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My Free Banking Posts

My Free Banking posts will not be focused on the monetary policy aspects of ‘free banking,’ but rather on the other aspects of what I would call a ‘free-er banking’ environment going forward. I plan to focus not only on these non-monetary policy activities of central banks, but also those of the other government actors (Ministries of Finance/Treasury Departments, deposit insurers, supervisors) that have intervened in the banking markets the past century in the US and elsewhere.

About five years ago I completed research on the functions that central banks engage in. This required reviewing about 120 central bank laws from around the world. The more familiar functions are so called ‘core’ functions, which most central banks undertake:

  • Monetary policy
  • Foreign exchange and reserve management
  • Lender of last resort
  • Supervision and regulation of commercial banks
  • Payment and settlement systems oversight and participation
  • Currency and coin management
  • Fiscal agent

But central banks also get involved in a myriad of other, ‘non-core’ functions beyond those above:

  • Non-bank financial institution supervision
  • Management of deposit insurance systems
  • Unified supervisor of financial institutions
  • Resolution and liquidation of failing banks
  • Financial intelligence unit for anti-money laundering
  • Credit bureau
  • Mortgage or housing activity
  • Open bank assistance (bailouts)
  • Agricultural related activity
  • Small and medium enterprise loans
  • Development banking
  • Financial institutions development funding
  • Loans to non-banks (bailouts)
  • Export credit
  • Ownership of a bank or state bank activity
  • Consumer protection

Although much of the focus of the Free Banking blog will likely be on monetary aspects of central banks and alternatives to central bank money, I will spend my time focused on the other issues cited above. For example, I have spent much of the past two and a half years, both through research and four lawsuits under the Freedom of Information Act, trying to figure out precisely why the Board of Governors and New York Fed felt compelled to bail out Bear Stearns and AIG (but not Lehman); why the FDIC voted to bail out Wachovia, Citigroup, Bank of America and most large banks through the FDIC Debt Guarantee Program (aka TLGP—Temporary Liquidity Guarantee Program); and why the FHFA and Treasury felt compelled to bail out Fannie Mae and Freddie Mac. I have researched the history of these powers and hope to contrast how these bailouts worked during the most recent crisis as compared to early periods of financial turmoil such as the Panic of 1907 and back to earlier crises in the pre-Federal Reserve era. Although some of these periods may not be during the ‘free’ banking period that most people on this blog speak of, it was before the creation of a central bank in the US, which was certainly a ‘freer’ banking period prior to the massive interventions that went with the combination of the birth of the Federal Reserve, the Depression era legislative changes and up through the more recent crises during the 1980s and early 1990s and the ongoing implementation of Dodd-Frank.

I also expect to share some of my experiences on these issues working with central banks and financial agencies outside of the US, which is how I have spent my professional time the past twelve years.


  1. Vern, regarding "the Depression era legislative changes" you mentioned. I once read that Milton Friedman felt FDIC insurance would have been enough to get us out of the banking crises of the early 1930's, rather than gov't imposing the numerous other monetary and tax measures that were adopted to bolster the central bank's powers. Would you have an opinion about this?

    Of course, pre-WW2 circumstances created an emergency situation (and one could say the Cold War has kept us locked into it), but if we take those circumstances out of the equation, do you think FDIC was enough to restore consumer confidence, and that instead of increasing central bank powers in the mid to late 1930's, we should have reverted back to the pre-Federal Reserve era and continued improving upon the national banking era (1863-1913)?

    1. In Monetary History of the United States, Friedman does say that deposit insurance helped stabilize the system, but I am sure that with the way deposit insurance has developed including during the most recent crisis, he might rethink whether it was a good idea.

      Friedman also has good things to say about the Reconstruction Finance Corporation, although as I recall he has said that it was not as big a factor as deposit insurance in stabilizing the system. I would disagree that RFC was a good thing and think that most of the stabilization was due to deposit insurance as it stopped the runs which were driving the bank failures/suspensions that shrunk the money stock.

      Friedman also seemed to argue for more intervention in the case of Bank of United States by the local clearinghouse. Based on what I have read about it, he seemed to be a bit obsessed with what he saw as anti-Jewish sentiment toward the bank. I also disagree that BOUS should have been saved and think it was best to let it fail as it was what Bagehot would have called an 'unsound' institution.

      I have addressed these issues in a book I am in the midst of finalizing so early next week I will post more precise comments based on cites to Monetary History of the United States.

      1. Interesting about RFC and BOUS, but if it wasn't for FDIC during the most recent crises, I'd probably still be running for the hills, or fully invested in TreasuryDirect (, with minimal funds in a local bank checking account.

        If I may add, the FDIC today is under much greater strain because the Fed's notes are no longer restrained by coin-redeemabilty, as it was until the 1960's. But I still think FDIC is one of the most dominant factors in maintaining stability.

        Looking forward to hearing more about your book.

        1. Here are the cites I mentioned to MHOTUS:

          "The RFC played a major role in the restoration of the banking system as it had in the futile attempts to shore it up before the banking holiday." (p. 427)

          "Federal insurance of bank deposits was the most important structural change in the banking system to result from the 1933 panic, and, indeed in our view, the structural change most conducive to monetary stability since state bank note issues were taxed out of existence immediately after the civil war." (p. 434)

          Small depositors "headed for the hills" as you say in the 1930s who put the money in their mattress and shrank the banking system. During the most recent crisis it was the big domestic and international depositors who "headed for the hills" but the same arguments were made that it would shrink the banking system. However, there is no way you are going to see these big depositors putting millions in a mattress. They would have kept it in some form of financial asset (bonds or gold).

          FDIC provides short-term stability, but at what cost?

          1. I have no idea why I was reading MHOTUS decades ago, but I remember that quote about FDIC. As a point of interest, when Friedman says at the end of the sentence, "state bank note issues were taxed out of existence immediately after the civil war," you may want to see the Wikipedia summary of the Veazie Bank v. Fenno:

            In effect, the Civil War was fought so the federal gov't could reclaim it's monetary powers that were lost to Andrew Jackson's Supreme Court in the 1837 Briscoe case. So, that's why I don't see how state-chartered free banks would ever fly.

            Regarding FDIC, I also don't see how federally-chartered free banks would survive with reassuring depositors. Of course, I'm looking at this from the small working guy's perspective, but I think the Treasury Department should exercise reasonable control over the banks it charters and insures. So, maybe it will be free banking within a range of permissible action, but not free to the extent that a tangible free market commodity is free. In any event, it should be much better than central banking.

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