To this end the Libertarian Party will, on taking office, commence a "sound money” policy in regards to Sterling[1]. The Bank of England will remain and regain powers lost[2] to enable it to be responsible for the oversight of this policy. State deposit insurance will end[3].
Fractional Reserve Banking[4] of Sterling will continue, but under sound money principles.
The sound money policy will be vital because we will remove the monopoly of Sterling. Banks and other entities will be free to issue their own currencies. This is sometimes called "Free Banking"[5]. This will be achieved via repealing the relevant sections of the Legal Tender laws that currently force people to accept Sterling while restricting banks and other entities from issuing their own currencies, distinct from Sterling.
Once the currency and legal tender monopoly is ended, new currencies created by entities like banks or credit card operators will be possible. Once that happens, Sterling will be judged against any of these currencies that might emerge as well as in isolation. Should an administration behave in a fiscally imprudent manner the people can withdraw their support and their wealth from it. This will apply equally to the Government and to the other currency producers.
Banks and other entities will not be left to run riot. Fraud, misrepresentation, false accounting, theft and other laws will be vigorously upheld with a shift from regulation towards supervision.
Although the formation of a State run gold-backed “Pounds Sovereign” is attractive in some dimensions, this, in reality, should not be necessary due to the ending of the currency monopoly. Other organizations are expected to step in and provide gold-backed deposits or gold trading and vault facilities should sufficient demand exist, so the energy, expense of, and distortions caused by a State player in this market can be avoided.
Note that the State will offload holdings in private banks that might remain from the banking crisis of 2007-9. As such it will no longer need trouble itself with the internal operations of banks except when in breech of the Law.
[1] Sound Money is focused on maintaining a stable value and purchasing power of the currency. This, in essence, is a means to uphold the implied contract that the note represents. As the Bank of England is the entity that issues the currency, it is the body that will be charged with upholding and maintaining it. Examples of Sound Money would be not artificially raising or lowering interest rates, devaluing the currency or refusing to increase the money supply to keep pace with economic growth. Quantitative Easing is an opposite of sound money policy – expanding the money supply at a time when the economy looks to contract.
[2] the Bank of England lost a number of powers to other bodies such as The Treasury and The Financial Services Authority. Those that still apply to the role of the Bank of England will be repatriated.
[3] Depositors will be at liberty to seek insurance for their deposits at their own expense.
[4] FRB is not a "scam". Money is not "created". It is simply on-lent then lent again with end of day inter-bank transfers deciding where the net flows are. All debts and demands for cash are honoured. All unused money remains on-lent. For those who still think it is a scam and understand Football, would you always relegate a team even before all the day's matches have finished? No? You await all the scores and then look at the table. This is the same mechanism with FRB - all transactions of the day are accounted for, netted off and only then will we need to know who owes whom. Most "deposits" in banks are on-lent. Banks must ensure customers are aware of the truth if banks statements are more a record of their lending to the banks, not a record of cash held in a vault on their behalf.
[5] "Free Banking" is not to be confused with "free at the point of use" current/checking accounts common in the UK.
25 comments:
Sensible. Except FRB really is a scam precisely because - as you say - people do not understand it. When Northern Rock went down people were mocked for trying to withdraw their deposits. The government and the banks were counting on public ignorance about FRB to save their skins. No luck, lie-bubble eventually popped by Mervyn King as I recall.
...if it were not a scam then your bank balance would show
a) how much you deposited
b) how much has been lent on, IE: how much of it is at risk because of bank lending
c) preferably some kind of reliable risk rating for the wandering cash.
The mechanism of FRB per se is not a scam.
Currently banks to not tell you you have, in truth, lent the bank money which it has now put at risk and this is clearly mentioned as something that needs to be addressed.
Depositors need to be told what they are getting into and that may well include some of the points you raise being on the bank statements.
Ditch the guarantee for depositors, and you should get banks springing up which will match maturities. Then there'd be no need to worry about how much has been lent on, since all money saved with a bank is assumed to have been lent on as of right.
TC: I would say the banking system taken as a whole is a scam, even if no single part of it necessarily is, the scam is emergent.
I certainly agree that central interest rates are the biggest problem, IE: this is largely the government's fault, as usual. [insert anti-Brown rant here]
Quick analogy: when government sets interest rates it is price fixing. They should know that can't work.
I for one do not think that it is a "scam" per se...
however I do think that FRB leads to massive economic distortions...
For even if we had a fixed monetary base backed by gold (gold standard)... FRB will still distorts the rate of interest of credit... and this in turn contributes to a complete distortion of the "capital structure" of the economy.
This was something the "english currency school" failed to pick up on...
Is there any way we could look to return the sterling to 100% reserve and 100% gold backed (not overnight obviously) whilst allowing interest rates to fluctuate freely in the market?
