Jump to content
House Price Crash Forum
Sign in to follow this  
Traktion

Free Banking - A Good Article

Recommended Posts

http://mises.org/journals/rae/pdf/RAE2_1_15.pdf

Here is a good passage:

White might have avoided confusion if he had not, as in the case of Scottish

banking, apparently failed to consult Frank W. Fetter's Development of

British Monetary Orthodoxy, although the book is indeed listed in his bibliography.

Fetter notes that Smith, in his parliamentary testimony, clearly

enunciates the currency principle. Smith, he points out, was concerned about

the fluctuations of the commercial banks as well as of the Bank of England

and flatly declared his own currency school objective: "it is desirable in any

change in our existing system to approximate as nearly as possible to the

operation of a metallic currency; it is desirable also to divest the plan of all

mystery, and to make it so plain and simple that it may be easily understood

by all."20 Smith's proposed solution was the scheme derived from Ricardo, of

creating a national bank for purposes of issuing 100 percent reserve bank

notes.

The same course was taken, in his testimony, by Richard Cobden, the

great leader of the Manchester laissez-faire movement. Attacking the Bank

of England and any idea of discretionary control over the currency, whether

by the Bank or by private commercial banks, Cobden declared:

I hold all idea of regulating the currency to be an absurdity; the very terms

of regulating the currency and managing the currency I look upon to be an

absurdity; the currency should regulate itself; it must be regulated by the

trade and commerce of the world; I would neither allow the Bank of England

nor any private banks to have what is called the management of the currency.

. . . I would never contemplate any remedial measure, which left it to

the discretion of individuals to regulate the amount of currency by any principle

or standard whatever.21

In short, the fervent desire of Richard Cobden, along with other Manchesterians

and most other currency school writers, was to remove government

or bank manipulation of money altogether and to leave its workings solely

to the free-market forces of gold or silver. Whether or not Cobden's proposed

solution of a state-run bank was the proper one, no one can deny the fervor

of his laissez-faire views or his desire to apply them to the difficult and complex

case of money and banking.

For those who aren't up to speed with the concept of free banking (http://en.wikipedia.org/wiki/Free_banking), it is nothing to do with bank charges or such, but they way the banks operate within the economy. Instead, it allows banks to be created as easily as any other company, and essentially allows them to have their own currency, which can float against others (predominantly the issued currency of the country).

I didn't digest the full gravity of such a solution after first reading about it, but in pondering it, I have realised just how brilliant and simple the idea is. There is no need for a central bank, base rates or any other meddling with the issued currency. The state can just issue the currency (essentially fixed, although perhaps expanding/contracting with population) and then leave it alone. No fractional reserve banking is permitted (or rather, the point is, it can be avoided), so the money in circulation remains stable.

The clever bit is how allowing the "free" banks to do as they wish; they can print as much as they like, lend as much as they like, but the market sets the value on the currency. If a bank decides to lend 10 times the amount of Sterling, the markets may (perhaps logically or may not for other reasons) decide it is worth 10 times less than Sterling. As items would continue to be (although not required to be) valued in Sterling, it does not have any inflationary/deflationary affect on the Sterling money supply.

The simplicity of this model makes a huge amount of sense. The banks operate within their own bubbles and cannot pollute the Sterling money supply in any meaningful way - the market dictates what the bank currency is worth in relation to it. There would be no need to manipulate Sterling through interest rates or printing, which would keep prices steady, limiting any cyclic affects caused by credit expansion/contraction.

How could it be implemented in the real world? ATMs could either give custom bank notes out or, more usefully, exchange to Sterling on the fly (based on the exchange rate at that point in time). Equally, using debit cards could exchange on the fly. It would work in a near identical way to when spending money abroad, except there may be no (or small) charge.

Sterling banks (or even Sterling accounts within a free bank) would still exist, but they would be full reserve and would bear no interest, unless you asked the bank to broker an interest bearing loan with your money (which you would then have no access to, until repaid).

