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DAVID RICARDO

Sunday, July 29th, 2012

By Charles Sannat, Resident Economist at Au Coffre

The second in a summer series of articles on the great economists, the first of which on Thomas Malthus may be found here.

His life

David Ricardo (1772-1823) was a 19th century English economist and also a stockbroker and Member of Parliament. He is regarded as one of the most influential economists of the classical school alongside Adam Smith and Thomas Malthus.

David Ricardo was born on the 18th of April 1772 in London, England and died on the 11th of September 1823 at Gatcombe Park.

David Ricardo was the third of seventeen children born to a middle-class family of Jewish bankers (of Portuguese origin), having emigrated to England from the Netherlands just before his birth. At the age of fourteen, David Ricardo joined his father at the London Stock Exchange, where he began to learn about finance.

Ricardo rejected the orthodox Judaism of his family and ran away at the age of 21 with a Quaker, Priscilla Anne Wilkinson, whom he had just married. His mother, as punishment, never spoke to him again. At that time, Ricardo also became a Unitarian. The rift with his family forced him to be self-sufficient by becoming a stockbroker.

His first works, on monetary problems during the Napoleonic wars, appeared in the form of three articles published in The Morning Chronicle between 1809 and 1810.

One year later he published The High Price of Bullion, a Proof of the Depreciation of Bank Notes (1811), where he developed a quantitative thesis which stated that the excessive issuing of bank notes contributed to the depreciation of the English currency during the Napoleonic wars. This book influenced the drafting of the “Bullion Report” by the commission of the same name of the House of Commons.

The debates generated by the publication of his monetary works led Ricardo to develop his knowledge of economics, which had begun in 1799, during a particularly tedious holiday in the English spa-town of Bath, when he focused his attention on economics by reading An Enquiry into the Nature and Causes of the Wealth of Nations (1776) by Adam Smith.

His career as a stockbroker made him sufficiently wealthy to retire in 1814, at the age of 42. He moved to Gatcombe Park and divided his time between politics and economics.

Having entered the British Parliament in 1819, after having purchased a seat representing Portarlington, an Irish rotten borough, he sat until 1823, the year of his death. As an MP, Ricardo defended free trade and the repeal of the Corn Laws voted in 1815.

Ricardo was self-taught in economic theory. He corresponded profusely with Jeremy Bentham, Thomas Malthus and Jean-Baptiste Say, on topics such as the role of landowners in society. He also frequented London’s intellectual circles, and became a member of Malthus’s Political Economy Club and the King of Clubs. In 1815, Ricardo published his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815).

In 1817, his masterpiece On the Principles of Political Economy and Taxation (1817) was published and which he continued to revise throughout the remainder of his life. The second edition was published in 1819 and the third in 1821.

In 1820 David Ricardo wrote to Malthus a few years before his death: “Political economy is according to you a study on the nature and causes of wealth. I believe that to the contrary it must be defined: a study of distribution… Day by day, I am increasingly convinced that the first study is vain and disappointing and that the second constitutes the  proper subject of the science”

He died of an ear infection in 1823 at Gatcombe Park at the age of 51, a year after having completed a long journey around Europe. Upon his death, his wealth was estimated at £725,000, a significant sum for the time.

Theory of comparative advantage

David Ricardo demonstrated that all nations, even the least competitive, find in certain theoretical conditions (perfect competition, without political pressure), an interest in entering the world of international trade by specializing in production where they have the greatest relative advantage or the relative disadvantage with the least negative consequences.

In chapter VII of On the Principles of Political Economy and Taxation, Ricardo develops the example of the wine and cloth trade between England and Portugal.  In a given number of hours of labour, Portugal produced 20 metres of cloth and 300 litres of wine while England produced 10 metres of cloth and 100 litres of wine. England was thus at a disadvantage in the two sectors of production.

Ricardo demonstrated, however, that England had an interest in specializing in the production of cloth, where it had a relative advantage, because for 10 metres of cloth, it would obtain 150 litres of Portuguese wine (versus 100 at home). Conversely, Portugal would have to specialize in the production of wine since the trading with England of 300 litres of Portuguese wine would allow it to obtain 30 metres of English cloth instead of 20 metres of Portuguese cloth.

England had a comparative advantage in the production of cloth whereas Portugal had an absolute advantage.

Ricardo’s analysis thus demonstrated that specialization based on comparative advantages allows a simultaneous increase in the production of wine and cloth. In his model, there is always a combination of prices so that free trade is advantageous to every nation, including the least productive: it is a positive-sum game.

To reach this conclusion David Ricardo makes four assumptions: the value of labour is equal to price multiplied by the quantity of labour; competition must be perfect; there must be permanence in the factors of production at international level (only goods circulate) and lastly productivity must be constant. In reality, these theoretical conditions are never fulfilled, and the practical application of the theory of comparative advantage poses more problems than it resolves.

Indeed a nation which specializes in one sector of production becomes dependant, for other sectors of production, on international markets. In addition to political pressures which it may then undergo, it is also more vulnerable to international speculators.

An example of consequence: the specialization of a poor nation within an export-led culture results in a drop in the domestic availability of basic foodstuffs. A rise in local prices of these basic foodstuffs ensues as well as the risk of famine.

The theorist behind the Gold Standard

In the Bullion Report submitted to the House of Commons in 1810, Ricardo condemns the excessive issuing of banknotes, which in his view is the cause of inflation. He recommends that the issuing of currency be limited by the amount of gold in reserves, in order to guarantee its value.

The theory of ground rent

Wealth is distributed between three components which are wages, profits and rent. For Ricardo, population growth inevitably leads to a rise in the cost of subsistence (due to the diminishing returns of land) and ground rent (following the increased need for arable land). The consequence of this inflation, which workers already living in poverty must bear, is to make a rise in wages necessary so as to ensure their survival. Thus population growth must  cause a crash in profits due to rent and consequently the end of investment in manufacturing, which Ricardo calls “the stagnant state” of the economy, a state which can be reversed through technological progress. Ricardo thus adopts the point of view of Thomas Malthus and criticises the social welfare that is granted to the destitute which creates poverty in the long-term by encouraging undesirable births.

Ricardian equivalence

“Ricardian equivalence” or “Ricardian neutrality” is an economic theory also known as the “Ricardo-Barro effect” or “Ricardo-Barro theorem of equivalence”, first stated by Ricardo and later adopted by Robert Barro in 1974.

According to this theorem, there exists, under certain conditions, an equivalence between the increase in national debt today and the increase in taxes imposed at a later date for the repayment of this debt and its interest. If those involved in economic  activity behave in a rational way, a stimulus policy  (distribution of revenue financed by the national debt) will not push them to consume, but rather to save (increase in interest rates), in preparation for future tax rises. The validity of “Ricardian equivalence” has long been – and still is –debated. The theorem was stated only within very precise circumstances, limited by numerous assumptions.

