The crooning Mr Banks of Cherry Tree Lane about the status of Britain at the top of the global heap of power and wealth at the turn of the last century comes to an end in a run on his bank triggered by a panic when his two young children want to deposit their meager tuppins.
Bank of the United States in 1933, Barings and Northern Rock of United Kingdom and, of course, up the financial value chain, the large investment banks have all collapsed validating more the purported indispensability of banks, large and small, rather than their tendency to fail.
Banks, we therefore know, fail.
That the rent that bankers seek to insulate themselves from their own failures as an industry and to ensure the economic health or Adam Smith’s wealth of nations since the monopolist advent of fiat money or the paper debt of government imposed on the citizenry by government decree to ease the difficulty of barter transactions in real goods and services in anticipation of the real produce of the butcher and the baker in 1776 can render the invisible hand of enlightened self interest a relic is a known fact of history. Moral hazard, because it exists, cannot, therefore, be monetary policy just as moral philosophy cannot be political economy.
We also thus, but not as obviously, know that nations fail when banks fail.
This knowledge that such failures have occurred before should enable us to mitigate such occurrences again in deference to the citizenry in whose interest the citizens are ex ante incurring the paper debt of their ex post real work by their own decree.
The monopoly supply of fiat money by central banks in exchange for government debt by Departments of Treasury around the world, also on paper, is a redundant exercise which I have critiqued elsewhere in these pages because paper bills can be supplied at decreed rates of return to government, and hence, by transmission to users of those bills in the money markets, rather than relying on the bond markets. Bonds can all, therefore, be purchased back by governments and their future issuances ended as a matter of standard practice of central banking, globally, for, after all, taxes paid in currency fund the functioning of the governments.
British debt can all be purchased back by the Bank of England (BoE) in exchange for pounds. Or can it?
The present context of the European Union, of which United Kingdom (UK) is a member, lends itself, especially given the inclination of the European Central Bank (ECB) to buy the debt of countries in economic distress, to also buy all outstanding debt of UK, mostly gilts and other forms, in exchange for euros from Frankfurt, acceding by British choice, UK to the Economic and Monetary Union (EMU) managed by the ECB.
London Inter-Bank Offered Rate (LIBOR) will no longer be necessary, because, henceforth, interest rates for money supply to all member banks of ECB can be set (fixed) by decree by ECB, bringing to an end reserve banking and the market for central bank reserves.