In response to: “The King’s Revolt” (Vol. 2, No. 4).


To the editors:

Henri Lepage’s critique of The End of Alchemy: Money, Banking, and the Future of the Global Economy by Mervyn King, a recent book by a former governor of the Bank of England, seems to me both extremely enlightening—his refutation is unanswerable—and affected by surprising ideological blinkers.

The impasse faced by the central banks is noted by King and Lepage. From quantitative easing to endless reductions in interest rates, they have become prisoners of their own Keynesian logic. The central banks are imagining, and even enacting, measures that are as radically coercive as negative interest rates, “helicopter money,” or the banning of cash—which would mark the subjection of each of these spheres of human activity to the oversight of state officials, a sort of totalitarianism through absolute transparency.

Not only does King part ways with these models, he does so by mobilizing several concepts borrowed from the so-called Austrian school of Carl Menger, Eugen Böhm-Bawerk, Friedrich Hayek and Ludwig von Mises (without, it should be noted, acknowledging this, even in his notes). King proposes an alternative to the current system, which consists in entrusting the central banks with

a new role as a pawnbroker for all seasons—that is to say, a pawnbroker on which banks could always count—with the consequence that banks would be required to maintain reserves to the top of the till. Under this new regime, liquidity support would be provided to banks experiencing temporary cash shortfalls, but only under the umbrella of contracts fixing the collateral they hold at the central bank and the conditions under which they would be forced to accept a haircut.

The implementation of such a system would mark the end of so-called fractional reserves, which are, according to King, the primary cause of our current setbacks.

According to his proposal, however, King would enshrine the central bank as the ultimate planner of economic activity. This shows that his apparent conversion to the concepts and modes of Austrian economics remains superficial. Lepage explains—and on this point his demonstration is brilliant—(in the French):

such a project would involve the reconstitution within the central bank of a planist administration whose function would be to manage the haircuts applicable to all the financial assets that can be used as collateral. … This system therefore leads to giving the offices responsible for determining the level of haircuts according to the type of assets, the nature of the sectors, and of their activities, perhaps even the individual characteristics of firms, excessive power to act on the financial conditions of banking activity.

In the current system, only the prime rate is set by the central bank, the economic agents remain free to fix the other rates. In the system advocated by King, the entire schedule of rates would be subject to the goodwill of the administrative agents—of this supposedly “omniscient and angelic state” (James Buchanan), according to the epistemological error that underlies any anti-liberal approach. In reality, King does not understand that the market is precisely the method selected by evolution as the most capable of managing that radical uncertainty which he describes as inherent in human societies. Far from arguing for the reinvention of planism (!), this uncertainty requires us to explore models that, unlike the current situation, let alone King’s solution, lead us toward greater accountability for economic agents.

It is in the “programmatic” part that, in my opinion, the weakness of Lepage’s criticism appears. To write that “episodes of systemic contagion are in fact extremely rare—not to say non-existent” and not to see that the very institution of the central bank was conceived in a perfectly progressive, incremental, Popperian way, so as to remedy observed deficiencies (bank runs, etc.), does not seem to me to account for the reality, especially when it is a matter of advocating the suppression, pure and simple, of the central bank, in order to institute what Lepage calls a system of free banking.

It is perfectly possible to argue for the epistemological superiority of the Austrian school, while integrating features of a statist nature, especially when these have been gradually shaped by practice. Consider the history of Roman and Common Law rights, the result of the vicissitudes of daily life, which have regularly been the object of restatement (American law) and codification, but which have not altered either their nature or intrinsic superiority over the administrative and Cartesian vision of the law.

Let me conclude by noting that Henri Lepage offers a definitive refutation of the King solution, without, for all that, being able to sketch a convincing alternative to Leviathan.

Drieu Godefridi


Henri Lepage replies:

Drieu Godefridi responds to my assertion that “episodes of systemic contagion are in fact extremely rare—not to say non-existent,” claiming that, in his view, this “does not seem to me to account for the reality…” The development of electronic techniques for treating data has revolutionized historical research, in particular, in the area of economic history. They allow for] large scale analysis of the accounting records of companies or banks. The results have called into question a number of historical dogmas that have been transmitted from generation to generation without critical evaluation. This is a fact. One may, of course, accept or reject the conclusions of this research; they often do not conform to what is politically correct these days. I have cited my sources, without expanding on them, as this is not the place. It is true that some of these texts that do not have the imprimatur of a peer-reviewed journal, but the authors I cite are respected scientific professionals (for example, Charles Calomiris or Anna Schwartz). I would be curious to see Godefridi’s sources refuting the lines of research that I mention. Otherwise I might be tempted to suggest that he is also affected by ideological blinkers.

His second criticism is that: “the very institution of the central bank was conceived in a perfectly progressive, incremental, Popperian way, so as to remedy observed deficiencies (bank runs, etc.).” This is a theory, universally adopted, perhaps, but only a theory. As I have noted, the history of pre-modern banking and banking institutions has recently attracted the attention of new generations of researchers. A new interpretation has emerged. It is now clear, for example, that the emergence of the first purely cash payment systems based on credit mechanisms dates back much earlier than had been previously believed. This is incompatible with the traditional conception of a hierarchical, progressive, and incremental progression from one stage of currency to the next. As for the raison d’être of the first central banks, historical sources have shown that these early banks were not shaped by purely economic and financial concerns, which, according to the theory, were the basis for their activity in the modern world. These remain subjects of considerable controversy. I am left wondering to what degree Godefridi is interested in them, a personal choice on his part.

I would also recommend avoiding any overly systematic or literal interpretation of the Hayekian scheme of a spontaneous order to legitimize the existence of specific institutions whose first outlines appeared only three centuries ago, and which only became truly widespread fewer than a hundred and fifty years ago. That is a long while for us, but very little time in the history of civilizations. Above all, from Hayek and Buchanan I have retained the view that the concept of spontaneous order is valuable only as an instrument of analysis— when used to account for the emergence of global structures and complex social organization—and not as a means to legitimize the existence of specific institutions.

While I am, generally speaking, in agreement with Godefridi on many subjects, there is one area where we remain in complete opposition: finance, banks, and the notion of “Too Big to Fail.” This is but a single episode in a longer conversation that is, I hope, far from its conclusion.


Drieu Godefridi is a Belgian author and founder of The Hayek Institute in Brussels.

Henri Lepage is a French economist.

Translated from the French by the editors.