The Bank Notes Act of 1910
Some recent discussion here on the ALS blog has centred around the issue of private currency, fractional reserve banking (FRB) and the historical role of gold within monetary systems. Whilst some of the associated questions will no doubt get rehashed again and again I would like to focus this article on what I think is the key obstacle to freedom when it comes to the question of private currency.
Currency comes in a multitude of forms. Some alternate categorisations that we might apply to currencies are:-
- Privately issued or Government issued.
- Fiat or Promisory
- Tangible or Electronic
- Paper or metallic
Perhaps the most familiar form of currency is the national fiat currencies that we encounter daily such as the plastic Australian notes we find in our wallets or the green paper notes that we call US dollars. Both of these are examples of currencies issued by governments where the value is determined by government monetary policy and market demand rather than via any contractual promise. As such they are known as fiat currencies.
Not all government issued currencies are necessarily fiat currencies. In earlier times many governments routinely issued currencies that entailed an explicit promise and they were in essence a contract between the holder of the currency and the issuer (in this case the government). The following picture shows an early US dollar that was promisory in nature and carries words that outline an explicit commitment to redeem the currency for some specific article. In this example the note carries the words: “This Certifies that there is on deposit at the Treasury of The United States of America One Dollar in Silver Payable to the Bearer on Demand”. So long as the term “One Dollar in Silver” means a specific weight of Silver (as in US law it once did) then such a note is not a fiat currency but a promisory note.
So a government issued currency need not be a fiat currency, even though pretty much every government issued currency today is. Private institutions can in theory also issue such promisory notes. The next images shows an historical example of a promise issue by “The City Bank of Sydney”.
This note promises to pay the bearer 20 Pounds on demand. At the time “20 Pounds” legally meant a particular quantity of gold coin.
However such paper promises will only function as a medium of exchange if they are transferable. If the promise is explicitly made out to a particular person, rather than to the bearer (holder) in general, then the item can not serve as a medium of exchange. A promise that is to a particular named party does not have any redemtion value to a third party and so it won’t circulate. The following images shows a modern example of a paper promise that won’t circulate because it is specific to a named party only.
The images shows a gold certificate issued by the Perth Mint which promised to pay a given amount of gold on demand. These Perth Mint certificates come in two forms, allocated metal or unallocated metal. However the certificate is to a named party and as such the certificate is not transferable and can not circulate or act as a medium of exchange.
In 1910 the Australian Federal Government passed several monetary reforms and one of these was know as “The Bank Notes Act of 1910″. Whilst the act does not prohibit private currency in Australia it does impose a 10% tax on redemption for all private currencies. Such a tax is prohibitive in nature and it effectively brought to an end the existance of privately issued currencies in Australia.
The most simple freedom orientated monetary reform that we could have in Australia would be to abolish “The Bank Notes Act of 1910″. It would not bring to an end the dominance of the fiat Australian dollar, nor reform the basis of monetary policy, but it would pave the way for private alternatives. It would not open a flood gate but it would leave the door slightly ajar. It is hard to see any more ambitious reform towards privatising money having any effect without this first basic step. In the monetary arena even such a basic level of freedom is rare in the world today but it does exist. The best precedent for such freedom comes from Scotland where today private banks still issue private promisory notes, payable to the bearer on demand and circulating as a functional alternate currency. Given the political will Australia could very easily make this quite minor technical adjustment and become one more niche of freedom in the world and present at least a modest reminder of the way a less centrally controlled world once worked.
45 Comments »
Leave a comment
-
Recent Comments
Fleeced on State Elections 
Steve on State Elections 
Semi Regular Liberta… on State Elections 
Philip Lillingston on State Elections 
papachango on State Elections 
Shem Bennett on State Elections Fleeced on State Elections 
'Nuke' Gray on State Elections papachango on State Elections Fleeced on State Elections 
Semi Regular Liberta… on State Elections Fleeced on State Elections Fleeced on State Elections 
TerjeP (say tay-a) on State Elections Steve on State Elections
LINKS
Featured Book
Stats
ALS elsewhere
Gee the 10% tax sounds harsh, but isn’t this actually much lighter than the system in the US where the US mint has outlawed the use of gold and silver backed private currencies.
