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Lockdown did more harm than good

On October 5th the Coulsdon and Purley Debating Society debated the motion “Lockdown does/did more harm than good”.

Mike Swadling proposed the debate, and below is his speech delivered to the society.  As always with this friendly group the debate was good natured, very well opposed and drew out some great views from the audience.

‘Lockdown does/did more harm than good’ – Proposing the motion

Lockdown, all of the lockdowns, were a challenging time for all of us, I’m sure.  As we thankfully move out of them, we need to be careful not to look back with rose-tinted glasses, for the price of lockdown is a cost we now are all forced to bear. 

“We had a shared sacrifice through lockdown, we don’t like to think that was in vain, but we must avoid what economist call the ‘sunk cost fallacy’.”

What surprised you most about your lockdown?

What did you do / stop doing that surprised you?  I would like to tell you about the great skill I learnt, or hobby I engaged in, but for me and this may sound a little odd, it was that I used aftershave more.  Now to avoid confusion this was not eau de toilette, perfume, or eau de Cologne.  This was cheap aftershave. 

Going into an office since I was a teenager I would shave ever day, or at worst every other day.  In lockdown, suddenly shaving a was much less common event and I needed some cheap aftershave to somewhat painfully help my face recover after a weekly shave.

I don’t doubt you have better surprise experiences from lockdown, but whatever they are, we should avoid confusing the revelation from adversity with a positive experience.  We didn’t see our friends and families for a long time. Many lost their jobs, and their businesses in lockdown, many lost hope. 

We had a shared sacrifice through lockdown, we don’t like to think that was in vain, but we must avoid what economist call the ‘sunk cost fallacy’.  This being our tendency to follow through on an endeavor if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits.

And Lockdowns costs, way outstripped Lockdowns benefits.

I want to for a moment separate lockdown from the pandemic and endemic problem of Covid.  Many people lost their lives to this terrible virus.  But the virus is quite separate from the actions we take to manage or deal with it.

We have seen around the globe a mixture of measures to handle Covid.  Some countries have in effect locked Covid out of their land, this has worked for Australia and until recently New Zealand, some have staid in almost permanent lockdowns, some taken a very limited response like Sweden, and some like the UK, US and Switzerland with more federal systems have adopted different approaches across their countries. 

All of these counties took different approaches, to fight the same virus.  I will argue we should have taken a very different approach to fight lockdowns, and that Lockdown did more harm than good.

The idea of a Lockdown was such an anathema.  Government ministers telling you how long you were allowed out of your home, and police forces flying drones to check who is visiting beauty spots. The burden must lie with on those in favor of lockdowns to prove they had an invaluable and undeniable contribution to make in fighting covid. 

If the last 18 months have taught us anything it’s that lockdowns didn’t stop the virus, didn’t control the virus, but did cause untold damage to our society.

For lockdowns to be justified they must in my opinion pass the following 3 tests:

  1. That comparted to the society being free, a lockdown stops or slows the spread of the virus in the community and saves lives.
  2. That the impact of the lockdown is sufficiently mild on the economy, and general functioning of society, that the ongoing costs as still outweighed by the original benefit.
  3. That in the free society the benefits of lockdown is so significant that it justifies a transfer of our freedom to government, and that the government proves it has the moral authority to exercise control over out lives.

I will demonstrate lockdowns have failed all 3.

Did “comparted to the society being free, a lockdown stop or slow the spread of the virus in the community and save lives”?

The original plan for dealing with a virus was messaging to increase hygiene, some voluntary social distancing, and protecting the most vulnerable until heard immunity had built up to protect them naturally.  Indeed you will remember that we originally ‘locked-down’ for just 3 weeks to ‘bend the curve’, to protect the NHS.  This would flatten the peak number needing medical treatment for Covid, and ensure hospitals didn’t run out of capacity.  It was never expected that the total number who would need hospitalization, or who would die would significantly change as a result of lockdown.

We have now had 18 month of those ‘3 weeks’ and we can compare those countries who followed their original plans more closely with those who undertook severe lockdowns.  The comparison suggests frankly as a result of lockdowns, not much changed.

Now I am going to talk about deaths.  Death has so far proved to be 100% unavoidable.  People will die, and will die at a higher rate when a new virus is doing the rounds.  An individuals death is tragic, but for policy purposes, we need to look at which policy saw the least deaths, and ideally the least years of a fulfilled life lost.

“What does all this data tell us, frankly not a lot.  Which does show, that whatever the ingredient was that lead to a higher or lower death rates from Covid, it certainly wasn’t lockdown”

The Oxford Covid-19 Government Response Tracker, collects systematic information on policy measures that governments have taken to tackle COVID-19. The different policy responses are tracked since January 2020, cover more than 180 countries and are coded into 23 indicators, such as school closures, travel restrictions, and vaccination policy.  They rank countries on how strict their lockdown policy was from 0 to 100, with 100 being the strictest.

The UK sits at 80 out of 100, France at 88, Spain 82 and Italy 69.  Germany comes in at just 64 and all the Scandinavian countries are in the 60s, with Sweden the lowest at 65.  How does this compare to the Covid death rate?

At over 2000 per million, the UK and Italy had the most death, with France and Spain not far behind.  Germany and Sweden had similar numbers of deaths at about 1300 and 1450 per million respectively, and limited lockdown Norway and Finland we’re bottom with both less than 200 deaths per million.

Incidentally Bosnia at the high rate of 90 in severity of lockdown and Hungry at a lenient 66, were the two countries in with the highest death rates from Covid in Europe.  Iceland with the least lockdown, ranked at just 50 out of 100, and had the least deaths per million, with just 33 deaths in total.

What does all this data tell us, frankly not a lot.  Which does show, that whatever the ingredient was that lead to a higher or lower death rates from Covid, it certainly wasn’t lockdown.

If you don’t believe the data from Europe or have some reason to dismiss it.  Let’s look at the US, a society, where different legal jurisdictions are more comparable.

It’s been widely reported the New York and California have had serve lockdowns, and generally high compliance rates among the population, yet they come in 5th and 33rd among the 50 states for death rates.

Texas at 20th and Florida ranked 9th by death rate, have had some of the least restrictive and shortest lockdowns.  Arkansas 10th, Iowa 25th, Nebraska 42nd, North Dakota 23rd, South Dakota 12th, Utah 45th, and Wyoming 35th, by rates of deaths, are the only states that did not issue stay at home orders in early 2020.

The very scattered nature of death rates shows once again that whatever the ingredient was that lead to higher or lower death rates from Covid, it certainly wasn’t lockdown.

In the first lockdown rates were falling before the lockdown was brought in, in the autumn rates continued to rise as lockdown came in and death rates peaked in the middle of the winter lockdown.  As we have opened up society we’ve not seen any increase in death rates as pubs, stadiums, theater’s opened and schools returned.

There is simply no evidence that ‘comparted to our society being free, lockdowns stopped or slowed the spread of the virus in the community or saved lives’.

Now to address the second test. 

Was the impact of the lockdown sufficiently mild on the economy, and general functioning of society, that the ongoing costs are still outweighed by the original benefit?

Now I believe I have demonstrated there was no benefit from the original lockdown, but even if you believe there was, does it outweigh lockdowns undeniable costs? 

I have said this before to this grand society, but it bears repeating.  The Great Frost of 1709 was the coldest European winter during the past 500 years.  It caused widespread crop failure and economic devastation.  2020 was the worst economic contraction since 1709.  Let’s just put that into some perspective.

In the intervening years we have faced, Jacobite revolution, a global 7 Year war with Louis XV’s France, fought in and lost the Americas, seen off Napoleon, fought two World Wars against Germany, seen massive economic changes with agricultural and industrial revolutions, introduced and repealed The Corn Laws, seen global economic depression in the 1930’s, formed a Union with and given independence to Ireland.  Gained and lost the world’s largest ever Empire,  Yet none of these created as big a fall in GDP as we faced last year. 

To remind you, Lockdown caused more damage than the Luftwaffe.

“Put simply the richer a country is the longer people live.  We have in one year for no good reason, destroyed more wealth in the UK, than any other year for the past 300.  How can that not have serious ramifications?”

The UK has an average life expectancy of 81, Uganda 63.  Canada is 82, Chad 54.  France 82, Fiji 67.  Germans with their love for beer and bratwurst, outlive Gambians by 19 years. 

Having spent some time working in Belgium, a country of endless rain.  I know it’s almost not possible to eat a meal there without a large helping of potatoes, yet even they live 20 more years on average than the people of tropical Burkina Faso.  Singaporeans, live on average 11 more years than neighboring Malaysians.

What separates these countries?  One word, wealth.

Put simply the richer a country is the longer people live.  We have in one year for no good reason, destroyed more wealth in the UK, than any other year for the past 300.  How can that not have serious ramifications?

“during the year to July 31st, Barnardo’s saw a 36% increase in the number of children referred for foster care. We know the NHS saw a 28% rise in children being referred to mental health services in late 2020”

But it’s not just an economic cost, it’s a societal one. 

  • We know for instance that during the year to July 31st, Barnardo’s saw a 36% increase in the number of children referred for foster care.
  • We know the NHS saw a 28% rise in children being referred to mental health services in late 2020.
  • We know the number of children in need of urgent or emergency care, rose by 18%, compared with 2019.
  • We know in the decade preceding the pandemic, the mean IQ score for children aged between 3 months and 3 years of age hovered around 100, but for children born during the pandemic that number tumbled to 78.
  • We are taught to socialize puppies but for a year we didn’t socialize baby children, who were at basically no risk from Covid.
  • We know as of June, there were 10,000 fewer patients in England starting treatment for breast cancer, than in the year before.  Either we believe breast cancer has disappeared or this will have long term consequences to their health.
  • We know rates of depression in early 2021 were more than double those observed before lockdown.
  • We know studies of school pupils show a consistent impact of the first lockdown with pupils making around 2 months less progress than similar pupils in previous years.

We saw people die alone in care homes, and hospitals.  We have given out two years of frankly guessed GCSE and A Level results.  We have supply chain problems globally and we have printed money like it’s confetti and inflation is once again rearing its ugly head. 

All of this was for lockdowns, that we can see when compared to the countries that didn’t lockdown,  made not a blind bit of difference to the spread of the virus.  Do the ‘ongoing costs, outweigh any original benefit’.  Absolutely not. The third and final test I passionately believe is the most important. 

In the free society are the benefits of lockdown so significant that they justify a transfer of our freedom to government, and does the government prove it has the moral authority to exercise control over out lives?’

If I may again repeat my words from a previous debate.  The income tax was first introduced in the Napoleonic Wars as a temporary measure and is still with us today.  Blanket restrictions were applied to pub opening times during World War One, and left largely unchanged until 1988 and rationing stayed in place for 9 years after the end of the second world war.

“Nothing is so permanent as a temporary government program” to quote Milton Friedman.

Since 1215 with Magna Carta, through the 1689 Bill of Rights, to universal suffrage, freedoms have been hard won.  Those in power always want more, and by necessity will sacrifice your liberty to take it.  Any didn’t they just do that.

Lockdown broke articles 3, 5, 13, 18, 19, 20, 23 and 27, of the Universal Declaration of Human Rights. 

This is not a partisan point, as our supposed opposition parties were just as enthusiastic about granting politicians, civil servants, medical chiefs and the police ever more power over our lives.

Did the governing class justify this power grab?  Let’s look at a few cases.

  • Prof Neil Ferguson who’s alarmist and thoroughly disproven predictions sparked the first locked had to resign when it was reported that a woman he was said to be in a relationship with visited his home in lockdown.
  • At the time, then Health Secretary Matt Hancock, yes that Matt Hancock said it was that it was “just not possible” for Prof Ferguson to continue advising the government.
  • Matt Hancock of course was having a secret affair with his closest aide whilst couples, if living in separate households were not allowed to meet under rules his department was responsible for.  In his hypocritical case, ‘Hands. Face. Space’, were both health instructions and almost unbelievably a seductive technique!
  • The Welsh Tory leader resigned after he was seen drinking in the Senedd during a pub alcohol ban in Wales.
  • Scotland’s chief medical officer resigned after making two trips to her second home during their lockdown.
  • And of course Dominic Cummings drove 264 miles, and popped to Barnard Castle, whilst the rest of us were in lockdown.

Rules for thee and not for me, has been the mantra of those in power.

