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By Toby Baxendale, on 30 August 10
A reader has sent in his thoughts about the recent proposals to reform the regulatory apparatus of the UK banking system:
Last Friday I had a quick view at the report by HM Treasure on a proposal to reshuffle the institutional setting for financial system regulation and oversight in the UK. The introduction (4 pages) is interesting but sometimes depressing. It openly recognised that UK authorities (Bank of England and FSA) failed to see the problems coming and to react adequately. Good. However, the solution it proposes is not to improve the understanding of the building up of bubbles and imbalances, or to reinvigorate the political will so it can make decisions even if those affect the banking status, or to stop trying to achieve the unachievable (a big apparatus able to foresee everything in the system as a whole), but… just rearranging chairs… (every one else in the world, G20, ECB, FED, is rearranging chairs too, so this reshuffling is quite mainstream). However, maybe in the case of the UK there is a possibility to introduce sound thinking in this new Bank of England-based structure (and stop the endogamic kind of thinking within current monetary authorities), through the external members of the newly created “Financial Policy Committee”. The report says (p. 17) among other things:
2.43 It will be important to ensure that the external members of the FPC are able to provide sufficient levels of expertise and challenge to the Committee’s deliberations – this will not only include experience of banking, but also other financial sectors such as insurance and investment banking and, of course, macroeconomic expertise.
2.44 In addition to the chief executive of the CPMA, the Chancellor will appoint four external members of the FPC using a similar recruitment process to that used for the MPC. The Government will look carefully at the best way to ensure that external members demonstrate ample relevant knowledge and experience and the ability to work constructively in a committee environment, without conflicts of interest that would prevent them participating fully in the work of the Committee.”
My take on this is that the external members of the FPC have to be radically different in make up than the internal members of the current MPC i.e. usually a academic, or some who has come from that background. Entrepreneurs, great business leaders and representatives from the SME sector , all who operate at the coal face would have more of an idea about what is and is not actually going on in the economy, better still, why not think about reforming the whole system anyway so we do not rely of 20 or so central planners to determine the value of our very currency, arguably with language, the foundation of civil , peaceful society.
Above all, if we are only tinkering and not radically reforming, he concluded “please appoint those WHO DID SEE it coming and who have a sound theoretical framework behind it (and kick out those who were clueless…)”
Bravo to that, we can name a number of Austrian School economists and Austrian influenced fund managers and entrepreneurs who could do this job.
By Toby Baxendale, on 30 August 10
http://www.npr.org/blogs/money/2010/08/26/129451895/how-to-spend-1-25-trillion
Cranky money policy or real economics?
Is this the start of the decline of the American Imperial Empire we are observing?
By Steven Baker MP, on 11 August 10
Over at CentreRight, I have set out briefly the mistake presently being made by policymakers in the US, which I expect to be mirrored in the UK later this morning. For example:
Injecting more new money, whether through QE or credit expansion in excess of real savings, will not “fight recession”. It will merely delay and worsen the eventual downturn, because injecting new money is bound to shift activity from sustainable economic action to action supported only by that new money.
Sooner or later, the mainstream economic paradigm must shift to accept the importance of time and hence a robust capital theory. Everyone’s prosperity depends upon it.
By Antonio Pancorbo, on 8 July 10
Today, as there are so many politicians meddling around trying to get things right in our economies, people are concerned about money; not only about having more (or any), but also about having a sound currency.
Where can we find good quality money? For centuries, and civilization after civilization, gold (and silver too) have consistently won out in the long-running contest against livestock, grain, cowrie shells, feathers, etc., to find an economic good that people can use as “money” for their trades. Something valuable and stable in its value to organise complex divisions of labour in societies. So if the pound and the other fiat currencies want to replace gold as money for the next 3,000 years, they had better listen to what this “barbarous relic”, in Keynes’ words, has to teach them.
