Home > Uncategorized > Bagehot’s engaging naiveté

Bagehot’s engaging naiveté

from Asad Zaman

Chapter 2 of Goodhart’s “Evolution of Central Banks” cites in detail several arguments made by Bagehot (pronounce Badge-it) in favor of a free banking system without a Central Bank. After listing them, he notes that Bagehot is “engagingly naïve”, as a gentle critique. It is astonishing that a hard-nosed practical financial analyst like Bagehot would indulge in such visionary daydreams about a “free market” system. This testifies to the power of ideology to blind one to the faults of idolized system. Here are some of the “naïve” arguments advanced by Bagehot in favor of free banking:

  1. In a competitive free banking system, every bank would maintain adequate reserves, to create credibility.
  2. Also, in case of panics, they would lend to distressed banks, in order to protect the financial system.
  3. This system of multiple reserves (where each bank keeps its own reserves) would be superior to a centralized system, where only one bank keeps reserves., due to the benefits of competition over monopoly.

Goodhart shows that this starry-eyed idealization of free banking is contradicted by Bagehot’s own practical experience in context of the workings of the Central Banking system.  read more

  1. Ikonoclast
    June 17, 2020 at 12:12 am

    That’s not engaging naiveté on Bagehot’s part, it’s frightening naiveté or else disingenuous and feigned naiveté . While any nation runs a state fiat money system, a fully democratic Government owned and controlled Central Bank is an absolute necessity, for social equity purposes. The US Federal Reserve does not meet those criteria now and has not since its inception.

    The Board of Governors of the Federal Reserve System claim disingenuously that, “The Federal Reserve System is not “owned” by anyone.” This is a patent absurdity and refuted by their own explanation. See;


    “This central banking “system” has three important features: (1) a central governing board—the Federal Reserve Board of Governors; (2) a decentralized operating structure of 12 Federal Reserve Banks; and (3) a blend of public and private characteristics….

    Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District’s Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.”

    Clearly, all criteria for “ownership” are met within the context of a capitalist mixed economy. The fact that the ownership is an amalgam of public and private ownership does not invalidate the fact that the Reserve System is “owned”. Its ownership is partly public and partly private. Ownership in a capitalist mixed economy system involves two basics; control and income from ownership. A third basic is also usually involved. That is the right to buy of sell ownership of anything. There is shared control obviously by government and boards of directors acting in concert. There is income from ownership. Net earnings go to the U.S. Treasury but only after expenses, a reserve AND “legally required dividend payments” are made to Reserve Bank stockholders.

    “Ownership” in a capitalist system is always regulated. There are always laws and regulations which stipulate the precise legal possible operations of variants of ownership, meaning the operations of control rights, income rights and sale rights. The fact that the Government’s and Reserve Banks’ private shareholders’ operations of these rights are governed by particular or special laws does not obviate the reality that the rights exist.

    Quoting below from the “The New Republic”:

    “Rarely does a day go by when some House Republican doesn’t demand an end to Federal Reserve funding of the Consumer Financial Protection Bureau (CFPB). But you will never hear about the Fed’s direct subsidy to private banks that costs over three times as much as the total CFPB budget.

    The subsidy comes in the form of a 6 percent dividend, paid on stock that over 2,900 banks purchase to participate in the Federal Reserve system. Very few places where ordinary Americans park their money offer such a risk-free benefit. In 2012 (the last year with available data), the Fed gave away $1.637 billion in dividends to banks, tax-free in the majority of cases. And the Fed has been doing this for the last 100 years. It’s one of the many unknown ways the Fed extends special benefits to Wall Street.

    The dividends are one example of the strange manner in which the Fed is both a public and private entity. The Federal Reserve Board of Governors, the main policy-making body, is appointed by the President and confirmed by the Senate. But there are also twelve regional Federal Reserve Banks, whose presidents participate in the committee that sets monetary policy. These Reserve Banks operate as private corporations owned by member banks in their districts, even though they also regulate the same banks.” – The New Republic.


    There is not a right to sell or trade such stock but there is a right to refund if a bank no longer meets the criteria to hold reserve stock.

    Overall, the U.S. Reserve Bank System is a private club of capitalists making rules and issuing money in manners designed primarily for their own benefit. (Quantitative Easing is a case in point.) They have a say and stake in issuing their own money and credit. That’s not a right given to every citizen. Every Central Bank should be 100% Government owned and completely separate from the private sphere in terms of control, ownership and dividends which should all belong to the national government alone and thus to the people.

    Ultimately the capitalist market and money system must be superseded for true socialism to evolve. We perforce must evolve beyond money and markets or we will remain trapped in capitalism until it collapses. Actually, the capitalist collapse has now begun but that’s another post.

  2. Robert Locke
    June 17, 2020 at 10:17 am

    Socialism had its chance in the 20th century; its regimes reigned from the Pacific to the Atlantic, but people rose to get rid of it in the 1990s. Why waste our time with this nonsense.

    • June 17, 2020 at 11:09 am

      Robert, let me first say I am not a socialist in the ‘state socialist’ sense, and second, that what you read in the newspapers is not always true. So, I don’t agree with Ike’s expecting to give governments control of banking. I envisage our all being in control of our own banking (albeit adequately informed and advised about it), and our right to do this not enshrined in national law changeable by politicians but embodied in an international constitution authorised by plebiscite.

  3. Craig
    June 17, 2020 at 5:28 pm

    It’s the pattern/paradigm changing SINGLE concept that we need to be searching for. The capitalist/socialist duality, especially at a time when seeming unresolvable problems have lingered for centuries if not millennia, that must be thought outside of.

    The banking/money system needs to become a constitutionally arms length, separate and fourth branch of government firmly guided by the concept of the new monetary paradigm and its policies. This is where the founding fathers “dropped the ball”. Domination via money after all was what the revolution was all about.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.