In Praise of Credit Checks

by Jeffrey Tucker
http://mises.org/daily/5789/In-Praise-of-Credit-Checks

“The credit report is the best friend of the responsible in the same way that it is the worst enemy of the irresponsible.”

There is No Disinterested Authority

by Kevin Carson
http://c4ss.org/?p=8744

In a recent discussion, someone proposed “a political system comprised of professionals rather than career politicians.” Policy-making bodies, she suggested, might be equally divided between professionals and elected politicians.

Battle for the Heart of the Occupy Movement

by Kevin Carson
http://c4ss.org/?p=8737

Center for a Stateless Society Media Coordinator Tom Knapp, summarizing his experience with the Occupy St. Louis movement, reported a movement “with an ideological center of gravity somewhere in the neighborhood of ‘mild reform Democrat.’” Most of the people there, apparently, were basically Coffee Party people with better signs and slogans.

Robbing Us Blind

by David D’Amato
http://c4ss.org/?p=8712

Calling attention to the crises spawned by contemporary global capitalism, the Occupy movement provides an opportunity for more than mere response to the symptoms of that system. Just as doctors would be remiss to merely attend to symptoms on an ad hoc basis, we who are concerned with social and economic justice must set ourselves upon the underlying disease.

2011 Index of Economic Freedom

http://attackthesystem.com/?p=11153

As determined by the collection of neocons, theocons, vulgar libertarians, and stooges for the military-industrial complex that comprise the Heritage Foundation.

It isn’t a crisis of capitalism but a crisis of globalism

by Robert Henderson
http://livinginamadhouse.wordpress.com/?p=1116

It isn’t a crisis of capitalism but a crisis of globalism

Amongst the wailing and gnashing of teeth from all parts of political mainstream over the ongoing economic crisis its prime cause goes unmentioned. Free market capitalism, which has been accepted , whether enthusiastically or resignedly, by Western elites for the past quarter of a century as the only economic theory worthy of support, is being questioned. Even some of its firmest adherents are questioning whether there has been too much freedom of individual action in the economic sphere. Some mainstream commentators who write for resolutely “free market” supporting newspapers like the Daily Telegraph and Daily Mail, are even beginning to wonder if capitalism is in a crisis from which it may not recover:

Which Side Are You On?

by Kevin Carson
http://c4ss.org/?p=8630

Occupy Wall Street has come under fire from some libertarians, on the grounds that it’s relatively silent about the role of big government, and its proposed remedies lean heavily toward increased government intervention.

When the Mafia Can’t Compete With the Chamber of Commerce

by Kevin Carson
http://c4ss.org/?p=8150

I’ve written frequently on the national regulatory state as a source of monopoly rents to big business. But the true nature of regulation as a naked power grab by incumbent businesses is nowhere more apparent than at the local level. At the lower levels of government, conventional, brick-and-mortar business establishments are heavily involved in using regulatory enforcement to shut down low-cost competition.

What to Make of “Capitalism”

Note: This posting has generated nearly a hundred comments, and has been viewed by pushing towards 10,000 people. We are not surprised, as the issues discussed are central to the future direction of the libertarian movement. For this reason, we are pinning it to the top of the blog until the comments and views fall away. SIG

by David D’Amato
http://c4ss.org/?p=8156

For the United Kingdom’s The Guardian, Pankaj Mishra says the world is “looking at a fresh political awakening,” citing examples from Egypt and Greece to Israel and China. “[E]xtreme and seemingly insurmountable inequality,” Mishra argues, are the source of the new “public anger,” and that inequality is itself the result of “the west’s model of consumer capitalism.”

Personal Perspectives 27, Austrian Economics and Anarcho-Capitalism: Peace, Prosperity and Freedom (2011), by Michael McKay | www2.libertarian.co.uk

 

Austrian Economics and Anarcho-Capitalism: Peace, Prosperity and Freedom
Michael McKay

Personal Perspectives No. 27
ISBN 9781856376372
ISSN 0267-7156 (print)
ISSN 2042-275X (online)

© 2011: Libertarian Alliance; Michael McKay

Personal Perspectives 27, Austrian Economics and Anarcho-Capitalism: Peace, Prosperity and Freedom (2011), by Michael McKay | www2.libertarian.co.uk

Kevin Carson in Forbes Magazine

 

As Kevin Carson has noted in the past, the IMF’s “actual purpose was to subsidize the disposal of surplus American goods and capital in foreign markets. The World Bank and IMF were created as an adjunct of William Appleman Williams’ “Open Door Imperialism,” a safety valve for the chronic overproduction and overaccumulation under state capitalism.”

