We occasionally get some pretty nutty comments on the threads but I often think that this blog’s comments are models of coolness and restraint compared with what else is out there. In response to a fairly decent article by Niall Ferguson, the historian, at the Daily Telegraph today, is this zinger from some character by the name of King O’Malley. Enjoy:
What a load of Tosh. Adam Smith is a discredited lackey of the Lord Shelburne camp who promoted the idea of a market based ‘hidden hand’ when in fact the ‘hidden hand’ was, as everyone at the time knew, the supranational elite banking/gold cartels that dictated policy to already indebted British governments. Smith lacked the moral courage and intellectual ability to address the control of money and its value, fractional reserve banking and fiat paper in his laughable diatribe ‘Wealth of Nations’.
As far as I know from reading Adam Smith, the great Glasgow professor was in favour of some form of gold-backed currency, although the exact details escape me. But no matter; what this splendidly nutty comment shows is that its author has heard words such as “gold”, “fiat money”, and “fractional reserve banking”, and is convinced that there was some dark conspiracy by the great economist and the UK establishment to obscure or suppress knowledge of these things, or that Mr Smith “lacked the moral and intellectual courage” to talk about them in his “diatribe” (WoN being in fact a calmly-argued piece, the very opposite of a rant).
The depressing thing is that is that is a bit of a debate – admittedly on the sidelines of the economics debate – about things such as the proper structure of banks, monetary systems, and the like. The danger is that if a person who has not heard of criticisms of fractional reserve banking, etc, encounters comments like the one before without first understanding a bit about the subject, they’ll be put off for life. “These guys are crazy”, he’ll say, and move on back to the same old complacent, wrong-headed consensus view. All the more reason, then, for such gloriously normal characters like Kevin Dowd to set the pace in arguing for free banking.
By the way, I make no apology for keeping banging on about this free banking issue. It is a subject where a steady stream of blogging commentary can make a difference, I hope.
Few people consider the wording on our currency. “I promise to pay the bearer” used to mean an equivalent value of the paper issued. It was gold but now what is that “value”? Gordon Brown’s promises? That will be worhtless, then.
Your previous piece on KD is all well and good, but…
Debt-for-equity is not particularly radical or exciting. Banks bonds are trading well below their par value (or were doing so until the government started bailing them out) all a debt-for-equity swap would do is crystallise those latent losses.
The deposit insurance scheme makes sense to me, but as long as the price the banks pay is, e.g. that the minute they get into trouble they get put into administration, depositors repaid first (with government loan if necessary), the government loan gets paid next, and the bank in administration is not allowed to make any new loans and charges its borrowers penal rates to encourage the ‘good’ borrowers to go elsewhere.
Once the government loan is repaid, the remaining run-off fund (being primarily ‘bad’ borrowers) is returned to original shareholders/bondholders who have to squabble over what is left (if debts are swapped for equity, this would be a good time to do it). This was pretty much what they were doing with Northern Rock until recently (and by this government’s standards, it was going rather well).
Of course, if some banks don’t like the sound of this, they can eschew the deposit insurance scheme, but nobody would deposit with them, which is fine, they’d only be able to borrow from large funds (who are perfectly capable of doing their own due diligence, unlike ordinary depositors who only have a few grand in the bank at any one time).
The problem is there’s a very very thin line between he who questions the received wisdom and he who is a nutty conspiracy theorist. And as such they who adopt minority political positions tend to be sitting in the same bus as they who believe the green lizard masonic aliens run the world.
On the other hand, the Left has always been infested with total dingbats, and it hasn’t done them any harm.
I was not aware that an idea, if it is good, has to be exciting, Mark. Being correct is good enough for most of us.
Nope. The article was about depositors being given equity in the recapitalised bank as part of any restructuring. The position of the bond-holders is not something KD spoke much about.
Of course, if deposit insurance were run on purely commercial grounds, and banks were not under some heavy-handed state regulator, then of course such arrangements would evolve in a market.
IanB writes: The problem is there’s a very very thin line between he who questions the received wisdom and he who is a nutty conspiracy theorist.
Sometimes. Sometimes the line between the two is pretty wide and easy to spot, however. Maybe part of the problem is when a body of thought or set of ideas is forgotten for a long time. for example, if you say to someone that there was a time, before the Welfare State, when millions of people insured against sickness etc through Friendly Societies, etc, you might get an incredulous look, if only at first.
Actually, the idea that modern banking is a controlled fiction and that we need to go back to something more honest is actually not nutty at all, of course.
On the 31st of March, there is a discussion “Beyond Inflation Targeting” at the Policy Exchange.
You may not know me from Adam (I met Brian M and others last week at the LA CT lecture), but I’m speaking, and putting the case that Governments caused this crisis and free banking is the way out. I am facing 3 people with an utterly orthodox way of thinking, so this should be fun.
I plan to publish my speech somewhere (here?) afterwards, with some notes. However, if anybody can get a ticket and give some support….