So perhaps a blueprint:
IE: raise reserve requirements of sterling by 5% a year every year (in a free banking system) or something like that...
Max,
A 100% reserve system would mean banks must cease to lend. They become vault operators. It would not actually work because banks, for example, could just sell auto-rollover 1 minute time deposits with zero penalty also known as current accounts and get around it.
UK M0 WAS, IIRC, around £45bn until recently (goodness knows where it is now since QE). The US gold reserves were around £5.5bln at that time, for a reference point.
Having a gold-backed M0 has some detractors, namely those voicing exposure to gold-producing nations.
It is a separate issue having reserves growing towards M0 vs one where notes and coin or deposits at the Bank of England could be redeemed for gold on demand. The former could come under the umbrella of Sound Money.
Is this is a revision of existing LPUK monetary policy?
If so, I heartily welcome it, but I would also point out that the OLD monetary policy is still displayed on the manifesto pages.
Can the LPUK webmaster fix this please?
Tim, but even if they sell 1 min auto-rollover deposits...
wouldn't they have to match those to 1 min auto-rollover loans?
If so, I can't see many businesses lining up to take out a loan that could be called back any min the banks needs it...
If on the other hand you combine a load of 1 min auto-rollover deposits and lend out in the form of a single 6 month loan...
you are commiting fraud are you not? for the 1 min deposits are not actually being rolled over every min... they are now lent out for a 6 month period and not withdrawable...
And for normal people the extent of whose desire to gamble runs to a few quid each week on the Lotto, you would explain all this as... what?
I only ask because normal people (i.e. 99% of the electorate whose vote the LPUK needs) are going to read all this and think "WTF substance are these guys ON?"
Max,
The example was just for instance, for the bank would probably only offer overnight in terms and conditions but deliver demand most of the time. This happens now if you turned up and asked for £50k cash withdrawal, they would say in the t&c's you need to give notice of a few days.
As for the contract per se, it is between you and the bank. The bank has borrowed the money and it is there, as cash/M0. It then on-lends without any reference to the first contract with the bank. This, AFAICT is not fraud.
@quintavoc,
The Libertarian Party will significantly reduce the ability for people - in particular pensioners and savers - to be robbed/indirectly taxed by an Administration via interest rate changes, printing money (also known as Quantitative Easing) and other such currency manipulations.
This will be achieved by removing the monopoly position over money currently held by the state, so making the currency open to competition.
@ Tim Carpenter,
Whilst I don't profess (or want) to understand detailed economics on a national scale, I am aware of the intentions (and, hopefully, the outcome) of what is being discussed.
What I was questioning is the wisdom of so much jargon being used in a public discussion when it is the Libertarian EFFECT that it is currently so important that ordinary people understand - en mass!
So far as I am concerned, everything we need as a monetary policy can be found here or here
@quintavoc: the new policy is alot simpler than the old one.
That makes it an easier proposition for voters to understand.
The whole question of MONOPOLY is one that we need to focus on.
Government creates monopoly. Either on its own or hand-in-glove with corporate interests.
I have just read the entry entitled "Libertarian Party Policy on the Monetary System and Banking" with great dismay. The first point states it would return the Sterling to a sound money policy and then contradicts said statement with the subsequent statement. The Bank of England was, is and shall remain a central bank. In being such it influences the mechanism of exchange we currently enter into in our transactions via the pound. I do not have enough space in this comment to point out the folly of such interventions but the Bank of England remains contradictory to any sound money policy. Secondly, to propose the removal of the monopoly on currency creation sounds interesting. To replace it with multiple entities raises the question will the value of having assets in one bank show greater favour then in another? Could two workers who elect two different banks find that they receive different rates of exchange when purchasing goods and/or services? It is not clearly stated if said currencies will be tied to a tangible asset(s). Thirdly, fraction reserve banking of Sterling continuing reaffirms my belief that Sterling is not tied to any tangible asset, thus leaving it open to fluctuation. This continues the notion that the exchanges we enter into, in good faith, for goods & services by goods & services can still be influenced by an outside source.
The footnote number 3 raises the very simple questions. Why does the person need to seek insurance for wages placed into a bank? Why is not the bank responsible for its actions of banking?
I would cautiously advise that the soundness of these policies are distressing to one studying Austrian economics.
So you have finally reversered your absurd policies. well done.
However "Banks and other entities will be free to issue their own currencies." equals chaos. State monoploy is taking it a bit far really isn't it. The market simply wants a currency it knows and has faith in, simple as that.
And for htose talking about FRB. You are all morons.
Lastly, please drop the utter obsession with Austria (you know, the thing that has never worked) and adopt Chicago (which has, please see Chile for an example)
Right, that's it! I'm a famous pacifist, but if KB (or his boyfriend) don't either shut up or learn the first thing about libertarianism - as opposed to woolly liberal shite - I'm coming up there to rip their bloody typing fingers off!
