debt money

The latest instalment in my tour round the libertarian/anarchist "classics" brings me to a work very appropriate for today's messed up world.  In "Mutual Banking" American Individualist Anarchist William Batchelder Greene explains clearly what is wrong with the current banking system (now, just as much as then) and proposes a non-profit mutual bank as a solution.

The bankers, he says, are the new aristocracy who, with state collusion through banking licensing and legal tender laws can buy up all the assets of a country and leave its people bankrupt and destitute.  They control access to money and credit and can pick and choose those industrious would be entrepreneurs who will win and lose by their actions.

He presents, at one point, an interesting argument for the repudiation of our current national debt - no real value would be destroyed by so doing, just an unwinding of the legal values that gives the elite few such an upper hand over the rest of us left paying for that debt.  If ever there was a time for revolution against the bankers it seems to me to be now.  

This will also be a good read/listen for those who do not understand the nature and inherent flexibility of money, such as a few of those at the "Speak Easy" last week.  Greene's solution, he says, would be inflation free, low cost, circulating currency backed by real assets that does not allow for a parasite class of bankers (or, indeed politicians) to take control.  If you ever wanted to know how a credit union worked, this will also provide much background information.

I am often finding that ideas that I develop for today's problems turn out to have been thought of many times before - Greene's model here describes with uncanny accuracy my proposal for an Oxfordshire local currency network for example.  This is not history - it is living proof that the problems we are facing now have been at the forefront of men's minds for decades and centuries - and that if we had only listened to the likes of Greene then we would be unlikely to be up this particular shit creek.  The Mutualists' message is, if anything, more important today for us having comprehensively ignored it for over a century and the problems getting a hundred times worse in the meantime.

You can get the text I have used (the 1870 publication) at the Libertarian Labyrinth website (.pdf), and attached you will find 12 files - an MP3 for each section, a .zip file of all the MP3s and an iTunes/iPod optimised .M4B file that has everything in one audiobook file with chapter bookmarks and so on.  

Enjoy.

According to the BBC, today both Tories and Lib Dems will formally outline their current plans for dealing with the regulation of the banking sector in a post election world. Neither, it seems, are prepared to think "outside the box" as that early century cliche went: the Tories looking at returning banking oversight to the Bank of England, whence it came a few years ago, the Lib Dems more firm on plans to break up the biggest banks, starting at least with the ones in de facto public ownership. However, one thing we can be pretty sure of: neither will be proposing the single most important possible change to banking that would do the most to stabilize the money system and longer term the economy...Free Banking.

As a concept it's pretty simple: Free Banking is where banks, and potentially other organizations such as communities, trading companies and so on, issue their own currencies instead of trading in the "national" currency of the territory in which they are operating. These currencies compete against each other for users. The value of each rests solely on the soundness of the business practices of the organization issuing them. If one bank/issuer over-extends itself all the others who would normally accept their currency at par with their own (say when a business customer of theirs tries to deposit them at the end of each day) will want to pay less for them and the message will soon get round that the over-extended bank needs to change its business practices, its risk profile say, or risk complete devaluation of its issued currency. There are also lots of other mechanisms that, in a free market, but not a fiat system, would come into play to ensure the currency issuers play responsibly.

The system we have today, fiat currency "guaranteed" by the nation is whose name it is issued, is the result of a long term grab for power by the state. Why would they do that, in a market that functioned quite well? Well, there are profits to be had in issuing currency - so called "seignorage". However in the current system where fiat money tends to be introduced via lending by the commercial banks regulated to do so this seignorage profit has reduced, and has also been passed to those issuing banks rather than to the state. The big reason is inflation. We take it as axiomatic that inflation can be a good thing, if you are in debt. With your future repayments more or less fixed in numerical terms if you can inflate the money supply your payments will tend to fall in real terms with time.

Who are the biggest single borrowers in our economy? Well usually the government. So the government can inflate away the running costs of their debt. Well, okay, says you, but it also eats into the costs of everyone else's debt too, doesn't it - so we all benefit from inflation, right? Wrong. Lots of us may well be in debt, but after many decades of inflation and only a few of burgeoning private debt, the lenders have become savvy to this. How many of you are now on variable rate mortgages? Government induced inflation really assists really long term borrowers on fixed rates (ie gilt issuers predominantly).

And on that subject, on the other side of the coin, if you pardon the pun, inflation erodes savings. All of us need some of those, even if we are in debt - for example for our retirement. Inflation keeps eating into our pension funds - firms and returns have to grow faster in monetary terms just to maintain the value of our savings. But equally, if inflation undermines our savings, so it also undermines the money we have in our pockets now. If we think the prices are going to go up, we want to buy more now. Inflation actually drives us into more debt, transferring more in interest from less well off to the better off lenders, so we can buy now before the prices rise.

But inflation also distorts in all sorts of other ways - if it is more difficult for us to work out as individuals whether we should borrow to buy that new Hi-fi today and pay the interest, or wait until we don't need to borrow because it will still be there at the same, or perhaps a lower price, how much more difficult is it for people who have to make borrowing decisions about investing in capital goods? Inflation corrupts the signals that prices are sending to manufacturers for example - they don't know necessarily whether they are getting a better price because of inflation or because their product is in greater demand.

Since the US finally adopted central bank run currency, followed by a fully fiat monetary system a few years later, the state has overseen a devaluation in the currency of over 98% - roughly a period of a hundred years; the Federal Reserve system was established in 1913. But this most recent decade shows the problem at work perfectly and the government's part in it. At least until 1997 the government, through the regular collaboration between the Treasury and the Bank of England, was instrumental in setting the base rate as we call it here. That is used to create a signal to all the banks who are regulated to lend in sterling that they should lend more, if the base rate goes down, or lend less, perhaps call in loans, if the base rate goes up.

