How much should we fear the State?

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Austro-libertarian and other free market oriented economists focus their efforts on explaining the inefficient and destructive nature of the state – how this compulsory aegis of taxation and redistribution retards economic progress and the standard of living, siphoning off ever more productivity into vast bureaucracies that control and regulate every aspect of our lives with a fine toothcomb. The state represents an enormous concentration of wealth and power which could never be attained by a private individual (or even an institution) in a genuine free market, a degree of power and wealth that seeks to extend its destructive influence not only within the territory of the individual state itself, but also overseas with armies, navies and air forces and all of the fire power of destructive weaponry that they can carry.

To any one individual the state can seem like an awesome and overwhelming entity – in the UK, it provides your banking infrastructure, your healthcare, your transportation networks, educates your children and supposedly is the guardian of your health, safety and wellbeing from greedy, unscrupulous companies who might seek to defraud or injure you. Moreover, if you get on the wrong side of the state then its uniformed police force can arrest you, its judges in long black robes can imprison you or freeze your assets and, of course, it promises to do the same to all of the people who attempt to commit a crime against you. And who could not fail to be overwhelmed by the state’s vast and impressive buildings such as the Houses of Parliament or the US Capitol, and the patriotic, flag waving ceremonies such Presidential inaugurations which inspire a turnout of millions?

This essay will in no way dispute the fact that the state is something to be feared (and indisputably so when we consider that the world’s entire nuclear arsenal is sufficient to destroy it tens of times over). What we will explore here, however, is the fact that the monopolistic and overreaching nature of the state is both its source of power yet also its Achilles’ heel – that the state is far from a lean, mean fighting machine and is in fact bumbling, bloated and altogether rather stupid.

First, the state is severely handicapped by its very nature as a monopolistic force. Because it does not need to compete in any areas in which it decides to wade it has a natural tendency to languish in laziness and inefficiency to a degree which renders it extremely vulnerable. For example, the global cyber attacks on state owned and some private computer networks and infrastructure last year are a testament to this. These attacks were made possible by the fact that the operating facilities of the targeted organisations – which included Britain’s National Health Service were outdated and hence highly susceptible to such attacks. Most private consumers of information technology, on the other hand, had had the necessary patches and updates installed. This reliance on out of date technology seems endemic, spreading also to areas which are nominally private but which are heavily supported by the state such as banking. According to entrepreneur Simon Black (who started his own bank when he got so fed up with the service offered by established banks), the Society for Worldwide Interbank Telecommunication or “SWIFT”, which is the premier global financial network, uses Windows Vista as its platform – an operating system which Microsoft no longer supports. Domestic infrastructure seems to be even worse. In the UK, most salary and business payments rely on the BACS network which dates from the 1960s and still, in our age of instant communication, takes three days to transfer funds between bank accounts. How is it possible that vast organisations such as Britain’s National Health Service and SWIFT are basically using technology that is more outdated than that available to any private individual who recently bought a laptop or smartphone? The answer, of course, is that these organisations are simply shorn of any competitive reason to innovate or to stay ahead of the game. Without the threat of losses as a result of the continual supply of tax dollars they are devoid of any reason to maintain the highest standards in order to ensure that they are efficient and up to date. Such lack of standards spreads also to the personnel in these organisations. Bureaucrats, who are more or less promised a job for life so long as the avoid making a major mistake, have little incentive to develop their knowledge and skills and so are unlikely to ever be as smart as private entrepreneurs who always need to keep a sharp eye on the game. This is one of the reasons why (in spite of all of the hullaballoo from politicians seeking election) tax and regulatory loopholes will always exist – because the people finding and exploiting them have both greater ability and incentive than those who are supposed to close them. This is not to imply, of course, that politics is not a competitive arena. However, the nature of competition in politics is very different from the nature of competition in the free market. In the latter, people are competing to create more wealth for the benefit of consumers and so it is a positive sum game – one person’s gain does not depend upon another’s loss. It is true, of course, that in a particular industry one company may prosper while others go bankrupt, and obviously there can only be one CEO of any particular company at a time. But even if a person is beaten to the position of CEO of one company the process of wealth creation itself will allow plenty more enterprises to be started in order to exploit opportunities which have not yet been explored. In the free market, one door closed is two more opened. Politics, however, is decidedly a zero sum game. The power possessed by one individual is necessarily taken from another, and money given to one set of beneficiaries has necessarily been taxed (i.e. confiscated) from another. There can only be one President of the United States or one Prime Minister of Great Britain – the process of politics will not create an unlimited number of great and powerful states in which the opportunities to become either President or Prime Minister are multiplied. Therefore, the budding politician must necessarily gain from what anyone else loses and he must make sure that no one else is able to beat him to the top job. Thus, there is seldom any genuine co-operation or betterment in the political sphere as, ultimately, everyone is the enemy of everyone else – and the only co-operation that does exist is in the form of favours, bribes and other “tit-for-tat” arrangements, with any relationships always susceptible to a sudden backstabbing by the more ruthlessly ambitious partner. With such a widespread lack of trust serving as the foundation for the state it becomes impossible for it to operate as a fast, efficient and unified whole. Indeed, private citizens can often be thankful for the fact that the little feuds and foibles between individual state departments and fiefdoms are a frequent distraction of the state from plundering the average Joe.