“Of course not everyone was unmasked, the staff, the people serving them, those not privileged to move in these lofty circus, needed to retain their muzzles when serving the great and good”

We saw earlier this year staged photos of world leaders in masks during the G7 Summit in Cornwall, next to photos of them all unmasked enjoying normal conversations.  Of course not everyone was unmasked, the staff, the people serving them, those not privileged to move in these lofty circus, needed to retain their muzzles when serving the great and good.

We saw the same at Wimbledon in the Royal Box, where only staff need to were a face covering, and again recently at the Met Gala in New York. 

Rules for thee and not for me, shows the moral bankruptcy of those who govern us, and show how ‘the government has proved it does not have the moral authority to exercise control over our lives’.

“The vaccines have protected many and saved a lot of lives, but in a free society people must be free to choose if they want them.  They must be free from the coercion of vaccine passports”

Freedoms are returning, lockdowns have in large part lifted.  But we must be ever vigilant.  The vaccines have protected many and saved a lot of lives, but in a free society people must be free to choose if they want them.  They must be free from the coercion of vaccine passports. 

We must free from the zero covid strategy being implemented in much of Australia which is seeing in, Melbourne of all cities Police use rubber bullets on people protesting lockdowns and coerced vaccination.

Lockdowns didn’t work, they did more hard than good, their harm is sadly enduring.  As frustrating as it is to know we wasted a good year in lockdown, we must acknowledge that due to their immense harm lockdowns must not be allowed to happen again.

Summary

I set 3 tests for Lockdown                

  1. That comparted to the society being free, a lockdown stops or slows the spread of the virus in the community and saves lives.
  2. That the impact of the lockdown is sufficiently mild on the economy, and general functioning of society, that the ongoing costs as still outweighed by the original benefit.
  3. That in the free society the benefits of lockdown is so significant that it justifies a transfer of our freedom to government, and that the government proves it has the moral authority to exercise control over out lives.

When we compare countries, who took different measures, lockdowns in no way demonstrate they worked stem the spread of Covid.

We know the impact of lockdown on the economy, on society, on children’s education, and on all our health in the long term.  In no case will it be good.

We have lost freedoms, that are proving slow to return.  The government and those more broadly in power have not demonstrated they are fit to govern, and take our freedoms.

Lockdown did more harm than good, and I urge you to support the motion.

Image from https://pixabay.com/illustrations/soil-health-mask-protection-corona-5935148/

To find out more about the Coulsdon and Purley Debating Society visit their Facebook page at https://www.facebook.com/CoulsdonPurleyDebatingSociety/ or email them at [email protected].

Independents For Liberty – Conference 2021

Independents for Liberty held their 2021 Annual Conference, ‘Restoring Liberty, Rebuilding A Free Country’, on Saturday, 25th September.

They are an association of pro-liberty individuals and influencers aiming to restore liberty and rebuild a free country.

Their mission as individual associates of Independents for Liberty is to make the case for freedom, promote political activism that supports your liberty and grow sustainable economies that enhances long-term freedom.

Michael Swadling of Croydon Constitutionalists shares tried and tested campaign strategies every independent libertarian candidate should be using for their local election campaigns.

Mike’s contribution:

  • On Council run events: “…why should the taxpayer be forced to subsidise my weekend?”
  • “All councils have to publish a report of everything they spend that’s over £500 …what’s really useful is identifying the budgets that have more controversial items …the payments councillors can award themselves…”
  • “We had a petition to make sure no one is paid more than the Prime Minister in the Borough. …to say no one in the Town Hall is doing a more important job than the Prime Minister. …you can start to call out some of those.”
  • “‘As poor as a Council Executive’ is not a common phrase people will hear.”

Christopher Wilkinson opens the first annual Independents for Liberty conference by outlining how the association will help rebuild a free country:

Harry Fone, Grassroots Campaign Manager for the Tax Payers’ Alliance, tells what we can expect from the Tax and NI increases, Government and Council waste, and highlights important points for independent libertarian candidates to campaign on:

Gareth Seward, speaking at the 2021 Independents for Liberty conference, explains the coming consequences of government economic policy. An essential primer for understanding current events.

You can see more on the Independents for Liberty Facebook page https://www.facebook.com/IndependentsForLiberty or their website https://independentlibertarians.uk/

Podcast Episode 59 – Domestic Passports? DEMOC, Rayner’s Rant & The Withdrawal from Afghanistan

We are joined by Peter Sonnex, former soldier and Brexit Party Parliamentary candidate, as we discuss the threat of domestic Covid Passports, the upcoming DEMOC Referendum and what Angela Raynor really thinks of you. We then chat with Peter about the shambolic withdrawal from Afghanistan and the future security implications.

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No Passports Required – Wednesday 13th October

‘I loathe the idea on principle. I never want to be commanded, by any emanation of the British state, to produce evidence of my identity.’ Fine  words we fully support once spoken by Boris Johnson.  The last 18 months of lost freedoms, the ever growing size of government, the threat of national ID cards and coerced medication through vaccine passports, risk the freedoms that once were a birth right of every British citizen. 

Come and meet-up with likeminded freedom lovers, at our No Passports Required drinks downstairs at The Milan Bar, Croydon on Wednesday 13th October, from 7pm.  We aim to make these a regular monthly event with our second drinks scheduled for the 17 November.  We will hold these in association with Dick Delingpole’s #ThirdWednesday Libertarian drinks club.  The eagle eyed among you will spot the first one is on the second Wednesday, but broadly we hope to host on the 3rd Wednesday of each month.

Come and meet us downstairs at The Milan Bar, 14–32 High Street, Croydon, CR0 1YA on Wednesday 13th October, from 7pm.

Free Banking Theory and History of the Monetary Sphere

Monetary Piece by Josh L. Ascough

Read in PDF: https://croydonconstitutionalists.uk/wp-content/uploads/2021/09/Free-Banking-Theory-And-The-History-of-the-Monetary-Sphere.pdf

Throughout the history of economic development, banking, and the monetary sphere as a whole, has been the subject of widespread unease to people and a seductive opportunity for Governments. Indeed, there is likely no other institution that has seen such a wide array of Government controls in some form or another; whether that be the formation of central banks, regulations, interventions or monopolisations; all for the purposes, we are told, of maintaining stability and ensuring any economic crises is averted or lessened.

This however is not the case. In fact governments’ seizing control over any aspect of money and banking, has seldom been for the purposes of stability or fiscal reasoning.

The purpose of this piece is to demonstrate the theory of what has been coined, Free Banking. Free Banking looks at the theoretical, historical and empirical examples of a money and banking system, free from government control; with private banks setting their own reserve rates, and issuing their own competitive notes.

The piece will go over several key subjects, in order to provide a greater, in depth analysis of the Free Banking theory; with corresponding historical and empirical evidence.

The topics of discussion are:

The Free Banking Theory

Unstable Restrictions and Bad Regulations

History and Instability of The Bank of England

Bygone Gold Standard – The Possible Future of Free Banking

– The Free Banking Theory –

The first and naturally the most important question to answer at this time is, how does free banking operate?

Banks are allowed to issue any liabilities they wish; subject only to the constraint that they persuade their customers to accept them of their own free will. The competition between the banks forces them to make their notes convertible. The banks are compelled to make their notes convertible by persuading a noteholder that it will retain its value; this trust in the stability in the notes value, is achieved by making a legally binding guarantee of the future value of the note. A bank that makes its notes convertible holds a competitive advantage over rival banks that do not have convertibility. Because entry into the competitive market is free (freedom of entry), the banks are unable to form a lasting cartel of inconvertibility; if such an act was tried, it would merely encourage new competitors to enter the market, who would gain an advantage by offering convertible notes, and the cartel banks would lack legal means of privilege and protection to keep the competitor out. Member banks of the cartel would be incentivised to undermine the competition by offering tacit convertibility to noteholders in order to gain an advantage.

In order for a bank to increase the demand of its notes, it would have to expand its attractiveness and trust among customers; advertising more, branching out, increasing its reputation etc. but it could not do so simply by putting more notes out into circulation, when the demand to hold these notes is not there.

This freedom to issue notes competitively, is not without constraint, which is attained via what can been referred to as being similar to a chain gang, and is regulated by market forces.

Kevin Dowd gives details into the restraints banks face and as to why unlimited, undesired expansions of issued notes would not work in the banks favour; stating that:

“Given the fact that banks will choose to commit themselves to convertibility, then it is the need to maintain convertibility which forces banks to limit their note issue. This is so because the circulation of convertible notes is limited by the public demand to hold them. […] Any notes issued beyond the demand to hold them […] would simply be returned for redemption, since the notes would not remain in circulation for long enough to justify the expense of putting them out and taking them back again.” (Dowd 1989, pp. 8-9)

Banks not just in a free banking system, but in all systems have to guard themselves from two kinds of financial risks: an insolvency risk, and an illiquidity risk. Insolvency is the risk of a bank’s net worth becoming negative, and this kind of risk is one which banks share with all private businesses. Illiquidity is the risk that a bank may default on its legal obligation to redeem its notes or deposits. To protect and attempt to prevent the former, a bank will look to diversify its portfolio, so that fluctuations in asset value are likely to cancel each other out, or be of minimal harm. However, if the bank’s net value is found to be negative, its creditors would run on the bank and shut it down, since said bank is shown to be badly managed with loans not performing, and a risk to its creditor’s capital. When it comes to the latter (illiquidity), the banks could, in principle, operate as “warehouses” in which there is no risk of illiquidity due to operating on a 100% reserve rate. The problem with this though, is the banks would be unable to lend and could only make profits from charging deposit fees. Additionally historical evidence indicates depositors prefer fractional reserve banking due to receiving interest on their deposits; rather than the fees 100% reserve “warehouses” would have to charge its depositors, in order to cover expenses.

Before continuing, an important distinction of the different degrees of money needs to be made:

MOE = Medium of Exchange: Refers to the debt instrument which is transferred in the exchange process (notes). MOA = Medium of Account: Refers to the commodity in terms of units which are quoted as prices (gold) (so many units of good x for one unit of good y). UA = Unit of Account: Refers to those units (MOA). The distinction is important because different considerations apply to MOE and MOA. MOE tends to require the use of an instrument that cannot be used for some other purpose at the same time. A MOA however is free of this limitation an can be used by any number of people simultaneously.

How is the value and quantity of bank-issued money determined under free competition; more specifically, if the banks are subject to no ceiling on currency issue, nor a floor on their reserve ratios, what market forces are in place to compel the banks to limit their issues and hold positive reserves? Assuming gold to be the basic money that acts as the MOA and the MOR (Medium of Redemption), then the purchasing power of money (or MOE) is the purchasing power of gold (PPG); the demand and supply of money determines the PPG; or, the rate of issue relative to the velocity of money or demand to hold determines the purchasing power, which tends to be reflected in prices: MV=PY (money velocity = price of output). The monetary stock demand for gold is the sum of the banks’ demand for reserves, and the demand for bank reserves derives from each bank solving a reserve-holding optimisation problem. In the event of a money shock to supply or demand, the stock quantities supplied and demanded for gold, are represented as:

These are brought back into long-run equilibrium by international flows of gold. This is what the classical Economist David Hume classed as the ‘specie-flow mechanism’.

To obtain a greater understanding of long-run equilibrium, we can observe it in diagram format:

The vertical axis represents the banks supply of reserves, with the horizontal representing the banks demand for reserves. The rate of money velocity determines the rate at which the banks hold a demand for reserves; as well as the market rate of interest: for example; if no one spends anything and people are signalling a demand to hold liabilities (notes and deposits) then the bank wouldn’t need reserves and could issue more loans, and transfer larger quantities of credit; the reverse effect takes place if MV is high. If people’s demand for bank liabilities is low and their time preference is for goods sooner, then the banks notes will be returned to them sooner for redemption in gold; meaning the banks will need to hold a higher reserve ratio.

In long-run equilibrium, with PPG being the same worldwide, then the individual country’s share of the world stock of gold; represented as (G i / G w), corresponds to that country’s share of demand for gold-holding on the world scale:

What happens if an individual bank over-issues? Before delving into this important question, we need to take a look at a bank’s balance sheet. This very basic bank balance sheet displays variables for the bank, which seeks to maximise and optimise the total size of each side of the sheet. If we simplify things a bit more and assume K is fixed, then the balance sheet imposes the following constraint:              

(R + L = N + D + K).