After the political turmoil caused by the events of "Black Wednesday" when speculation against the pound led the government to raise interest rates three times and to 15% at one point, we were left with hundreds of thousands of households who could no longer afford their mortgages. A housing slump ensued and led to a policy for the next few years of keeping interest rates as low as possible - lower probably than the economy deserved. Just as the housing market was getting back to relative values from before that crash, another asset was bubbling - the "dot com" stocks and shares.

When that bubble burst, there was a great concern in Treasuries on both sides of the Atlantic that the burst would turn to recession (and indeed it did in the US). Gordon Brown in the UK was so concerned that Labour's first term in twenty years would end with a recession that again base rates were kept artificially low, signaling to the commercial banks that were part of this cosy central-commercial bank cartel that they should lend even more, even more irresponsibly, and we had the housing price bubble that has resulted in the current economic carnage. All the way up that price bubble the least well off are encouraged to transfer more of their wealth to the lenders and now, all the way down, that cosy relationship means that the banks, the lenders, are the ones being baled out while everyone else will suffer vast capital losses with no compensation.

And finally, central banking and its bastard daughter inflation kills. Literally. You'll notice that the history of central banking has been closely related to when government wanted to borrow to fight wars. In the past century, more of this has been done via inflation than by direct government borrowing. If there's an inflationary surplus already in the economy, go to war, destroy some capital goods, and with it some human capital and all of a sudden there are things to spend that surplus inflationary money on. If you are already n a war, perhaps an unpopular one, and you cannot finance it via extra taxes or selling debt, inflate, inflate, inflate and you'll be able to buy up your war-goods before everyone else sees the inflation in the form of a reduction in the value of their money.

So, which of Vince, or George, will take such a brave step? Of course, we know the answer - what they really want of course is for themselves to be in charge of this vast power inflation gives. But wouldn't it be great if just for once, politicians made the right policy decision for us not them.

I have long argued that the current crisis will not be solved, nor a future similar one prevented, by doing "more of the same" - tinkering with regulation and so on is fiddling around the edges of a money system that is fundamentally corrupted. A few weeks ago I wrote that we had until 2nd April to persuade leaders to change the system rather than shore up the old one.

There is now one of those petitions at the Number 10 site which asks that monetary reform be included in the options for the G20 when they meet. Now, I don't agree with the nature of the reform the petition writers wish to see (although I used to). But I do agree that "something must be done" and all the petition actually asks for is greater reform to go on the agenda.

So if you agree that the G20 needs to take a more fundamental look at what money is and how it works, rather than just altering the regulatory regime of the current flawed system, maybe you'd like to sign the petition too.

Over in the latest Lib Dem Voice debate, on whether we should support FairTrade or not, the name of Dr Michael Hudson has come up in the comments, and I thought this was worth highlighting (H/T Disinter):

I am quite familiar with the work of Michael Hudson and Fred Harrison as they are both prominent advocates of Land Tax and the work of Henry George. Here Hudson is putting into much better words than I have so far been able to what I have been advocating since the run on Northern Rock or before about why the current bank bail-outs will not work and are aimed not at rescuing the real economy, ie us, our jobs and homes and personal wealth, but that of the lobbyists and the financial sector that keeps politicians in office, and in lucrative work of course after they've given up office!

Basically we need to have a biblical style Jubilee - the one in fifty years in which all debts were written off, those who had become indentured to landowners to pay off their debt are freed, and the origin of the happy cry of "Hallelujah". This would be better than the write-offs and government guarantees being so gleefully doled out by governments around the world. Banks, or some kind of Zombie fund, could take on the toxic debt and renegotiate them down to the value of the underlying asset - the home or perhaps the business - and turn the debt back into a performing asset rather than toxic debt - even potentially making a profit on the current market value of the debt.

This is something I've been working with trying to setup in Oxfordshire - using limited liability partnerships into which the debt, the property and the rental yield from the property are put to turn the nearly repossessed home into an affordable home for the occupant but also an income generating asset for the lender. But why is it just us off-beam unschooled economists who are promoting this sort of thing? Where are the adventurous young bankers coming up with this sort of thing? Oh yes, that's right, it's easier if they can just persuade our governments to bail them out and let the tax payer take the risks of their over-enthusiastic lending.

Most of you know I have little truck with bankers at the best of times, let alone after they have comprehensively trashed our entire way of life(!), but to be fair to them, I've been watching some coverage of the Westminster Banking Trials, and it made me wonder whether our glorious representatives might have actually started from the wrong place.

They have passed the buck to the banking industry and not looked at the state's much more important contribution to creating this crisis. Without learning this, they will be doomed to make similar mistakes in future and cause, one day, an even bigger crisis that they will not be able to stop.

And it's all the more worrying since the evidence of government's responsibility for this crisis was given to their very committee on 20th March, 2007 - so nearly two years ago now, in the Treasury Select Committee's investigation into the first ten years of Bank of England "independence" and the Monetary Policy Committee. And with evidence, it is a relatively simple matter to construct an alternative view of the credit crunch in which the over-extension of the banking system is a direct result of public policy, at least in the UK anyway.

Eddie George, the former Bank of England Governor in oral evidence to the Select Committee, and picked up in the next day's Independent, said that the political incentive in the late nineties/early noughties was to keep the cost of borrowing down far enough to keep people borrowing against property and spending on imports to prevent the UK economy going into a mini-recession following the dotCom bubble.