First of all, no rulers or brilliant minds ever had the great idea that gold could play the role of money in society. Instead, they had to accept what people used and agreed to in their trades. In fact, rulers have always hated gold as money because of the power it has taken from them. They tried to bypass the laws of physics and chemistry and create gold from nothing, but the most they achieved was to debase their currencies, a blatant trick that has been condemned since time immemorial. They also tried to replace gold with something of low value they could control. Something that they could give to people (or force them to accept) in exchange for their properties and labour so they could continue with their grandiose schemes, wars and white elephants. Rulers had to wait until they invented fiat money (backed only by governments’ promises to maintain its purchasing power) for their dreams to come true.
We accept fiat money and the rationale behind it. It is true to say that if central banks print paper money, an economic good devoid of any other utility (except for collectors), this fiat money releases gold from its social function as money, and becomes more available for other purposes. Jewellery, ornaments, medallions and many other beautiful things you can make with gold are, thus, more affordable. However, we accept this rationale with a serious note of caution. Behind fiat monies there are governments historically eager to indulge in public spending and irresistibly tempted to create money by simply running the central bank’s printing press.
If we compare fiat money with gold, there are a few lessons that fiat money has already learnt from gold –namely, its physical characteristics. Fiat monies, like gold, tend to be scarce, valuable, divisible, transportable and incorruptible, which makes them as efficient means of exchange as gold.
However, physical characteristics alone were not all that made gold the most efficient means of exchange. Gold production is also limited and not manipulable. To produce this scarce, valuable, divisible, transportable and incorruptible substance it must be mined from the ground, which is a slow, expensive and risky business. In stark contrast, producing fiat money is not a slow, expensive and risky process. It is simply a political decision that only requires an accounting entry in the central bank’s books. This makes fiat currencies political creatures more than anything else, which gives them a nasty taste (except for those in with the political power). And here is where the serious lessons from gold start kicking in.
As counterfeiters know, central banks have the monopoly over fiat money production. They produce it on the basis of their “monetary policy” decisions, which are taken by top-ranked official committees based on the research of highly-trained central bank staff. Monetary policy is discretionary but not capricious. It is governed by general rules and objectives, and legal provisions ensure that central banks have independence to resist political and industry pressures, and this is a good thing. Monetary policy is at the core of central banks, and all economists (except, perhaps, the Austrian School) cannot conceive a modern economy without a centrally planned monetary policy that exercise an effective influence over interest rates, the prices at which people are willing to lend and borrow funds and clear the “available-funds-to-lend” markets.
However, if we again put fiat money and gold together, we see that gold has been able to act as sound money without centrally planned production decisions taken by top-ranked official committees. Gold has been produced simply by mining it from the ground, perhaps the most credible measure to ensure that money creation is going to be free from political an industry pressures.
This “mining-from-the-ground” lesson to produce sound money could be a tough lesson for today’s mainstream monetary theorists, but if central banks wished to replicate it for their fiat money production, they would, first, have to establish the strictest possible operational independence that ensures low and predictable fiat money creation, free from any political and industry pressures; and, second, they would have to abandon any idea of conducting a scientific monetary policy as a means to justify discretionary money production, and simply let the supply and demand of loanable funds determine interest rates.
In addition to monetary policy, central banks today can also produce fiat money when they are instructed to monetise public debt. In contrast to monetary policy, this is not elegant economics. If abused, this is plain State villainy but it is something that may happen with fiat money. If ancient rulers, no matter how powerful they were, had problems paying their debts, they opened their vaults, counted how much gold there was, and decided whether to tax their subjects more or to tell creditors that they would have to wait. If modern governments have problems paying their debts, they can tax their people further, declare default, or ask their central banks to print more fiat money and avoid unpopular announcements.
Removing from fiat monies their ability to monetise whatever deficit might be needed to keep governments profligate and in power is another tough lesson that gold would pass on to fiat money production. However, for those who want currencies “as good as gold,” central banks must turn a deaf ear to the requests of government, the mighty and the powerful to produce more fiat money for them (and to the detriment of everyone else), and remain steadfast gatekeepers of the fiat money they produce.
