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Playing Games with the 2nd B.U.S.

In case anyone wonders why I haven't posted for a while, it's because I'm supposed to be working on my Little Fed Book. I say "supposed to be" because it isn't the actual writing of that book that’s kept me from posting here. It’s the writer's block that’s had me in its grip, as it does for a while each time I’m supposed to start a big project.

This time ‘round part of the problem is that I decided to begin by writing about an episode concerning which I knew relatively little: the story of the Second Bank of the United States. Once that was out of the way, I figured, the rest would be downhill. I hadn’t reckoned on the slogging it would take to get elevated in the first place.

I knew the basics well enough from teaching them: the post-1811 state banking boom and subsequent suspensions; the calls for a new Federal bank to see to a quick resumption of specie payments and to supply a "uniform" paper currency; Jackson’s famous veto aimed at foiling its supporters’ attempt to renew the Bank's charter; and the subsequent "Bank War" in which Jackson and Biddle traded blows aimed in the one case at assuring the Bank's demise and in the other at undermining the Bank’s opponents by making their actions appear responsible for plunging the country into a depression. I also knew where to look for evidence concerning the Bank’s actual conduct. But the more I studied those sources, the more I realized that I needed a better framework by which to understand the Bank’s relations with state-chartered banks. In particular, I needed to better understand why its relations with Northeastern banks tended to differ from those with banks elsewhere, as well as why its conduct toward other banks changed over time.

When, while straightening up the mess in my office (my favorite writer’s-block therapy), I happened to come across a paper I wrote in grad school called “A Game Theory Illustration of Bank Competition,” it occurred to me that game theory might be a good way to come to terms with the Second B.U.S. In the paper I represented the banking “game” as one in which a player might choose either to cooperate with a rival by accumulating or reissuing the rival’s notes, or to defect by returning those notes for redemption in specie. When the players are equally privileged, the payoffs are symmetrical. Moreover, because mixed strategies (that is, those in which one bank cooperates while the other defects) involve persistent reserve gains by the defecting bank, and persistent losses by the cooperative “sucker,” the payoffs are those of a Prisoner’s Dilemma. All-around defection is therefore the unique Nash Equilibrium:

The banks end up, in other words, taking part in the routine (say, daily) exchange and settlement of claims, including checks as well as notes, with specie alone being treated as a reserve asset. The system’s capacity for expansion will then depend solely on the available stock of specie reserves and what banks determine to be their optimal specie reserve ratios.

To appreciate the strategies employed by the second Bank, it helps to first consider the situation faced by a “pure” currency monopolist, meaning a bank that enjoys an irrevocable, exclusive privilege of issuing paper money. Because the public ordinarily finds paper more convenient than gold, the privileged bank’s monopoly causes other banks to treat its notes and other claims against it that are readily convertible into its notes as superior substitutes, in “normal” times at least, to specie. The relative payoffs to the less privileged bank or banks for cooperating versus defecting are then more or less the reverse of those for the game involving equal rivals, giving rise to a mixed-strategy Nash Equilibrium in which the less privileged banks hold and reissue the privileged bank’s notes, perhaps even lodging their specie with it, while it nevertheless continues to redeem any items it collects from them:

In what ways did the situation confronting the Second Bank of the United States differ from that faced by our “pure” currency monopolist? First of all the Bank’s charter, rather than granting it irrevocable privileges, was to lapse after two decades unless renewed by a Congressional vote. That meant that the Bank had to take into account the political consequences of its actions, including the possibility that, by making life difficult for state banks, it might discourage legislators in the affected states from voting for its renewal. Concern about renewal prospects would incline the Bank to assign lower payoffs for defection than those a pure monopolist might anticipate. This change alone might suffice to give rise to a cooperative Nash Equilibrium, that is, one in which the state and Federal banks elect to “live and let live”:

Second, the Bank’s privileges did not include an outright currency monopoly. Instead they consisted mainly of its status as a government depository, together with its ability to establish branches anywhere, which allowed its notes to command the same value everywhere, and therefore to be uniquely useful in interstate commerce. The notes of state chartered banks, in contrast, tended to be discounted as they traveled beyond their place of issue.