Should We Abolish the IMF? – E.D. Kain – American Times – Forbes

Back in the USSA, by Kevin Carson

http://c4ss.org/?p=5477

Politicians and talking heads, of both the mainstream liberal and conservative persuasions, commonly refer to this as “our free market system,” or maybe “free enterprise.”

But we haven’t had anything even remotely resembling a free market for over 150 years. (For that matter we didn’t have one before, what with Enclosures, the Combination Law, mercantilism, slavery and colonialism.) Since the mid-19th century, what we’ve had is massive collusion between big government and big business. The corporate economy was created almost whole-cloth through a monstrous act of top-down government intervention, with the help of such things as the railroad land grants and other infrastructure subsidies, the exchange and pooling of patents, tariffs, regulatory cartels, and union-busting by uniformed thugs. The New Deal was just corporatist icing on the cake.

What we have is not a free enterprise system, but an interlocking directorate of giant, centralized government and corporate bureaucracies. The same personnel circulate, through a revolving door system, between senior corporate management and government political appointees. The same person who is now Assistant Vice President for Such-and-Such at So-and-So Corp LLC, is apt in five years to be Deputy Undersecretary for the Other Thing. And vice versa, of course. It makes about as much sense to treat a Fortune 500 corporation as a “private business” as it makes to treat a count in fourteenth-century France as a private landlord.

Within the large corporation, management bears more resemblance to the Soviet Nomenklatura than to free market entrepreneurs. They justify their power in the name of shareholder value, but in fact shareholders exercise almost no control over corporate management. Proxy fights almost never work, and corporations are typically controlled by inside directors. After a brief period of hostile takeovers in the ’80s, management quickly acted to restore insider control and nullify the threat of such attacks through measures like poison pills and greenmail; today, most takeovers are friendly and carried out by the management of both companies in collusion. If some seats on the board are occupied by institutional investors, it’s more accurate to describe it as a coalition between interlocking corporations. Bond issues are reserved mainly for financing mergers and acquisitions, and most new investment is financed by retained earnings, so the external control exerted by the capital markets is largely mythical.

American corporate management claims to represent shareholders as a legitimizing ideology, just as the Soviet bureaucracy claimed to represent the workers or the people — meanwhile having dachas, private cars, and shopping privileges in the luxury department stores reserved for Party members. In both cases, though, what you really had (and have) is a self-perpetuating oligarchy in control of a free-floating mass of unowned capital.

The typical Fortune 500 CEO invests money that she didn’t contribute from her own past savings, but that lacks any external owner capable of exercising any genuine control over it. Corporate management spends other people’s money, amounting to de facto owners of it. Shareholders are conventionally regarded as residual claimants, because in legal theory they have a claim on all revenue that’s left over after after all contractual claims are paid. But in the real world, it makes more sense to say that the shareholder is a contractual claimant with even fewer rights than a bondholder, and that management is the real residual claimant. A shareholder is entitled only to whatever dividend management sees fit to issue, if any. But senior management is entitled to whatever salaries and bonuses they can get, through mutual logrolling with the board of directors.

A lot of establishment libertarians, when they call for a “free market,” really seem to mean the present corporatist system without the welfare or the health and safety regulations — a world owned by Wal-Mart and Halliburton.

But when you hear a call for a freed market by someone at the Center for a Stateless Society, or anyone else on the free market left, please be aware that we mean something completely different by it. What we want is a society in which corporations are deprived of all the subsidies, privileges, protections, and artificial property rights they currently enjoy. What we want is a society in which all market activity consists of free exchange between equals, without anyone paying monopoly rents to the privileged and powerful. What we want is a society in which all functions of the state are replaced by voluntary association, whether by market transactions, mutual aid associations, or gift economies.

In short, the free markets we talk about have nothing to do with those of Dick Armey and FreedomWorks, the AEI, or the Heritage Foundation. We’re not talking about socialism for the rich and a Dickensian work house for everyone else.

When we say we believe in free enterprise, we mean it.

“Bad news coming” thought Winston…

Christopher Houseman

No, not the impending cuts of so many public payroll salaries (some of which have jobs associated with them), but rather a certain commonality in the Coalition about the motives for their present course of action.

