Douglas Carswell’s Banking Reform Bill published

The House of Commons has just published Douglas Carswell’s upcoming bill on banking reform. You can read the PDF here. Douglas Carswell blogs about this publication, here.


Cobden Centre Radio

Cobden Centre Radio: Steve Baker MP

In our latest 26-minute Cobden Centre Radio show, I interview Steve Baker MP about his Austrian path into the world of politics and how he thinks we can inject financial sanity into the economically diseased global body of Keynesian orthodoxy.  Touching upon the Douglas Carswell bill, due for its second reading in November, we also discussed how the British state can be rolled back, and where he thinks the British economy is heading, and how he thinks we can turn everything around to create an honest monetary system and a reduced government.

At the end of the interview, Steve also mentions a new TV documentary by Wag TV, due to be broadcast on Channel4 on the 21st of October, immediately following the coalition government’s comprehensive spending review, as a commentary upon the state of Britain’s finances. As Wag TV have produced some of my favourite documentaries in recent years, and as Steve may be playing a significant role in this new documentary about the British economy, Cobden Centre subscribers may want to book this date in their diaries for a rare night in with the TV. In the meantime, here is our fourth home-grown radio show:

Alternatively, try our podcast:

Subscribe to Podcast


Ending the Sugar-Rush from Candy-Floss Credit

In an article for Critical Reaction, Graham Stewart highlights some of the challenges the Regulation of Deposits and Lending Bill may face:

there are obvious objections to the proposals, not least that this well intentioned effort to restore sound finance could prove so deflationary that it seriously retards the economy and thereby further destabilises the nation’s already precarious accounts. Vehement opposition can be expected by the major high street banks, drawing in turn calls for them not to be undermined by some and by cries that they’ve brought this situation upon themselves by others. Would the Carswell-Baker Act (as we might call it) cripple the UK’s banking sector if international competitors did not follow suit and carried on regardless? In the short term at least, the prescription for financial rectitude may prove a more painful cure than merely enduring the illness.

Other concerns involve trying to foresee the response of depositors if they were given the choice to opt out of allowing their bank to invest their money according to the bank’s preferences. Those who chose not to see their money used for other investment purposes would see their accounts ceasing to pay interest and would incur greater handling costs. Might some small savers balk at paying higher bank charges and therefore stick their savings under the mattress instead? In such ways might imprudence rather than financial savvy result.

Nevertheless, what Douglas Carswell proposes should be the basis for serious debate. On Wednesday his bill passed its first reading without dissent. The second reading debate will take place on 19 November at which point we can expect the legislation to hit the parliamentary buffers. But the fundamental questions that underpin his proposal will remain in need of better answers than have thus far been offered by the defenders of the status quo. In recessions the magic by which a depositor’s money may be invested elsewhere yet still withdrawable on demand loses its potency. For it is at such times that we discover that (at the banks’ current ratio of being thirty times leveraged), for every £1 held by British banks, there are 30 different depositors laying claim to it. That is rather a lot of different places for £1 to exist at any one time.

The whole article is well worth reading.


A historic day: reactions to the Regulation of Deposits and Lending Bill

The 15th of September, 2010 was truly a historic day.

In response to the bill presented on Wednesday by MPs Douglas Carswell and Steve Baker, published this reaction from Jesus Huerta de Soto:

In the cradle of modern democracy, in the parliament of the United Kingdom, a bill was officially presented in London yesterday with a dual objective: first, to fully and effectively defend citizens’ right of ownership over money they have deposited in checking accounts at banks; and second, to once and for all put an end to the recurrent cycles of artificial boom, financial and banking crisis, and economic recession which have been afflicting the world’s (poorly-named) market economies for at least two hundred years.

In perfect keeping with general legal principles regarding property, principles essential to the functioning of a market economy, the bill aims to abolish the privilege the private banking system currently enjoys of operating with a fractional-reserve ratio on the demand deposits (and equivalents) it receives. The idea is to re-establish a 100-percent reserve requirement for money on demand deposit and to bring about the culmination of Peel’s Bank Charter Act of 1844, which correctly diagnosed the problem of a fractional reserve but regrettably exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money. As a result, Peel’s Act failed to achieve its purpose, and banks continued to artificially expand credit against newly-created deposits (mere accounting entries on their balance sheets) and to generate speculative bubbles which, sooner or later, when the market uncovers the errors committed, give rise inexorably to severe financial and banking crises and to profound economic recessions. (Anyone with an interest in an in-depth study of all the analytical and historical details may consult my book, Money, Bank Credit, and Economic Cycles, which has been published in four Spanish-language editions, two English editions by the Mises Institute in 2006 and 2009, and translated into thirteen languages.)

It is exciting that a handful of Tory MPs led by Douglas Carswell and Steven Baker have taken this step. If they are successful, they will go down in history like Wilberforce – with the abolition of the slave trade – and other outstanding British figures, to which the whole world owes so much.

There were a number of encouraging comments on this post, and on Stephan Kinsella’s update UK Parliament Speech Invokes Mises Institute re Honest Money and Sound Banking.

I was also delighted to see the story picked up by Lew Rockwell, who promoted Toby’s superb Telegraph article, The Radical Reform That Would End Boom and Bust in Banking:

What is needed is to let people own their own money, with the banks keeping it safe for those that want complete peace of mind. Let the depositor decide if the money should be lent and for what period, until it matures. Remove all political control from banking. And let’s have more language of the fiduciary rather than the gambler from bankers.


First reading of Carswell’s Financial Services Bill

Douglas Carswell MP yesterday delivered a superb speech in support of his eagerly anticipated Financial Services (Regulation of Deposits and Lending) Bill, introduced as a Ten Minute Rule Motion:

With no objections, the bill was brought in by Mr Carswell and Steve Baker MP. The next reading will be on the 19th of November.

UPDATE: Here is the full text, courtesy of Hansard

15 Sep 2010 : Column 903

Financial Services (Regulation of Deposits and Lending)

Motion for leave to bring in a Bill (Standing Order No. 23 )

1.33 pm

Mr Douglas Carswell (Clacton) (Con): I beg to move,

    That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder; and for connected purposes.

Who owns the money in your bank account? That small question has profound implications. According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs-but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder. Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member’s behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank-bank B-which could then lend on 97% of the value. The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.

Banks enjoy a form of legal privilege extended to no other area of business that I am aware of-it is a form of legal privilege. I am sure that some hon. Members, in full compliance with IPSA rules, may have rented a flat, and they do not need me, or indeed IPSA, to explain that having done so they are, in general, not allowed to sub-let it to someone else. Anyone who tried to do that would find that their landlord would most likely eject them. So why are banks allowed to sub-let people’s money many times over without their consent?

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

My Bill is not just a consumer-protection measure; it also aims to remove a curious legal exemption for banks that has profound implications on the whole economy. Precisely because they are able to treat one’s deposit as an investment in a giant credit pyramid, banks are able to conjure up credit. In most industries, when demand rises businesses produce more in response. The legal privilege extended to banks prevents that basic market mechanism from working, with disastrous consequences.

As I shall explain, if the market mechanism worked as it should, once demand for credit started to increase in an economy, banks would raise the price of credit-interest rates-in order to encourage more savings. More folk would save as a result, as rates rose. That would allow banks to extend credit in proportion to savings. Were banks like any other business, they would find that when demand for what they supply lets rip, they would be constrained in their ability to supply credit by the pricing mechanism. That is, alas, not the case with our system of fractional reserve banking. Able to treat people’s money as their own, banks can carry on lending against it, without necessarily raising the price of credit. The pricing mechanism does not rein in the growth in credit as it should. Unrestrained by the pricing mechanism, we therefore get credit bubbles. To satisfy runaway demand for credit, banks produce great candy-floss piles of the stuff. The sugar rush feels great for a while, but that sugar-rush credit creates an expansion in capacity in the economy that is not backed by real savings. It is not justified in terms of someone else’s deferred consumption, so the credit boom creates unsustainable over-consumption.

Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme-and the people who built it-and in doing so devalue our currency to keep the pyramid afloat.

Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.

The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.

Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth. With honest money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.

With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling-and indeed unaware-investors in madcap deals through credit instruments that few even of the banks’ own boards seem to understand.

Question put and agreed to.


That Mr Douglas Carswell and Steve Baker present the Bill.

Mr Douglas Carswell accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 19 November and to be printed (Bill 71).

You can track the progress of the bill here.


A Bill to Fight Crony Capitalism

Steve Baker MP has an article in today’s Wall Street Journal entitled “A Bill to Fight Crony Capitalism”:

If you borrow a friend’s painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers. British parliamentarians have an opportunity to change that today, and I hope they do.

Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank’s investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust. Unless it manages to convince politicians that it is too large to fail, in which case it will be bailed out by taxpayers.

