Economic Myths #5 – Banking is Capitalist

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By both mainstream economists and the general public alike the cycle of “boom and bust” is believed to be a tendency inherent in any capitalist economy. The fact that the latest such cycle, resulting in the seemingly endless stagnation that we are enduring now, originated in the banking sector and that large banks and bankers ratcheted up huge earnings and bonuses only to cause disaster has implicated banking to represent the very worst aspects of capitalism, motivated by uncontrollable greed that ends in destruction.

Unfortunately this popular view of the mainstream could not be further from truth. In fact with its intimate ties to government and its special, legal privileges it is hard to imagine a less capitalistic industry than banking. Part of the deception – wilfully inflamed by politicians and their lackeys – is one that engulfs other industries subject to government meddling such as energy; that simply because the participants in the industry are private individuals or entities and are not officially part of the government means that the enterprise must be classified as part of the free market and saddled with all of the supposed flaws of that system. Very often however private companies and brands are simply the public facing part of what is essentially a government operation or a government controlled cartel. Britain’s railways, for example, are owned by Network Rail, a statutory corporation with no shareholders; the train operations are parcelled out into geographic monopoly franchises that are awarded to private bodies by the government. The network is, therefore, under the de facto control of the government. And yet when you are stranded for two hours on a crowded platform because of delays whose logo is it you see everywhere at the station? Whose name is embossed proudly along the side of the train that you’ve been waiting for and who – and, by extension, which economic system – gets all of the blame for the problems? This is just as true in the banking sector as it is in the railways. Banking is nothing more than a government run cartel operated in front of the public by private bodies.

The supporting pillar of this government cartel is the central bank. Although this body is not always government owned it possesses a key legal privilege which is to be the sole producer of the nation’s money supply. Since 1971 (but in practice much earlier) all of this money in the world has been paper money, irredeemable and unbacked by any precious metal or market-chosen commodity. This is a very hefty privilege indeed for who wouldn’t want to have the legal ability to just print the very thing that can be exchanged for valuable goods and services? The central bank can manipulate interest rates (the most important prices in the economy) and control the volume of money either by changing the reserve requirements of the commercial banks or by making open market purchases (usually of government bonds but since 2008 pretty much any asset) with freshly printed cash. At the very bedrock of the banking system, therefore, is an institution that is blessed not by the voluntary purchases and exchanges of individuals but rather by the aegis of government. This institution would not exist in a genuine, capitalist economy as its powers rely not upon free exchange but upon government enforcement. Money would not be a centralised, government issued ticket on worthless paper nor would anyone have monopoly control over its production. Rather, money would be a commodity such as gold or silver. No one would be able to simply wave a wand and make gold appear in the way that central banks can make paper money appear, nor could anyone simply do the equivalent of no productive work in order to purchase valuable assets. Rather they, like anyone else, would have to earn their money through productivity that serves consumers. The volume of money in the economy would be regulated not by the central bank’s fiat but by the demand for freshly mined gold from the ground. Interest rates would be set by the demand for and supply of loanable funds and not by the arbitrary decree of monetary policy.

The reason why private banks appear to be the epitome of greed is that they are the channel through which the central bank’s deeds flow. They are the recipients of new money from open-market operations and of new loan-issuing powers when reserve requirements are altered. Credit expansion under the business cycle therefore affects the banking industry first and it is this industry that demonstrates the largest paper gains – all of those huge profits and hefty bonuses – and, consequently, the most catastrophic losses when the inflation stops. And yet the only method of making the fraudulent and destabilising fractional reserve system work, at least for a time, is the monopoly issuance of paper money by a central authority, robbing people of the ability to redeem notes that are over-issued and allowing the banks to inflate continually in concert. Furthermore, under this system banks are endowed with a special legal privilege in that they do not have to time their assets in line with their liabilities. When the disaster of “borrowing short” to “invest long” finally unravels who is that steps in to save the day? Why, the cartel-managing central bank of course, in its role as a lender of “last resort”, permitting the private banks to privatise their gains and socialise their losses. Once this fact – recognised in the US as the infamous Greenspan put – is understood by the private banks it will serve only to inflame risky and reckless business ventures. After all, why bother with prudence when you know that someone else will mop up the mess? None of this would be possible in a genuine, capitalist economy where each bank would have to suffer its losses and take full responsibility for its risky ventures.

This short description indicates that banking is woefully far from being a capitalist industry. Rather it is an industry that is well and truly in bed with government, relying on government for its profits, for the sustainability of its operations and for the absorption of its losses. “Private” banks they may be but a part of the free market? Absolutely not!