Nick Clegg has assured the LibDems that he doesn’t want to cut the state for the sake of cutting it. No, he wants to cut it so he can rebuild the state differently. Likewise, Liam Fox has informed the Tories that he doesn’t want to cut defence and nor does David Cameron (cue Tory applause) – but at the moment, he has no choice.

Thus is the libertarian ideal of a smaller state smeared in the eyes of political activists and the wider public as a necessary evil, a stopping-off point to be endured on the road to the sunny uplands of a reshaped and re-expanded State tomorrow.

Unless libertarians can convincingly and appealingly present to the public the truly joyous reality of being able to work (or not) as we please, with whom we please, to offer goods and services we’re proud of to whomever we please, libertarians will remain marginalised and misunderstood. They’ll be seen as an articulate but callous bunch, perversely rejoicing over the wider dislocation and misery caused by the State’s champions ditching the minions they think they can most easily do without.

When faced with people determined to do exactly the wrong thing, Lenin’s “The worse the better” dictum may be an accurate response to their failures. But it’s no way to market anything to anyone.

PS. I note the Tories’ pledge to let headteachers discipline children for misbehaviour on the way to and from school. I leave the last word on this news to John Taylor Gatto:

As schooling encroaches further and further into family and personal life, monopolizing the development of mind and character, children become human resources at the disposal of whatever form of governance is dominant at the moment.

101 Years Ago – G.K. Chesterton on Ideas and Ideals

Christopher Houseman

A wonderful answer to all the proud pragmatists who dismiss the power of ideas – including libertarianism.

Ideas are dangerous, but the man to whom they are least dangerous is the man of ideas. He is acquainted with ideas, and moves among them like a lion-tamer. Ideas are dangerous, but the man to whom they are most dangerous is the man of no ideas. The man of no ideas will find the first idea fly to his head like wine to the head of a teetotaller. It is a common error, I think, among the Radical idealists of my own party and period to suggest that financiers and business men are a danger to the empire because they are so sordid or so materialistic. The truth is that financiers and business men are a danger to the empire because they can be sentimental about any sentiment, and idealistic about any ideal, any ideal that they find lying about. Just as a boy who has not known much of women is apt too easily to take a woman for the woman, so these practical men, unaccustomed to causes, are always inclined to think that if a thing is proved to be an ideal it is proved to be the ideal. Many, for example, avowedly followed Cecil Rhodes because he had a vision. They might as well have followed him because he had a nose; a man without some kind of dream of perfection is quite as much of a monstrosity as a noseless man.

Chesterton, G. K. (2010). Heretics (297–298). Bellingham, WA: Logos Research Systems, Inc.

Will Hutton on How the Banks Won (and keep winning…)

Christopher Houseman

Will Hutton presented a Dispatches documentary recently on Channel 4 about the British banking cartel system.

The extent of Mr. Hutton’s connections with the previous Government were plain to see, as he treated us to an hour of breast-beating to the tune of “Why oh why do the noble politicians not rescue us from the greedy bankers?” This seems more than a little rich (in irony only, you understand). As I recall, the recent banking crisis would have lawfully removed large numbers of greedy bankers from the UK economy – but for Labour’s insistence on debasing the money supply still further to try to prop them up.

Perhaps the most informative snippet came towards the end when Mr. Hutton revealed that British banks currently lend out fifty times more money than they have on deposit, and five times more than the value of everything else the UK produces. No wonder our glorious leaders are worried about a repeat performance. Mr. Hutton’s solution? To try to force the banks to stop inflating residential property prices by switching the focus of their lending activities to (British-based?) businesses.

Sadly, Mr. Hutton didn’t tell the viewers how his proposals would avoid inflating the prices of business “assets” (commercial property, plant and machinery, R&D, properly skilled and experienced labour, etc.). Nor did Mr. Hutton explain how artificially stimulating productivity could be compatible with any conceivable form of environmental responsibility (so much for the alleged anti-environmentalism of decision-making in a free market). In fact, Mr. Hutton didn’t even tell us why businesses should apply for his proposed extra loans if they can’t be sure there are enough additional customers able and willing to pay for all the proposed new supplies of goods and services.

100 watt light bulbs.

Fred Bloggs.

Although there is a store in Southport which has a large sign saying  ”We now stock 100 watt light bulbs.”

Here’s the details:
Chris Taylor Electrical Supplies
01704 544047

Enjoy.

