpleasant consequence of competition?

You could try collusion. Create the British Association of Bike-Makers and, at your annual conference, agree that no one will sell bikes for less than £200. Or lobby the government to set a minimum bicycle price of £200.

Alas, a minimum price will not work on its own, because it does not stop competition on quality. If everyone must sell bikes at £200, and my competitors’ bikes are worth £100, then I can get an advantage by producing better bikes at a cost of £110. My competitors will then retaliate with a yet better bike that costs £120 to make. This process will continue until we are all making bikes at a cost of £200, and none of us is better off than when they cost £100. To keep the benefits of our minimum price, we also need to restrict the quality of the bikes on sale: we need maximum standards.

Trade unionists and employment regulators are devoted to keeping the price of labour higher than its market value. So they must also stop the suppliers of labour from competing on quality. The endeavour is corrupt in principle – indeed, it would be illegal if the product were anything except labour – and futile in practice. The legislation they favour does not eliminate competition between workers; it simply benefits some at the expense of others.

I recently managed a team of two consultants. They were of roughly equal value. John was brighter but Don worked harder, often violating the Working Time Directive. If I had stopped him, who would have benefited? Not Don. He would have been robbed of his ability to compete with John, and his chance of promotion would have been reduced. A ban on hard work benefits not those who work “too hard” but those with other qualities to offer. It rigs the competition in their favour.

It is impossible to eliminate competition between the suppliers of labour. Rule it out in one respect, such as effort, and it will merely shift to something else, such as talent. Rule it out in all economically relevant respects – allow no price or quality competition – and it will shift onto irrelevant preferences of the employer. A bigot might employ foreigners if they came at a discount. But why would he otherwise? Immigrants do better in America than in France, not because Americans are less racist, but because their labour market is less regulated.

Labour laws are intended to protect employees from employers. But no such protection is needed. Feudalism ended long ago, and the labour market is not a monopsony (a market with only one buyer). No one is forced into any particular job. Indeed, unemployment benefits mean that no one need work at all. Labour laws merely distort the allocation of labour and arbitrarily bestow costs and benefits across the population. They should not be interpreted more stringently; they should be repealed.


The Ethics of Capitalism: A Secular and a Theological Justification

The current debate about bankers’ bonuses is often seen as one of fairness pitted against the greed of those nasty capitalists,.

To me, bankers are lawfully working within the system – one  that is rotten to the core. The banking system is the greatest of all examples of State corporate capitalism. We have a central bank that is State owned, we have a legal tender law that prevents competition in the provision of the production of money, and we have private sectors banks which are licensed by the State to be its agent when it wants to monetise its very own debts and create inflation at the expense of its citizens: people who have been prudent and thrifty as well as those on fixed income.

The State has one important central intention: to hide its prolific over spending.  We have private sector banks that have legal privilege granted to them so they can use their depositors’ money to lend out many times over to entrepreneurs. They are the only type of business in the whole country  permitted do this. All other commercial enterprises at all points in time need to keep their current creditors whole, otherwise they are insolvent. There is no requirement at all in this country for any bank to keep even one penny in reserves against their depositors’ funds. In fact, it has been a stated fact of law since 1811 in Carr V Carr that “his” deposited funds are not his, but are in fact the banks’.

This fractional reserve banking system we have can only work with a lender of last resort i.e. the State owned central bank with legal tender laws. This means that in partnership with the State, the State can monetise its debts (at the expense of you and me) and the banks can keep as little reserves as they can get away with to make a return on capital that you and I in the real capitalist private sector could never do.  This encourages risk. Indeed with the banks now able to borrow at the taxpayers’ expense via the discount window (heavily subsidised short term central bank funding) and know there is a guarantee of a bail out should their gambles go wrong makes the state and the bankers two equal partners in a very unjust process.

The resulting situation is what I call ‘corporate capitalism’  (thoroughly amoral) as opposed to ‘capitalism’, which is totally moral.  This needs some explaining, as I suspect worthy people are shooting arrows at the wrong target.

