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By Paul Birch, on 5 July 10
By kind permission of Paul Birch, we reproduce his essay setting out a proposal for honest money through bearer shares, previously published on this site in October 2009. Paul’s own site may be found here: www.paulbirch.net.
1. Introduction
Nobody understands money, least of all economists. Too sweeping a statement? Perhaps. But every analysis of the workings of monetary systems that I have ever read has been seriously in error at one or more crucial points. This is true not only of the supposedly impartial opuses of academic economics, but also of the writings of Marxists, socialists, Keynesian dirigists, free-marketeers, anarcho-capitalists, libertarians and utopians of every flavour.
On important issues of monetary policy, then, and whether a free market in money is either workable or desirable, the protestations of the experts must be considered unreliable. In particular, the claims of libertarian-leaning economists, such as Ludwig von Mises, that the operation of “free banking” would be both stable and superior to the system of government monopoly called “central banking” need to be treated with scepticism; they have not proved what they think they have proved.
Here I intend to give a description of certain aspects of the creation and use of money free of major error; it is conceivable that I may not entirely succeed. I shall argue that free banking, as it is usually understood, may be liable to gross instabilities and inefficiencies, especially in a free-market environment, and that a centralised fiat currency has definite advantages. However, I shall then describe an alternative form of free-market banking that appears not to suffer from these deficiencies and into which the current system of state control could be metamorphosed. I shall argue that it is the innate honesty or dishonesty of the banking method that most distinguishes good money from bad; and that it is of the greatest importance to ensure that the laws under which banking takes place are able effectively to restrain all dishonest forms of banking, including those in which the dishonesty is most subtle.
2. What is Money?
So what is money? A deceptively easy question, that. Answers from the past include “gold”, “silver and gold”, “a medium of exchange”, “a promise to pay”, “a store of value”, “a measure of demand”, “just another commodity”. Such answers hold a germ of truth, but only lead to controversy, because they miss the essential point. All along we’ve been asking the wrong question. Instead, let us ask a new one:
What is the function of money?
The function of money is to keep track of who owes what to whom. In a world in which there is division of labour and in which we obtain diverse satisfactions by the voluntary exchange of goods and services we have need of an accounting device to permit this exchange to take place at minimal cost and without undue coercion or confusion. This accounting device we call money. Simple barter is not enough, because the goods I want are seldom held by the person to whom I can render service.
Imagine a central register, detailing every transaction entered into by each and every person, and containing a list of all the favours owed by each and every person to each and every other person. That would do it. It would be hideously complicated, but it would work. Fortunately, though, we needn’t go to such lengths, because in a market economy most of that data is redundant. All we really need to know is the current balance to the account of each person — how much the rest of the world owes him or how much he owes the rest of the world — and even that need not be centrally recorded.
In a market economy, then, the function of money is to reduce the transaction costs of honest trade (including gifts and bequests other than those directly in kind) by reliably and efficiently registering the indebtedness resulting from previous transactions. The details of those previous transactions no longer matter; only the present net position counts (except for incomplete transactions, such as when you have bought an item but not yet paid for it).
So, if the function of money is to keep track of honest trade, can we now answer the original question in a more enlightened and constructive way? I think we can.
Continue reading “Honest Money through bearer shares, a proposal”
By Andy Duncan, on 26 May 10
With what Mr Spock might call the fascinating financial news stories we have all seen in the last week or so, most people are coming around to the idea that we are on the edge of some kind of financial abyss. Is our drop into this abyss inevitable, in the best historicist tradition of the Marxists, or is there some clear route which can steer us away from a fall into a double-dip recession, or even a hyperinflationary depression, which is merely sitting around awaiting our discovery?
We at the Cobden Centre believe in the creation of a good sound currency system based upon honest money. However, the route to that may prove long and hard, and perhaps too long and too hard to get us quickly out of our current mess. Is there a simpler fix we can apply in the meantime?
Floy Lilley of the Mises Institute believes there is. She has been examining some financial reforms of the mid 1980s, in which New Zealand found itself in a remarkably similar position to our own current morass, with massive government debt and a large client state suffocating what remained of a shrinking productive sector.
How did the New Zealand government solve this problem?
Maurice P. McTigue, the former Minister of Works in New Zealand, led the assault. Some of the measures he instigated included reducing the Department of Transportation from 5,600 to 53 and reducing the numbers in the Forest Service from 17,000 to 17. In his own department, Mr McTigue remained the sole employee out of 28,000.
In a lecture he gave in 2004 (reproduced below), Mr McTigue explained how they achieved their remarkable turnaround in New Zealand’s fortunes, and how they escaped their own 1980s debt crevasse.
Alas, Ms Lilley believes our current UK Coalition government is incapable of adopting the bold measures taken by the New Zealand government:
Britain, too, is at a crossroads. Its political leaders cannot bear the thought of not spending, so they have stopped thinking about it. They are falsely convinced that any cuts in public spending would destroy the country’s basic public services and stop any economic recovery from ever beginning. Their economists have this backwards. The British population can look forward to ever-increasing taxation under the thumb of a coercive and costly bureaucracy whose monetary policies serve the state, but do not serve people.
Floy Lilley
But just in case there are any UK politicians out there who want to know how New Zealand did it, here is Mr McTigue’s 2004 lecture, as delivered to the students of Hillsdale College in the United States:
Rolling Back Government: Lessons from New Zealand
If we look back through history, growth in government has been a modern phenomenon. Beginning in the 1850s and lasting until the 1920s or ’30s, the government’s share of GDP in most of the world’s industrialized economies was about six percent. From that period onwards – and particularly since the 1950s – we’ve seen a massive explosion in government share of GDP, in some places as much as 35-45 percent. (In the case of Sweden, of course, it reached 65 percent, and Sweden nearly self-destructed as a result. It is now starting to dismantle some of its social programs to remain economically viable.) Can this situation be halted or even rolled back? My view, based upon personal experience, is that the answer is “yes.” But it requires high levels of transparency and significant consequences for bad decisions – and these are not easy things to bring about.
