On Money And Society: An Exclusive Interview With Steve Baker MP

A former RAF aviation engineer and software engineer in the financial sector, Steve Baker has been the Conservative MP for Wycombe, Buckinghamshire since 2010. Recently he was elected by his colleagues to the Treasury Select Committee, where he has put questions to Bank of England Governor Mark Carney, and he has also sponsored a Parliamentary debate on ‘Money Creation and Society’. He is an outspoken follower of the Austrian Economic School, and is an advocate of ‘free banking’ and the de-nationalisation of money. In this interview, Steve shares his views on money, banking and economics generally; why he chose to enter into politics; his plans for the next Parliament; and the prospects for sound money and banking in the UK and around the world.


Steve Baker has been fascinated by machines since his youth growing up in Cornwall. He studied Aerospace Engineering at Southampton University through a University Cadetship programme, entering the RAF on graduation, and served his country in multiple international locations for 10 years.

Also fascinated by information technology, on leaving the RAF in 1999 he studied towards a degree in Computer Science at St Cross College, Oxford. He then worked in a number of IT roles, including at Lehman Brothers in 2006-08, leading into the global financial crisis. His personal website (here) makes plain that, “My work at Lehman Brothers particularly informs my present work on reforming the financial system.” He decided to enter politics in 2007 and was elected to Parliament on his first attempt in 2010.

Steve is hardly the only sitting MP to focus on financial and banking issues. But he is the only Conservative MP to openly advocate for fundamental reform of not just banking, but of money itself. This is due to his outspoken belief in the key tenets of the Austrian Economic School, which teaches that activist monetary and fiscal policies undermine long-term economic health. To begin our discussion, we explore how Steve experienced the 2008 financial crisis and the impression it made.

JB: Steve, you had been working at Lehman Brothers for about two years when the financial crisis hit in 2008. Did you ever have a sense that the firm was dangerously exposed to a potential crisis? That the firm’s high leverage and a reliance on short-term financing could bring it down? That the financial system in general was as fragile as it demonstrably was?

SB: Back when Lehman was posting record quarter after record quarter, I was focussed on delivering value through software and I still believed our masters understood the institutional superstructure of the economy. It was only when the bust came that I realised the Austrian School had crucial insights to offer which were missing from the mainstream.

JB: How exactly did you come to believe that the Austrian Economic School provided the best explanation for the 2008 financial crisis and also for understanding economics more generally? Was this a gradual process or rather something more like a sudden epiphany?

SB: It was a long process. I first read Mises’ The Causes of the Economic Crisis and Hayek’s Monetary Theory and the Trade Cycle in 2000 during my MSc in Computer Science. I was planning to make my fortune in software, but then the dot-com bust happened. I wanted an explanation and found it in these books. However, my priority was business and I didn’t have the confidence to start telling economists where they were going wrong. It was only after working for banks and their regulators that I realised key insights about epistemology and method were absent from mainstream economics in important ways. That caused me to read more deeply, co-found The Cobden Centre with Toby Baxendale and then use my Parliamentary position to promote better economic policies.

JB: Please describe what it is you mean by free banking and money. Most people just take national fiat money and heavily-regulated banking for granted. Of course this was not always the case. But then have free banking and money really ever been the norm? Why is this topic of such importance to you?

SB: By ‘free-banking’ I mean money and a banking system produced by the spontaneous co-operation of free individuals in markets. It is what Hayek proposed in his Denationalisation of Money and HM Treasury briefly worked in that direction as an alternative to the euro. Usually, free banking means gold (or silver) as the base money and banking conducted under the ordinary commercial law, usually with unlimited strict liability. Canada and Scotland historically came closest to free banking. In a future free-banking system, cryptocurrencies or blockchain technologies of some sort are likely to have a role. Sound money is crucial to the justice of social processes.

JB: When and how did it occur to you that, by entering politics, you could contribute to changing the terms of debate around money and banking, when neither major UK party seemed to have any interest in doing so?

SB: Originally, it was the scandal of the Lisbon Treaty – the mangled EU Constitution – which prompted me to seek election to deliver an in/out referendum. It seems I may have played my part in reaching that objective but that decision was reached in 2007, before the crash. Once the crash came, when I had no realistic expectation of being elected, I decided to establish an Austrian School think tank. My surprise selection for a Conservative-held seat and election to Parliament changed everything.

JB: Please describe your experience in Parliament to date. What is it like to be something of a ‘maverick’ MP on the issues of money and banking? Is it encouraging? Discouraging?

SB: It’s hugely encouraging but hard work and I always appreciate support. As far as I am aware, I have no original ideas in this field and, being wary of the fringes of debate, I keep close to established literature. As a result, I seem to be attracting colleagues to at least consider the possibility that the Austrian School has a better answer to the question—famously asked by HM the Queen—of how the financial crisis could have happened. People know I am unorthodox but they also know I am grounded in credible literature. They also recognise the call for lower taxes, balanced budgets and sound money as distinctively Conservative. I suppose the difference is I really mean it; I don’t just say such things in hope of being elected.

JB: You recently sponsored a Parliamentary debate on ‘Money Creation and Society’? What was the purpose of the debate and do you believe that it achieved your objectives?

SB: Prominent Constitutional fiat money advocates Positive Money were agitating for a debate and they have strong national support. Despite disagreeing on many things, I am one of their best contacts in Parliament. The timing of the debate corresponded with their campaigning activity. However, of course I have spoken many times in the same vein, beginning with my maiden speech. Positive Money had created sufficient support for a debate in the main chamber to be possible and I was glad to lead it. We meant to move the debate forward and we did: I have received messages of support from around the world.

JB: Having recently achieved selection to the Treasury Select Committee, you have now had the opportunity to engage with Bank of England governor Mark Carney on multiple occasions. While he is obliged to answer your questions, do you find his answers satisfactory? Or evasive? Does it seem to you that the Bank of England is properly accountable to Parliament? Or is it able more or less to set policy on its own? If you could change anything about the existing governance of the Bank of England—other than abolishing it—what would that be?

SB: It is always a huge pleasure and privilege to ask questions of the Governor, who also chairs the G20 Financial Stability Board. Mark Carney is undoubtedly the central banker of his generation, full of talent and statesmanship. He knows where I stand. Perhaps our good-natured jousting can sometimes be seen in the sessions. His answers are mainstream and remember he has a dreadful power to shift markets with every word. He is sometimes breathtakingly honest—for example in relation to the shortcomings of mathematical models—but it is right that he has regard to the potential for his words to reverberate through markets. This factor has no place in a free society, of course, but we are where we are. The Bank is accountable to Parliament and the officials evidently take this seriously. The Bank operates within its mandate and that means it reaches policy decisions independently of politicians.

Given that, like Walter Bagehot [ed. note- Bagehot was Editor-in-Chief of The Economist from 1860 to 1877 and wrote extensively on fundamental economic and financial issues], I think the ideal system would not include central banks, your last question is hard to answer. I would have the Bank produce research that questions their groupthink and they are doing so. It will be a long time yet before we win the argument but having the Bank itself challenge orthodoxy may be an important breakthrough.

JB: Assuming that you and the Conservatives are re-elected in the coming months, what plans do you have for the next Parliament? What goals are realistic? And if you’re optimistic, what might be achieved over the next five years?