We know that the free market capitalist system is without doubt the most efficient creator and allocator of resources. Adam Smith taught us that “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” in his Wealth of Nations. Self interest or the profit motive drives man to create and to provide all the multiplicity of goods and services we have enjoyed and will enjoy.

Mises in his famous book Socialism, showed us that if Society was run by planners, the price system which allows resources to flow to their most desired uses would not function. Indeed it would impoverish anyone nation that tried it. If, say. the planner could not correctly witness all the competing bids and resource allocations for metals that were capable of being used in the construction of railroad tracks (that involves many companies competing for scarce resources) he would never know which metal would be the most cost effective to build his railroad.  No one planner would be able to economically calculate, or indeed, no army of planners would be able to calculate and allocate all the resources of Society in the socialist economy better than the many millions of participants in the economy allocating resources via the price mechanism. The experiment in the Soviet bloc with socialism impoverished at least three generations and lead to wide scale death and a general shortage of life, and misery.

Hayek, in his very famous essay “The Use of Knowledge in Society” added to the critique of Mises by pointing out that absenting the price system would mean that the central planning officials would need to absorb the entire knowledge of all the people in society to effectively plan their needs. This was absurd and impossible.

All State planned schemes, from the provision of money to the provision of health and education – even in our cosy mixed economy – could be done better by an unhampered market.  We are thus weary of all bloated government departments and officials who say they can do something better for us – they can’t.

The efficiency case for an unhampered market, or free market capitalism is clear and unchallengeable. The subjective actions of freely consenting adults in a capitalist system produce the most amount of goods in the most efficient way.  But is there an objectively moral case for the capitalist system? I attempt to answer it in the remaining part of this Insight article.

First Principles: Secular Argument

I Argue

One thing that distinguishes human beings from all other life forms is our ability to communicate with each other via talking. Only human beings can make a proposition. The question of what is just or unjust only arises because I can debate or argue this point with another person.  To be able to argue my position I must be in control of my physical and mental self. I must own myself in order to be to be a human being.  I have the total right to use all my physical and mental faculties to participate in life, otherwise I cannot even exist as a human being expressing an opinion. I do not know many people who would argue with this. If I did not own my own faculties I could not participate in life except under the command of who owned me.  This also implies that just so much as I own myself, I do not own anyone else. It also follows that if I do something that violates another human being without their consent I violate their right to express their very humanness.

Thus, I deduce that by my very being , I own myself , I own my own property as me, I have a right not to be interfered with so long as I do not interfere with anyone else.  It clearly follows that if I were to interfere with someone else’s property, they would not own it.  This would deprive them of their own humanity, I suggest. This is a deduction from the axiom that to exist I need to argue. I come to this conclusion via the Haberrmasian axiom of interpersonal argument that has been so cleverly adapted by Hans Herman Hoppe in his book The Economics and Ethics of Private Property.

To argue against this you explicitly acknowledge control of your faculties, at the very least. Following Kant’s Golden Rule that a norm should be universal in its applicability should it be objectively valid, this proposition surely fulfils this requirement to be a totally objective axiomatic principle.

All ethical propositions, such as socialism, that say that you owe a duty to the State to provide for others,  are violations of the very distinguishing thing that makes you a human being and not a rock or a colony of ants.  To advocate any form or socialism, be it of the democratic variety, the communist variety, or indeed the mixed economy is to violate your very essence of being a human.

John Locke in his “Two Treatises of Government” spells out that property or,  if you like all resources exist prior to any government. Man mixes his labour with what he finds and it is by right his. Government cannot ‘dispose of the estates of the subjects arbitrarily’. Locke left us with a conundrum called “Locke’s proviso.” This is where if a man mixes his labour to own something that was not owned before; he must always leave a “sufficient” amount for other human beings.