The banks have an incentive to hold an adequate reserve ratio; not only to enhance profits but to reduce its liquidity cost Q, which is the estimated value of costs incurred in the event the bank runs out of reserves, or reaches negative reserves. The cost of negative reserves may be in the form of legal penalties, the clearinghouse issuing a penalty, or the bank seeking to liquidate its assets in order to cover short notice calls for redemption. The bank’s choice of its level for R and its circulation of  N and D, depend on how its choice influences Q. Having a greater volume of  N and D circulating raises the number of claims against the bank that can be brought for redemption, and therefore clearings large enough to bring about negative reserves.

There is an equilibrium size of a bank’s currency circulation that satisfies equi-marginal conditions. This is measured by the value of the public’s desire to hold currency issued by the bank i. This value is measured as N i* p, where ‘p’ indicates the public who hold it as an asset, ‘i’ is the issuing bank, and * is the desired value. If the bank’s circulation exceeds the desired level

what would happen? If we assume the excess currency is introduced via loans, the borrower spends the currency; leading to the recipient to have balances of bank i in excess of their desired holdings. The recipient; for which notes issued are greater than notes desired, can respond to this excess in several ways.

(1) Direct Redemption

(2) Deposit Into Another Bank

(3) Spending the Excess.

As a consequence of reserve losses from over-issue, the bank i finds its reserves below its desired ratio, formulated as:

The net benefits of holding reserves now exceed the net revenue from making loans via continued over-issue.

So what of the risks of bank runs? What happens if the banks expansionary endeavours lead to a run? The first thing to note is isolated bank runs are tolerable, because what bad banks lose, better ones gain. Secondly, we need to make a distinction.

There are two kinds of bank runs:

(1) – Deposit Runs: Deposit runs occur when the public runs to convert deposits into notes.

(2) – Note Runs: Note runs occur when note holders run on the bank in order to redeem in specie (gold/silver).

Before we continue we need to define our terms. A deposit is a liability of a bank, which is redeemed with one of the banks liabilities, called a note. A note, is a bank liability that has to be redeemed with an asset, known as specie (commonly gold/silver). A deposit run therefore, is when the public run upon the bank to convert one liability with another; deposits for notes. Note runs then, are runs where the public demands to convert bank liabilities into assets which is an outside medium; or, to put it another way, a medium of redemption that is not a product of the bank such as gold and silver. In the situation of a deposit run, there is a sudden but short demand to convert deposits into notes. This sudden shortage of liquid assets will be reflected in the liquidity market, and will (temporarily) drive up the interest rate. So long as the deposit run does not turn into a note run, the bank could temporarily create extra liquidity simply by issuing more notes. In short, if a deposit run were to occur, the banks would have the incentive to create the necessary liquidity in order to correct it. Note runs on the other hand occur when the public run on the banks to redeem bank notes for specie. Under a fractional reserve system, the banks would be unable to redeem all their notes at once without prior notice; nor is it within the banks abilities to create more specie at will, unlike notes to deal with deposit runs. A single bank may be able to purchase additional specie to cover the redemption, but if the note run is on the banking system as a whole, then all banks will be short of reserves. The banks can avoid the possibility of defaulting on redemptions, by relaxing the convertibility contracts; instead of being bound to redemption on demand without notice, they would use an option clause, giving the banks the option to defer redemption for a pre-specified period of time, so long as they pay a pre-specified rate of interest on the notes which had deferred redemption. It would not be worth suspension if the overnight interest rate is less than the compensation rate the bank would have to pay from deferring. The question then arises: why would the public be willing to have redemption deferred? The noteholders would be compensated if a bank suspended redemption, and the presence of an option clause would reassure risk-averse holders that they would lose little or nothing if they were not first in line during a note run.

“If the public withdraws currency from deposit accounts, then reserves will be drained from the banks, which forces them to contract their balance sheets; unless the central bank expands the monetary base. A centralised, monopoly of currency is then seen to create incentive and epistemic problems seldom present with a decentralised, competitive system”

An advantage of letting banks issue their own notes, without state-enforced reserve requirements, would be that the banks would be better suited to accommodate changes in the public’s desired currency-deposit ratio, simply by changing the mix of note and deposit liabilities. To give a simple example, let us assume a case, where banknotes alone are used as currency and the desired reserve ratios for notes-deposits are the same; no expansion or contraction would be required of overall money or credit. The stock of base money, ‘B’ is equal to the stock of reserves, ‘R’, while the money stock ‘M’, is equal to that of bank deposits, ‘D’ plus outstanding banknotes, ‘N’.

B = R and M = D + N

Equilibrium here requires that actual bank reserves are equal to the desired bank reserves:

R = r(D + N); where ‘r’ = R/M is the desired bank reserve ratio. By adding ‘B = R’ – ‘R = r(D + N) to subtract D and N gives us: M/B = 1/r. Which indicates the independence of the money multiplier, M/B, from the publics’ desired currency-deposit ratio. Under a central banking system however, all currency takes the form of base money. This means instead of the above mentioned (B = R and M = D + N) we have:

‘B = R + C’ and ‘M = D + C’

Where ‘C’ is the publics’ holding of base money. As commercial bank liabilities don’t include banknotes, the condition for reserve equilibrium is:

R = r(D)

Having c = C/D denotes the publics’ desired currency-deposit ratio, and substituting to subtract D and C gives:

M/B = (1 + c)/(r + c)

The expression in brackets is the standard money multiplier. Unlike a free banking multiplier, the standard under central banking implies that, holding ‘B’ constant, a change in the publics’ desired currency-deposit ratio alters the equilibrium quantity of money. If the public withdraws currency from deposit accounts, then reserves will be drained from the banks, which forces them to contract their balance sheets; unless the central bank expands the monetary base. A centralised, monopoly of currency is then seen to create incentive and epistemic problems seldom present with a decentralised, competitive system.

Under a free banking system, directors of competitive banks have no specific difficulty meeting demands for currency. If a depositor wishes to convert some or all of their balance, the bank need only to supply the depositor with additional notes. If many or all of the banks depositors come forward for the same reason, the bank simply issues further additional notes. The form of liabilities demanded is not a matter of concern for the bank in question, what matter is their total value. When depositors convert deposits into notes or vice versa, there is simply a reduction of one balance sheet item in exchange for an increase in another; this would be similar to changing a £5 note for five £1 coins. As a final point this relates back to what was discussed about deposit runs; a deposit run is a simple action for a bank to deal with, so long as there are no restrictions of note issue in place.

Another way of looking at the calculation problems under central banking can be shown further in two diagrams. We’ll assume two different scenarios; one where central banks operate on a fractional reserve basis, and the other where central banks operate under 100% reserves:

If the central bank holds a monopoly of currency; thereby all the gold stock goes to the central bank and commercial banks treat its IOU’s as their reserves, and it doesn’t back its notes 100% then that spells serious trouble, as when the central bank operates on a fraction it can shift Rs out. As the central bank’s reserve ratio effectively determines the reserve ratios of other banks, this would lead to PY seeing an increase. Where P is the price and Y is output.

In the second scenario where the central bank operates on a 100% reserve requirement, we can see the effects below:

Under 100% the central bank is forced to issue nominal quantities of notes equal to the quantity of gold in its vaults; the central bank is forced to hold on to its gold reserves. This may seem a better scenario, however, we need to remember that the central banks notes; because it has monopoly of currency, are treated as reserves to the commercial banks. The effects of this are shown in the diagram: If people withdraw more notes, then reserves decline; if they redeposit them, reserves go up; meaning we would obtain instability in the currency ratio, making it still inferior to free banking and the natural, market mechanisms which regulate the banks.

Opponents of Free Banking; or fractional reserve banking in general, base their criticism on two key areas:

The first being the argument that fractional reserve banking is fraud. This argument is focussed on looking at the credit banks issue; viewing it as “created credit”, and that two people cannot hold a claim of ownership to the same coin.

There are two important factors which make the bankers ability to operate on a fractional reserve basis possible. The first is the fungibility of money, which allows depositors to be repaid in coin, bullion or whatever the commodity may be, other than that which was originally handed to the banker. Second is the law of large numbers; which as George Selgin notes, is that which

“ensures a continuing (though perhaps volatile) supply of loanable funds even though single accounts may be withdrawn without advance notice.” (Selgin 1988, p. 20)

The operation of banks classifying deposits of gold in any shape other than an ornament, and acting as savings-investment intermediaries goes back to the days of the goldsmiths. Historically in England, as early as the time of King Charles II (1660-85), the role of the bailee and the debtor of the depositor, developed side by side.This lead to money warehouse receipts becoming IOU notes, or debt instruments. This has been named as the bagging rule. Under this rule coins placed in a sealed bag or container saw the goldsmith treated as a bailee; storing them safely, with a fee charged for storage. On the other hand loose coins brought to the goldsmiths, were acknowledged as loans to the banker; the goldsmith was seen as a debtor, with the depositor holding the right to call upon their loan for repayment. By 1672 the practise of free loans (demand deposits) to the bankers had become widespread.

Since its early development, a fractional reserve bank free from regulation, performs an intermediary role. The bank recognises credit granted to it by depositors/holders of the banks notes, and makes the funds available for loans and investments. As confidence in the demand liabilities of the bank rises, the entire demand for MOE can be performed successfully by them, so all commodity money is withdrawn from circulation and left at the disposal of the bank. Stock equilibrium is reached at the point when the demand for the money commodity for non-monetary purposes (such as bank reserves; industrial/consumption purposes) is sufficient to absorb the surplus created by the use of bank notes. The size of the bank money stock, is determined by the demand to hold bank money at the new equilibrium rate. From this stage onwards, additional expansion of bank money will only appear viable as the aggregate demand for money balances expands. Under a free banking system, historically the banks have continued to demand commodity money for their reserves. This is to maintain a margin of error with regards to the redemption of an individual bank’s notes. Furthermore, banks will regularly send rival bank notes back to the issuer for redemption through the clearinghouse. By returning its rivals notes for redemption, the bank only gives up assets which earn no interest and in return, receive either its own notes (which protects it from unexpected redemption) or it’ll receive commodity money in the form of gold, which is more liquid and a risk-free asset.

On the subject of “created credit” it is agreeable that lending not backed by voluntary savings contributes to instability and financial crises. However, the distinction between transfer credit and created credit helps to illuminate the difference between warranted and unwarranted expansions of the inside money stock. Transfer credit is granted by banks in relation to people’s desire to abstain from current consumption by holding. Created credit on the other hand is generated regardless of any voluntary abstinence of spending. If the nominal supply of inside money is not reduced in tune with a fall in demand for holding money, then the credit is created, rather than transferred. Created credit can only exist in the short run; credit created leads to an adjustment of prices which (eventually) restores monetary equilibrium, causing all outstanding credit to adjust back to the aggregate demand. Since nobody holds inside money in excess of the balance he desires to hold, all credit under monetary equilibrium is transfer credit; meaning any referral to created credit, is the temporary expansion of the money supply due to excess bank lending or investment. Unlike operations  of credit transfer, created credit leads to disproportional activities in the production process. This artificial diversion of resources due to the “forced savings” of created credit is halted once prices adjust to eliminate the excess money supply. This expansion and credit creation, is the classic example of the boom-bust cycle; unwarranted expansion, followed by a contraction back to equilibrium. To give a further examination of the difference, credit creation arises when credit granted gives rise to bank liabilities being in excess of the demand for inside money balances. Transfer credit on the other hand, consists of credit granted which gives rise to liabilities in tune and consistent with the demand to hold inside money. It is on this topic that sadly many Austrian Economists fall flat on their theories; including unfortunately Rothbard and Mises. They viewed any credit not backed by 100% as unwarranted, but this would not be a form of credit; any “bank” holding 100% reserves on all its liabilities is not an institution that grants credit, it is merely a warehouse.

Another common argument against Fractional Reserve Banking; besides the “fraud” argument previously discussed with reference to the bagging rule, goes as the following: A warehouse storage on money is legitimate, a time deposit account is legitimate; a demand deposit account is neither a warehouse nor a time deposit. Therefore a demand deposit is illegitimate. This argument however, is based on what is known as fallacy of denying the antecedent, or fallacy of the inverse. It would be on similar lines to saying: a car has wheels and is transport, a bus has wheels and is transport; a train has no wheels, therefore a train is not transport. The difference is not that of kind, but is instead a difference in degree.