Does current fiat money production wish to learn these lessons from gold production, and set low, predictable, and non-manipulable paths of fiat money creation? Will central banks abandon monetary policy and the monetization of deficits? Are these wise moves? This is something to be discussed. As a final consideration, though, in a world of honest money, when people want more pounds, what they do is not lobby the Bank of England or influence its monetary policy decisions, but instead to work hard and exchange the wealth they have produced for pounds. This is the way by which they will have many pounds more.
By Tom Burroughes, on 10 June 10
Last night, yours truly, along with a number of other Cobden Centre supporters and assorted free marketeers, listened to Toby Baxendale talk about a radical proposal to sort out the UK national debt. He talked about a good many other things, but the centrepiece of his talk was how, as part of a key reform, we could slash the debt burden and save future generations from the crippling expense of the current debt.
What interested me, beyond the core of Toby’s talk, was the reaction from the audience. A number of people I spoke to – their conversations are off-the-record so I will not name them – told me they were skeptical about Toby’s reasoning on the national debt point, although they accepted that, at face value, there may be a vital point they were missing. I must say that I am not entirely convinced myself but that may because I have not understood the point and need to do a bit more thinking and reading. In particular, there is a worry that the Cobden Centre might appear, unless we thrash these issues out clearly, to be pitching some sort of “magic bullet” solution. And I am sure that Toby does not regard there being anything magical about honest money.
One simple issue that arises from any plan to wipe out a lot of debt is the law. In debt restructurings, for example, one point that bankers have to deal with is the seniority of debt holders. The UK’s national debt is held by a variety of different people, foreign and domestic; it is held by a variety of institutions. Any plan to adjust debt, or cut it, has to take into account the kind of people who hold it and any contractural issues that may arise. It may sound nick-picky but it is the sort of detail that is actually very important in resolving debt issues at the corporate level, for example.
I was mightily impressed by the few words of Steven Baker in reference to his maiden speech on the issue in the House of Commons. It almost seems too good to be true that we have a sitting MP who actually understands, and wants to spread understanding of, these issues. (The fact that Steven has actually had a serious job as an engineer is also a refreshing change). For far too long, the free market position has suffered from a lack of articulate defenders in parliament (there have been honourable exceptions, such as the late Nicholas Budgen or Jock Bruce-Gardyne). Simply conveying the message that states make a mess of money is a key argument to make. It would be good for other MPs and commentators in the mainstream media to be more acquainted with the Austrian school. There are already signs that this might be stirring: consider this article on banking by Dominic Lawson, who seems to have inherited his father’s grasp of good economics.
By James Tyler, on 8 June 10
In recognition of soaring inflation, and the looming threat that our new government will resort to monetisation of the national debt, we are bringing forward this classic article, originally published in December 2009.
Mr Smith works hard, plans carefully, and saves what he can, putting his money into a building society. He pays his credit card bills off each month, and tries to overpay his mortgage when he can.
Mr Smith got a 3% pay rise last year – inflation was only 2% – so he felt good about that. But… he doesn’t feel any wealthier.
Year after year, the government had said that the economy was growing strongly, but still, things seemed harder for his family and him. Train ticket prices up again. Heating bills rocketed when the price of oil went up, but never seemed to come down. He swears a loaf of bread and a pint of milk were much cheaper in years gone by.
When he changes his cash for Euros, he realises that his holiday in France is now unbearably expensive. His tax rates didn’t go up, but still, after all his bills were paid, he seemed to have less and less spare cash than he remembers a few years ago.
There are Mr Smiths everywhere. Careful folk, who plan, save for a rainy day and have a sense of personal responsibility.
Smith is the target.
It is Mr Smith who is going to pay for the banking crisis.
His saved wealth will pay the national debt.
His prudence will bail out Gordon Brown’s profligacy.
His forgone holiday will pay the banker’s bonuses.
His careful spending will pay for the vast number of quangos.
His financial planning will bail out the failed NHS computer project, over-budget military programs and ID cards.
His sense of responsibility will end up funding the destruction meted out in Iraq and Afghanistan.
It won’t be the politicians or the bankers who pay for global warming – he will.
He knows he pays tax… but what is hard for him to comprehend is that there is another pernicious process draining his wealth and subverting his hard work towards paying for the misjudgement of others. Whether he likes it or not, he naively pays for the decisions made by the political class.