Rising house prices make the majority who are owner-occupiers feel good. Plenty of credit and spending makes the country collectively "feel good". Staying out of recession, even just a short one, allows Gordon Brown, Chancellor, to keep banging on about his mantra of having abolished boom and bust, and having presided over the longest period of economic growth in recorded history.

Now let's have a think about Bank of England "independence" for a second: the Bank has "independence" insofar as its one defined job is to maintain a government set target inflation rate. The Bank is solely responsible for monetary policy to achieve that. Not, categorically not, macro-economic policy in general. So the enjoinder to keep people "feeling good" about the economy must have come from Downing Street.

So, having given this instruction, the City reacted in the only possible way. Clearly the Bank of England could not be as brazen as to pump high-powered government created money into the system. So the only way this policy objective could be implemented was to sell more debt. Either more debt to the same people who had already debt, or new debt to people who weren't in debt. And the only asset class that could bear this sort of debt creation without itself feeding through into inflation was housing.

So, on the technical signal of low base rates from the Bank of England the banks swung into lending mode - after all, they make money when they are lending. And when one group of people has had their fill of mortgage debt, and you cannot sell them any more, you have to find new customers. You need to start selling mortgages to people you would previously not have considered a good risk. You need to offload that more risky lending so you invent a collateralized debt obligation to sell that risk to many different types of investor. Markets get more and more jittery and start wanting to insure and hedge their positions and create credit default swaps.

On the demand side, with rising property prices, as I have written before, far be it from a classic "bubble" mentality where irrational optimism takes the crowd into ever more irrational market situations, people who were aspiring owners who could not afford to buy and faced with rising rents apparently only heading north for the foreseeable future, had to take ever riskier loans in a desperation to get on a housing ladder being consistently talked up by government and the fourth estate in equal measure.

Now, this doesn't let bankers off the hook of course: they should have said when they knew the policy was untenable without taking extra-ordinary risks. But with a few honourable exceptions few in the political arena were complaining too much at the "feel good factor" at work despite mounting evidence of unsustainable personal debt. But if we are going to learn from this crisis, we must understand that the "original sin" in all of this was political policy. How can we expect politicians to fix it?

If this analysis is correct, we can surely say that Gordon Brown and the government of the late nineties is responsible for the most devastating episode of capital destruction on record.

Nick Clegg has a piece in the Independent this morning repeating his suggestion of last week that we should consider joining the Euro. Not, it has to be said, now and in a hurry - he does not see it as a way out of the mess the financial markets are in - but in recognition that the world after this crisis will be a different economic landscape in which ganging up together with Europe may outweigh the loss of credibility the City of London will have wrought on itself. He concludes:

But given the gravity of the economic crisis in Britain, and our unique exposure to international financial markets, silence about the euro must end. The future has never been more uncertain. People are increasingly desperate for stability in our economic affairs. We must be ready to think anew. [From Nick Clegg: We should consider joining the euro - Commentators, Opinion - The Independent]

Indeed, we must think anew, but alas the Euro is still part of the old world not the new. It is the system itself that is broken. It is true that one could argue that the Euro is slightly different from the rest of the system in that its central bank is not controlled by a single government with spending plans it would like to get that central bank to finance. At the moment that is; and God forbid that it ever should - we don't want these people to have any control over our lives, as liberals, do we?

If the Euro is able to survive the current crisis, with the pressures of Greece, Spain, Portugal and Ireland at least threatening to break all the rules, it will be a stronger currency I am sure if it emerges out the other side, but how long would it take for it to be ready to absorb an economy the size of the UK's?

Then also I notice talk that the BRIC countries, and at least China and India, as global creditor nations, will hold a lot of sway when the G20 meets in a few weeks time, are resurrecting something similar to Keynes' idea of the Bancor as a sort of a supra-national reserve currency. I doubt that they will readily accept a switch from one "national" reserve currency to another. The very notion of a reserve currency linked to one particular geopolitical grouping skews the system against all the other nations by effectively ensuring they have to buy that reserve currency in order to trade. In the new world where these economies are nipping at our heels it is economic imperialism, and protectionist, to believe we have a right to be some global super-currency.

I really think we have to begin to look beyond the era of "central banking" - it's not like it's been around that long - less than a century in reality. It has proven time and again to be a hostage of markets owing to the moral hazard inherent in the private banking system knowing they will be baled out in a crisis and has been a constant source of inflation. Not even our most monetarist governments have been able to control the money supply. It is one of the great monopolies that our liberal predecessors knew were a great cause of inequity.

As well as establishing this group to look at the electoral use of technology, the party needs to establish a group of, if you like, futurologists, to look at how the technological advances, especially in communications, over the past couple of decades can facilitate even more wide ranging changes right down to the institutions we have accepted till now as the very life-blood of the economy. The genie is out of the bottle, we are in a new epoch, and it seems to me that the opportunity this financial crisis affords us to do away with some of the old and facilitate the new is unmissable.

Some of you will know I have long had an interest in money. Not in the sense that I have lots of it, though it would be nice if I did, but in how it works, what it is supposed to do, and how well it does it. I had long ago predicted a catastrophe in the current system, believing it to be systemically flawed, and have long hoped that when it came it would be terminal.