Jesus Huerta de Soto, one of the greatest living polymath Austrian School teachers in his essay “The Ethics of Capitalism” , shows us how possibly the other living giant of the Austrian School, Israel Kirzner in “Discovery, Capitalism, and Distributive Justice”  has solved this proviso of Locke. And allows us to build the objective moral ethic of capitalism.

Socialist, social democrats and a large body of modern day liberals and conservatives have a distributive conception of justice that is about a top down approach of redistribution of scarce resources from those who do have to those who that have less, or nothing, or whose lobby groups has succeeded in extracting something from those that have. Kirzner shows us how as all human being are creative actor: they are always engaging in entrepreneurial activity to generate new goods and services.  All human beings are alert to opportunity, some to a greater degree than others. The fruits of this alertness arises via their actions. This is universally so. To not act would not create these things. So he proposes an axiom that all human beings have a natural right to the fruits of their own entrepreneurial creativity.  As these things are created out of nothing, it implies that the acting person has an undoubted right to the quiet and peaceful enjoyment of the fruits of his or her labour. If it did not exist before, it cannot be a negative to anyone else.  So Locke’s proviso is overcome by the understanding of society as dynamic and spontaneous constantly evolving process with alert actors constantly creating new goods and services that they must have an unquestionable right to own.

De Soto coins the term ‘Dynamic Efficiency’ to describe this process. He also points out that the free market capitalist system – that we know is the most efficient system – is also the most just and in fact, these two concepts are indeed two sides of the same one coin. Any form of intervention is immoral as it impedes the creative capacity of individuals to express their creativity and create all the wide range of goods and services we have. It should be pointed out that top down provision of health, education, transport, industry etc is inefficient and hence unjust as it suppresses the creative activity of human beings.  Absent the profit motive and you will get sub optimal results.

Do Soto points out that the last Pope, Pope John Paul II in his Centesimus Annus, which built on the earlier work of the Rerum Novarum of Pope Leo XIII, established the universal moral capitalist ethic by acknowledging the natural right (God given) to express your very creativity unhindered so long and you hinder no one else.

First Principle: Theological – God Endowed Rights

I Exist

Writing about the morality of capitalism in glowing positive terms as I have done above and setting it in the backdrop of universally applicable objective axioms is not as unfashionable as talking to any thinking person about God, but only just! Such is the secular society we live in; you are considered to be an ill informed mystic should you engage in “god bothering.”  The See of Peter would naturally see this differently and I am very grateful for De Soto to direct me to the pro capitalist teachings of the Catholic Church.

Are the above self evident axioms that are universally applicable in all times and in all places to everybody there because we are human or are they there because they are God endowed?

I can ague both, but I favour self evident God endowed over self evident secular, although the latter can stand on its own legs. Why?

I wrote an article about the proof God three years ago for In short, I take the Aristotelian inspired position that as I exist I know that other physical things exist. I know that each and every one of these physical things must have been caused by another physical thing. I know that nothing is infinite. If it was, I would not exist as for it to be infinite, it would occupy all time and space and I would not exist. As I exist, I know this cannot be the case. I know there is a beginning to the universe and that there are physical boundaries  to the universe, therefore I know there cannot be an infinite series of physical causes and effects as there would be no boundary and no beginning. Therefore what caused the first physical thing must indeed be immaterial if it cannot be a physical cause. This immaterial thing is what I label as ‘God’.  So I conclude God does exist and the only act I can attribute to God by a priori reasoning is that God created everything. As I like to exist I am very grateful for this and can only conclude that God has good intentions.  If I do not like to exist, I can choose not to and commit suicide. God is therefore good for me and objectively good for all human beings.  As God has created everything, he has endowed us with the ability to reason and engage in the formation of reasoned propositions, the latter which is undoubtedly a unique attribute to mankind the former quite possible unique to mankind, sets the foundation for the derivation of the rights of man and the very ethics of capitalism.

Further reading


Do it for the money

Last year two police women (WPCs) were discovered to have a reciprocal child-minding arrangement. It was initially declared unlawful. Child minders who receive payment for their services must be registered with Ofsted. And receiving payment is not restricted to receiving money. Anything of value counts, including “free” minding of your own child. These unregistered WPCs were wrongdoers.