WSJ subscribers can read the whole article here.


Support for Douglas Carswell’s forthcoming Bill to reform the banks

The news of Douglas Carswell’s upcoming Ten Minute Rule Bill is spreading like wildfire, and generating some real excitement.

Nick Cowen at Civitas asks Could Greater Deposit Transparency Improve Bank Lending?

Under current laws, high-street banks maintain a key advantage over other companies. They are allowed to treat money in current accounts both as an on-demand deposit (that can be withdrawn by the account holder at any time) and a loan that can be lent out indefinitely. This makes it much easier for them to lend out money in the good times. However, it also causes problems during a credit crunch or when a bank is considered unsafe for any reason. Then people realise that money cannot actually be in two places at once and deposits could potentially be lost, often requiring the Government to step in to restore confidence.

In a more transparent system, people would see the link between bank deposits and lending. They would appreciate that banks are only able to provide the services (and interest on accounts) that they do because they lent out a large proportion of all money deposited. With that comes a small measure of risk as well. Sometimes debts aren’t repaid on time or not at all. Customers could have the option to opt out of taking that risk, and pay a small fee for banking services instead, or select the level of risk they are prepared (how much of their deposit should be available on-demand at any one time).

Stephan Kinsella has written about this British Proposal for Banking Reform at, with a wealth of links for further reading:

This proposal, if implemented, could help end the state practice of fractional-reserve central banking which causes inflation and the business cycle. It will be interesting to see what happens tomorrow. As Baxendale notes, “I hope this Bill gets a second reading so that Honest Money can become a major taking point in the banking reform debate.”

Ben Lodge at The Freedom Association celebrated the Bill as A lesson in sound economics, from some very sound individuals

It is rare to find a member of the public who thinks about our monetary system, and the government’s heavy involvement in the financial sector. It is rarer still to find a politician who would be willing to challenge the conventional wisdom that the recent financial crisis was a failure of “free-market capitalism” and that, of course, the solution should be bailouts and nationalisation. This argument suits the politicians because it passes the blame away from themselves, and justifies an increase in the size of the state.

There are, however, a couple of MPs who still believe in sound economics, who believe that the financial crisis was caused by artificially low interest rates, inflationary monetary policy, and over regulation. Douglas Carswell MP has created a Bill, which will reform the banking sector, which is being supported by Steve Baker MP.

We were also delighted to see Sound Money & The 10 Minute Rule Bill promoted at Liberal Vision by Sara Scarlett:

Named after Richard Cobden, one of the most significant Liberal Party figures of the 19th Century, the Cobden Centre is a pressure group that lobbies for honest money and banking reform.

The Cobden Centre is also enthusiastically dedicated to providing education and resources for those interested in Austrian Economics subsequently their website is a treasure trove for any inquiring mind.

Founded by entrepreneur Toby Baxendale earlier this year, the centre has gone from strength to strength rapidly and is certainly a group to watch. Earlier this week Baxendale delivered some hard truths to the bankers whilst speaking in support of the Ten Minute Rule Bill: “Bankers have behaved like Welfare dependents. They exist on £ billion handouts – to fix a credit bubble they had a big role in creating. To preserve free market economics, we need to rediscover honest money.”

Finally, we are grateful to Brian Micklethwait for highlighting the issue on Samizdata:

Ten Minute Bills seldom pass. But they are a chance to fly a kite, put an idea on the map, run something up the flagpole, shoot a shot across the bows …

We hope the message has spread further still, and eagerly anticipate tomorrow’s reading. This is just the beginning.


CentreRight: Douglas Carswell leads the way on bank reform

On CentreRight, I explain that Douglas Carswell leads the way on bank reform:

There is a doctrine which creates wealth and spreads it around. It is just and moral. It works. It is called capitalism and, today, in practice, there is very obviously something wrong with it.

If one were to summarise the doctrine of capitalism in one word, it would be “property”. It is property which enables human social cooperation through production, exchange and consumption. The voluntary exchange of property has rules and these are known as contract.

These two concepts, property and contract, are fundamental to capitalism and yet, in relation to money held on demand in bank accounts, they are applied at best inadequately.

On Wednesday, immediately after Prime Minister’s Questions, Douglas Carswell MP will be introducing a moderate and conservative ten-minute rule bill which would introduce sound property rights and contract to monetary deposits. It is potentially of profound importance and I am delighted to support him.

Read the rest of the article, including a range of relevant links, here.