Tuesday, December 1, 2009
Adam Smith on Too Big to Fail
"To restrain private people, it may be said, from receiving in payment the promissory notes of a banker for any sum, whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty, which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed."
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" The legal rate...ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest....A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
Adam Smith
Long ago when money was gold and the supply thereof was much more rigid then it was possible to refer to money as capital. It was a lie but they got away with this duplicity and insisted that the distribution to the owner of such capital would be styled as "interest" so as to differentiate this from the distribution to a land owner which they styled as "rent". In either case the "justification" for the distribution was scarcity and ownership and both would have rightly been called "economic rent".
In the world today money is not scarce. It is created when government spends it into existence and "interest rates" (actually rent rates) are employed to maintain the scarcity and to allocate the "scarce resource" to best use. But in the case of money, as in the case of land, the privatization of the rent is not necessary to the allocative function. Nor is the privatization of the rent of money necessary to the maintenance of scarcity.
Why are the banks not nationalized and the "interest" employed to fund the public purse? It is the responsibility of government to control the value of the government's fiat money. And why does the ocean borrow water?
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