It was not a terribly learned or technically sophisticated analysis, and I have had to re-think lots of it - especially the idea that the system was flawed primarily because "banks create money out of nothing". I now acknowledge that they do not create actual money - but maintain that the more or less unfettered ability, at least in most "normal" market circumstances, to create "purchasing power" in the form of pseudo money credit is just as much of a problem. And I understand that the problem is less one sided and is, as has been seen recently, shared by the banks just as much as the users of that inflated purchasing power since when the crunch comes the banks have to scramble to get their hands on some of the real stuff to cover their liabilities.

If my previous analysis of the problems was insufficient, I can at least say that I have not particularly plumped for one solution or another.

I have been wary of the "gold bugs" though feel I understand them at least a lot better having read Murray Rothbard's "What Has the Government Done to Our Money?" (available as a downloadable PDF as well).

I have flirted with the idea that government can not only manage a fiat money system well enough but benefit from it in the form of Seignorage, following the work of people like James Robertson and Joseph Huber's "Creating New Money" (also available as a downloadable PDF).

I have even tried, in vain I am afraid (but I have to say largely because of the acerbic and antagonistic attitude of its main contemporary proponents), to grasp the ideas of Major C H Douglas and the Social Credit movement - after all, it is probably the only "monetary system" to have held political power in its own right in various parts of the developed world.

And I have been attracted to less formal ideas of money such as documented by our own David Boyle in his various books on subjects such as time banking and local or complementary currencies.

But probably the main reason none of these ideas has me fully committed is that the most important thing you can learn about money from even a cursory study of it is that it is and has been through history, an incredibly flexible and simple concept. The very fact that there are so many theories about it and what it ought to be, how it ought to work, is testament to this. And in response to this, my instinct is that our monetary systems should be more flexible and simpler. We have created a vast and complex leviathan for something which essentially performs a few very simple tasks. And we have to ask "cui bono"?

And today I got an email from the Mises Institute advertising a little book with an essay by F A Hayek, whose ideas on competing private currencies I have long thought of as an obvious solution, called "A Free Market Monetary System":

A Free-Market Monetary System and The Pretense of Knowledge

I urge you to read it right through - it's only twenty or so short pages and does a far better job than I could ever do at explaining why the current system is utterly unfit for purpose, outrageously disadvantageous to the ordinary person or business and completely skewed towards those who seek power and ultimately complete power over others.

It was of course written during the last really major monetary crisis of the mid to late seventies, but I find this conclusion on the urgency of this sort of measure so prescient and apt it is almost chilling:

We have not got that much time. We are now facing the likelihood of the most unpleasant political development, largely as a result of an economic policy with which we have already gone very far.

My proposal is not, as I would wish, merely a sort of standby arrangement of which I could say we must work it out intellectually to have it ready when the present system completely collapses. It is not merely an emergency plan. I think it is very urgent that it become rapidly understood that there is no justification in history for the existing position of a government monopoly of issuing money. It has never been proposed on the ground that government will give us better money than anybody else could. It has always, since the privilege of issuing money was first explicitly represented as a Royal prerogative, been advocated because the power to issue money was essential for the finance of the government—not in order to give us good money, but in order to give to government access to the tap where it can draw the money it needs by manufacturing it. That, ladies and gentlemen, is not a method by which we can hope ever to get good money. To put it into the hands of an institution which is protected against competition, which can force us to accept the money, which is subject to incessant political pressure, such an authority will not ever again give us good money.

I think we ought to start fairly soon, andI think we must hope that some of the more enterprising and intelligent financiers will soon begin to experiment with such a thing. The great obstacle is that it involves such great changes in the whole financial structure that, and I am saying this from the experience of many discussions, no senior banker, who understands only the present banking system, can really conceive how such a new system would work, and he would not dare to risk and experiment with it. I think we will have to count on a few younger and more flexible brains to begin and show that such a thing can he done.

Thirty years on, not only is this more urgent than ever before - even if the remains of the current system can be rebuilt, it will be so hemmed in by people and institutions trying to ensure, against hope from my perspective, that the present messiness can never be repeated, that trade and growth will suffer disproportionately, but the currently proposed cures will harm far more than they benefit in any case.

Further, because of the huge changes in global communications I have written about previously that have happened even since Hayek wrote that, we are now in an era in which money can be even more flexible than ever - we can form communities of trust not based around nations for example but common interests in diverse geographic markets. This is not just a matter of urgency to get us out of present problems, but of great opportunity - to take an epochal leap into a new sort of a globalized economic system that favours ordinary people and their economic actions over the rich and powerful.

Of course for this reason alone it may never be allowed to happen, but if our collective governments, who answer of course, in theory at least, to us, the mass of us and not just the few, were not so fixated on some past fiction they want to save they could do it. If Obama really meant what he said about "government that works" he would recognize that the government monopoly of money creation does not work for the benefit of the mass of people government are supposed to serve and be really bold. But even if not, we can all begin closer to home.

Books referenced in this blog (if you want to buy them and do so through these links, I'll get a little money from each!):

"Creating New Money" (Joseph Huber, James Robertson)

I’ve long been wanting to try and address an issue which appears to be a fairly significant point of conflict between various people who would otherwise all call themselves libertarians. A post by our good Devil and the comments that follow it provide a good opportunity. Some there and elsewhere in libertarian groups would even suggest that those of us who subscribe to the opinion that land values are somehow not legitimate private property cannot really be libertarians at all. On the contrary, some would say even that we are crypto-communists for wanting to rob people of the yields from their landed property.

Yet it seems to have been a matter of controversy throughout the history of anarchist and libertarian thought, and both sides even invoke John Locke as the supreme expositor of property rights in support of our arguments.