A study by the DGTPE (Direction générale du Trésor, of the French Ministry of Economy and Finance) suggests that households, in the eurozone and in France, could follow a Ricardian pattern: “a 1 point rise in GDP of the structural public deficit would be compensated by a 3/4 point increase in GDP of private savings, which would be consistent with a mainly Ricardian pattern for households in the eurozone.” (The authors of this study note that it is not advisable “to interpret this type of correlation too hastily as a causality.”)

In his blog, Christian Bialès speaks of a dispute over the assumptions of Ricardian equivalence given that its development should also lead to disputing the principle itself: indeed, an increase in the national debt does not induce in any way a future increase in taxes. Governments can choose to reduce public expenditure, to borrow or increase taxes or even a combination of the three.

COWBOY ACCOUNTANTS – OR LONE RANGERS?

Thursday, July 26th, 2012

By Mark Rogers

We’ve had the diddlers and the dodgers, Jimmy Carr – and now the BBC, tradesmen (again) and school children.

Over the last few days it has been widely reported that the BBC encourages its higher earners to set up personal service companies into which their earnings can be paid: the result is savings of millions of pounds in the employer’s National Insurance contributions. The BBC furthermore claims that the Inland Revenue knows; the Inland Revenue says that it does not advise employers on how they remunerate their employees. Reading between the lines, this suggests that the Inland Revenue is trying to avoid being criticised for going along with the BBC’s policy.

This is beyond parody.

The BBC, paid for by the licence fee and the public purse is trying to save public money through lowering its employer contributions to national insurance by encouraging its staff to be paid through service companies.

This is condemned by the government and MPs as immoral, and the government and MPs say it should stop.

The BBC would then be compelled to seek more public money in order to fund its employer contributions.

But that’s alright – because the Chancellor can simply put up taxes to collect sufficient funds to hand to the BBC so that the BBC can afford its employer contributions.

Should those who work for the state pay taxes at all?

Let me re-punctuate that sentence: should those who work for the state “pay” taxes at all? One is tempted to put the word “work”, for the most part, in inverted commas as well, but that is another issue!

There are three important and interconnected reasons why the answer to that question is: No.

First, by being paid net of tax, those who work for the state would be reminded of who they are and what their functions and obligations are with regard to the general public. It would also put paid to that irritating, and smirk-filled, habit that state employees have, when one raises with them the cost and value to the general public of state interference, “I pay taxes too”. They won’t have it that as their wages are paid out of the public purse so, ipso facto, that is where the taxes which are deducted come from as well and that to that extent “they” do not pay “their” taxes.

Second, cost. The process by which wages are paid by the state to state employees and then taxes deducted, whether through PAYE or tax returns by those who are notionally “freelance” because they are paid their state salaries through personal service companies, is, equally ipso facto, a circular one, involving yet more state employees at HMRC to collect these taxes. By paying state employees net of tax, an immediate gain in savings would be made on all aspects of that collection – paper- and computer-work, furniture and offices, etc.: remember the state employs some seven million people. And as the majority of them will in fact be on PAYE, this extra work is done every month.

This second reason leads inexorably into the third and most important. When a worker in the private sector is taxed, when new jobs are created which are taxed, when extra work is done which is taxed and so on, the Treasury makes a net gain, i.e. this is income that it did not possess before.

The same is manifestly not true of the taxes resulting from the state taxing its own employees.

Consider: the state takes that new income which is generated by the private sector and uses it to pay state employees, in the process deducting the relevant taxes. But what it thus takes, it is taking back. No new revenue is generated by this circular process. And insofar as there are, as noted above, costs involved in this process, there is even a net loss.

Therefore, state employees should be paid net of tax.

The state sector could be looked upon as one vast Keynesian multiplier, continuously generating budget deficits, while providing absolutely no evidence of the alleged multiplier “effect”, the boosting of aggregate demand and production. This must be seen as yet another of those causes of our present economic woes that long pre-date the overt plunge into crisis.

Cash in hand immoral

Not for the first time has an MP and Minister revealed that he doesn’t know what he is talking about. The Treasury Minister in charge of tax, Mr David Gauke, has claimed that it is immoral to pay for casual labouring jobs in cash. Most of the people who do such jobs would not be earning enough to register for VAT, and therefore the discount is built into their prices as they are not required by law to charge VAT. Whether or not they pay tax is also a moot point as they may not even earn enough to exceed the low personal threshold.

Mr Gauke has further announced that tax advisers who advise wealthy businesses and the likes of Jimmy Carr should be named and shamed. This is in the context of Her Majesty’s Revenue and Customs seeking new powers to force such advisers – the “cowboy tax advisers” in Mr Gauke’s words – to reveal their clients.

And in a very worrying move, as reported in The Daily Telegraph today, 26 July 2012, HMRC is targeting school children: “HM Revenue and Customs has set up teaching modules to guide children through the hazards of Pay as You Earn and National Insurance contributions. Some of the modules … teach children as young as 11 about paying their fair share of tax.”

Whether or not this is tantamount to encouraging children to snoop, a question appears in the teaching material phrased thus: “Can they [the pupils] think of any example they may have heard of in their local area?”

Now, the Revenue has denied that it is collecting information from teachers: but consider, as noted in one of my earlier articles about the “diddlers”, the Revenue has a whistleblower line which all are encouraged to use should information about “diddlers” come to their knowledge. And the implication is that those who, though not themselves engaged in such transactions, do not avail themselves of the whistleblower line are themselves “immoral”. So, this “teaching” module is in fact an information trawl – albeit a hands-off one.

As noted in my earlier articles, only a government very sure that it was providing value for money could indulge in such Maoist exhortations about morality.

Cowboy accountants

There is, however, something even more interesting about Mr Gauke’s remarks, which were reported in The Times, Monday, 23 July, 2012. One advantage of his moral posturing is that it has stirred up considerable controversy, with many editorialists and letter writers pointing to the unnecessary complexity and incoherence of the tax code, as well as its unfairness towards those on low wages – this is all to the good.

But one point has been overlooked: in lambasting the tax advisers who conduct avoidance schemes, Mr Gauke revealed that there are about twenty such firms, that the government’s own scheme to compel such advisers to reveal products (rather than clients) doesn’t work, and that these “shadowy” firms are often elusive, changing names “to avoid detection”. They are contrasted, interestingly, with “the well-established, reputable advisory firms”; how the advice of the latter, presumably still on how to avoid taxes, differs from the shadowy firms is not elaborated – perhaps the cowboys are simply much, much better at it.