What we’re seeing around the world at the moment is what I would call a silent revolution, reflected in a change in how people view government accountability. The old idea of accountability simply held that government should spend money in accordance with appropriations. The new accountability is based on asking, “What did we get in public benefits as a result of the expenditure of money?” This is a question that has always been asked in business, but has not been the norm for governments. And those governments today that are struggling valiantly with this question are showing quite extraordinary results. This was certainly the basis of the successful reforms in my own country of New Zealand.
New Zealand’s per capita income in the period prior to the late 1950s was right around number three in the world, behind the United States and Canada. But by 1984, its per capita income had sunk to 27th in the world, alongside Portugal and Turkey. Not only that, but our unemployment rate was 11.6 percent, we’d had 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our credit ratings were continually being downgraded. Government spending was a full 44 percent of GDP, investment capital was exiting in huge quantities, and government controls and micromanagement were pervasive at every level of the economy. We had foreign exchange controls that meant I couldn’t buy a subscription to The Economist magazine without the permission of the Minister of Finance. I couldn’t buy shares in a foreign company without surrendering my citizenship. There were price controls on all goods and services, on all shops and on all service industries. There were wage controls and wage freezes. I couldn’t pay my employees more – or pay them bonuses – if I wanted to. There were import controls on the goods that I could bring into the country. There were massive levels of subsidies on industries in order to keep them viable. Young people were leaving in droves.
Spending and Taxes
When a reform government was elected in 1984, it identified three problems: too much spending, too much taxing and too much government. The question was how to cut spending and taxes and diminish government’s role in the economy. Well, the first thing you have to do in this situation is to figure out what you’re getting for dollars spent. Towards this end, we implemented a new policy whereby money wouldn’t simply be allocated to government agencies; instead, there would be a purchase contract with the senior executives of those agencies that clearly delineated what was expected in return for the money. Those who headed up government agencies were now chosen on the basis of a worldwide search and received term contracts – five years with a possible extension of another three years. The only ground for their removal was non-performance, so a newly-elected government couldn’t simply throw them out as had happened with civil servants under the old system. And of course, with those kinds of incentives, agency heads – like CEOs in the private sector – made certain that the next tier of people had very clear objectives that they were expected to achieve as well.
The first purchase that we made from every agency was policy advice. That policy advice was meant to produce a vigorous debate between the government and the agency heads about how to achieve goals like reducing hunger and homelessness. This didn’t mean, by the way, how government could feed or house more people – that’s not important. What’s important is the extent to which hunger and homelessness are actually reduced. In other words, we made it clear that what’s important is not how many people are on welfare, but how many people get off welfare and into independent living.
As we started to work through this process, we also asked some fundamental questions of the agencies. The first question was, “What are you doing?” The second question was, “What should you be doing?” Based on the answers, we then said, “Eliminate what you shouldn’t be doing” – that is, if you are doing something that clearly is not a responsibility of the government, stop doing it. Then we asked the final question: “Who should be paying – the taxpayer, the user, the consumer, or the industry?” We asked this because, in many instances, the taxpayers were subsidizing things that did not benefit them. And if you take the cost of services away from actual consumers and users, you promote overuse and devalue whatever it is that you’re doing.
When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement. And if you say to me, “But you killed all those jobs!” – well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn – on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned.
Some of the things that government was doing simply didn’t belong in the government. So we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.
We achieved an overall reduction of 66 percent in the size of government, measured by the number of employees. The government’s share of GDP dropped from 44 to 27 percent. We were now running surpluses, and we established a policy never to leave dollars on the table: We knew that if we didn’t get rid of this money, some clown would spend it. So we used most of the surplus to pay off debt, and debt went from 63 percent down to 17 percent of GDP. We used the remainder of the surplus each year for tax relief. We reduced income tax rates by half and eliminated incidental taxes. As a result of these policies, revenue increased by 20 percent. Yes, Ronald Reagan was right: lower tax rates do produce more revenue.
Subsidies, Education, and Competitiveness
What about invasive government in the form of subsidies? First, we need to recognize that the main problem with subsidies is that they make people dependent; and when you make people dependent, they lose their innovation and their creativity and become even more dependent.
Let me give you an example: By 1984, New Zealand sheep farming was receiving about 44 percent of its income from government subsidies. Its major product was lamb, and lamb in the international marketplace was selling for about $12.50 (with the government providing another $12.50)per carcass. Well, we did away with all sheep farming subsidies within one year. And of course the sheep farmers were unhappy. But once they accepted the fact that the subsidies weren’t coming back, they put together a team of people charged with figuring out how they could get $30 per lamb carcass. The team reported back that this would be difficult, but not impossible. It required producing an entirely different product, processing it in a different way and selling it in different markets. And within two years, by 1989, they had succeeded in converting their $12.50 product into something worth $30. By 1991, it was worth $42; by 1994 it was worth $74; and by 1999 it was worth $115. In other words, the New Zealand sheep industry went out into the marketplace and found people who would pay higher prices for its product. You can now go into the best restaurants in the U.S. and buy New Zealand lamb, and you’ll be paying somewhere between $35 and $60 per pound.
Needless to say, as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises – and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded, probably because families are prepared to work for less than corporations. In the end, it was the best thing that possibly could have happened. And it demonstrated that if you give people no choice but to be creative and innovative, they will find solutions.
New Zealand had an education system that was failing as well. It was failing about 30 percent of its children – especially those in lower socio-economic areas. We had put more and more money into education for 20 years, and achieved worse and worse results.
