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«Besley for inviting me, Professor Philip Booth and the Institute of Economic Affairs for allowing me to also use this as an opportunity to introduce ...»

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Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme-and the people who built it-and in doing so devalue our currency to keep the pyramid afloat.

Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.

The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so.

Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.

Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth. With honest


money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.

With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling-and indeed unaware-investors in madcap deals through credit instruments that few even of the banks’ own boards seem to understand.

Question put and agreed to.

Ordered, That Mr. Douglas Carswell and Steve Baker present the Bill.

Mr. Douglas Carswell accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 19 November and to be printed (Bill 71).




If you borrow a friend’s painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers. British parliamentarians have an opportunity to change that today, and I hope they do.

Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank’s investments turn sour —and investments often turn sour at some point— the bank cannot pay back the deposits and goes bust. Unless it manages to convince politicians that it is too large to fail, in which case it will be bailed out by taxpayers.

366 NOTICIAS This skewed relationship between bank deposits and normal contract and property rights, combined with state interventions like the central planning of interest rates and various guarantees, is what causes boom and bust. Today I will be supporting my colleague Douglas Carswell, member of Parliament for Clacton, as he introduces a bill to phase out fractional reserve banking.

Our friends in the U.S. and Europe are watching closely, for the same crony capitalism afflicts the world.

Leading up to the recent financial crisis, banks borrowed (and continue to borrow) at absurdly low rates from central banks.

Their salesmen then flogged mortgages on commission to those with no hope of repaying the principal from their income. This junk was pooled and flogged again, this time anonymously, to hapless investors prepared to believe that housing prices could only rise, and that the risk of default did not correlate across their portfolios. This is just one of the errors of contemporary financial capitalism.

Our Regulation of Deposits and Lending bill would allow you, Britons, to choose how your money is used. You would have the choice either to deposit your money for safe-keeping, or to save it for a term to be invested further by the bank. If safekeeping is your choice, you can have your money back on demand.

Your property rights would be intact—you would remain the owner of your deposit. You would probably not earn interest; in fact you may have to pay for the privilege of direct access through branches and cash machines. If, however, you want a yield, you may choose to deposit your money for a term instead. The bank can then invest it further, potentially earning you an income.

Credit would continue to exist, backed by real savings. The saver would be fully aware of the benefits and risks when choosing between depositing money and saving it for a term.

Two years ago the world economy crashed, yet no progress has been made in trying to prevent new crises. Ending fractional reserve banking has been proposed at various times by various economists of the three great traditions —Keynesian, Monetarist and Austrian. One could ask why the call to end the anti-capitalist legal privilege of fractional reserve banking has not come louder and sooner?


Is it outrageous to suggest that bankers rather like the socialization of risk and easy access to others’ money, and that their success in this system requires the ears of the right politicians?

In contrast to the heroic entrepreneurs of Rand’s «Atlas Shrugged,»

the contemporary financier receives astonishing remuneration for reporting unrealized profits. Meanwhile, he shares in none of the losses inevitable under a system built on fatally flawed models of market behavior. Instead of lending only to people they trust, the current system means contemporary financiers are content to lend to anyone, provided they can pass off the risk to someone else.

Losses have been socialized by the power of the state. Bonuses have been paid at bailed-out banks and support staff think this is justice because they weren’t the ones making the deals. Executives who, in another age, would have lost everything as partners with open liability, have instead retired wealthy.

If there is today a class conflict within capitalism, it is not between workers and owner-entrepreneurs, but between taxpayers, bank executives and stockholders. Stockholders have long since given up control of their property and the small investor finds few returns. Meanwhile, finance capitalists gamble other people’s money on the basis of models and theories that turn out to be nonsense, all while telling us how much value they are creating and deserve to share. That rare breed, the long-term stockholder, has no recourse after losses or poor dividends, and the taxpayer is compelled to pick up the outstanding tab.

This sketch is incomplete and most of the players involved in this system do not intend to exploit others. But exploitation it is when one group is compelled to cover the losses arising from bad bets made by a second group with money belonging to a third. This system of relationships is not healthy. That ancient golden rule, «do as you would be done by,» has indeed been cast aside for «do unto others before they do unto you.» We ought to ask if this is how we want to live.

The enemies of freedom portray the financial crisis as a failure of capitalism. In reality markets do not grant legal privileges such as fractional reserve banking —politicians do. The legal privilege of fractional reserve banking destroys the sound 368 NOTICIAS capitalist mechanisms of property and contract law. Today we hope to end it.

Mr. Baker is a Conservative member of the British Parliament for Wycombe.

(Published in the Wall Street Journal of September 15, 2010)

–  –  –

Make provision to require banks to prospectively provide options and disclosure to certain depositors and customers in specified circumstances; and for connected purposes.