Lone Rangers

This is by no means to be flippant: perhaps these “cowboy” outfits are Lone Rangers, operating as pioneers at the frontline between the profligate welfare state and all those who want a more just and accountable taxation system.

Consider: there is no legislation on what constitutes paying “a fair share”: how are eleven year olds, bamboozled as they may be by the complexities of their HMRC “teaching” modules, going to quantify such a ludicrous notion? The graver point arising from this, though, is that HMRC is making things up as it goes along: no-one is obliged to pay their “fair share” as no-one can possibly know what that phrase means – it is not a law, and as exhortation is so much puff, but disturbingly now being aimed at children who may be susceptible to coercive blandishment.

Now, this freelancing as to the nature of the law by HMRC is to be expected, given that all departments of state more or less operate on delegated legislation, that is, parliament cedes the power to oversee the department’s rule-making and exercise of powers to the department itself, that parliament has, that is, abrogated its powers of holding the executive to account, a fundamental violation of the English constitution. Morality, Mr Gauke, M.P.?

One of the problems of modern parliamentary practice is that, even before M.P.s have granted the delegated powers, they do not read legislation either properly or at all before it becomes an Act. In the case under discussion, the enormous incoherence of the tax code is the result.

The civil servants at HMRC responsible for putting the legislation into practice also do not read it properly, or do not understand it – this is evident not only from the mistakes they make, such as over-taxing vast numbers of people while under-taxing others, but also from the fact that they themselves are not aware of the possibilities of avoidance until such cases come to their notice.

But then, neither M.P.s nor civil servants are incentivised to read and understand legislation in full: they all have their expense accounts and their retirements on gold-plated pensions to rely upon, and the result is monumental sloppiness, as well a massive dereliction of duty towards the ordinary voters and taxpayers.

There are however people who are massively incentivised to study the tax code in depth, who indeed are the only people in the country who actually understand how it works. And they are those very “cowboys” that are being condemned by HMRC.

How can this be? Well, very simply, they are incentivised by the thought of the fees that they can charge their clients for reducing tax bills and by the desire to give their clients the best possible service: this acts as a mighty spur to know every last clause in the tax code and know, moreover, exactly how to use their resulting knowledge.

No doubt, they would be reluctant to assist our legislature in simplifying the tax code for fear it would put them out of a job, but as there are, apparently, few of them, and given their manifest ability they ought not to experience too much difficulty in finding work in the thriving economy that would result from the reduction of the burden of government that would follow the reduction in the burden of taxation.

Of one thing there should be no doubt in the reader’s mind: this onslaught on diddlers, dodgers, and cowboys is the result of incoherent legislation which allows HMRC to pursue its own agendas. That can only be stopped by a thorough Parliamentary overhaul of all the existing legislation on taxation. The ordinary subjects of HM’s government should not, however rich or poor they are, be subjected to state vendettas which only arise because parliamentarians do not do their job properly: no-one outside Parliament or Whitehall should be made to pay for the incompetence and negligence of M.P.s and civil servants.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

The time Romans destroyed mountains to extract gold

Tuesday, July 24th, 2012
Roman Gold coin

Roman Gold Coin – Augustus Aureus. Source Sacra-moneta.com - Photo Numismatica Ars Classica

The Roman Empire was obsessed by gold. This precious metal formed the basis of the Roman economy.  As Rome didn’t have any surplus crops and did not manufacture goods, gold was transformed into money and used for trading.  To ensure a constant supply, Roman legions, who were paid in gold, took control of the richest countries in the ancient world.

In an Empire as powerful as the Roman Empire, the most important things were the struggle for power, spreading wealth, buying goods and financing armies.  The Roman Empire was very different from the Egyptian empire which probably didn’t have a large army.  The Romans had to finance a very large empire.

After he had gained power in 31 B.C., Augustus decided to conquer the north-west of Spain, a region to which Rome under the Republic had not penetrated. The desire to mine for gold was chief among the reasons for this conquest – and in due course the new workings in the north-west proved more than comparable to the richest goldfields of previous civilizations. The output of these mines, according to Pliny, averaged in the region of 20,000 Roman pounds of gold each year. Here follows his account of the gold mining operations, almost certainly based on information from engineers in Spain because of the technique it describes of destroying mountains, the remains of which can still be seen today, for example at Las Medulas:

“In the world of today gold is found in three ways. … First, in the sediment of rivers, like the Spanish Tagus…, purer than any other gold and polished by attrition in the running stream. Otherwise it is dug out by sinking shafts, or gained by the destruction of mountains. Let me explain both methods. Those who seek gold first of all remove the surface earth which has indicated gold. Underneath is a deposit of sand: this is washed, and an estimate of yield is formed from the gold precipitate. Sometimes, by uncommon good luck, gold is found immediately in the topsoil. … The name ‘canalicium’ (or, according to others, ‘canaliense’) is given to gold mined from shafts. It appears shot through the marble gravels [i.e. quartz] … embracing the marble particles. The veins wander this way and that in channels along the sides of the shafts – hence the name ‘channel gold’. The earthy roof of these shafts is held up by wooden props. When they have dug out the ore they crush it and wash it and burn it and reduce it to powder. The refuse which is thrown out of the furnace – they call it ‘scoria’ – in the case of gold is crushed and heated again: the furnaces themselves are made from … a white earth like potter’s clay, for this is the only substance that can bear the blast of the furnace and the incandescence of the gold.

“The third method of mining may seem to surpass the achievements of the Giants. For by the light of lanterns mountains are hollowed out by galleries driven deeply into them. Lamps are also used to measure the length of the miner’s shifts, for many of them do not see daylight in months together. Mines of this kind they call ‘arrugiae’. Fissures can suddenly open up and crush the miners [i.e. with roof-falls] … and so arches are left at frequent intervals to hold the mountains up. In these mines – and in the shaft mines too – flint is met with, and the miners break it up by using first fire and then vinegar: more often, because the galleries thus become full of suffocating steam and smoke, they break it with iron rams of 150lb. weight. The pieces are carried out, night and day, on their shoulders in the darkness along a human chain: only the last in the chain see daylight. When all is ready they cut the ‘keystones’ of the arches, beginning with the innermost. The earth on top subsides, and gives a signal, and a solitary look-out on a peak of the hill observes it. With shouts and gestures he orders the mine to be evacuated, and he himself speeds down as well. The mountain then breaks and falls apart with a roar that the mind can hardly conceive, and with an equally incredible blast of air.”

However, as Pliny goes on to say, there was no certainty that gold-ore would be found in the debris, and even if it were there, the work that followed to extract it was very difficult. It required water, in strongly flowing streams of great volume, which often had to be brought great distances; this water was to wash the fallen debris of the mountain. Reservoirs were built in order to control the force with which the water fell onto the ore, and after the washing it had to be properly channelled away to prevent any loss of gold.