It cost us twice as much to get a poorer result than we did 20 years previously with much less money. So we decided to rethink what we were doing here as well. The first thing we did was to identify where the dollars were going that we were pouring into education. We hired international consultants (because we didn’t trust our own departments to do it), and they reported that for every dollar we were spending on education, 70 cents was being swallowed up by administration. Once we heard this, we immediately eliminated all of the Boards of Education in the country. Every single school came under the control of a board of trustees elected by the parents of the children at that school, and by nobody else. We gave schools a block of money based on the number of students that went to them, with no strings attached. At the same time, we told the parents that they had an absolute right to choose where their children would go to school. It is absolutely obnoxious to me that anybody would tell parents that they must send their children to a bad school. We converted 4,500 schools to this new system all on the same day.
But we went even further: We made it possible for privately owned schools to be funded in exactly the same way as publicly owned schools, giving parents the ability to spend their education dollars wherever they chose. Again, everybody predicted that there would be a major exodus of students from the public to the private schools, because the private schools showed an academic advantage of 14 to 15 percent. It didn’t happen, however, because the differential between schools disappeared in about 18-24 months. Why? Because all of a sudden teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. Eighty-five percent of our students went to public schools at the beginning of this process. That fell to only about 84 percent over the first year or so of our reforms. But three years later, 87 percent of the students were going to public schools. More importantly, we moved from being about 14 or 15 percent below our international peers to being about 14 or 15 percent above our international peers in terms of educational attainment.
Now consider taxation and competitiveness: What many in the public sector today fail to recognize is that the challenge of competitiveness is worldwide. Capital and labor can move so freely and rapidly from place to place that the only way to stop business from leaving is to make certain that your business climate is better than anybody else’s. Along these lines, there was a very interesting circumstance in Ireland just two years ago. The European Union, led by France, was highly critical of Irish tax policy – particularly on corporations – because the Irish had reduced their tax on corporations from 48 percent to 12 percent and business was flooding into Ireland. The European Union wanted to impose a penalty on Ireland in the form of a 17 percent corporate tax hike to bring them into line with other European countries. Needless to say, the Irish didn’t buy that. The European community responded by saying that what the Irish were doing was unfair and uncompetitive. The Irish Minister of Finance agreed: He pointed out that Ireland was charging corporations 12 percent, while charging its citizens only 10 percent. So Ireland reduced the tax rate to 10 percent for corporations as well.
There’s another one the French lost!
When we in New Zealand looked at our revenue gathering process, we found the system extremely complicated in a way that distorted business as well as private decisions. So we asked ourselves some questions: Was our tax system concerned with collecting revenue? Was it concerned with collecting revenue and also delivering social services? Or was it concerned with collecting revenue, delivering social services and changing behavior, all three? We decided that the social services and behavioral components didn’t have any place in a rational system of taxation. So we resolved that we would have only two mechanisms for gathering revenue – a tax on income and a tax on consumption – and that we would simplify those mechanisms and lower the rates as much as we possibly could. We lowered the high income tax rate from 66 to 33 percent, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19 percent, which became the flat rate for low-income earners. We then set a consumption tax rate of 10 percent and eliminated all other taxes – capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20 percent more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance. If tax rates are low, taxpayers won’t employ high priced lawyers and accountants to find loopholes. Indeed, every country that I’ve looked at in the world that has dramatically simplified and lowered its tax rates has ended up with more revenue, not less.
What about regulations? The regulatory power is customarily delegated to non-elected officials who then constrain the people’s liberties with little or no accountability. These regulations are extremely difficult to eliminate once they are in place. But we found a way: We simply rewrote the statutes on which they were based. For instance, we rewrote the environmental laws, transforming them into the Resource Management Act – reducing a law that was 25 inches thick to 348 pages. We rewrote the tax code, all of the farm acts, and the occupational safety and health acts. To do this, we brought our brightest brains together and told them to pretend that there was no pre-existing law and that they should create for us the best possible environment for industry to thrive. We then marketed it in terms of what it would save in taxes. These new laws, in effect, repealed the old, which meant that all existing regulations died – the whole lot, every single one.
Thinking Differently About Government
What I have been discussing is really just a new way of thinking about government. Let me tell you how we solved our deer problem: Our country had no large indigenous animals until the English imported deer for hunting. These deer proceeded to escape into the wild and become obnoxious pests. We then spent 120 years trying to eliminate them, until one day someone suggested that we just let people farm them. So we told the farming community that they could catch and farm the deer, as long as they would keep them inside eight-foot high fences. And we haven’t spent a dollar on deer eradication from that day onwards. Not one. And New Zealand now supplies 40 percent of the world market in venison. By applying simple common sense, we turned a liability into an asset.
Let me share with you one last story: The Department of Transportation came to us one day and said they needed to increase the fees for driver’s licenses. When we asked why, they said that the cost of relicensing wasn’t being fully recovered at the current fee levels. Then we asked why we should be doing this sort of thing at all. The transportation people clearly thought that was a very stupid question: Everybody needs a driver’s license, they said. I then pointed out that I received mine when I was fifteen and asked them: “What is it about relicensing that in any way tests driver competency?” We gave them ten days to think this over. At one point they suggested to us that the police need driver’s licenses for identification purposes. We responded that this was the purpose of an identity card, not a driver’s license. Finally they admitted that they could think of no good reason for what they were doing – so we abolished the whole process! Now a driver’s license is good until a person is 74 years old, after which he must get an annual medical test to ensure he is still competent to drive. So not only did we not need new fees, we abolished a whole department. That’s what I mean by thinking differently.
There are some great things happening along these lines in the United States today. You might not know it, but back in 1993 Congress passed a law called the Government Performance and Results Act. This law orders government departments to identify in a strategic plan what it is that they intend to achieve, and to report each year what they actually did achieve in terms of public benefits. Following on this, two years ago President Bush brought to the table something called the President’s Management Agenda, which sifts through the information in these reports and decides how to respond. These mechanisms are promising if they are used properly. Consider this: There are currently 178 federal programs designed to help people get back to work. They cost $8.4 billion, and 2.4 million people are employed as a result of them. But if we took the most effective three programs out of those 178 and put the $8.4 billion into them alone, the result would likely be that 14.7 million people would find jobs. The status quo costs America over 11 million jobs. The kind of new thinking I am talking about would build into the system a consequence for the administrator who is responsible for this failure of sound stewardship of taxpayer dollars. It is in this direction that the government needs to move.