For example, see the details about the legal charges brought against the Liberty Dollar:
http://www.libertydollar.org/ld/legal/legalissues.htm
The US mint published the following warning:
http://www.usmint.gov/consumer/index.cfm?flash=yes&action=HotItems
The United States Mint urges consumers who are considering the purchase or use of these items to be aware that they are not genuine United States Mint bullion coins and they are not legal tender.
Jono – I’m not a US legal expert. However the term “legal tender” generally has a quite specific meaning. It means that a creditor must accept the instrument that is deemed “legal tender” as adequate settlement for a debt. It means that the item can’t be refused. The fact that something is not “legal tender” merely means that it CAN be refused. It does not mean that it MUST be refused. I think the US mint has
over stepped the markover extended it’s claim in this instance.The following legal case brought against e-gold is also embarrasing for the US government.
http://www.e-gold.com/letter2.html
Two questions:
1. What benefits does Scotland enjoy as a result of issuing private promissory notes? I mean, while it might increase monetary freedom, what practical benefits are there?
2. How would privately issued money deal with counterfeiting? It’s impact on government issued money can be severe, so I imagine it might be devastating to private issuers.
Does anyone know the history behind the Bank Notes act? Was there some sort of crisis that it sought to address?
A better question might be what benefits does the current effective prohibition offer. And I would suggest that there is no benefit. However to answer your question directly I think the only real benefits of ending the prohibition are:-
a) It is a necessary precondition for any subsequent more significant reform in the direction of privatising monetary processes. It is an enabling reform.
b) The actual experience of dealing with private currency would likely make people more open to alternatives.
Given the simplicity of the reform (e.g. just repeal the Bank Notes Act of 1910 via a private members bill) I think it is worth doing if the opening existed. I don’t think anybody would wish to expend much political capital on it however. It’s the sort of reform you would do if there was no significant objection. You would probably tailgate it on as part of some other reform bill that was happening anyway. I recently ran the reform idea past leftist leaning economist John Quiggin and he thought it was fair enough.
The basic inference I draw from your question is correct however. This sort of reform in and of itself is not going to change peoples lives in any significant way and is never going to help anybody win votes. It is an ideological fringe issue a bit like compulsory voting or seat belt laws.
They would face similar issues that governments face. Actually private issuers would have more incentive to deal with the problem than government given that they ultimately wear a greater chunk of the cost. In any case this issue does not seem to impede the issue or use of private currency in Scotland.
A good question. As far as I know it was not so much in response to a crisis but rather a form of patriotic symbolism for a relatively new nation. However it is interesting to note that it was also around this time that the US Federal Reserve came into being (1913) and that Britian first left the gold standard (1914) so it is likely that certain events or ideas were common drivers in each case.
Terje, what can I say? Didn’t you learn from Justin? You should wait for every ten comments, and then answer them all in one giant column! Otherwise, people will simply accuse you of trying to have the last word all the time! And I’m sure you wouldn’t want that, would you?
Thats terrifice Terje.
You’ve explained EXACTLY how a trouble-free monetary system would work.
You could bank on it that these certificates ARE IN SOME SUBTLE WAY PROHIBITED!!!!!!!! from being transferrable. Well perhaps I’m going to far here since there is very many ways in which the taking up of such certificates AS MONEY is prevented.
But the thing is this. If we had all these Perth Mint setups… And with electronic transferrability like E-gold as well as Cash,bars and coins….
….. If you didn’t audit them then they would eventually start lending your Gold out so that the certificates weren’t backed 100%.
And as soon as you get that happening you get a bifurcation of the economy. Like some sort of shredding of space-time into two parallel universes.