He has no choice. No option. He was never asked to vote for it. And for the most part, the act of theft is so subtle he doesn’t even know it is happening.
Why does he feel poorer?
Why is it that Mr Smith seemed to miss the ‘boom’, yet is hurting more in the bust? Why doesn’t life get easier for him? What is going on?
Inflation.
As technology produces things more cheaply, Mr Smith should have been able to reap the rewards – except that things don’t get cheaper for him. Society cheats him when the government opens the spigot of new money, washing this value away as the torrent of new money chases prices higher beyond his reach.
The winners are always those close to the gusher – the banks, financiers and politicians. These are the ones who get to spend the new money first, thus chase prices up before Mr Smith gets any sniff of what is happening.
To save or to invest?
Think about your personal circumstances. Every time your payslip comes in, you have a choice of how much to spend and how much to save. Every rational person knows that there is a balance to be struck between current enjoyment (consumption) and future enjoyment (savings – or deferred consumption).
This choice is exactly the same for society as a whole. As a country, we must decide how much to consume, and how much to defer consumption in order to allow our children and us to enjoy things in the future.
The choice for us all is simple. Defer consumption and invest for the future, or consume and enjoy now.
What is the process by which we save for the future? There are two ways.
- Voluntary saving. If society needs to invest for the future, but people prefer to consume, then the savings rate – the profits paid on investments and/or the interest rate paid on deposits, rises until people choose to defer consumption and invest.
- Forced saving. Government policy forces a decrease of the purchasing power of money via inflation of the money supply. The net effect is a transference of wealth from savers and fixed income groups towards net borrowers (itself included). It also creates an artificial pool of liquidity into which the government can sell its IOUs.
The evil of Forced Saving
The natural state of affairs in a free market, with a more consistent supply of money, is that general prices fall as technology advances. The prudent are rewarded, and borrowers have to carefully evaluate and moderate their flights of fancy, only investing borrowed funds carefully in sound projects.
When the value of money declines, savers find that their money buys less, whilst borrowers are happy to find that they can repay their debts with money of a decreased value. It’s like borrowing five books from the library and finding that you are only required to give four back!
By setting a target for rising prices and then pulling levers to increase the supply of money in the economy to achieve it, the government prevents the natural response of general prices to competition, increased efficiency and innovation: they stop prices from falling.
Entrepreneurs, innovators, inventors and new businesses exist because they believe that they can satisfy society’s wants better than they have been served before. They have ideas, innovations and take risks in order to provide goods that are cheaper than they otherwise would be. Businesses operating in a competitive environment always seek to reduce costs, be that one step more efficient and produce a cheaper or better widget. As group of people, entrepreneurs bring efficiency and innovation, and they make stuff cheaper.
The benefit to Mr Smith should be that his income goes further. As time progresses, technological innovation should mean he can buy more with the same cash. But that’s not what happens, as any pensioner knows. Saved money buys far less now than it did at the time it was saved.
Governments achieve rising prices by encouraging the supply of new money. This new money comes from the central bank via its control of the banking system. The first users of this new money are invariably politicians, finance capitalism and big business. These guys get to use the newly minted money first, and thus spend it first. This process bids up prices, leaving everyone else chasing behind, and poor old Mr Smith last in the queue.
What an evil system it is then, when government can control money in such a way as to give it a first user advantage that penalises all those in the general population whose wealth is being rapidly diluted. A process that systematically violates and loots pensions, savings, fixed incomes and the actions of prudent, and rewards the profligate, the speculative borrowers and above all, rewards the biggest borrower of all: Government.
Let’s be clear. The current system is a process that diverts the benefits of innovation and technological advancement that should accrue to the general population, and thrusts it towards the desired spending of the well connected and the political class.
We need to stop this continual violation of the little man. Mr Smith has to start realising what is happening to him.
That’s why I’m proud to support the efforts of the Cobden Centre.
By Toby Baxendale, on 29 May 10
I praise the Coalition government for their first brave attempt to tackle the £156 bn deficit with their £6 bn of net cuts. This, as we know, is scratching the surface of the problem.