How could we transfer from where we are now to such a system? One idea would be to make each current UK bank a free bank, then float the banks' currency against one another, with the reserve ratio (and perhaps other factors?) as a starting point against Sterling. Then withdraw all current notes from circulation, giving them the "average" (or some other arbitrary) value in exchange for the new Sterling notes. After a period of time, the exchange rates would stabilise and people could choose where and how to store their money. New banks may also appear, offering various products.

I am not sure how the rest of the world would react to such changes and I would imagine Sterling may fluctuate for a period, but after a relatively short period, things would surely stabilise. The BoE could take measures, such as QE or some such, to target the current Sterling exchange rate as best as possible. Some people would lose out, some would gain, but it would give us a good platform to move forward. After the adjustment period, the currency would then be fixed and would remain the same forever (other than said preferable, defined, fluctuations with population or some such).

What are people's thoughts on the above? I think it actually represents a way to move from a broken and unfair system, to one which is fair and self balances. I would welcome the debate.

Share this post


Link to post
Share on other sites

You can't fractionally reserve in a fair and open way.

Why?

No one will pay you back.

Some good ideas though, mybe they will come in useful when the current system complete eviserates itself.

Edited by Injin

Share this post


Link to post
Share on other sites
http://mises.org/journals/rae/pdf/RAE2_1_15.pdf

No fractional reserve banking is permitted (or rather, the point is, it can be avoided), so the money in circulation remains stable.

Another one! But I sense you can clear this point up for me.

No reserve, lend it all out. Full reserve, put it all in the safe. What point am I missing here?

Share this post


Link to post
Share on other sites
You can't fractionally reserve in a fair and open way.

Why?

No one will pay you back.

Some good ideas though, mybe they will come in useful when the current system complete eviserates itself.

I think that's pretty much the point: if they fractional reserve, the markets may just see it for what it is - inflating the money supply, until it is repaid. Potentially, the more money they create, the more it will devalue their currency against Sterling. It would impose a sense of unavoidable honesty on the system, which we surely be very appealing.

I wish this sort of information was less buried away on the web somewhere and more common knowledge. There are clearly other good, researched ideas out there, yet we obsess with trying to keep the current, rather terrible, system in place. Why aren't there more people calling for such reforms or even asking probing questions?

ummm

It's 2009 and your post contains far to many words for me to read ;) Especially with a few home brews under my belt.

*Selects youtube tab*

:lol: I did get a bit carried away on the typing front, but I think it is all rather interesting! It's a bit early for the home brews isn't it?! :)

Share this post


Link to post
Share on other sites
Another one! But I sense you can clear this point up for me.

No reserve, lend it all out. Full reserve, put it all in the safe. What point am I missing here?

Sorry, read the rest of your post. I think I'm getting it, but isn't life complicated enough without having to hedge

your chosen currency?

Share this post


Link to post
Share on other sites
I think that's pretty much the point: if they fractional reserve, the markets may just see it for what it is - inflating the money supply, until it is repaid. Potentially, the more money they create, the more it will devalue their currency against Sterling. It would impose a sense of unavoidable honesty on the system, which we surely be very appealing.

This was the old system - but when it collapsed the top bankers paid the state to force the rest of us to use paper not gold/silver and so keep their vast wealth rather than going bankrupt.

I wish this sort of information was less buried away on the web somewhere and more common knowledge. There are clearly other good, researched ideas out there, yet we obsess with trying to keep the current, rather terrible, system in place. Why aren't there more people calling for such reforms or even asking probing questions?

Because people who see it for what it is and are horrified are unfortunately rare. Most folks who work it out immediately join in and get busy shafting everyone else.

In a prisoners dilemma short term sense it's the right action to take, too.

Share this post


Link to post
Share on other sites
:lol: I did get a bit carried away on the typing front, but I think it is all rather interesting! It's a bit early for the home brews isn't it?! :)

I've bookmarked the thread to read when I can be arsed (aka Sober).

It's 10:34pm here in my part of Australia :P My problem is that my current batch of homebrew is exploding but is drinkable. It's a race between me and my suicidal beer.