If you maintained the 100% backed warehousing and audited it rigourously then the financial economy and the real economy are really the same economy… And in fact you would never read the following words…. “the financial economy and the real economy”
Because with that warehousing scenario and without ever having fractional reserve, there is no two economies… and what was the financial sector now becomes barely noticeable and something that no-one really need take notice of.
Some research ought to be done about countries clarifying their property-rights with regards to money and that preceding a massive expansion in the countries economy.
I’m thinking of Sir Isaac Newton standardising the pound sterling. And reigning great vengeance on anyone who debased the coin of the realm.
Our greatest scientist must have worked it out just how important it was to clarify property rights in this manner.
His influence as to the power of the British Empire might have been stronger via this channel then all his mighty scientific discoveries.
>>>>>>>>>>>>>>>>>>>>>
We have more then one type of compulsion I think.
Hernando De Soto….. Probably the only non-Austrian (I think he’s basically a closet Austrian) economist alive today worth spending a lot of time listening to.
Well he has shown just how important it is to have that clarity-in-property rights. To have VERY clear property-titles. He shows that its when property-titles have been clarified THATS WHEN a formerly poor country can suddenly become rich.
Now I hope, of course, that one day we can get that clarification in property rights in a totally voluntary society. For that we’ll need a lot of work on natural law and we’ll need competitive courts and things. And I hope also that one day it will be practical to have private defense.
But look both these things are not possible without going through certain stages.
We need compulsion in defense (ie a defense budget) for the time being. Because we need to be able to have an air and submarine buffer that keeps the bastards right away from the continent and we need the capacity to be able to avenge ourselves by killing regime-leadership.
And in the same way that we cannot yet dispense with compulsion for national defense, well we ought not dispense with compulsion in a totally purist way when it comes to bringing total clarity to property-titles.
It is because we don’t have clarity in property rights when it comes to digging under roads and tunnelling under peoples property that we have to rely on government to provide our infrastructure…. (just for example) and so we have a lot of work to do in this clarification process for property that currently exists under ground and for the rights and obligations which ought to prevail when it comes to HOMESTEADING underground property titles.
So you all think its a big put-upon to dissalow fractional reserve?
Well you could allow it and minimise the monetary damage but always in the context of maximum clarity in property rights. No way could you leave it to the banks themselves or they would naturally try and fudge and homogenise less good money with better money. Then the bad money would drive out the good. And the whole thing would collapse all the way to where we are now.
But its too much of a wild card to be even allowing a highly differentiated fractional reserve product IN TRANSITION.
This is no game we are playing here. In transition we simply have to hit all the right targets and avoid a recession. You screw money up you can ruin millions of peoples lives and even make a war more likely.
So in transition we really need to at first get to 100% backed fiat… And then we can privatise with great confidence from that point.
>>>>>>>>>>
Now of course I realise I haven’t made my case yet. But for that we need to get into monetary theory.
the use of bank cheques as currency is quite common in korea now.
the largest note is the 10 000 won note which is about AU$13-14 which when the average monthly take home pay packet is about AU$2500-3000 gives you a big wod of cash.
because of this the use of 100 000won bank notes is quite common and most places will accept them as currency. the practice has become so widespread that there is quite a large market for machines to check the security features of the bank cheques which a lot of retailers use.
there is a bit of pressure on the government to introduce a larger currency note because of the relatively high cost of the bank cheques which have a limited life compared to official currency due to the fact that wen they are cashed they have to be destroyed.
I think that HK uses banks to issue money as well — there are both HSBC and BOC notes floating around, although I’m not sure of their legal status with respect to the government (there are no government notes), and whether BOC notes would be treated differently to HSBC in extreme circumstances.
Hard to say. I would think that being able to calculate the trajectory of a canon ball is a pretty useful insight. Ultimately though economic might is the most potent weapon, assuming of course you know what to do with it.
Bravo Terje, very good article.
So what are the benefits of private alternatives?
Conrad – I did not know that Hong Kong used private promisory notes as part of it’s currency stock. So thanks for the tip.