In other words, the method of sluicing rocky and sandy material in order to extract gold was being used on a massive scale starting with converting the mountains into that material!

Sluice boxes, filled with a shrub like rosemary to trap the gold, were built in the drainage trenches. The released pulverised rocks continued on their way ultimately to the sea, where it inevitably silted the estuaries.

These mining operations were of a colossal scale and complexity never seen before, the Romans managing to achieve these feats not only because they were astonishingly good engineers, but because in the north-west of Spain they had a plentiful and powerful supply of water.

An indication of the scale of these operations is found in one single shaft-mined area in Asturias, where it is estimated that 30,000,000 to 40,000,000 tons of rock were treated. From another in Galicia has been estimated that 5,000,000 tons of quartz were removed for crushing. The operation described above by Pliny as “surpassing the achievements of the Giants” involved extracting gold from very ancient, high-level alluvial terraces. Here the material was a clayey substance and relatively soft, and Pliny describes how water was conducted to these “collapsed mountains” in such a fashion that it could be played over the debris from great altitudes, between 400 and 800 feet to judge from the appearance of the present remains of typical sites.

As a result of the natural power which the Romans contrived to harness, they were able to treat vast expanses of territory for gold extraction. It has been estimated that during this lengthy period of Spanish mining that 500,000,000 tons of rock may have been removed – a figure which even if it is on the generous side, certainly bears out Pliny’s references to estuarial silting of the rivers which were the drainage channels for the mining effluent for this gigantic operation.

This is a revised version of an article that originally appeared in 2010. It has depended on C. H. V. Sutherland, “Gold, Its Beauty, Power and Allure”, 3rd revsied and enlarged edition, Thames and Hudson, London, 1969, from which in particular the long quotation from Pliny has been taken. This book has has been referred to before, here and here.

Las_Médulas

THOMAS MALTHUS

Sunday, July 22nd, 2012

By Charles Sannat, Resident Economist at Au Coffre

The first in a summer series of articles on the great economists

Thomas Robert Malthus was born near Guildford (Surrey) on the 13th of February 1766 and died in Bath (Somerset) on the 29th of December 1834 (at the age of 68);  he was a British economist of the Classical School as well an Anglican priest.

He is known in particular for his work on the relationship between the dynamics of population growth and production, analyzed from a “pessimistic” perspective, in full opposition to the Smithian concept of harmonious and stable equilibrium.

His name gave rise to a new adjective in common parlance, “Malthusian”, often viewed with negative connotations (describing a somewhat conservative frame of mind, anti-investment or fearful of scarcity) and a doctrine, Malthusianism, which includes an active birth control policy to control population growth.

In 1798, he published anonymously An Essay on the Principle of Population, which was hugely successful as well as controversial. Malthus then committed himself to deepening his research and travelled the continent, visiting Denmark, Sweden and Russia. In 1803, he published a new edition of his Essay, much expanded, and signed it by name. The repercussions were significant. In 1809, the fourth edition of the Essay was translated into French, in Geneva.

He met David Ricardo for the first time in 1811, the two men subsequently maintained an extensive correspondence which enabled him to develop new methods of analysis of demand.

He wrote other works, in particular Principles of Political Economy, published in 1820.

He died in 1834 and was buried at Bath Abbey, in Somerset.

Malthus and the relationship between population and production

The works of Adam Smith and David Hume soon attracted him toward political economy. He attempted to apply the theories of William Godwin, an 18th century rationalist, influenced by the thought of Jean-Jacques Rousseau and Condorcet, who believed in a perfectible society. The priest Malthus was charged with assistance to the poor in his community; the poor harvests from 1794 to 1800 resulted in misery and distress, and struck a chord.

In 1796 he wrote an essay on the crisis which England was undergoing, an essay which adopted a position in favour of social justice and proposing to expand the system of public assistance to the poor, but he did not publish it.

However, the student of Godwin rebelled against his teacher upon reading Social Justice (1793). In this utopian work, Godwin described a society where an increasing population will encounter prosperity and justice. The gap between Godwin’s ideas and the brutal reality that he observed lead Malthus to radically alter his perception.

His Essay on the Principle of Population, published in 1798, was a lampoon reacting against these ideas.

In opposition to the “moral” reformers who blamed the government for the ills of society, Malthus wanted to demonstrate that they actually arise from natural and inescapable laws. He adopted a theory put forward by Joseph Townsend in A Dissertation on the Poor Laws in 1786 or by the Italian Giammaria Ortes.

An Essay on the Principle of Population

Malthus mathematically predicts that without barriers, population grows in an exponential or symmetrical manner (for example: 1, 2, 4, 8, 16, 32…) while resources grow only in an arithmetical manner (1, 2, 3, 4,5, 6…). He thus concludes that demographic catastrophes are inevitable by nature, unless population growth is prevented.

He also advocated the ceasing of all help to the needy, in opposition to the Speenhamland laws (a precursor of the modern welfare state, which produced many of the problems that we now experience) and the proposals of William Godwin who sought to expand assistance to the poor.

Policies of population control influenced by Malthus are known as “Malthusian”.  His fears revolved around the theory that population growth is faster than the increase in resources, resulting in impoverishment of part of the population. As the old regulators of population (wars and epidemics) were no longer playing their parts, he imagined new barriers, such as restricting the size of families and the deferring the legal age of marriage. These proposals are only currently applied in  the People’s Republic of China, which indeed views itself as being forced [not neutral] to severely restrict its population.

Malthus’s pessimistic prediction was set back, as the world experienced a large increase in resources and agricultural production (the “green” revolution),  new international means of exchange of subsistence goods and the emigration of part of the excess population to the United States or the colonies, where modern agricultural methods created new resources.

We thus went from two thirds of the world’s inhabitants suffering from malnutrition in 1950, to one in 7 by the year 2000, while over the same period the global population grew from  two and a half billion to over six billion.

Nonetheless, natural constraint re-emerged from 2009 onwards: the green revolution has resulted in the depletion of soils and groundwater aquifers.

The prospect of an exhaustion of fossil fuels in the short and medium terms is considered by many increasingly likely, particularly as a consequence of a large increase in the production of goods and services.

However, it is interesting to compare two historical cases:

1960: 3 billion inhabitants, 2 billion suffering from malnutrition (i.e. 66%).

2000: 6 billion inhabitants, 800 million suffering from malnutrition (i.e. 13.3%).

Malthus’ pessimistic predictions were promptly set back by the industrial revolution and the green revolution. Whether his analysis remains structurally valid in the long term remains to be seen.