OK, delete the word “exciting”. My thinking is…
a) It would be pretty outrageous to force a debt-for-equity swap on ordinary depositors (especially if they relied on the £50,000 guarantee),
b) Bond-holders are more sophisticated investors who have made their own risk-reward decision, they did well in the good times (fair play to them) and shouldn’t now be cushioned using ordinary savers’ money.
c) Even if UK banks lose £100 billion or something (highly unlikely), this is only a few per cent of total assets/liabilities (stated as £7 trillion or something) so a few per cent ‘hair cut’ for bond-holders (who are already down enormously) would sort this out nicely no need to touch depositors’ money (seeing as customer deposits are only in the order of £1 trillion), – if you suggest this as a way out then you are on a hiding to nothing, politically at least (and morally as well IMHO).
The only tricky bit is deciding where the borderline is between depositor and bondholder, but it can’t be that difficult.
No more outrageous, surely, then asking their fellow taxpayers to do so. And that is the nub of the matter: if we try to protect everyone’s savings, etc, while trying to turn the banking system around, we will simply pile up debt – and future inflation – instead, to be borne by the population as a whole.
The debt-for-equity swap idea is not, as KD suggested, a painless one. Nor is it likey to be politically palatable. but if it is stronger banks that we want, it is an option worth considering. I guess the problem in getting from where we are to a better, more rational model is that there is a lot of legacy crud to deal with first. (This, of course, is the curse of any libertarian reformer).
I totally agree. In fact i would add that due to those much-maligned instruments called credit default swaps, which are a form of tradable insurance product, such bond-holders should get some, if not total, compensation equal to the face value of their bonds, at par.
Unfortunately many nutty left wingers are busy appropriating austrian ideas at present.
Johnathan Porritt is busy saying that banks should be stripped of their power to run fractional reserves, and that *libor interest rate should be controlled by the central bank*.
I wonder if King O’Malley is supping from the same spoon as “Dirty Euro”… It has the same ring. Beyond Dave Spart.
That horrible Adam Smith, not mentioning fractional reserve banking, which didn’t exist yet!
(Smith did mention “bank money”, specifically that of the Bank of Amsterdam, given that it existed at the time.)
Nor was Smith obligated to mention fiat money, as it was an uncommon thing, at the time, and of little value (see the Continental paper issued by the American colonies during the War for Independence… which started after the publication of Wealth – the Continental (paper) Dollar was made worthless almost immediately, to no-one’s surprise).
Likewise, the control of “value” of money, given that it was, at the time, so close to entirely metallic rather than fiat, is not something Smith was in any way obligated to address – attempts to control the value of bullion or to enforce bimetallism simply failed.
It takes a special sort of crank to complain that Smith wasn’t Mises (and was a coward for so being!), despite Smith’s death being nearly a century before Mises’ birth, and before the rise of the things the crank demands Smith denounce.
Another great economics professor who produced a calmly argued and rigorously researched book was Thomas Malthus, author of Essay on the Principle of Population which was published 22 years after WoN. Like Johnathan’s example in banking, most comments on Malthus are by people who have not actually understood what Malthus actually argued and are therefore put off an analysis which is highly relevant today, given that population growth underlies very serious world problems.
For example, with global warming our leaders spout about targets for reducing carbon emissions yet never mention per capita emission reduction targets. Population growth has fuelled the rise of troublesome Islam, in that most Muslim states have indeed been doubling every 25 years or less for at least half a century (I’m not sure of the precise figures – any Samizdata pedants please give us a link rather than argue the exactitude of the 25). The killing of 200,000 people in the great tsunami was reckond a huge catastrophe but the commentariat failed to mention that this represented about 2 days worth of net population growth in the four countries most affected – scarcely a ripple on the graph.
The mainstream dicussion on this concentrates on humanitarian issues like Band Aid, with little mention of the fact that this succeeded in doubling the Ethiopian population in 20 years and transforming the country into a state which can never again ever hope to be self sufficent. Or on Bill Gates’ philanthropic aim to cure many of the world’s diseases: this would of course cause an enormous population catastrophe…
Johnathan, I’d welcome a thread on Malthus in the 21st century: how (much of) his analysis is relevant today and ideas for modern solutions to the population problem (yes I do have some): since he wrote in 1803 his idea of “moral restraint” is hardly the solution for our times. I’d like to hope that this is another subject “where a steady stream of blogging commentary can make a difference” and would be happy to draft the contribution myself.
RW,
Coincidentally, this topic has come up several times on a number of Libertarian blogs recently, resulting in a great deal of heated comment. Ian B will probably appear and explode any second now. 🙂 A lot of it seems to have been triggered by Mr Porritt’s article.
In reply, I refer all readers in the first place to Julian Simon’s book on the subject.
If you want to argue your case from a perspective that knows about Simon’s arguments and evidence, I’d be happy to participate.
From memory, in book 4 of wealth of nations, Smith considers the intrinsic value of gold, gold as a measure of the wealth of a nation and gold as backing for an issued currency. He uses the example of the influx of gold from the new world over the preceding century or so, an influx that resulted in a drop in the value of gold (as supply and demand would suggest) rather than an increase in national wealth. He suggests that even when gold was the actual currency, coin issuers devalued it by clipping and debasing. In short, he isn’t a good authority if you’re arguing for something like the gold standard.