The following link is an image of one such note issued by the Shanghai Banking Corporation:-
http://www.banknoteworld.com/banknotes/hong_kong/HongKongP204c-500Dollars-1997-donatedmp_f.jpg
Also here is a link to an image of a Scottish private bank promisory note:-
http://www.rampantscotland.com/clydebruce20a.jpg
In both case you can make out the inscriptions where they pledge to pay the bearer of the note. They are explicit promises.
“Hard to say. I would think that being able to calculate the trajectory of a canon ball is a pretty useful insight.”
Right. But that was open to all parties.
Sure, but others could have emultated his economics as readily as they emulated his physics if they wished. And in fact many other nations fixed to gold, most actually. The Chinese silver standard and the US era of bimetalism being notable exceptions.
Not that purity abounded. Many nations floated and switched to inflation taxation in times of war. The US dollar was floated during the US civil war and the British pound was floated during WWI (and later restored in the 1920’s very badly by Churchill). And of course when the British pound floated ever commonwealth nation that used the pound as a unit of account (eg Australia) felt the economic effect.
Terje,
here is a link to all the notes — there are in fact 3 banks that issue notes — I had forgotten about SCB
http://www.info.gov.hk/hkma/new_hk_banknotes/eng/index.htm
I think an important part, which I don’t know the answer to is how (or if) the government makes the notes secure. For instance, if HSBC went broke, and the government simply became accoountable for the notes, then these banks are really much more like a government printing press, than a useful currency alternative. On the flip side, one can also imagine the government going broke, in which case it would be interesting to know what would happen to the currency — it doesn’t neccesarily follow that it would be worth nothing, since the banks need not go broke also. That probably isn’t a fuss in places like HK (the government isn’t going to go broke and neither is HSBC), but it would be a fuss in many other countries. In fact, one can imagine a bank’s currency being better than a governments in many circumstances.
Conrad,
The quality of such private promisory notes depends on two factors.
1. The integrity of the private bank. They have an interest in defending their reputation and given that we let the private sector produce our food I’m more than happy to let banks create our currency as promisory notes. Unlike Graeme I’m not interested in regulating their capacity to pay, merely in seeing their obligation to pay subject to the normal rules of contract. A promise to pay on demand is not a promise to warehouse anything. We should judge them by their performance not their methodology. Although obviously if they do promise to warehouse such as E-Gold or the Perth Mint does then that should also be a legally enforcable contractual obligation.
2. The quality of the “unit of account” that the promise is denominated in. Banks generally have little control over this as the government typically proscribes the unit of account (be it gold grams, bags of wheat or foreign units of currency) through a multitude of policies ranging from tax law to criminal penalties and government fees.
This article of mine really addresses some of the history behind the first of these. However as I implied in my responce to DavidL and in earlier discussions I actually think point 2 is of far more significance. The most obvious and prevalent way to address point two is to have a uniquely national unit of account that the multitude of laws refer to (eg Australian dollar) and then have a separate stand alone policy or law that defines what that unit means. For example we could let the banks create all currency as promises to pay so many Australian dollars on demand and then have a law that defines the Australian dollar to mean 40 milligrams of gold. Likewise we could define the Australian dollar as being 1 big mac and a half pint of milk. I prefer the gold version.
Regards,
Terje.
I came across this speech as I was researching something else and I thought of this thread and the issue of free banking.
http://www.rba.gov.au/Speeches/2001/sp_gov_180901.html
Specifically Q2 ‘Question 2: Why not leave interest rates to the market?’
Apparently people who advocate a free banking system are a bunch of ivory-tower academics.
I suddenly have less faith in the RBA.
From Andrews link:-
Interesting that since 1910 and the widespread adoption of central banks the world has since experience the greatest rate of inflation in all of written history.
Maybe Ian Macfarlane, as the then Governor of the Reserve Bank, was not offering an entirely unbiased opinion.
“Unlike Graeme I’m not interested in regulating their capacity to pay..”
I’m not interested in regulating their capacity to pay either.