In a debate with Economist George Selgin, Robert Murphy makes the claim that it is Fractional Reserve Banking that makes bank runs possible, and that, under a 100% reserve system, bank runs can’t happen. This claim is extremely flawed however, because it looks at the matter backwards; bank runs are seldom unprovoked. This claim holds that banks fail because they are run upon; rather than the banks being run upon because they’re failing. Additionally, this concept insinuates that under a 100% Reserve system, it is not possible for banks to be run upon due to bad loan’s being invested in, poor management by banks of their policyholder’s money, or because of any other criteria which may lead to distrust of the banks. This almost seems like a use of Neo-Classical ‘General Equilibrium Theory’; that under such a banking policy, we must presume the banks to have perfect information and know the costs, desired outcomes, and time preferences of consumers; under such a theory we must presume already achieved states of equilibrium, and for bankers to be omniscient. Such presumptions and already known possibilities, removes the possibility of disequilibrium in the monetary sphere. This seems dishonest, due to the Austrians rejecting the general equilibrium theory of Neo-Classical Economics.

So if it is not fractional reserves which cause instability, cycles or bank panics*, what are the causes?

*A bank panic occurs when a run on the bank liabilities threatens the solvency of the banking system. They’re not only a cause for concern due to threatening the liquidity of the banks; leading to the public questioning the soundness of their medium of exchange, but additionally because they disrupt the information gathering functions of the financial sector. This type of panic raises the cost of credit, though an important distinction to be made is this increase in cost for credit is not accompanied by any increase in incentives to save or to expand credit. The resulting pressure on credit caused by the panic runs a real risk of causing a recession.

There are three schools of thought on banking instability:

(1) – The Bubble Explanation: Instability is caused by bank runs as random phenomena.

(2) – The Incomplete Information: Banking instability is due to bank runs, as rational responses by depositors who are imperfectly informed.

(3) – State Intervention: Suppressing the automatic stabilising mechanisms that evolve in the market; these suppressions can take the form of restrictions of note issue, restrictions of banks as intermediaries, state-mandated liability insurance, using the monetary system to raise revenue, and the lender of last resort.

The bubble explanation sees bank runs as speculative bubbles; underlying a mob psychology. The main characteristic of this, is prophecies are self-fulfilling – any factor that makes people anticipate a panic, will lead to a panic, however irrelevant the factor may be. This theory has the following explanation: (1) banks operate on fractional reserve banking and are unable to redeem all liabilities at once. (2) Banks are obliged to redeem on demand, and do so via a “first come, first serve” basis. (3) The public knows the banks cannot redeem all liabilities, and is concerned to avoid capital losses. As a result, depositors have an incentive to beat runs.

The incomplete information explanation states that bank panics are caused by the depositors’ lack of knowledge of the net worth of banks. This theory suggest that bank runs occur when depositors get noisy signals that suggest the banks are insolvent. The difference between this and the Bubble is that the indicators that cause the panic are relevant economically; they convey information – imperfect as it may be about the state of the banks. In the case of the bubble argument any variable can cause a bank run if it leads to depositors to anticipate a panic. The run of the Incomplete Information theory is “rational”, if relying on it ex-ante. This does not mean the speculation is correct; if it is correct that a bank is insolvent, then the bank run will have served a socially useful purpose by shutting down an insolvent bank. If the speculation is incorrect then it will lead to depositors shutting down a solvent bank.

“Free bankers do not deny that a bank may be run upon without state interference, but the theory differs from the other two by denying the banks fail because there are runs; free banking instead recognises the banks are run upon because they’re failing”

The regulatory explanation* explains that bank runs are caused by bad regulations of the banking system. The market would protect itself from bank runs if it were unrestricted, and allowed genuine market forces to operate and coordinate, but is prevented and stalled by outside, state-based interference. Free bankers do not deny that a bank may be run upon without state interference, but the theory differs from the other two by denying the banks fail because there are runs; free banking instead recognises the banks are run upon because they’re failing. There is imperfection in information, but free bankers state that these discoordination of signals; as well as most bank runs throughout history, are the cause of interference in the monetary system from the government, as well as the monopoly position and exemption from market restraints of central banks.

*The effects of regulations and central banking on stability and crises will be discussed in detail in the Bad Regulations and Central Banking sections.

On the subject of the history Free Banking holds, many countries throughout history operated on a free banking basis; Canada is the closest contrast to the American system of regulations and national banks prior to the Federal Reserve system; to keep close to Europe, Scotland was arguably the most successful system close to free banking.

The Scottish Free Banking era begins roughly around 1695 by an act of the Scottish Parliament; one year after the creation of the Bank of England. The Act gave the Bank of Scotland a legal monopoly over the issuing of notes and banking activities. While an act of legal monopoly may not seem like Free Banking, the Bank of Scotland thought its position safe; assuming Scotland could not accommodate more than one bank, and took no effort to renew its monopoly position when it expired in 1716.

Though the Bank of Scotland had an official sounding title, it was not treated nor recognised as a state institution. Larry White explains the details of this, stating that:

“The government neither did business with the bank nor regulated it. […] the act creating the bank prohibited its lending to the government, under heavy penalty.” (White 1995, p. 22)

White continues explaining the circumstances which lead to such arrangements:

“The crown of Scotland had been joined to that of England since 1603, and union of the parliaments was soon to in 1707. Shortly after the bank’s founding there would no longer be a Scottish government with which to become entangled. In London the Bank of Scotland was commonly suspected of disloyal Jacobite leanings throughout the early 18th century. The British Parliament therefore turned a deaf ear to the bank’s petitions against the chartering of its first rival, the pointedly named Royal Bank of Scotland, in 1727.” (White 1995, p. 23)

“The Royal Bank tended to dispatch agents to trade its notes for the notes of The Bank of Scotland, and would present large quantities of them for redemption; with hopes of embarrassing their rival. The Bank of Scotland retaliated in the same manner, but lost the game. It was forced to suspend payment in 1728, due to the continued conflict draining it of its reserves”

A rivalry between the two banks in Scotland began from day one of the Royal Bank opening for business. The Royal Bank tended to dispatch agents to trade its notes for the notes of The Bank of Scotland, and would present large quantities of them for redemption; with hopes of embarrassing their rival. The Bank of Scotland retaliated in the same manner, but lost the game. It was forced to suspend payment in 1728, due to the continued conflict draining it of its reserves. The bank made calls for its loans to be paid, a 10% call to its shareholders, and resorted to closing its doors for several weeks. This was not a single occurrence however, The Bank of Scotland had already faced suspensions; a run in 1704, which was sparked by rumours of revaluations of coin, forcing it to suspend for four months. While the bank was not insolvent, its assets were illiquid. It was at the time of this run that the bank set an important procedure, by announcing that all notes would be granted a 5% annual interest, which would be in effect during the period of a delay of payment to the bearer. This clause was called again for the eight month suspension in 1715, following a run during the civil unrest, and once more in 1728. During the suspension of 1728, a merger was proposed by the Royal Bank’s directors. However, the two sides were unable to reach an agreement in terms of how to value the Bank of Scotland’s stocks; providing historical evidence of the difficulty of securing a cartel of an industry. The competition between the two banks offered innovation in the banking industry. In 1728, the Royal Bank introduced the cash credit account, which was a form of overdraft. An individual applying for a cash credit account was required to provide evidence of sound character, and at least two co-signatories. Once the account was opened, the holder of the account could draw upon the whole amount or a fraction for personal or business transactions. There was interest charged on the account, but only in the event of an outstanding balance. The CCA lowered the cost of maintaining note circulation for the bank, by introducing more of the public to the use of notes. The account allowed an individual to borrow against his capital at lower costs; allowing him to take on productive endeavours that otherwise would have been unprofitable. The Bank of Scotland followed suit, by introducing their own CCA in 1729. The rivalry between the Royal Bank and Bank of Scotland began to come to an end in the 1740s. In order to counter the popularity of the Royal Bank among merchants in Glasgow, the Bank of Scotland granted a sizable cash advance to a partnership in Glasgow in 1749, for the purpose of forming the Glasgow Ship Bank. The partners promised to promote the circulation of the Bank’s notes. In an attempt to counter the promotion, the Royal Bank sponsored the founding of the Glasgow Arms Bank in 1750. In what was seen as a surprising move to the two banks in Edinburgh, the Ship Bank and Arms Bank began issuing their own notes; leading to the two Edinburgh banks to cease their feud. The Edinburgh banks chose to withdraw their credit from the banks in Glasgow, and stopped credit to any bank in Edinburgh or Glasgow which was circulating Glasgow notes. By 1756 the Glasgow banks proposed a geographical division of the Scottish market between the banks. However, to add more evidence to the difficulty of cartelisation, no agreement could be reached; allowing competition to be maintain in the industry. An important entrant into the banking sector was the British Linen Company. The corporation was chartered in 1746 to promote the linen trade. In 1747, the company’s directors began issuing interest bearing promissory notes, which would be used to pay its agents weavers, manufacturers and other customers. In 1750 it began shifting into the banking sector by issuing non-interest bearing notes payable to the bearer on demand. The Linen Company began to devote its time entirely to banking and withdrew from the linen industry; renaming itself to the British Linen Bank. The bank held a truly innovative role, by being the world’s first success with branch banking. By 1793 the bank had 12 branches in operation, leading to the British Linen Bank having the industries greatest note circulation in 1845. The entrepreneurial efforts of the British Linen Bank; from linen company to bank, showcases the innovative competition achievable under freedom of entry.

An important innovation in banking development, was that of bank-issued notes transferable by endorsement. Assignable notes gave way to fully negotiable banknotes assigned to no one in particular, but instead payable to the bearer on demand. A further development was the non-negotiable check, allowing the depositor to transfer balances to a specific party. Thus, at this time the modern form of inside money; redeemable bearer notes and checkable deposits are established. In England bearer notes were first recognised during the period of Charles II’s reign, it was around this time that warehouse banking was giving way to fractional reserve banking. Initially the courts reluctantly gave approval to the growing practice. Then after some controversy, fully negotiable notes were recognised by an act of Parliament.

While it may be argued no bank would accept a competing bank’s notes at par value, the reality is that banks hold more to gain from accepting foreign notes at par, as both a defensive mechanism to maintain their reserves, but also to attract more customers depositing and conducting business with them. Established banks that refused to take the notes of newly entering banks, or of established rivals soon had to change their policies, since the new banks would accept the established bank’s notes, and would drain their established rivals reserves; providing many an embarrassment for the banks who refused acceptance or par value, while the mentioned established banks were not offsetting their losses, due to not accepting at par. The rivalrous behaviour of banks accepting at par, causes inside money to become more attractive to use over commodity money. This is due to the fact that, since notes from one town are accepted at par value at a bank in another town, there is little reason and is seen as more convenient to carry notes, rather than lugging huge sacks of gold across towns and dealing with the large costs which would come from transporting gold. As George Selgin states:

“As par note acceptance developed during the 19th century in Scotland, Canada, and New England — places where note issue was least restricted — gold virtually disappeared from circulation. In England and in the rest of the United States where banking (and note issue in particular) were less free, considerable amounts of gold remained in circulation.” (Selgin 1988, p. 25)

The notes of Scottish banks, unlike that of Bank of England notes, could be issued into small denominations; though no notes smaller than £1 could be issued under the Act of 1765.

Contrary to the notion, Scottish banks were less at risk to counterfeiting, whereas counterfeiting of Bank of England notes was commonplace, especially in periods of suspension. The reason behind this is that the likelihood of counterfeiting going undetected coincided directly with the length of time a note circulated before being returned for redemption at the issuing bank. Scottish notes on average held a brief time of circulation, as rival banks would not hold the notes of competitors in their tills, but would return them through the clearinghouse for redemption. This was not the case for Bank of England notes, due to restrictions of note issue on banks in London, and the Bank of England’s notes acting as reserves for commercial banks. The six-partner rule as part of the Act of 1708, prevented England from experiencing strong join-stock banks similar to those based in Scotland.