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Economic Myths #4 – Profits are Evil

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One of the elements of any economic system founded upon free exchange that induces a purple-faced rage amongst statists and progressives is the concept of profit. This residual – the amount left over once an entity has deducted its costs from its revenue – is said to line the pockets of greedy shareholders while exploiting labourers and consumers.

First of all it is important to understand what we mean and what we do not mean by profit. Here we will be discussing profits that an entity may earn purely as a result of voluntary trade and free exchange; we do not mean those “accounting” profits that entities may earn as a result of favourable government regulations, direct government subsidy or any kind of residual of a trade relationship based upon force. These profits – including bank bailouts and stimulus funding – are rightly to be condemned as unjust and immoral, sustaining the power base of the incompetent, wealthy elite at the expense of everyone else. But such a condemnation must not be allowed to throw out a very precious baby with repulsively filthy bathwater – for profit is one of the most vital elements that gives life to an economic system that relies upon the division of labour.

For the praxeologist profit is, of course, endemic in any human action and not just those based upon monetary calculation. All actions seek to produce better circumstances than those that would prevail, but for the action. All humans in everything they do therefore seek for a psychic profit – making more money than before is only one of these possible actions. Strictly speaking, therefore, any condemnation of profit would be a performative contradiction as, in the mind of the critic, the satisfaction of achieving condemnation would be a better circumstance than not having done so. Although such a technical and theoretical argument is unlikely to appeal to the mass of lay persons who view profits as evil and unjust, it is important to understand the roots of the concept for here we can see the importance of the profit motive – the stimulus for engaging enterprise in the first place. Without the possibility of earning profit – i.e. a better circumstance than that which prevailed before – no entrepreneur or inventor would ever bother developing and bringing to market all of the wonderful products that make our standard of living so high.

Abandoning for a moment our commitment to wertfrei economics and embracing the belief that anything that benefits the consumer or labourer is “good” and anything that harms him is “bad”, let us examine two or three specific, recurring myths concerning the concept of profit.

First of all, let us deal with the allegation that profits line the pockets of the capitalists at the expense of workers and consumers. Profits are not achieved at the “expense” of anybody. The amount of profit is only ever determinable in retrospect after all of the consumers have purchased their wares and all of the workers have been paid their wages. At the time that the consumers bought the products and the workers negotiated their terms of employment nobody knew what the profit was going to be – or even if there would be a profit at all! If you felt that you were being “fleeced” at the time you purchased a product or sold your labour then why did you enter the transaction? If a firm should be required to divest its profits back to those whom it has cheated and stolen from then what happens when the firm makes a loss? Does it work the other way round too? Did not the customers and the workers cheat the firm in this instance? Should the firm be able to go back to a customer who may have purchased an item six months ago and take more from him to wipe out the deficit? Profits, instead, benefit the consumer by ensuring that scarce productive resources are devoted to their most highly valued ends – industries and production lines where profits are abnormally low will have resources reduced and redirected to areas where they are abnormally high, thus decreasing supply in the former and increasing it in the latter. Ironically, the combined action of entrepreneurs has the ultimate effect of eliminating all profit by balancing resources throughout the economy. It is only because consumers’ tastes and preferences are constantly changing that profit opportunities continue to exist and deployment of resources must be repetitively assessed and altered accordingly. Ultimately, therefore, it is the consumer who is responsible for the existence of profit and not the capitalist-entrepreneur. Furthermore, it is profit that provides entrepreneurs with the resources to further invest in capital equipment and expand the business. This will increase supply and lower prices.

Second, even if the concept of profit for inducing enterprise was accepted, what of the allegation that profits are really used to “extract” money from the industry to pay shareholders – money that would otherwise be invested back in the business to the benefit of consumers? What this overlooks is the fact that if a distribution is made to owners or shareholders it is because the entity has already invested in the business to the extent that is economically viable and any further expansion would be wasteful. While the firm may retain some additional earnings as a buffer in anticipation of a poor performing year or for some other kind of insurance, masses of retained earnings are otherwise wasted by lying in corporate bank accounts. It is better to distribute those funds to the shareholders so that they can be reinvested in other productive enterprises that are still in need of investment. Thus the consumer is benefitted by this fresh investment in other products and services that ensures that the supply of these can also be increased and their price lowered.

