In light of recent events, we’re bringing forward this proposal from June 2010.
There’s two ways to view the financial meltdown that occurred in 2008. The first is that it was a rare and unfortunate blip that can be remedied with calm and enlightened improvements in the regulatory framework. The second is that it exposed a serious flaw in the entire monetary system, and is likely to be repeated unless a radical transition takes place.
It’s no surprise that politicians, bankers and regulators – the architects of the banking industry – favour the first idea. This is why their response has skirted around the edges instead of dealing with the core. Even supposedly extreme measures such as nationalising banks are in fact attempts to preserve the status quo.
For those of us who favour the second idea, 2008 provided a golden opportunity to join the public debate and present a credible alternative. Perhaps we missed it. But if indeed another crisis is coming, this article attempts to outline a 14-point plan that could be implemented quickly and genuinely reform the institutions that create financial instability.
The key aspects of this proposal have been made previously, notably by economists Kevin Dowd and Richard Salsman. It could be implemented in three phases:
Over 2 days the aim is to ensure that all operating banks are solvent
- Deposit insurance is removed – banks will not be able to rely on government support to gain the public’s confidence
- The Bank of England closes its discount window
- Any company can freely enter the UK banking industry
- Banks will be able to merge and consolidate as desired
- Bankruptcy proceedings will be undertaken on all insolvent banks
- Suspend withdrawals to prevent a run
- Ensure deposits up to £50,000 are ring fenced
- Write down bank’s assets
- Perform a debt-for-equity swap on remaining deposits
- Reopen with an exemption on capital gains tax
Over 2 weeks the aim is to monitor the emergence of free banking
- Permanently freeze the current monetary base
- Allow private banks to issue their own notes (similar to commercial paper)
- Mandate that banks allow depositors to opt into 100% reserve accounts free of charge
- Mandate that banks offering fractional-reserve accounts make public key information (these include: (i) reserve rates; (ii) asset classes being used to back deposits; (iii) compensation offered in the event of a suspension of payment)
- Government sells all gold reserves and allows banks to issue notes backed by gold (or any other commodity)
- Government rescinds all taxes on the use of gold as a medium of exchange
- Repeal legal tender laws so people can choose which currencies to accept as payment
Over 2 months the aim is the end of central banking
- The Bank of England ceases its open-market operations and no longer finances government debt
- The Bank of England is privatised (it may well remain as a central clearing house)
You can download a copy of the plan in pamphlet form here.
Let’s dream for a moment that politicians and bankers accept this reform without a serious fight. Do you think that the UK can go alone with it or any sort of international agreement would be needed for all countries to adopt the same kind reform?
Cheers, and let’s keep good dreams alive.
I think this is much more sensible than Toby’s plan, though I don’t think it could be done so quickly.
Regarding the international markets, as Apolinar says I think this is where the problems may be. We will still get monetary stimulus from the central banks in the US and Eurozone. ABCT will probably continue, though it may be attenuated.
I think both plans can work together. In any case, this is the direction: remove State intervention from the banking sector
Toby’s plan had great big gaping holes in it, given that it basically entailed printing money.
This plan could happen, but it would have lots of unintended consequences – the main being that 100% reserve requirements would make it very difficult for banks to lend, and on the back of that harder for people to invest.
((Why would a bank give a depositor interest if it ca’t lend that money? ))
Contracting the money supply so dramatically coudl also lead to stagflation rather than low or zero inflation as intended.
Unlike Toby, Anthony isn’t proposing 100% reserve requirements.
Dear Tyler, some quick reactions:
Toby’s entails printing money, but as long as you require a 100% reserve requirement, it is not inflationary (not deflationary either, so there is no contraction of the money supply)
A 100% reserve requirements would make more difficult for banks to lend. So they will have to better assess borrowers’ creditworthiness and find real savings to fund new projects. This is a change for a more sustainable credit growth, and a financial system less prone to asset price bubble collapses.
With a 100% reserve requirements banks will not give a depositor interest. On the contrary, they will charge fees for money custody and payment services. There is not such a thing in economy as a free lunch. So if today banks pay you interests for your “deposits”, you may assume that this is not an on-site deposit, but something different. Maybe something riskier than you suppose. Ask Norther Rock clients whether they had on-site deposits or something riskier.
as long as you require a 100% reserve requirement
He does not require a 100% reserve requirement. His article specifies both 100% reserve and fractional reserve. The customer would choose which he prefers.