The alarm in February of 1797 that an invasion from France was imminent, accelerated a draining outflow of gold which had already encouraged the Bank of England to restrict its discounts in 1795. This alarm led the Bank of England to suspend payments in specie on its notes. The suspension was approved by Parliament and was not lifted until 1821. While banks in Scotland were mostly exempt from ther drain, when managers received the news that London banks had suspended payment, the managers of the leading banks; the Bank of Scotland, Forbes, Hunter & Co, the Royal Bank and the British Linen Bank, met and came to the conclusion to follow the actions of the Bank of England and suspended payments. The reason for this, was that the Scottish banks feared, if they had made payment in specie available while the Bank of England maintained suspension, the English demand would have drained them of their reserves. It is theorized that the banks continued to quietly redeem their notes in Scotland for specie, handed to them by favoured customers.

The Free Banking era of Scotland came to an end with the passage of the Peel’s Bank Acts of 1844 and 1845. The Act further imposed the privileged monopoly position of the Bank of England, and suppressed freedom of note issue in the countryside, Ireland, and Scotland.

– Unstable Restrictions and Bad Regulations –

We have now shown in detail the history and theory of free banking, but what of an unfree system of money and banking? what are the effects of regulations on the banks?

While it may be argued that the biggest cause of instability are central banks, financial instability is not restricted to central banking. Bad regulations and restrictions can, and do, affect an economies stability.

While England gives a clear example of the instability of central banking, America (which until the Federal Reserve Act has been wrongly classed as free banking) provided clear examples of bad regulations.

While there were various “free banking” laws passed in the US between 1837 and 1861, the classification of these as “free banking” is facetious at best. State laws for “free banking” may have allowed for freer entry into banking, but they required banks to collateralise their notes by lodging them to state government bonds, which in turn tended to fall in value and not be very stable, and so bank portfolios would be stuffed with state bonds not worth their salt. This is in combination to the fact that many state governments restricted branch banking and outlawed notes that gave the issuing bank an option to delay redemption; or an options claws. In short the American “free banking” experience could be summarised as a free entry ticket into quick sand: you can enter for free, but it’s highly volatile with very little benefit.

“Interstate and Intrastate banking laws (Unit Banking) – restrict banks to operate only within the state or county they are chartered; limiting the banks’ economies-of-scale and their ability to branch out; the benefit of not restricting these would be the diversification of capital portfolios to limit the risk of failures, and withstand a crises”

The United State held two consistent regulations which had a huge effect on its financial instability; one being eluded to above, namely a restriction on branch banking.

Interstate and Intrastate banking laws (Unit Banking) – restrict banks to operate only within the state or county they are chartered; limiting the banks’ economies-of-scale and their ability to branch out; the benefit of not restricting these would be the diversification of capital portfolios to limit the risk of failures, and withstand a crises. American Glass-Steagall Act – The Glass-Steagall Act separated commercial banks from investment banks; prohibiting deposit-based institutions from engaging in investment securities, and investment-based institutions from issuing deposits. It was introduced with the belief that the combination of these institutions was a contributor to the banking collapse of the 1930s, but the restriction actually increases the risk of bank failure, because the banks are restricted in their ability to diversify their portfolios.

Another is that of a restriction on the issuing of bank notes. Restrictions on the note issue are potentially destabilising because they interfere with the mechanisms by which the free market can correct a deposit run; we remember, a deposit run is simply a run for bank notes, not a note run, in which the public is running to redeem their notes for the MOR. A monopoly lender of last resort can be destabilising, because it removes the automatic check on over-issue; the note-clearing system, which would have arisen spontaneously had the note issue not been monopolised and restricted.

Economist Kevin Dowd comments on the increased risk of deposit runs after the American civil war; stating that:

“After the Civil War the note issue was effectively cartelised under the National Banking System and banks of issue were subject to various limits on their note issues. Deposit runs were very frequent but the banks’ ability to deal with them was limited. These runs usually lead to suspensions.” (Dowd 1989, p. 33)

It’s not just regulations which can have negative effects on the monetary system. State interventions, combined with bad regulations, tend to have the effect of inducing instability and bad incentives for maintaining said instability.

State Sponsored Liability Insurance is a perfect example of this. While they protect banks against runs in the short run, in the long run they have the side effect of encouraging policies and bad incentives which are more likely to produce failure, due to the fact that big risk taking banks pay the same premiums as those that pursue safer policies.

The two primary arguments in favour of interventionism in the money and banking sphere are:

(1) Confidence.

(2) Information.

The Confidence Externalities Argument for State Intervention: This argument for state intervention in the monetary sphere takes the basic stance of: Government intervention is necessary to increase insufficient confidence levels that would be provided under a free market in banking. This argument can refer to either a single bank or the banking system as a whole. It runs against the fact the banks, as private establishments have every incentive to promote confidence. Each bank will recognise that, if it does not maintain confidence, it will face greater risk of a run; at beast, forcing it to borrow liquidity, or use its option clause to give it time to liquidate assets to gather the proper funds to meet demands to cash out; at worst, it will be driven out of business. Given this, there is no a priori argument for why a bank will take insufficient measures to promote confidence. Either way if this argument is true it proves too much. If it justifies the suppression of competition within the banking system, then it may justify suppression of competition among other industries which rely on competition; such as insurance, healthcare, broadband, commercial airlines etc.

The Information Externalities Argument for State Intervention: This argument for state intervention states that a competitive banking system would impose large information requirements. It argues that the uniformity of money is a public good, which reduces the information burden; with the conclusion that the government must suppress the varieties of money that would arise under competition. This argument, like the former asks too much, and could apply to any good or service. It can be equally argued against a variety of products or brands. It is simply the argument that too much choice makes life difficult, and should be suppressed by government decree, with the government choosing for its ‘subjects’.

There are many issues for when Governments intervene in the monetary sphere, the two primary issue however are:

(1) The establishment of a central bank to act as a lender of last resort (LLR),

(2) The establishment of state-sponsored deposit insurance.

The LLR role of the central bank – according to proponents – is to provide liquidity to banks who otherwise cannot obtain it. Since the LLR role is meaningless to a good bank; as they can almost always obtain loans to maintain liquidity, LLR protects bad banks from the consequences of their own high-risk investments, over-expansions and lack of confidence from its clients. This leads to central banks encouraging the very instability they claim to be set up to keep under control. It also affects the market in a less obvious manner. Since the LLR role of the monopoly bank tries to keep weaker, less stable banks open, the very existence of LLR reduces the incentives for good banks to build up their customer base, diversifying their portfolio, and generating higher confidence in anticipation of winning the bad banks market share. That competitive aspect of banking relies on weaker, less sound banks facing ruin, and this aspect cannot yield much pay-off if the over aggressive banks are to be bailed out under a LLR. The LLR leads to circumstances where even good banks may act more aggressively in their lending and take more, high-risk investments that weaken the confidence of its client base. As stated above, the irony of the lender of last resort role is it can produce the very instability its proponents claim would otherwise occur without a central bank. The sad reality is, the central banks LLR role could be falsely seen as the cure to financial instability; unfortunately, it often is. Deposit insurance has similar, negative incentive effects. DI leads to depositors being less scrutinising of the banks activities and its management; managers see this and no longer need to worry about maintaining confidence. A rational response from a bank would be to reduce its capital, since one of the main roles of maintaining capital of high strength; to maintain confidence of its depositors, no longer applies. Even if a good bank wished to maintain the high strength of its capital, it would be beaten by bad banks acting on bad incentives who cut their capital ratios to reduce their costs; the fight for shares of the market, would force ex-ante good banks to imitate the bad. State-mandated deposit insurance therefore turns strong capital positions and client confidence, into competitive liabilities and waste.

A final note to make, is on the topic of contagions. Proponents of State involvement look to the nation-wide panic in America during the 1930s. However, these panics were not occurring due to a lack of regulation; on the contrary, they occurred because of regulation and State involvement. The runs which occurred throughout the 30s were due to fears that FDR would devolve the dollar, alongside speculation; prompted by the Governor of Nevada, that the other States would issue bank holidays; if people in one State see another’s governor issuing a bank holiday in which redemption is void, they will begin to speculate and fear similar actions by their own States.

As Economist George Selgin notes:

“Contagion effects also appear to have played a more limited role than is usually supposed during the “Great Contraction” of 1930 to 1933. Prior to 1932, bank runs were confined mainly to banks that were either pre-run insolvent themselves or affiliates of other insolvent firms […] Serious regional contagions erupted in late 1932, but these were aggravated if not triggered by state governments’ policy of declaring bank “holidays” in response to mounting bank failures […] The truly nationwide panic that gripped the nation in the early months of 1933 appears to have been more a run on the dollar than a run on the banking system, triggered by rumors that Roosevelt intended to reduce the dollar’s gold content […].” (Selgin 2015, p. 25)

The combination of reserve requirements, anti-branching laws and restrictions on note issue fostered the panics of America’s National Banking era, as these prevented banks from issuing additional notes to meet growing demand to hold, or effectively mobilising reserves to meet demands; instead these regulations promoted interbank scrambling for base money. Looking at Canada as a contrast to the US; as Scotland was to England, gives us further indication that regulatory restrictions were fundamental in fostering panics, since Canada had a large absence of panics and lacked the restrictions found in the US.

– History and Instability of The Bank of England –

The most malevolent means for a Government to hold control over the monetary sphere, outside of regulations, is through that of a Central Bank. If the United States gives us examples of the instability of regulations and interventions, England gives us an old history of monopolisation and financial instability under central banking. Indeed, the two things which perpetuate State power the most, are financial crises and wars; a Central Bank helps the State in financing the latter and (to give benefit of the doubt; unintentionally) enacting the former.

History shows many examples of governments seeking to use the banking system to raise more revenue. An example of this is in Britain from the period of 1793-1797, in which the government needed funds in order to wage a war with France, so it pressed the Bank of England for loans. These ended up depleting the Bank of its reserves, and when rumours in 1797 of French invasion surfaced, it caused a run on the Bank that it did not have the resources to withstand. This lead the government to stepping in, in order to save the Bank from failure, by relieving it of its obligation to redeem its notes for gold. The early history of the Bank of England can be summed up as a series of purchases of privileges by the Bank from the Government. Originally, the Bank made a loan to the Government of £1,200,000 for William III’s war with France, in return for the right to issue notes to the same amount. This fixed amount was extended in 1697, when it was argued that the Bank should enjoy a monopoly of chartered Banking in England, and the privilege of limited liability for its shareholders.

This privilege is expanded on by Economist Kevin Dowd. Dowd comments on the privilege over monopoly of note issue; stating that:

“[An] example of destabilising restrictions on the monopoly note issue is provided in the 1844 Bank Charter Act in the UK. This act gave the Bank of England an effective monopoly of the note issue, but it also divided the Bank into an Issue Department (responsible for the note issue) and a Banking Department (responsible for the rest of the Bank’s business), and these two departments were to be entirely separate from each other. […] The effect was to leave the Bank wide open to deposit runs since the Banking Department had no access to additional notes (or specie, for that matter) if it were faced with a run on its deposits. This created the absurd possibility that the Bank of England might default on its obligations to redeem its liabilities despite the fact that the vaults of the Issue Department were full of gold. Three times subsequently – 1847, 1857 and 1866 – the Bank was faced with such runs […].” (Dowd 1989, pp. 32-33)

In order to obtain proper context of the Bank of England, we require going back ex-ante its establishment, as well as ex-post its monopoly roots reaching into the core of money and banking.