Reprinted by permission from IMPRIMIS, the monthly journal of Hillsdale College
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 Toby Baxendale, on 18 May 10
I offer a £1,000 reward for anyone who can tell me why this logically won’t work, practical politics, for now, being another matter.
What follows is an attempt to show you that this can be done.
Remember the story about the Emperor whose only concern was not the welfare of his people but the state of his clothes? Lacking a new outfit for his procession, he instructs the finest clothe-makers to propose designs. Step forward Slimus and Slick, promising that only clever people will be able to see their splendiferous garments; they will be invisible to anyone stupid. In exchange for gold coin – real money – they make something special for the King. The King, seeing nothing when presented with these designs made out of thin air, worries that he must be stupid because he pretended to the fraudsters that they were wonderful. Word goes round that only clever people can see the garments, so everyone cheers the naked King during his procession. It takes a small child, on top of his father’s shoulders, to exclaim: “the Emperor has got nothing on!” Everyone falls silent. Then, one by one, they start muttering, “the Emperor is naked!”
I am going to tell you that our Emperor – the government – has no clothes and is indeed naked with respect to our money. The sooner we realise this the better. Then we can make real progress and prevent the imminent misery. Indeed, the realisation of its nakedness should reveal that we have a unique moment in history to do something very special: to make banking secure, pay off the national debt, and even enable a 28.5% income-tax cut.
We all know what notes and coins are: money, or cash. It allows us to exchange the fruits of our work for the goods of others. When we deposit cash in Bank A – say £100 – we lend this money to the bank. This may come as a surprise to most, as we think what we deposit in a bank actually remains “ours” beyond this point. But as soon as you make a deposit it becomes the bank’s i.e. “theirs.” They then lend what is called credit of £100 to an entrepreneur, who banks it in bank B. Like magic, we now have you, who have a claim to “your” £100, and the entrepreneur, who also has an equally valid claim to “his” £100. This happens 33 times for every £100 deposited in the UK economy on average, meaning that for every £100 deposited, it is lent out to 33 people. Some of the banks did this up to 60 times. This cash cannot exist in two places at the same time, let alone 60 places at once. So what bank A does, is write you an IOU. Yes, your bank-statement is a mere IOU, the bank saying “ bank A owes you £100 on demand.” This is called a demand-deposit. We now see that demand-deposits are created out of thin air! Indeed, these are just ledger-entries from one bank customer to another.
Tesco groceries can be paid by electronic transfer. All we are doing is moving our bank’s IOU to Tesco’s bank in exchange for their groceries. This is how the world works. Do we care that we are buying goods and services out of thin air? Like the Emperor, does he care – as long as all believe he is clothed? Well, the customers of Northern Rock did. So when more than a small percentage of them asked for their IOUs from Northern Rock to be repaid – or, as they thought, for “their” money back – it could not be, as the bank had already lent it many times, making it impossible to reimburse all they owed. Indeed, if the government had not pledged to underwrite all deposits, then there would be a very good chance that the whole system would have collapsed.
If we accept that the Emperor is naked then the path to solving all our current financial problems becomes clearer.
Consider this following programme of reform:
- Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.
- Mandate all banks to hold your cash (100% reserved) on demand at all times.
- Wipe from the bank ledgers all the demand-deposits/IOUs as banks would not owe you money anymore. This means the “thin air” money disappears, to be replaced exactly with cash money. Note: this is not inflationary, as the cash replaces the demand-deposit which acted as money. As we have established, it is only thin-air that the banking system has created to facilitate the multiplicity of lending of the same bit of money, so its total replacement with cash would mean the money supply stays exactly the same.
- Require all banks to lend real savings that people knowingly place with banks to lend to businesses to get a return of interest and capital back when the business repays that loan. This is nice, simple and safe utility banking. This is what Mervyn King advocates.
- As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run.
- As for the banks, not having you the depositor as a liability anymore, they will suddenly be £850 billion better off, with no current liabilities and only assets (loans to business etc), post reform. The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform, owned by their existing shareholders. As the national debt is still just under the £850 billion, which would be available as surplus assets of the banks, this could still be achieved.
- No national debt means no interest costs (currently £40 billion p.a) associated with paying for our borrowing. Therefore, give an immediate 28.5% income-tax cut. Total income-tax raised is £142 billion.
The boy in the story stood on his father’s shoulders. I stand on the shoulders of great men who have advocated part of this reform: Irving Fisher, the greatest American economist, the Nobel Prize winners Soddy, Hayek, Buchanan, Tobin, and Allais. Recently, Kotlikoff of Boston University has published an excellent book, “Jimmy Stewart is Dead” advocating a similar reform. It is endorsed by more Nobel Winners: Akerlof, Lucas, Fogel, Prescott, and Phelps. I count 36 endorsements from the great and the good for the book. All endorse Kotlikoff’s move to what he calls Limited Purpose Banking which is another way to get 100% reserved (i.e. secure) deposits backed by cash rather than thin-air.
The Economist Huerta De Soto, in “Money, Bank Credit & Economic Cycles,” has seen the opportunity that presents itself to reform for 100% money while also paying off the National Debt. Following on from this, I suggest a substantial wealth-creating tax cut for the people. Just like the boy in the story, I do hope that people start to realise that the emperor really has no clothes, and that an enlightened approach can address this.
By Tom Clougherty, on 21 April 10
The BBC reports that the IMF has unveiled its interim proposals on a new international tax on the financial sector, ahead of a meeting of finance ministers this weekend.