Review by Sean Gabb of Kevin Carson’s “Organization Theory”

Free Life Commentary

Free Life Commentary,
A Personal View from
The Director of the Libertarian Alliance
Issue Number 184
18th June 2009
Linking url: http://www.seangabb.co.uk/flcomm/flc184.htm
Book Review by Sean Gabb

Organization Theory
Kevin A. Carson
Booksurge, 2009, 642pp, $39.99
(ISBN 9781439221990)
Available from Amazon

(http://www.amazon.com/exec/obidos/ASIN/1439221995/ref=nosim/kayetechsystems)

I will begin my review by stating its main conclusions. These are that Kevin Carson has written one of the most significant books the libertarian movement has seen in many years. I do not agree with everything he says here. I do not suppose any libertarian will unreservedly accept what is said. Even so, I doubt if there is a libertarian who can read this book and not, in some degree, have his vision of a free society enriched and even transformed by it.

Summarising an argument that is worked out over more than six hundred pages is not easy. However, Mr Carson begins by observing that, while economic theory seeks to analyse the behaviour of individuals and small groups within a market system, the economic reality is a world dominated by large corporations within which prices are largely administered and there is an absence of competition.

He asks why this should be so. Why is there so much substitution of hierarchy for individual contracts? The standard answer, provided by Ronald Coase, among others, is that large firms are more efficient than small firms. The further the division of labour is carried, the larger the potential economies of scale. In an open market, however, the division of labour involves transaction costs – these being the costs of negotiating exchanges between many different suppliers of goods and services. Within a firm, these costs are not abolished, but are much reduced. Therefore, a firm will expand to the point where the cost of organising one more transaction within itself is equal to the cost of letting that transaction be made on the open market.

According to this analysis, firms grow large so far as their lower internal transaction costs make them more efficient than their smaller competitors. And there is an obvious temptation to regard size in a market economy as evidence of greater efficiency.

Against this analysis and its conclusions, Mr Carson argues that the point at which internal transaction costs become equal to the costs of transactions via the market has been artificially raised by state intervention. There are few objective benefits in size. Lowest long run average cost is often achieved by rather small scale production methods. There is little evidence that large factories are more efficient than small factories. There is little evidence that large firms are more innovative than small firms. Anyone who looks inside a large firm will see information and management and resource allocation problems similar to those described by Hayek and von Mises in their work on socialist calculation.

For two hundred years, economists have been content to repeat and elaborate on the example of the pin factory described by Adam Smith – in which the operations of making a pin are divided among many workers, thereby raising average output. In fact, these efficiencies can be realised just as easily by dividing the operations so that individual workers perform them one after the other.

If large firms predominate, it is not because they are the outcome of free market forces. Rather, they are called into being by systematic distortions of the market that amount to a subsidy on size. These distortions include the following:

First, there is subsidised transport and communication infrastructure. According to Mr Carson,

[i]t’s… important to remember that whatever reductions in unit production cost results from internal economies of large-scale production is to some extent offset by the dis-economies of large-scale distribution.[p.34]

The British and American railway networks, for example, were built in the nineteenth century by private companies. However, investment was only made profitable by

Free Enterprise: The Antidote to Corporate Plutocracy Keith Preston

http://www.libertarian.co.uk/lapubs/econn/econn112.htm
Economic Notes No. 112
ISSN 0267-7164                   ISBN 1856376303
An occasional publication of the Libertarian Alliance,
Suite 35, 2 Lansdowne Row, Mayfair, London W1J 6HL.
© 2009: Libertarian Alliance; Keith Preston

Keith Preston is the founder and director of American Revolutionary Vanguard, a USA-based tendency committed to advancing the principles of anti-statism, personal liberty, cooperative individualist economics, and the sovereignty and self-determination of communities and nations.  He is a graduate student in history, an independent business owner and entrepreneur, and advocate of a new radicalism that reaches beyond the archaic left/right model of the political spectrum.  See the ARV website at www.attackthesystem.com.  He can be contacted at 1108 West Grace Street-Apartment 8, Richmond, Virginia, USA, 23220; email: kppgarv@mindspring.com; Phone: 804-355-7161.  This essay is a very slightly edited version of the winner of the Libertarian Alliance’s 2008 Chris R. Tame Memorial Prize: “Can a Libertarian Society be Described as ‘Tesco minus the State’?”

