Thomas Attwood – a ‘country banker’ – would have been affected by the 1844 Act
News has been sent of the Neoaustrian critique of fractional reserve banking and their idea of free banking on a 100% gold reserve – quixotic in Professor Huber’s opinion, but ‘a revelation to others’:
Ben Dyson of Positive Money wrote in 2010 about a London School of Economics Lecture on Fractional Reserve Banking; Professor Jesús Huerta de Soto (right) from the Austrian school of economics was to unveil his proposal for similar legislative change that the “Peel Act” or Bank Charter Act of 1844 achieved.
The loophole at the root of the financial crisis
Ben explained that the 1844 Act made it illegal for commercial banks to issue their own bank notes. Before this, the banks had issued so many bank notes that they caused inflation and destabilised the economy. Unfortunately the legislation did not make it illegal for banks to create the digital numbers in your bank account. Since then, digital money has become 97% of all the money in the economy. Between 2000 and 2009 alone, banks created £1.2 trillion of this digital money – a major contributing factor to the house price boom and subsequent bust.
Scrolling to the last entry on this page of Professor Huber’s website will enable the reader to download Neo-Austrians between Gold Standard, 100% Reserve, and Free Banking. Notes on the occasion of reading Jesús Huerta de Soto (Money, Bank Credit, and Economic Cycles, Auburn, Al.: Ludwig von Mises Institute, 2009, 2nd edition) by Joseph Huber.
About a hundred years ago a main representative of the Austrian School, Ludwig von Mises spoke out in favour of tying the money supply to Currency School principles and full reserve:
‘The basic conception of Peel’s Act ought to be restated and more completely implemented than it was in the England of his time by including the issue of credit in form of bank balances within the legislative prohibition.’ – ‘… it means the introduction of a new program based on the old Currency School theory, but expended in the light of the present state of knowledge to include fiduciary media issued in the form of bank deposits. The banks would be obliged at all times to maintain metallic backing for … all notes issued and bank deposits opened.’
Jesús Huerta de Soto (HdS) is a proponent of contemporary Neo-Austrians. Huber understands that his proposals have four main components:
1) An attempt to lay the theoretical foundations of a monetary and banking reform aimed at free banking without central banks, though subject to the requirement of a 100% reserve on deposits or full gold reserve, respectively.
2) The middle and biggest part of the book is based on the Austrian School’s production model and theory of the business cycle – a harmful boom-and-bust process caused by wilful additions to the money supply, created by banks and central banks extending their balance sheets out of thin air. Balanced markets are not supposed to produce cycles.
3) National central banks practise fractional reserve banking, having abandoned the gold standard or any equivalent real-asset standard, in favour of pure fiat money. This has brought about unsafe and unstable money, unsound finances and recurrent crises.
New Currency Theory (NCT), as championed on Professor Huber’s website, shares the criticism of fractional reserve banking as an illegitimate privilege of the banking industry and as the root cause of overshooting money supply, inflation and asset inflation, i.e. credit and debt bubbles and recurrent crises – but for a different reason: whereas Neo-Austrians see legal-tender laws and central banks as basically evil and to be abolished, NCT sees independent central banks as the best candidates to serve as a state’s monetary authority in the exercise of its monetary prerogative (monopoly of currency, money issuance, and seigniorage).
Though sadly imperfect, my grasp of the remainder of the paper prompts me to think it will be of particular value to New Era colleague, Molly Scott Cato, and to forward this alert with its hyperlink. Molly’s study of politics, philosophy and economics was later enhanced by a course in statistics. She is currently Professor of Strategy and Sustainability at the University of Roehampton, Convenor of Roehampton Business School’s Responsible Capitalism research centre and lead candidate to contest the European Parliament Elections for the South West Green Party in 2014.