BE IT ENACTED by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the

authority of the same, as follows:

1. Prospective Deposits into Banks

(1) Bank customers seeking to deposit funds into a bank subsequent to the date of this Act shall be provided with the option to either (a) deposit said funds into a Custodial Deposit Account, or (b) entrust said funds with the bank for Lending Intermediary Services.

(2) Funds entrusted with the bank in Custodial Deposit Accounts

will be treated as follows:

(a) A bank holding funds in Custodial Deposit Accounts shall act as depositary and custodian of said funds which, being fungible, may be commingled.


(b) The Depositors as a group shall retain ownership of said commingled funds, each Depositor having a pro-rata interest in the funds based on the amount of his or her own Custodial Deposit.

(c) The bank shall guard and safekeep said funds and may not lend or otherwise dispose of said funds.

(d) The bank shall make said funds available for withdrawal upon demand to any Depositor any or all of his share of said funds.

(3) Funds entrusted with the bank for Lending Intermediary

Services will be treated as follows:

(a) The customer will be considered to the Lender.

(b) The bank shall be custodian of and shall safekeep the Lender’s funds until the funds, or a portion thereof, are lent out to a particular borrower, at which time the Lender relinquishes title to said lent funds.

(c) Interest earned from said loan shall be paid to Lender, as shall repayment of the principal.

(d) The bank’s fees for said Lending Intermediary Services may be taken from said interest payments as agreed by the bank and the Lender.

(e) Default on the loan is at the Lender’s risk. Bank Deposit Insurance [as provided by BoE?] shall not be available for said funds lent via a bank’s Lending Intermediary Services.

2. Pre-Act Deposit Accounts

(1) Deposit accounts existing prior to the date of this Act may be drawn down but no funds may be added thereto.

(2) Interest accruing to said pre-Act deposit accounts shall be treated according to paragraph 1(1) above. Accordingly, said accrued interest and must be either withdrawn, deposited into a Custodial Deposit Account, or lent via a bank’s Lending Intermediary Services. Said interest accrued shall be held in escrow on behalf of the customer until an election is made.


3. Short Title Commencement and extent (1) This Act may be cited as the Bank Customer Choice, Disclosure and Protection Bill.

(2) This Act shall come into force forthwith.

Printed and promoted on behalf of Douglas Carswell of 84 Station Road, Clacton-on-sea, Essex.

El profesor Miguel A. Alonso imparte una conferencia sobre la crisis económica y financiera en Estados Unidos invitado por la Universidad de Georgetown El pasado viernes 1 de octubre de 2010 el profesor Miguel A.

Alonso impartió la conferencia «The First Global Financial Crisis of the 21st Century: Origins and Proposals for International Reform.

An Austrian Approach», invitado por el Intercultural Center de la Universidad de Georgetown (Washington DC), dentro del programa «International Law, Politics and Economics: Perspectives from Spain and the United States». Posteriormente, participó en la mesa redonda The European Union and the International Economy, en la que también intervinieron los profesores Michael Bailey y Kathleen McNamara de la Universidad de Georgetown, y el profesor Javier Guillén del Departamento de Derecho Público I y Ciencia Política de la Universidad Rey Juan Carlos.

En el transcurso de su ponencia, el profesor Alonso esbozó la teoría austriaca del ciclo económico para posteriormente explicar las causas de la burbuja inmobiliaria en Estados Unidos, centrándose especialmente en los efectos perturbadores de los procesos de expansión monetaria y crediticia vividos por la economía norteamericana. Después de mostrar con gráficos la distorsión experimentada por el proceso productivo de aquél país, y los desequilibrios observados entre sus niveles de ahorro e inversión (reflejados en un creciente déficit por cuenta corriente), el profesor Alonso planteó una serie de reformas orientadas a impedir los efectos desestabilizadores de los procesos de expansión monetaria y crediticia.

Concretamente afirmó que, bajo un sistema bancario de reserva fraccionaria, la protección de los bancos centrales como «prestamistas de última instancia» y la laxitud de las políticas monetarias, pueden estimular el desarrollo de procesos de expansión crediticia conducentes a la formación de burbujas de precios, 372 NOTICIAS ciclos económicos expansivo-recesivos, y crisis financieras y bancarias.

La supresión de este escenario de inestabilidad, pasaría por la adopción de reformas en el sistema monetario y bancario: concretamente, la aplicación de un coeficiente de caja del 100% sobre los depósitos bancarios a la vista, y el retorno a un sistema de patrón oro que sustituya al actual régimen de dinero fiduciario que permite la creación de dinero sin respaldo alguno.

Los profesores Alonso, Philipp Bagus y Juan Ramón Rallo, publicarán en los próximos meses una versión ampliada de esta conferencia en forma de artículo.

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