Finally, it is worth emphasising that which we indicated above – that profits are never certain and the possibility of their corollary – loss – is always present. Capitalist-entrepreneurs do not first of all calculate how much profit they want and then work out how much they will pay for inputs and charge for outputs. Such a calculation may form the motivation to engage in enterprise and it might determine the boundaries of their productive action but they cannot force the outcome to agree to their projections. Rather, they must be prepared to be the highest bidder for inputs and the lowest seller for outputs in order to ensure that they can purchase resources on the one hand and then sell the resulting products on the other. This process is fraught with uncertainty and only at the end is it possible to ascertain if it has been profitable – and, indeed, a certain line of production which may hitherto have been profitable may suddenly find it is loss-making. All it may take is a marginal increase in costs as a result of competing entrepreneurs bidding away resources to other uses, coupled with no corresponding increase in sales in order to completely wipe out any profit. Or may be consumer tastes change and competing products and services become more attractive? Although profit is the motivator of entrepreneurial activity it is never certain and everyone else must be paid in full before it can materialise, if it does at all.

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Economic Myths #3 – We Need More Jobs!

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During the economic malaise one of the most frequently watched figures in the economy is the number of jobs that are either created or destroyed. Government makes “job creation” a central plank of its economic policy to put people back to work and the impression that more people are being hired and fewer are being fired buoys their hubristic impression that we must be on the road to recovery.

Unfortunately this obsession with jobs is another example of the error of looking at an isolated aspect of economic achievement rather than at the entire picture – much like trying to boost consumption in order to further growth which we explored in myth #2. Jobs (or work, or labour) are simply what we have to do in order to achieve our valuable ends with the scarce resources available. It is the toil and suffering that we have to undertake in order to get to what we want because we do not live in the Garden of Eden. Our ideal situation is to have everything we want without having to have any jobs at all and economic growth fuelled by greater capital investment permits us to have more and more of what we desire for less effort. Our focus, therefore, is not on jobs per se but, rather, on what these jobs produce – the outcome of our labour and not that labour itself.

The most oft-cited example of useless job creation is government paying people to dig holes in the ground and then fill them up again. The unemployment figures would go down; the stock market would probably rally; the currency would strengthen. And yet these “jobs” have produced absolutely nothing whatsoever. All of the time and effort put into administering and fuelling them simply depleted the world of resources rather than added to it. In the real world, what this looks like is government providing artificial stimulus or subsidies to industries that are not otherwise economically viable; government “job creation” programmes; and not to mention, of course, the endless ream of bureaucrats that the government employs directly. Creating artificial jobs that do nothing funded by a government payroll simply papers over the cracks of an unsound economy. Yes, more people feel better as they have dollars in their hands and are probably not worrying about where the next meal will come from; but all that has happened is that those who were already working are now being forced to subsidise those whose employment creates no productivity.

A related fallacy is that if somebody somewhere is carrying out some kind of economic activity and the more of that activity there is then, so it is concluded, the better the economy is doing. To the central planners it doesn’t matter whether there is a housing boom, a construction boom, a tech boom or a stock market boom as long as there is lots of stuff going on, regardless of whether people actually want the products that are churned out by those enterprises. It is for this reason why we have the business cycle in the first place. Obsessed by creating some kind of “output” the artificial stimulus of credit expansion pushes the economy onto a path which, while brimming with activity, is ultimately not in harmony with the desires of consumers.

Job quality is more important than job quantity. The correct focus of any economic policy should be to ensure that we are labouring to direct the scarce resources available to the ends that we desire – and not simply on wasting those resources by doing some kind of fundamentally useless activity just to make government look good. “Full production” and not “full employment” should be our mantle.

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Economic Myths #2 – Consumption Boosts Growth

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The belief that economic growth is boosted by consumption is based upon such a simple misunderstanding that a realisation of the truth will cause one to question why such a simple fact evaded you in the first place.

The confusion is based on a conflation of the desire to consume on the one hand with the act of consumption on the other. It is true that all economic growth, and all economic activity, is motivated by the desire to achieve consumption – in other words, to devote scarce resources in order to satisfy our most highly valued ends. Without any desire to consume or to satisfy any ends there would never be any economic activity whatsoever. The act of consumption, however, does not in and of itself fuel any economic growth. For consumption is the result of growth – i.e. of increased production – and not the initiator. Consumption is what we reward ourselves with once we have achieved growth and not that which we do in order to begin it. Stated in its simplest way you cannot consume a good unless it has first been produced.

At any one moment in time there is an array of produced goods available to us. Each of us faces a basic choice as to what to do with these goods – consume them now, or turn them into productive capital goods that will yield a greater output of consumption goods in the future. If we choose the first path – consumption – all we do is reduce the number of goods available to us and we are left with less. We may have achieved immediate satisfaction but we now have fewer resources left with which to produce more in the future. If I burn a log of wood to keep warm I cannot then use it as building material later. Rather it is gone forever and I will now have to labour in order to search for fresh building materials if I am to make good this loss. A farmer who decides to eat the seeds for crops in the spring will then have nothing to sow and come harvest time will have barren and empty fields rather than lush acres full of wheat. Beyond the point of providing nourishment and sustenance to the human body the act of consuming of these goods will not provide any growth. Consumption, for the most part, is the destruction of what we have. Growth is the transformation of what we have into something that will produce more for us in the future. If we choose the second option – that of turning our goods into productive resources – rather than destroying the resources available to us we will invest them in productive enterprises that raises the yield of consumer goods in the future.

