The British people now live, for over 10 years, with more debt than disposable income (House of Commons, 2018). Not only that, but households are now net-borrowers for the first time since 1988; borrowing 1.2% of GDP in debts (Office of National Statistics, 2018). Do you know something else? This perfectly coincides with the decrease in spending on welfare when compared to GDP since 2012; people cannot reduce their spending any more, and so are turning to loans to make it up (Office of Budget Responsibility, 2019).

Why do I bring this up? As the majority of households are in debt, then we would want them to not be in debt, or for the debt to be less. Why? Because when they have less debt, they are in less danger of defaulting, less danger of overextending their credit which creates fragility in their behaviour, and are less able and likely to consume. We want a population who borrows less and who owes less.

Inflation allows this to happen. Let’s say you owe £100. The interest rate is 2%. So each year, you would owe £102, £104.2, etc. But what if the inflation rate is faster than the interest rate? What if the inflation rate is 3% (1% higher than the interest rate)? We would then owe £100, £99, etc. Even if you do not touch the principal, then you would eventually inflate the debt away. In a country sinking in debt (as we are now), inflation is a good.

Why do the Libertarian Party oppose it, then? Because it also inflates away savings, and inflates away investment. If I owe you £100, and inflation makes it equivalent to £1000, I’ve lost 90% of the value, making loaning worthless. If I save £100, and inflation makes it equivalent to £1000, I’ve lost 90% of the value, making saving worthless. Inflation would harm the starting of businesses in loans, but it would also make forgiveness of existing debts easier, which may in turn make the risk of starting a business less.

There is one more aspect I’d like to consider; a person can only be free when they have the money to be free, to quote Milton Friedman (1981). A society run by the rich and the serfs leaves the serfs unable to afford to be free; they must worry about food, health, education, and medicine. If we truly serve freedom, then we must ensure that the bottom of society is free enough to make their own choices, rather than be constrained by unfortunate circumstances and an economic model unwilling to help them.

A man who cannot do anything, such as pursue education, or better work, because he depends on his pay check day to day at the risk of leaving his child to starve, is no more or less free than a slave, even if his own choices left him there.

Policy 2: Re-establish the Gold Standard

The second policy introduced is the re-introduction of the Gold Standard. What is the gold standard? The gold standard is where you peg the price of money to a certain amount of gold. So let’s take the current price of gold from gold.co.uk (2019):



The current price of 1g of gold is £35.96. Therefore, £1 is worth 0.028g (rounded up) of gold.



So if you make £100, you can exchange it for 2.8g of gold. If you hold 1g of gold, you can get £36 (rounded up). What is the idea of this? Simple. If the British government wants to spend money, it must either spend only what it can collect in taxes, or what it can collect in additional gold.

Do you want more money? Then you need to collect more gold. So the government is constrained in spending in a deficit.

This means that if the economy enters a downturn, then the government is constrained in it’s ability to help through quantitative easing. Why does this matter? If you look at history (from 1854 to 2009), we find that recessions used to last between 18 months to 65 months (1854-1885), but since Keynesian economics have been implemented, recessions only lasted from 6-18 months, with the longest being the 1929-1933, but most being below double digit length in months, sometimes as short as 6 months. In short, Keynesian economics work for the shortening of recessions (National Bureau of Economic Research, 2010). The gold standard would have us return to recessions measured not in less than a year, but recessions lasting at least a year and a half, and frequently three years at a time. To paraphrase Keynes, “eventually, everyone is dead”. We can’t have people live terrible lives for years for the sake of some ideology.

Let us also consider the supply of gold. We do not make gold in the United Kingdom. Our money supply (M2) is £2.43 trillion (Trading Economics, 2019c)*. We would need enough gold to hold this value of money supply. So, we would need:

£2.43tr*0.028g(gold) = 68.04 million/Gold kilograms

We hold 310 tonnes of gold (TradingEconomics, 2019d). This is 0.3 million kilograms of gold. The United Kingdom would need to do one of five things:

1) Devalue our currency by about 227 times its current value.

2) Purchase 227 times the current level of gold reserves held by the government.

3) Reduce our money supply by 227 times it’s current amount.

4) Take 2.4 billion ounces of gold, which would require us to defeat and plunder the United States gold supply 8.5 times (Bureau of Fiscal Reserve, 2018). Alternatively, we could defeat and plunder China 37.8 times (TradingEconomics, 2019e). Or we can take one third of all of the gold on the planet ever mined (World Gold Council, 2019).

5) Embrace mercantilism, stop all importing, and rely on exporting to be paid by gold until we reach our reserve rates; our current exports are £548 billion per year (Office of National Statistics, 2019b); assuming that this remains constant, it would only take 4.4 years to do.



I’m sure you can see from the above that the idea of implementing a gold standard would be ridiculous, and offer only marginal benefit for the sake of an ideology.

Gold standards also act as a guard against using inflation to remove savings, and removing debts owed to you. This benefits the holders of capital, and does not benefit those who do not hold capital. We discussed this above.