Public outrage at the absurdity of preventing friends from looking after each other’s children caused Ed Balls, the Secretary of State for Children, Schools and Families, to intervene. He declared that reciprocal childminding was not a kind of payment after all. The WPCs congratulated him on this small victory for common sense.

Which just goes to show that the common sense of WPCs cannot be relied upon. For, despite Mr Balls’ great powers, he cannot by mere proclamation stop reciprocal childminding from being a kind of payment. His decision simply exempts this barter payment from the tax that Ofsted’s rules and registration fees impose on childminding when other forms of payment are used.

If one of those WPCs quit her police job but offered to continue minding her friend’s child for £50 a day, Ofsted’s requirements would reimpose themselves. The child may be cared for by the same person in the same place, but the introduction of money to the deal would bring with it the state’s administrative and financial burdens. Mr Balls’ “common sense” intervention thus encourages a barter economy in childcare.

This is a silly thing to do. Because money is a better method of payment than barter. While the WPCs barter, they can consume the value of the childminding work they do only in the form of childminding for themselves. This means that they will restrict the amount of childminding they supply to the amount they want to consume. If they paid each other in cash, this restriction would disappear.

As all economists know, money increases the opportunities for trade. Limit its use and many potential transactions will not take place; valuable goods and services will not be produced. And, when they are, they will often be produced by the wrong people.

For where money-based exchange is restricted, people must produce a wider range of goods, either for their own consumption or to increase the chance of having something they can swap for something they want. This is unfortunate, because the more things you do, the worse you will be at them.

In short, discouraging the use of money constrains trade, which limits the division of labour, which leads to inefficiency. Politicians ought not do it. Yet they do it all the time. They impose burdens on activities when done in exchange for money that they otherwise leave alone.

Consider the minimum wage. I am not allowed to pay someone £4 to spend an hour shopping for me. According to our government, that would be unfair, even if my employee agreed to it. Yet I am free to add an hour to my own shopping by walking to a distant supermarket in search of a £4 saving.

I am also allowed to spend an hour cooking my dinner, even if I would be unwilling to pay someone more than £3 to do it for me. Contrary to what you may have read on the Directgov website, working for less than £5.80 an hour is not illegal in Britain. It is illegal only if the payment is made in money.

Taxes have the same effect. Since most are levied on money-based transactions (with the notable exceptions of poll and property taxes), they inhibit trade and, hence, the division of labour. And the greater the rate of tax, the greater this malign effect.

Suppose, for example, that you are willing to pay up to £10 an hour to have some work done, and that the cheapest qualified labourers are willing to work for anything over £9 an hour. Then you should find someone to do the job. But if incomes are taxed at 20 per cent, the most the labourers can earn from you is £8 an hour and they will be unwilling to take on your job. You will have to do it yourself or go without.

Britain’s enormous regulatory and tax burdens on trade lead to an excess of do-it-yourself. People with neither talent nor inclination cook, garden, teach, drive and shop, to name but a few of the more common amateur activities. They are thereby drawn away from doing things they are better at and enjoy more.

What is the cost of such restrictions on the division of labour? Terry Arthur of the Institute of Economic Affairs has estimated that, at current tax levels, the cost is two thirds of every pound of tax collected. In other words, the marginal cost of transferring a pound from private hands into the coffers of Her Majesty’s Revenue is 67 pence.

Mr Arthur may be wrong, of course; estimating such “invisible”, deadweight costs is notoriously difficult. But even if his estimate is three times the real cost, the implications are profound. Taxes, minimum wages and the other regulatory burdens the government places on money-based commerce are far more costly than politicians and voters seem to realise.

Indeed, most do not recognise this cost at all. Some lament the futility of a system in which people are taxed only to receive their money back in the form of government provided services, such as education and healthcare. But they fail to see that the spinning of this money-go-round creates a terrible economic drag.