In fact, the IMF’s paper suggests two new taxes. The first, a ‘financial stability contribution’ would be levied on all financial institutions, initially at a flat rate, to help cover the ‘fiscal cost of any future government support to the sector’. The second, is a ‘financial activities tax’, which would be levied ‘on the sum of the profits and remuneration of financial institutions’.
The first point to be made is that justifying these taxes on the grounds that the proceeds will help governments deal with future crises is a straightforward con. The proceeds of the first tax could either ‘accumulate in a fund to facilitate the resolution of weak institutions or be paid into general revenue’ say the IMF, but you don’t need to be psychic to work out which of those is more likely – governments will just spend the money on current expenditure, as they always do. The second tax doesn’t even come with an either/or fig leaf – proceeds will go into general revenue, for governments to spend as they see fit.
So it is pretty clear that what we have here isn’t so much a policy to ensure financial stability, but rather to bail out profligate governments. Moreover, this could in itself worsen financial instability by making fiscal policy even more pro-cyclical (revenues would be highest during financial booms), and exacerbating boom and bust cycles.
There are other problems too. For example, the idea of compulsory ‘insurance’ against failure for banks (this is the direction the ‘financial stability contribution’ moves us in) is likely to make moral hazard – already a major issue – an even more severe problem. Even now, government guarantees to banks are largely implicit, but the IMF’s tax proposal would make them explicit. Indeed, the ‘financial stability contribution’ is not just an overt indication that irresponsible banks will be bailed out – it could easily be read as creating an obligation that they must be bailed out. And that’s hardly a way to encourage less risk-taking.
It is also problematic that these taxes will be applied to all financial institutions (including insurers, hedge funds and so on), most of which had little to do with the financial crisis. They are thus likely to damage the wider financial economy, without actually doing anything much to deal with the real offenders.
Which brings me neatly to the most depressing aspect of these proposals: the complete lack of understanding they exhibit about the actual causes of the financial crisis – loose monetary policy, ramped up by unrestrained fractional reserve banking, and amplified by fiscal incontinence. The saddest thing is that the world’s financial system desperately does need reform. Without a radically new approach to controlling the money supply and taming the credit cycle, history is doomed to repeat itself. But the IMF’s proposals do not even qualify as a step in the right direction.
By Steven Baker MP, on 30 March 10
The Belfast Telegraph reports Toby’s efforts to deliver “Big banking lessons from little Presbyterian Mutual“:
Investors at the Presbyterian Mutual Society are the only depositors in the UK likely to lose personal savings as a result of the banking crisis.
The organisation, which operated under an FSA exemption intended for credit unions in Northern Ireland, does not benefit from a Government guarantee scheme which protected savers’ money and put an end to the run on Northern Rock.
When customers attempted to withdraw £50m during the height of the banking crisis in October 2008, the PMS paid out £21m before entering administration in order to safeguard its remaining reserves, which totalled, by that stage, just £4m.
As the Northern Ireland Executive and the Government at Westminster wrangle over responsibility for the crisis, a charity and pressure group, formed to promote the principles of honest money, has formulated a plan which could refund the society’s savers, without necessitating a bailout at public expense.
The Cobden Centre, spearheaded by seafood entrepreneur Toby Baxendale, is keen to see the Bank of England issue new notes and coins to PMS investors who currently cannot access their money. Any inflationary effect would be mitigated by erasing deposits and allowing the Government to recover the society’s investments, to set against the national debt.
As the article hints, this measure is not inflationary. The inflation already happened when demand deposits were loaned. This measure is anti-deflationary. Think of it as a just and fair version of QE based on sound property rights.
Read more.
Further reading
By Steven Baker MP, on 15 February 10
 Dowd, Alchemists of Loss We are delighted to announce a forthcoming book by Cobden Centre Senior Fellow Professor Kevin Dowd and US-based journalist and former investment banker Martin Hutchinson: The Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System. The book contains some delightfully simple insights into a complex subject. For example:
The credit default swap sneaked up on everybody, becoming a $62 trillion market, without anyone outside the business knowing much about it. As the Bear Stearns, Lehman and AIG debacles revealed, these instruments also involved highly non-transparent credit risks of their own. As a holder of a CDS you don’t know whether your counterparty has issued only a few of your CDS, in which case you’ll probably get paid in a bankruptcy, or whether he has issued fifty times the outstanding debt you’re trying to hedge, in which case you’re unlikely to get paid.
And moreover:
Financial engineering’s benefit to the global economy is highly questionable and the proliferation of financially-engineered products of recent years has brought few benefits and led to huge losses for society at large. As we have seen, one quarter’s bad losses in late 2008 wiped out all the accumulated financial engineering profits of the last quarter century and saddled taxpayers with a bill for hundreds of billions, if not more.
Prof. Dowd has kindly agreed to pre-release two chapters through The Cobden Centre:
From Chapter 16:
Alert readers will have already picked up some of the advice we would give investors and clients of financial institutions:
- take a longer-term perspective and return to investment rather than speculation;
- do not seek to ‘enhance’ yields, because this always exposes investors to hidden costs and risks, whilst firms seeking finance should resist cutting corners on their financing costs, for the same reason; thus, both parties should be realistic in their expectations;
- avoid frequent trading, focus on static over dynamic strategies, buy and hold over activist portfolio management;
- pay more attention to costs and hidden charges, and work on the assumption that higher charges are usually a good signal of a bad deal;
- distrust commission-based salespeople;
- if you use derivatives, be clear why and use them only for risk management and not speculation;
- avoid complicated opaque products; and
- do not take liquidity for granted and ensure that your liquidity is protected in a crisis.