Tyler is right. If you freeze the monetary base AND offer 100% reserve accounts, the effects would be very deflationary – unemployment would rise dramatically and it would be more difficult for banks to lend.
You can get round that by letting government create money and spend it into the economy (as advocated by Positive Money). But you can’t have it both ways. I.e. freezing the base and offering 100% reserve accounts would lead to widespread unemployment.
Central Banks would continue monitoring the process for years Evans. It is not 2 days, 2 weeks, 2 month.
Who ensures that all operating banks are solvent?
When free banking would control the process?
At the long run, yes. Between, Central Banks continue the control of process.
Step 1 – remove deposits insurance
argh … panic … bank runs … bank closures … all banks insolvent! Joy :)
Re. No.8 (100% reserves), that’s much the same as full reserve along the lines advocated by Positive Money and Laurence Kotlikoff.
Re. No.9. (fractional reserve accounts), Anthony Evans does not stipulate (unlike Pos Mon and Kotlikoff) that commercial banks be prevented from creating money. To that extent, they’d be free to “lend money into existence” as if there was no tomorrow, just as they did prior to the recent crunch.
Re. 12, Evans says “Repeal legal tender laws so people can choose which currencies to accept as payment”. Legal tender does not stop people choosing. Debt and credit cards and cheques are not legal tender, but millions of people per day accept these as payment.
I like a lot of these ideas but when we end up with a mild, secular deflation (more so if we’re the only country) then to prevent massive unemployment people’s wages would have to fall also. A strong currency can work amazingly if people understood values instead of prices. Their wages would go down but the cost of everything would fall faster and their savings would be worth more. What a fantastic situation.
The problem is what Keynes called the public’s “money illusion”.
How do we overcome wage stickiness? How do we educate people to focus on value instead of price?
Your comment is absolutely spot on. You’ve honed in the central and political point that Austrians just don’t get: it’s the fact that given falling prices, trade unions are just not going to accept wage reductions – in money or “pound” terms, that is.
They are of course happy to accept REAL WAGE REDUCTIONS that come about because of inflation. And to that extent, unions are totally and completely illogical. Keynes pointed to that illogicality. But that’s where we are. That’s the reality.
Moreover, 2% or so inflation is completely harmless, as far as I’m concerned. Indeed it’s positively beneficial for a number of reasons including the fact that it amounts to a tax on people with excessive amounts lodged in banks for which they cannot think of a use. That’s an almost ideal tax.
The Austrian desire for falling prices is flawless as far as economic theory goes. As for politics, it hopelessly unrealistic.
I don’t want to be misunderstood – I would consider myself an Austrian but I do accept after generations of total mis-education about money, we have a mountain to climb politically.
I don’t agree that 2% inflation is harmless and I don’t think you can have excessive savings in a bank – you have lent the money to the bank and they are supposed to lend it to entrepreneurs to be used productively. That is the whole point of capitalism. You under-consume, save the difference and that capital can be used productively.
Inflation is theft and it transfers wealth to ends devised by purely political motives. We need to get politics out of money.
But… let’s imagine loan and deposit banking were separate again, as they once were and let’s imagine somebody is “hoarding” cash or gold as Keynesians and Monetarists like to disparage people for. I still don’t see that as a bad thing. The money isn’t being used productively…yet. But at some point it will be mobilised. Even if it isn’t, I don’t see any problem. By removing money from circulation they have sterilised its influence on prices, in a way they have just increased the purchasing power of the circulating stock for everybody else.
But also, people with money in the bank are independently wealthy and more able to resist state coercion. We are losing those people in droves and historically the result hasn’t been pretty.
“given falling prices, trade unions are just not going to accept wage reductions”
And what exactly would they do about it? Grind the country to a halt? Go on a murderous rampage?
The unions aren’t as powerful as they used to be, and what power they retain derives from pro-union legislation (such as the prohibition on sacking striking workers) and a bloated public sector.
For a government with the will to tackle our broken monetary system, I don’t think the unions would pose much of a problem. With needless labour laws repealed, and government trimmed back to the essentials, we’d soon discover how flexible wages could be.
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