I was speaking to a back bencher who used to have a senior role as an advisor to a current Cabinet member: he told me that their main objective was to cut the “structural deficit.” This is estimated to be about £70 bn. I get worried when the ambition is so low and assumes that growth will build up substantially this year, enough to bring in an extra £80 bn of tax revenue to “plug the gap.”
So I believe we will finish the year with £900 bn of national debt. This is forecast to cost £40 bn a year in interest service costs. This is nearly 30% of all income tax revenue. This is more than what we pay for the education of our children. What a shocking waste of our resources and a desperately onerous burden on the taxpayer.
If you follow this link to the Debt Management Office, you will see the perplexing sight that our very own Bank of England, part of the apparatus of the state, owns £190 bn of all outstanding debt. This is shown on the very first page, bottom left hand chart.
I say perplexing as it may have dawned upon you now that one side of the government issues new debt while the other part “buys” it with newly minted money. We the taxpayers get the privilege of paying the interest on this newly minted money that is now owed to the government!
Currently at the end of Q4 2009 the national debt was £796 bn, so £200 bn is 25% of this debt. Suffice it to say, I would think it reasonable to assume that ¼ of the £40 bn debt interest service is then totally unnecessary!
Our Chief Secretary to the Treasury, David Laws, is involved in the papers today with a £40k personal expenses scandal. This makes the front page of all major papers. This is nothing compared with this £200 thousand million debt problem and the £10 thousand million interest bill problem that this oddity generates! Yet no mention of this on the front pages!
This means £10 bn could be saved at a flick of a switch on a key board, with no economic consequences other than to relieve the burden of the taxpayer of having to pony up £10 bn in cold-blooded tax extractions. This savings could also be the equivalent of a 7% cut in income tax.
Now that would be popular.
I wonder if the real reason why one arm of Government must “buy” so much of the debt of another arm is to keep the illusion going that there is a market for UK debt. This then begs the question, “Did a bond strike happen a long time ago?”
Readers to this site know that I favour a solution that would totally eliminate the national debt as mentioned in these two articles:
However, today, this modest “pressing the button” reform could be done and should be done with no debate, and yet it is not!
The general lack of economic knowledge does concern me more and more. A timely reminder of this was in yesterday’s letter section of the FT, May the 28th .
‘Reminder of repressive US gold rush
‘Sir, Martin Wolf asks “How likely is financial repression?” (May 25). Based on the historical record, as he suggests, it’s pretty likely.
‘He does not mention a most egregious case of financial repression: the confiscation of all their gold from American citizens by their government in the 1930s, so they could be forced to hold depreciated fiat dollars. (The Federal Reserve Banks had their gold confiscated, too, and still own none.)
‘This was followed by default on the gold bonds of the US. For its citizens to own gold was made criminal by the American government, an outrageous and oppressive act that remained in force for decades.
‘Yes, when pushing comes to shoving, never underestimate what coercive measures governments will undertake. Mr Wolf’s reminder is timely.
Alex J. Pollock, Resident Fellow, American Enterprise Institute, Washington, DC, US’
I could not put this better myself.
We should all remember the following:
- The crisis always starts by Public Spending in excess of what we can afford.
- Deficit Spending then occurs, with no understanding that this risks the collapse of the economy.
- Denial of Any Problem is writ large amongst the incumbent ruling politicians.
- There follows a Lack of Political Will to do what needs to be done.
- Finally, Monetisation of the Debt. This always means your purchasing power goes down and a wealth transfer takes place from you to any of the programmes that the government is funding at the time. This is the best we can realistically hope for.
At the other extreme, we must hope the repressive measures of the Depression-era US authorities are not considered by modern British and European governments. But if the government lacks either the will or the knowledge to bag this easy £10 bn of savings, then it is hard not to infer that they actually want that money from the taxpayer in interest.
You then have to start wondering: where is this going to end up?
Further reading
The Crack-up Boom, a review of Mises’ The Causes of the Economic Crisis and Other Essays Before and After the Great Depression.