SB: Nationally, we must balance the budget. In all the circumstances, this will remain a tough problem. Personally, I would like to be re-elected by my colleagues to the Treasury Committee so I can continue to work on changing the terms of debate.

JB: How do you feel about the growing UK independence movement? Do you believe that the UK is more likely to fundamentally reform money and banking inside or outside the EU?

SB: People across the political spectrum are awakening to the reality that state power has escaped democratic control and that awakening is a good thing. The challenge is to hold politics together while a coalition for democracy and liberty is built, especially bearing in mind that it is the classical liberal and conservative family that is awakening first. A further fragmentation of the centre-right would be bad news for democrats and advocates of liberty.

Realistically, monetary reform is likely to come from either spontaneous market action or global reform of the post Bretton-Woods system. I don’t think the UK is likely to reform sterling unilaterally but this could happen provided we retain our own currency. I imagine Switzerland is culturally better-placed to reform independently, especially now they have decoupled from the euro. Maybe Russia will dramatically disrupt geopolitics with the reform you describe in your book. [Ed. note- I have suggested that Russia might respond to escalating international tensions by backing the rouble with gold. See here.]

JB: Do you regard the government’s ‘austerity’ policies to have been a success? How would you define ‘success’?

SB: Success would be a balanced budget. More work is required and the longer I spend in politics, the clearer it becomes that turning around a democracy is not like turning around a private company. The Chancellor has been more successful than most other finance ministers. I will continue to support him in so far as I can.

JB: To expand on the above, you are more aware than most about the deteriorating state of UK public finances and of the large imbalances in the economy more generally, such as the excessive reliance on property and financial services, and the chronic trade deficit with the rest of the world. Is it hard to be optimistic for the future when history suggests that the UK economy is going to remain weak for many years even in a relatively benign, non-crisis scenario in which these imbalances and excesses are worked off?

SB: In truth, it is often hard to be optimistic when you have “taken the red pill” of Austrian School economics. On the one hand, I am glad so many more people are now in private sector employment but on the other, as I have explained many times, the trajectory of debt and the continuing abuse of currencies is of grave concern. The future of our civilisation may be at stake.

JB: You co-founded the Cobden Centre, the leading sound money and banking think-tank in the UK. What do you see as the CC’s core mission? How exactly do you see the CC making a difference in future? Through education? Practical policy recommendations?

SB: The Cobden Centre’s core mission is to promote classical liberalism and specifically the Austrian School, that is, social progress through honest money, free trade and peace. It does not do politics but ideas and education. There is much more to do. Those interested in learning more can visit the website at and potential donors are welcome to send an email to!

JB: Thanks so much for your time Steve. Before we conclude, are there any other thoughts you would like to share with our readers, many of whom work in the financial industry and would be profoundly affected by the sort of money and banking policies you advocate. What sort of impression would you hope they would take away from our discussion today?

SB: I hope readers will read your reports and your book, The Golden Revolution, and Detlev Schlichter’s complimentary work Paper Money Collapse. I hope they will read Mises and Hayek. If financial professionals cease opposing honest money and banking will we achieve the greatest institutional reform of our age: money and banking subject to competition and free of ruinous state control.

JB: Thank you so much Steve for your time.



The value of Steve’s prominent role in promoting sound money and banking cannot be overstated. His leadership is an inspiration to all who would seek a better economic future. The best hope for real reform is to pressure the system both from within and from without. I encourage all readers to support Steve in his efforts in Parliament; through the educational resources of the Cobden Centre; and through their own private initiatives, whatever they might be.

Care to comment on this Report? Please contact me at

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It’s time to end the cruel delusion of cheap money and reckless spending

Steve Baker has written an article for today’s City A.M. calling for an end to the ‘cruel delusion of cheap money and reckless spending‘:

George Osborne will present his Autumn Statement to a country in the grip of a cruel economic delusion, perpetrated against the poor and the aspirational.

Welfare states everywhere are spending chronically beyond their means while papering over the cracks with easy money. Budget 2013 forecast spending in excess of receipts of about £9bn a month. Defence, criminal justice, local government and the Foreign Office have been squeezed. Two thirds of spending was expected on health, education and welfare, mostly pensions.

The sick and disabled, families, children and pensioners are reliant on these crucial services. With taxes already too high, government is critically funded by the bond markets. Those bond markets are in a dangerous bubble, deliberately inflated by central banks.

Keynesian economists prescribe even more stimulus to dreadfully-mistaken applause, as if it were in the general interest to expand the state yet further and borrow to do it. They should be more honest about their politics. It’s true the Budget isn’t like that of a household or business, because the government can tax, intervene and create money. That’s just the problem: state power is a great force for destruction …

Read the whole article.


Still stuck in the Middle Ages

“We have Stone Age emotions. We have medieval institutions.. And we have god-like technology.” – Edward O. Wilson.

The BBC reported last week that researchers from IBM had created the world’s smallest motion picture after manipulating individual atoms with a scanning tunnelling microscope. They separately reported the proposals of two Dutch engineers to introduce self-lighting weather warnings on motorways, and a dedicated driving lane that could recharge electric cars as they passed over it. As artist Daan Roosegarde pointed out, auto manufacturers spend billions of dollars on car design, research and development,

but somehow the roads.. are completely immune to that process. They are still stuck in the Middle Ages, so to speak.

Another staggering gulf lies between what we as individuals are capable of doing – more or less anything to which we put our minds – and what our governments are capable of doing – more or less nothing, other than mindlessly to continue the dismal and seemingly inexorable cycle of tax, borrow and spend. At a recent City debate hosted by Marcus Ashworth of Espirito Santo Investment Bank, ‘Is monetary activism the answer?’, Steve Baker MP and Ewen Stewart of Walbrook Economics essentially revealed the paucity of government thinking through generations, and across the political spectrum, that gave rise to such a desperate question in the first place.

As the graph below makes clear, in duration – if not necessarily in scale – the current economic crisis is now worse than the Great Depression. There are realistically just two schools of thought as to how an economic depression should be tackled. The neo-Keynesians advocate deficit spending, on the basis that government stimulus is merely taking the other side of a retrenching private sector. As the facile mud-slinging over Reinhart & Rogoff’s recent debt research reveals, the idea that a state can simply have too much debt for its own good gets little traction in the neo- Keynesian camp, which effectively suspends respect for mathematics, logic or sound economics whenever it happens to suit. The Austrians, on the polar opposite side of the debate, advocate a policy of non-interference with the free market process of economic adjustment. Less euphemistically, the Austrian perspective favours what Depression-era US Treasury Secretary Andrew Mellon recommended as painful but ameliorative policy:

Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate.. it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people. [Emphasis ours.]


Source:; Steve Baker MP

As we wrote back in January 2012, we side with the Austrians, specifically Murray Rothbard, and his classic study, ‘America’s Great Depression’:

If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt ? The first and clearest injunction is: don’t interfere with the market’s adjustment process. The more the government intervenes to delay the market’s adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery.

Thus far, on the basis alone of the recession chart above, Rothbard would appear to be winning the debate. There is no counter-factual, of course, from the 1930s – Roosevelt’s ‘New Deal’ intervened (in every sense). But it is both interesting and relevant to note Treasury Secretary Mellon’s earlier objective, namely to tackle the US’ vast federal debt load accumulated from World War One. This he did by taking an axe to income tax rates. The top marginal tax rate was cut

from 73% in 1922 to 24% by 1929. The overall public debt fell from $33 billion immediately after the war to approximately $16 billion by 1929. Note those quaint billions, with a ‘b’.