State banks thus had some incentive for retaining and reissuing the Second Bank’s notes instead of redeeming them, just as in the pure monopolist case; but the strength of this incentive differed in different parts of the country. In particular, northeastern banks tended to treat B.U.S. notes as relatively poor substitutes for specie, which they were frequently called upon to supply for international transactions (and, starting in 1818, for Suffolk Bank settlements), while banks elsewhere tended to treat them as good substitutes, which (so long as they traded at par) could be readily employed to offset the (typically adverse) flow of trade with the northeast. Forbearance by the B.U.S. toward northeastern banks would therefore have made a “sucker” of it. Consequently a non-cooperative “hard money” equilibrium tended to be prevail between the Bank and northeastern state banks, while a cooperative “soft money” equilibrium tended to prevail elsewhere:

And so things went during the Bank’s first years, with its non-northeastern branches playing “live and let live” with neighboring state banks, and generously expanding their own lending, and its northeastern ones aggressively redeeming local notes, and having local banks redeem theirs just as aggressively.

Murray Rothbard offers an excellent summary of the situation in The Panic of 1819. Before the panic, Rothbard observes, the Bank on the whole served

as an expansionary, rather than as a limiting force. The expansionary attitude of the Bank was encouraged by the Treasury, which wanted the Bank to accept and use the various state bank notes in which the Treasury received its revenue, particularly its receipts from [western] public land sales… In New England, on the other hand, both the private banks and the branches of the Bank of the United States pursued a conservative policy.

The catch was that things simply couldn’t go on this way for very long. The general expansion led to rising U.S. prices, which eventually worsened the trade deficit, increasing the demand for specie, especially in the northeast. Also, because the Bank’s various branches were collectively responsible for receiving and redeeming its notes, regardless of where the notes came from, and with no arrangements for any eventual inter-branch reckoning, the Bank’s northeastern branches found themselves hemorrhaging reserves. Eventually specie was commanding a premium even relative to B.U.S. notes, reflecting the public’s doubts concerning its continuing ability to meet demands placed upon it.

At last the Bank of the United States had no choice but to take steps to stem its reserve losses, which it did by calling on its non-northeastern branches to abandon their live-and-let-live policy toward state banks while aggressively contracting their own lending. It was this inevitable reversal of the Bank’s politically-motivated policy of forbearance–a reversal that would continue under Biddle's presidency–that triggered the Panic of 1819.

Apologists for central banks like to portray them as conservative institutions that serve to keep other ("commercial") banks on tight leashes; and although central banking doctrine was hardly developed at the time, the same thinking played a prominent part in the decision to establish a new federal bank in 1816. But though the new B.U.S. was certainly capable of being a conservative presence that would help to rein-in reckless state banks, in practice the Bank followed the state banks' lead, behaving conservatively only where state banks were themselves already inclined to be conservative, while fostering expansion elsewhere. The events leading to the Panic of 1819 suggest that competition among co-equal banks was both a sufficient and a necessary condition for the avoidance of excessive bank lending. The presence of a privileged federal bank, in contrast, appears to have been neither sufficient nor necessary. That presence was, on the other hand, uniquely responsible for the extent of excessive expansion that ultimately occurred. In light of such considerations the Panic of 1819 deserves to be regarded as the United States' first central-bank inspired financial crisis.


  1. Excellent post. Thank you.

    If you are still looking for ways to procrastinate I'd like to put in a request. It take a few hours.

    Amongst the people I've debated free banking with are those that point to the "wildcat" banking of 1800s America as being proof that such a thing cannot work despite the evidence of Scotland.

    So, if you could find time to outline all the problems that government regulation caused in a single linkable post that would be fantastic.

    The information is out there but it is buried in books and in youtube videos. Take for example the lecture you gave where you stated that despite all the problems the total losses to bank customers over X period of time was less than 1% of deposits.