But let’s start from where we generally speaking agree. We all, I think, would agree that monopoly is inimical to the free markets we would want to see. I suspect we would all subscribe to the idea that we are entitled to self-ownership, and that to a very great extent, self-ownership means the right to own the fruits of our own labour. And I think most of us would subscribe to what Herbert Spencer described as “the fullest liberty to do as [we] will compatible with the possession of like liberty by every other [person].”

I feel most of us also acknowledge that there are some problems in the historical distribution and acquisition of land and recognize that much vested interest has been created through violence or state intervention - either forcibly taking land off others as in many of the enclosures or through grant of title over others’ claims by the state favouring individuals or great families.

But that’s about where agreement ends insofar as land is concerned. It seems that most libertarians view land as a free market in which people are free to participate or not to the extent they wish - to own, to rent, whatever suits them at their time of life or financial circumstances. To use the fruits of their labour to buy up more than they can use for their own needs as an investment and charge others to use it if it has such a value. And that anything that impedes that is theft just as taking away your chattels or other property would be. In fact, I think they also feel that since, as they see it, we are inexorably moving away from dependence on land (most of us no longer have to till the soil for sustenance) the importance of land itself is diminishing and it becomes an ever more free market.

So, before getting into discussion of possible remedies, I want to set out why I think there needs to be remedies to the “land question” as many of us would call it. I believe that property in land breaches the three main tenets of libertarianism I mentioned above: it is monopolistic and therefore not a free market; it exacts a toll on the fruits of others’ labour; and as a result it denies people Spencer’s “fullest liberty…”.

First, some definitions, because I think people get quite confused about just what we mean by “land”. “Land” in the economic sense is not just the earth, the ground we walk on, the soil we till. It is the third factor of production; everything in the material universe not originally created by the application of labour and capital; resources in their “natural state”.

But more than just that, when we are talking about “the ground we walk on” we are really talking about its “location” as much as its extent. A million acres in the Dry Valleys region of Antarctica may, for all we know, have no material value whatever. The few acres of Chelsea Barracks was worth £970 million last year. Similarly, we may yet have no use, and therefore put no value on, one part of the electromagnetic spectrum, but have many competing businesses dependent on technologies that use another particular, finite, location on the spectrum. So we usually mean “land in a particular location”.

Land as monopoly. When Winston Churchill made his “speeches by the yard” on the land question in gathering popular support for Lloyd-George’s land taxing 1909 “People’s Budget” there were of course very much fewer people who owned their own homes than do nowadays. But he was also expressing the views of some anarchists, such as Benjamin Tucker, Leo Tolstoy and Proudhon, as well as Liberals such as Spencer and later Henry George, that the land monopoly was one of the greatest barriers to free markets.

Many today feel that land, especially in the form of property in housing, is much less of a monopoly if at all. After all, in a world where nearly 70% of households live in the home they own, how can it be the monopoly problem of grasping landlordism that it was at the turn of the 20^th century? But the problem of land monopoly has not gone away. In fact, because it is less obvious I would suggest it is more insidious. Every location is in effect a monopoly of its own. A monopoly of the various circumstances, services, links and other infrastructure that make it unique. If you have the only house for sale in a particular school catchment area, the only house within a reasonable distance of a transport link that will allow people to get to the nearest good employment opportunities, or any number of other factors, you have a monopoly.

By and large we can only have one occupier occupying any particular plot - okay, we can build upwards and fit more people on the same plot, but that itself is exploiting the monopoly power of that plot.

Some will say that a monopoly is not necessarily the worst thing that could befall us, after all, if someone owns all the shares in a company that too is a monopoly - you just invest in another one. If someone is the only doctor in the community they have a monopoly, but someone could start another surgery. But we all have to live somewhere. So far as I am aware, pace Patri Friedman’s “seasteading” project, we have yet to find a way of living that does not involve some contact with land - even boats have to moor somewhere once in a while.

So land is a monopoly quite unlike being the only person able to own and admire that genuine unique Picasso. Yes, others may want it, but it does not alter their ability to live by not having it.

Incidentally, it is this monopolistic quality of locations that means it is so easy to bid them up into a bubble, such as we’ve seen recently. All that needs to happen, in our debt-based money system is that the banks have got to be prepared to lend to someone more than the next bidder for the one desirable location in the area. Yes, this can encourage others to cash in and create more opportunities in an area but we remain in a quasi-monopolistic system. Those of us, which includes most libertarians I suspect and certainly all Austrians, who regard the fiat and debt-based money system as the root of all problems should be extremely worried about this monopolistic ability to talk up the price of any individual location - it is, or has been these past few years, the prime factor in enabling the creation of mountains of debt-based money.

Land exacting an unjust toll on others’ labour. If you happen not to be able to borrow enough to get you a home in the optimum location for your work, or your kids’ school, or near enough for relatives to look after the kids when you go out to work or a whole host of other reasons, you may find a place further away, but more of your labour is going to be spent circumventing those more optimal locations.

Or if you have a business, a shop say, and cannot manage to pay the rent for the optimal “pitch” where most people will pass your shop display and be tempted in, you’re still likely to have to employ the same minimal number of employees to get the work done as someone in the higher rent location, but your takings will be lower. If you look at the structure of retail rents in the UK for example you will find that landlords try and capture this difference explicitly - they try and charge a premium based on ever more complex formula for guessing what a business can make in that location.

This illustrates David Ricardo’s so called “Law of Rent” in which he discovered that rent will rise at any particular location to capture the difference between productivity at the lowest priced location relative to the one in question. The huge land values usually found nearest the most lucrative business districts of communities and cities arise directly because people who cannot afford to occupy them have to work harder to avoid those locations.

