Honest Money and the Future of Banking. Steve Baker MP

Transcription

1 Honest Money and the Future of Banking Steve Baker MP

2 On politicians and economists... the present political necessity ought to be no concern of the economic scientist. His task ought to be, as I will not cease repeating, to make politically possible what today may be politically impossible. To decide what can be done at the moment is the task of the politician, not of the economist... F A Hayek, 1978

3 Scope Why honest money? What needs to be done? How might we do it? What if we don t?

4 Why honest money?

5 Leviathan Source: IEA Discussion Paper No. 24

6 Debt projections Our gross national debt is about 6.5 trillion: the UK is effectively an enormous unfunded and effectively bankrupt pension scheme, with a large speculative holding in some banks and a sideline in running a small island state off the northern coast of France. Sources: BIS working paper 300 and IEA, A Bankruptcy Foretold plus updates

7 Keynes was not an idiot (unfortunately)

8 Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. 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. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. 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. Source: The Economic Consequences of the Peace, Chapter VI, pg

9 Source: Consumer Price Inflation since 1750, Jim O Donoghue and Louise Goulding Office for National Statistics and Grahame Allen, House of Commons Library

10 Source: Consumer Price Inflation since 1750, Jim O Donoghue and Louise Goulding Office for National Statistics and Grahame Allen, House of Commons Library

11 Inflation Price inflation is a consequence of inflation proper: an increase in the money supply How does money come into existence? Minting coins and printing notes Central bank operations Credit expansion by the banks

12 Ludwig von Mises Tu ne cede malis sed contra audentior ito

13 Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand. The Causes of the Economic Crisis In the course of the development of a banking system with fiduciary media, crises could not have been avoided. However, as soon as bankers recognized the dangers of expanding circulation credit, they would have done their utmost, in their own interests, to avoid the crisis. They would then have taken the only course leading to this goal: extreme restraint in the issue of fiduciary media. Monetary Stabilization and Cyclical Policy Source: The Economic Consequences of the Peace, Chapter VI, pg

14 And by the way... There was a full-scale banking collapse Banks are failing savers and entrepreneurs The crisis was manufactured by credit expansion in excess of real savings, driven by government, underwritten by taxpayers This isn t a crisis of capitalism

15 Everything hinges on money and bank credit

16 What needs to be done?

17 Objectives TCC: A peaceful, open and free society based on a stable, sustainable economy in which everyone has the opportunity to participate in constantly growing real prosperity. Rescue capitalism Provide better money and banking

18 How might we do it?

19 The fundamental flaws Barely restrained credit expansion in excess of real savings Capital accumulation prosperity relies on real savings We must reign in credit expansion and encourage saving and investment

20 Planning in bank credit Interest: the time preference of economic agents: goods now vs goods later Artificially lowering the interest rate encourages borrowing and discourages saving Any other commodity would disappear off the market Credit expansion new money representing no investable resources papers over the gap

21 Other flaws

22 Problems Reformers quickly agree on politically impractical reforms: EG: abolish deposit insurance/boe Reformers disagree fiercely over fractional reserves vs 100% reserves The mainstream debate is pitiful

23 Approaches 100% reserves: some Austrian, Keynesian, Monetarist and Public Choice support Free banking: the rest of the Austrians, hard money Monetarists Fractional reserve central banking: the rest of the Keynesians and Monetarists

24 Where reformers agree * Fractional reserve deposit taking is incompatible with the other significant features of the banking system An unhampered, fully-denationalised market in money would resolve reserve ratios * I think!

25 Practical action Widen and have the debate Pick a destination Pick a path Walk the walk

26 Carswell s Bill Progressively eliminates fractional reserves Potential support from advocates of: Limited purpose banking Constitutional fiat money Opens conversation to further reform Supremely unlikely to become law Some Austrian-School intermediate stages (HdS)

27 What if we don t?

28 Ramifications of failure Worse crises later Perceived failure of capitalism Public selection of increased statism Missed opportunity for a generation

29 Conclusion Our economic mess has a dreadful system of money and bank credit at its heart Money should be constitutionalised then denationalised Theorists disagree vehemently Practical politics constrain action We must not miss this opportunity

30 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