So, to return to the monetary activism debate, how did we get here ? Steve Baker lays it all out. In essence, the state has eaten itself. Before World War One, as the graph below reveals, UK government spending never accounted for much more than 10% of the economy. Now it accounts for almost half of it.

So we are not merely facing a financial crisis but in Steve Baker’s words, we are also beset by a profound crisis of political economy. Governments whose spending has spiralled out of control typically resort to three expedients: more taxation; more borrowing; and currency debauchery. As government spending crowded out the productive sector throughout the 20th Century, the extent of inflation over recent decades has been monstrous:

*January 1974 = 100 (linear scale)
Source: Consumer price inflation since 1750, O’Donoghue et al, Office for National Statistics, 10 March 2004

Since a substantial number of the advocates for yet more government borrowing are pressing for a narrowly Keynesian response, it is worth republishing what Keynes himself thought of the inflationary outcome:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth..

..There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

So the business of investing can no longer be conducted in a rational economic environment. Free market cleansing of malinvestments made during the boom years cannot occur because the free market itself has been suspended. Overmighty governments and their economic agents, notably the central banks, are once again showing the futility of a policy of supporting national champions – those champions today, ironically, being banks that would under any other environment be forced into insolvency. This is not a problem existentially limited to the UK. It afflicts most of the “developed” western economies – developed in the sense that a body riddled with cancer can be said to be “developed”.

So we do the best job we can under such extreme circumstances. We take shelter in credit of unimpeachable quality (not Gilts or US Treasuries) as an alternative to sitting idly in useless cash. We sail close to shore within attractively valued listed equity investments of businesses catering to a constituency of rising wealth (the Asian domestic consumer, for example) instead of one catering to the bombed-out, tapped-out, over-indebted and over-taxed western consumer. We diversify further into uncorrelated managed funds, and we diversify still further into currency that cannot simply be printed into exhaustion: the precious, monetary metals whose fundamental values are still so widely misunderstood in such a bleakly dishonest financial landscape. And we wait – and now actively agitate – for the sort of political radicals capable of understanding both how we got into this mess, and how we might shrink the overmighty state in order to get out of it. It may be a long wait. People, notably political zealots, have a tendency to cling to irrational beliefs rather than sound thinking. As Edward O. Wilson once said,

Men would rather believe than know.

This article was previously published at The price of everything.


Europe’s accounting rules are destroying its banks

Late last year, a group of institutional investors sent a letter to officials in Brussels, warning that European Union accounting standards are “destabilizing banks” and “damaging national economies.”

Accountancy may rhyme with geeky, but the investors were right and addressing the issue they highlighted is essential to restoring Europe’s financial health.

The European Commission officials were sufficiently worried by the U.K. investors’ charge — namely that because of EU accounting rules, banks may have systematically overstated their assets and distributed nonexistent profits as dividends and bonuses — that they said they would open an inquiry. Last week, the board that administers the rules put forward its own proposals. These are likely to perpetuate, not fix, the problem.

The rules concerned are called the International Financial Reporting Standards, and they’re used across the EU and in a growing number of other countries around the world. The potential misreporting involved is significant. In the case of just one U.K. bank, Royal Bank of Scotland Group Plc, I and others calculated that IFRS rules resulted in the bank understating its 2011 losses by 19.5 billion pounds, or roughly twice the U.K. taxpayer bill for the 2012 Olympic Games.

Deceptive Flattery

If this is correct, then the state’s 45.5 billion-pound ($67.7 billion) bailout of RBS in 2008 and 2009 was calculated against a balance sheet that probably also flattered to deceive. The risk of such faulty numbers is clear: If RBS fails to recoup this hole in its accounts through genuine profits, then the U.K. taxpayer may be on the hook for about 20 billion pounds more than the government bargained for. Last week, RBS reported a larger than expected loss in 2012 of slightly less than 6 billion pounds.

Like the U.S. generally accepted accounting principles, better known as GAAP, Europe’s accounting standards are detailed guidelines for the presentation of financial information. Just as governments publish manuals on how to drive a car safely, so they have encouraged the production of accounting guidelines for financial reporting.

The legal impact of the guidelines differs widely in the two scenarios, however. Driver’s manuals are nothing more than that, manuals, which no court would substitute for the law. If a driver starts to brake at the correct distance from a stop sign, but still fails to stop, it is no defense to have followed the manual — he or she broke the law. Under European accounting law, following IFRS standards is a defense and the guidelines have been allowed to override national laws.

The rule that concerns investors the most restricts provisioning against expected future loan losses. Under IFRS, loss provisions can only be booked (thus reducing this year’s profits) if a loan event, such as a default, has occurred. The U.S. rule makers who oversee GAAP have refused to follow the IFRS in this. Talks aimed at converging U.S. and EU expected- loan-loss accounting rules ended without result last July.

It is misleading to shareholders and dangerous for the banking system if commercial banks can declare a profit when they expect a loss, as it perversely incentivizes bank executives to wreck their banks. This is because bank executives tend to prioritize short-term risks and rewards: If they know that any negative outcome of a loan decision can be parked in the blue yonder, delaying ill effects on the bank’s performance and bonus pool, they will be more likely to ignore the risks and make the deal.

Prudent Accounting

U.K. law deals with this issue in sections of the Companies Act, called the capital maintenance rules, which require that directors prepare “true and fair” accounts, guided by the conservative principle of “prudence.” This approach means that banks should report the value of each loan at the lower of either its original cost or current market value. Because of IFRS, however, this part of the Companies Act isn’t enforced.

Equally dangerous is the effect on regulators. Working with accounts that underreport losses damages their ability to accurately assess the capital adequacy and stability of banks’ balance sheets.

Steve Baker, who in 2011 submitted draft legislation to Parliament to repeal the IFRS rules, puts the problem succinctly:

IFRS create a death spiral. Banks silently destroy their capital under the guise of profit, then they require taxpayer support, then the process starts again.

Defenders of IFRS say that these rules promote neutrality and objectivity — after all, if you estimate future losses for reporting purposes, why not future profits, too? They say the rules were changed to prevent “smoothing,” in which companies would time the recognition of income in order to create an artificially steady stream of profits. But surely smoothed profit streams cost shareholders and, in the case of a bailed- out bank, taxpayers less than exaggerated ones? Besides, profit smoothing was always illegal so long as laws were enforced.

What really changed in 2005, when the U.K. amended its laws to give banks the option to prepare accounts under IFRS rules, was that underprovisioning for losses became compulsory.

The evidence that revealed RBS’s Olympic-scale overvaluation came from the accounts of the U.K.’s bad-bank insurer, for which IFRS has different accounting rules. Unlike banks, insurers are required to value their assets and liabilities, taking into account probable future losses. This reporting difference highlighted the almost 20 billion-pound discrepancy in RBS’s 2011 accounts that the two sets of accounting rules produced.

Scrutiny Needed

Let’s hope that the European Commission will scrutinize the IFRS standards closely — it won’t be easy. The International Accounting Standards Board, which drew up the rules, doesn’t appear to accept the gravity of the problem. At a meeting last year, I explained to three senior board officials why profits calculated under the current rules aren’t safe for distribution. The officials acknowledged the problem, saying that banks should maintain two profit calculations, one for reporting to shareholders, and the other — not following IFRS rules — to determine distributions to shareholders. Surely this is false accounting?