The origin of modern banking can be traced back to around the middle of the 17th century, when merchants took up depositing their MOE with goldsmiths. In order to expand their operations, the goldsmiths began offering interest on deposits; the receipts they issued out for deposits would begin to circulate as a good alternative to lugging around heavy bags of bullion; this is what would lead to the paper receipts becoming IOU’s, or debt-instruments. Banking development took a change towards more centralised and monopolised methods around 1694, by events of purely political nature. King Charles II had run himself into considerable debt via relying on loans from the London Bankers, and 1672 Charles II suspended payments, and the repayments of bankers advances. This caused the King’s credit to be thereby ruined for several decades. This lead to William III and his Government to follow the scheme of a financier, named Patterson for the founding of an institution known as the Governor and Company of the Bank of England; later to be known as it is today as simply the Bank of England. The early period of the Bank of England’s origin was summarised by a series of exchanges of favours between a needy government and a corporation more than happy to accommodate. The BoE was founded with a capital accumulation amounting to £1,200,000, which was immediately lent to the government; in return, the BoE was authorised to issue notes of the same amount. In 1697 the government renewed the BoE’s charter, along with extended privileges; allowing it to increase its capital stock, and thereby its note issue, in addition to providing it the monopoly possession of government balances, via the order that all sums due to the government (taxes), must be paid through the BoE. Furthermore, a clause in the Tunnage Act provided limited liability to the members; this favour was to be denied to all other banking associations for over a century, giving the monopoly bank not only a great degree of privilege, but a “head-start”. Further grounding in the BoE’s monopoly and privilege was established in 1709 when the Bank’s charter was renewed once more. In addition to allowing it to raise its capital in return for a loan to the government, the Act decreed that no firms of more than six partners may issue notes payable on demand less than six months; this decree excluded joint stock banks from issuing their own notes. There were further renewals of the BoE’s charter which reaffirmed its privileges, accompanied loans and increase in capital and note issue in 1713, 1742, 1751, 1764, 1781 and 1800. To put it briefly, the Treasury had benefitted from the BoE’s monopoly position no less than seven times. Soon after the French war broke out, Pitt requested advances from the BoE. However, the 1694 Act had prohibited advances to the government without direct authorisation from Parliament; though for many years small amounts had been advanced on Treasury Bills made payable at the Bank. In 1793 the BoE applied to the government to indemnify it against liability of loans made in the past, and give it legal authority to carry out transactions in the future. Pitt agreed to bring the Bill to Parliament, but conveniently left out a limiting clause, leading to the Bank becoming compelled to complying with government requirements of any amount. By the period of 1795, these borrowings had reached such an excess that it affected the foreign exchanges, and endangered the BoE’s reserves; leading to the Bank’s directors to plead with the government to keep its demands down. Finally, in 1844, an Act was passed which ensured the Bank of England held monopoly of the issuing of notes in the country.

Many proponents of central banking would point to the British journalist and essayist Walter Bagehot and his famous book Lombard Street as argument for the existence of the Bank of England; stating that Bagehot called the Bank’s primary responsibility to be a lender of last resort, in order to ensure financial stability.

The problem with such an argument is that Bagehot’s call for the Bank to operate as a LOLR, was not out of belief that a central bank is necessary, but because he saw it as the only viable option to ensure the Bank of England performed as little damage as possible; that if a nation finds itself stuck with a monopoly bank of currency, it is to act in this way but that nations should not aim to establish such a bank in the first place.

We can see proof of this, anti-central bank position by simply reading straight from the source:

“In consequence all our credit system depends on the Bank of England for its security. On the wisdom of the directors of that one Joint Stock Company, it depends whether England shall be solvent or insolvent. This may seem too strong, but it is not. All banks depend on the Bank of England, and all merchants depend on some banker.” (Bagehot 2009, pp. 19-20)

Bagehot continues by stating that:

“The result is that we have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty – who might be called ‘amateurs’, who have no particular interest above other people in keeping it undiminished – who acknowledge no obligation to keep it undiminished who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it who are named by and are agents for a proprietary which would have a greater income if it was diminished, who do not fear, and who need not fear, ruin even if it were all gone and wasted.” (Bagehot 2009, pp. 22-23)

“We are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. But the natural system – that which would have sprung up if Government had let banking alone – is that of many banks of equal or not altogether unequal size.” (Bagehot 2009, p. 33)

Here Bagehot makes the remark on not returning to a system of competing banks of issue; not due to the superiority of the Bank of England, but due to the belief that no one would listen to him if such a call was made, as well as how the Bank should behave as a second best to it not existing at all:

“On this account, I do not suggest that we should return to a natural or many-reserve system of banking. I should only incur useless ridicule if I did suggest it.” (Bagehot 2009, p. 34)

“I can only propose […]. There should be a clear understanding between the Bank and the public that, since the Bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.” (Bagehot 2009, p. 35)

Walter Bagehot makes his final remarks here on how impossible it seemed to do away with the Bank of England; equating it to being easier to imagine the abolition of the Monarchy:

“I have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. I have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. And yet I propose to retain that system […] I can only reply that I propose to retain this system because I am quite sure that it is of no manner of use proposing to alter it […] You might as well, or better, try to alter the English monarchy and substitute a republic, as to alter the present constitution of the English money market, founded on the Bank of England, and substitute for it a system in which each bank shall keep its own reserve.” (Bagehot 2009, p. 144)

If one were to look at the shaky ground the English Monarchy has found itself in recent years with questions about its future, it can only be hoped that the British public will soon begin to question the validity of the Bank of England.

History shows not only the financial crises and major restrictions of regulations mentioned previously, but also those of central banking.

Below we see a historical record of financial crises and major restriction from the period of 1793 – 1933; the record shows America and England with their free banking counterparts, Scotland and Canada. An x indicates a crises for that period, and a black square indicates major restrictions enacted.

Source: George Selgin 2015, pp. 196-197 [condensed]. In reference to Bordo “Financial Crises”, Schuler “World History”, Schwartz “Financial Stability”.

Here we can see that the systems of high regulations, restrictions and monopoly of currency far out-performed for the grand prize of most crises riddled system than their free banking counterparts; not a good achievement to say the least, but an achievement none the less.

Under a central monopoly bank of issue system, as opposed to a free banking system of competitive note issue, things are radically different, due to the monopoly bank’s notes acting as reserves for the commercial banks, with the commercial banks issuing central bank notes, and are prohibited from issuing their own. In order to pay out notes to customers, a bank must acquire the notes in the interbank market, or from the bank of issue. If no additional notes are made available, then reserves become deficient and the banks must perform a contraction of their liabilities to avoid a default. In this scenario the supply of loanable funds is constrained, and lending rates rise above equilibrium, which then leads to a scarcity of credit, despite individuals’ demand to hold having seen no change. If the monopoly bank provides the desired reserves then a credit shortage is prevented. However, there is no certainty that the central bank will cooperate. Even if said central bank were to do so, there is no certainty that the notes issued for emergency purposes will be retired once the public no longer demands them. Unless such a precaution is taken, the surplus notes could return to the deposit banks, leading to them serving as the basis for inflationary expansion of bank credit.

Negative effects of central banking continue into the realm of deflation. In economics there is a distinction between good deflation and bad deflation.

Good deflation occurs due to an increase of productivity and reduced cost of production; leading to supply shifting to the right, and prices falling. This kind of deflation has a tendency to be relative; meaning certain industries such as computers, cars, crops or (in a parallel universe for Britain) housing.

However most central bankers don’t (or can’t) make the distinction between good and bad deflation.

A shortage in the money supply below that demanded, will lead to deflation; with reduced sales leading to production cutbacks in certain sectors, followed by reduced demand for the products of other sectors and finally to general unemployment. This is the bad kind of deflation which is not caused by productivity; either in a particular sector or the economy as a whole. Unfortunately, central bankers persist in regarding all deflation as the bad kind.

To add further setback to the general understanding of deflation, many Austrian Economists* persist in insisting that there is no such thing as bad deflation, and that all deflation is good. This perspective very much comes across as merely contrarianism; simply looking at the central bank’s view of deflation and frantically insisting on the opposite as a fact, when in reality the fact is based on a difference of degree.

In addition to what can be classed as “Young Austrians” and “Rothbard Fans” rather than readers.

What is the method to the madness? Why and how does the government benefit from a central monopoly bank of currency? For an answer we need to look at Siegniorage.

Siegniorage is the concept that governments reap the profits from producing new money at an expense less than the value of the money produced. The government is then able to finance additional expenditure by spending the new money into circulation. If the new money is interchangeable with the old, then an expansion of the stock of money taxes money holders by reducing the value of already established money balances (i.e. inflation). Under a specie standard of gold or silver, siegniorage was the differing value of minted coins and the actual content of gold/silver in them. This minting process, algebraically was subject to the following accounting identity:

M = PQ + C + S.

Where ‘M’ is the nominal value assigned to a batch of coins (e.g 100 pounds) ‘P’ is the nominal price paid by the mint per ounce, ‘Q’ is the number of ounces of precious metals embodied in the coins, ‘C’ is the remaining average cost of operating the mint, ‘S’ is the nominal siegniorage.

Modern banking and monetary systems do not operate under a specie system though, so how does siegniorage operate under a fiat system? Since the bullion content is 0 and production costs are close to 0, we need to set Q as Q=0; to further simplify we’ll set C as C=0. This follows that M=S. Nominal siegniorage equals one pound for each pound produced. Therefore a government’s siegniorage per year is equal to the change in the money stock. This can be written as:

S = ^H

Where ^ (delta in Greek) indicates the change in H, which is the stock of base money. Real siegniorage is marked as:

s = ^H/P

Where the lower case represents deflated variables, and P is the price index.

The budget constraint for a government that issues fiat money is:

G = T + ^D + ^H

Where G is government spending and T is tax revenue. ^D is the change in interest-bearing debt held by the public and not government. ^H is the change in non-interest-bearing debt (base money) held by the public.

The financing benefits to government via siegniorage is obvious when it comes to the mere printing of money. Via the method of open market operations, the method is a bit more indirect. By purchasing ^H worth of bills in the open market, the central bank retires that much debt; with the interest going to the central bank, and makes it possible for the treasury to finance a host of new streams of spending, whose current value is equal to ^H. In order to conduct the new spending in the current period, the treasury sells new debt to the public, replacing the debt which the central bank bought. The central bank’s open market purchase expands H and contracts D. The treasury’s issue of new debt sees D rise back up, followed by a rise in G. The overall impact is an increase in G financed by ^H; just as if the central bank had simply printed new currency and given it to the government to spend.

Vera Smith sums up the potential of central banks for governments in a statement from her book The Rationale of Central Banking:

“[…] it must be admitted that it is almost certain that by far the most powerful reason leading to the maintenance of Government intervention in the banking sphere, at a time when it was on the decline in other industries, was that power over the issue of paper money, whether such power is direct or indirect, is an exceedingly welcome weapon in the armoury of State finance.” (Smith 1990, p. 9)

– Bygone Gold Standard – The Possible Future of Free Banking –

As the final section I wish to present to the reader the following hypothesis:

Many supporters of free banking have suggested we would require returning to a gold standard, or keep a small remnant of the central bank if we retain a irredeemable fiat system.

The argument mentioned above goes along these lines:

If we were to return to a free banking system of competitive banks issuing their own notes, we would have to return to a gold standard in order to have the currency anchored to something. Irredeemable IOU’s would provide too much risk for financial instability. If we cannot return to a gold standard, then in order to have something like a free banking system, we would have to keep some degree of central banking, but get rid of the discretionary power to manage the monetary standard.

I propose that thanks to the technological developments of the past 10 years, a return to the bygone gold standard is not necessary; nor is maintaining a remnant of a central bank of monopoly issue.

“the fiat system should be converted to a crypto format of pound sterling, with scarcity artificially built and coded into the outside money and MOR. The new crypto-based outside money and MOR, would be obtained alongside the banks issuing their own debt instrument”

The proposal goes as follows:

Maintaining the MOA and UA as pound sterling, the fiat system should be converted to a crypto format of pound sterling, with scarcity artificially built and coded into the outside money and MOR. The new crypto-based outside money and MOR, would be obtained alongside the banks issuing their own debt instrument; IOU’s on a fractional reserve, with no floor restriction on how small denominations may be, with redeemability of the crypto MOR being transferred to a customer’s private wallet should they call upon the bank to pay the bearer on demand; an option clause would remain in place with interest to be pay of 5% should the bank require time to redeem.

It may be argued that such a proposal is not needed, because we have Bitcoin.

While I am a fan of Bitcoin I don’t think it is up to the task, due to its high volatility, and because I don’t think Bitcoin maximalists actually know what they want it to be when they say “Bitcoin can be the new money”.

The typical counter from Bitcoin maximalists on the subject of volatility is “if you think Bitcoin is volatile you should see the fiat money. What about that? Why not criticise government money?”

My response would be simply I have criticised State centralised, monopolised, irredeemable money throughout this piece, and this argument is simply Whataboutism; a variant of the tu quoque fallacy. The response to criticism of volatility being “look what the other guy’s doing” is not an argument nor a solution.

On the point of Maximalists not knowing what they want, I refer to the case that, the demographic in question tend to not make a distinction and other times will blend terms together.