Under the conditions as set out by Malthus, mathematically, it is maintained that it will not be possible for the global population to increase constantly and that governments will eventually have to  intervene, one way or another – demographic transition being less painful, but requiring two or three generations.

In Malthus  we find the idea that infinite growth in a finite world… could end.

GOLD THE CHASTENER

Saturday, July 21st, 2012

By Mark Rogers

Gold provides a unique discipline because it cannot be created by banks. In a gold system, gold is the ultimate regulator.”

William Rees-Mogg makes this observation in his most recent column in The Times, Friday 20 July, 2012. It is such an important observation, that I have added it to my slowly growing arsenal of Maxims.

His article briefly discusses the financial scandals emerging in the City – the Libor crisis, HSBC money-laundering – in the context of two important matters: the wisdom or otherwise of the regulators and what caused the bankers to behave as they did.

The first concern is raised in the context of the forced sale by the Lloyds group of some 600 branches to the Co-operative bank. This sale was foisted on the group by the authorities of the European Union, in the belief that it would enhance competition within the sector, “although it undoubtedly creates another large bank, which may develop new control problems for managers and senior executives”. Was the Co-operative chosen because of some vaguely left-wing worthiness supposedly attaching to it? And if so, will the Co-operative prove more reliable than other banks simply because of it? We shall see.

Rees-Mogg’s second concern involves both bankers and regulators and he makes the inevitable point that both are to blame in varying degrees. It is slowly being acknowledged that the so-called “light-touch regulation” was nothing of the kind: it was wrong-headed, inexperienced and incompetent regulation, intervening in and micromanaging unnecessarily the day-to-day running of the City while ignoring or encouraging many of the things that ultimately blew up – and it may anyway have been politically directed (see here and here).

He certainly has no hesitation in pointing the finger at President Clinton as being the chief architect of the bubbles that burst, entering into an arrangement with Allen Greenspan at the Fed to prevent American markets from falling. “He wanted to live in a continuous boom.” So that’s where Gordon Brown got his ideas about an end to boom and bust from!

The long bull market at the end of the 1990s was the result, because Greenspan refused to let the market self-correct and, “in the absence of gold, the Fed faced no ultimate discipline”.

It is the fundamental point that Rees-Mogg goes on to make about gold that is the most fascinating aspect of his discussion. Gold, he maintains, imposed discipline on the banks for over three hundred years.

It may well be that it is this that leads many modern economists (together with their devotion to Keynes) to despise gold. After all, we may all get into a lather over misbehaving bankers – but they certainly prevent economics from becoming the dismal science. How much less exciting is the talk of discipline… Not for nothing did Keynes despise traditional morality, and was himself a notorious gambler!

“Keynes, the Cambridge wizard, cannot be a substitute for the discipline that has gone with gold.”

Unfortunately Rees-Mogg, in spite of knowing that gold, as well as being a discipline against incautious bankers, also “gave money its sense of reality”, ends his important article on a note of pessimism: he believes that such was the manner of the going of gold that the gold standard can never return – but see The Gold Standard Returns for a contrary view, and one, moreover, that goes into some detail as to how it may indeed make a return.

Savings from 1912 to 2012

Wednesday, July 18th, 2012

Bank Notes or Gold Coins?

A little morality tale from France about fiat money versus true value

By Bé Habba

This article is translated from the French original by Bé Habba who is a contributor to the French site Forum-Gold.fr

On June 24, 1912, a good-natured workman named Anatole puts aside the sum of 100 Francs, for his descendants. He is paid 5 Francs per day for 10 hours work, as typesetter at a printing works. It is a good wage, as many people earn less: a carpenter or a labourer earns 3 Francs per day, a dressmaker earns 2 Francs and a farmhand earns 1.5 Francs.

One kg of bread is worth 0.40 Francs. His 100 Francs thus amount to 20 days’ wages or 250kg of bread. Putting aside one day’s pay per month, he had to save-up for over a year and a half (20 months) to amass his 100 Francs.

To save it, he has three options:

- bank notes, for example 2 “pink and blue” 50 Franc bank notes

- silver coins, for example 20 “Ecu” 5 Franc coins, that is to say 500g of silver with a purity of 900/1,000.

- gold coins, for example 5 “Napoleon” 20 Franc coins, that is to say 32.25g of gold with a purity of 900/1,000.

As a typesetter, he is fascinated by the latest 100 Franc note issued by the Banque de France, designed by Luc-Olivier Merson. It is the very first polychrome bank note to be put into circulation. Compared to the old monochrome bank notes in black, blue, purple or the blue and pink bicolour notes, what an innovation! He therefore definitely decides to opt for modernity and places this brand-new bank note under his bed-sheets.

During the inter-war period, the “Merson” 100 Franc bank note remains under the sheets, but it loses value as inflation is significant. To catch up with inflation, Poincaré suddenly devalues the Franc under the law of June 25, 1928, which reduces its value, measured in gold, five-fold: the Franc is now worth 65.5 mg of gold with a purity of 900/1000.

The previous value of the Franc, known as the ‘Germinal’ Franc, had been defined by the 1795 Convention and then by the law of 7 Germinal year XI (March 27, 1803). The Germinal Franc was worth 5g with a purity of silver of nine tenths or 322.58mg with nine tenths gold (that is to say a gold/silver ratio of 15.5). This is why the 20 Franc gold coin weighed 0.32258 x 20 = 6.4516g from the revolution up to the 1928 devaluation.

Thus in 1928, silver and gold coins, whose values as noble metals became five times greater than their face value, are demonetized and withdrawn from circulation (or hoarded). But bank notes remain valid, and Anatole leaves his 100 Franc “Merson” under his bed-sheets.

 In October 1936, the Franc is further devalued and it is decided that henceforth it can fluctuate between 43mg and 49mg of gold with a purity of 900/1,000. Then in early 1939, following a new devaluation, the value in gold is set at 27.5mg with a purity of 900/1,000.

During the phoney war, the fall continues, and in February 1940 the Franc is only worth 23.34mg of gold with a purity of 900/1,000 (that is to say 21mg of fine gold).

During the liberation, the situation becomes somewhat chaotic. Pre-war bank notes, notes issued by the French State and notes issued by the Americans are used concurrently. On June 4, 1945, all notes of a value equal to or higher than 50 Francs are withdrawn from circulation. This massive exchange for reserve denominations of 300 and 5000 Francs, was carried out in 12 days throughout the whole of France. Later, when the new “Jeune paysan” 100 Franc bank notes were printed, the son of Anatole obtained one which he once again placed under the bed-sheets.

Post-war, inflation starts-up again, and the purchasing power of the 100 Franc bank note crashes. Two new devaluations took place in 1945 and 1949.