P.S. Drinkable =/= best batch I've brewed.

P.P.S. I have 6 batches in various stages of aging. Missus asked me how much I was going to make and when I realised I had 120 litres of beer I thought I should slow down :lol:

Share this post


Link to post
Share on other sites
Sorry, read the rest of your post. I think I'm getting it, but isn't life complicated enough without having to hedge

your chosen currency?

I think the choice is either small constant effort or a total catastrophy every decade or two.

Would you rather eat what you want all the time and drop dead at 35, or moderate what you eat and have another several decades of life?

Share this post


Link to post
Share on other sites
Another one! But I sense you can clear this point up for me.

No reserve, lend it all out. Full reserve, put it all in the safe. What point am I missing here?

The money can only be in one place at a time, but you can chose to ask the bank to loan your money out to another. Much like if I were to lend you a tenner, I wouldn't have the tenner while you had it, but it doesn't stop me lending it to you still. The bank would act as a broker for finding borrowers of your money, should you give them permission to do so.

Practically speaking, you would probably have an account which is just like a safe and you could chose to give the bank a certain amount to risk* on investments, which would return you both interest.

*There will always be some risk of default, which could reduce the amount returned. Banks could publish default/return rates or some such to allow freedom of choice.

Sorry, read the rest of your post. I think I'm getting it, but isn't life complicated enough without having to hedge

your chosen currency?

You don't have to - you could just get an inflation free Sterling account.

There may be benefits from switching to a free bank's currency though, such as higher interest or some such, depending on how profitably they operate. People may have several accounts and transfer money as they see fit, while others may play it safe. People know how exchange rates and interest work already, so they have the tools to make decisions.

The point is one of creating balance - if Sterling is stable, there shouldn't be big booms and busts, which creates a stable foundation for business and personal financial security.

Share this post


Link to post
Share on other sites
I've bookmarked the thread to read when I can be arsed (aka Sober).

It's 10:34pm here in my part of Australia :P My problem is that my current batch of homebrew is exploding but is drinkable. It's a race between me and my suicidal beer.

P.S. Drinkable =/= best batch I've brewed.

P.P.S. I have 6 batches in various stages of aging. Missus asked me how much I was going to make and when I realised I had 120 litres of beer I thought I should slow down :lol:

:lol: It sounds like a pretty good race to be in!

Share this post


Link to post
Share on other sites
You don't have to - you could just get an inflation free Sterling account.

Seen, but I meant if one actually wanted to (whisper it) take a loan.

As I understand it, this could not be done in Sterling

therefore you would have to hedge against your loan currency appreciating against whatever currency you have contracted

for your wages / business agreements etc.

Share this post


Link to post
Share on other sites
Seen, but I meant if one actually wanted to (whisper it) take a loan.

As I understand it, this could not be done in Sterling

therefore you would have to hedge against your loan currency appreciating against whatever currency you have contracted

for your wages / business agreements etc.

You can have a loan of Sterling, just like I can lend you a tenner from my pocket. The difference is (compared to FRB), there must be someone with a tenner already, in order for them to lend it to you. i.e. To please the semantically precise Alan B'Stard's of this forum - it isn't extending credit, but a real loan.

A free bank could also arrange a genuine loan too (rather than extending credit), or they could risk inflating their currency by creating the money from the ether and giving it to you instead. It is only their currency value they are messing with, so the risk remains with them. If they claim not to be the reason for the cause of inflation, let them demonstrate it! ;)

Share this post


Link to post
Share on other sites
You can have a loan of Sterling, just like I can lend you a tenner from my pocket. The difference is (compared to FRB), there must be someone with a tenner already, in order for them to lend it to you. i.e. To please the semantically precise Alan B'Stard's of this forum - it isn't extending credit, but a real loan.