THE PERILS OF SELECTIVE LIBERTARIANISM

A political libertarian, broadly defined, is someone who wishes to dramatically reduce the role of the state in human social life so as to maximize individual freedom of thought, action and association.  The natural corollary to libertarian anti-statism is the defense of the free market in economic affairs.  Many libertarians and not a few conservatives, at least in the Anglo nations, claim to be staunch proponents of free enterprise.  Yet this defense is often rather selective, and timid, to say the least.  Libertarians and free-market conservatives will voice opposition to state-owned enterprises, the social welfare and public health services, state-funded and operated educational institutions, or regulatory bureaus and agencies, such as those governing labor relations, relations between racial, ethnic, and gender groups, or those regulating the use of the environment.  Curiously absent among many libertarian, conservative, or free-market critiques of interventions by the state into society are the myriad of ways in which government acts to assist, protect, and, indeed, impose outright, an economic order maintained for the benefit of politically connected plutocratic elites.  Of course, recognition of this fact has led some on the Left to make much sport of libertarians, whom they often refer to, less than affectionately, as “Republicans who take drugs”, or “Tories who are soft on buggery”, and other such clichés. ….[More]

If the G20 Moochers and Slairs would only stick to this sort of public schmoozing, and leave the rest of us poor sods alone to get on with it, the wordl would rapidly become….

….a better place.

David Davis

Look at this. Really, it’s all very nice and cosy and innately harmless. One is still – despite all that has occurred since, er,well, the beginning of times when one man thought he could enslave and corrupt the will of another – inclined to believe that even these G20-buggers, like the huggers below, are human beings after all.

 

aaaahhhhhh.....blessss....!

 

 

 

 

 

 

 

 

 

 

 

 

Minimal-statist type libertarians are not in principle against nations deciding to have some sort of titular “Head of State”, if that is what they want, provided that everyone agrees what the limits of authority of such an outfit under Common Law are beforehand, and _provided that_ everyone stays awake sufficiently for those limits to _be observed_ , and _be observed permanently_ . It is dangerous to allow a “State” to deirect, or even have the slightest hand in influencing, things such as “education” or “broadcasting”, if these conditions are to be met. Look at what has happened to ordinary and necessary qualifications for teenagers, for example under modern socialism in the UK, or to the propagandising output of the British State television braodcaster.

The present lot of outfits have clearly got out of hand, are rampaging drunk with power, and ought to be brought to heel. The malign influence of pre-capitalist barbaric anti-guides to survival, such as socialism, cannot be forgotten here.

In a Classical Liberal market civilisation, i suppose it would be perfectly all right for people to dress up as “Heads of State”, jet off to somewhere or other expensive, and pretend to have a “summit”. They could exchange ritual gifts of no value to anyone but each other, such as personalised I-Pods or silver framed photos of their dogs.

Moreover, being all bloggers by necessity, they could even issue “Joint Communiqués”. These would most probably give details of the joints they smoked while together as they will all undoubtedly be superannuated GreeNazis, ageing hippies, GramscoFabiaNazis, sad socialist,s and other varieties of worthless CO2-exhaling scumbag (although rich. Libertarians have “nothing against people getting filthy rich”….aka Tony Blair etc.) Or they might refer to statements of intent to regulate things such as “banks”….The great joy of such an arrangement is that nothing bad would come about as a result of their junketings.

The Kevin Dowd lecture on free banking | Samizdata.net

Sean Gabb

The Kevin Dowd lecture on free banking | Samizdata.net

The Kevin Dowd lecture on free banking

Johnathan Pearce (London) Globalization/economics

As promised, I have some thoughts following on from the talk given by Kevin Dowd, a professor at the Nottingham University Business School and a noted advocate of what is called “free banking”. He gave his talk at the annual Chris R. Tame Memorial Lecture as hosted by the Libertarian Alliance. (The LA was founded by Mr Tame, who died three years ago at a distressingly young age after losing a battle against cancer.)

Professor Dowd covered some territory that is already pretty well-trodden ground for Samizdata’s regular readers, so I will skim over the part of the lecture that focused on the damage done by unwisely loose monetary policy of state organisations such as central banks, or the moral-hazard engines of tax bailouts for banks.