By James Tyler, on 24 May 10
To set Toby’s “Emperor’s New Clothes” proposal in context, we are bringing forward a number of classic articles.
This article was originally published on 20 January 2010. It is a speech by James Tyler to the Adam Smith Institute Next Generation Group on 6 October 2009. This speech is also available on hedgehedge.com.
I have spent the best part of the last two decades pitting my wits against the market. It’s an unforgiving game: I’ve seen ups and downs, and many of my rivals buried under an avalanche of hubris, passion, illogical thought and unchecked emotion.
I have witnessed the sheer folly of the ERM crisis, the Asian crisis, the failure of the Gods at Long Term Capital Management and the insanity of the tech boom.
I have enjoyed the ‘NICE’ decade (Non-Inflationary Constant Expansion), and scared myself silly during the credit crisis.
I am a trader.
I risk my own money and live or die by my decisions, and face the threat of personal bankruptcy every time I switch my screens on. I get no salary – indeed I turn up at the start of the month with a large office overhead – a ‘negative’ salary. I have no fancy company pension scheme, no lucrative monopoly or franchise.
I eat what I kill.
Mistakes cost me my livelihood, so, above all, my decisions have to be rooted in practical and logical decision making.
Some have called my kind parasitic, but I would have said that I bring order, efficiency, predictability, stability and deep liquidity to a crucial process: a process that makes the whole world keep ticking.
I make money work.
I make the market in interest rate derivatives: a market born out of the neo classical revolution in finance fostered in Chicago during the 1970s. I am a child of Friedman, Fisher Black, Myron Scholes and the modern international financial system.
My analysis was steeped in the neo-classical, efficient markets paradigm.
Friedman’s ideal was working. Enlightened central bankers guided the free market with gentle nudges and short term liquidity infusions, free floating currencies gently adjusted themselves to the constant flow of new information and efficient and rational markets took all in their stride.
Credit flowed, people got wealthier, economies developed and all was well.
And then the crisis struck.
Continue reading “My Journey to Austrianism via the City”
By Andy Duncan, on 29 April 10
If What Has The Government Done To Our Money? is an hors d’oeuvre, then The Mystery of Banking is the main appetiser in our quest to understand how the current financial global crisis arose. Far meatier than its predecessor, The Mystery of Banking paints the Mona Lisa’s face, where the earlier book simply sketches out the smile.
There are some who say that Murray N. Rothbard’s greatest work is Man, Economy, and State, which some hail as the successor to Human Action. Others say that the mantle of his greatest work lies with The Ethics of Liberty, the pulsating heart of the American libertarian movement. Yet more people declare that it must be Conceived in Liberty, the stunning four-volume series describing the genesis of the American revolution.
Everyone, of course, is right. Because all choices are subjective. However, if I were to be forced to become a Robinson Crusoe and made to occupy a desert island, with hopefully an inexhaustible supply of Gin & Tonic, and only allowed by some great Dictator in the sky to take just one Rothbard masterpiece to the island, then it would have to be The Mystery of Banking, in the same sense that if given the choice of whether to take Beethoven or Mozart, I would have to take Mozart, because although Beethoven is much deeper than our Salzburgian hero, Mozart carries a good tune which I could whistle on the beach. (Though I might also be tempted by The History of Economic Thought, but that’s a different thread in a different story.)
The Mystery of Banking has become an underground classic, with dog-eared copies of the book recently fetching hundreds of dollars on Amazon before the Mises Institute re-published a new edition, also making available a lovingly-produced PDF of the book online. (There is also a stunning version available on Scribd.)
The book has gained a hard-core underground following because it is simply amazing in the sense that it maps out the incredibly dense maze of fractional reserve banking, the Aladdin’s nest of myth and fantasy which since the Florentine banking domination of the Medici clan, has taken the western world to the brink of absolute financial collapse more times than Madonna has re-engineered her underwear. Man, Economy, and State and Conceived in Liberty are perhaps the greater works, due to their sheer undiluted mass, but pound for pound, The Mystery of Banking packs a far more devastating power-to-weight ratio as a water-slashing racing boat skating between high-momentum supertankers.