    That would be a nice thing to link to. Without expecting someone to sit through six or seven videos to get to it.

    And the other issues such as prohibition of branch banking. Why was it done and what were the results? The same with requiring government bonds as capital, and why banks were charted in the first place and the harm that came from doing it.

    Just a short explanation of each thing with sources that anyone can get to, if possible.

    And then folks can do a contrast and compare between a heavily regulated currency industry and one that wasn't and see the different results.

  2. This question may well expose my ignorance of game theory but I'll ask it anyway…

    You state "All-around defection is therefore the unique Nash Equilibrium" for competitive note-issuing banks. From my study of evolutionary theory I understand that a "tit-for-tat" strategy sometimes evolves in situations where competitors are likely to meet on a frequent basis , and results in a degree of co-operation between the parties.

    Are there any reason why banks would not adopt "tit-for-tat" and (mostly) co-operate on monetary expansion rather than adopt all-round defection?

  3. Rob R:

    I think the answer to your question is to be found in George Selgin's narrative concerning the Panic of 1819, where he writes "the Bank’s northeastern branches found themselves hemorrhaging reserves" — to foreign creditors.

    Until the later "gold exchange standard" period, international debits had to settled in gold. That made a domestic "tat-for-tat" game impossible for the B.U.S., at least in the long run. Hence, the eventual crisis in 1819.

    1. I think that covers the specific situation of 2nd BUS v State banks , while my question was a general one on competitive note issuing banks and game theory. I know the economic reasons relate to the inherent instability of cartels, but I was curious how this would fit into a game theory context.

  4. Warren:

    Have a look at Rothbard's A History of Money and Banking in the United States: The Colonial Era to World War II. It's available for free download at

    I'd be surprised if it didn't have what you're looking for. It's not precooked oatmeal, however; some chewing will be necessary.

  5. George, if we ignore the fact that you'd probably allow state banks to issue their own coins, I think your vision of free banking is essentially the same as that of the original framers of the U.S. Constitution, namely, Jefferson, Madison and Adams.

    And, if everything had gone as planned under their original drafting, I believe we'd all be enjoying that model today: Under Article 1, Section 10, Clause 1: (1) state governments would not be allowed to either coin money or issue paper money, (2) state-incorporated banks would not be allowed to coin money, but WOULD be allowed to issue their own paper notes, and (3) the power conferred on state-incorporated banks to issue their own paper money would be tempered by inter-bank competition, as well as the restriction that no state government shall "make anything but gold and silver coin a tender in payment of debts."

    However, as we all know, none of this happened as planned.

    At my relatively new (and seldom visited) blog site, a couple months ago I posted a topic entitled "Lincoln as the Constitution's Slave Tax Enforcer: 1787-1861":

    Under this topic I'd hoped to show how the original framers underestimated both how difficult slavery would be to eradicate and how much economic/taxing power the federal gov't would need to enforce: (1) the Slave Importation Clause of Article 1, Section 9, Clause 1, which was designed to phase-out slavery beginning in 1808; and (2) The Three-Fifths Rule of the Direct Tax Clauses, which slaveholding states liked because it gave them extra representative power in Congress, but despised because under Hylton v. U.S. (1796) it gave Congress power to tax slavery out of existence. See Robin Einhorn's "Slavery and the Politics of Taxation in the Early United States"

    I wanted to mention this because after skimming through both of the Rothbard books mentioned above, in my view he doesn't consider that the Second B.U.S. (as well as subsequent mutations of it) would not have been necessary had the states honored their anti-slave commitments.

    1. George Selgin states: "The events leading to the Panic of 1819 suggest that competition among co-equal banks was both a sufficient and a necessary condition for the avoidance of excessive bank lending. The presence of a privileged federal bank, in contrast, appears to have been neither sufficient nor necessary."

      From a purely economic perspective (the one economists tend to favor) it may be true that a privileged federal bank "appears to have been neither sufficient nor necessary."