Second, as “Austrian” economists we know that statist intervention can never achieve anything that it is supposed to achieve – or at the very least it can only do so with significantly inflated cost. All of its publicly stated ambitions – conquering poverty, providing affordable healthcare, employment for all of those who want to work, safety and security in retirement, the vanquishing of crime and so on – will never be achieved simply because these things cannot be achieved through the means of wealth redistribution rather than through wealth creation. Indeed, because the state has no area where it can genuinely make a positive difference for the whole of society, its own natural incentive to sustain itself and to maximise its own power instils in it the desire to make problems worse rather than better – solely for the purpose of lending itself a perceived role. It is better for the state, for instance, to keep people poor so that they are dependent upon government handouts; it is better for the state to disarm its citizenry so that the latter present no threat to the state’s own armed guards, at the cost of increasing crime which the state can then step in to solve. Unfortunately this perverse incentive is fed by the fact that many people see the state’s failings as a reason for strengthening the state and giving it more power, rather than as a reason for getting rid of it. Most of the symptoms of these failings are far removed from the state itself and it requires the ability to follow a long chain of thought in order to identify the true culprit. When the government inflates the money supply, for instance, prices rise – yet it is businesses, i.e. all of those greedy, exploitative capitalists, who actually raise the prices directly and so it is them who get the blame. Similarly, when state mandated minimum wages result in unemployment the public view is that the fault lies with those same evil businessmen who are refusing to lower their profits and hire more workers. Most of this is due to the fact that the advent of democracy has severely weakened the distinction between the state and the people – the feeling of “us” and “them”. Rather, through our voting rights, all of us are the state and we are all doing what the state is doing. So, perversely, the state’s failings are perceived not its own but rather as our failings, as if it we ourselves who have failed in the particular endeavour. However, here also lies the state’s weakness. As recent secessionist movements and events within the European Union have indicated, the feeling of unity with and control of the state is severely weakened when the state becomes too big and bloated, swelling to a size where decisions are made by strange and unfamiliar figures in a city many thousands of miles away. Much of the motivation for the Brexit vote, for instance, was the desire to repatriate decision making authority from Brussels back to Britain. This suggests that the degree to which power can be removed from its proximity to the people is finite – a limit which has served as a severe frustration to the unifying, globalising and bureaucratising ambitions of political elites. Indeed, it is now unlikely that these ambitions will ever be fulfilled. Moreover, secession necessarily breaks up large states into smaller units which, as we explored in several previous essays, necessarily makes the state’s power vis-à-vis its citizens weaker rather than stronger.

This leads us onto our third point which is that the state, or rather the people who can be said to form it, are a minority of the citizenry. This is necessarily so because, as a parasitic entity, it is simply not possible for the state to be comprised of the majority. Contrary to popular belief no state has ever retained power as a result of force alone; rather, the state’s sustenance is dependent upon at least the tacit acceptance of the majority of the citizenry. Although the fear of force may constitute a reason for that tacit acceptance, generally the state has to ensure that its subjects are kept within the confines of a basic degree of contentment – that even if they may mumble and groan about the state’s inadequacy in this, that or the other, there is no pressing reason to upset the apple cart. The collapse of the Soviet communism, the Brexit vote and, we might suggest, the election of Donald Trump are instances of when such contentment with the status quo was exhausted in the minds of at least a significant proportion of the population. The end of the Soviet Union led to a markedly different political set up in Russia and Eastern Europe; we are yet to see the full consequences of the other two events. But when the people do decide to support a particular direction and to exert its independence with ferocity then the state has no choice but to yield.

This bumbling, bloated nature of the state is indicated by a joking phrase apparently made by the industrialist Charles F Kettering – “Thank God we don’t get as much government as we pay for”. Indeed, if all of the wealth and resources that the state commands were actually put to use effectively and efficiently then it would truly be a terrifying and formidable obstacle. Unfortunately, however, it is also summed up by what we might call, informally, the “cock up theory of history” – that, rather than great leaders and stewards shaping the world’s events in order to enhance humanity, anything significant that happens in the course of history is more attributable to a series of accidents and mishaps that just happen to have had widespread consequences. And it is here where the true danger of the state may perhaps lie.

One of the most infamous of these incidents occurred in 1983 at the height of the cold war when the Soviet nuclear early-warning system reported the launch of intercontinental ballistic missiles from the United States. The Soviet officer monitoring the system at the time, Stanislav Petrov, believed the warnings to be the result of a system malfunction – a belief which was verified subsequently by inspection of the system. His refusal to act on the false warnings prevented a Soviet retaliatory attack which would have almost certainly elevated the cold war into a full scale nuclear holocaust. In other words, the complete annihilation of human existence was averted by the prudential actions of a single individual who refused to trust his government issued equipment. When the state today still handles so much and handles it so badly the possibility of a grave mistake going the other way is very serious indeed – and all the more so when belligerent tensions are again reaching new highs. Indeed, a not too dissimilar incident occurred in Hawaii this month when a missile attack alert was broadcast publicly, sending the citizenry into a panic for the best part of an hour – all because a state lackey “pressed the wrong button”. It is for this reason more than any other that the state should be regarded as dangerous. So much power in the hands of so few people is at risk of one them making a simple error, rather than at the risk of that same person acting with evil intentions. As awesome as the state may be we have more to fear from its stupidity than from its ingenuity.

