Between the Lines by John Blundell in The Business

IN MY view, the finest economics pamphlet ever written by a Scotsman is Sir Walter Scott’s Letters of Malachi Malagrowther. He was attacking Robert Peel’s Banking Act. It is barely possible to reconstitute the mental landscape which was familiar to Scott and his contemporaries. It involves the blasphemy – we do not need a central bank. I am sorry to offend the main tabernacle of socialism.

It is now nearly a universal assumption that the state must be a monopoly supplier of currency within its boundaries. The European Union wanted to achieve this with the euro. Britain opted out – to our great good fortune in my view. Yet we are still subject to the government’s monopoly money.

I submit Walter Scott was correct to doubt the wisdom of compressing so much power in one institution.

Scottish pride can be mollified by the insight that William Paterson of Peebles conceived and devised the Bank of England. It was to be a money raising device for the Crown. So it remains.

It was not intended to suppress other banks but those who opposed it because they rightly feared it would inflate the currency (such as Richard Hoare founder of Hoare’s Bank in 1672, an institution still prospering today) came close to being imprisoned.

Let me be plain. Scotland’s greatest surges of commercial prosperity and economic dynamism were achieved without a central bank. Scottish banks competed. Their notes were exchanged. They were a market.

Today, the three Scots banks enjoy the empty right to print their own bank notes but they are a mirage – they are redeemable only for Bank of England notes – at the set price. You cannot pretend Clydesdale’s handsome Adam Smith £50 notes jostle with the Royal Bank’s or HBOS’s. They are in practice identical.

Michael Fry, the noted Scottish historian, crafted a clever pamphlet arguing for free banking under the aegis of the David Hume Institute and Professor Lawrence H White of New York University wrote an erudite history of Scottish banking outside of the state.

Apart from these two learned examples, standard Scottish business voices never even entertain the notion money could be far healthier uncontrolled by politicians – even under a light rein.

That high-tension wire of disconcerting ideas, Professor FA Hayek, published his ground-breaking paper The De-Nationalisation of Money in 1983. He has not turned back the official tide of ever greater state power. The reality of daily life does suggest many millions still trust non-state monetary instruments.

The price of gold, useable only for cosmetic or small-scale industrial tasks, still attracts a huge utility as money preferred above and beyond the paper promissory notes that are based upon that weakest of all claims – a politician’s veracity.

Note, I am not suggesting the state desists from issuing money. I do assert it should lose its monopoly. Hayek traced the origins of Scotland’s high watermark of prosperity to it winning free trade with England after a stuttering start under Cromwell but cemented after the Union of 1707. So Scotland has existed far longer without a central bank than with one.

Money has many different attributes or qualities. I rate its best as a reliable transmitter of value. Inflation is a disease of money – only of state money though. We acclaim the Bank of England’s current performance of a wobbling inflation rate of around 2 per cent. Yes, it is better than the inflations of Anthony Barber and other Chancellors of the Exchequer but the correct target for inflation is zero. Inflation merely dissolves the government’s debts. It is a fraud. It also destroys pensions at an alarming rate.

Please do not by diverted by the notion inflation is caused by trade unions, Arab sheikhs, “speculators” or other mythical forces. It is caused by the state issuing more money than there is value created. It is better termed dilution than inflation. If we had a market in money, governments would be forced to be honest.

In a qualified sense, the vast international currency markets show the assessment of relative values takes place efficiently in millions of transactions every day – we call it the exchange rate – but within every state’s frontiers (the EU being a state for this purpose) its monopoly is uncontested – and rivals banned by law.

We catch a slight whisper of the non-state origins of the most successful moneys which governments then co-opted. The dollar, a decayed version of “thaler” – Jaochim Thaler being a private minter of silver coin trusted for the integrity of its mint. Sterling is something of a mystery. It would be pleasing to think it was linked to Stirling, the town, but it is possibly based on a Jewish medieval money lender Easterling. Numismatic history offers a sharp cold shower in monetary history. The great inflations were caused by kings and emperors adding base metals or clipping their coins. They blamed merchants for what was authorised theft by the princes.

Sir Walter Scott was not an economist in a fashion we could understand. He was a perceptive student of human nature. He recognised that giving the Bank of England the powers to neuter the private issuing Scottish banks was a profound long term error. It has proved to be. If we suspended or erased Robert Peel’s Banking Act then Scotland could re-invent its banking heritage.

John Blundell is director-general of the Institute of Economic Affairs

If you are interested in central banks issues buy on line or download for free
Should We Have Faith in Central Banks?
The ECB and the Euro: The First Five Years by by Otmar Issing.