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Free Banking in Brazil

I'm currently in Brazil at a summer seminar for young Brazilians interested in libertarian ideas sponsored by the Atlas Foundation and in the beautiful mountain town of Petropolis outside of Rio.  On Thursday, I participated in a debate at the equivalent of the Chamber of Commerce in Sao Paulo celebrating the Mises-Brazil Portuguese translation of Ron Paul's End the Fed.  Around 70 people stuck around for almost 3 hours to listen to me give a 45 minute talk on why we don't need a central bank, followed by commentary and discussion from other participants.  The event was well-covered by the Brazilian press, including a nice story in the top economics paper in the country that included a picture pairing that I just loved (that's a Facebook link as I can't find it online).

There was also some TV coverage.  My bit is, in fact, in English.

It's amazing to think that a debate like this could draw this much attention in a part of the world not known for skepticism about central banking. That, I think, is a good sign.

  • Warren

    Awesome. Though when I saw the headline I thought there was going an article on Brazilian free Banking.

    I hope you reached a lot of people via that newscast.

    Just a general question: Is there a list of all the countries or regions that have had free banking? I'm going to buy the Dowd book as soon as I'm able but it would be nice to have the list in the meantime.

    Thank you,


  • Arteaga

    You should come to Mexico. Most of the people here dislike our central bank (Bank of Mexico) but no for the right reasons (Most people would like Banxico to engage in more "inflationary" practices in order to boost the economy).

    Currently im doing my BA thesis on the banking system in Mexico before the revolution, which had no particular barriers to the formation of new banks (not until the first mexican banking crisis in 1883), but it wasnt a "free banking" system as it was very primitive and was dominated by two powerful banks; Bank of London, Mexico and SouthAmerica (currently owned by spanish bank Santander) and Banco Nacional de Mexico (Currenlty owned by Citigroup). The first bank in Mexico was established in 1863 (Bank of London) , then it was followed by some small local banks in the decade of 1870 in northern mexico, and then the next big bank was funded in 1880 as an alliance between the mexican state and some french bankers (Banamex).

    I do think that the monetary history of Mexico is one of the most interesting in world history. The abundance of silver and the several political conflicts made it so. I think the Monetary Historians would gain a lot of knowledge if they could study Mexicos monetary history.

  • Paul Marks

    Yes Arteaga – most critics of Central Bank policy in history (as Ludwig Von Mises, and many others, pointed out) wanted the Central Bank of their country to be even more inflationary (i.e. the traditional definition of "inflation", increase the money supply, not the modern definition which is "prices going up in the shops") than they were.

    Originally Central Banks were created to make it less difficult for governments to borrow money (itself a bad thing from a limited government point of view), but there were soon demands for Central Banks to "help trade" by spreading "easy credit" or "lower interest rates" among banks and to help the banks if they got into trouble. In Britain there was more resistance than in many other countries – even at the time of Walter Bagehot (the third editor of the Economist magazine – and the man who basically ruined it, at least from a libertarian point of view) the Governor of the Bank of England opposed Bagehot's support for a "lender of last resort" role for the Bank of England in relation to the commercial banks. Although, by modern standards, Bagehot was actually a moderate. The American struggle against Central Banking and against "easy money" or "cheap credit" generally is well known here.

    As for Brazil….

    In some ways it is very similar to the United States – in that it has a President with a hard core leftist background (and so on – which may be a reason why the present American Administration gives so much money to the Brazilian state owned oil company to do stuff that the Obama Administration will not allow American companies to do). Although it may be that the President of Brazil is more pragmatic than Obama – and (more importantly) that the mainstream media and so on are more open to nonestablishment left ideas.

    Let us hope so.

  • A central bank should not pursue an inflationary monetary policy, but neither a central bank nor any other central authority should pursue a deflationary policy or even a zero-inflation policy either.

    The free market should determine what people promise to return in credit agreements. If people promise depreciating assets and other people accept these promises, no central authority should interfere.

  • Paul Marks

    As usual Martin your use of language is unclear.

    I now know you well enough to understand that the lack of clarity is intentional.

    Central Banks should not exist.

    If they do exist they should not create more money (either for governments or to prop up private banks). This is not a "deflationary policy" – it just means that Central Banks (if they are not abolished, should not do anything).

    As for private lenders (call them banks – or whatever).

    If someone lends money – they must first HAVE THE MONEY THEY SEEK TO LEND (either their own savings – or the savings that clients have invested with them, to be lent out).

    It is quite true that (by shell games and smoke and mirrors tricks) banks can "expand credit" beyond real savings. This is why an honest money lender is not afraid of the words "show me the money" (the money he claims he has available to lend) and even J.P. Morgan (let alone modern credit bubble gamesters) was terrified of those words.

    However, should they choose to do that (lend out more "money" than was ever really saved), they create a phony "boom" and an all too real BUST. The malinvestments are then liquidated (and a lot of general harm is done – it is NOT a matter of everything just returning to how it was, this even Richard Cantillion, back in the 1700s, knew).

    Of course, if the bust is so severe that the banks can honor their obligations – then they must be allowed to go bankrupt (i.e. CLOSE THEIR DOORS).

    • If they do exist they should not create more money (either for governments or to prop up private banks). This is not a "deflationary policy" – it just means that Central Banks (if they are not abolished, should not do anything).

      No. That would be an inflationary policy. The Fed pursued a deflationary policy during the depression for example.

      Creditors don't lend money. They extend credit. Extending credit creates money if people use promissory notes as money. No central bank is necessary.

      Real saving has nothing to do with depositing money in a bank. Real saving occurs when I build a house and extend you credit to purchase it. When I extend you credit through a financial intermediary like a bank, the bank issues notes representing its lien on the house or your obligation to pay for the house over time.

      I can use these notes as money, or I can deposit them in the bank and earn a portion of the rent that the bank charges you for the portion of the house that you don't yet own. We call this deposit "saving money". This nomenclature is unfortunate, because it misleads so many people.

      The bank can earn the interest it pays a depositor only because the house I built is real property with a marginal value in many productive organizations. The real opportunity to save occurs when I build the house, because I create something with real value that you can use because it has marginal utility. Without houses and similar real property, you can dump tons of gold in a bank to no avail.

      Money is an accounting device, a medium of exchange with no intrinsic value. It is not real property. It has no marginal utility. You believe that money itself is valuable, but this impression is illusory. Money is no more valuable intrinsically than a ledger entry. If you don't believe me, read Bastiat.

      A central bank can distort price signals by encouraging creditors to extend credit too freely. I have never disputed this point. The point is not controversial here at all. It never has been controversial here. You repeat the point over and over again when no one here disputes it.