Returned to power in 1958, General de Gaulle announces the creation of a “re-valued Franc” which he entrusts to his Minister of Finance, Antoine Pinay and the economist Jacques Rueff. On December 27, 1958, an order establishes the “new Franc” equivalent to 100 old Francs. As the old Franc was worth 1.8mg of fine gold at that time (33 times less than the Poincaré Franc of 1928, and 12 times less than in 1940), the new Franc is thus worth 180mg of fine gold.

The old coins and bank notes remain valid for some time but the amounts written on them are henceforth worth cents rather than Francs. Anatole’s grandson thus exchanges the “Jeune Paysan” bank note of 100 old Francs which his father bequeathed him, for a brand-new “Semeuse” 1 Franc coin made of nickel. He finds the new coin to be very pretty and shiny. He places it under the bed-sheets.

The value of the new Franc is slightly devalued in 1969 and is worth 160mg of gold. Later the gold standard is abandoned and even prohibited under the Kingston Agreement of 1976.

During the period from the 1970s to 1990s, inflation is still occurring and several additional devaluations take place. In the year 2000, the “Semeuse” 1 Franc coin is still legal tender.

Finally, after 17 devaluations of the Franc during the 20th century, we reach the major revolution with the switch to the Euro: the coins and bank notes are put into circulation on January 1, 2002. The French have 6 months to exchange their Francs at any bank, and a further 3 years for coins and 10 years for bank notes issued by the Banque de France.

In January 2002, Anatole’s great-grandson removes the “Semeuse” 1 Franc coin from under the bed-sheets and exchanges it for Euros: one 10 cent coin, and one 5 cent coin. He again places the 2 coins under the bed-sheets.

And then, on June 24, 2012, Anatole’s great-grandson, who is now 60 years old, feels that the anniversary is an appropriate time and says to his son:

“Pierre, I must tell you something.  Exactly one century ago, your great-great-grandfather Anatole put 100 Francs aside. At the time, that was a significant sum. Each of his descendants carefully preserved this sum and it was handed-down from generation to generation, in the form of bank notes and then coins, through two world wars and several changes of currency. Today, I solemnly give to you the equivalent of the original 100 Francs: 15 Euro cents. It is up to you to preserve them and to pass them on to your eldest, to continue the family tradition.”

“But Dad, what do you want me to do with 15 cents? I can’t even buy a quarter of a loaf of bread! With that, I can barely get 40g of bread!”

EPILOGUE

Today in 2012, Pierre, a workman on the minimum-wage, earns 50 Euros per day for 7 hours work. He earns 1100 Euros per month for 22 days work.

One kg of bread costs 4 Euros, and to buy 250kg one would need 1,000 Euros. By putting aside 1 day’s wages per month, like his great-great-grandfather Anatole, he will need to save-up for 20 months.

However, if his ancestor had saved his 100 Francs in 20 “Ecu” 5 Franc silver coins, he would have approximately 340 Euros, instead of 15 cents. With that, he could buy 85 kg of bread.

But if his ancestor had saved his 100 Francs in 5 “Napoleon” 20 Franc gold  coins he would have approximately 1,300 Euros! That amounts to 26 day’s wages, and over 2 years of savings (26 months). With this, he could buy 325kg of bread…

JIMMY CARR AND HIS “TERRIBLE ERROR”

Monday, July 16th, 2012

The Morality of Taxation

By Mark Rogers

A couple of years ago when I was working part-time on a very modest wage for a proof-reading company, we received a huge job with a tight deadline: it required a dedicated proof-reader rather than be shared out round the office and I volunteered. For about five weeks I was no longer part-time, but working very long hours, including at the weekend. This didn’t trouble me, because I had a made a rough calculation based on what I believed to be my tax position, and I reckoned I would have earned a tidy extra sum by the time I had finished.

Alas, there are no tax avoidance schemes for the low paid on PAYE

I had underestimated the effect of the National Insurance contributions as well as being out in my tax calculation. Net result: the taxman took the equivalent of three and a half weeks’ rent, and the difference between what I took home as a result and what I normally took home was negligible. For all that I gained from it, the extra work had simply not been worth doing; only the company and its client, and the state benefited from my hard work.

This surely suggests that there is something immoral about the way in which the tax system works in modern Britain.

Yet it appears that Jimmy Carr, the stand-up comedian, thinks that his tax avoiding behaviour was immoral. What, Mr Carr, is moral about a tax regime that so easily and casually penalises those on low wages?

Tax in the news

Ever since this year’s Budget tax has been regularly hitting the headlines, with U-turns on fuel duty and the absurd hot pasty tax, over which the Chancellor decided to compromise, thus inventing an absurd tariff to determine at what point a take-away pastry becomes “hot” for the purposes of taxation. Thus the imbecilities of micromanaging taxes.

And as stated in my last post on the Libor scandal, there does seem to be strong evidence that the scandal was allowed to roll because of Gordon Brown’s insatiable demand for taxes for social spending.

In June, The Times decided to “uncover” just what sort of earners at the top end were engaging in tax avoidance schemes. There had been the embarrassment of Ken Livingstone, during the race for the Mayoralty of London, over his creative accounting practices. This was a delicious farce, ending in the shamed Livingstone asserting that he couldn’t see why anyone earning his sort of money wouldn’t be taking advantage of tax avoidance schemes. Not for the first time has a left-wing ideologue been caught smirking over his capitalist wallet…

Jimmy Carr’s “terrible error”

What much of the brouhaha surrounding the revelations by The Times of “aggressive avoidance” (in the Chancellor’s words) shows is that there is simply no understanding of the widespread effects of the corrupting nature of complex tax policies.

Jimmy Carr tweeted his remorse and stated that “in future I will conduct my financial affairs much more responsibly”. But his position over his taxes is based on two false assumptions. They are: (1) that what a modern welfarist government does is necessary, and (2) that government does it well. Neither is true: we need to be very certain that the state is giving it subjects value for money (see here). The trouble with this proposition is that we cannot be certain that value is being given because the accounting exercise to arrive at total certainty would be too vast to accomplish. On the other hand, there is more than enough evidence to prove the opposite: that much of what the state does, it does incompetently and wastefully.

In the circumstances it seems to me that anyone is entitled to the maximum benefit from the work he or she does. The tax implications I will deal with in a moment, but there is another aspect of the Jimmy Carr case that is revealing.

It was suggested that the revenue should have been alert to the fact that he was working some 200 days a year, and that any reasonable computation given his successful career and his concomitant high profile should have suggested that his tax returns were not an accurate reflection of his true earnings (even though, it must be asserted, he was doing nothing illegal).