Alas, there is no prospect of an end to this waste, even if politicians understood it. When invisible costs are incurred for the sake of visible benefits, a politician will never consider them too great.


A day of reckoning: how to end the banking crisis now

Drawing on the work of Nobel Laureates in economics from three traditions, plus numerous other distinguished scholars, Cobden Centre Chairman, economist and successful entrepreneur Toby Baxendale presents an informal introduction to our proposal for honest money and the benefits consequent on the reform. See also our precis of Irving Fisher’s 100% Money.


  • The average overhang of credit to money of all banks in the United Kingdom is 34 x to its reserves i.e. its actual money base1.
  • If more than one person in 34 walks into all banks simultaneously to withdraw their deposits, there will be a system wide bank run and a mass liquidity event with systematic default and insolvency.
  • We saw the start of this with Northern Rock in the summer of 2007.
  • We attempt to paper over the cracks and restore confidence in the banking system still today – with little success2.
Sterling Liquid Assets (BoE FSR, Jun 2009)

Sterling Liquid Assets (BoE FSR, Jun 2009)

A practical, politically-acceptable proposal

Our proposal is, as Irving Fisher wrote, “The opposite of radical”:

  • Require 100% cash reserves to be held against all demand deposits; there can never be a crisis if a bank always holds 100% cash against all its demand deposits.
  • Parliament can do this with one Act.

A similar Act took place in 1844. The Bank Charter Act or “Peel’s Act” established a 100% reserve requirement for bank notes that were issued claiming to be redeemable in gold. The reality was that there were 23 notes in issue for every one unit of gold at the time, creating instability, “panic” and general economic chaos. Not a too dissimilar situation from today where we have 34 claims on money to one unit of money. Politicians in the 19th century did not see the creation of unbacked credit through accounting entries as a problem, since it was only done on a very small scale. The problem then was rampant note issue (claims to real money) well over and above the monetary base, as this was the preferred method the bankers used at the time.

It is often forgotten but when you place £1m in a savings account (in cash) in say the Royal Bank of Scotland, which has no legal reserve requirement, they then lend £970k (in credit) , keeping on average 3% of cash back in reserves, to an entrepreneur in say HSBC, who then deposits that money in HSBC. We now have one claim to the original £1m and one claim to the £970k. The money supply has moved from £1m to £1.97m – just like magic! This is credit expansion.

The reality is that across all the banks in the United Kingdom licensed by the Bank of England, we have for every £1 of money (in cash), £34 in claims to money (credit)!

Peel’s problem was the over issue of notes to gold: our problem is the over issue of credit to money.

Continue reading “A day of reckoning: how to end the banking crisis now”

  1. See the Bank of England’s Financial Stability Report. Oral evidence from Sir Fred Goodwin (RBS) and Mr Andy Hornby (HBOS) to the Treasury Select Committee was at variance with our calculations:
    Q1864 Mr Love: Sir Fred, can I ask you, following on from those questions, how leveraged was RBS at the time of the Lehman’s dissolution?
    Sir Fred Goodwin: I think there would have been a variety of different ways of looking at the leverage ratio.

    Q1865 Mr Love: I am just looking for a rough idea, order of magnitude.
    Mr Fred Goodwin: Towards the higher end but there would be others higher than us. We would have loans to deposit.

    Q1866 Mr Love: What was the ratio?
    Sir Fred Goodwin: 110% but there would be others similar to that, there would be some higher and some lower. We were to the right of the middle, we were at the higher end of the middle.

    Q1867 Mr Love: Mr Hornby, can you tell us what it was for HBOS?
    Mr Hornby: Yes, our loans and advances were around £450 million, our customer deposits were about £250 million, therefore the percentage of one to the other was around 57%.

    See – Page EV246, Q1864 []

  2. See for example, Caithness, “My Lords, the Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. The noble Lord, Lord Peston, has just said that it is the fault of the bankers. I agree with him up to a point, but would go further and say that the fault that really needs correcting is our whole banking system.” []