(to be pedantic WoN was published in 1776, the year of the declaration of independence, not before the revolution began. Smith knew of the revolutionaries in America and sympathised with them)
“King O’malley”?
We had a hoaxer here in Australia who gave himself the name “Ern O’Malley”. That was literary hoaxing. I think this is the same- a hoaxer!
*BOOM*
Pa Annoyed
Thanks. I shall read with interest.
Going completely OT:
King O’Malley was a yank who made a name for himself in Aussie politics immediately post Federation.
In Texas he started a church and declared himself “First Bishop of the Waterlily Rock Bound Church, the Red Skin Temple of the Cayuse Nation“.
He started out in Oz politics in 1896 on a temperance platform, and wanting to ban barmaids because they tended to be “hired for their physical attributes rather than their prowess in drawing ale”
He is personally responsible both for labor being spelt without a ‘u’ the name of the Australian Labor Party, and for Canberra.
Died the same year I was born.
Definitely one of the more ‘colourful’ characters in Oz political history.
And Nick, it was Ern Malley, no O’
Is the word “colourful” an Australian euphemism for “total arsehole who should have been strangled at birth?”
Yes
Adam Smith a member of the “Bowood Circle”?
I would like to see some evidence. After all there was no greater enemy of the Bowood Circle in Britain than Edmund Burke and he was a personal friend of Adam Smith.
To put this in American terms – think of Edmund Burke as Joe McCarthy (if anyone thinks that is an insult to Burke I would say you do not know the real story of the life and times of the Senator from Wisconsin) and then say someone who was a close friend of his was a card carrying member of a treasonable movement.
I am not a great Adam Smith fan (although I would not go as far as Rothbard did in holding he was a nonenity, it is true that he compares badly to some other economists of his time).
As for money and banking:
Most people (in England) never saw a bank note in his life time of Adam Smith. And he was happy with that.
He did wink at some of the tricks of bankers (one reason that Rothbard hated him), but those tricks were so tiny (by modern standards) that it is silly to go over the top about them.
England (let us leave aside Scotland) was not really a “gold standard” country in the 18th century – it was more of a gold-as-money country (with a bit of bank note fraud on top – but not much).
Adam Smith a member of the “Bowood Circle”?
I would like to see some evidence. After all there was no greater enemy of the Bowood Circle in Britain than Edmund Burke and he was a personal friend of Adam Smith.
To put this in American terms – think of Edmund Burke as Joe McCarthy (if anyone thinks that is an insult to Burke I would say you do not know the real story of the life and times of the Senator from Wisconsin) and then say someone who was a close friend of his was a card carrying member of a treasonable movement.
I am not a great Adam Smith fan (although I would not go as far as Rothbard did in holding he was a nonenity, it is true that he compares badly to some other economists of his time).
As for money and banking:
Most people (in England) never saw a bank note in his life time of Adam Smith. And he was happy with that.
He did wink at some of the tricks of bankers (one reason that Rothbard hated him), but those tricks were so tiny (by modern standards) that it is silly to go over the top about them.
England (let us leave aside Scotland) was not really a “gold standard” country in the 18th century – it was more of a gold-as-money country (with a bit of bank note fraud on top – but not much).
For Rothbard’s attack on Adam Smith see his history of economics (a terrible pity that the third volume was never finished – but that is another story).
Better that “normal” people like Kevin Dowd do the talking rather than crazy people.
Fine J.P. – no one would ever give me a university job (or even my D.Phil) anyway.
However, remember those “normal” people have no way of stopping busts.
So history would repeat itself.
There would be a massive bust (as there was in the United States after 1907) and people would be open to demands that the government “do something” (hence the Federal Reserve).
One bust among many – bust that wreaked things for vast numbers of people and gave the socialists their best propaganda line.
And all due to bankers trying to lend out more money than actually exists in real savings.
The “little” point that “normal” Kevin Dowd will say anything rather than face.
Remember 1907 happened at a time of quite extensive government interference in commerce, and rapidly changing government policies.
I think we should be wary of fractional reserves, and I think any “free banking” system should be required by law to maintain a significant reserve, maybe 50%. But I don’t think that a full reserve is really necessary.
Malthus was not a professor of economics (neither was Smith), but rather a minister. His population/demographics concerns were that the dislocations of a rapidly industrializing England would encourage rapid growth of the underclass who were moving in ever greater numbers to England’s urban centers. This population shift from rural to urban and accompanying demographic growth of this underclass would then lead to mass starvation, increased crime, strained social ties, class warfare such as that of the Luddites, etc.
Malthus worked for the East India company. My understanding is that he was mostly concerned with populations problems in India. He saw India as being what Europe would turn into.
“In 1805 he became Professor of History and Political Economy at the East India Company College (now known as Haileybury) in Hertfordshire.” Wikipedia.
He mainly seemed concerned with the Poor Laws and Corn Laws, which were British.