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Markets and Central Banks

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The financial world experienced its equivalent of a major earthquake this month when the Swiss National Bank (SNB), the central bank of Switzerland, made a dramatic and unexpected change in policy. In 2011, concerned by the rapid appreciation of the Swiss Franc and, thus, damage to Switzerland’s exporting industries and commercial banks, the SNB instigated a policy of maintaining a peg with the Euro at 1.20 Francs to the Euro. If ever the price of Euros declined against this mark then the SNB would obligate itself to sell Swiss Francs and accumulate Euros to maintain the parity. This policy therefore created a seemingly impenetrable price floor for the Euro against the Franc. Whenever the Euro declined to the 1.20 area traders could take a sure bet that they could sell Francs and use them to buy Euros (technically referred to as “shorting the Franc”), knowing that the SNB would take action to depreciate the value of the Franc and thus increase the value of the Euros that these traders now held. Indeed, that was precisely what was happening and what was expected on January 15th of this year when many traders had just opened long EUR/CHF positions as the currency pair was hovering around the 1.20 area. In recent months, however, the increasingly lax monetary position of the European Central Bank in order to ward off deflation and sluggish growth in the Eurozone – leading to a QE programme announced on January 22nd – led the SNB to maintain an increasingly expensive policy of depreciation of its own currency that risked fuelling bubbles and malinvestments within its borders. Clearly they were spooked by something as no one seemed to be prepared for the sudden announcement, on January 15th, that the SNB would, with immediate effect, abolish the peg against the Euro and the Franc would again be permitted to fluctuate freely. The market was suddenly awash with sell orders for the Euro and buy orders for the Franc that, within the space of a few minutes following the announcement, the Euro depreciated against the Swiss Franc from about 1.20 to around 0.75 – a dramatic drop of 37.5% – and eventually settling around the 1.00 mark. The movement happened so fast that any liquidity between these two points completely evaporated and anyone hoping for an entry or exit between them was pursuing a lost cause. Needless to say, anybody who owned the Euro against the Franc lost an awful lot of money, with some large institutions, such as Citibank, Barclays and Deutsche Bank, losing tens, if not hundreds, of millions of dollars. Particularly hardest hit, however, was the retail foreign exchange market, which in recent years has seen considerable growth amidst relatively lax regulation. Several of these outlets went bust while the largest, FXCM, had to be bailed out by an investment bank with $300m. Retail traders to whom these institutions cater are those who trade “on margin”, in other words, they borrow money to fund their positions. Thus their own equity amounts to only a proportion of the total cost of any trade, often as small as 0.5%. Therefore, a small movement in favour of any particular trade can lead to large profits, while a small movement in the opposite direction threatens not only to wipe out the client’s capital but to leave them owing money to their broker if the trade continues to sink and is not closed out. If this is the consequence of a small adverse movement, imagine the effects of an extremely large move such as that seen on the 15th. The movement was so sudden that stop losses, the trader’s conventional protection against risk, were useless and FXCM was particularly hard hit, being left with $225m worth of client accounts with negative equity. Needless to say, of course, there were also big winners on the other side, particularly those who were either skilful or fortunate enough to own put options on the Franc against the Euro with a strike price close to the former peg.

Standing aside from this entire calamity, what should the Austro-libertarian make of the situation? Profits and losses are supposed to be the result of superior entrepreneurial judgment in directing scarce resources available to the ends most urgently desired by consumers. Those whose judgements are more accurate than anyone else’s will walk away with profits, those who whose are not will be lumbered with losses. In financial markets, this is manifest in, say, the purchase of a stock which demonstrates the willingness to invest capital in the underlying enterprise and that the enterprise is one which will meet the ends of consumers with its trade; or a speculation in, say, the futures market is an attempt at “price discovery” and to prevent the emergence of false prices that would cause resources to be wasted1. However, the overwhelming fact that was laid bare on January 15th is that entrepreneurial fortunes are not made and lost in the financial markets through correct foresight of the desires of consumers – they are made and lost based on the whim of central banks. People are no longer rewarded for best estimating the desires of consumers but for guessing the motivations of the financial lords and masters sitting on their thrones of paper money. The stock market is no longer a place to rationally allocate resources amongst industries but a place to make bets on monetary policy. Indeed most of the significant shifts in a given stock market are made on days when the relevant central bank makes an important announcement. Those who clap their hands with glee when parasitic “gamblers” burned their hands on the day of the SNB announcement and “got what they deserved” should ask the logically prior question of why the financial markets have become such a casino in the first place. For years, central banks have maintained artificially low interests supported by monetary expansion which have made it profitable to plough funds into assets such as stocks at extraordinarily low cost – buoyed up by the, not unreasonable, belief that central banks will act to correct any dips in asset prices. Indeed with interest rates so low, borrowing money to buy assets has become an almost costless affair. Why should anyone follow other, riskier entrepreneurial ventures when this one has almost no chance of failure? Indeed, the SNB’s own commitment to maintain the peg seemed to promise free profit to anyone wishing to buy Euros and sell Francs near the peg, knowing full well that the SNB would be doing the same and hence buoying the value of the Euro against the Franc. Given that central banks have been creating fortunes for years it should come as no surprise when they take them away again, albeit in one, spectacular blow.