Now the IASB has proposed a fix for the problem, recognizing that the delayed recognition of expected losses has proved “a weakness” during the financial crisis. Yet their proposed solution is to add more micro-rules that define the specific situations in which banks should be allowed to declare an impairment and book losses.

This approach is fundamentally wrong. The IFRS rules are the problem, because they interfere with enforcement of the law. Banks should decide when to provision for a loss, and the full force of the Companies Act should be used to punish them if they do so dishonestly. More detailed standards will just encourage more manipulation of them.

This article was previously published at


Reforming fractional reserve banking

This article was included as an expert submission to Ron Paul’s Monetary Policy Anthology.

“When you’re one step ahead of the crowd you’re a genius. When you’re two steps ahead, you’re a crackpot.”[1]

-Rabbi Shlomo Riskin

Lincoln Square Synagogue, February 1998

“I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency and managing the currency I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks to have what is called the management of the currency.

I should never contemplate any remedial measure, which left to the discretion of individuals to regulate the amount of currency by any principle or standard whatever… I should be sorry to trust the Bank of England again, having violated their principle [the Palmer rule]; for I never trust the same parties twice on an affair of such magnitude.”[2]

-Richard Cobden

Report from the Select Committee on Banks of Issue

British Parliament, April 1840



It is a great privilege to write this essay on money and banking reform to mark the retirement of Dr. Paul from Congress. We in the United Kingdom have much to thank Dr. Paul for his tireless campaigning on these issues, especially those raised in the full public glare of two Presidential campaigns, making money and banking reform resonate here as well more than it otherwise would have.

At the Cobden Centre, we have two great parliamentarians, like Dr. Paul also inspired by the Austrian School of Economics: Steve Baker, Member of Parliament (MP) for High Wycombe (my co-founder of the Cobden Centre); and Douglas Carswell, MP for Clacton. Taking the idea of full-reserve free banking, currency competition, honest accounting, and full open liability for bankers, they have produced four bills in Parliament which we will discuss next in summary.

The Financial Services (Deposit and Lending) Bill – 2010

Carswell describes the Deposit and Lending bill as follows:

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.[3]

Currency and Banknotes (Amendment) – 2011

Carswell describes the Currency and Banknotes Amendment as follows:

That leave be given to bring in a Bill to amend the Currency and Banknotes Act 1954 to allow banknotes in addition to those issued by the Bank of England to be legal tender; and for connected purposes. … My Bill would amend the Currency and Banknotes Act 1954 to enable a range of different currencies to be used as legal tender in Britain. The idea comes from a 1989 Treasury paper from when John Major was Chancellor. What the Treasury proposed as theoretically possible 22 years ago, the internet now makes practically achievable.

The internet has given people unprecedented choice. We have access to a greater range of music, financial services, groceries and books than ever before, so why do we have legal tender laws that create a monopoly currency?[4]

In an email to me, Carswell expressed the influence Congressman Paul has had on his work:

Reading Ron Paul’s End the Fed gave me the confidence to speak out.  I suddenly realised it wasn’t just a few of us Brits who doubted the whole fiat money/candy floss currency scam.  He has given hope to those of us throughout the West.

Financial Services (Regulation of Derivatives) Bill

Steve Baker compiled the Regulation of Derivatives Bill with the help of Gordon Kerr, Tim Bush, and Kevin Dowd. [5] When he introduced the legislation on 15 March 2011, he described the Bill as requiring “certain financial institutions to prepare parallel accounts on the basis of the lower of historic cost and mark to market for their exposure to derivatives; and for connected purposes.”[6] Baker explained how the accounting rules for banks incentivize trading in derivatives by enabling unrealized profits to be booked up-front, leading to large but unjustified bonuses and dividends.

More broadly, banks are producing accounts that grossly inflate their profits and capital in three ways:

(1)     Using mark-to-market and mark-to-model accounting, banks record unrealized gains in investments as profits.

(2)     International Financial Reporting Standards (IFRS) prevent banks from making prudent provision for expected loan losses by allowing recognition only of incurred losses.

(3)     IFRS encourages banks not to deduct staff compensation from profits.

Taken together, these flaws mean that banks’ accounts under IFRS are at once rule-compliant and dangerously misleading. The Regulation of Derivatives Bill[7] deals with this broad problem. For much more detail, see Gordon Kerr’s Adam Smith Institute pamphlet, “The Law of Opposites.”[8]

Financial Institutions (Reform) Bill[9]

Baker compiled the Financial Institutions Reform Bill with the help of Gordon Kerr and Kevin Dowd. The bill was introduced on Wednesday, 29 February 2012. The key provisions of the bill would:

(1)     Enforce strict liability on directors of financial institutions;

(2)     Enforce unlimited personal liability on directors of financial institutions;

(3)     Require directors of financial institutions to post personal bonds as additional bank capital;

(4)     Require personal bonds and bonuses to be treated as additional bank capital;

(5)     Make provision for the insolvency of financial institutions; and

(6)     Establish a financial crimes investigation unit.

The purpose of this Bill is to minimise moral hazard within the financial system by ensuring that those who take risks are held personally liable for the consequences.  Since rules can usually be gamed by financial institutions, a principle underlying this Bill is to minimise scope for evasion.

Baker said,

The public are rightly incensed at the injustices we see across the financial system but our economy must have responsible, innovative and enterprising financial services.  It is essential that commercial freedom is maintained while creating a system in which remuneration is a just reward for success, not the unjust product of unrealised profits and bailouts.

My Bill would make directors of financial institutions personally liable for losses.  It would ensure that losses came first out of institutions’ bonus pools then directors’ personal bonds before hitting equity.  Directors would also be exposed to unlimited personal liability long before any suggestion of taxpayer bailout.

With key decision makers’ own wealth at risk, they would take responsible decisions instead of expecting rewards for failure.

It’s time to tell bankers, “Yes, innovate. By all means earn large rewards for providing valuable financial services. But bear your own commercial risks. Don’t expect the rest of us to bail you out.”[10]

Public Attitudes to Banking: A Survey Commissioned by the Cobden Centre (2010)[11]

When we started the Cobden Centre, we all thought we knew about money and banking and all thought we knew what our fellow Brits thought about it all. To the great credit of Prof. Anthony Evans, he said let’s do some empirical testing. And so the Cobden Centre commissioned a survey. This research formed the basis of much of the work our parliamentary friends have embarked upon.

The survey was conducted by the market research company ICM with 2,000 participants.  The results offer us a rather confusing array of views as to what people think banking is about.

  • 74% of respondents thought that they were the legal owner of the money in their current account, as opposed to the bank being the legal owner.
  • 66% of respondents answered “don’t know” when asked what proportion of their current account was used in various ways by their bank.
  • 15% wanted safe-keeping services.
  • 67% wanted convenient access.
  • 8% knew correctly that they had lent money to the bank.
  • 33% think it is wrong that the bank lends out what they view as their money.
  • 61% said they would not mind the bank lending if it was done safely.
  • 26% wanted reserves to match deposits.

It would seem a sizeable minority percentage would want some form of safe-keeping services.  Most would want easy access, which would imply short-term borrowing matched with short-term lending, so as to avoid runs, rather than the current practice of lending long and borrowing short.