This reasoning is fallacious because it smoothes over another tax avoidance scheme, and the only one available to poor people, which is simply not to work. Once Mr Carr has worked out what his tax bill is going to be if he does conduct his affairs “responsibly”, will he respond by not working for so many days each year? And will he then continue to be branded an “avoider”?

It’s all a bit too much like the “hot” tax for pastries: how can any determination be made of what constitutes moral behaviour when it comes to taxation in the modern state?

The Laffer Curve bumps into Parkinson’s Law

There can hardly be anyone in the Treasury who does not understand the Laffer Curve, which demonstrates the optimum level at which tax avoidance (or indeed evasion) is simply not worth engaging in. The fact that a simplified tax system with fewer and lower taxes would produce more revenue is self-evident.

However, those same people would also know Parkinson’s Law which states that work expands to fill the time available to do it, and which in turn therefore promotes the expansion of bureaucracies. So, notwithstanding the fact that the Laffer Curve demonstrates that revenue would rise, it would also take far fewer people to collect it. In spite of the increased income, it would be invidious to pay people for doing nothing, although in a way, when the inspectors and collectors working in such a complex system get it wrong, as they frequently do, it could be said that they are being paid to do nothing.

Soaking the rich

One consequence of the welfare state is the re-ordering of priorities away from the traditional functions of the state – law and order and defence – something which has been occurring with a vengeance since the Coalition took power in the government’s senseless winding down of the armed forces. The result is that welfarist governments divert attention from these traditional, small state functions (see here for a broader analysis) into the appeasing of the lobbies and interest groups that batten like piranhas on the body politic.

This is accompanied by diversionary attacks on high earners as “selfish”, which only serves to stimulate envy, a moral consequence of the welfare state which was surely not intended but must be taken into account.

However, for those who want to soak the rich, may I make a proposal that is guaranteed to  answer the coalition’s obsession with ensuring that the rich “pay their share” – and that poorer people pay nothing at all!

Flat tax

There is only one mode of taxation that is guaranteed to ensure that the rich pay their “fair share” of taxes and that is a flat tax with a high personal threshold. This means that the rich have no incentive to employ creative accountants, and it also means that those at the lower end of the economic scale have every incentive to work because they are not taxed until they are earning an amount that leaves them properly remunerated after tax.

For a glimpse of what a simplified and fairer tax system consists in, take a look here at the Hong Kong Inland Revenue Board’s assessment for the tax year 2012-2013 – in which taxes are being reduced and allowances increased.

Getting the equation right

I’ve never laughed at a joke by Jimmy Carr, but his “serious statement” about his mortification had me in stitches. I’ll leave the last word to another entertainer, reported in The Daily Telegraph on June 22, 2012, by Fraser Nelson.

“When the singer Adele opened the tax bill for her first album, she had this to say: ‘I’m mortified to have to pay 50 per cent. Trains are always late, most state schools are [expletive deleted] and I’ve gotta give you, like, four million quid?’”

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

Hard LIBOR

Thursday, July 12th, 2012

By Mark Rogers

In my previous post on this scandal, I noted that the more information comes to light, the less coherent the story becomes. While this is true given the state of the evidence so far, there is no harm in imposing coherence upon what has come to light, providing one takes account of the history of the financial shenanigans and the economic legerdemain of the previous government.

And in a very robust editorial in its 7 July 2012 issue, that is precisely what The Spectator does. It goes for the top:

“Cheap debt was, in the Labour years, seen as a new horn of plenty – and by everyone. To banks, it meant being able to take massive bets and reap unimaginable rewards – easy to come by in a bull market. To Labour, it meant a jackpot of cash. Brown’s greed for tax was just as pernicious as the bankers’ greed for profits. Every bonus paid in the City was split 60/40 with HM Revenue & Customs: it was a joint venture with the banks. The Financial Services Authority failed to prevent banks running down their capital ratios, or putting themselves at risk by lending long and borrowing short. So long as the taxes flowed in to fund Brown’s social programmes, his government did not worry about reckless lending and market manipulation.”

This strikes me as an entirely plausible assessment of what was going on; notice that the argument made here does not suggest that the government and its taxmen were happy to take advantage of behaviour they came to know about (despite their current denials); it argues that this was a done deal from the very heights of government: the bankers, the regulators and the government “were all united in their commitment to cheap debt, all desperate to believe that the prosperity that it seemed to bring was real. The Bank of England thought it had found the secret to economic stability. Gordon Brown’s government hailed the ‘end to boom and bust’. Regulators talked about the triumph of the ‘light touch’, giving banks the freedom to innovate, while not taking undue risk. The conditions which set the scene for the Libor scandal were the same ones which inflated the bubble that burst four years ago.”

This is an accurate description of the folly of the Brown/Blair years. It was really Gordon Brown as Chancellor who was running the country, with his well-known obsession for micromanagement; if the British economy was like the Cheshire Cat during this period, then Blair was the grin that was all that was left behind. It also, in asserting that the driving force was Gordon Brown’s social spending, vindicates my own view (here and here) of what lies at the heart of the financial crisis.

And the oil that smoothed all these dangerous follies: the promise that the banks were “too big to fail”. In other words the government, by making this promise and legislating as it did, helped trigger the destruction of the old City ethos: bankers, just like everyone else in business and trade like making profits (including me); it is what trade is for. It is the how of the making, not profits per se. Throughout the Brown years it was painfully evident to me that the Chancellor was either ignorant of or indifferent to the general laws of economics – an end to boom and bust indeed! As I have remarked before on this site (in the first of the two articles linked to in the previous paragraph), bankruptcies are an economic necessity – and not only in accordance with Schumpeter’s ideas about Creative Destruction, but also more mundanely in terms of economic housekeeping.

Fortunately, this is in the process of being changed. The present Chancellor is working to put into place financial mechanisms that will identify failing banks and put them into administration so that they can go bust while minimising the fall-out and protecting depositors. The sort of thing the Bank of England used to do, and on the whole quite well. This too is perhaps to make a comeback: in June 2010 the Chancellor announced plans to wind up the FSA and restore financial regulation to the Bank of England (albeit creating two more bodies as well, but their powers seem likely to be modest and restrained, perhaps functioning more in an advisory capacity). Recent reports indicate that this is now happening.

The Spectator editorial may be found here, but you will need to subscribe (at £1 per week, a snip) to read the entire article.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

THE LIBOR SCANDAL: POLITICS, OR JUST ANOTHER BANKING SCANDAL?

Tuesday, July 10th, 2012

By Mark Rogers

The LIBOR scandal is marked by one very obvious quality: the more information that comes to light, the less coherent the story becomes. The latest example is the revelation at the Commons Treasury Committee’s questioning of the Deputy Governor of the Bank of England, on Monday 9 July, which is that it is not actually known whether attempting to “fix” or “manipulate” the rate is continuing. This may of course have something to do with the fact that many other banks are still being investigated with no conclusions so far.