      But, although fields of study are often isolated in academia to facilitate teaching, they don't really exist in isolation. So, for example, we can't really separate economics from politics, law, sociology, psychology, etc.

      That's what I'm trying to say in my comment above about slaveholding states' violation of the Slave Importation Clause and the Three-Fifths Rule of the Direct Tax Clauses, in which case the presence of a privileged federal bank was necessary, but not sufficient.

      Sure, "competition among co-equal banks" may have been "sufficient and a necessary condition for the avoidance of excessive bank lending," but there were much greater issues at stake, i.e., the viability of the entire new federal system.

      The necessity, but then insufficiency, of the privileged Second B.U.S. is what Justice Joseph Story expressed in his Briscoe v. Bank of Kentucky (1837) dissent: "The states may create banks … upon private capital … and may rightfully authorize them to issue bank-bills or notes as currency [but] … subject always to the control of Congress, whose powers extend to the entire regulation of the currency of the country."

      I'm not saying that what we have now in the Federal Reserve was intended by Story, or other tax and monetary lawyers that followed him, but in order to correct any problems we have now, the past needs to be represented and reconstructed as accurately as possible, which is what I think we're trying to do here in this blog. In effect, we're asking each other, "Where exactly did we go wrong?"

  6. Well John Adams suggested a very limited national bank (covered by strict rules on what size capital it could have and so on). Nothing about it (or commercial banks) just dealing in coins (as far as I can remember).

    The Adams suggestion satisfied neither side – the anti national bank people did not like the idea because it was a government backed national bank. And the pro national bank people did not like the idea because the rules that John Adams laid down for his proposed national bank prevented a vast credit bubble – and, in private, a vast credit bubble was EXACTLY WHAT THE PRO NATIONAL BANK PEOPLE WANTED A NATIONAL BANK FOR.

    Still back to George Selgin's post.

    Once human conduct (human choices) is stripped of PRINCIPLES then it does indeed become a morality free mess – with things like "the Prisoner's Dilemma" becomming important.

    For human beings are worth more than spit there is no "Prisoner's Dilemma". If a person had committed a real crime, a violation of the nonagression principle, then they should step forward and admit what they have done, and take their proportionate punishment. They should certainly not wait to be caught, or try and find a way of gettting a punishment that is less than they deserve.

    However, if someone has not violated the nonaggression principle, but (rather) has just violated some unjust government regulation. They should certainly not inform on someone else who has violated the unjust aggression – in the hopes of getting a less harsh punishment. If refusing to inform on someone else who has done nothing wrong (has just violated some unjust government regulation) leads to one's own death that is unfortunate – but such a consideration is not relevant in terms of choosing what to do.

    In short, for a person who has right principles, there is no "prisoner's dilemma" – the entire discussion (with all its mathematics and so on) is beside the point.

    And banking?

    The credit money booms that led to such crashes as (for example) "The Panic of 1819" are directly related to the above.

    If a person has no right principles (no honor) he (or she) is quite capable of saying "well other bankers are lending out money that does not exist, money that no one saved, by using book keeping tricks – I will do so as well, and earn lots of money".

    But bankers do not have to do this – they CHOOSE to do it (for reasons of greed). "But if a bank executive refuses to go along with this stuff, they will get fired in favour of people who promise a higher short term return to bank shareholders and depositors".

    Oh dear, how sad, never mind. If those people who control a bank are so short sighted that they want vast short term returns at the expense of the longer term (ignoring the overexposure of the bank) then a person of principle (of honor) should accept being fired, and seek an honest job (even if it is a humble one – on low pay and with bad conditions).

    And when the bust INEVITABLY comes, such banks (and those who have deposited their savings in them – on the promise of higher interest rates) should be left to go bankrupt. Yes the people should lose their money – as the inflated "broad money" (bank credit) shrinks back down to the actual money (the monetary base). Efforts to "prevent deflation" are really efforts to maintain the credit bubble by expanding (inflating) the monetary base. This has been happening over recent years – and it will end in tears (a lot of tears – and, most likely, tears of blood).