There is, however, a glimmer of light that has emerged from the situation – that the reputation of central banks and their pronouncements may have received lasting damage. First, the fact that the SNB reiterated, in no uncertain terms, its policy to maintain the peg a mere month before it was removed indicates that what central banks say cannot be trusted or taken as gospel. Second, the fact that it did so abandon its policy reveals the fact that these institutions do not possess the omnipotence and invincibility that they have led us to believe. In the long run, central banks cannot outwit reality and the market cannot be fought. By accumulating depreciating Euro assets at the same time as appreciating Franc liabilities the SNB was driving itself towards bankruptcy with a ludicrously expensive policy. Perhaps, therefore, the sudden realisation that the emperor has no clothes will cause bankers, economists, investors and speculators to look at central banks with a more critical and sceptical eye. May be there will then be a chance that the fatality of the pursuits of the more important central banks, such as the US Federal Reserve, will achieve widespread realisation.

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1DuncanWhitmore, Speculation, duncanwhitmore.com

Fractional Reserve Banking – The Ethics and Economics

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Fractional reserve banking is a prime topic for study on the part of libertarians on the one hand and of “Austrian” economists on the other. For not only is the practice, in the way it is carried out today, deeply unethical it also creates macroeconomic instability and is one of the causes of economic crises such as that which we are enduring currently. This essay will explore in particular the ethical and economic consequences of the legal framework imposed by government fiat that breathes life into this practice, concluding that it is government that is at the heart of its unethical nature and causes the endurance of its bad effects.

What is Fractional Reserve Banking?

A bank engages in fractional reserve banking if it retains as reserves only a fraction of its liabilities that can be redeemed on demand – most often, this means money that is held in current or “checking” accounts where you are entitled to withdraw your money at a moment’s notice. If customers have deposited in the bank £10 million of cash and the bank’s reserve requirement (or its internal practice, depending upon the regulatory regime) is 10% then the amount of cash held by the bank for withdrawal by those customers is a mere £1 million. This may be easier to visualise when deposited money consisted not of paper but of gold and other precious metals. When you deposited your gold in a bank, you were issued with a paper warehouse ticket stating the amount of your deposit (say, 10oz) and the fact that you were entitled to withdraw it on demand. If your bank engaged in the practice of fractional reserve banking then only a portion of this gold would actually be in the bank ready for you to withdraw. Incidentally, these warehouse tickets were the origin of paper money – a £10 banknote issued by the Bank of England still states “I promise to pay the bearer on demand the sum of £10”, £10 originally meaning 10 pounds in weight of sterling silver. Indeed, all of the monetary denominations such as pounds, dollars, francs and marks were originally fixed weights of precious metal. These days, of course, the note is backed by no commodity whatsoever and statements of account at banks merely indicate a promise to pay the sum stated in paper money which has, to all intents and purposes, replaced metals such as gold and silver.

The obvious question, then, is where on Earth has this money gone? If it is not in the bank then where is it? And more importantly, why is it not in the bank? Have the bankers taken your money and used it to purchase luxury consumption goods, hoping that you will never come back for it? Not quite; the answer is that the bank has loaned the money to borrowers, usually for the long term to people who wish to take out a mortgage, for example, in spite of the fact that all of the bank’s liabilities are payable on demand. In this practice of “borrowing short to lend long” the bank takes a gamble that two conditions will be met. First, that it will only ever need the fraction of deposits kept as reserves in order to meet the number of withdrawals by its depositors that are likely to be required at any one time; and second, that a sufficient number of the borrowers will pay back the money that has been lent out. The primary motivation for this is, of course, to earn interest on the sums lent. This is why most banks do not charge their depositors a fee for their services – they are using your money deposited to earn an income from other people.

Fractional Reserve Banking – Fraudulent or Legitimate?

The question of whether fractional reserve banking is fraudulent is a matter for debate in libertarian circles. Could not, for example, two persons agree to engage in the practice? If I know, for example, that my bank will only keep a fraction of the money as reserves and I know it is at risk of the bank’s insolvency then is there any breach of the non-aggression principle?