I say “attempting” advisedly, for in the current issue (7-13 July) of The Economist, its leader on the affair states: “If attempts to manipulate LIBOR were successful—and the regulators think that Barclays did manage it, on occasion—then this would be the biggest securities fraud in history.” The emphasis is mine, because this appears to divide the matter in two: “attempts” – which may have come to nothing, and “success”, which was apparently only the case “on occasion”. What does this mean in the light of the fines that Barclay’s has paid on both sides of the Atlantic: was it fined for its few successes, or was it fined for the attempts as well? And if the regulators merely “think” that Barclays did so manage it, how big was the malfeasance? That is, on this reckoning, there may have been other, unacknowledged or untraceable, successes, or some of the successes may have been exaggerated: we just don’t know because the regulators appear not to know.

In other words, is this the biggest securities fraud in history?

You see how confusing this has become? It becomes more so…

A Banking Scandal

On Saturday 7 July 2012, a Times leader vigorously asserted that this was not a political scandal but a banking one. The occasion for the reflection was the spat in the House of Commons between the Chancellor George Osborne and Ed Balls, now the Shadow Chancellor, but Minister for the City at the time the LIBOR fixing was occurring – or was being attempted. The Chancellor suggested that Ed Balls as the relevant minister at the time would have questions to answer, something that the Labour Party would have been quick to take up had the relevant minister at the time been a Tory.

The present writer begs to differ: this is most certainly a political as well as a banking scandal, and the ramifications of the political side of it go to the heart of how we are governed, what is appropriate state intervention and what the limits of such intervention should be.

The Governor of the Bank of England and the FSA

Sir Mervyn King, although apparently furious when the fixing first came to his notice was unable to do anything about it – he had no powers. On the other hand, at least according to some accounts, it may have been the case that the Financial Services Authority signed off on the fixing, or may have appeared to do so. Perhaps it didn’t recognise it as “fixing”: in his evidence at the Treasury Select Committee, the Deputy Governor of the Bank of England, either confused himself, or wishing to confuse the committee (the matter is not clear), asserted that the Bank was in confusion as to whether what it was uncovering was incompetence, flaws in the system or dishonesty. It is also not clear whether the possibility that something dishonest was occurring was a perception at the time, or at some later time, or with hindsight now.

This confusion may explain why the FSA may have “signed off” (if it did): it simply didn’t understand what was going on, or didn’t know what it was doing. There is the further question as to when it changed its mind (if it did).

There is also the curious fact that the British Bankers’ Association which administers the LIBOR, the London Interbank Offered Rate, has not been put into anybody’s sightlines to discover its views and behaviour in the matter. (All I have found is a very bland statement on its website.) Should this happen, there may be some interesting questions raised as to at what point a rate which is manipulated everyday on the basis of fairly complicated submissions, becomes “manipulated”. Is this an inherently flawed system (if it is, can it be fixed or should it be abandoned)? Or is the problem that too much regulatory intervention has falsified regulators’ and practitioners’ perceptions of what is going on and should be going on. On either of these suppositions, it is only too clear to see how some traders, with or without the complicity of senior management, would hope to get away with manipulating their submissions.

Bob Diamond’s Resignation

The regulators do seem to have changed their minds about one significant matter. Some reports suggest that because Barclay’s had fully and freely cooperated with the investigation, had been the first to do so, and had in the past even tried to warn the authorities of the fixing it suspected going on at other banks (such warnings occurring some 32 times over a period of 14 months), and paid the fine promptly, the regulators were happy and did not require any rolling of senior Barclay’s heads.

Then all hell broke loose, both the Governor of the Bank of England and the head of the FSA thrust Mr Diamond into the limelight and demanded or appeared to demand his resignation. Having declined to resign, he then did.

Politics – or what?

Both the Bank of England and the FSA are state institutions. After having apparently done a deal in good faith, the leaders of these two institutions then changed their minds: is there the possibility that this was a move to cause a distraction, in the sudden realisation that incompetence or connivance by the regulators might come to light given the rolling nature of the affair: that possibility seems all the more credible after the unsatisfactory answers given by the Deputy Governor to the Treasury Select Committee.

The main reason why I maintain that this is at bottom a political crisis, even more than a banking one, is that it is a crisis of the regulatory system imposed by Gordon Brown. Mr Brown, as Chancellor, decided to politicise the regulation of the banks. The banking institutions of this country are regulated by THREE regulatory bodies, already enough of a recipe for disaster: they are the Bank of England, the Financial Services Authority and the Treasury.

Under the interventions, the Bank of England, while being given the new power to set interest rates, formerly the prerogative of the government of the day, had most of its traditional functions of supervision removed from it (hence Sir Mervyn’s frustration, as mentioned above).

The bulk of these functions was handed over to the FSA, a revamped version of the old Securities and Investments Board (created in 1985), which came into being in 1997, and whose powers were defined in the Financial Services and Markets Act 2000. The FSA operates with delegated authority (i.e. authority that did not need to be referred back to the government or parliament) to create its own powers and rules to impose on and intervene in the banking system. It spawns so much delegated rule-making that the FSA is one of the principle obstructions to proper oversight of banking, and to that extent may be considered an enemy of reform, in that as long as it continues to exist it will only see, as is the way of state intervention, more powers for itself as the “solution”.

And as for the Treasury, it has no expertise in these matters, banking regulation never being amongst its traditional functions.

So there you have it: the traditional, historically-experienced supervisory body stripped by the government of almost all its powers, the roping in of a department of state with no experience in these matters, and the invention of a new bureaucracy, which amongst other things attracted as regulators bankers at lower levels of management, who brought their own lack of expertise of banking overall and as understood at the experienced top end of management, and who equally had no experience of working in a governmental bureaucratic environment.

What is anybody in these circumstances expected to do, except make a mess?

The banking sector became overtly corporatist under the regulatory regimes created by Labour, which in turn created the climate for any number of scandals and crises. Matters were not improved with the nationalisation of most of the high street banks, “where”, in the words of Allister Heath, “profits have been privatised and losses nationalised.” Mr Heath is the blunt and vigorous editor of the free market (and free) newspaper, City A.M., and a sterling advocate of the return of capitalism to the banking system (here): his analysis is one of the shrewder expositions of what has gone wrong and how matters may yet be righted.

In the meantime, those who understand how compromised banks have become, and alarmed at the government’s enthusiasm for quantitative easing, will readily see how investing in gold as a safe haven makes sense, the only port in economic storms.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST