Economics

Sound money for Europe

You can be sure that most of my colleagues in the European Parliament do not embrace the concept of the free market. Day after day, I hear them speaking up for the protection of established interests or attempting to regulate away risk. However, there is one area where there is a genuine coalition of interests and that is the need for banking reform.

Despite all the legislation, nearly six years after the run on Northern Rock and almost five years since Lehman Brothers collapsed, we’ve endured an onslaught of new financial regulations emanating from Brussels, but we haven’t solved the fundamental problem. If a bank went bust tomorrow it would still need taxpayers to bail it out. The Left hate bail outs because they believe taxpayers’ money should be spent elsewhere and not on subsidising what they see as “rich bankers.” While those of us who believe in free and open markets think that companies that fail ought to be allowed to go bust to allow better-run rivals and new entrants to fill the gap in the market. This coincidence of interests has formed the basis of the Left-Right coalition.

For the last few years, I have been pushing three items within the family of Cobden Centre proposals: no taxpayer bail out; director liability and sorting out IFRS accounting standards.

We have spent the past five years introducing legislation that does not tackle the fundamental problem of banks needing bailouts when they fail. I have been making this point for several years and it seems that finally other legislators share this view.

In a report on banking reform adopted by the European Parliament in early July, there was genuine agreement on the need for an overhaul of the banking sector. Most political groups agree that supervisors will need to spell out procedures to wind down failing banks without taxpayer funding and to create a scheme to allow customers of failed retail banks to continue to pay their bills or withdraw money from ATMs until ownership is resolved.

However, we have to be realistic and recognise that at some point, governments will be tempted to use taxpayers money. Therefore, we agreed to encourage banks to separate wholesale banking activities from retail activities in the event of failure so that the savings of retail savers are not used to subisidise the trading activities in the investment arms of banks. This so-called ringfence need not necessarily be structural but a clear distinction needs to be made.

In the same report, I tabled an amendment which received the support of a large part of the European Parliament that we should explore how to make directors more liable for failure including exploring the feasibility of a return to the partnership model of ownership. Although there are concerns about how this would work in practice, the principles of director liability and the need for a better alignment between performance and reward are now firmly on the agenda.

I have also worked with the Cobden Centre, PIRC and Steve Baker MP to point out the concerns that many investors have expressed over IFRS. This included hosting a packed event in the European Parliament organised by the ACCA where Gordon Kerr from the Cobden Centre spoke alongside representatives from the auditors, the banks and the standard-setters themselves. This discussion helped us to secure the support of all major political groups in the European Parliament for a major review of international accounting standards.

In making the case for a review, it has been important to highlight the apolitical nature of this issue. All political groups regardless of party, are supporting calls for simpler standards that drive better governance and question why banks are able to book unrealised profits without making sufficient provision for potential losses.

In addition, supporters of the work of the Cobden Centre believe it is vital that consumers understand how fractional reserve banking works. This means making consumers aware that when they open bank accounts, their money is not actually on deposit at the bank. I have consistently spoken in parliamentary debates on the need for banks to be much more transparent with consumers when they open accounts and to distinguish between deposit accounts, current accounts where so-called savers are really lending their money to a bank and investment accounts. In time, I hope to be able to introduce amendments pushing for such transparency.

It may be far away and many may question whether the UK should remain a member of the EU, but as long as Britain remains in the EU and I remain a Member of the European Parliament I will continue to seek to influence the debate and share the ideas of the Cobden Centre with MEPs across the political spectrum.

Economics

Richard Cobden’s achievements

“We are on the eve of great changes” Richard Cobden told Parliament in February 1846. He was correct. Britain stood poised to embark on a period of growth unparalleled in its history, which would, in a few short years, bring it wealth and power not seen since ancient Rome. A major reason for this was Britain’s path breaking adoption of free trade, and the man behind that as much as any other was Richard Cobden.

By the late 1830s it was apparent that the Whig government led by Earl Grey and then Viscount Melbourne had exhausted itself in the passage of the Reform Act of 1832. This had given the vote to propertied males, enfranchising many of those made rich by the Industrial Revolution. The Radical faction within the Whig Party sought a new cause with which to restore the momentum which had carried the 1832 Act and settled on repeal of the Corn Laws.

The Corn Laws was a catch all name for the thicket of tariffs which had been erected to keep foreign wheat out of Britain. Justified on the deathless grounds of ‘food security’, these laws also had the handy effect of benefiting the landowning classes, many of whom sat in the Commons and Lords as Tories.

The Corn Laws, as with any tariff, had the effect of making the product in question and associated goods more expensive. The burden of this was borne disproportionately by the members of the emerging working class in burgeoning industrial centres such as Manchester and Leeds who spent a large percentage of their incomes on food. By extension, they raised labour costs. And blocking foreign producers from selling in Britain prevented them from earning the money to buy the output of the new industries.

Out of this shared interest between workers and bosses (and other factions such as dissenting churchmen) came the Anti-Corn Law League, established in Manchester in 1838. One of its founders and leading lights was Richard Cobden.

Cobden was born the son of a poor Sussex farmer in 1804 and started his own textile printing business in 1828. It quickly became a success and in 1832 Cobden moved to Manchester, the centre of the booming British textile industry.

Immersed in the city’s Radical politics Cobden quickly became active. He was instrumental in the shift from broad based reform agitation to a single issue focus which had led to the creation of the League, noting that “the English people cannot be made to take up more than one question at a time with enthusiasm”. Throughout the campaign Cobden would hold to the principle of single minded focus on full and immediate repeal of the Corn Laws.

He became a prolific writer, and in his work he revealed the broader purpose behind the activities of the League. In Cobden’s mind free trade and peace were linked, he wrote in 1842 that “Free Trade by perfecting the intercourse and securing the dependence of countries one upon another must inevitably snatch the power from the governments to plunge their people into wars”.

With the Corn Laws Cobden and the League faced a problem of concentrated interest. While the benefits of repeal were spread across society, the costs were concentrated. Each person in Britain might benefit by a few pounds a year from repeal (though that was no small sum to impoverished workers) but those relatively few people who would be adversely affected by repeal stood to lose far more. The landowners were incentivised to act more strenuously in fighting against repeal than individual consumers were in fighting for it.

Partly because of this the League was frustrated during its first two years. Copying the tactics of the campaign for the 1832 Reform Act and the contemporary Chartists, the League attempted a strategy of mass agitation with open meetings and lectures. These suffered from frequent attacks by Chartists who resented any reforming competition, after one meeting Cobden wrote: “The Chartist leaders attacked us on the platform at the head of their deluded followers. We were nearly the victims of physical force; I lost my hat, and all but had my head split open with the leg of a stool”. The failure of this strategy left the League short of money. Attempts to petition Parliament were heavily defeated and the League members were frequently tempted away into movements for wider reform.

In 1841 Cobden convinced the League to change strategy. He wrote to a fellow member “You will perhaps smile at my venturing thus summarily to set aside all your present formidable demonstrations as useless; but I found my conviction on the present construction of the House of Commons, which forbids us hoping for success. That House must be changed before we can get justice

From now on the League would seek to make Parliament its battleground, starting with a by election in Walsall in February 1841. The Tories allied with their Chartist arch enemies in an effort to defeat the League which still came a close second. Cobden’s strategy had been a success, the Morning Chronicle noting that “one consequence of the contest at Walsall is that the Corn Laws are, and must henceforth be, throughout England, a hustings question”. With a general election approaching the Whig leaders adopted a stronger free trade stance.

The election of summer 1841 saw the Whigs defeated by Robert Peel’s Conservatives, heirs to the Tories, and seemingly dashed hopes of Corn Law repeal for the foreseeable future. But the situation was brighter than it might have appeared. The election saw a number of League members returned to Parliament including Cobden, now widely recognised as the League’s leader, who was elected MP for Stockport. Also, by the end of the year, ‘operative’ associations attached to the League, mostly consisting of working class supporters, had organised to protect League meetings from the violence of the Chartists. But perhaps more importantly, in Peel, Britain now had as Prime Minister one of the most remarkable statesmen in her history.

With Britain in economic depression Peel deliberated before finally announcing his budget in February 1842. Despite his Tory lineage, Peel recognised that the Conservatives must learn to accommodate themselves to changing circumstances if the wilder, revolutionary wing of the Chartists was to be held at bay. Given the revolutions across Europe in 1848, this was no minor threat. Peel’s Tamworth Manifesto of 1834, as close to a foundational act as the modern Conservative Party has, had been an act of reconciliation with the passage of the 1832 Reform Act.

Peel’s fiscal proposals were in this tradition, proposing a drastic tariff reduction with revenues to be made up by a new income tax. The moves were warmly welcomed by liberals and, while it represented a significant vindication of the League’s arguments, it also brought danger. As Cobden predicted “The greatest evil that could befall us would be a bona fide concession – The middle classes are a compromising set”.

After some debate about strategy (during which Cobden squashed a move to declare a general strike by factory owners) the League stepped up its propaganda. Millions of leaflets, posters, handbills, and newspapers were distributed with the aim of reaching every voter in Britain, though that was only about 600,000 people at the time.

But despite all this activity the League found it needed an event, a shift in circumstances beyond its control, to provide proof of its arguments and swing opinion behind them. That came in 1845 when the potato crop failed. Particularly in Ireland, where much of the population depended on potatoes, this caused great suffering, culminating in a famine which killed an estimated one million people.

Cheap food was needed and quickly. Faced with this unfolding catastrophe, supporters of the Corn Laws were helpless. A further vital, final, factor was Peel’s reaction. Acting on humanitarian grounds and the perennial desire of Conservative Party leaders to pick fights with their backbenchers (in this case the land owning Tories) in order to prove they are ‘different’, Peel moved for full repeal in 1845. In May 1846 repeal was passed and the Anti-Corn Law League wound itself up.

The benefits for Britain were immense and immediate. The effects of famine receded and a wider program of free trade enacted. Between 1815 and 1842 Britain’s exports edged up from £47,250,000 to £50,000,000. By 1870 they had rocketed to £200,000,000.

How had Richard Cobden and the League managed to defeat the special interests in favour of keeping the Corn Laws?

First, and most importantly, they were right. Free trade became the orthodoxy to such an extent that we can forget that while the League was working its ideas were one strand of a lively discourse. There was a long tradition of bad economics arguing for protection and Friedrich List was giving these old doctrines a new outing even as the League was campaigning.

Second, their strategy of exclusive focus on Corn Law repeal was a success. Cobden refused to be, and refused to let the League become, distracted by any other reform or campaign. This ensured that while the Chartists got nothing from a long list of demands the League actually got more than its comparatively modest aims with Britain quickly embracing free trade generally.

Third, they were tactically flexible. There were three fronts to their activities. First, were the mass meetings. These were of limited success largely owing to the competition, both ideological and physical, of the rival Chartists. The second front was education. Here the League had more success, sending literally tons of propaganda out every week. They pitched to all sections of society, sending lurid drawings of emaciated families to lowbrow readers and helping found The Economist for the highbrow. Third, and most effective, was the Parliamentary front. It was arguably the fact that the League engaged here while the Chartists didn’t that guaranteed the success of the League relative to the Chartists.

The fourth factor was, as Harold Macmillan put it, events, or, more broadly, circumstance. Without Peel’s transformation of the Tory Party into the Conservative Party and its concomitant embrace of free trade, the League would have had to wait until at least 1848 and the possible election of the Whigs who, under Lord John Russell, had finally adopted full repeal as a policy. And without the famine in Ireland it is doubtful whether either party could have carried repeal in as full a form as eventually happened.

To a large extent however, this event is not so exogenous. It could be, and was, painted as the predicted outcome of the bad policies of the Corn Laws.

As a result, when circumstances combined in 1845-1846 in the advents of Peel and the potato blight, thanks to Cobden and the League the arguments for free trade were widely enough known to be accepted as a viable possibility. The lesson is to have rigorous, well tested arguments. Pick a definite, achievable aim then work hard to spread and publicise your views until they become the ‘white noise’ of the debate. Then position yourself to take advantage of changing circumstances and move quickly when circumstances change.

When Richard Cobden died in 1865 the French foreign minister wrote that he was “in our eyes the representative of those sentiments and those cosmopolitan principles before which national frontiers and rivalries disappear; whilst essentially of his country, he was still more of his time; he knew what mutual relations could accomplish in our day for the prosperity of peoples. Cobden, if I may be permitted to say so, was an international man”.

At the end of three successful years The Cobden Centre can continue to draw on its namesakes rich example as it looks forward to furthering his goals of peace and prosperity.

Economics

And now for something completely different

In these days of economic doom and gloom I think it is time for me to try and raise a lighthearted chuckle amongst our supporters. And who better to turn to than Donald Trump!

Economics

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.

Press

Sean Corrigan on CNBC

Sean Corrigan is a good friend of TCC. Yesterday, he appeared on CNBC where he provided a masterful overview of current events on the markets. You can see him in action here.

Press

Steve Baker in Jewish Chronicle

The current edition of the Jewish Chronicle has a sound article by TCC board member Steve Baker. Headed ‘Injustice to banking’ it covers one of the least understood yet most damaging aspects of the financial crisis, namely, “the way International Financial Reporting Standards (IFRS) mislead UK and Irish banks and their stakeholders about their true financial positions”. You can read the article here.