You are not serious about this Terge. If you take away the monetary inflation, and the OTHER government backing….. then you will have to retain and enhance the many thousands of regulations they have now.
You are SOFT on regulation.
Thats pretty clear.
Because if you had a visceral hatred of regulation then you’d accept 100% backing so you could get rid of the rest of the commie-rigged-market setup that they have going.
“The reason was that such “free” banking systems were found to be prone to instability without a central bank to manage liquidity and provide last-resort funding in a crisis.”
This is exactly right Terge. And everyone knows it.
Justin and David have asked you about practical benefits of this and that. We have had 14 or more years without a recession. What has your ponzi-Gold scheme got to offer on the PRACTICAL level?
Not on the Purist level. But on the PRACTICAL level?
I’m not talking about the PURIST level. Just the PRACTICAL level.
What has your system got to offer?
Does anyone know what the general circumstances were around the time of the 1910 act? What were its proponents trying to solve by effectively banning private money? Or were they simply trying to protect the monopoly of the reserve bank in issuing currency?
Fractional reserve is unstable. That provides the reason/excuse…
But then industries are always prone to cartelisation.
Most of the banks would be wiped out if they had to compete on the level-playing-field of 100% backing.
They were also busy banning private phone companies around the same time.
It would be fascinating to understand more deeply the daily issues and circumstances that saw some of this type of legislation become law. What were they thinking in 1910 that made them go down this path?
1. Its normal industrial cartelisation.
2. Fractional reserve gold was deeply unstable. And it would be a great deal more unstable in the information age.
I think that in the next few years as more newpapers publish antique archives on line it will be easier to get a sense of these things. I do have some old SMH issues from around the time but not enough to get the essence of such debates. From the old clipping I have read however it seems that there is little new under the sun. The desire to make economic factors submit to the control of government is nothing new and neither is the desire for freedom and free enterprise. Both cases seem to get the same air time then as they do today.
Just for fun here is a news search (mostly USA) for the year 1930 on an interesting but different economic topic:-
http://tinyurl.com/2bd8hy
Here is what left leaning economist John Quiggin recently said about the Bank Notes Act of 1910.
http://johnquiggin.com/index.php/archives/2007/03/17/in-praise-of-libertarianism/
This is partly why I think such a reform could be passed without too much opposition. The Australian government issued currency is not today a newbie. It is the worlds sixth most heavily traded currency. As such a little competition hardly seems threatening.
I just noticed that several comments made by Graeme Bird after 7:30pm on the 13th of April have been stuck in moderation. I have just released them and they now appear amoung the comments above according to the time he submitted them. Graeme I deleted your minor meta comments.
If we remove government monetary inflation (I assume you use the term here to mean monetary expansion) and we continue to permit Fractional Reserve Banking then which major regulations would need to be enhanced or retained as a result? I know that you say there are thousands but perhaps you could offer a few significant examples.
Before there was a central bank in Australia there was monetary instability. After there was a central bank there was more. The same pattern can also be seen in the USA. The nature of the instability may have changed but the fact is that central banks did not really solve anything. They just shifted the burden of adjustment onto third parties.
Not really because prior to 1910 promisory notes were required to have 100% backing, unlike demand deposits. So they effectively moved to prohibited promisory notes that were at least notionally 100% backed but not demand deposits which were fractionally backed. Since then banks have worked hard to make demand deposits a viable medium of exchange and today EFT is very popular.
“If we remove government monetary inflation (I assume you use the term here to mean monetary expansion) and we continue to permit Fractional Reserve Banking then which major regulations would need to be enhanced or retained as a result? I know that you say there are thousands but perhaps you could offer a few significant examples.”
Well I could do if you stopped the … censorship.
I mean I’m not going to wait a … week for my comments to get by and make it look like you’re winning this debate.
{editorial note by Terje: I can’t stop the moderation so there is no point asking me to fix it. I can only approve your comments as and when I see them and I can only do it for this particular topic. I agree it is akward but you either need to give up, live with it and manage as best you can or convince the site administrators (ie Sukrit or John) that you should not be moderated.}
“Apparently people who advocate a free banking system are a bunch of ivory-tower academics.”