In its simplest form this is best seen just by having to spend a fortune on your season ticket, an hour on the train to work and so on. Churchill again used to tell a story about the tolls of London Bridge and the landlords of Southwark. Most people in Southwark worked in the City of London as relatively low paid workers. It was the cheapest area they could get within reasonable travel distance of work, their means of sustenance. The parish elders responsible for enacting the poor law support in the parish of Southwark noticed that though most of the community were gainfully employed over the river, they still had to hand out a lot of dole to give them an acceptable quality of life.

London Bridge at the time had a toll, and so the parish petitioned to have the toll removed so that the workers would at least have to spend less getting to and from work. They succeeded in their aim. For a while the dole required fell, but then they noticed it rose again nearly to the former levels. What had happened? The landlords of Southwark had also noted that the workers would have a few extra pennies in their pockets and put up their rents to capture it.

With developments in transport methods and so on of course it is easier nowadays to get further to work and so on, so the gradient if you like at which landlords closer to the centre of things can cash in on others’ inability to rent their locations is lower, but it exists all the same. At some point, on the outer fringes of any settlement, there will always be those locations which are only just “marginally productive’ in which the residents can only just get to work or their other needs and maintain a reasonable standard of living. Ricardo’s Law of Rent says that inside those locations rent will rise to capture the bulk of the difference between the costs of those living further out and those living closer to the centres of economic activity.

Land impinging on others’ “like freedom”. Both of these previous factors combined clearly affect those excluded from the better locations freedom to enjoy the fruits of their labour. This is where Locke comes in. Robert Nozick coined the phrase most often quoted here - the idea of the “Lockean Proviso”.

Locke had said, in his Second Treatise, that it was legitimate to appropriate as much land as one wanted, so long as one left enough, of similar quality, amenity and so on, for everyone else. He also said that we own the earth “in common” with everyone else (note - common, does not mean “collective”). If we are to have self-ownership everyone born (who has to make do with this our only planet on which to eke out a life) must have a common birthright to claim a place to do so. You cannot own the fruits of your labour if someone is always taking some of them off you just to have a place to sleep at night.

That may have been easy in the New World, where there seemed as if there were vast, perhaps unlimited, tracts of currently unoccupied land just there for the taking. But in a more sophisticated economy, one not based solely on one’s agrarian abilities (and let’s face it we all benefit from that agglomeration of humanity into bigger, more specialised, settlements), more and more people will want to settle in the same area both to contribute to and benefit from the economic activity that human civilization affords. At that point, when Locke’s Proviso is breached, and there cannot be “enough and as good left over for everyone else”, land starts to have the two qualities already mentioned - of a monopolistic, zero-sum, market and of exacting a toll on others labour. At that point it begins to have a rental value. The rental value reflects the extent to which Locke’s Proviso has in fact been breached - the higher the rent the more people could make “as good” use of a particular location and the fewer “as good” locations are available.

So that “rent” is not something the current owner “earns”, except by the purest luck of being there before anyone else, so much as something that all the other potential owners of that monopolistic location create; what they have to pay to avoid the previously occupied location.

I’ve already gone on too long in this piece to be able to go into the possible remedies to this situation. All I wanted to show in this though is the problems land in particular as a type of property creates. Problems which all are inimical to the principles of markets and freedoms that libertarians are supposed to stand for.

If the monopoly factor were not of itself enough to make a libertarian think twice about treating land, location, as a species of property worthy of different treatment from other chattels and goods, the fact that it gets its value not by any of the labour the first appropriator expends on it but because of the costs others expend having to avoid it, and the consequent limits on the freedoms of others to do as they please and enjoy the full fruits of their own labour ought to convince them.

As I said in a comment on the Devil’s blog earlier, some libertarians feel that you can’t be a good libertarian if you believe the land market needs some type of reform, I have to say that I find it difficult to see how one could be a good libertarian without acknowledging that land needs some kind of reform because the effects private ownership of rental value of locations are so opposed to the basic free market and self-ownership tenets of our philosophy.

No doubt I will return some time to try to convince you about the best remedies to these problems.

Money is not wealth. Wealth only exists in real things that people produce and you consume, or more properly take pleasure in owning. Unless you are a very sad person whose pleasure is in counting and admiring a pile of bits of crinkly notes, money is only valuable insofar as it allows the person who has it to buy things, goods or services that add to their store of wealth.

For most people, money is just a unit of accounting that tells them they have sold their labour (or something else) for a certain amount of wealth’s worth that they can use later to buy some real wealth. It gets over the problem of so called “coincidence of demand” – that at the time you sell your labour or goods you may not in that instant want something the person buying it from you has to offer.

In a world of uncertainty, it is prudent, if we are able to, most of the time at least, to hold a little bit of money in reserve so that we can eke it out and survive if for some reason we are unable to get more of it before we need to pay our bills, buy more food and otherwise fulfil the basic needs of life. That’s just what prudent companies do to ensure they can pay you every month and buy things to sell before you come along to buy them.

But really “saving”, putting something away for that ever-looming “rainy day”, is where money (“cash”) falls down as an asset class. And in doing so it does immense damage to us all – our financial fortunes, our environment, our society.

In the context of establishing our idea of a “Community Finance Partnership” a friend and I have been reading up on various community finance networks that sprung up at the time of the Great Depression. And I believe I have finally had an epiphany in my understanding of “usury”.

Many of the groups and systems I have been looking at, formed during the Depression to help make up for the lack of circulating currency which was making a bad situation worse, worked on the understanding that charging or paying interest was itself the major problem that had led to the “credit crunch” of the time.

Interest bearing cash tries to turn money from being a means of exchange and unit of account into something fundamentally different – a store of value. It encourages the hoarding of cash balances, which are then not available to be spent in the real productive economy.

The charging of interest on loans means that the borrower has to acquire more money than they borrowed in order to pay off the principal and the interest. We have a tiny amount of non-interest bearing “money” in our system. In the UK, prior at least to the recent troubles, this amounted to only about £50bn – in the form of issued notes and coins. All the other purchasing power in our accounts was created as interest bearing debt and so over 97% of our purchasing power needs repaying at some point, with interest.

The JAK bank in Sweden, which has its origins in a similar Depression-era Danish venture, calculates that up to between 30% and 40% of everything we spend goes on paying this embedded interest committed to by all the borrowers in the supply chain of the goods and services we are purchasing and have been created in the past. This represents a huge transfer of wealth from those who have little, to those who own the financial institutions that create this debt-based purchasing power.

In such a system also, inflation is virtually guaranteed, as it helps those in debt (most often governments telling us they are acting in our name) reduce the value of their debt by reducing the purchasing power of those who hold current purchasing power unencumbered by debt. This is a transfer of wealth from those prudent enough to operate within their means to those who don’t.

It is a vicious cycle at the centre of our economic lives that allows the rich and powerful, including states and bankers, to manipulate our purchasing power for their ends rather than ours. If we did not have to finance this 30-40% embedded interest then, not only would our purchasing power hold its value better, but we’d have 30-40% more of it, for the same amount of labour sold, with which to purchase real wealth and get closer to financial independence.

Money is a human creation, and the way it operates can be changed by human intervention. If we do not change it now, in the process of rebuilding the financial system that has just crashed, we are doomed, absolutely inevitably, to repeat this crisis in the future. And we should not be afraid to demand such change. After all, it affects the vast majority of us negatively at the moment and only benefits a tiny minority. It is a test of our democracy if you like that we must rebuild the system in a way that works for the majority rather than against the majoroity.

We've seen much over recent weeks about how awful the City has been. How banks have made rash dodgy loans. Short sellers, overpaid executives and whatever else...

But I'll let you into a little secret: for every loan there is both a lender, perhaps a dodgy spiv with too high a bonus to be sure, but just as importantly there has also to be a borrower.

We have seen a little po-faced political bemoaning of the culture of consumer debt, but this unsecured credit - spending money - does not appear to be the primary debt that has caused this collapse. With few exceptions, when the banks talk about the sub-prime loans lying like a half-dead half-back at the base of a maul, they are talking about mortgages. Are not these borrowers to be condemned in equal proportion? Did the bankers force them to borrow? Are not they just as greedy, in their own way, as the bankers making themselves rich on those borrowers' seeming insatiable demands for more money? Maybe these are the real "sub-prime loons" that are really responsible for bringing our economies near to systemic collapse?

Of course it would be electoral suicide to lay so much blame on the ordinary "Joe Sixpack, the hockey mom". And indeed it would be quite wrong to do so. For most of those mortgage borrowers, perhaps especially what has become known, horribly disparagingly, as the "sub-prime" borrowers, were being completely rational. Rational, that is, in an utterly irrational system. And the results of that rational behaviour are now serving to highlight just how irrational the system is.

Indeed, it is so utterly irrational a system that those borrowers we might want instinctively accuse of being the least rational - those whose chances of paying off the large loans were the smallest - are in fact the most rational. Because in that mad upward spiral of house prices, those still left renting would be the worst hit. The urgency of getting out of renting and fixing your future housing costs at today's rates is all the more pressing.

Because here's the second little secret for tonight: we all rent.

This may seem counter-intuitive in a world where 70% of folk "own" their home and most of the rest want to. If you are, or can recall when you were, on the point of making the transition from renting to buying the first time, this will be easier to understand. One of the factors in your decision to stop renting and to buy instead will have been whether the mortgage payments, as compared with your current rent payments, are reasonable value, over the length of time you expect to be needing to use that property.

Of course there are many other factors as well. Some in favour of ownership, such as being able to improve, redecorate or even trash the property, and having the prospect of capital growth. Some in favour of renting, such as not being responsible for all the maintenance, or not being stuck with a mill stone if you can't sell it when you need to move. And of course the supreme benefits: a. you don't need to charge yourself rent - after all you are paying for it anyway and b. if you get to the end of your payments okay, you get it rent free for as long as you like and still get to sell the rights to it hopefully at a tidy profit.

But as tradable assets, our properties are valued on the basis of the yield it could achieve to an investment buyer now, and their view of how that is going to change over the time they expect to hold the investment. And when we buy a home, what we are actually buying is the right to collect the rent on that property for several years ahead at a "fixed" price today that we think will benefit us. Few owner occupier buyers will probably think about it that clinically. They might instead look at local comparisons to assess what they ought to be willing to pay. But so long as there is a rental market, and since there are some disbenefits to ownership as noted above it is likely that there will always remain a rental market, the money-value to the market is going to be based on its current and future rental potential and the overall yield over the time an investor would expect to hold that property investment.

So, what rising house prices indicate is that investors believe that there are going to be higher returns in terms of future rent potential. And if you are still a tenant, higher returns to the landlord mean higher costs to you. So if it is economic to freeze the rent payments at or near today's levels for the foreseeable future, you definitely want to do so. This becomes a bubble because the effect of future expectations compounds itself. Throw in relatively cheap loans and people can afford more in the present to secure those expected future gains.

Okay, now having, I hope, got you thinking in terms of "rent" I want to get you thinking about the different components of this "rent".

Take two identical, some might call them identikit, homes. Two same model "Barratt boxes". Only one is in Kensington & Chelsea, the other in Blaenau Gwent. I choose them because they are the highest and the lowest respectively local authorities by "land value" in England and Wales. Three bedroom, 100 sq m and with a rebuild cost of £1500 per sq m. On the face of it, they ought to cost about the same to buy, somewhere around £150,000, but of course they don't, do they.

If you managed to find the same little plot in K&C as in Blaenau on which to place your "Barratt box" you'd probably find that in Blaenau it would cost next to nothing - probably a couple of thousand pound per plot, for the trouble of clearing it! But in K&C it would cost several million and probably wouldn't be worth your while putting that Barratt box on it! In fact, in the recent purchase of Chelsea Barracks by the Candy brothers, which was reported as £959m for 12.8 acres, your average tenth of an acre plot would set you back a cool £7.3 million.

In fact, the Chelsea Barracks site is a good one to look at, since it will not involve criticizing the "poor widow" for not developing her prime land, but the government! What did the government, the Ministry of Defence do to make that barracks land so valuable? It certainly wasn't its former use as a barracks! It's not because it was a barracks that makes it an in demand site. But because of all the economic and social activity that goes on around the site. In fact, once upon a time, as a barracks, no doubt the site would have attracted the usual motley collection of military hangers on - whore-houses, bars and so on - it may even have depressed local land values initially, but certainly for the past few decades holding it out of its more productive use has meant other local prices have been pushed higher than they would be if all that land had been used productively.

In fact, the proportion of the "rent" due to the value of the building, the same sort of building as in Blaenau, is a tiny fraction of the overall rent. The rest is due to the location. The popularity of a location which is made up of dozens of factors, but centres around the fact that there are hundreds, thousands, of people who could beneficially make use of that location to be nearer work, social and other opportunities created by the surrounding community.

Now, here's the easy part to remember. What Land Value Taxers want to see, from David Ricardo, Adam Smith, J S Mill, Henry George to Lloyd-George, Churchill, Asquith and many others to the present day, is that the portion of the rent a property yields due to its location, and not the building on it, should be collected by the community and redistributed amongst the community instead of privatised by the highest bidder (or in some cases still the person with the most brutal land grabbing ancestor!), shored up by cheap bank loans. It is rent due to its monopoly as a good location that many people could make use of rather than any effort of the landowner.

In an LVT based tax system, when you "buy" your home, you'd be buying the right to collect the rent for the building alone. This is something you as an owner can affect, through your diligence or negligence in maintaining it or in building something of higher density on the same site. In the language that a typical home buyer will understand better, we want you to pay the £150,000 for the Barratt box to Barratt or the previous occupier, but you pay the remainder, the rent caused by its location, in annually assessed chunks, to the state instead of paying taxes on the earnings from your economically productive labour.

You can already, I hope, see the advantages. This bubble we have lived through over the past decade, the angst of people priced out of the market stressing about if they ever will get out of renting, the ballooning of borrowing that now threatens the very system that created it, will be things of the past. For as long as you can justify paying the location rent given the benefits that particular location gives you nobody can shift you. If that rent rises it is a sign that more and more people are being excluded from land that they might make more productive use of than you. Why should you be able to exclude them for as long as you like and then also reap a massive profit from having cost so many others much money "avoiding" your plot?

Instead of that home in Kensington & Chelsea costing you £7.35 million up front, it'll cost you £150,000 or so up front, which you can borrow to pay for if you need to, and a hefty annual location rent bill instead of both the remaining £7.2 m mortgage it would have cost you to buy the location up front and your income and other taxes on productive labour. Your disposable income is likely to be maybe 30% higher just for losing those income taxes. You can save in a wider range of productive assets for your future than just the monopolistic endeavour of owning a popular, or up and coming location. You may even choose to save so you can continue to pay the location rent when you stop earning for whatever reason - though most would probably find it just as good to save for an income in retirement and to downsize or move so that someone else can have the benefit of the local school you no longer use, the local rail station you no longer commute from and whatever other factors have made your location a popular one and for the proximity of which you would continue to pay even after you have stopped using them.

In the lingo, this is called creating "free land". Returning it to common ownership and paying as you go to occupy the bit that most suits you at any particular time of your life.

Even apart from the source of government revenue this would provide (though some of us would prefer to see the rent collected and simply doled out to all citizens in that community as a community dividend, a basic universal non-withdrawable income in place of most cash benefits) it fundamentally shifts the burden away from working and producing and onto inefficient use of scarce resources.

It is essential in an environmentally responsible regime, because it makes the choice of whether to live close and not pollute by commuting or to live far and spend a fortune in travel costs, more available to more people.

And it is essential in a liberal regime, as it gives people a choice in the "taxes" they pay - the tax savvy will soon work out that if they can spot an up and coming area that still meets their needs early they will pay less tax and watch the services there get better as others catch on, until it reaches some kind of equilibrium again. And it stop people making monopoly profits out of excluding others from what we all need access to - a location to base ourselves at.

This would be so much more than just a "tax switch" though - it would so fundamentally change the fairness, equit, economic justice for millions of people who, knowingly or not, are trapped in a system that takes money from them to line the pockets of landowners, the ranks of whom are getting ever more distant for many people all the time.