Besides this motherhood and apple pie stuff, investors should also be careful of correlation-based investment and risk management strategies, which work well when not needed but are apt to break down when they are. This is not to suggest that they should give up on diversification. People understood diversification long before Modern Portfolio Theory, but they tended to practice it differently and more wisely. Diversification was assessed by committees of experienced practitioners, who took a long-term view and relied on their judgment rather than unreliable correlation estimates – a far cry from modern practices of modern fund management, with its obsession with short-term performance assessment
Investors should demand transparency. Perhaps the most sobering lesson we have learned since the subprime crisis broke is the benefit of transparency in business dealings. Time after time, when a fiasco has occurred, a key contributing factors has lack of transparency. Subprime mortgages, CDOs and credit default swaps were all financial innovations that relied crucially on nobody asking too many questions. So too with the vast Madoff Ponzi scheme, involving some of the most sophisticated investors in the world, which rested on the same fatal human omission.
Download Chapter 16 to read on.
From Chapter 17:
The restoration of a rational and stable financial system inevitably requires major reform on a number of fronts. History gives much guidance here and also a role model: the period we should seek to emulate is the nineteenth century. Then money was sound, the dominant currency of the time, the pound, was literally as good as gold, while financial institutions were conservative and generally stable, and an altogether healthier financial ethos reigned.
It is very common these days to sneer at the gold standard: after all, it was Keynes who once dismissed it as “a relic from a barbarous age”. We would suggest, on the contrary, that a gold standard or some suitably 21st Century commodity equivalent would be highly desirable, and put an end to the disastrous century-long experiment with fiat money and its attendant miseries of inflation and monetary instability. The fact that Keynes opposed the gold standard is a further reason to support it.
The nineteenth century model would also entail major reforms to financial institutions and the regulatory system: greater liability and greater responsibility, the repeal of deposit insurance and investor protection legislation and the abolition of the big financial regulatory bodies such as the SEC and FSA. And by nineteenth century standards, we really mean early nineteenth century standards, those that pertained to the period before the Bank Charter Act of 1844 and the Companies Act of 1862, when liability was very real.
As for the banking system, we would suggest that the role model is Scotland pre-1845, when the Scottish banking system was virtually free of state control, unhindered by a central bank, and equally admired and envied across the world – and copied by countries such as Canada and Australia. In all three countries, free banking systems operated highly successful for very long periods of time. Indeed, the Canadian system was widely admired in the United States – and many US reformers in the late nineteenth century saw it as their ideal. The Canadian system was highly stable – apart from the failures of two small Alberta banks in 1985, its last notable bank failure was that of the Home Bank of Canada back in 1923. There were no Canadian bank failures in the 1930s and, even after the establishment of the Bank of Canada in 1934, many still regard the Canadian banking system as the best in the world.
Our first choice environment would be one with a commodity standard, free banking (no central bank) and financial laissez-faire, restrictions on the use of the “limited liability” corporate form and the most limited government. Even if we don’t return all the way to these early nineteenth century standards (and we can imagine the opposition!), we should still move as much as possible in that direction, though we would not advocate the reintroduction of the notorious debtors’ prisons immortalized in the fiction of Charles Dickens! However, our proposed reforms herein are adapted to the “second best world” (if it’s actually that; it may be about thousandth best of all the ‘parallel universe’ possibilities) in which we live, with relatively large government, a fiat currency and a central bank.
The most important institutional policy that must be solved is that of an excessively expansionary monetary policy. Simply making the monetary authority “independent” does not achieve this if the monetary authority retains its interactions with politicians and the financial community, both of which want loose money. The ideal to aim at is a hard money Fed, a Paul Volcker Fed.
Download Chapter 17 to read on.
You can also pre-order Alchemists of Loss at Amazon.
Further Reading
- Huerta de Soto, Money, Bank Credit and Economic Cycles
- Baxendale, A day of reckoning: how to end the banking crisis now
- What is wrong with banking, part 1: the legal nature of banking contracts
- Frank Whitson Fetter, Development of British Monetary Orthodoxy 1797 – 1875
- F. A. Hayek, Denationalisation of Money: The Argument Refined
- Gordon Kerr, How To Destroy the British Banking System and Bailing out the Banks – Glaring Evidence of Moral Hazard
- James Tyler, My Journey to Austrianism via the City, Money is not working and How to avoid future encounters with financial meltdown
- Irving Fisher, 100% Money, 1935
By Steven Baker MP, on 25 January 10
 Should banks be permitted to operate with a fractional reserve on demand deposits or should 100% reserves be a legal requirement? Should there be a central bank with a monopoly on note issue? What are the consequences of these choices? These were mainstream questions in the 19th century and they demand attention today. Here, following the ESCP Europe/Cobden Centre “Colloquium on Honest Money”, Steve Baker frames the debate to be had about money and banking.
Today, people are well aware that we have a banking crisis, a “credit crunch“. That is, there is a problem in the financial system, a system which is centrally planned — see Economic Interventionism, Banks and the Crisis – and an approach which necessarily works badly – see Strip the Bank of England of its power. So, what are the features of the present system and what are the alternatives?
The two important features of the present, orthodox system are:
- The banks are not required to keep money in reserve to the value of demand deposits. That is, they operate with a fractional reserve. As Toby Baxendale has pointed out, today if more than one person in 34 asks their bank for their money back in notes and coins, which is a reasonable, contractually-sound request, we will have a systemic banking crisis — a run on all banks — because there is simply not as much cash as people’s bank statements say there is.
- There are, across the world, central banks in which committees of experts set “monetary policy” — see The kindness of geniuses – a rate of interest which, through various mechanisms, affects the entire economy. And the economy is, of course, what people choose to do, since the economy is nothing more or less than the cooperation of thinking, acting individuals and of corporations run by thinking, acting individuals; therefore, manipulating the interest rate necessarily distorts the actions of people and the productive structure. Central banks also act as “lenders of last resort” in the event of a run on a particular bank — which is possible because of their fractional reserve — but in the case of Northern Rock, the Bank of England did not ultimately fulfill that role.