A free bank could also arrange a genuine loan too (rather than extending credit), or they could risk inflating their currency by creating the money from the ether and giving it to you instead. It is only their currency value they are messing with, so the risk remains with them. If they claim not to be the reason for the cause of inflation, let them demonstrate it! ;)

It's not only that - people who had borrowed from them would be the main onces asking for proof. :)

If the bank is just pretending, they can't provide any and so the bank has to take the real loss. (No different to now in fact, except the banks power to make up even more funny money to cover that loss would be curtailed.)

Edited by Injin

Share this post


Link to post
Share on other sites
This was the old system - but when it collapsed the top bankers paid the state to force the rest of us to use paper not gold/silver and so keep their vast wealth rather than going bankrupt.

Yeah, I read about that. At least the beauty of a fully floating currency, the currency may become practically worthless if they keep on printing, but it would/should be pretty obvious to the markets what they were doing. Forcing any free bank to publish how much of their credit is in circulation at any time would be handy for this.

Because people who see it for what it is and are horrified are unfortunately rare. Most folks who work it out immediately join in and get busy shafting everyone else.

In a prisoners dilemma short term sense it's the right action to take, too.

Agreed - at least there are a few people out there making noises about this stuff, even if the mainstream media is still ignorant of it.

Share this post


Link to post
Share on other sites
It's not only that - people who had borrowed from them would be the main onces asking for proof. :)

If the bank is just pretending, they can't provide any and so the bank has to take the real loss. (No different to now in fact, except the banks power to make up even more funny money to cover that loss would be curtailed.)

:lol: Good point - brilliant! The banks would hate this idea... it's far too transparent for their ambiguous tastes! ;)

Share this post


Link to post
Share on other sites

BTW, I thought of another benefit of free banking. If the bank does decide to back their notes with gold, silver or something else of value, it would keep the State honest too. If they print too much Sterling, it will inflate against the sound banks' money. The whole thing would be relatively transparent and would balance brilliantly!

Share this post


Link to post
Share on other sites
BTW, I thought of another benefit of free banking. If the bank does decide to back their notes with gold, silver or something else of value, it would keep the State honest too. If they print too much Sterling, it will inflate against the sound banks' money. The whole thing would be relatively transparent and would balance brilliantly!

And theres the biggest stumbling block.

Share this post


Link to post
Share on other sites
I think that's pretty much the point: if they fractional reserve, the markets may just see it for what it is - inflating the money supply, until it is repaid. Potentially, the more money they create, the more it will devalue their currency against Sterling. It would impose a sense of unavoidable honesty on the system, which we surely be very appealing.

I wish this sort of information was less buried away on the web somewhere and more common knowledge. There are clearly other good, researched ideas out there, yet we obsess with trying to keep the current, rather terrible, system in place. Why aren't there more people calling for such reforms or even asking probing questions?

:lol: I did get a bit carried away on the typing front, but I think it is all rather interesting! It's a bit early for the home brews isn't it?! :)

Coz every minute of every hour 'they' unleash barrages of mind numbing brainwashing on the masses - thru their soaps and everything else!

You should read the defence/threats to leave by the city bankers as they are threatened with regulation!

Feck-off then you parasites! It's about time Pensions of the working masses etc are not accumulated into their greedy little mits.

It will collapse the way Elites/shareholders etc sponge off society and rip us off our pensions thru excessive charges/bonuses whether they make a profit or not.

People have got to stop being greedy (coz that's how the City rip you off)

They lure you in with £££ signs of gain and charge you whether they make a profit for you - or not!

Share this post


Link to post
Share on other sites

I'm surprised there aren't more opinions on this. Does it not appeal to some? I would be interested in hearing about down sides too.

Share this post


Link to post
Share on other sites
I'm surprised there aren't more opinions on this. Does it not appeal to some? I would be interested in hearing about down sides too.

I think the only downsides are in the implemenation - too many Vi's for the existing system and too much cash to be made scamming.

Share this post


Link to post
Share on other sites
To please the semantically precise Alan B'Stard's of this forum - it isn't extending credit, but a real loan.

Bravo! If only more people were willing to please the Alan B'Stards, the world would be practically perfect in every way. :P

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   295 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.