From its opening, with its dedication to three hard money champions — Thomas Jefferson, Charles Holt Campbell, and Ludwig von Mises — The Mystery of Banking is a remorseless Austrian dissection of what lies at the heart of the western world’s financial system; which some might say is “absolutely nothing at all” and which others might say is “fractional reserve banking”. (Or do I repeat myself?)
Professor Rothbard spends the first hundred pages of his incisive book describing money, its origins out of barter, its purposes, its uses, and its evolution, eventually leading towards the creation of loan banking and free banking from the late medieval period onwards.
Rothbard then describes a more developed world in which twenty dollars became a fixed weight of gold just under one ounce, and how the mathematical genius Isaac Newton defined the pound as a fixed weight of gold just under a quarter of an ounce. (From these fixed weights and their stable exchange rate, the division of labour between the two currency areas can thus be easily integrated into a single wealth-creating whole.)
Although Man, Economy, and State remains the more powerful book, The Mystery of Banking is far more dangerous to the establishment, because it blows the gaffe on their monopoly of money management and reveals who always benefits first from their nefarious practices of printing money directly from thin air (i.e. the government and its friends) and who pays for this benefit (i.e. everyone else).
Although this is obvious to all when a private counterfeiter spends his ill-gotten “money” in local stores, government has wrapped so many emerald-coloured curtains around the alchemy of their nationalisation of the money supply, that this wealth transference effect is much harder to discern with government-regulated fractional reserve banking.
Rothbard shreds these curtains, making it clear how the government always benefits first and why they are motivated to do it — even given an ability to tax — and how they have escaped detection for so long, with otherwise intelligent economic commentators in recent times demanding that governments engage in quantitative easing, to “help” the rest of us, which is like a householder demanding that a burglar steal his possessions in order to help with his insurance claim.
Rothbard blows away the rulers of the emerald city through clear analogy and example, such as beaming down the Angel Gabriel from heaven to double the supply of money in everyone’s pockets overnight, before examining the results of such an action in the morning, thus revealing that any supply of money is equally optimal; this leads to some startling implications.
However, this is just one example. There are many others like it, in the book.
Having carefully used historical precedent to reveal the history of money, in the second half of the book, Rothbard then gradually un-weaves the most insidious double-blind deception in history, which is the rise of central banking and the creeping nationalisation of the banking industry, to follow the nationalisation of money. Starting in England, and then spreading like a virus to the rest of the world, Rothbard lifts stone after stone in his unrelenting mission to expose the light-shy creatures underlying central banking, allowing none of these segmented arthropods to escape back into the darkness and the slime before he scores them with his acidic pen.
The final section of the book examines a Rothbardian seven-part plan, in the Cobden and Bright tradition, to return us all to a hard money standard. The annotated highlights of this plan are:
- Redefining money to be a fixed weight of gold
- Government gold deposits to be returned to their rightful owners, i.e. the holders of government paper money
- Central banks to be abolished
- Fractional reserve banking to be replaced by 100% gold reserve banking for all demand deposits
- Banks to become free to issue their own gold-certificate cash notes
- The complete de-nationalisation of money and the removal of government guarantees on bank accounts, to re-introduce the ‘healthy gale’ of bank runs back into the banking industry — one of Rothbard’s alleged favourite movie scenes is the collapse of the bank of Danglars in The Count of Monte Cristo!
- The abolition of government-mints to be replaced once again by the private minting of gold money
For all true followers of hard money, The Mystery of Banking is thus an essential element on the pathway to understanding how and why we can achieve the goal of honest money, which even the former alchemist Isaac Newton knew was impossible to manipulate over the long term. Let us also hope that if the Rothbardian plan outlined above comes to pass, that the new international name for the fixed weight of gold will be “The Rothbard”, in memory of this hero of hard money, whether this is one gramme, 10 grammes, or a good old-fashioned one Troy-ounce of gold.
By Jamie Whyte, on 22 April 10
Federal Reserve Chairman Ben S. Bernanke has given testimony before the Committee on Financial Services of the U.S. House of Representatives.
If you thought things were moving our way, look at the remarks at the end of note nine.
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
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