Instead, I want to focus on those aspects of Professor Dowd’s talk in which he tried to sketch out what a laissez faire, free market banking system would actually look like. This is essential; a great deal of commentary so far – while it is very good – has mainly focused on how we got into this fix and why the fixes being attempted by Western governments are proving so stupid. As PJ Rourke said recently, the attempt by the Obama administration to flood the market with cheap money as a “solution” is a bit like the case of when your Dad has burned the dinner, so you ask the dog to cook it instead. No, what Professor Dowd did this week was lay out three broad areas for reform.

Firstly, he says we should remove many of the existing regulations, government-mandated deposit protection schemes, bank capital adequacy rules and other restrictions on what banks can do and how they work. For example, government support for depositors – who are also effectively creditors to their banks – means that there is a moral hazard problem; the banks have less incentive than they would otherwise have to act prudently if there is always the government, acting like a sort of 7th Cavalry, able to ride to the rescue. That has to go. Professor Dowd also wants to hack away at the morass of rules and regulations that violate client/banker confidentiality, or those rules that force banks to lend to people, as is the case in the US, where banks are forced to lend to certain groups or else violate laws about racial discrimination, etc.

Secondly, Professor Dowd addresses the issue of letting banks fail. At the present, policymakers adopt a sort of “too big to fail” doctrine; this doctrine, while not explicitly laid down in any form of statute or operating manual – as far as I know – is a rule that says that some institutions are so large, and the attendant systemic risks posed by their failure so catastrophic, that they should not be allowed to go out of business. The problem of course is that this rule of thumb is often arbitrary and subject to political horse-trading. To wit: the US government’s decision to let Lehman Brothers go down last September, followed shortly by the $85 billion bailout for AIG, showed a total lack of clear message to the markets, and to bankers, one way or the other.

Professor Dowd believes that banks should be allowed to fail and furthermore, if modern limited liability laws were weakened or abolished completely, then such massive conglomerates would be economically and legally unsustainable in the first place.

As a result, banks would probably be smaller, and there would be a lot more of them, so the failure of any individual bank, while unpleasant for some, would not wreck the system as could happen if a mega-bank goes wrong. Also, instead of wide-ranging and hideously expensive bailouts, Professor Dowd favours putting banks into administration, writing down, in full, the value of their loan books, and getting depositors to exchange their status as creditors for that of an equity holder.

This “debt for equity swap” arrangement, while it would anger depositors who lose money, would come with the promise, and hopefully the reality, of a rise in the capital value of their equity stake in a bank if confidence returns to a more robust banking sector, as the debt/equity swap recapitalisation is designed to achieve. And of course banks are entirely free, as are their clients, to take out deposit insurance in a commercial market.

The third leg of his solution is broader, and more long-term, although there are some immediate measures that could be taken. Professor Dowd is against fiat money – money not backed by actual commodities or real assets of any kind – and in moving to a commodity-based/asset-based system. He is not, by the way, necessarily arguing for the gold standard or some gold-based system, although he points out that in the 200 years up to the First World War, the UK enjoyed a remarkable period of stable prices, with the odd blip. What he is arguing, however, is that the message on a banknote that says “I promise to pay the bearer on demand the sum of X” should be an enforceable legal contract, not what amounts to the jeering joke that it now is.

In the subsequent Q&A session afterwards, one person made the excellent point that a simple reform would be to ban legal tender laws. Such laws currently require a person to accept as legal tender a currency that the state has mandated for a particular region. Instead, if a person wants to refuse to accept sterling and only wants to accept dollars, euros or Swiss francs instead, he can do so. He can also choose to trade in whatever medium of exchange he wants, and with whoever wants to accept it.

Inevitable questions arise. First of all, in thinking about free banking, private monetary systems and the like, the first objection will be is that this will be very messy; there has been no real experience of such monetary systems in the past, etc.

But this is incorrect. Free banking, as defined by Professor Dowd, in fact operated in Scotland, for example, up until legal changes in 1845. South of the River Tweed, the English system had operated under what amounted to state-controlled banking under the Bank of England, set up in 1692. In the 18th and 19th centuries, England saw a number of booms and recessions, such as the 1840s railway boom and the downturn of 1870s. One should remember that the BoE was established by the-then post-Glorious Revolution government as a way to raise money for wars without having to keep asking a fractious public for taxes, and without having to borrow at expensive rates in the money markets. N.A.M. Roger has explained this issue of financing for naval warfare brilliantly. Indeed, it reminds us that state monopoly money systems typically arose in order to finance wars, while the welfarist aspects came later.