The needs of savers and borrowers would be better aligned by requiring depositors to choose, at the time of making a deposit, how much money they wished to put into plain saving (i.e., savings set aside for safe/precautionary holding as opposed to investment purposes — a distinction made by the Austrian scholar Ludwig von Mises) and how much into capitalist saving (i.e., savings set aside for investment gain as opposed to safe/precautionary savings). This would provide the setting for, and lead to, much more stable and substantial growth.

In a modern setting, the ability for banks to distinguish between plain savings, those savings that people want for safe keeping, and savings for capitalistic investment via the normal savings bonds, time deposit accounts, and so on and so forth, would allow the banking system to mediate more accurately the diverse time preferences of all savers and borrowers.  (The Manchester/Lancashire system of full reserve banking and private money creation that we will discuss in the last part of this essay is a good historical example of how mediating only capitalistic savings, and not plain savings, created a system of safe credit—until it was interfered with by the Stamp Act.)

The ICM survey showed all of us that there is a need to sort out what people actually think happens with their money and banking and what actually does happen—as the two things are very different.

The Jesus Huerta De Soto Monetary Reform Proposal in Summary

Some three years ago I was fortunate enough to introduce both of our Parliamentarian friends to the greatest of all the living Austrian School economists in the full reserve tradition, Professor Jesus Huerta De Soto.  His 1998 book, translated into English in 2006 as Money, Bank Credit, and Economic Cycles, is the seminal treatise on the matter.

In chapter nine, he outlines his reform proposal. (All quotes in this section are taken from chapter nine and the full book can be downloaded at The aims of the reform, as summarized by Prof. Huerta De Soto himself, are as follows:

[O]ur proposal is based on privatizing money in its current form by replacing it with its metallic equivalent in gold and allowing the market to resume its free development from the time of the transition, either by confirming gold as the generally accepted form of money, or by permitting the spontaneous and gradual entrance of other monetary standards.

This second element of our proposal refers to the necessity of revoking banking legislation and eliminating central banks and in general any government agency devoted to controlling and intervening in the financial or banking market. It should be possible to set up any number of private banks with complete freedom, both in terms of corporate purpose and legal form. …

Nevertheless the defense of free banking does not imply permission for banks to operate with a fractional reserve. At this point it should be perfectly clear that banking should be subject to traditional legal principles and that these demand the maintenance at all times of a 100 percent reserve with respect to demand deposits at banks. Hence free banking must not be viewed as a license to infringe this rule, since its infringement not only constitutes a violation of a traditional legal principle, but it also triggers a chain of consequences which are highly damaging to the economy. [12]

The crux of his reform proposal is as follows (the description is mine and made UK-specific by me — read chapter nine in full for the complete version in the Professor’s own words):

(1)     All demand deposits are immaterial money, and are not the depositor’s money but a liability from the bank they deposit with to pay them back money in the same amount as deposited, on demand.

(2)     Let the government back all these demand deposits for physical cash and place them as reserves against the existing demand deposits. This is virtually a costless activity on behalf of the state. It is also not inflationary, as the backing, the physical cash, cannot be spent, as it sits in reserves.

(3)     The money supply can neither expand nor contract at this specific point.

(4)     The banks, where they had current liabilities, now no longer have them as they are fully reserved.

(5)     This generates a one-off gain to the banks in terms of their net worth. In short, so much as they had these current demand liabilities, now they have these backed with paper notes for the same value, so their net worth has gone up by the equivalent amount.

(6)     The asset side of the balance sheet, their loan portfolio, stays intact.

(7)     As there are over £1 trillion of demand deposits in the UK banking system, the banking system’s net worth would have risen by £1 trillion.

(8)     Why give this one-off gift of largesse to the shareholders and bonus-hungry bankers? Well, don’t. Form special purpose vehicles to hold the asset side of the balance sheets of the banks to collect on these outstanding loans and you can contract out the management of this to the existing banks.

(9)     By doing this, the banks’ net worth on the day after the reform is still the same as the day before the reform, but the £1 trillion loan repayments are now paying off our national debt obligations. This is a unique one-off gain and is a byproduct of this reform.

(10)     The gold price would need to rise to back all the deposits with gold and then you fix all money in one of its historic anchors: gold (you could also use silver or other successful monies). Since gold increases in physical supply at the rate of approximately 2% per year, if productivity gains run at about this rate you will have stable prices; if productivity rates are greater, then a benign price deflation.

(11)     Let the people spontaneously discover what their most favoured money actually is.

I have suggested my own reform proposal along this line of reasoning here:

In short, I would have no-reserve banking, not 100% reserve. By this, I have suggested that all demand deposits should actually be swapped out for physical cash and the current liability of the bank just rubbed out. Then the people would actually own their own money on deposit and not be current creditors, thus I would question the need to perform point number two and substitute along the lines of what I just suggested.

Would 100% Reserve Free Banking be the End of Lending and the End of Commerce as We Know It?

This is the question that gets asked when most people have understood that 100% reserve banking would be the end of bank-created credit. Many credible and distinguished people attribute the creation of bank credit as the source of the Industrial Revolution itself. Such a powerful thing is alleged.  The noted Daily Telegraph writer Ambrose Evans-Pritchard says in his 21 October 2012 column:

One might equally say that this opened the way to England’s agricultural revolution in the early 18th Century, the industrial revolution soon after, and the greatest economic and technological leap ever seen. But let us not quibble.[13]

For those followers of Dr. Paul and those generally interested in monetary reform in this tradition, I did some research into the genesis of the Industrial Revolution to see if this assertion held any merit. I have focused my research into the County of Lancashire and what became the first industrial city of the world, Manchester.[14] In this concluding historical section, I will show that in the first third of the Industrial Revolution, private credit, bills of exchange, backed by the goods and services that were being traded for and by gold and silver, was the preferred modus operandi. The taxation of this private money by the 1815 Stamp Act led to their slow decline in favour of the privileged note issue of, in particular, the Bank of England. However, by late 1874 some 45%[15] of all credit was still private credit in the form of bills of exchange. Private credit was the preferred medium of the Industrial Revolution, and not bank-created fiduciary credit.

Early Banking in Manchester

The historian Arthur Redford in his book about merchants and foreign trade in Manchester described the early bankers of the town:

The first Manchester Bank, that of Byron, Sedgwick, Allen, and Place, was opened in 1771, in combination with an insurance office, and the Mercury welcomed it with the comment that “from the general Approbation the Scheme has met with amongst all Ranks of People, it is not questioned that it will be of infinite Utility to the Trading Part of the Town, and to the County in general.” …. It was not the only Manchester banking business, for in 1772 John Jones and Co. were “Bankers and Tea Dealers” and within thirteen years were to have offices in London from which Jones Lloyds sprang. In Liverpool also most of the early bankers, says their historian, “arose out of general merchants, some few from tea dealers, and one from linen merchants.” Even after declaring themselves bankers, the banking business was usually continued along with trading. But the use of the term banker was late, and until almost the end of our period the commerce of Liverpool, with its complex dealings in foreign exchange, and the internal trade of Lancashire seem to have been carried on mainly through the bill discounting side of the merchants’ and traders’ businesses. In Liverpool marine insurance broking was closely allied.”[16]

The key thing I observe here is that in the first part of the Industrial Revolution the issue of notes (which were the chief means of bank fiduciary credit) was a side issue and bills of exchange were the main mechanism to facilitate this massive explosion in trade. Also, this first bank in the UK’s main industrial area was nearly 100 years behind the establishment of the Bank of England and the Scottish public banks.