@Wormit
"The first point states it would return the Sterling to a sound money policy and then contradicts said statement with the subsequent statement. The Bank of England was, is and shall remain a central bank. In being such it influences the mechanism of exchange we currently enter into in our transactions via the pound."
Firstly, you make presumptions as to the role and function of the BoE. The BoE will have a remit for Sound Money management of Sterling and will regain the powers necessary for it to do that. The BoE is the issuing bank of the Pound Sterling currency, so it must manage it. How is that anything but logical?
When Midlay's Bank creates its own currency - the Mid - it might initially keep the lending of it within its own branches. In doing so head office will have oversight on the lending amounts of each branch to ensure that the M0 of the Mid is controlled. It will centrally control baseline interest rates of the Mid lent from its branches. Will Head Office be lender of last resort in Mid to one of its own branches that has suffered unusual flows? You bet it will. At some stage it will allow other banks to take deposits of the Mid so as to gain wider acceptance and liquidity, but any sensible bank would demand certain behaviours such as lodging all M0 balances except vault reserves at Midlay's and strict rules over FRB of the Mid to avoid tarnishing its reputation or debasing the currency.
As the Bank of England is the operator of Pounds Sterling, you would think that it would perform similar functions and operations, no? If some operations are unnecessary for Sound Money, then the BoE will not perform them, for their role is "Sound Money for Pounds Sterling", NOT "Central Bank with knobs on".
"Secondly, to propose the removal of the monopoly on currency creation sounds interesting. To replace it with multiple entities raises the question will the value of having assets in one bank show greater favour then in another? Could two workers who elect two different banks find that they receive different rates of exchange when purchasing goods and/or services?"
Of course, because the currencies are different and the backing and reputation of the entities issuing it are different. These banks do not issue Sterling, they issue their own. THAT IS THE POINT. Good money will force out the bad and keep the BoE on its toes. Instead of Northern Rock polluting the market with its lending strategy, it would have polluted its own currency alone.
"It is not clearly stated if said currencies will be tied to a tangible asset(s)."
An entity issuing currency must not defraud. I would not wish to comment on exactly how currencies would be backed.
"Thirdly, fraction reserve banking of Sterling continuing reaffirms my belief that Sterling is not tied to any tangible asset, thus leaving it open to fluctuation."
You give the impression that FRB is best not performed and should be stopped. How can one lend money with 100% reserves? You also give the impression that FRB means there can be no asset base to a currency. That is just not true.
"This continues the notion that the exchanges we enter into, in good faith, for goods & services by goods & services can still be influenced by an outside source."
Unless you enter into barter, that will ALWAYS be the case regardless of Free Banking, Sound Money. Heck, even barter or gold gets messed up by good crops, dumping on the market, hoarding, etc etc.
"The footnote number 3 raises the very simple questions. Why does the person need to seek insurance for wages placed into a bank? Why is not the bank responsible for its actions of banking?"
The Bank is responsible, just as the responsibility lies with the penniless driver that smashes into you and puts you off work for a year. You have insurance because the wrongdoer may not have assets from which to reclaim damages.
@Kevin,
"The market simply wants a currency it knows and has faith in, simple as that."
Agreed. But who decides? We have Hobson's Choice right now. What to do if we do not have "faith" in Sterling? Suck it up, thats what, and that is not good enough.
Bringing in competition will keep the BoE and thus Sterling on its toes.
If Sterling is indeed well managed via Sound Money, most people will not bother to use other currencies. That would be fine by me. This is why we have abandoned the need for Pounds Sovereign, for if there is a need, someone will provide it. If there is no need, providing it may have been an expensive vanity project.
@Tim
Appreciative of the reply. Although you have clarified some points I presented I still have disagreement and lack of clarity in others.
@Kevin
Whilst I appreciate you have an opinion, the use of aggressive tones and dismissive behaviour would assume either lack of tolerance or an inability to be able to enter into constructive debate.
@Kevin: Keynesian and Chicago School economists both reject the free market in money. They both deem inflation to be either a good thing or a necessary evil.
@Tim. Finally. Fantastic policy rewrite. It was a joy to read.
1. I never could see the necessity of our former pounds sovereign. That's an understatement it produced confusion and involuntary nausea.
2. As a libertarian, state monopolies have me rocking in a corner. This policy gives the power back to the individual.
Competition or at least the threat of it is the only decent and sensible answer and you've written it very well.
"It is not clearly stated if said currencies will be tied to a tangible asset(s")
@Steve: The beauty of it is one less thing for us to worry about, its entirely up to the market. Potatoes, tin, you could just make it up out of thin air and do some crazy thing like FRB. Whatever floats the customers boat, keeps their trust and is therefore created and managed soundly.
I love it.
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