Thursday, February 19, 2009

NOT PJ: Free Bank (to a Good Home)

Our correspondent Bernard Darnton serves up a history lesson this week – with the promise that obscene ranting will resume as usual next week.

The Bank of England achieved a stunning success last week, reveling in an historic victory atop the rubble of the global banking crisis. HBOS – Halifax / Bank of Scotland – revealed vast losses that threaten to push its recent adoptive parent, Lloyds Banking Group, into public hands. A 280-year battle has ended. The Glorious Revolution is complete.

The Bank of England first attempted to smash the Bank of Scotland (“the old bank”) in 1727. The Britich Crown suspected the Bank of Scotland of helping to fund the Jacobite Rebellion (called the Jacobite “Rising” by people who don’t believe in constitutional limits on government, such as the previous Minister of Justice).

As well as taking the traditional approach to this type of disagreement, that of sending a whole lot of guys to go and stick knives into a whole lot of other guys, the British Government decided that some economic warfare was also in order. The Royal Bank of Scotland (“the new bank”) was founded by Royal Charter with the mission of destroying the old bank.

The Royal Bank began to stockpile Bank of Scotland banknotes and then presented them all for redemption at once. In those days, money meant something – your notes were backed something heavy and shiny. If you tried the same thing at the Reserve Bank today your banknotes would just be pointlessly swapped for different banknotes. The old bank had to call in loans, and while it suspended payments for a few months it didn’t buckle.

The new bank remained hostile for years but with the Jacobites defeated (using the old-fashioned knifing method at the Battle of Culloden) the banks eventually came to a truce and started accepting each other’s notes.

The British government had failed to crush the Bank of Scotland with brutal competition in Scotland’s free banking system. The stability of the system sparked Karl Marx’s observation that “capitalism causes banking crises, except in Scotland.” In other words, freedom causes banking crises -- except where banking is free. An even simpler translation might be “capitalism doesn’t cause banking crises.”

As is now clearly apparent, a bastardised semi-free system cobbled together by politicians for their own ill-thought-out ends is quite capable of causing banking crises and inflicting far more damage than competition in a free market.

Unfortunately, Karl Marx’s spectre still haunts the banking system. Having flooded the world with easy money, governments are now looking to take advantage of the crisis they’ve caused by taking ownership of many major banks. At a British inquiry last week, HBOS’s would-be new owners delighted in discovering that the bank’s previous bosses had no formal banking qualifications. No one’s yet asked whether being an MP, which mainly requires knocking on doors and giving away bundles of other people’s money, is a suitable qualification for someone wanting to run a bank.

* * Bernard Darton’s NOT PJ column appears here every Thursday at NOT PC * *

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5 Comments:

Blogger Crampton said...

I'd love to see the source on the Marx quote!

The Selgin and White work on free banking is about the best stuff out there. Larry White's "Theory of Monetary Institutions" is the single best explication of how a free banking system would work. I'm a fan...

2/19/2009 01:55:00 pm  
Blogger Jeff Perren said...

With the way things are going, it's tempting to believe that the only way to solve the problem is to go stick some knives in some guys.

The problem is, it would be like offing the Pope and his Cardinals. You'd just get a whole new batch exactly like the old one the next month.

2/19/2009 03:07:00 pm  
Blogger Berend de Boer said...

I don't think we need another Karl Marx quote on banks, you're the top hit for this quote on Google right now!

2/20/2009 08:46:00 am  
OpenID Bernard Darnton said...

Crampton, I got the quote uncited and third-hand, albeit from someone who knows a fair bit about Scottish banking, so it won't meet your rigorous academic standards. Indeed, it wouldn't meet Wikipedia's somewhat less rigorous standards [citation needed] either.

However, it met my needs at the time so I borrowed it without asking too many questions. I wasn't going to go trawling throught Capital looking for a reference. If Marx couldn't be bothered finishing writing it, I certainly can't be bothered finishing reading it.

2/20/2009 09:27:00 am  
Blogger Crampton said...

Ah, damn. I was wanting to read the quote in context, etc. I'm a big fan of free banking and would have been cool to have a Marx quip as support. Oh well.

2/20/2009 10:12:00 am  

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