Data supplied by Prof. Angus Maddison shows us that from 1700 to 1820 there is 338.38% growth in measured economic activity. The next 130 years saw 960.06% growth when the Industrial Revolution was in full flow.[17] Nevertheless, with the initial explosion of activity in the mid- to late-1700s, to the early 1820s, we see the prime industrial county in the world exist with few or no banks and banks not providing credit services as we know them today, and clearly not to its detriment.

Economic historian T. S. Ashton quotes William Langton (a driving force behind the founding of the Manchester Statistical Society in 1833) writing later in the 19th century:

“It is exceedingly natural,” said Langton, “that those banks which still retain the privilege of issuing their own notes should desire to retain it, since it naturally adds to their profits; but it has always been recognised in the great industrial district of Lancashire that it is no essential condition to the wielding of manufacturing and commercial enterprise, and that the banks not possessing this privilege have not stinted their customers of any legitimate accommodation.”[18]

Langton also notes their usefulness vis-a-vis other modes of money:

My personal memory of trade only extends back to the year 1820; but at that time the Liverpool merchants received nothing but bills in payment from Manchester of their cotton invoices; every such payment, if in what was called promiscuous paper, requiring a calculation of interest to make a settlement per appoint. This practice gradually disappeared with the resumption of cash payments by the Bank of England and the lowering of the standard rate of interest; but if economy of interest of money is to be taken as the special recommendation of any particular kind of circulating medium, this one surely ought to bear the palm![19]

W.T. Crick and J.E. Wadsworth note the significance of Manchester and the nearby City of Liverpool by observing:

Yet, in spite of Lancashire’s advanced industrial organization, banking was rather later to develop than in some other areas. No banks are recorded in Manchester until 1771 or in Liverpool until 1774, and when eventually they were formed, they do not appear to have acquired note circulations except in a few unimportant instances.[20]

Ashton describes the special preference for bills of exchange over notes:

These are reasons explaining the ubiquity of bills of exchange at this period. The special preference of Lancashire for bills rather than notes is a matter deserving of research. It arose, no doubt, out of a high degree of commercial confidence, no less than out of a low degree of trust in note-issuers, and the fact that Lancashire bought raw material from distant places and sold products in distant markets must also have engendered a preference for a document the circulation of which was not confined to the sphere of operations of a local bank. As time went on the domestic bill came to play a smaller part in commercial transactions: the increase of the stamp duties after the Napoleonic War dealt a blow to the system; and the growth of large banks of deposits with many branches, together with the shortening of the customary terms of credit, led to a substitution of cheques for bills in inland trade during the later decades of the nineteenth century. But in the period with which we are concerned cheques were in their infancy and the bill had no serious rival as a medium of exchange between traders.[21]

Ashton also gives us clues as to why they have almost vanished today from the commercial idiom as the stamp duty applied to them was less advantageous vis-a-vis note or chequebook issue as the latter provided quicker redemption in money possibilities.

If we dig a bit further into the historical record we see that these bills arose spontaneously to fulfill a need to be able to facilitate the smooth transmission of trade. A wonderful book written by Alfred P. Wadsworth & Julia De Lacy Mann, The Cotton Trade and Industrial Lancashire 1600-1780, documents this history quite thoroughly:

We have seen Marsden as a manufacturer, putting out cotton and yarn through his agent and debiting the materials and wages against the value of the finished goods. On the other side he maintained a London house, through which he bought his raw materials and sold his fustians, and in connection with which he conducted extensive operations as a bill discounter. Between 1688 and 1690 he was involved in a maze of lawsuits, from which some account of his business may be constructed


Having “constantly great and considerable sums of money in his hands” [Marsden] lent money to other dealers in return for their bills on London; or he “furnished them with bills of exchange for payment of considerable sums of money at London to them or their order, or to such persons as they appointed to receive the same,” either receiving cash, or, generally, giving them credit at an agreed rate of interest. When they failed to pay him for the bills he had given them, he would take an assignment of their goods at Liverpool —cotton or linen yarn, promissory notes, or bills drawn on their London debtors. But apart from his own trading credit, he had “for many years past been intrusted or employed with greate parte of the monies retorned out of the county of Lancaster to London.”[22]

Marsden the industrialist had become the banker as well as the chief remitter of revenues back to Lancashire and the principal collector of taxes. Daniel Defoe, trader, writer, and journalist, remarked in 1727, that:

[A] very great part of the bills drawn out of the several counties in England upon the tradesmen in London, such as factors and warehousekeepers, are made payable to the General Receivers of the several taxes and duties, customs and excise, which are levied in the country in specie, and the money is remitted by those collectors and receivers on account of those duties; this generally appears by the bills or endorsements, which often mention it in these words for his Majesty’s use.[23]

Thus credit was granted and discounted bills accepted and paid with specie, not with notes or other such fiduciary credit. The Crown accepted these bills!

In commenting upon the various inaccuracies with traders being bankers, after an extensive investigation into the disputes listed in the court records, Wadsworth and Mann conclude:

Much might be said of the use of the bill in the general system of credit, but enough, perhaps, has been suggested in earlier pages to indicate its importance. The bill on London, then as a century later the dominant form, entered at every stage, and into every form of transaction, ran from the smallest to the largest sums, and passed even more freely than cash. The financial mechanism which turned on the bill, the promissory note, and other credit instruments, and has here been summarily illustrated, bulks large in all the commercial manuals of the time. … It is apt to be forgotten that the credit machinery of industries like the textile trades was hardly less extensive before the foundation of the country banks than it became after.[24]

Unwin, Hulme, and Taylor did a fantastic investigation into the affairs of Samuel Oldknow and his mill at Mellor. There is also some evidence to show why Lancashire rejected bills vs. notes:

Enough has been said to show the almost desperate condition of Oldknow’s affairs at the beginning of 1793. He had invested an immense capital—for those days—in the fixed forms of land, buildings, and machinery which could not yield any return without the assistance of commercial credit—and owing to the outbreak of war commercial credit had almost ceased for the time being to exist. No fewer than 872 bankruptcies were recorded between November 1792 and July 1793. The problem of credit currency became acute. The country banks, which had multiplied greatly during the previous decade, had produced an over-issue of notes, some of them for such small amounts as to provoke the derisive issue by a Newcastle cobbler of a note for two-pence. But the notes even of the sounder banks were now returned on their hands and many were obliged to close their doors.[25]

The instability that these free banks issuing fiduciary credit afforded the industrialist in the times of crises was very destabilising, as you did not want to become a creditor to a bankrupt banker. This is one way to accelerate your own potential to become bankrupt. So commercial credit, or bills backed by real goods, was sought in preference.

Why did these Lancashire Bills Decline?