There are also current, not just old, examples of banks that operate with unlimited liability partnership structures – Pictet, the Swiss bank, and Lombard Odier, are just two examples. There are dozens of such banks using these structures in Switzerland and by no coincidence; they have avoided the worst of the credit crunch. These banks are typically for the rich but it seems to me that there is no logical reason why such an approach could not be used more widely. So there are different ways of doing banking right now. And do not forget the humble UK mutual building society: they have their limitations, but as a business model they had a lot to recommend them.

Another objection might be that the debt-for-equity swap way of restructuring failed banks under bankruptcy protection laws would be politically unfeasible, since depositors would be hit. I understand that, but Professor Dowd is not trying to imagine what sort of reforms would appeal to David Cameron, say, but what sort of reforms would be workable. That is a rather massive difference, as I am sure readers will agree.

Another objection is that “real money”, as opposed to the state-arranged fiction that we have now, cannot work for as long as governments take such a large slice of GDP. That is probably correct. One of the reasons why so many advocates of Big Government regard “gold bugs” or free bankers as dangerous nutters is that they realise their welfare states would be unworkable under such monetary arrangements. The Ponzi schemes of most welfare states would not be able to function. Even so, as long as governments retain the ability to tax, they have the ability to raise debt in the financial markets in the knowledge that their collateral can be collected at the point of a gun. But a real-money system still hampers such activity considerably.

In the longest run, the best hope of avoiding such financial disasters in the future is to wean the public and policymakers off the seductive delusion that one can create wealth by turning on a printing press. Sooner or later, if you try to fake reality, it bites you hard in the arse. Of course, it is a mark of the kind of man Professor Dowd is that he is too polite to put it as bluntly as that.

I await comments!

Comments

It sounds all very interesting and I really wish now I had been there as the other event I was at did not afford me the opportunity I had hoped to grab my local Oxfordshire MPs and try and sell them my idea for a “Bank of Oxfordshire” using, believe it or not, partnerships and asset based scrip.

I particularly like his ideas about what to do now, practically speaking, because I guess I always focus on the “hereafter” policies of competitive currencies and so on which are probably still a bit far up the Overton window for most peoples’ comfort.

There was an interesting piece about C Hoare & Co in one of yesterday’s newspapers just so people recall that there is at least one UK based bank on an unlimited liability model.

Was any mention made of Gesell, WIR Bank and similar alternative structures that often started up in the Depression and some of which, such as WIR, are still going from strength to strength?

Posted by Jock at March 19, 2009 02:05 PM

Firstly thank you for organising an enjoyable evening and thought provoking talk.

One additional area that will be critical to moving in the direction of free banking is reform of the insolvency laws and procedures. However desirable it may be to put a bank into an enforced reconstruction the law, particularly in England, makes it impossible to complete in a realistic time scale. The timescale for advertising ceditor claims, the lack of sufficient powers of an administrator to cut a deal amongst creditors and make it stick without protracted legal action, and the absence of any legal recognition (in statute or precedence) of priority for the counterparties of many of the new financial instruments mean that any administration process under current law would take months or probably years to resolve. A bank will go under if the uncertainty lasts more than a few days.

Sorting out the legislation and enforcing the current competiton rule to break up the major banks into more managable units will be preconditions of Prof Dowd’s approach.

A further and slightly off topic thought. The Sarbanes-Oxley laws in the US require CEO’s and CFO’s of companies, including banks and other financial institutions, to sign declarations that their organisation has fully effective internal controls, the records are complete and accurate, and that the financial statements can be relied upon. Clearly these representation for AIG, Citibank and other were patently false. Why are there no CEOs and CFOs in handcuffs awaiting trial??

Posted by RobertD at March 19, 2009 02:16 PM

It certainly appears to have been an excellent talk; I look forward to seeing a video of it.

Johnathan’s summary mentions two points which I think could be implemented fairly quickly and do much to improve on the current system: repeal of “legal tender” laws and elimination of deposit insurance. The former is fairly straightforward and explained in the article. The second bears more discussion.

Deposit insurance (in the US, anyway) is an artifact of the Great Depression, installed to prevent catastrophic “runs” on banks, sometimes sparked by mere rumor. It was (and is) a legitimate concern, and while the problem is exacerbated by a fractional reserve system (as I’m sure Paul will interject here at some point), it would also be a problem even without fractional reserve lending. The US’s solution was to create a new federal agency (the FDIC) to run the insurance fund, and (not coincidentally) directly regulate most banks. Therein lies the flaw.