Economics

Financial regulation and the deception of government intervention

From Deception of Government Intervention (1964) – an essay in Mises’ anthology Economic Freedom and Interventionism – we learn how governments adopted “the third way”:

Faced with the tremendous challenge of totalitarianism, the ruling parties of the West do not venture to preserve the system of free enterprise that gave to their nations the highest standard of living ever attained in history. They ignore the fact that conditions for all citizens of the United States and those other countries which have not put too many obstacles in the way of free enterprise are much more favorable than conditions for the inhabitants of the totalitarian countries. They think that it is necessary to abandon the market economy and to adopt a middle-of-the-road policy that is supposed to avoid the alleged deficiencies of the capitalistic economy. They aim at a system which, as they see it, is as far from socialism as it is from capitalism and which is better than either of those two. By direct intervention of the government, they want to remove what they consider unsatisfactory in the market economy.

Such a policy of government interference with the market phenomena was already recommended by Marx and Engels in the Communist Manifesto. But the authors of the Communist Manifesto considered the ten groups of interventionist measures they suggested as measures to bring about step-by-step full socialism. However, in our time the government spokesmen and the politicians of the left recommend the same measures as a method, even as the only method, to salvage capitalism.

In the aftermath of the financial crisis, we are now going down a road towards ‘judgement-based’ regulation of financial firms in an attempt to salvage capitalism.

It is proposed that firms will be supervised by what amount to shadow management teams of disinterested, public-spirited individuals more able to reach sound views than firms’ own management teams: they shall possess “the optimal experience and technical ability”.

Quite where these mythical philosopher kings are to be found, I do not know. Presumably, financial firms and regulators already hire the best people available. And the notion that the best people will work for the regulator despite inevitably higher rewards in the firms themselves is silly.

Financial firms will find their business subject to the day-to-day judgement of government officials. To think that those officials will be more capable than the institutions’ traders and managers is a fantasy. The outcome will be, as it has been, a surprise financial catastrophe as regulators fail to foresee the future and, since they are bound to converge on “best practice”, fail as one.

A free society is not one based on constant official interference with business. It is one based on cooperation, choice, competition, profit & loss, predictable rules fixed well in advance and exit from the market: that is, property, contract and the classical rule of law.

Rather than resort to fantastic ideas about the effectiveness of government interference with market phenomena, we would do better to reapply the principles of a free society. Financial institutions should be no exception, for government intervention caused the crisis [1,2].

Postscript: Marx and Engels’ ten measures are available here.

TCC Development

Detlev Schlichter joins TCC’s Advisory Board

I am delighted to announce that Detlev Schlichter is the latest person to join The Cobden Centre’s Advisory Board

Following a near two decade career in financial markets as a derivatives trader and investment manager, which saw him work for J.P. Morgan, Merrill Lynch and Western Asset Management, in 2009 he resigned his position in the City to focus on writing his major and forthcoming book: Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown (John Wiley & Sons). Detlev also runs an outstanding blog called PaperMoneyCollapse.

If you want to see this great Austrian School economist and writer in action then take a look at this.

Events

So its off to the good students of Warwick University

Later today, James Tyler from TCC Advisory Board and I are heading off to speak at a seminar organised by some of the free market students at Warwick University.

From now on, the Cobden Centre is open for such outreach ventures with young people in schools, sixth form colleges and universities.

If you want speakers on free markets, free trade, what a liberal banking and monetary system might look like, and radical ideas on genuine social reform, then please feel free to contact me directly here. For as well as our planned events, publications and media outreach, the CC is now in business to receive invitations to address tomorrow’s opinion formers.

Press

Me on my postings

This is my first posting as the CEO of The Cobden Centre. I recent months I have been working with our Chairman, Toby Baxendale, and Corporate Affairs Director, Steve Baker, and our Founding Fellow, Dr. Anthony J. Evans, to get the basics in place.

Today, TCC has a world-class team, including an outstanding network of Senior Fellows, a tremendously supportive and pro-active Advisory Board and an ambitious and exciting business plan.

It is in this context that I will mainly be jotting my postings. For as well as representing and commenting on the policy perspectives of the Centre, my missives will tend to focus on articulating the organisation’s priorities, activities and ventures. As such, the weeks and months ahead are going to see the TCC go through a major step change in its outreach work – across a wide range of areas. I hope you are looking forward to it. I certainly am.