Henry Thornton, an economist, banker, and Parliamentarian, commented on the demise of bills to the favour of notes in 1802: “Some Bank of England notes have also been recently employed in the place of small bills on London, the use of which has been discouraged by the late additional duty on bills and notes.”[26]

Redford discusses the response of Manchester merchants to the duties and taxes imposed on bills of exchange:

A much more protracted struggle, extending throughout the second quarter of the nineteenth century, was waged by the Manchester merchants against excessive stamp duties on various kinds of legal documents. … Bills of exchange and promissory notes were first subjected to stamp duties in 1782; a general Stamp Act of 1815 had increased the duties, which thenceforth discriminated between short-dated and long-dated bills. In the post-war period the average duty on all bills of less than £50 was 1/2 per cent.; but this charge was felt to be prohibitive, and had in Manchester caused bills to be almost completely replaced by bank notes. Bank notes, however, were considered to be a much more inconvenient and risky means of payment, since they were payable “to bearer” and not “to order.” The Manchester Chamber of Commerce therefore moved in 1822 for the reduction of the duties, and sent up several petitions on the subject, to the Prime Minister, the Chancellor of the Exchequer, and the Houses of Parliament. The petitioners described the serious inconvenience to business which had resulted from the virtual extinction of “a description of currency of great convenience and security”; they suggested a greatly reduced scale of duties, and argued that, if this were adopted, not only the business community but also the revenue would benefit greatly, because of the increased use of bills of exchange.[27]

The Bank of England (BoE) was still a private bank at the time. However, as the government’s favoured bank it had certain privileges and was always lobbying for more. The 1815 Stamp Act made the reissue of bills of exchange virtually impossible. Some were taxed up to 460% higher than Bank of England note issue, or subject to great penalty that made the issue of private credit by other banks more expensive than BoE note issue. In 1825 the Bank of England set up a branch in Manchester specifically to take advantage of the terrible taxation placed on private bill issue and make sure that those pioneers of the Industrial Revolution had to take BoE credit.

The significance of Manchester as the prime industrial area of the world at the time does make it a meaningful and worthy study area from which we can extrapolate, hopefully, our findings to the wider canvas of today and I submit that in the absence of bank-created credit we, like our ancestors, have nothing to fear. Indeed, like the pioneers of the Industrial Revolution, we should embrace private money solutions such as bills of exchange and rely on the lending of real savings to provide real capital to entrepreneurs and not bank credit created out of nowhere. Full-reserve systems are not only stable, but growth enhancing. Lending does not die as many advocates of fractional reserve banking dread.

[1] Arizona Jewish Post, 18 September 1998

[2] Report from Select Committee on Banks of Issue, Ordered, by The House of Commons, to be printed, 7 August 1840.

[8] Gordon Kerr, “The Law of Opposites: Illusory Profits in the Financial Sector.”

[12] Huerta de Soto, Jesus. Money, Credit, and Economic Cycles. 2nd edition. Auburn, AL: Ludwig von Mises Institute, 2009, pp. 739-740.

[14] Although the City of Manchester is now part of Greater Manchester or the Greater Manchester Urban Area, prior to 1835 it was part of the Salford Hundred of the county of Lancashire. By 1853, it had reached full City status.  So for the majority of this essay’s focus, when Lancashire is referred to, it certainly should be read to be synonymous with what is the heart of Manchester City today. Also, you will see Liverpool mentioned as well, often in the same light as Manchester. This is due to their close geographic connection and the Port of Liverpool being often the import and export venue for the Manchester manufacturers.

[15] Dun, John. British Banking Statistics. London: E. Stanford, 1876, p. 87.

[16] Redford, Arthur. Manchester Merchants and Foreign Trade. Manchester: Manchester University Press, 1934, p. 248.

[17] Maddison, Angus. Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History, Oxford: Oxford University Print, 2007. (Table can also be found at

[18] Ashton, Thomas Southcliffe. Economic and Social Investigations in Manchester, 1833-1933. London: P.S. King & Son, 1934.

[19] Langton, William qtd. in Ashton.

[20] Crick, W.F., and Wadsworth, J.E. A Hundred Years of Joint Stock Banking. London: Holder & Stoughton, 1936, pp. 142-143.

[21] Ashton, Thomas Southcliffe. An Eighteenth-Century Industrialist: Peter Stubs of Warrington 1756-1806. Manchester: Manchester University Press, 1939, p. 139.

[22]Wadsworth, Alfred P., and Mann, Julia De Lacy. The Cotton Trade and Industrial Lancashire, 1600-1780. Manchester: Manchester University Press, 1931, pp. 92-93.

[23] Defoe, Daniel, qtd. in Wadsworth and Mann,  p. 93.

[24] Wadsworth & Mann, p. 96.

[25] Unwin, George, Hulme, Arthur, and Taylor, George. Samuel Oldknow and the Arkwrights: the Industrial Revolution at Stockport and Marple. Manchester: Manchester University Press, p. 79.

[26] Thornton, Henry An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802), London: George Allen and Unwin, 1939, note to p. 214.

[27] Redford, p. 209.


Steve Baker on Russia Today

A must-watch interview: RT’s Laura Smith talks with Steve Baker MP:


Steve Baker MP on sound money

Episode 68: GoldMoney’s Andy Duncan speaks to Steve Baker MP, a Conservative backbencher who represents the constituency of Wycombe in the United Kingdom’s House of Commons. A supporter of the Austrian School of economics, Mr Baker has launched several private member’s bills in parliament – with the support of his colleague Douglas Carswell MP – aimed at advancing dialogue on the subject of sound money. In this podcast Steve Baker discusses these bills, along with his views on quantitative easing, the post-Bretton Woods monetary order, and the chances of a future monetary reset. Mr Baker also touches upon the future of the euro, Britain’s membership of the European Union, and his co-founding of The Cobden Centre. He also discusses a possible future political initiative to launch a British gold pound project.

Download audio file: Steve Baker MP on sound money 
(18:01 min)

This podcast was recorded on 15 November 2012 and previously published at


Maybe now they will start listening to Steve Baker…

Now that we are being engulfed by the LIBOR scandal and find that the Bank of England was heavily involved (shock horror), perhaps it is worth revisiting one of the most important speeches given by a politician in recent memory and which couldn’t be more relevant to the latest outrage.

In June, 2010, Steve Baker MP took to his feet in the House of Commons to spell out, in plain language, why our banking system has become so corrupted and address the central economic issues that are seldom touched on in mainstream debate.

Our monetary system is characterised by private banking, with a fractional reserve controlled by a central bank, which determines monetary policy and has a monopoly on the issue of legal tender. A Monetary Policy Committee sets interest rates.

A Soviet-style committee at the centre attempts the impossible job by setting interest rates – perhaps the most important price signals in the entire economy – in the same manner that Stalin’s planners picked the price of bread, and with the same catastrophic results.

Artificially lowered interest rates increase the demand for credit, and decrease the supply of savings, but the legal privilege granted to banks means that they can meet demand by extending credit that is unbacked by real savings. There is a good argument to say that that causes the boom-and-bust cycle, the misdirection of resources in the capital structure of production, and over-consumption by consumers. That is the biggest problem that we face today.

On top of this, private banks “have the legal privilege of treating depositors’ money as their own.”

The Bank of England subsidises and supports a fractional reserve system where private banks lend out depositor’s money for a profit – money that was left with them specifically for safe-keeping. This is in breach of the depositor’s claim on that money and their fundamental right to their own property. Some might call this theft.

And that’s before we even get on to talk about the “moral hazard of having a state-backed lender of last resort and state deposit guarantees, and of the socialisation of the cost of failure”.

Price controls on interest rates, the expansion of credit unbacked by savings leading to boom and bust, the destruction of property rights through fractional reserves and more moral hazard than you can wave your increasingly worthless pound notes at. Truly a tour de force in blundering interventionism.