Additionally, there are issues of imports and exports; when a country imports, it pays for the imports with gold. This decreases the amount of gold the country holds. If you have less gold, you have less money. As such, the currency deflates in value. This means that the importing country becomes more competitive for exporting in the future. The United Kingdom is an importing country; a Gold Standard would make exporting more competitive; if the Libertarian Party wants to turn the U.K. into a manufacturing hub, exporting our gold supplies would certainly do that. However, as the United Kingdom is an importing country, we would simply be making importing more and more difficult for ourselves.

However, it would also mean that the prices for importing will increase (again, for food, for example), leading to higher costs of consumption. If wages for increased demand of employment do not grow faster than this, it will lead to long-term increases in costs of living.

There is a simple reason that the world has abandoned the gold standard; there isn’t enough gold. There isn’t enough gold to peg the U.S. dollar alone, let alone the top G20 economies, let alone the economies of the planet. To return to a gold standard would be to render the currency either valueless, confiscate and destroy large amounts of it, or a return to mercantile policies that led to the good decisions such as the opium exporting to China for the sake of silver.



On Commentary of the Gold Standard

The manifesto points out that from 1815 to 1914 there was a period of economic growth, and places the value on the gold standard. I have pointed out the reasons for economic growth in the IP and technology section here, but I’ll explain it more simply here; technology. Technology is the biggest driving factor of economic growth in history. During the time period that the Libertarians point to, the British had a strong economy because of technology growth; technology growth that was improving factor productivity by 1% every year (as one estimate put post-1831 growth had it) would have increased British productivity by over 250% per man (Antràs and Voth, 2002). Let me provide a more direct example:

The British “Crompton’s Mule” was invented in the latter part of the 18th Century. It took several decades to spread throughout the United Kingdom. Before then, a British worker was half as competitive as an Indian worker; as in, for the wages to the product, an Indian worker was twice as good. After a British worker got a Mule? He could produce 1,200 times as much as the same Indian worker (Broadberry, S.N., Gupta, B, 2005).

Perhaps it’s because the British had just invented steam power at the beginning of the 1800’s, and made it workable, leading to massive infrastructural projects and the spread of railways to feed the industrial machine, as well as the massive military spending for the famous British navy that produces jobs for both engineers and sailors alike (Atterbury, 2019).

The idea that this is due to the gold standard is at best a massive mis-reading of economic thought at the time. At worst, it’s a deliberate sleight of hand to trick the reader into thinking these two factors have any relationship.



Policy 3: Introduce unrestricted competition among depository institutions of all types

Policy 4: An end to government guaranteed deposit insurance

I am putting these two policies together because they have the same problem; banks are important to the economy, and to the country as a whole. There is a reason that governments bail out the banks, and it’s not just because the politicians and the banks are in bed together (although they likely are). It’s because when the banks fail, every business in the country loses its money, every person who has money in the bank loses that money, and a portion of the country simply ceases to have money, jobs, and assets.

I’ll pick a bank at random; Lloyds Banking Group (2019). They have 21 million savings accounts; one-third of new housing is invested by them, Lloyds owns the Bank of Scotland which handles 90% of businesses in Scotland. If they failed, one third of people would lose their money, 90% of business in Scotland would cease to function, and one third of new housing would stop.

Banks are vital for an economy, they’re not simply places we put £5 notes. That is why we insure them. Because if they fail, the consequences of failure stretch far beyond the bank itself, or the owners personal accounts.

Frankly, unregulated banks put entire communities at danger, and put entire economies in danger. Like the military, or nuclear energy, they are regulated for a reason.

Policy 5: Owners/directors of depository institutions would carry personal liability for losses

It is interesting that a libertarian party would remove the right of creating a PLC (which most banks are), a public liability company which has limited liability. How to decide who would be responsible? Would stockholders be responsible? Or only whoever is sitting at the seat of the table? Most of these are voted by the board; would the board of directors be responsible?

Are they proposing the removal of LLC and PLC law in general? Just for the finance industry?

As the U.K. is a country of common law, this would easily spread to other industries. Will we find lawsuits awaiting any company that fails to deliver? We would find every company that can leave will leave the United Kingdom within a moment. In the manifesto, they praise the ‘fintech’ industry, while proposing to create law to destroy it. We are already scary enough to work in, in a world that may or may not Brexit hard or softly.

We would create a corporate culture of never risking anything, and of an economy that dares not do anything that cannot be guaranteed success. It would destroy all innovation, investment, and growth in the economy. This is a policy that sounds good, but even a cursory look would be worrying.

As usual, there isn’t enough fluff to really reason this idea through. What laws are they proposing? Why is this in monetary policy? Is it Libertarian to change LLC and PLC law?



Policy 6: Minimum capital to debt ratios would be laid out by law, and published clearly on customer statements

This confused me for a while; the usual banking term is debt to asset, or debt to equity ratio. I then discovered that capital to debt is a business term; the Libertarian party is full of businessmen, so it makes sense that they’re using the language. The idea behind it is that a business can use this ratio to eliminate its debt. This is a fundamental misunderstanding of how the modern banking system works.

So what are they talking about? Divide a bank’s capital by it’s debt. If it has £100 of capital, and £66 of debt, it has a 1.5 capital to debt ratio. A quick look puts it at 0.5 (Lloyds) and 2-ish (HSBC). So we have a wide range of capital to debt ratios already; I believe this policy would be an overreach of the Libertarian idea of not increasing the reach of government. I also believe it would go against policy 3; what if a bank wants to offer more stability, or more investment opportunity? As a bank holds the risk (policy 5), does it not have the right to make money?

As far as policy goes, it’s a bit bland. More information to the consumer is good, but I assume it is to make the market safer? It certainly makes the market slower.

Let’s say they use a ratio of 2.0 capital to debt ratio, or 0.5 debt to capital ratio. So the bank has £100, but owes £50 to the consumers. That’s it; they cannot lend anymore money. The economy stops there, until someone lends them £20, in which case, they can lend a further £10 (0.5 of £20). If someone withdraws money, they are now in breach of the law, and must withdraw from a loan faster. The economy stops quickly, and moves stickily.

We do not use this in banking, because banking does not work like a business. We judge banks by their ability to produce liquidity, to release deposits, and provide loans to business, people, and each other. Banks usually have higher debt to asset ratios, due to how they work. Let me explain.

The current method we use is the reserve ratio; in the United Kingdom, we have a reserve ratio of 1.5%. For the sake of simplicity, let’s say it’s 10%. Person 1 puts in £100. The bank keeps £10, and loans out £90.

The next person takes their £90, puts it into a bank (by spending or saving it). The bank keeps £9 (10%), and loans out a further £81.

This person does the same; the bank keeps £8, and loans out £73. Etc.

In the end, the initial £100 has created, over the course of just 7 people, £521.64 of economic activity. This isn’t the largest effect; I put the reserve ratio at 10%; the real rate is 1.5%, and it doesn’t stop with just 7 people. Naturally, in reality, debt outstretches the assets.

This has another name; the multiplier effect. It is a central tenet of Keynesian economics, and I am assuming that this a stealth attempt by the Libertarian party to stop this, by creating a limit on the expansion of monetary supply. The effects would be an economy that is growing even slower, and yet another attack on our financial sector, who would flee to continue their practises abroad.



Policy 7: Monetary Competition

The Libertarian Party would like cryptocurrencies such as Bitcoin, as well as other precious metals like gold and silver, as well as other recognised currencies such as Zimbabwe dollars, the U.S. dollars, Chinese Renminbi, and Venezuelan dollars. I joke because they haven’t specified which currencies they’d recognise. At one point in Germany post-World War II, they used cigarettes as currency (Bignon, 2004). Good news for tobacco makers.

The idea is to prevent the government from debasing the currency by allowing other currencies to be used; the problem is that I cannot even imagine people coming to pay for their cigarettes with a small bag of gold, a wheelbarrow of Zimbabwe dollars, or with Indian rupees and the shopkeeper trying to give change in Euros or a few silver coins.

Which silver? Is it pure enough? Guess the shopkeeper will need to keep the goods until he can get the stock independently checked for the purity of the silver.

In terms of more economic analysis, it will lead to less domestic demand for British pounds, and greater domestic demand for foreign currencies; this will lead to a depreciating currency, making importing goods more expensive, and exporting goods yet more attractive.

To pay for the foreign currency, we will also see the gold reserve from policy 2 reduce, reducing the value of the British economy to use U.S. dollars instead.

We would also be completely at the mercy of other countries who choose to debase their own currency, and if the British hold a significant amount of their currency, it will hurt British consumers without any way to prevent the damage, or have recourse for their hurt (such as voting those responsible out of office).

This also ignores the biggest advantage of our currency**. Simplicity. One currency, exchange rate £1 : £1. Even someone from Birmingham could use it.



Conclusion:

The policies of the Libertarian Party UK 2019 are confusing to read; some policies that overreach, some policies that do indeed hold liberal ideas. Some fundamental misunderstandings of the economy, and some ideals that are unrealistic in the modern economy. There are deliberate misrepresentations of history, and poorly explained ideas if they are even explained at all. There are policies that appeal to some sense of libertarian ideology, but I cannot believe appeal to any portion of the electorate.

They are embracing policies that would destroy the British economy, destroy the financial sector, and leave more households than not into debt and worse condition. I have tried to explain the positives of each policy, but the negatives are large and hard to justify. Even if so, they are not justified in this manifesto.

The only benefits from the above policies are as such; they would set the United Kingdom up for returning to an manufacturing powerhouse as per the British Empire, we would return to an export focus that may produce low-skilled jobs (but with automation, how many will be produced?), and there would be a focus on individual responsibility, and in turn, lower taxes and lower costs of living. However, without the redistributive policies of the current system, many will sink into debt or live much poorer lives in the short, medium, and possibly long-term. This, in turn, will lead to populism and nationalism.

I believe in many libertarian principles, and I agree that Britain is in need of a written constitution. But the policies laid out here, read through the eyes of someone who knows economics, are all ideal and nothing practical or beneficial. It was a disappointing read.