    Murry Rothbard would (of course) forbid such conduct in advance (by arguing that lending out "savings" that no one has really saved, i.e. money that does not really exist – is fraud), George Selgin would not agree.

    But (I hope) George Selgin would agree that once the bust has come – the banks (and the depositors) should not be bailed out in any way, but must be allowed to suffer the full consequences of their greedy folly. Sadly this means a terrible economic decline for everyone else also – but (if the market is allowed to clear) there can be a quick recovery, and efforts to "save the financial system" just (in the end) make everything even worse.

    As for the historical debate.

    Sadly Andrew Jackson did really (in practice) oppose credit bubble banking (i.e. banks lending out far more "money" than they actually had to lend – pyramid scheme credit bubble banking) he just opposed the national "Bank of the United States" and put the money in "pet" State banks instead.

    The pet State Banks then played "fractional reserve" (i.e. credit bubble) games with the money that was deposited in them – and a vast boom-bust took place.

    To understand the mind set involved it is worth studying the words of Jamie Dimon – the controller of the largest bank in the United States (J.P. Morgan Chase) and one of the people who put Barack Obama in the Whitehouse.

    How does Mr Dimon respond to the vast increase in the monetary base by the Federal Reserve over recent years?

    Does he think "good – I can reduce the gap between bank credit ["broad money"] and the monetary base – by all this extra cash the Fed has de facto given me (via sweetheart loans and so on)"?

    No he does not think in these terms.

    On the contary he calls the idea of building up "capital" (ie. actual money – the base on which his pyramid scheme of loans without real savings is based) "unAmerican" (because such capital requirements would limit the size of pyramid schemes).

    The mind of a man like Mr Dimon is so filled with greed that their is no room for anything else (not for principles of just conduct, not for honor, not even for common sense).

    The average person is not a saint (I certainly am not), but most people (if civil society is to function at all) really do not have minds this filled with unreasoning (indeed close to insane) greed.

    Someone like Mr Dimon (or so many of the bankers of President Jackson's time)does not think in terms of "what is right?" he thinks in terms of "what can I get away with?"

    For such a person the "Prisoner's Dilemma" is not a bit of nonsense with a lot of mathematics attached.

    For this sort of person the "Prisoner's Dilemma" is something real – he really would, if arrested, think in terms of "can I inform on my friend to get a lesser punishment for myself" (such people have no true friends – not in the real sense of someone they are prepared to suffer for in order to protect).

    "Paul – economics must assume that all people are like this, that they have no principles of just conduct (no honor) that they are just the sterotype of Economic Man".

    No, no (a thousand times no).

    If human beings have no principles of just conduct – if they are just calculating machines who could not care less about such concepts as "right" and "wrong" then there is no hope for civil society. For civil society rests on people doing the right thing – not all people, indeed not anybody doing the right thing all the time.

    But most people doing the right thing (having some basic sense of decency) most of the time.

    In a world entirely made up of Jamie Dimons (and so on) civil society simply could not exist.

    "But what should be done about them?"

    Rothbard would say they should be punished for their "fraud" – George Selgin (on the other hand) would deny that their pyramid schemes (and so on) are "fraud".

    In which case they should be allowed (indeed made) to "go down with the ship".

    When their overextended credit bubble banks finally crash – they should NOT be helped (in any way). Bankruptcy (real bankruptcy not rigged "managed bankruptcy") should take place.

    Yes, no doubt, they will have managed to salt away a "nest egg" of money they have (legally no doubt) taken out of the bank before it finally crashes.

    But at least no one will employ them again.

    And, more importantly, other people (seeing the totally ruined stockholders and depositors in the bank) will not be so trusting of such "morally flexible" people in future.

    In this way (and only in this way) can a market really work.

  7. Paul Marks:

    Competition is central to free markets. It's not a combat between good and evil.

    Game theory is the branch of mathematics that, par excellence, models competition. George Selgin's blog post above is the most concise, elegant uses of game theory to explain an important chapter in economic history that I've ever had the pleasure of reading — all of which bodes well for his forthcoming Little Fed Book.

    The view that fractional reserve banking is fraud has been dealt with, ad nauseam, here and elsewhere. It's become a reflex of cranks, a defect that becomes especially tedious when it goes on and on, paragraph after paragraph.

  8. I hope my kind commentators will pardon this late response to their various questions and observations–I completed this post just before heading north to hear Matt Ridley give this year's Hayek Lecture–which was great fun, by the way. So now I'm playing catch-up.

    To Warren: I actually need fewer rather than more ways to procrastinate! But concerning wildcat banking, (1) modern free bankers have always insisted on the difference between "free banking" as enacted by various U.S. State governments between 1837 and 1860 or so and genuine free banking as most closely approximated by the Scottish system. Instead of providing for genuine free banking the various State "free banking" laws provided a way for banks to be established without a specific charter subject to legislative approval. In every case the banks so established were subject to important regulatory interference, including the requirement that they refrain from branching and the requirement that they "back" their notes with specified assets; (2) the poor quality of mandated security in many "free banking" systems was the chief cause of bank failures during the so-called "free banking" era in the U.S.; fly-by-night or "wildcat" banking was in contrast quite rare, notwithstanding the frequent retelling of tired-old stories to the contrary. People who take the wildcat myth seriously are about as ill-informed about antebellum U.S. banking as people who take Hollywood Westerns seriously are misinformed about life in the old west. Alas, this includes quite a few non-economic historians who persist in ignoring the evidence supplied by their economic counterparts, including Hugh Rockoff, Arthur Rolnick and Warren Weber, and Howard Bodenhorn. A quick search including their names and the string "free banking" will turn up most of the relevant works (I do not think that you will find them in Rothbard.) Alas, these revisionists themselves could use some "revising" in that, with the exception of Rockoff, they seem no less inadequately informed about the history of genuine free banking systems like Scotland's as non-economic historians are about that of U.S. "free" banks.

    Rob R.: Yours is in fact an excellent question. The short answer (putting Richard Schulman's observations, which are also correct but which refer to an open-economy case only, aside), is that, the longer banks cooperate by refraining from redeeming rivals' notes, the riskier cooperation becomes, because an apparently cooperative bank might take advantage of the situation to accumulate a war-chest of some rivals' notes, to spring upon that unsuspecting rival. Such "note raids" actually occurred in the early days of banking; and they had the effect of convincing banks to stick to the "non-cooperative" strategy of routinely redeeming rivals' notes.

    Rick: I like the idea that Jefferson et al. had a free banking arrangement in mind. But as I recall Madison actually weighed in in favor of the B.U.S. Concerning Adam's views on the matter I confess to being quite ignorant (and appreciate Paul Mark's provision of further details.). The points about the connection of the 2nd B.U.S. and slavery are intriguing.

    I stand by my remarks about the Second Bank having been neither necessary nor sufficient to prevent excess credit expansion; I did not say that there was no sense in which the Second Bank was "necessary." Of course everything that ever comes into existence may be said to have been "necessary" in some sense of the term. Things happen for reasons.

    Paul, I don't think that any plausible imbibing of "principles" can serve to do away with "prisoner's dilemmas" or other phenomena described by game theory; in any event it isn't just prisoners or criminals who may find themselves confronting the problem in question. Moreover, in the case of banking the "dilemma" is a good thing, because it serves to check excessive credit expansion. Do we really want bankers to cooperate instead of competing? Give me greedy (and non-cooperative) bankers over generous live-and-let-live ones any day!

    As for the rest, as Richard has already pointed out, I've been at pains here and elsewhere to insist that expansion of the stock of bank money does not constitute credit "creation" or a pyramid scheme or whatever so long as it occurs in response to a prior increase in the real demand for balances of bank money.