The key to promoting growth, therefore, is not to encourage the act of consumption which equates with an act of destruction. Rather it is to encourage production and a direction of a greater proportion of our resources available today towards saving and investment so that we may consume more in the future. This is particularly important following a bust that results from a boom or bubble inflated by credit expansion. With so many malinvestments left starved of resources the best thing we can do to minimise the pain is to increase the proportion of saving and investing so that at least some of the doomed projects may realise a degree of viability. Instead our economic lords and masters do the precise opposite and encourage us to borrow, spend and consume which only exacerbates the losses experienced by those projects that were started in the boom. Growth must begin with saving, sound investment and production which is then rewarded by greater consumption. Consumption will never lead to growth and it is important for Austro-libertarians to point out this grave fallacy.

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Economic Myths #1 – Rising Prices = Recovering Market

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One of the positive indicators of our so-called economic recovery bandied about not only in the media but also by our monetary lords and masters at the head of central banks is the idea that rising prices (particularly in the housing market) are a sign of economic recovery. This mistaken belief is part of a wider myth that views the economy as a big number, a number which, if going up, means things are good and getting better, and if going down means the situation is bad and getting worse.

Theoretically the market price for any good is never “good” or “bad”. It simply a function of supply and demand for that good. However, if anything, relatively high prices indicate a scarcity of goods relative to the money used to buy them rather than an abundance. This situation may be a localised boon to those who are in the business of selling the scarce good, but for those of us on the other side of the transaction having to pay more hardly suggests a general increase in our prosperity. For if society is getting wealthier and producing more goods we should find that we are be able to buy more with the same amount of money rather than less – hence, prices should decline and not rise.

What is of course meant by the “recovery” of rising prices is precisely a localised recovery and improvement for a select group of people – those who borrowed cheap money heavily during the boom (mostly the politically connected big banks and investment houses) and ploughed it into assets. They can now breathe a sigh of relief as the prices of those assets once again begin to rise with the new round of monetary inflation. The rest of us, on the other hand, have to sit by and watch the purchasing power of our wages drop, unable to continue to afford to buy things because the “recovering” prices put them out of our reach.

A general recovery is not based upon rising asset prices buoyed up by paper money. It is created by a sound monetary order that allows entrepreneurs to allocate resources to where they are most urgently desired by consumers. The result should be a gradual secular price deflation, so that the money in the hand of the lowest earners gradually increases in value, enabling everyone and not just the super rich to grow wealthier and more prosperous.

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The Pope, the Mafia and the Government

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Pope Francis, the poverty-obsessed pontiff who seems to be unable to do anything other than advocate measures that will increase it, recently turned his attention towards mafia violence. In doing so he does not seem to have become aware of the fact that replacing the word “mafia” with “government” would turn reports of his recent outcry into what reads like a piece of libertarian literature. Indeed had he just changed this one, tiny word and shifted his entire focus to the real root cause of evil in the world today the present author would be embracing the Pope as his new libertarian hero and be preparing for his conversion to Catholicism.

In the following extract from BBC News, let us try this very thing – substituting the word “government” for the word “mafia” and the word “politician” for the word “gangster” – and see what we get.

Pope Francis has launched a stinging attack on the government, warning politicians that they will go to hell unless they repent and stop doing evil.

“Blood-stained money, blood-stained power, you can’t bring it with you to your next life. Repent,” he said.

He was speaking at a prayer vigil for relatives of those killed by the government.

The Pope has spoken out frequently about the evils of corruption and wrote a booklet on the subject in 2005 when he was archbishop of Buenos Aires.

The meeting near Rome on Friday – organised by a citizens’ group called Libera – was aimed at demonstrating the Roman Catholic Church’s opposition to organised crime, rejecting historic ties with government bosses claiming to be good Catholics.

The Pope told told Italy’s mobsters to relinquish their ‘blood-stained money’ which ‘cannot be taken into paradise’.

The meeting was an attempt to draw a line under the church’s historic ties with government dons claiming to be God-fearing Roman Catholics

The vigil was filled with those who have suffered at the hands of the government, including people whose family members and loved ones had been killed.

As the names of those murdered were read out, the Pope listened, deep in sombre thought, says the BBC’s Alan Johnston in Rome.

After expressing solidarity with the 842 people at the vigil, he said that he could not leave the service without addressing those not present: The “protagonists” of government violence.

“This life that you live now won’t give you pleasure. It won’t give you joy or happiness,” he said.

“There’s still time to not end up in hell, which is what awaits you if you continue on this path.”

Our correspondent says there is a long list of brave priests in Italy who have stood up to the government, and some have paid with lives.

But he says that the wider Church has been accused of not doing enough to confront the politicians.

Anti-government activists hope that the Pope’s words are a signal that he is on their side.

Is it nothing short of astonishing that, to libertarians at least, this report should be so easily fitted to suit government? According to Rudolph Rummel’s research, government has killed an estimated 170 million people during peace time. Isn’t government the true evil hierarchy of organised crime, the institution that kills, maims, steals, on such a colossal scale that it might be perhaps a bit more worthy of the Pope’s attention than the mafia? Isn’t government the ultimate protection racket, demanding tribute from its victims in order to provide them with security, while half of the time encouraging the very acts (terrorism, political violence) against which we need defending? And as awful as mafia violence is, most of the activities in which crime families are involved are simply serving the public goods and services that the government outlaws – namely, gambling, drugs and prostitution. As they cannot compete openly and legitimately in order to supply these provisions they have to settle their disputes by turf wars and violence, as well as greasing the wheels with corruption by bringing public officials onto their payrolls. None of this would exist were it not for government.

We can, of course, never expect an arch-statist such as the Pope – who seemed content to serve as Archbishop of the capital of his country while it was systematically laid to waste by its government – to turn his attention to government in this way unless he has a very sharp and potent but unlikely “Saul on the road to Damascus” experience. Indeed, the very week after he attended the vigil for relatives of those killed by mafia violence, he received the arch crime boss of them all – President of the United States, Barack Obama – at the Vatican. Let’s end with the Guardian’s description of Obama’s arrival in Rome – readers can decide for themselves whether this sounds more like a bringer of peace and harmony; or like a crime lord terrified of assassination:

Obama had arrived at the Vatican in a cavalcade of more than 50 vehicles. Several were packed with men dressed in black and, disconcertingly, wearing masks. It was not immediately clear if they were Italian special forces attempting to confuse potential terrorists or American secret service agents trying to hide the effects of a more than usually gruesome hangover.

A White House correspondent who was travelling with Obama tweeted that the huge, bulletproof presidential limousine – which is nicknamed The Beast – was too big to get through the gates of the Vatican.

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The current crisis in the Ukraine, where a Western-prompted coup of the pro-Russian government has led to Russian occupation of the Crimean peninsula and “protection” for its naval interests in the Black Sea has highlighted the attitude of the West, and of the United States in particular, to what may be regarded as their “exceptionalism”. Whatever standards other countries and governments are held to, the US believes that it is permitted to deviate from (nay, obliterate) those standards, labelling their own actions with some other, innocuous term while utilising some half-baked moral justification in order to promote its acceptability. What is, for other countries, an illegal invasion of a sovereign state is, when the US does it, an act of “liberation”. When someone else organises a rebellion against a sovereign government it’s a violation of international law; but the US only “spreads democracy”. When other states commit horrendous acts of torture or indiscriminate murder they are “war crimes”; for the US, these are tactics that are necessary in the just and noble “war on terror”. Indeed Washington’s leaders have become so blinded by their sense of exceptionalism that they fail to realise that the case of the Ukraine, more than most others, has drawn stark attention to this unrelenting hypocrisy. Russia’s interests in the Ukraine are far more pressing than any interest that the US has either there or in any of its previous catastrophes such Iraq, Afghanistan, Syria, and wherever else into which it has poked its heavily armed nose. The Crimean population, according to a referendum held on March 16th, is overwhelmingly in favour of not only Russian intervention but of outright annexation of the region by Russia. Furthermore, Russia’s response, thus far at least, has not been to steam roller in, guns blazing, but has, rather, been more measured. So not only is the US protesting Russia’s actions, actions which the US happily takes everywhere around the world – it is doing so while Russia has stronger interests, is heavily supported by the indigenous population, and has taken weaker action than the US has in any of its self-invented skirmishes.

The concept of exceptionalism, however, is not something that is restricted to the US or is somehow born out of the US psyche. Rather, exceptionalism traces its roots to the very heart of how government operates domestically. If people steal from each other, it is called “theft” and is criminalised, yet when government steals it is permitted and is called “taxation”. If a company dominates an industry it is called a “monopoly” and must be broken up; if government does it, it is called “nationalisation” (probably with some other seductive sound bite such as the industry is being run “for the people”). If Bernie Madoff takes cash from customers to pay returns to previous investors, it is called a pyramid scheme and he is locked up; when government does precisely the same thing it is called Social Security. If the mafia forces you to pay tribute in return for security it is called a “protection racket”; when the government forces you to contribute to its armies, navies and air forces it is called “national defence”. Government necessarily conditions its operatives to believe that they are excepted from the common morality to which all other human beings must adhere. It is only because the US is the de facto most powerful government on Earth (although it is encouraging to see Obama’s belligerent efforts coming to nought in both the current crisis and the crisis in Syria) that this exceptionalism becomes magnified onto the international scene.  So in just the same way as government does not have to behave in the same way as its citizens, neither does the most powerful government have to behave like any other government. The US is not alone in this regard and has been preceded by other wealthy and heavily armed states – Ancient Rome, and the British for instance – who, coupled with a hubristic belief that they represent the pinnacle of “civilisation” in an otherwise barbarous world, have ploughed their way over everyone else whom they expect to be held to other standards. Indeed, when a pirate was brought before Alexander the Great and asked to explain his actions, the pirate is believed to have replied that what he, the pirate, was doing, was exactly the same as that which Alexander was doing. The only difference was that Alexander terrorised the seas with a “navy” and was styled an “emperor”, while the pirate did so with a “petty ship” and was thus brandished a “robber”1.

The conquest, therefore, of the exceptionalism of the most powerful nation can only be achieved by eradicating that exceptionalism at home – in domestic government and domestic policies. All human beings, whether they work for the government, the civil service, or are private citizens, must adhere to the same common morality and must be held to the same moral standards. Better, still eradicate government completely and the political caste – together with the divisions it creates between itself and those of us less exalted – will disappear entirely. Only then can we hope for a peaceful world in which all humans are equal before the law – both nationally and internationally.

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1See St Augustine, City of God, Book IV, Chapter 4.

Ethical Banking – the Woes of The Co-operative Bank

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The Co-operative Bank, one of Britain’s smaller financial institutions, has recently gone through several spectacular stages of self-destruction that has left many of its advocates, having trumpeted the fact that the bank initially emerged from the financial crisis of 2008 relatively unscathed, eating hearty slices of humble pie. Earlier this year its planned acquisition of more than six hundred branches from Lloyds Banking Group fell through when it was revealed that the bank was harbouring a large capital shortfall, most of it stemming from bad debts that were incurred as the result of an earlier merger with Britannia Building Society. The resulting rescue attempts by The Co-operative Group – its outright owner – left seventy per cent of the bank in the control of its bondholders, many of whom, such as US hedge funds, are precisely the kind of outfits that this “ethical” institution did not wish to emulate. Then, in November, the bank’s chairman at the time of its crisis, the Reverend Paul Flowers, was filmed allegedly purchasing illegal drugs from an acquaintance days after his appearance before a Treasury Select Committee during which he was unable to answer basic questions about the bank’s operations during his tenure, and had apparently organised drug fuelled orgies with rent boys from his bank email address, in addition to other past indiscretions. To make matters worse it has been alleged that Reverend Flowers’ influence extended to the leadership of the British Labour Party, expanding the Co-op’s in-house crisis into a political one. This succession of events has highlighted not only the hypocrisy of The Co-operative Bank in striving to maintain and promote an ethical stance and status (an aim that it is shared by its parent and the wider Co-operative movement) but also those who have used this institution as a political tool in holding it up as a paragon of virtue in the wake of the havoc and destruction caused by those greedy and unethical city banks. But this raises a very pressing and pertinent question – precisely what is ethical banking?

The Co-operative Bank’s ethical pride appears to centre on its mutual, member-owned status (or at least that of its parent) that allegedly offers an alternative to the shareholder model, and its Ethical Policy that prevents it from extending banking services to arms dealers, polluters, oppressive regimes, animal testers and so on. Having apparently brought itself to the brink of collapse through over-expansion and bad loans on the watch of a junky chairman who didn’t even know the size of the bank’s loan book does not appear to give much credit to this. Nevertheless, as far as the basic ethics of banking are concerned, all of this is pretty irrelevant. Rather we must conclude that banking, as far as it is practised in most of the world today, is inherently unethical. The Co-operative Bank, regardless of its ownership or its lending policy, was still engaged in the fraudulent cartel of fractional reserve banking under the aegis of a central bank and in that overriding respect it was no different from any other financial institution – and it was this fact that is at the foundation of its weakness. It took money from depositors and lent that very same money with which it had been entrusted to borrowers, expanding the supply of money, lowering the rate of interest and diverting resources to otherwise unsustainable capital projects and investments. It is this that marks the grossly unethical conduct of The Co-operative Bank and one cannot claim to be an ethical institution while at the same time engaging in this kind of fraud, the outcome of which can only be to lead the economy on to a destabilised path. Thieving depositors’ money is not made any better simply because it is lent to politically correct, environmentally friendly and do-gooding borrowers (indeed given that Co-operative Bank has apparently extended several million pounds worth of loans on favourable terms to the Labour Party some might say it makes it much worse).

Genuine, ethical banking can only come about only when a deposit institution issues one, single title to each penny that is on deposit. Where a bank extends a loan this must be met either from its own funds, or from fixed term deposits that mature at a date specified to coincide with the repayment of a corresponding loan. Naturally a bank can specify that it will only lend to certain borrowers in order to attract a certain class of saver, but that is only a distraction from a bank’s basic ethical duty – to safeguard the funds of its depositors. Any bank, regardless of the characters and qualities of its borrowers, puts these funds at extreme risk under the fractional reserve system if those same borrowers cannot repay the loans. Whatever went wrong with The Co-operative Bank’s particular peculiarities, one should not allow them to detract from this central fact of the banking system and focus should be diverted to its direction if we are ever to have truly ethical financial institutions.

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Anti-War and Anti-State

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The furore over the recent attempt of the UK government to commit military force in Syria in concert with the US government revealed a widespread popular opposition to war that appears to span the entire political spectrum. Indeed, libertarians must admit that the ideological left, with its anti-imperialist and anti-war profiteering motive, has often been a louder voice in castigating the warmongers and interventionists in conflicts past and present.

Nevertheless it must be emphasised that if one is to be truly anti-war then that commitment alone is, regrettably, not sufficient. For war is always propagated by states, between states and for the benefit of states. Libertarians often point out that “war is the health of the state”, permitting the government to suspend the status quo and enact all manner of heinous oppression and control that would be unthinkable in a time of peace, measures that, curiously, do not disappear as soon as the alleged enemy is vanquished. But as much as it is true that war feeds the state so too does the state feed war, not only siphoning off resources from the productive sector towards the creation of bombs and missiles, but, crucially, the very desire to create a bigger state makes war more likely. Many anti-war activists of the left have no problem with government metastasising to whatever size in economic and social matters, creating alleged “fairness” and “equality” and whatever other emotive but elusive goals happen to sound most appealing. The aims may be innocently honourable enough but it is ridiculous to think that the means of the state can ever be used peacefully, let alone to believe that a large state can be the promoter and preserver of peace. There are three key reasons for this.

First, the state always means conflict. The precise means at the states disposal, the only means that it can use – violence – results in the constant diversion of scarce resources away from the ends of their owners and towards the ends of others. The state is effectively engaged in a constant war on its own citizens, forever plundering and pillaging them to fund their lavish lifestyles and to line the pockets of their friends under the guise of wasteful socioeconomic programmes. Foreign war, fundamentally, is no different and every motivation for it ultimately reduces to a battle over resources. It is therefore somewhat bizarre that anti-war activists are content to allow a government to war against its own citizens but, for some reason, as soon it comes to doing the same against foreign nations then all hell breaks loose. However correct this latter reaction may be, not only is it hypocritical but it is also dangerously naïve to expect the state to restrict itself to peace and harmony abroad when it will never even do so at home. Nazi Germany, for example, was met with such ambivalent dithering in the interwar period precisely because its ideology – big government control and intervention – was of no particular distinction from that which prevailed everywhere else at the time. The only difference was that it was prepared to take this ideology to its logical end, additionally piling on racial dogmas and nationalistic overtones that resulted in crimes which, however horrific and unforgettable, obscures the basic similarity between Hitler and, say, Roosevelt.

Secondly, big states attract the attention of control freaks and the greedy. The more money that is stashed in the government and can be leeched away by bloodsuckers and parasites then the more alluring it becomes to try and take a slice of that pie – and once that slice is taken, how wonderful it would be to take another slice, and then another after that! Finally when government intervention naturally starts to stifle productivity and there are no more pies left to be eaten, the siren song of war becomes ever sweeter to governments and their sponsors, not only as a distraction from their own economic mismanagement but as a way forward to secure a flow of resources from abroard and to tighten their grip on the domestic citizenry through lasting wartime or “emergency” measures. Neither must we forget that there is, among the political class, an alluring quality to being a wartime leader or “warrior”. Seeing off an alleged terrible enemy and apparently saving one’s people from invasion (although it doesn’t even need to get this far) is judged as being more heroic and worthy of the highest honours and decorations whereas creating “mere” peace and prosperity is apparently rather dull and uninspiring. Indeed, the most highly rated leaders all made their mark during wartime or were at least warmongering – Lincoln during the War between the States, Roosevelt and Churchill during World War II, and Reagan and Thatcher during the Cold War, for instance. Only when a conflict is so obviously pointless, futile and/or unjustified – such as those in Vietnam and Iraq – does this strategy backfire, as it did upon Johnson, Nixon and the younger Bush.

Finally, the degree of government intervention necessary to create alleged social or economic ends have only been met during a legacy of wartime control. The New Deal, for example, was modelled upon the wartime regime of Woodrow Wilson; World War II on the New Deal; and the post-war “Great Society”, the fight against poverty and the Civil Rights era all came after these wartime regimes were firmly in place. The citizenry have to be “united” (or worn down) by something such as war before they can ever begin to accept the degree of interference necessary to promote big government measures during peacetime. Ironically, therefore, a lot of the cravings of the anti-war left are reliant upon war if they ever have the hope of seeing the light of day.

In sum, therefore, to be anti-war but pro-state is the epitome of all dangerously ill-informed and contradictory positions, giving birth to the very thing it seeks to destroy. Rather, to be anti-war one must also be thoroughly and unreservedly anti-state, recognising this evil entity for precisely what it is – perpetual and endless conflict and violence. Only when we are well and truly rid of this scourge will there ever be a chance for peace.

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Making Government Irrelevant


Much of the pro-Liberty movement, including the present author, seems to focus on the role of education in being the prime driver towards a world free of state violence and coercion. We believe that informing people of the true nature of the state (i.e. no better than a band of thieving thugs) will incite people to embrace freedom and reject government intervention.

However, a great deal more thought needs to be turned to whether, rather than people wilfully and decisively rejecting government, the “revolution” will come about through a seemingly more mundane and passive method – that of simply making anything that government does irrelevant.

We are already bearing witness to several instances of this. The internet, and the increased accessibility to the world wide web through portable devices, renders almost inert any government attempt to control information, the whole Wikileaks saga perhaps being the most profound testament to this. Indeed it is possible to suggest that the average person today has quicker and better access to information than Presidents Reagan, Bush and Clinton did a mere twenty to thirty years ago. Added to this is the infancy of virtual currencies such as Bitcoin and Litecoin demonstrating how it is possible to curb government currency and capital controls and render physical borders irrelevant. In spite of the fact that virtual currency appears to be far from perfect in these early days, one cannot overlook the promise that their idea if not their present execution holds for the future. And in the United States 3D printing seems to be taking the bite out of gun control.

The marvellous thing also is that these mini-revolutions occur without violence and bloodshed – there is no fighting, no overthrow and no killing. Indeed this is not unusual as previous civil strife and conflict has not been about government per se but, rather, over who controls the government. The struggle of the twenty-first century, however, is over getting government out of the way entirely, regardless of who is in charge of it. We should not be surprised, therefore, that there will not be one big and violent revolution to overthrow government for ever but, rather, hundreds of small, decentralised and peaceful revolts that will simply cause government to wither away in helplessness.

This is not to suggest, of course, that government will not fight back in these areas; indeed governments, as they start collapsing from over-borrowing, overspending and eventual bankruptcy, will try ever more desperately to enforce increased controls and pluck all of the remaining feathers from the golden geese of their citizenry. But the more those geese are plucked the more they flap towards an escape and independent individuals have, historically, been better at what we might call the “invention of circumvention” than the government has been at stopping it.

But let us focus on the one area of government that is both its method of function and, according to the beliefs of the average Joe, it’s raison d’être – violence. Government commits its horrendous abuses and enriches its participants through the use of force against others. But is also supposed to protect the common citizen from the use of force by others and this is why government is still regarded as necessary. What if, then, an invention would enable any person, at extremely low cost, to protect his or her person and property from all forms of force? I have very little idea as to what this could be – an invisible force field around each object you own, perhaps? This is a matter for the genius of inventors. But imagine the result – in one swoop you would eliminate both the ability of government to tax, steal, imprison, kill, maim and live off the fat of everyone else and you would completely eradicate its reason for existence. For if people can now protect themselves from invasion of their person and property at very low cost, why bother with government? Why would anyone pay taxes for an army or police force when this new, cheap, method prevents the very reason for their existence? Of course, people may continue to pay “taxes” voluntarily for some service that the current administrative set up may be perceived to be providing. But there is nothing wrong with this if that is what people want to do with their own money. The bite of force, however, will be lost and government will be relegated (one might say promoted) to the same level of every other market player – having to offer people a valuable service in return for its voluntarily paid revenue.

We should, therefore, urge all inventors to dust off their drawing books and get working on such a marvellous invention. It may, quite literally, save the world before it drowns in a sea of statist despotism.

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