The answer to this question lies in the consequences of the terms upon which such an arrangement could be made and the also in the legal and regulatory context. There are two basic possibilities; either one’s deposit of money in a bank is a bailment, in which case the bank acts as a custodian of your money (like a warehouse or storage facility); or, the deposit takes the form of a loan to the bank and the bank is simply your debtor. In the former case, you retain proprietary title to the money and it is ring fenced from the bank’s own assets. If the bank goes bust then its creditors cannot get their hands on your money. Your bank statement is not a statement of account but, rather, an inventory of property deposited in the bank for safekeeping. In this scenario, but for one important qualification that we will mention below, the statement of account (or the warehouse ticket for gold deposits) is defined as the cash on deposit – in other words, it is the same thing. That is why people accepted paper tickets in trade when they were titles to gold. These transactions are not payments of money at all; they are transfers of the bank’s obligation to redeem cash on demand from one person to another. Because the obligation to pay is a full, proprietary title the transfer of this obligation is as good as the cash itself. Under this banking arrangement, fractional reserve banking would be fraudulent. If the bank loans out the money to a third party then it is required to grant full proprietary title over the money to the third party debtor in exchange for a promise to pay back the sum lent once the maturity date of the loan is reached. But the bank cannot legally divest itself of a title that is not in its possession. In essence the bank would be selling property which it does not own. It is exactly the same as me purporting to sell your house or your car to someone else and pocketing the cash – or a storage warehouse loaning out the furniture that you have deposited there for safekeeping. In practice, what happens is that the bank creates two simultaneous titles to the cash on deposit – one for you as the original depositor and one for the borrower. Both of you are under the delusion that you have exclusive title to the cash on deposit whereas in reality it could be claimed by the other person. In the second case, however, where the deposit takes the form of a loan to the bank, if this is agreed and understood by both parties in a genuinely free legal and regulatory environment then all well and good – there is certainly no breach of the non-aggression principle for libertarians to complain about. If the bank goes bust with it goes any claim to your money. However, one important aspect is that what is now in the depositor’s possession – a mere promise that you will receive payment in cash on demand rather than a full, proprietary title to cash – is a markedly different good from cash or a proprietary title to cash. Hence, we are now talking about two different goods – money on the one hand and a loan agreement on the other, something that is below the quality of money as the most marketable commodity. While it therefore may be a perfectly legal arrangement and people may be able to trade these loan agreements in exchange for goods and services (as we do today when we make electronic transfers) we would expect a loan agreement to trade at a discount compared to real money. Should this be doubted, even under full reserve banking the paper ticket to warehouse deposited gold was regarded as a distinct commodity by the trading public; when gold coins were stamped with a dollar value equal to the dollar value of a paper ticket, even though redemption of that paper ticket would guarantee payment of the same dollar value in coin, Gresham’s law came into effect and the paper tickets were traded while the coin was hoarded1. Under a system with genuine market pricing, therefore, we would expect warehouse receipts to gold to trade at a discount compared to real gold. If this is so then clearly loan agreements – far less secure than 100% warehouse receipts – would trade at a discount even lower than this.

All of this would be fine from a libertarian point of view and nobody can stop anyone else from accepting loan agreements freely in exchange for goods and services if that is what they want. The problem with today’s banking system, however, is that there is no genuine choice between these two arrangements. The fact that in today’s world “everybody” uses fractional reserve banks and “everybody” generally accepts mere loan agreements in settlement of debt without a premium does not mean that this arrangement has the full, unbridled consent of the public. First, legal tender laws force the public to accept as payment the government’s own monopoly brand of money and are unable to consider alternative media of exchange. Second, under the guise of “anti-money laundering” (in other words to try and stop drug traders, “terrorists” and other underground operations that are of the government’s own creation) the legal and regulatory regime has all but abolished cash transactions of any significant quantity, thus forcing people to direct their financial needs through banking institutions. Third, government schemes such as the Financial Services Compensation Scheme in the UK or Federal Deposit Insurance in the US (which basically means that the taxpayer is forced to foot the bill if the bank loses your money) provide a positive incentive to use these banking institutions and prevent either the hoarding of cash by the public or any “maverick” banker from splintering away and establishing a full reserve bank2. Fourth, these institutions have been completely cartelised under the aegis of the central bank, meaning that the only institution available for people to use for their banking amounts to little more than a single, fractional reserve bank splintered off into different brand names such as HSBC or Barclays in order to give the illusion of competition in the banking industry. Indeed, the force of government, either in the form of direct enforcement of fractional reserve banking or by forcing the taxpayer to bail out the consequences, has always been required to sustain the practice for any extended period of time as genuine competition between freely standing banks has always restricted their ability to issue large quantities of unbacked notes. The precise effectiveness of this point is debated between “Austrians”. The Mises-Rothbard orthodoxy emphasises that competing banks will swiftly call upon each other for redemption in the event that one bank takes possession of another’s notes. For example, if I deposited gold at Bank A and received for it a paper ticket stating that I had gold deposited in Bank A, I could use this paper ticket to buy goods and services from, say, a grocer. But if the grocer banks at Bank B, he will deposit my note from Bank A with Bank B, but Bank B will call upon Bank A to redeem its note in gold. Hence Bank A would be restricted from over issuing unbacked notes as whenever they fell into the hands of the customers of other banks those other banks would call upon Bank A for redemption in gold. Mises, moreover, also emphasised that the bank’s reputation with its own customers for being able to meet redemption on demand was a decisive limit upon the expansion of unbacked notes3. However, when all banks are issuing the same notes everywhere, with all gold deposited centrally in a monolithic bank (or no gold at all, as under our current regime) then this clearly isn’t possible and all banks would be able to expand together in concert. Later writers, however, have pointed out the importance of interbank lending in neutralising the effectiveness of banking competition, with banks that have over-issued notes borrowing from banks that are under-issued in order to meet redemption demands. In other words banks will not necessarily call upon each other for redemption and will seek instead to earn an interest profit through mutual lending4. However, all we need to conclude here is that people today do not have a genuine choice as to whether they should meet their financial needs through fractional reserve banks. We can, though, still see the difference between payments in cash and other methods of payment in certain limited circumstances. Debit and credit card payments are inherently less secure than hard cash and the risk to the merchant is that the card issuing bank will not honour the transaction after the customer has left with the goods – in just the same way as a deposit bank may be unable to honour a paper ticket to warehouse deposited gold. Acquiring banks and card issuers therefore levy a charge upon merchants in order to guarantee – or at least improve – the security of the transactions and some merchants pass this charge on explicitly to their customers as an additional fee. This results in two prices – a lower price for payment by cash and a higher price for payment by card. It is reasonable to assume also, therefore, that given a genuine choice people would also regard hard cash and deposits in fractional reserve banks as distinct goods of different value. Finally, if the lack of genuine consent of the public in using fractional reserve banks should be doubted, then try asking any banker whether he would be prepared to look his customers in the eye and tell them their money is not really in the bank. The experience of the present author suggests that this is enough to close a debate on the matter with bank employees who actually know how the system operates.

All of this suggests that people do not wish their banking arrangements to be managed with fractional reserves, given a genuine choice. Indeed the entire backbone of Mises’ thesis in The Theory of Money and Credit is that money and what he called “fiduciary media” (notes issued unbacked by gold) are distinct concepts and where people trade fiduciary media at a par with money or backed notes they only do so because they believe that they are not fiduciary media and are, instead, fully backed notes with redemption on demand all but certain. Something to pull the wool over the public’s eyes is needed in order to achieve this. In our world today it is the force of government sustaining fractional reserve banking and compelling people to use it which is the illegal and immoral element. This should be the focus of libertarians in their moral opposition to its practice.

Fractional Reserve Banking and Economic Instability

In addition to the moral element concerning fractional reserve banking, the practice in the way it is carried out today is also economically destabilising. As we know from “Austrian” Business Cycle Theory, the creation of credit that is not supported by any real saving forces the economy onto a path of malinvestment that must collapse once the credit creation stops. Fractional reserve banking is the primary method through which this credit creation occurs. Nevertheless, once again this issue is intricately connected to the legal and regulatory framework in which fractional reserve banking operates and it is this factor that will be emphasised in the treatment below.

Let us posit a first scenario where banking consists of deposits of gold and precious metal in exchange for paper warehouse certificates, certificates that are a legal title to money and do not represent merely a loan to the bank that would permit the latter to do with the gold whatever it likes. If, therefore, A deposited 100oz of gold in a bank the bank would issue a 100oz paper ticket to A and the gold would remain locked up in the bank’s vault ready for A to come and collect at a point in the future when he deems fit. In this instance 100z of gold in the economy has been replaced by a warehouse ticket to 100oz deposited in the bank When this ticket is used and accepted in trade it is “as good as gold” and people will trade the paper as though it was gold, although, as we noted earlier, with the possibility that it may trade at a minor discount compared to the real thing. At this point, the money supply has not altered; rather 100z of money proper has been replaced by a 100z “money substitute”. In this environment, if the bank engaged in fractional reserve banking it would print new paper tickets which represent full, legal titles to gold without any corresponding increase in gold on deposit in its vault – in other words, pure fiduciary media, in Mises’ terminology. Let’s say that the bank lends an unbacked 100oz ticket to a borrower, B. There is now, therefore, 100oz of gold deposited in the bank but 200oz of paper tickets that can be exchanged in trade. The supply of equally homogenous money substitutes that are deemed to be as good as money and are traded as money has therefore doubled. This method of fractional reserve banking (which, we might recall, is also the fraudulent one) will therefore cause economic instability and lead to the business cycle as it has channelled a new supply of money unsupported by real saving through the loan market. The new supply will lower the interest rate on money and will incentivise borrowers to invest in longer term investment projects than are sustainable under the pool of available savings5.

Let us now examine a second scenario where banking does not consist of deposits of gold and precious metal in exchange for paper warehouse certificates but, rather, gold is deposited on loan to the bank that is redeemable on demand. The money is legally the bank’s to do with whatever it likes but the lender may call for redemption at any time, taking the risk that the bank may not have sufficient reserves to meet the redemption. Furthermore let us assume that this arrangement is entirely voluntary and agreed to, with no government impetus or the force of law compelling its use. If A therefore makes such a loan of 100oz to the bank he will receive a paper ticket or a statement of account stating that he has loaned money to the bank that is redeemable on demand. A may be able to trade these “loan agreements” either in paper ticket form or electronically – either way it doesn’t really matter as both would be a transfer between individuals of the bank’s obligation to pay. 100oz of gold has been deposited in the bank and a 100oz loan agreement has been released into the economy. If the bank now engages in fractional reserve banking and makes a loan of 100oz to B by creating out of thin air another paper ticket (that in and of itself constitutes only a loan agreement and not a proprietary title to hard money), we now have 100oz of gold still in the bank but 200oz of paper loan agreements to gold issued in the economy. On the face of it, it would again appear as though the money supply has expanded through credit creation. Wouldn’t this lead to economic instability and ultimately to the business cycle? However, this is unlikely to be the case. For the crucial aspect in starting the business cycle is that the interest rate on money is lowered through people’s inability to perceive money that represents genuine savings and money that has been created out of thin air. In this case, however, it is possible to distinguish between money proper and mere loan agreements to money that are redeemable on demand. An expansion of the latter does not lead to an expansion of the former. While the “interest rate” on the loan agreements may fall as a result of the their expansion, so too would their discount compared to money proper as the increasing abundance of these loan agreements makes the security of redemption less likely. The effect of the increased discount would be raise production costs to borrowers which would offset the reduction of interest rate and prevent the business cycle from occurring.

Let us now fast forward to the situation that we have today. Now, the paper ticket itself has replaced gold as the item that is deposited and as we stated above everyone is either forced or cajoled into using fractional reserve banks under the aegis of a single, central bank. The expansion occurs through the increasing of deposit balances on account – i.e. the numbers on your bank statement. If you deposit £100 worth of Bank of England notes in your account you can transfer the bank’s obligation to pay electronically. If the bank then creates a loan out of thin air by creating another deposit account, both you and the borrower then have the ability to spend these digits in the economy. But, unlike the difference between money proper and mere “loan agreements” that was plainly obvious in the second scenario we explored, here, nobody knows which of the digits being spent represents genuine savings and which have been conjured out of thin air. Hence, the interest rate on money will fall, longer term investment projects will be stimulated and the business cycle begins with its “boom” phase.

It could be alleged that the inherent instability of this arrangement could be countered with the “prudence” of the banker – the idea that an expert fractional reserve banker will be able to loan wisely to only those borrowers who are most trustworthy and will keep on hand enough reserves to meet redemption requirements. This is beside the point. Apart from the fact that it is the least prudent bankers and borrowers who post the highest profits during the boom phase, leaving any conservatives way behind, the fundamental problem for economic stability is that no inter-temporal transaction has occurred – in other words there has been no a trade of present goods for future goods. In normal saving and lending, in order to make loan to the borrower for, say, one year the lender must save for a year. The lender in this instance has given up consumption for one year and freed real resources in the economy to the borrower so that the latter may use these resources in an investment that will come to fruition at the maturity date of the loan in one year’s time, allowing the borrower to pay back the loan to the lender so that the lender can then purchase consumption goods that have come into existence as a result of the borrower’s year-long investment. This is what makes real, sustainable economic growth possible – the harmony of temporal interests over goods between those with short time horizons and those with long. With fractional reserve banking, however, no such harmony exists. The lender – that is, the depositor – does not want to relinquish consumption for a year. He maintains his cash balance in a demand deposit account because he wishes to call upon those funds for current consumption and not consumption in one year. He may, of course, leave the funds in his deposit account for a year but the crucial point is that at the outset this is not certain – he wants to be able to call on consumption goods at a moment’s notice when the time arises. The borrower, however, wants goods that he can invest for a yearlong production process, tying up those goods for that duration until the project comes to fruition. He cannot accept goods that someone else will want back in a shorter time. It is clear that both individuals cannot have their way and that one or the other must ultimately triumph because the same resources cannot be simultaneously consumed and invested. During the boom phase when credit expansion rises, it is the borrower who wins as his increased purchasing power allows him to purchase the resources and invest them in capital goods – hence there is, during the boom phase, a marked price inflation of capital goods as these borrowers take advantage of their newly found purchasing power and a relatively weaker price inflation of consumer goods as the latter become more scarce relative to the demands of consumers. Once the credit expansion stops and starves the borrower of fresh purchasing power, however, it is the lender’s preferences that rule the roost. Either the lender must be prepared to start saving and thus provide the resources to complete the borrower’s investment projects; or, if he is not so prepared and maintains a preference for consumption, then the borrower’s investments must be liquidated. Hence, in the bust phase we experience a heavy price deflation of capital goods as they are hastily sold off and a weaker, relative price deflation in consumer goods buoyed up by the fact that these goods are still in demand.

Conclusion

What we can see from all of this is that the destabilising effects of fractional reserve banking on the one hand and its illegal and immoral aspect on the other are two sides of the same coin. The fact that people do not know which units of currency in existence represent real, genuine savings and which have been conjured out of thin air as fiduciary media is the essence of both the fraudulent  and destabilising nature of fractional reserve banking. The government in bed with a monolithic banking system pulls the wool over everyone’s eyes for their own enrichment at the expense of wasteful malinvestments during booms, followed by unemployment, misery and taxpayer funded bailouts during busts. It is high time that the public realised the true nature of their fractional reserve banking system and anyone who cares for liberty is right to emphasise its odious nature.

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1As Ron Paul has suggested, it was this that resulted in a withdrawal of gold coin from circulation and its concentration as deposits in banks that made it easier for governments to confiscate them. It is for this reason that both Paul and, earlier, Mises urge the need for gold coins to be used physically in transactions. See Ron Paul, “The Political Agenda for the Real Gold Standard”, Ch. 7 in Llewellyn H Rockewell, Jr. (ed.), The Gold Standard – Perspectives in the Austrian School; and Ludwig von Mises, The Theory of Money and Credit, Part Four, Chapter III, “The Return to Sound Money”.

2We can also suggest that, as per Ron Paul’s analysis cited in note 1 above, that as electronic transfers and paper notes bear the same legal value, Gresham’s law comes into effect and the paper notes are stashed away in banks while electronic digits are traded.

3Ludwig von Mises, Human Action, The Scholar’s Edition, p. 436.

4See, for example, Nikolay Gertchev, “The Inter-bank Market in the Perspective of Fractional Reserve Banking”, Ch. 10 in Jörg Guido Hülsmann (ed.), Theory of Money and Fiduciary Media – Essays in Celebration of the Centennial.

5This expansion of credit is not likely to last for very long in a competitive banking environment that lacks deposit accounts. Not only, of course, could overexpansion call for redemption of the overissued notes in specie, but soon the economy would clearly be awash with paper tickets which reveal that something is amiss. Central banking, abolishing competition, would be needed to sustain the expansion of note issue and electronic transfers between deposit accounts would be needed to hide the expansion from plain sight. Ironically, therefore, monetary expansion or “printing money” these days involves a contraction and not an increase of circulating paper notes. As a note of historical interest, Peel’s famous Bank Charter Act of 1844 failed to control economic instability because, following the otherwise insightful Currency School of thought that was prevalent at the time, it concentrated only on banknotes and overlooked the role of deposit accounts in expanding the money supply.