    But as for letting insolvent banks fail, we are in complete agreement.

    1. George, thanks for your reply.

      It's quite possible that Adams and Madison, like Hamilton, were in favor of a central bank, but my understanding is that they believed only the First B.U.S. would be necessary, and only for a 20 year term (1791-1811).

      The 1796 Hylton case authorizing a direct tax on slaves, along with the Slave Importation Clause initiating a slavery phase-out in 1808, was supposed to make a central bank unnecessary after 1811. Then, slavery was supposed to whither on the vine and we'd be left with state-incorporated free banks issuing their own competitive notes (but with only the federal government allowed to issue coinage).

      If you or anyone cares to respond, some questions I still have are:

      Given that the framers gave the federal government exclusive coining powers, does this mean they wanted Congress to be the only issuer of "base money" (upon which all state bank notes would be issued)?

      Also, what are some of the reasons a temporary federal central bank (the First BUS) would have been necessary in the first place? Could it have been to influence, control, or eliminate some of the more stubborn pro-slavery state banks? In other words, why a TEMPORARY federal central bank? If slavery had not existed at ratification in 1787, is it unlikely that we would have seen the First B.U.S.? Or, could the temporary First B.U.S. have been formed for other reasons? etc.

  9. George, I'm curious. While this is exceptional work, I can't help but feel it's more of the same stuff you've been doing for thirty years: Searching for evidence that the free banking thesis might be TRUE.

    Have you ever thought of (or have you already done) doing the opposite? That is, searching for evidence that the idea that our monetary system would be better arranged competitively is FALSE? Economics has its…problems as an experimental science, but the best way to inject scientific credibility into an argument is to try your damnedest to disprove it. I've read a great deal of your work: You have excellent command of both historical and theoretical evidence. Have you ever tried to find a situation where a free banking or nominally free banking system outright failed and you couldn't easily draw a line from that failure to some kind of adverse public policy?

    After an honest search, if you still find nothing that is very conclusive or particularly damning, you will have at least strengthened your own position. If you do indeed find something, you'll be buying great personal credibility and people will take the rest of your work all the more seriously (not that they don't already, of course).

    1. You will perhaps not credit it, Michael, but I've often expressed the hope that I would come across some damning evidence against the hypothesis that free banking is less dangerous than central banking, precisely so that I could make people understand that I'm not bound to favor free banking for ideological reasons. In fact I think you mischaracterize my research program in saying that it involves "searching for evidence that the free banking thesis might be TRUE." I have spent at least as much time looking at evidence that seems to point the other way, only to find that on closer inspection it doesn't disprove the thesis at all. The plain truth is that I was at first quite shocked to discover how easy it was to sustain the free banking thesis: it doesn't take lots of twisted and fancy arguments to maintain it. Of course eventually I became convinced of the thesis's correctness: if sustaining a thesis seems like shooting fish in a barrel for a long enough time, one can't help but accept it.

      But there's a sense in which I think your suggestion betrays an incorrect understanding of how science works. It is in fact an adversarial process, like a prize fight or (since competing teams are sometimes involved) a tug of war. One team pulls hard for its theory, another for the rival; eventually one team prevails. The process doesn't work better if players decide to push instead of pulling, because the strength of their rival's arguments isn't well tested that way. Were each of us forced to arrive at truth in isolation, the analogy would be false. But we are members of a community of scholars, and so can do better by specializing.

      Of course, if central banking and other kinds of government regulation of money lacked champions, efforts like mine to argue the virtues of free banking would not prove all that much. But far from this being the case, the opposite is true: the "central bank thesis" is the prevailing "paradigm" (a much overused word, but correct here); and those who propose to challenge it represent but a tiny minority. There's no need for free bankers like me to contribute to the effort to refute free banking–there are plenty of persons pulling the rope that way. Our best contribution consists of mounting as strong a challenge as we are capable of doing, to see whether they can maintain their position or are forced to yield.

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