“We need a Bitcoin standard” Well this a loaded statement. What is meant by it? Are we looking at Bitcoin as a future medium of exchange, medium of account, unit of account, medium of redemption, or a blend? If we are looking at Bitcoin being a MOE, then it would simply act as a base money with the UA remaining as pounds, dollars etc. If we are looking at it being a MOA, then we are going to have some extortionately high costs. It’s not cheap or of no cost to change the account medium or the unit; excessively large amounts of time would be the price for accounting how much x quantity of a good is worth of y unit; it would not be a simple difference of “2+2=4” and changing it to “2×2=4”, it would be as if creating an entirely new number; the time and costs of figuring out what is less, what is more, and what it equals when correlated with other numbers.

This does not mean Bitcoin or any other cryptocurrency cannot or should not play a role in the proposal. It is entirely possible that an individual bank could issue Bitcoin as an alternative medium of redemption, should it find itself unable to redeem in crypto pounds.

To get back to the matter, what of the banks’ individual debt instruments? Crypto is entirely digital so how would banks issue IOU’s?

in the crypto sphere there is what is known as paper wallets. These are essentially slips of paper with QR codes which keeps track of the currency a person holds, which can be redeemed into their private wallets via scanning the QR code.

Bank IOU’s would function in a similar manner to that of paper wallets, and the debt instruments issued by various banks during the Scottish free banking area.

Above we see some basic designs to provide an idea for how these bank IOU, “paper wallets” could be presented.

The banks would issue debt instruments with their logos printed on to the slips to better advertise their services in the hopes of raising demand for their notes; just as banks in a free banking system would do. These notes would be issued to customers after making a deposit of crypto pound sterling (from this point we’ll refer to it as CPS); unless the account created is a time deposit, the deposit will be treated as a loan to the bank, with the bearer having the right to call upon the bank for redemption and for the bank to make payment upon its debts. This method of redemption would function on the same grounds as it does with paper wallets in the crypto sphere. When the debt instrument is brought for redemption, the QR code will be scanned and the CPS electronically transferred to a customer’s private wallet.

When it comes to the velocity of the bank notes, the transferring of notes would work the same way it does today and during the Scottish free banking era. Notes used for financial exchanges, after the settlement is made, can be deposited at the recipient’s bank, spent further, or redeemed at the bank of issue for CPS.

If an individual bank were to over expand beyond the demand to hold its notes, the same equation mentioned previously would occur:

Leading to the same outcome when over issued notes are brought for redemption by the public, or at the clearinghouse:

What about coins? There are many instances where small change is needed for transactions, would small denominations of coins remain or would the smallest be notes of £1?

To answer simply, yes denominations smaller than £1 would remain; in either the form of coin or, if an individual bank’s customers held a demand for smaller denominations but held a preference for notes, the bank could issue notes of 50 pence, 20 pence, 10 pence etc.

We’ll assume a similar case to that of our current one with the exception of £1 notes existing.

Denominations smaller than £1 would be conducted as minted coins, tow which either the banks would mint their own with the ability of redemption in small denominations of CPS (or small “p” for crypto pence; Cp), or independent minters would provide said coins for circulation; similar to what occurred with the Birmingham Button Mints.

These coins would not necessarily have to be minted from silver but could be simple plastic tokens as, the material they’re made from would not be of great importance.

These coins, like the notes displayed above, would hold a QR code raised on the coins similar to that of braille. When used in a machine for payment such as parking, the raised QR code would be scanned to assess what denominations are being entered; alongside ensuring the braille-like QR code is unique to the denomination in question and is not a counterfeit.

Depositing the small coins and redemption would work the same way as the notes. The code would be scanned and the MOR would be transferred to the customer’s private wallet; in the case of depositing into the bank, it would be managed in the same manner with the balance being issued and credited to the customer’s account.

Who would “mine” the CPS?

Banks themselves would not mine for the CPS, this venture would be handled by private coders being commissioned to produce the CPS; receiving a percentage as payment based on hash rate and proof of work, as is similar to how miners are compensated in the crypto sphere. It is unlikely banks would find an attraction to mining themselves, due to the difficulty of obtaining results the closer a cryptocurrency reaches its scarce limit, as well as the costs of maintaining their own resources for mining and coding, due to requiring high powered technology for efficient hash rates. It is therefore more plausible that the banks and minters would find it more efficient to shop around; find high quality miners who have good track records and contract them for their work and offer a percentage of the coins mined as compensation.

– Final Thoughts –

While this proposal is a short one and more work is certainly needed to expand further details, it should be clear that cryptocurrency technology offers a viable method of abolition central banking without reinstituting a bygone gold standard. We have the technology, we know it’s possible to encrypt scarcity into cryptocurrencies, and it does not require the high costs and delays of changing the MOA or UA. Under such a system it is more likely and probable of getting government out of money and banking; learning from the more free systems of the past, and developing a more private, competitive and free monetary system.

– Sources –

  • Dowd, K 1989, The State and the Monetary System, St. Martin’s Press, New York (pp. 8-9)
  • White, L 1999, The Theory of Monetary Institutions, Blackwell Publishers, Oxford (pp. 54 – 61)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (pp. 19-21)
  • Selgin, G 1988, The Theory of Free Banking, Rowman & Littlefield, New Jersey (p. 20)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 99)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 61)
  • Selgin, G 1988, The Theory of Free Banking, Rowman & Littlefield, New Jersey (pp. 60-62)
  • https://www.cato.org/blog/bagging-rule-or-why-we-shouldnt-arrest-all-bankers
  • Does Fractional Reserve Banking Endanger the Economy? A Debate, (2018), YouTube video, added by ReasonTV [online]
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (pp. 22-23)
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (p.24-26)
  • Selgin, G 1988, The Theory of Free Banking, Rowman & Littlefield, New Jersey (p. 25)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 62)
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (pp. 41-42)
  • White, L 1995, Free Banking in Britain, Institute of Economic Affairs, London (p. 85)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (pp. 30-31)
  • Dowd, K 1989, The State and the Monetary System, St. Martin’s Press, New York (p. 33)
  • Dowd, K 2014, Money and the Market, Routledge, New York (p. 21)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 25)
  • Dowd, K 1989, The State and the Monetary System St. Martin’s Press, New York (pp. 32-33)
  • Smith, V 1990, The Rationale of Central Banking, Liberty Fund, Indiana (pp. 9-21)
  • https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/our-objectives
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (pp. 19-20)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (pp. 22-23)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 33)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 34)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 35)
  • Bagehot, W 2009, Lombard Street, Seven Treasures Publications, United States (p. 144)
  • https://www.bankofengland.co.uk/knowledgebank/what-is-deflation
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 112)
  • Selgin, G 2015, Bank Deregulation and Monetary Order, Routledge, New York (p. 145)
  • White, L 1999, The Theory of Monetary Institutions, Blackwell Publishers, Oxford (p. 39)
  • Smith, V 1990, The Rationale of Central Banking, Liberty Fund, Indiana (p. 9)

Image: https://unsplash.com/photos/WgUHuGSWPVM

Roald Ribe, the Capitalist Party (Liberalistene), Norway.

Across the North Sea, the Kingdom of Norway with it’s Scandinavian welfare state and history of Vikings is not the first place you associate with libertarians.  However the International Alliance of Libertarian Parties does have a representative from the land of the fjords.  The Capitalist Party (Liberalistene) (Wikipedia), advocates for a minimal state and free market economics.  We speak with Deputy Chair Political, Roald Ribe about the party.

Roald thank-you for your time.

Could you tell our readers about your party?

A huge mix of value-liberal, classical liberal, libertarian, minarchist, anarchist, laissez-faire, individualism oriented capitalists. Common ground is typically no rulers, less government, less laws and regulations, less tax, less bureaucracy, less politicians and so on. Unyielding on principles, on property rights and self-ownership, but flexible on speed of implementation. It will take time to provide enough people with enough knowledge to let them realize that they want anything to change, or to recognize the fact that a better society could and can exist. Our political programs are evolving significantly over time (7 years so far) to reflect that fact, and to try to factor some acceptance of the Overton Window into them and the general communication with potential members and voters. Our name in Norway is Liberalistene. In English the name is Capitalist Party. Where Laissez-faire is implicit in the name.

“Getting representation for a classical liberal ideological base into the public view, always insisting on less state, less taxes, less power to politicians and bureaucrats, gets our membership (and me) excited”

What are main issues in Norway you campaign on, what gets Libertarians excided?

We have distinct political programs covering most issues on three political levels (all) in Norway. Three levels seems a bit much for just over 5 million people, so we will try to merge the two lower into a local level, and the other a national level like today. As a start. All the “established” parties in Norway, those who are represented in parliament most of the time, seem to agree that there is no maximum size for the state in the economy. Creating a heard voice, a rallying point, recognised representatives of the opposite view, is task number one. Getting representation for a classical liberal ideological base into the public view, always insisting on less state, less taxes, less power to politicians and bureaucrats, gets our membership (and me) excited.

Your country has stayed out of the EU, but what’s your parties view of the EU and the Euro?

The population in Norway has voted against joining the EU twice. Political representatives in parliament still slipped Norway in, through the small back door named the EFTA, with no asking the population again first. Probably because they expected that the answer would be the same as for the EU. So, we are part of the EU, but “only” through the EFTA.  There is a majority for it in Norway it seems (EFTA), because voters have bought the political dogma that Norway “needs” such a deal to sell oil, gas, fish, electrical power and other unrefined and raw materials into the EU area or other parts of the world. It will not take much free market knowledge to realize that this is an outright lie. So, we are in the EU, but with no influence. Our party would strongly prefer for Norway to be out of that situation.

Different countries campaign in elections in different ways, what methods does your party focus on, and do you have any interesting stories from the campaign trail?

Our next national election for parliament is in this year, 2021. So we are in the middle of preparing for it now. The formal election campaign lasts from 10. August till the election day 13. September. Most significant boost in this election campaign is that a former Minister and MP with 20 years of experience in parliament, has joined our party. Mr Per Sandberg used to be Deputy Chair of the Progress Party, but has now upgraded himself ? to the top election candidate for Liberalistene in the Oslo and Finnmark election districts. This has not gone unnoticed in the media, and through his activities combined with our steadily increasing experience with media handling and election processes and campaigns, we get a lot more attention and traction in the media than we have been used to this far.

In addition to the constant hard work leading up to being taken seriously enough to be joined by an established political figure, campaigning is done in various physical forms. Branded stands in streets where we have enough active people to swing it. Talking to people, distributing brochures. In some less urban areas we are getting a lot of brochures distributed straight into mailboxes by single activists. We try to write opinion pieces for different news media, and we are getting better at it. With a couple of pre-qualified celebrities in our ranks, it is getting somewhat easier to get the party included in the media.

At this point in time we do not have the capacity to make a trail of it. In the locations where we have enough active personnel, they organise their own plans and activities in their area, basing the plan on their own assessment of when, how and what kind of effort can be realized by them, and what they think will be most effective there. The central / national organization is mostly a service and materials provider, making brochures and flyers available, ordering tents, flags and other materials in ways that makes it affordable and available for as many as possible.

“It will be interesting to see what kind of trade relations the UK develops with the world going forward by itself outside of the EU. If the UK is successful with that work, as I expect it to be, it may undermine the solid political EFTA support in Norway, which would be perceived as a good thing by our party”

Do you have any views on UK politics you can share?

I think your country did well to finally get the Brexit process into motion, but I expect that the usual suspects will drag their feet and silently sabotage it as much as possible. It is nice to observe that some of your political figures seem to wise up a bit on lockdown policies. It is about (bleeping) time… It will be interesting to see what kind of trade relations the UK develops with the world going forward by itself outside of the EU. If the UK is successful with that work, as I expect it to be, it may undermine the solid political EFTA support in Norway, which would be perceived as a good thing by our party. We hope our countries will continue to uphold the traditionally good relations between them, and continue to work for the best possible conditions for cooperation between the two populations, including as much free trade as possible.

If you could introduce, repeal or change 3 laws what would they be?

A law securing absolute property rights, protecting all possible value from coerced confiscation, especially from the government.

A new law securing negative rights only for individuals exclusively, abolishing any and all privileges given in law to any individual or group.

A new law to require that at least two old laws must be removed for new or changed to be introduced. 

“Governments have lost their last marbles if it ever had any, and are flushing down the economic future of many in a hole full of dirty, irrational, fear mongering. The only way to counter this is to provide more individual freedom and economic freedom for business”

Lastly how do you think your government is handling the Covid-19 crisis, and what would you like to done to help the economic recovery?

