On January 10, 2013, I penned a letter to the Financial Times, pointing out an error in its characterization of lending-of-last-resort operations. As the letter below describes, these central bank operations often do not go according to plan:

Sir, Your leader “Basel bends on liquidity rules” (January 8) asserts that: “Central banks can always provide liquidity, and while their facilities should not be a first resort for banks, the Basel Committee is right to signal it will incorporate access to them in its rules.”

You might have added: “But, central banks have a propensity to make a muddle out of what should be routine operations – like those associated with the provision of lender-of-last-resort liquidity.” The Bank of England provides the most recent evidence of this in what turned out to be a catastrophic government failure and arguably the start of the current financial crisis.

On August 9 2007 European money markets dried up after BNP Paribas announced that it was suspending withdrawals from two of its money market funds. This put Northern Rock – a profitable, solvent bank – in a liquidity squeeze. Northern Rock turned to the BoE for a relatively small infusion of liquidity.

This routine lender-of-last resort operation would have worked, according to the textbooks, but for a BoE leak to Robert Peston at the BBC. The BBC story broke on September 13 2007 and the next morning a devastating bank run ensued.

In a flash, Northern Rock went from being solvent (if temporarily illiquid) to bust. Indeed, it was government failure – the BoE’s bungled attempt to provide emergency liquidity – that transformed the Northern Rock affair from a minor, temporary liquidity problem to a major solvency crisis.

So, when it comes to central banks, there is often a wide gulf between the textbooks and reality. It’s time to close the book on Basel III and its liquidity coverage ratio, and to focus on fixing central banks, so that they can properly deliver liquidity, when needed, at a price.

Steve H. Hanke, The Johns Hopkins University, Baltimore, MD, US

To my surprise, what I thought was a simple factual clarification of a Financial Times editorial quickly drew the ire of none other than The Old Lady of Threadneedle Street. Indeed, Nils Blythe, the Bank of England’s communication director was quick to reply in the next morning’s FT:

Sir, In a recent letter (January 11) Professor Steve Hanke made the unsubstantiated claim that the Bank of England leaked information about a lender-of-last-resort operation at Northern Rock to the BBC. This claim is wholly untrue. As the governor made clear in evidence to the Treasury Committee of the House of Commons, the Bank wanted to provide support to Northern Rock covertly, precisely because of the risk of a run by retail depositors.

Prof Hanke also argues that Northern Rock was suffering “a minor, temporary liquidity crisis”. It is worth noting that even when it was supplied with abundant liquidity Northern Rock could not find a buyer and had to be nationalised. With hindsight it is clear that Northern Rock was an early example of the solvency crisis which gripped much of the banking sector in the following years.

Nils Blythe, Communications Director, Bank of England

To put it plainly, I am quite underwhelmed by Mr. Blythe’s argument and evidence. Although it would appear that his response is in line with standard central banking protocol, I found his letter quite concerning for two reasons.

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What’s the worst thing about Delaware?

No, not Joe Biden. He’s just a typical feckless politician and the butt of some good jokes.

Instead, the so-called First State is actually the Worst State because almost exactly 100 years ago, on February 3, 1913, Delaware made the personal income tax possible by ratifying the 16th Amendment.

Though, to be fair, I suppose the 35 states that already had ratified the Amendment were more despicable since they were even more anxious to enable this noxious levy.

But let’s not get bogged down in details. The purpose of this post is not to re-hash history, but to instead ask what lessons we can learn from the adoption of the income tax.

The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.

But the main lesson I want to discuss today is that giving politicians a new source of money inevitably leads to much higher spending.

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Every year, Microsoft founder Bill Gates drafts a letter charting the course for the foundation he created with his wife, Melinda. This year, the focus is on the value of precise measurement in driving innovation and progress. His inspiration was the book The Most Powerful Idea in the World, “a brilliant chronicle by William Rosen of the many innovations it took to harness steam power.”

Certainly mensuration was important to the development of the steam engine, but there was a much more crucial ingredient, and unless we understand the role that it played, solutions to the world’s most pernicious problems will remain elusive. The key to grasping this missing ingredient is the aeolipile. As shown in the accompanying video, the aeolipile is a hollow metal reservoir with multiple radial “exhaust pipes,” all of whose spouts point off tangentially from the hub. To make it work, you simply suspend it, fill it with water, and light a candle under it. And… Voila! You’ve harnessed steam power to generate rotary motion.

This device is also known as Hero’s Engine, after Hero of Alexandria—who invented it over two thousand years ago…. Despite its seemingly obvious practical applications, Hero’s Engine was never more than a party favor. It had not the slightest impact on the course of human history. Why not?

The ultimate causes are contentious (Deirdre McCloskey will give you one answer), but the proximate one is obvious: the aeolipile was never commercialized. There wasn’t a sufficient network of entrepreneurs and investors toiling away in ancient Alexandria to relentlessly seek out, capitalize, and commercialize new technologies and innovations. The steam engine was refined and widely deployed during the Industrial Revolution only because such an entrepreneurial network had come into existence by the late 18^th century, first in England and soon thereafter, elsewhere.

And that’s the real key to massively disseminating the benefits of innovation: enlisting the assistance of the free enterprise system. It is not a coincidence that the productivity of elementary and secondary education has collapsed while productivity in virtually every other field has steadily improved. Education has been largely excluded from the free enterprise system for the past 150 years.

So, while precise measurement certainly has its role to play, I hope someday to read an annual letter from Bill Gates that focuses on the need to harness all the freedoms and incentives of the marketplace for the betterment of education the world over.