As opposed to people who understand monetary applications of game theory, money creation, credible disinflation and direct and indirect mechanisms of monetary policy?
Graeme, why do you continue on that free banking is unstable? New York State had one of the finest banking systems ever produced before the Carter Glass Act. It was so flexible too that it could avoid bank runs.
Brendan asked:-
I happened apon this:-
http://en.wikipedia.org/wiki/Free_Banking#Theory_of_Free_Banking
There are few citations and not much coherence within this text but it does seem to offer some background.
For more background on the 1890s see the following:-
http://www.caslon.com.au/boomprofile5.htm#roaring
Real world example in today’s Australian of how governments can really botch things up when it comes to monetary policy in particular, gold reserve.
http://www.theaustralian.news.com.au/story/0,20867,21562878-2703,00.html
[...] Petersen at Thoughts on Freedom manages to make a potentially dry as dust topic – the Bank Notes Act of 1910 – reasonably [...]
Pingback by Club Troppo » Missing Link | April 17, 2007
So this is where you washed up after IP, Terje.
A currency storage and transfer service for Graeme: https://www.libertyreserve.com/Default.aspx?tabid=33
Bannerman – IP was great . Such a pity it died.
A History of the Note Issue is on the Reserve Bank’s website.
The Australian Notes Act 1910 is no longer in force. It was repealed by subsequent Acts and now lives on in the Reserve Bank Act 1959. Perhaps the least efforts way to allow private commodity money would be to repeal:
section 44 of the _Reserve Bank Act 1959_. This section disallows persons and states from issuing bills or notes for the payment of money payable to the bearer on demand and intended for circulation.
section 22 of the _Currency Act 1965_. This section prohibits the making and issuing of other than official coins.
Doing this would keep the Reserve Bank and the Treasury in place, issuing notes and coin, but allow private companies to issue coin and notes as well.
Danny – the page you reference on the RBA website does not say that the Bank Notes Act of 1910 was repealed and replaced. However you are quite likely correct in what you say.
Having reflected on the questions regarding the benefit of such reforms I think the most central reason that I advocate a role for private currency is that ultimately I think central governments should be responsible for deciding and setting the national “unit of account” that is used to denominate the book keeping within government accounts and which forms the basis of tax laws and legal penalties and which thus generally prevails in the conduct of private commercial transactions, however ideally this power would be limited by a constitutional rule prohibiting that same central government from issuing any “medium of exchange”. Such a separation is in my mind the most likely structure to lead to responsible monetary policy and behaviour over the long haul.
Terje, have you seen this amusing aside to the issue of private currency. Can you believe the muppets who tried to actually bank these cheques and notes? Does anyone know any of the history of these cranks?
That “amusing aside” link is the best link that I could think of to get people to understand what fractional reserve means under free enterprise conditions.
You see what these guys are doing is what anyone could do under free enterprise conditions. Since under those conditions no-one has a banking license which is the same thing as saying that everyone has a banking license.
No-one has a license to print money since everyone has a license to print money.
Looks like the DoJ aren’t fans of alternative currency: http://www.theregister.co.uk/2007/05/01/e-gold_indictment/
“Does anyone know any of the history of these cranks?”
Do I?!
Yep. Search for the Principality of Caledonia, which are a similar group and you will see many old monarchist, anti communist, national socialist and other whacky ideologies – although largely it goes back to a tax dispute.
They have somewhat of an argument about the legality of our constituiton, although this is ultimately flawed, it is an interesting point to note there actually was a Royal Commission in 1926.
Ben – thanks for drawing attention to the DoJ attack on e-gold. The written response from e-gold pulls few punches.
http://www.e-gold.com/letter3.html
Here is but a small samples of the response from e-gold:-
hi,
i am from pakistan and i like to know the prices of old currency of us dollar and i have some antique us dollars and i want to sell them send me procedure of sell anitique notes