The Bogeyman Fallacy of Evil ‘Unregulated’ Banks: How Free Banking Could Bring Transparency, Stability, and Choice

Nathan Friend February 20, 2017 0
The Bogeyman Fallacy of Evil ‘Unregulated’ Banks: How Free Banking Could Bring Transparency, Stability, and Choice

There is a phantom menace that Marxists hold dear. Indeed, in the times of milk and honey following the overthrow the bloated bourgeoisie and the ascension of Comrade Corbyn, ‘unregulated’ banks will take their place as the sworn enemy of the workers in the songs and legends of the bards. Even now, the myth builds. Bankers, let loose by a free market, milk the people of their hard-earned money whilst the Tories in parliament watch with idle glee. Lily Allen, hero of the working classes and mother of the revolution, even mentioned it on twitter the other day. She wondered aloud why it was that Britain could ‘afford unregulated banks’, whist it couldn’t afford to throw more money at the NHS and pay teachers the piles of money they deserve for their selfless and heroic service.

Lily Allen, as is often the case, is dead wrong. Firstly, she seems to have confused public and private spending; since an unregulated banking system, i.e. a system free from government intervention, would be privately run and not cost anything from government coffers. Secondly, the banking industry is probably one of the most regulated industries in the UK, and has been for decades. The simple truth is that banking is far from a free market. Marxists like Allen are so dogmatic in their committed assertion that free-markets are bad, that even evidently unfree markets like banking must be a free market. Why else would it be so bad?

If only Lily Allen had bucked her long and colourful history of being wrong and was correct in her accusation. We have intervention in the banking market to thank for many of the problems we attribute to the industry. Let’s take the banking crash in 2008 as an example. Whilst many people like to think that the collapse was an inevitable symptom of capitalism; a by-product of greedy free markets, it was in fact a result of state intervention in markets that should be free. Big banks love regulations, which is probably why they spend so much time lobbying for them in Westminster and Brussels. They can afford crack legal teams to navigate bureaucracy and locate loopholes to exploit, whilst their smaller competitors cannot. Regulation passed by American and European governments in the lead up to 2008 pushed out small firms, distorting the market in favour of large firms, fostering a proxy oligopoly. Big banks – we’re looking at you Lehman Brothers – had become ‘too big to fail’. They represented so much of the market that if they were to collapse, they would bring most of the economy down with them. It is therefore unsurprising that when they did collapse following the bursting of the housing bubble, that governments chose to pump loser firms with taxpayer money to keep the economy afloat; creating hordes of zombie banks dependent on corporate welfare. They knew then, and they certainly know now post-bail out, that they don’t need to be responsible. The government will pick up the pieces, save the losers, and happily sponsor a disparity of competition and a dearth of fairness in the market. Talk about laughing all the way to the bank.

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Government presence in the banking industry doesn’t stop at bailouts and legislation; it is part of the banking industry’s very fabric in the UK. The Bank of England holds a monopoly on currency. It also possesses the authority to set interest rates, basically dictating the price at which banks can lend or borrow money. Whilst this is hardly unorthodox – almost the entire world runs on this system – it is by no means unregulated. If Lily Allen was indeed correct in stating that our banks are unregulated, we’d all be living in a free banking society, not one with a central bank.

Free Banking hasn’t had a presence for some time now but when it did, such as in Scotland until 1844 or British Canada until 1914, the results were positive. So why did central banking replace free banking? Most central banks were formed by governments with one idea in mind. They wanted an institution that would lend them masses of money, on agreeable terms, with few questions asked. Governments sought also, as they always do, to expand control over the economy. What better way to do this than to grant a dictatorial monopoly on determining interest rates to a central bank? Now the government can attempt to slow or speed spending if they so wish. As well as that they can print more money, which is basically government sanctioned counterfeiting, to reduce the value of money; eroding savings and wages whilst falsely inflating prices. With that in mind regulation and intervention sounds rather sinister, doesn’t it? This is cronyism, not capitalism.

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Why then, do so many people lament the idea of unregulated banks? Deregulation has become a bogeyman to villainise free markets, perpetuated by those with a fallacious understanding of the economy. When the government regulates banking and currency, it merely expands its control over the individuals it is sworn to serve. But how could free banking, a system where there is no central banks and very little regulation, work?

Historically in free banking economies, basic money was determined in either gold or silver standards. Minting gold or silver coin was normally monopolised by the government, in an effort to keep the value of these coins steady and provide an official base for free floating competitive currencies. Banks would then distribute banknotes and allowed people to open accounts denominated in whatever standard, normally gold or silver, had been determined by the government. Banks endeavoured to make their currency widely accepted by other banks in order to attract customers. Banks were forced here to accept all forms of currency, striking mutual deals with their competitors to accept each other’s notes and give customers a reason to bank with them. Private notes stayed more or less at the same value as their competitors. Retailers had no problem accepting different notes, just like they don’t have a problem today with accepting various checks and credit cards from differing banks. Notes in free banking economies proved to be more reliable than central banking societies. Unlike government backed issuers, free banks can’t purposely devalue their currency and get away with it, it’s a breach of contract. They can’t take on risky procedures like dishing out more than they have in their reserves or making questionable investments, because risky banks would prove unpopular with consumers, who can easily look elsewhere. In a free banking system, competition and choice places power in the demand side of the market, empowering consumers and gives consumers true sovereignty over banks.

Free banking is transparent, stable, and maximises consumer power. Which is presumably why governments would rather opt for a central bank. No matter how often Marxists like Lily Allen insularly reassure themselves that capitalism is bad, that the poison touch of government is good, and attribute all wrongdoings to free markets, there is a simple fact that remains. The freer the markets, the freer the people. Banking and currency is no exception. In fact, it’s a sterling example.

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