The FDIC is staffed by government bureaucrats with no personal economic stake in the game. They are, by and large, decent and well-meaning people, but they aren’t the “best and brightest” (such people don’t work for bureaucracies) and they are hampered by hidebound rules and a lumbering, ineffecient and inflexible system. Insurance “premiums” are not established on any actuarial basis, but are essentially identical for all banks, however well or badly managed [1], and setting the rate is quite politicized. The proper response should be to use private deposit insurance.

With private deposit insurance, banks could shop around for insurance companies with the best rates and service. The insurance companies themselves would more accurately and carefully assess “risk” than it would ever be possible for the government to do, and would price accordingly. They would set capital levels which make sense given the specific nature of the bank’s business (rather than one-size-fits-all rules), assess the true value of its assets and liabilities (including, where appropriate, off-balance-sheet contingent liabilities), and in general do a better job of assessing the because it is their (and their shareholders’) money which is at risk. If the FDIC misprices, the insurance fund gets depleted and they go to the government for more money. If a private insurance company misprices, its capital gets depleted and shareholders replace the management. Competition among insurance companies would keep any from becoming unduly risk-averse in their regulations or expensive in their pricing. It’s a true free-market solution, and would work.

[1] There has been a move in recent years to incorporate some sort of “risk-adjusted” element to the premiums, but if this has actually been implemented (I’m not sure about that) the differential was essentially nominal.

Posted by Laird at March 19, 2009 04:28 PM

RobertD, you make a good point about the speed of administration process under existing English law. Prof. Dowd made the point that the debt-for-equity swap and recapitalisation of a bank would have to be done very fast, over a weekend. A long delay would be a disaster, in particular, because of the need for businesses etc to make payments and handle invoices, etc.

Laird, thanks for the detail on the insurance angle.

Posted by Johnathan Pearce at March 19, 2009 05:01 PM

I am delighted to see articles like this posted on Samizdata Jonathan – excellent, more in this vein as and when you can please.

Posted by mike at March 19, 2009 05:19 PM

This is the problem I see with insurance: How can an actuarial table be constructed?

Do bank failures follow a known statistical pattern? Clearly not.

I wouldn’t believe any private agency offering deposit insurance. Gold reserves are all that can be believed. At least until an actuarial table can be constructed.

Posted by Current at March 19, 2009 05:23 PM

Two questions:

1. As Laird pointed out above, the bank guarantees were specifically made to avoid panics, wouldn’t the removal of these guarantees necessarily cause panics? With the advent of instantaneous communication available to even the stupidest among us, wouldn’t ‘runs on the bank’ become a regular event?

2. Fiat money v. asset backed currency -
With fiat money there is a good deal of leverage that is not possible with the asset backed. This seems to imply that under a asset backed regime the economy would be significantly less dynamic one, and growth could be curtailed. Yes, a blessing in the possible smoother booms and busts, but it would seem a curse in reducing growth, productivity.

Looking at the historical rates of inflation / deflation it really appears that prior to the 1930′s, this cycle was much more dynamic than after: (UK) Consumer Price Inflation Since 1750(Link)
I realize this study is a reconstruction and I have no way of evaluating the methodologies but it seems relevant.

Posted by Will Anjin at March 19, 2009 07:26 PM

This isn’t life insurance; there are no “actuarial tables”. That doesn’t mean that the risks can’t be rationally assessed. How do you think an insurance company insures any one-time event? Lloyd’s has known how to do this for centuries (even if they’ve fallen off course a bit lately). [I need help here from someone with better knowledge than mine about probability; is this a Bayesian analysis?]

Moreover, the real point isn’t whether there is going to be deposit insurance; that’s a given, after the experiences of the Great Depression. The only question is who provides it, and at what cost? I submit that government is the least qualified entity to do so, for a variety of reasons (some noted in my previous post). In a truly free market each bank would decide whether to offer it or not and the market would reward or punish that decision, but even in a regulated environment the government could simply mandate that banks carry some minimal level of deposit insurance as a condition to maintaining their charter. Banks could choose to carry more than the minimum amount, and again the market would determine whether or not that was a wise decision, but it’s still a market solution. (Probably a market would develop for banks with different insurance levels: minimal for those with relatively small balances wanting cheap banking services, higher for those with more money who are willing to pay a bit more for peace of mind. Let the market sort it out.)

Posted by Laird at March 19, 2009 07:36 PM