Stepping back from today’s monetary orthodoxy — a fractional reserve and a central bank — the options are plain: we can have a 100% reserve on demand deposits, or not, and separately, we can have central banks with a monopoly on the supply of currency, or not. Hence, Jesús Huerta de Soto models (PDF) the banking debate as follows:
 The shape of the debate (click to enlarge) As Irving Fisher, one of the founders of Monetarism, pointed out in the sub-title and content of his book 100% Money, there are potential benefits to be gained from moving to another system. For example, Fisher identified the following as the headline benefits of moving to a 100% reserve requirement:
- keeping chequing banks 100% liquid so that there can be no more runs on banks,
- preventing inflation and deflation,
- largely curing or preventing depressions,
- and wiping out much of the National Debt.
Since we have had a run on a bank, since the money supply has deflated, since attempts to reflate the money supply risk price inflation and distort the economy, since the boom-bust cycle is evidently still in progress and since we are doubling our national debt, it is perhaps worth taking seriously the question of how our system of money and banking is organized.
Furthering that discussion was the purpose of the recent ESCP Europe/Cobden Centre Colloquium on Honest Money directed by Founding Fellow Dr Anthony J. Evans, Chaired by Corporate Affairs Director Steve Baker and attended by Chairman Toby Baxendale amongst 9 other academics and practitioners in the field of money and banking.
We will continue to develop and promote a range of ideas to open up and further the debate on money and banking.
Further Reading
- Baxendale, A day of reckoning: how to end the banking crisis now
- Frank Whitson Fetter, Development of British Monetary Orthodoxy 1797 – 1875
- F. A. Hayek, Denationalisation of Money: The Argument Refined
- Huerta de Soto, Money, Bank Credit and Economic Cycles
- Gordon Kerr, How To Destroy the British Banking System and Bailing out the Banks – Glaring Evidence of Moral Hazard
- James Tyler, My Journey to Austrianism via the City, Money is not working and How to avoid future encounters with financial meltdown
- Irving Fisher, 100% Money, 1935
By Gordon Kerr, on 18 January 10
The following is the text of an address by Gordon Kerr, a Cobden Centre Advisory Board Member, to the Brussels Group at the European Parliament on 13th January 2010.
By Invitation of Syed Kamall MEP, Christofer Fjellner MEP and Alexander Graf Lambsdorff MEP. Meeting chaired by Shane Frith.
Syed Kamall, Shane Frith, ladies and gentlemen, thank you for inviting me here to address you today.
1. Introduction
May I provide a few words by way of brief personal background. I have spent the bulk of my 25 year banking career as a structuring engineer.
I played a minor role in wrecking the British banking system by designing and implementing synthetic capital structures – these are mechanisms for banks to produce, as if by magic, additional capital in their accounts which does not in reality exist.
This artificial capital was and remains a product of inconsistent regulatory capital rules that applied to different categories of banking activities.
By way of example: multi billion portfolios of insured loans were flipped from the funded regulatory regime (8% capital ratio) to the derivatives regime (1/16th of this – 0.5%) merely by wrapping them up in credit default swaps.
I will seek to persuade you today of my view that there exists a simple and perhaps Europe-wide cure to the banking crisis. Make a simple legal change.
Simply stipulate that funds deposited under demand deposit contracts with banks belong to the depositor and must be backed by cash or a near cash asset (such as Government bonds).
This proposal would not freeze the banking system. On the contrary, it would revitalise it by ensuring that there could never in future be a run on banks. This proposal would enable free markets to flourish, and would remove the banks from taxpayer dependency.
The European Parliament has this power. Let me invite you to consider using it.
2. Why is this step necessary?
Let me frame the regulatory options very clearly. The number of truly different ways of regulating the banking industry is two. The only alternative to the 100% collateralised demand deposit regulatory structure is the Fractional Reserve system. This is the present system.
Under fractional reserve regulation banks are required to maintain a minimum say 8% “fraction” of their exposures as capital.
Since the bulk of European banks are shareholder owned rather than mutuals or government owned, market forces virtually compel them to push Fractional Reserve regulation to the limit.
No bank CEO could keep his job if he was not fully leveraged in supposedly stable market conditions.
Furthermore, capital is expensive to raise. Under the present system market forces result in the emergence of methods of inflating what I would regard as a fair measure of bank capital such that it appears greater than it actually is.
If the proposal now made is ignored then I fear we will have failed to learn anything from the 2008 collapse.
The alternative is simply to patch the banks back together under a supposedly strengthened Fractional Reserving set of regulations. However, FR in any form is almost certain to lead to another boom bust cycle.
In the initial phase banks will generate large profits as they again inflate the money supply, driving asset prices up which in circular fashion will boost lending once again as the collateral values of the assets justify greater and greater loans. This will give the appearance of economic growth but, like the boom that preceded the present bust, it will merely be storing up more problems for present and future taxpayers.
Contrast the sincere and genuine concern shown here in this Parliament for the interests of future generations in the context of our climate change concerns with the scant regard for their financial interests demonstrated by our continued tolerance of ineffective banking regulation.
3. A few words on the critical importance of demand deposit contracts.
Why has the UK Government, and others, bailed out banks? Of all the stakeholders in banks, which category of stakeholder was deemed so important that such previously unimagined sums needed to be spent to protect its interests?
Borrowers’ interests did not justify the bailout; their loans would be treated as an asset in liquidation and sold to the highest bidder;
Shareholders – surely this is the class of stakeholder least deserving of any taxpayer rescue funds.
Lenders – mainly other banks and institutions. This class does not merit state protection, they knew the risks and took them. Likewise derivative counterparties; this class is in exactly the same category as lenders, the only difference being the technical point that most derivative exposures are unfunded as opposed to funded. The widely quoted credit default swap market illustrates the maturity and professionalism with which both these categories of stakeholder assume credit exposure to banks.