And yet successive policy makers still fail to connect the dots. Steve makes it easier for them:

Today, money is a product of the state. The Bank of England controls the price, quantity and quality of money. Perhaps if we were talking about any other commodity, there would be far less confusion over and questioning of the cause of the crisis. If money is a product of the state, we should ask ourselves, “Is this a good idea?”

Perhaps instead of holding an enormous and costly inquiry into the causes of the LIBOR scandal and the wider problems in the banking industry, Westminster politicians could simply swallow their pride and start listening to what Steve Baker has been saying for the last two years.


Bankers’ bonuses and unlimited liability

On the 29th of February, Conservative MP Steve Baker tabled a 10 minute rule bill on bankers’ bonuses. In it he proposes that directors of financial institutions post personal bonds that can be called in should an institution they hold responsibility for fail. Essentially, this increases the liability of directors of financial institutions to a far greater, and personally significant, level.

This is an interesting proposal and one that is supported by a number of luminaries – the Bank of England’s financial stability guru Andy Haldane being one, and the substance of the bill has been crafted by professor Kevin Dowd and Gordon Kerr, himself a banker and founder of Cobden Partners. This is certainly timely and the whole debate about bonuses is far from being settled. But in looking for a long term solution to this question of remuneration, it is worth casting an eye to the pre Big Bang City, when soon-to-be-created investment banks were still merchant banks, jobbers and brokers. This was a time when membership of the London Stock Exchange required that member firms could either be a broker, acting as an agent between end users and the market itself for a fixed rate commission, or a jobber acting solely as a market maker and prohibited from any contact whatsoever with the end use investor. As a fresh faced junior on the floor of the Stock Exchange in 1982 – a “blue button” – I was paid a base salary of £3,500 per annum, with an indicated bonus of 65% paid at a rate of 15% each quarter with the final 20% at the year end, depending on results and personal performance. The reason for this arrangement was two-fold. Firstly, there was (and still is) a requirement that all regulated firms hold a reserve of regulatory capital that is equivalent to 90 days operating costs. Reduce your fixed costs by having a low base salary (topped up by non-guaranteed bonuses) and you reduce your regulatory capital requirement. But the second reason relates to the structure of the firms themselves. Unlike modern businesses, the pre Big Bang firms were unlimited liability partnerships. The partners of the firms wanted to mitigate their liabilities until they knew how profitable they had been at the year end and so we staffers put up with a slightly erratic method of remuneration.

But it was this element of unlimited liability that was a key to the stability of the City. Every member firm had a group of individuals running it who had a huge vested interest in the financial stability of the firm. Every partner watched his or her part of the business like a hawk and was party to every decision on expenditure and risk taking. It was an incredibly effective system. Every partner knew that if he or she messed up, it was not just their bonus or their job they were losing: they would lose their home, their son would be chucked out of their private school, their daughter would have her pony repossessed by an unsympathetic bailiff, and the Jaguar would go back to the showroom. Everything would be gone including their dignity. The fact is, there is no better way to regulate risk than have the deal maker waking up at three in the morning in a cold sweat about an ill conceived decision.

Wind forward twenty or so years and the deal maker’s downside is now no more than his or her job. If it is a terrible error they have made, at best the shareholders of the bank pick up the bill; at worse, the taxpayer.

Steve Baker’s bill seeks to move some way towards restoring this old regime. By posting a bond as part of the regulatory capital of a bank, as Steve’s bill proposes, the liability of an individual director is part guaranteed. But the director has, ultimately, unlimited liability on the debts of the firm he governs. The recovery capital – that which the director will cough up should the bond be called in – is a minute fraction of the potential liability of any of the significant institutions concerned. With balance sheets reaching a trillion pounds or more, a director’s personal wealth will never make a significant difference to losses. But committing a risk taker at an institution to effectively put up his life’s accumulated worth is a serious and effective way of ensuring that this individual thinks far more carefully when looking to speculate with someone else’s balance sheet.

However, I fear that Steve’s bill, whilst a smart way of ensuring risk is mitigated from those at the top of an institution – the directors – may not go far enough. After all, very few directors of these institutions will be aware of the day-to-day activities of any trading desk. Far more effective would be a solution whereby those heading up business divisions of regulated institutions would carry a liability restricted to just those areas under their control. Spreading the risk amongst a wider range of those on the payroll would generate more capital and so be a more realistic resource in the event of a failure. It would also be a far more effective way of ensuring a wider spread of risk takers buy into the risks associated with their activities. In return, those who are prepared to participate in the risk element of the business would be able to participate in generous bonus schemes and the moral hazard that is a significant feature of the current bonus schemes would be eliminated.

Of course, details would need to be looked at in terms of what constitutes risk business and non-risk, agency business. But what is important about Steve Baker’s bill is that it opens a new area of debate restoring the risk / reward balance in favour of the taxpayer. With a system so jammed packed with moral hazard, Steve’s thinking is a helpful contribution to a complex and important issue.


The 2012 Baker Bill: a programme to end financial crises

Earlier today Conservative Steve Baker MP put forward a Private Member’s Bill, the Financial Institutions (Reform) Bill, which outlines a programme of radical reforms to the banking system and calls for an end to state meddling in banking. Steve is co-founder of the Cobden Centre, and has been MP for Wycombe since May 2010.

The underlying principle of his Bill is to minimize moral hazards within banking, by making those who make or preside over risk-taking as liable as possible for the consequences of that risk-taking. Since financial institutions often circumvent rules, the Bill also includes mutually reinforcing measures that minimize scope for evasion.

Within this framework, bankers would be free to do as they wished, but they would bear the consequences of their own actions.

Thus, Steve’s Bill addresses the rampant moral hazard problems within the modern banking system, and this is the central issue in putting the banking system back on its feet and restoring its integrity. Indeed, his proposals provide nothing less than a free-market solution to the current banking crisis

I would therefore ask all supporters of free markets to promote this Bill and to push for similar measures in other countries.

One key provision of the Bill is to make bank directors strictly liable for bank losses and require them to post personal bonds as additional bank capital. These measures reaffirm unlimited personal liability for bank directors, and will rule out all-too-familiar “It wasn’t my fault” excuses on their part.

The Bill also calls for bonus payments to be deferred for five years, and for the bonus pool to be first in line to cover any reported bank losses. Any reported losses would be covered first out of the bonus pool and then out of directors’ personal bonds before hitting shareholders.

These measures would provide strong incentives for key bank decision-makers to ensure responsible risk-taking, as their own wealth would now be very much at risk.

Amongst other measures, the Bill:

  • Proposes a tough bank solvency standard, and would require any insolvent bank to be automatically put into receivership;
  • Calls for the Government to propose a fast-track receivership regime for insolvent banks and to produce a plan and associated timetable to end all state involvement in the banking system;
  • Calls for accounts to be prepared using the old UK GAAP governed by Companies Act legislation, as proposed in Steve’s previous (2011) Private Member’s Bill, the Financial Services (Regulation of Derivatives) Bill. This would put an end to the various accounting shenanigans associated with IFRS accounting standards; and
  • Calls for the establishment of a Financial Crimes Investigation Unit to investigate possible crimes committed by senior bankers: this Unit would investigate all banks that have failed or received public assistance since 2007 and would replace the Financial Services Authority, which has proven to be utterly useless.

Further details of the Bill can be found on Steve’s website: