This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

Dizzy Miss Izzy

I'm so dizzy my head is spinning
Like a whirlpool it never ends
And its you, girl, making it spin
You're making me dizzy*

Tell me I'm not with it, if you must, but the fact is that until a couple of days ago I'd never heard of Izabella Kaminska, who bills herself as a "finance blogger" and believer in something called the "collaborative economy," in which sharing things takes the place of buying and selling them, the result being, she claims, a reduced carbon footprint.

Although I rather doubt that we're likely to witness an end to our "propensity to truck and barter" anytime soon, I don't doubt that such an event would in fact reduce carbon emissions: there would, for one thing, be a lot less less breathing going on. But what concerns me isn't Ms. Kaminska's general economic philosophy, to call it that. It's her vertiginous spin on free banking, which she saw fit to air this past week, first on FT Alphaville, and then on a blog of her own called, appropriately enough, Dizzynomics.

All this might have gone happily unremarked had the Econ Blogosphere's Grand Pooh Bah not seen fit to deem the last of these disorienting missives worthy of his readers' attention. And so it happens that, Despicable Free Banking Nobody though I am, I find myself submitting, for The Rt. Hon. GPB's consideration, my own humble post, the gist of which is that Ms. Kaminska hasn't the foggiest idea what she's talking about.

Because I addressed some errors in Ms. Kaminska's FT post in comments to that post itself, I'll embellish a bit here rather than repeat myself.

In discussing the founding of the Bank of England, Kaminska refers to the risk that "a private syndicate" took in "lending money to" the "UK" government. Let pass the anachronism. What matters is that the arrangement in question involved, not a loan directly made by the parties in question, but one made from the proceeds of a public stock offering, the lure for which consisted of monopoly powers the new Bank was expected to command. The stock sold in 12 days, and though the investors (again, not the scheme's principals) could hardly avoid taking some risk, their gamble had every appearance of being a darn safe one. According to Sir John Clapham (History of the Bank of England i, p. 20), among the various projects being floated in those times, "the Bank with its Parliamentary backing, its high sounding name, and its guaranteed income from the taxes was a very attractive proposition. The speed of the subscription need not surprise those more familiar than any pamphleteer of 1695 could be with how and why men invest."

I comment in the FT post itself on Kaminska's suggestion that the Bank of England was particularly effective at enhancing England's prosperity, so let me add here some brief excerpts from the source I referred to in that comment: Rondo Cameron's chapters on "England" and "Scotland" from his edited volume, Banking in the Early Stages of Industrialization (Oxford University Press, 1967). "The English banking system from 1750 to 1844, " Cameron observes, "was far from ideal in its contributions to either stability or growth of the economy as a whole." Topping Cameron's list of that system's infirmities is the Bank of England itself, whose "contributions to industrial finance were negligible, if not negative." Regarding Scotland Cameron says, in contrast, first, that despite having been "a poor country by any standard" in 1750, it "stood with England in the forefront of the world's industrial nations" a century later, and, second, that "the superiority of its banking system stands out as one of the major determining factors" of this relatively rapid growth.

Ms. Kaminska's estimate of the contribution of the Bank of England's monopoly privileges toward British economic stability is just as unfounded as her opinion regarding its contribution toward British prosperity. "Before the Bank knew it," she writes, "its notes had become the most liquid and trusted in the land." Actually, because the Bank didn't even bother to have branches beyond London before 1826, its notes were until that time seldom seen beyond the metropolis. (Nor, prior to the French wars, did the Bank issue notes for less than the princely sum of 10 quid.) If the Old Lady's notes were nonetheless judged safer than those of country banks, that was because those banks were severely under-capitalized and under-diversified. And why was that? Because they were not only denied Joint-Stock status, but subject to a rule limiting their ownership to six partners or fewer. In short the country banks–the only sort, remember, allowed to operate wherever the Bank of England chose not to–were by law prevented from achieving any reasonable degree of financial diversification and strength. Here we see how, like most apologists for central banks, Ms. Kaminska fails to appreciate how the advantages commanded by such banks have as their precise counterpart limitations imposed upon all others. Little wonder so many English country banks fell victim to the Panic of 1825! Contrast, again, the situation in Scotland at the time, with three chartered banks and twenty-nine provincial ones, all commanding nationwide branch networks, and not one bank failure since a private bank failed in 1816–and even that one paying 19s on the pound! "Certainly Scotland," Sir John observes, "appeared to have secrets of sound banking that England might inquire into."

Ms. Kaminska is sanguine enough to allow that the Bank of England's powers tempted it to engage in "imprudent money-printing." But she spoils this lapse from her otherwise unalloyed confidence in the benevolence of state-sponsored monopolies by adding, gratuitously, that the bank was "not helped by the fact that [it] still had to compete with a whole bunch of private banks who were just as keen to issue money to an equally imprudent degree." But, as I've noted, "compete" with "private" (meaning, presumably, country) banks is just what the Bank did not do, at least not until after 1826. Instead, by the terms of its charter it subjected them to inhibiting constraints, and then, having led them on by means of its own generous discounts, reversed course and…let them fend for themselves. (For evidence, see the relevant section of my article, "Bank Lending 'Manias' in Theory and History.")

Kaminska can at least take credit for originality in reporting that, during the 1840s, "a terrible inflation" took hold in England, and that it was to combat that outbreak that Peel's 1844 Act was passed. Alas, the claim owes its originality to the fact that there's not an ounce of truth to it. The same may be said for her claim that the Scottish system was stable only because Scottish bankers "were so good at forging oligopolistic cartels that happily restricted competition." As I noted in my FT comments, there's no evidence that limited entry was a source of any significant monopoly power in Scottish banking. (On the contrary: the system was notoriously efficient.) Nor is there any evidence that Scottish banks policed one another other than by engaging in regular note exchanges, as they would have been no less compelled to do had entry into the industry been open. But let us assume, for the sake of argument, that Ms. Kaminska is correct in holding that oligopoly was the cause of the Scottish system's superior stability. Then why, one wonders, does she not grant that a similar oligopoly might also have made England better off than it managed to be with its patently unstable blend of monopoly and hamstrung polypoly?

In 1833, thanks to a the efforts of the great Thomas Joplin, the terrible Six Partner Rule was partially circumvented by way of the discovery that its language encompassed note-issuing banks only, and not mere banks of deposit. The Bank of England thus faced for the first time competition from other joint-stock banks. Such are the facts. And what does Ms. Kaminska's make of this development? First, that it came, not in 1833–that is, well ahead of Peel's Act–but "in the latter half of the 19th century"; and, second, that it occurred, not because a clever banker discovered a loophole in the law aimed at severely restraining the Bank of England's rivals, but supposedly because restrictions imposed by Peel's Act on the Bank of England itself created "conditions" favoring the rise of "a new type of unregulated" bank. "Some history" indeed.

Ms. Kaminska concludes her remarks on English versus Scottish banking with a long excerpt from the Bank of England's web pages, telling of how it "established the concept of lender of last resort" in the wake of the crises of 1866 and 1890. Had the "concept" thrust down its throat, by Walter Bagehot, is closer to the truth. What that great man had to say concerning the respective merits of the English ("one reserve") and Scottish ("natural") systems is, or ought to be, too well known to warrant repeating.

In her Dizzynomics follow up Ms. Kaminska adds little to the substance of her FT argument against free banking, such as it is, preferring instead to heap anathemas upon free bankers, who according to her reckoning are thick on the ground (were it only so!), and whom she regards as "reason and logic deniers" incapable of grasping the fact "that whenever we've had free-banking systems they've resulted in chaos or alternatively co-beneficial collusion to the point were the system is not free by the standard definition of free."

No one, so far as I know, has ever claimed that the systems generally held out as examples of "free" banking–Scotland, of course, and Canada before 1914, among others–were perfectly so. Not me. Nor Kevin Dowd. Nor Larry White. Nor any other free banker I know. Of course those systems weren't perfectly free. No banking system ever was. Nor has Hong Kong ever witnessed free trade in all its unsullied glory. So what? The question is always whether the examples come close enough to serve as evidence of the likely consequences of the fully-realized alternative. Was Scottish banking, to return to that case, "close enough" to shed light on the consequences of truly free banking? The debate on that question was joined some years back, with Larry White weighing in in the affirmative against the counterarguments of Murry Rothbard, Larry Sechrest, and Tyler Cowen and Randy Kroszner, among others. Ms. Kaminska, having found the opposition's case neatly summarized in a blog post, simply overlooks White's rejoinders. She overlooks as well the not-insignificant body of theoretical work using induction aided by deduction rather than deduction alone to draw inferences about the likely consequences of unalloyed freedom in banking.

Kaminska herself needs no theory, on the other hand, to reach the conclusion that genuinely free banking, unlike the Scottish mongrel, must lead to "chaos." How can she know? As she offers neither evidence nor argument, one must hazard a guess. Mine is that she is referring to the U.S. banking system between the demise of the second Bank of the United States, in 1836, and the outbreak of the Civil War, and that she imagines, as many people do, that because a half-dozen states passed so-called "free banking" laws during that interval, it qualifies as one of perfect freedom from any sort of bank regulation. Excuse me for having had to suppress a yawn just now–it is a long post, after all, and fatigue is setting in, quite possibly for us both. Suffice to say, then, that old banking myths die hard, and that this especially hoary one about U.S. "free banking" seems harder to kill than Rasputin himself. That it is mostly hokum is nonetheless easily established: just have a look at any post-1975 work by an economic historian on the subject, including the locus classicus, Hugh Rockoff's The Free Banking Era: A Re-Examination (Arno, 1975). (A later survey piece is here.)

A misreading of the same U.S. experience seems also to inform several of the obiter dicta that follow Kaminska's opening thrust, including her claim that free bankers fail to "appreciate that it was standardizing certain subjective [?] values like weights, distances, time [sic] itself that has allowed society to cooperate, grow and thrive." (Because antebellum state banking laws generally prohibited branching, state banknotes tended to be subjected to discounts when encountered any distance from their source; in contrast, in the Scottish and Canadian systems, where banks were free to establish branch networks, banknote discounts were unknown.) Ditto her belief that free bankers "advocate a Wild West model where no one can trust anyone and everyone has to do due diligence themselves." (Though it's true that the antebellum [old] west was inundated by all sorts of phony bank paper, that result came about, not because banking was unregulated there, but because territorial authorities, by having outlawed it, made their citizens perfect targets for phony notes purporting to come from legitimate banks down east. Where banking was more, though not perfectly, free, as in 19th century Canada or Scotland, in contrast, it sufficed to trust one bank, and to accept only those notes regarded as current at that bank, to avoid trouble.)

I hope I've said enough to suggest why I find it remarkable than anyone should take Ms. Kaminska's ramblings on free banking (or, I now feel justified in saying, on any subject whatsoever) seriously. Perhaps no one does. Still I wish Tyler hadn't given those ramblings more currency by advertising them, without the benefit of critical comment, on Marginal Revolution: here, surely, is a case where sharing adds to rather than subtracts from the world's burden of hot air.
*Tommy Roe, "Dizzy."

  • Per Kurowski

    And just looking at how government’s regulators are able to introduce financial feudalism with current banks makes one shiver about even further government involvement.

  • Lord Keynes

    No doubt you have made some cutting criticisms of some of the points in Kaminska's original post, and nobody doubts that you are very well versed in the history of banking and that you can make a spirited defence of free banking too, which needs a careful response from critics.

    However, regarding Scotland,

    (1) they had a suspension of specie payments from 1797 to 1821. This is a pretty radical departure from "free" banking, wouldn't you agree?
    (2) in 1793 the British government organised a bailout of Scottish banks after a banking crisis in Scotland when the war with France broke out. It looks like that free banking system would have had a severe crisis without this bailout. Perhaps the system may even have collapsed.
    (3) there is evidence actual settlement in specie appears to have been restricted in Scottish banks. The Scottish banks often discharged their notes by offering assets that could be directly or indirectly liquidated in the London money markets, which of course were ultimately backed by the Bank of England.
    (4) we have evidence that the notes of the Bank of Scotland and Royal Bank of Scotland came to be regarded as close substitutes for reserves in Scotland and these banks formed a cartel. In short, the thesis of Sheila Dow and John Smithin. 1992. “Free Banking in Scotland, 1695–1845,” Scottish Journal of Political Economy 39: 374–390 (which incidentally is perfectly familiar with White work on free banking) seems to be right to me.
    With regard to other free banking systems, their history really does not inspire much confidence. Australia’s free banking experiment was a disaster, and ended in a massive property and financial asset bubble, whose collapse induced a debt deflationary depression, worse than Australia’s Great Depression in the 1930s.

    • George Selgin

      Lord Keynes, no one says that free banking, or the historical approximations of it, were flawless. But whereas you and others can with some effort list a handful of blemishes in the records of these systems, such lists are unimpressive if held against the far worse records of other arrangements. No one, for example, can compare U.S. with Canadian, or English with Scottish, banking, and declare with a straight face that their records are equally good or bad! Read contemporary accounts of those systems, and you will find, first of all, few complaints about the "free" ones, and countless ones about the others.

      I cannot help thinking, indeed, that there is something desperate about all this sniffing about for "dirt" on free banking, which seems to me a rather extreme instance of stones being tossed from glass houses.

      I also believe you are mistaken on the 1793 "bailout" by the way. Larry White tells me that Scottish banks were seldom much indebted to London, and that when crises affected the London market the tendency was for London to call in outstanding Scottish loans rather than to act as a last-resort lender. It would in fact be rather remarkable to find, on the contrary, that the B of E was acting as a last-resort lender to Scottish banks long before it began, thanks in part to Bagehot's urging, grudgingly to offer the same service to other English ones!

  • JN

    I find it hard to believe that you had never heard of her before.
    She's been spreading myths about the benefits of government and central banks and the evil evil evil private banking system and private currencies (and libertarians in general) for years now. And been pretty successful at it.
    She has thousands and thousands of followers and is invited, organise and attend finance and banking conferences, mostly across Europe.

    Unfortunately, she's specialised in cherry-picking facts within her VERY partial knowledge of banking history and understanding of bank accounting/regulation to justify state and central bank interventions/monopoly.
    I've mentioned her a few times on my own blog (like here I try to avoid her now as it would mean spending my whole time debunking the myths she keeps spreading.

    Scott Sumner had its own 'exchange' with her about a year ago:
    "One amusing sidelight of Nick Rowe’s recent post was all sorts of people agreeing that they can never understand what Izabella Kaminska is talking about (including Nick and I.) The lazy way out would be to assume that Kaminska is a phony. But lots of smart bloggers do find her interesting, as does the Financial Times, which publishes her columns. So she probably has valuable things to say."
    This caused quite a stir…

    And her response:

    • George Selgin

      JN, I guess I have been leading a sheltered life–lucky me! As for those who find Ms. Kaminska's writings worthwhile–well, there's no accounting for taste. Still, I doubt that she's a phony. More likely she has preconceived notions, and then lazily searches the web for whatever she can find that appears to support them, ignoring the rest. To say that her writing reflects similar laziness would, however, be taking this generous view too far, for it seems far worse than mere sloth alone can account for. That the FT should find her worthy of its space is certainly a blotch on that esteemed newspaper's record.

  • damag0r

    "But whoever claimed that the systems generally held out as examples of "free" banking–Scotland, of course, and Canada before 1914,"

    I think you made a small typo here. Shouldn't that be 1934?

    • George Selgin

      Depends; some consider the 1914 Finance Act to have marked an important step away from free banking. Others would mark the era's passing, as you do, with the establishment of the Bank of Canada in 1935.

      • damag0r

        Was just ignorance on my part of the significance of 1914. Reading about the 1914 Finance Act now.

  • Per Kurowski

    I am not entirely sure what a "free bank" is… but I am absolutely sure that a bank which is allowed to hold different levels of capital (equity) against different assets, currently based on perceived credit risks… is a ball and chained bank.

    • George Selgin

      Call me idiosyncratic, Mr. Kurowski, but according to my way of thinking, one shackles a bank, not by allowing it to do something, but by preventing it from doing something.

  • Per Kurowski

    When you allow banks to earn higher risk-adjusted returns on equity when lending to "the infallible" than when lending to "the risky", you are effectively shackling the banks to lending to "the infallible".

    • George Selgin

      I don't follow your use of "shackle" at all here. Suppose I offer you a million bucks, no strings attached. A sure thing, if ever there was one. And let's agree that, unless you are mad, you are bound to take the money. So, have I "shackled" you into taking it?

      Putting the semantics of "to shackle" aside, it seems you have some complaint about banks being able to make what you call "infallible" loans. But which banks, where, and when?, and what has the complaint to do with free banking, which is the topic of discussion here?

  • Per Kurowski

    If banks are allowed by regulators, not by markets, to hold less capital when lending to those perceived, credit wise, as "the infallible", than when lending to "the risky", is that banks who are free to effectively allocate bank credit in the real economy?

    Currently the officially imposed risk weights for the sovereigns is zero percent; the risk weight of someone belonging to the AAAristocracy 20%; and the risk weight of an ordinary citizen, a small business or entrepreneur, 100 percent.

    Has that anything to do with freedom?

    • George Selgin

      I'm sorry, Mr. Kurowski, but you seem to be under the impression that I have nice things to say about the Basel capital standards, or that I think that banking as practiced in the U.S. and elsewhere circa 2005 was "free." Nothing could be further from the truth.

      • Per Kurowski

        Absolutely not. I do not believe you approve of Basel capital standards… I was just adding some considerations with respect to how these distort the allocation of bank credit and which is something not frequently discussed. For instance the stress tests do not include analyzing what is absent from the balances of the banks… like loans to small businesses.

  • vikingvista

    Here's a word seldom expressed by my Viking clan: "splendid".

    What a shame if Ms. Kaminska's ego stands in the way of her appreciating the learning opportunity, if not the elevation, of being so thoughtfully and artfully skewered by George Selgin.

    Your blog posts are too few, but always worth the wait.

  • Rob Rawlings

    Absolutely brilliant – I doubt if there will be a better rebuttal (or, indeed , post of any sort) on an economics blog this year.