The key stakeholder whose interests could not be sacrificed must be DEPOSITORS. Why are depositors’ interests considered so important and deserving? I think the answer to this question must be that depositors mistakenly believed back in October 2008, and even since then, that funds they deposit in a bank belong to them. That is a serious mistake. In case any of you are in any doubt there is no legal difference in any European jurisdiction of which I am aware between a deposit contract and a loan contract. Both are loans to the bank and a deposit contract is a loan that can be called back by the lender supposedly on demand.
But few UK citizens are aware of this point. A recent UK survey found that 70% of the sample surveyed believe that depositors own the money they put in a bank, just as the client of a law firm owns the funds he leaves in a solicitor’s Client account in the UK. How would you feel if you went to collect your funds from your solicitor and were told “ I’m sorry, I’ve just lost all your money by speculating it without your permission in an attempt to boost my profits? ” Yet this is how we approve of banks treating our demand deposits under fractional-reserve banking rules.
The proposal now submitted would prevent future crashes and would recognize the critical importance of demand depositors by stipulating that ownership of demand deposit funds remained with the depositors, not the banks.
Market forces would ensure that banks worthy of surviving the present crisis would clean up their business models and render their balance sheets transparent. They would seek to grow and profit by persuading depositors to convert some deposits to loans.
4. Replies to Possible Objections
Various objections have been set out:
- Banks would fail to be able to provide loans. Response: Bank lending would only be curtailed to the extent that they could not provide loans not backed by savings willingly lent to banks. Some of the projects presently being financed would not succeed in obtaining credit in such an environment. This is surely no bad thing since it is precisely these marginally viable transactions that form the tipping point of each successive banking crisis. Only 3% of the UK Bank’s liabilities are demand deposits.
- Interest rates would rise and economic development be held back. Response: The absence of bank crises would eliminate the massive squandering of capital goods which accompanies severe recessions, and there is no reason to suppose that the interest rate would be any higher in such a system than the market rate implied in today’s environment. Again, the matching up of saved funds with loaned funds should prevent the inception of non- viable projects saving the system from the crashes which always lead to a freezing up of bank lending.
- A 100% reserve requirement would inhibit the contractual freedom of the parties. Response: On the contrary, the proposal represents the natural application of traditional property law principles to a monetary deposit contract.
- Economic growth is not possible without a certain amount of credit expansion and inflation. Response: May I quote De Soto “ The slight, gradual and continuous deflation (in the sense of a rise in the purchasing power of the monetary unit) would actively foster sustained, harmonious economic development”.
5. Conclusion
At the point of collapse the Royal Bank of Scotland had leveraged itself so severely that it had lent out each pound sterling sitting in so called demand deposit accounts 66 times.
Even the most prominent defenders of fractional-reserve banking recognize that the establishment of a 100% reserve requirement would put an end to banking crises.
Simon Johnson, former Chief Economist of the IMF said in May 09 “The Finance industry has effectively captured our Government…recovery will fail unless we break this financial oligarchy”
You have the power to prevent any recurrence of these banking crises and to free governments and taxpayers from the finance industry. I urge you to use it, change the legal status of demand deposit contracts as proposed – provide that such funds remain 100% cash backed and remain the property of depositors.
Ladies and Gentlemen, thank you.
Gordon Kerr
January 13th 2010
Further reading
By Steven Baker MP, on 29 December 09
 Razeen Sally’s Trade Policy, New Century (PDF) succeeds magnificently in explaining the 21st-century case for free trade and, specifically, unilateral trade liberalisation to the interested, non-specialist reader.
From the IEA home page of the book:
The World Trade Organization (WTO) is failing to deliver the trade liberalisation desperately needed to bring prosperity to developing countries, according to a new study released today by the Institute of Economic Affairs. The WTO is hamstrung by a cumbersome negotiating model and the influence of vocal protectionist lobbies who oppose free markets. At the same time, increasingly popular regional ‘free-trade agreements’ often create as many barriers as they remove by erecting new obstacles to trade with countries outside the blocs concerned.
In the context of policy paralysis at the WTO, the author, LSE trade expert Dr Razeen Sally, argues that governments must take back the initiative from supranational institutions. The priority must be unilateral liberalisation – removing trade barriers to benefit domestic consumers rather than waiting for tortuous international negotiations to be resolved. Governments can also help maximise the benefits of free trade by liberalising their economies and strengthening key institutions.
But what is the imperative for the UK? Surely, European Union citizens enjoy free trade?
The EU is a customs union: we trade ostensibly freely within it, but, as can be seen from the EU’s TARIC database, we find ourselves behind a complex system of tariffs on, for example, wheat, notwithstanding the battle long since won by our inspiration, Richard Cobden, to repeal England’s Corn Laws in the general interest.
And this is the key point: free trade is in the general interest. We may make the political and economic arguments in detail, but the public good is our ultimate aim, and not just at home. Razeen Sally explains (pp179-180, emphasis mine):
Adam Smith fortified his presumption in favour of free trade with an explicit political argument. Protectionism is driven by ‘the clamorous importunity of partial interests’ who capture government and prevent it from having ‘an extensive view of the general good’. Free trade, in contrast, tilts the balance away from rent-seeking producer interests and towards the mass of consumers. It is part of a wider constitutional package to keep government limited, transparent and clean, enabling it to concentrate better on the public good.
As important to Smith and Hume was the moral case for free trade, centred on individual freedom. Individual choice is the engine of free trade, and of progressive commercial society more generally. It sparks what Hume called a ‘spirit of industry’; it results in much better life-chances, not just for the select few but for individuals in the broad mass of society who are able to lead more varied and interesting lives.
To sum up: free trade is of course associated with standard economic efficiency arguments. But the classical-liberal case for free trade is more rounded, taking in the moral imperative of individual freedom and linking it to prosperity. Finally, free trade contributes to, though it does not guarantee, peaceful international relations. Freedom, prosperity, security: this trinity lies at the heart of the case for free trade.
In a short article, I can scarcely do justice to this monograph’s insight in relation to the case for classic liberalism nor to its observations on emerging geopolitics: I heartily recommend the book.
Further reading
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