Lockdown is a travesty against citizens, especially those in the low income bracket. The only rational strategy out there seems to be The Great Barrington Declaration. Governments have lost their last marbles if it ever had any, and are flushing down the economic future of many in a hole full of dirty, irrational, fear mongering. The only way to counter this is to provide more individual freedom and economic freedom for business. Failure to do so should eventually be punished by quite a few voters. In that path, where we expect more voters to arrive eventually, is where libertarian efforts should loudly position themselves. But remember, voters go where they believe is right, not where you think they should. We must make it our business to find the points where those two often differing views coincide with each other, well in advance of voters arriving there.

The Capitalist Party can be found online at https://www.liberalistene.org/ on Facebook at https://www.facebook.com/CapitalistPartyOfNorway, and Twitter at https://twitter.com/Liberalistene. They are also on email at [email protected].

TPA’s Quids Inn campaign

The TaxPayers’ Alliance has called for tax cuts to support Britain’s pubs. They have also issued new beer mats, which will be distributed in pubs across the country urging punters to sign their petition. Speaking to the invited audience at the Barley Mow pub, chairman and founder of JD Wetherspoon Tim Martin was adamant that if Britain’s boozers are to survive, the government must help this struggling sector.

Dan was there to report:

“It was fantastic to be able to join the TPA for the launch of their “Quids Inn” campaign.  After the last 16 months of lockdowns everybody certainly deserved a drink!  The current VAT reduction really should be extended beyond September to enable the hospitality industry to recover from the pandemic.

It was also great to catch up with so many stalwarts of the cause of freedom.  It is clear we are going to have to work together to ensure a classically liberal approach to the nation’s post-Covid future.”  

Don’t forget to sign the petition.
More photos and details of the campaign: https://www.taxpayersalliance.com/cheers_quids_inn_campaign_launches_new_beer_mats_calling_for_cheaper_pints

The Anti-Free Trade Position Returns

Protectionism, Mercantilism, and the Denial of Consumer Sovereignty

Image: https://pixabay.com/photos/container-goods-ship-porto-4675851/

Opinion Piece by Josh L. Ascough

On the 21st June, 2021, Labour MP Emily Thornberry appeared on BBC radio 4, insisting that the government must cease the lifting of protections in place for British Steel; stating that:

We have to stop this government lifting the protections that steel has at the moment, because if we don’t, then we could end up with cheap steel being dumped in this country and it being the end of the steel industry.”

Throughout the Free Trade talks with Australia as well, farmers unions have been demanding for greater protections to be in place, with suggestions of restrictions on the number of meat produce that can be imported into the country, while allowing the free export of British meat.

One has to ask whether we’re seeing a return to Protectionism and Mercantilism.

In a sense the UK has never truly abandoned fallacious positions of trade. The British Steel industry has a history of bail outs and subsidies; in 2019 the government issued British Steel a £300 million bailout. In the same year, it received £43 million in subsidies.

But what is Protectionism, and what is Mercantilism?

Protectionism is idea that government must implement policies that restrict international trade, with the guise of helping domestic industries, and protecting consumers from making “harmful” choices.

Mercantilism is an economic policy designed to maximise the exports of the nation and minimise the imports to said nation, via regulations, tariffs, and to a degree outright bans of imports for certain goods.

On the surface there is very little difference between the two positions, as in the end both stifle competition and offer privileges to protected industries.

The conclusion from many Protectionists and Mercantilists is to issue tariffs on foreign imports, and offer subsidies to national industries in order to avoid a trade deficit, and have fair competition.

“domestic consumers face the costs of these tariffs, as they find the goods and services they wish to buy cost more; thereby reducing the consumers standard of living”

Tariffs however, hurt a nations consumers. While the country’s government in question may issue tariffs for the purposes of protecting domestic industries and consumers from apparent “dumping”, the domestic consumers face the costs of these tariffs, as they find the goods and services they wish to buy cost more; thereby reducing the consumers standard of living.

The issue of subsidies has a similar effect on consumers. A subsidy at the end of the day is a tax, and by extorting from consumers in order to prop-up a domestic industry, you’re reducing their expendable income.

The area Protectionists wish to avoid however, that of a trade deficit, is fallacious at best. The trade deficit myth looks at purely the flow of financial capital from one nation to another, yet it fails to look at why money is flowing and what those who transferred capital received in return; that being, the goods; whether that be goods of higher order for the purposes of more efficient production processes, or lower order goods (final goods: consumer goods). The problem with the concept of a trade deficit is, it answers too much: If more money via trade flowing from one country to another, while disregarding the goods received is a serious issue, then we must also look at the trade deficit between England and Scotland; or London and Oxford.

“the trade deficit doctrines logic, I have a trade deficit with the hobby business, Games Workshop. Over the course of 10 years, I’ve probably given £50,000 to the company. We have to ignore the products I received in exchange”

By the trade deficit doctrines logic, I have a trade deficit with the hobby business, Games Workshop. Over the course of 10 years, I’ve probably given £50,000 to the company. We have to ignore the products I received in exchange, and all the subjective value I attained from these goods, and time spent utilising them; we should only look at the movement of money. I need to issue quotas against Games Workshop of how many goods they’re allowed to sell me, in order for the payments between me and them to equalise.

The ends which Protectionists wish to reach, is that which they loosely label “fair competition”. The problem is, their concept of fair competition is not only far from any meaning of fair; as it requires the protection of some industries and barriers in place of others, but, also that the fair competition doctrine is very similar to the idea of perfect competition.

The theory of Perfect Competition is the state of affairs, where there are a certain number of buyers and sellers, selling (buying) the same quantities for the same price. The question that arises is; where is the competition?

The market is not a state of affairs; it is a process of discovery. To get right to the core of the problem with this doctrine, via the perfect competition doctrine, you rule out the possibility of the entrepreneur discovering an absence of information that is held by consumers and his competitors. Under the perfect (“fair”) competition doctrine, it is attempted to maintain what could be called a static form of the market; the subjective values, marginal utilities and choices of consumers, and the multi-period production processes of competitors put a wedge in your plans. Consumers have made the “wrong” choices; competitive entrepreneurial producers have discovered how to sell the same product cheaper – it’s not “fair”.

The Market is a process of discovery. At any moment, market participants can face utter ignorance; not just that of optimal ignorance – where participants know what they don’t know, but the costs outweigh the gains, but that of an absence of information; we do not know what we don’t know.

It is the role of the entrepreneur to be alert to the ignorance of market participants, and predict what the future price and value of goods will be. It is the role of the entrepreneur to see incoordination in the market –  where there are two prices for the same good; indicating to the entrepreneur that sellers(buyers) are offering(charging) too high(low) a price; if he is alert and sees one selling for 20 and one for 10, he will buy at 10 and sell for 15. It is through this entrepreneurial process of discovery, that we move away from disequilibrium and closer to equilibrium.

There is not just the pure entrepreneur who sees sellers, one at 10 and one at 20 and chooses to sell at 15. The entrepreneurial producer discovers he can produce the same product for a lower price, and the entrepreneurial seller may request his employees to smile more to appear friendlier in order to sell more goods.

The only way to allow the market process to operate, and to have entrepreneurial discovery is to have actual “fair” competition, which is freedom of entry; i.e. no privileges.

That which is often; intentionally or not, overlooked, ignored, and disregarded by the Protectionists; Consumer Sovereignty, must be stressed here.

“Consumer sovereignty is often something that Interventionists of all stripes; no matter the term we use, wish to stamp out. …Consumers vote with their feet and wallets”

Consumer sovereignty is often something that Interventionists of all stripes; no matter the term we use, wish to stamp out. Consumers ultimately have the final say of which goods are produced; how successful a production processes product will be, and who provides greater value via the epistemic nature and signal of profits. Consumers vote with their feet and wallets.

There is an entrepreneurial aspect to the consumers as well as those mentioned previously. An entrepreneurial consumer, who discovers he can satisfy his wants/needs for a cheaper price, will seek to obtain these means to satisfy his wants, and utilise them for the value they achieve, and profits from their service to him.

The practices of the Protectionist and the Mercantilist require denying the consumer of his sovereignty, and to classify the praxeological aspect of the consumers’ choice as wrong; the interventionist ideals of these two require not only the denial of consumer sovereignty, but the denial of subjective value.

Is Our Core Argument Based On Efficiency?

The answer to this question, to which we’ll finish with, is in the negative. The core of the argument for free trade is the same as that for the market process as a whole: coordination.

The purpose behind why the free market in all areas is the superior system; including that of trade, is because it better achieves coordination of the subjective values of individuals. The free market, through the entrepreneurial process of discovery, and the freedom of entry into the competitive market, allows for greater ability to coordinate market signals, and Protectionism stifles with this coordination; placing static over the signals and providing false or faulty signals – in total reducing the quality and leaving values unsatisfied.

It is for coordination that we should reject Interventionism in all its forms; whether it be Protectionism, Mercantilism, or Nationalism.

Undead Capitalism – The Effects on Time Preference and Interest Rates If Humans Were Immortal

Image: https://pixabay.com/vectors/zombie-spooky-scary-creepy-monster-521243/

Josh L. Ascough

– This Piece Is Satire and Should Not Be Taken Seriously –

– If You Do Take This Piece Seriously, Please Thoroughly Research The Term ‘Satire’ –

– Dedicated To Jessi Bennett. You Made Me Do This –

Human life, as all life, faces a time constraint; it is in large part due to this constraint that humans rely on their subjective time preference with regards to the choice for current consumption or future consumption.

To add to this, the time preference over current/future consumption is what makes interest rates possible. The time preference aspect of interest is based on the notion that humans’ prefer to consume in the present, rather than at a designated later, future time period; it is this time preference which helps to explain monthly payments of, for example, a TV.

(Due to time preference, people tend to accept small payments over a set time period for full ownership in the future, i.e. £500 for a TV to buy it in the present, or a £50 deposit followed by monthly payments plus interest, unless ceteris paribus, their ordinal ranking of the good is high, as well as the demand to satisfy their wants/needs for current consumption, i.e. they’re not willing to postpone; people would not be willing to pay the final settlement price for a good they want to satisfy their wants now, if they have to wait for the future to receive the good)

What would happen though, if some genius entrepreneur discovered a way to make humans immortal?

“Governments would hate it because they wouldn’t be able to issue a Death Tax or Inheritance Tax, so they would probably try to ban it”

Firstly Governments would hate it because they wouldn’t be able to issue a Death Tax or Inheritance Tax, so they would probably try to ban it, it would then enter the black market and cartels would tamper with it and turn everyone into zombies.

But assuming Governments don’t interfere (I know, it’s a big assumption more unlikely and unrealistic than this piece), the other question to ask is, how immortal would it make people? Would it be a simple case of humans wouldn’t die of old age, but could die from starvation and disease, or, would it be a case of complete immortality; no disease, mortal wound, aging, or level of hunger could kill a human?

We’ll assume it to be the more simple case, since it’s easier to grasp and if we assumed complete immortality, then the Hyperventilating Overpopulation Ensemble (HOE) would have a heart attack.

“we would likely see a large shift in the market from current consumption to future consumption, with the time preference for goods and services extending for future periods of ownership and consumption”

If humans had the basic degree of immortality (cannot die of old-age, but can from mortal wounds, starvation and disease), then since the time constraint of life would be unaffected by old age, while the time preference and marginal utility of food and medicine would remain the same, we would likely see a large shift in the market from current consumption to future consumption, with the time preference for goods and services extending for future periods of ownership and consumption.

Under this assumption, since peoples’ time preference as a whole has seen a shift to the future, if people still prefer small payments over a prolonged time period, then we would likely see, ceteris paribus interest rates plummet, since people would be saving far more than they are spending; meaning an exponentially larger pool of funds, would be available for long-run multi-period projects of production, expansions in capital goods for larger scale productions of consumer goods in the future, a larger housing supply etc.

In conclusion: I the writer clearly need to get out more.

Podcast Episode 58 – An Effective Opposition! Where will it come from?

We are joined by Steve Kelleher, the recent London Mayoral candidate for the SDP, and Scott Neville, the Co-Founder of the Hampshire Independents, as we discuss the lack of an effective opposition to the current Government and where a future opposition might come from.

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