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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The Choice Illusion

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In the mainstream debate both for and against a free market, one argument that appears continuously is that the free market is predicated upon choice and the ability of the individual to choose. Those in favour will argue that more choice promotes competition and increases the freedom of the individual to meet his ends, and so the increasing of choice and stifling of monopoly wherever it appears is a good thing. Opponents will counter that choice can be wasteful, costly, inefficient and overwhelming particularly when it concerns supply of provisions as basic as water, and, furthermore, that often the appearance of choice is merely an illusion conjured up by private companies that basically operate in a profit-maximising cartel.

Wading into this debate as a libertarian we can see that the basic statements on each side are not incorrect. However they either overlook or misunderstand the true nature of choice in a free society. The kernel of truth in the pro-choice argument is that voluntary behaviour, expressed through choice, leads to market outcomes that provide the most benefit to the consumer. But such an advocacy is formal only – people choose voluntarily not only which suppliers they are willing to patronise, but also the extent of choice itself in a particular industry is the outcome of voluntary action. In some industries, for example, particularly those that are growing and innovative, consumers are willing to support multiple suppliers with a large range of different products and all of these may be viable. We might say that smartphone manufacturing is representative of this kind of industry. In other industries, however, which are perhaps maturing or consolidating and reaching the end of their innovative stage, the benefits to be gained from economies of scale and simple and straightforward products with little differentiation might be what consumers desire. This is particularly true of the supply of commodities where the only differentiation is price and the only benefit to consumer can be reduced costs. This kind of supply naturally lends itself to one or only a bare handful of suppliers and choice in such an environment may be reduced to minor differences in customer service but is otherwise likely to be stressful, wasteful and unnecessary.

However, pro-choice advocates often are not arguing in favour of this formal meaning of choice, but rather they assume and press ahead for a choice that is substantive. In other words, for every single industry there must, necessarily, be several suppliers from which a consumer can choose, however basic the product and however costly the splintered operations. We have already examined the economic fallacies of this belief from the point of view of competition law and the shibboleth that increasing competition is always a boon to the consumer. However, it is also a dangerous ruse that can be used to create nominal or illusive choice while preserving an overarching government monopoly or control that allows government favoured private companies to line their pockets, at the same time allowing all of the blame for the waste and inefficiency to be directed not to the governmental element but to the “free market” vestige of the particular industry. In the UK the privatisation frenzy of the Thatcher and Major governments was often justified by the need to give “choice” and “competition” to the consumer. Britain’s railways for example, are now “privatised” and whenever you board a train there will be a private company’s logo emblazoned on the carriage and you will see front line members of staff wearing uniforms that indicate their representation of these private companies. But the track, stations and signalling are wholly owned by Network Rail, a statutory company that has no shareholders and is under the de facto control of the government. The train operations themselves are not subject to the forces of natural competition but are parcelled out by the government into geographical monopoly franchises to private companies chosen by the government and who, with the government’s blessing, are allowed to operate the franchise for a set number of years before they must retender. This cauldron of public and private activity blended together led to the UK’s railways being judged the worst in Europe from the point of view of cost and efficiency in early 2012. Yet it is “privatisation” and “competition”, those fancy public-facing corporate logos on the timetables and uniforms, that are lumbered with the blame, rather than the government string-pulling. The energy industry is just as bad, if not worse. The electricity infrastructure is owned by National Grid, with six dominant, government-licensed suppliers sending their product through the same wires in what is a ridiculously regulated and cost-heavy sector that is not only seeing rising prices for consumers and talk of fuel poverty but is also on the verge of collapse. Indeed the Soviet-style description of the regulatory framework by Energy UK, the industry’s trade association, only scratches the surface but it is a succinct summary:

The electricity and gas markets are regulated by the Gas and Electricity Markets Authority, operating through the Office of Gas and Electricity Markets (Ofgem). Ofgem’s role is to protect the interest of consumers by promoting competition where appropriate. Ofgem issues companies with licences to carry out activities in the electricity and gas sectors, sets the levels of return which the monopoly networks companies can make, and decides on changes to market rules.1

All of this is before we even go near the odious and destructive high street banking cartel.

Given all of this is, is it any surprise that people lay the blame for poor service, for high costs, for inefficiency, for waste, and for private companies lining their pockets at the door of free marketers’ obsession with choice and competition? Is it any surprise that, not realising that it is the underlying control and forcing of substantive choice to the benefit of its favoured friends in “private” industry, that there are calls for renationalisation of public communications networks and utilities? There is a strong case to be argued, not only from the point of view of its danger to the reputation of the free market but also from that of the level of service offered to consumers, that private companies operating government controlled services is often worse than explicit and outright nationalisation.

As libertarians who cherish the free market our devotion to choice is encapsulated by our commitment to voluntary behaviour and interaction and is only a subset of this wider concept. We do not mean a controlled and enforced, substantive choice in every industry, nor do we mean the illusion of choice created by the government that rips off the consumer and leaves the free market to bear the brunt of their ire. Leave the consumers alone entirely to express their preferences through voluntary action. Leave them alone to determine how much choice they want. Only then will we see industries that are genuinely able to meet the needs of consumers with ranges of products that are suitable to their ends at prices that they are able to afford.

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1http://www.energy-uk.org.uk/energy-industry/the-energy-market.html. Emphasis added.

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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