Some months ago there was a discussion of Australia’s free banking experience at a site called “Social Democracy for the 21st Century.” I will not go into the particulars of Australia’s experience here, because I have forgotten much of what I once knew about the subject and lack time at the moment to refresh my memory. The gravamen of the criticism, however, was that the financial crisis and resulting depression Australia suffered in the early 1890s under a free banking system was more severe than the Great Depression in Australia, under a quasi-central banking system. (The government-owned Commonwealth Bank of Australia was a commercial bank and in addition exercised certain central banking functions.) This comparison supposedly discredits free banking.
Arguments like this from single instances are not persuasive. It is like saying that Zimbabwe’s hyperinflation of several years ago discredits central banking, case closed. Free banking, central banking, and other monetary systems have a variety of experience, and one must look, insofar as possible, at the totality of the evidence. The facts do not speak for themselves; we have to interpret events and determine what the facts are and which facts are salient.
We do know with certainty, though, that every one of the more than 50 documented hyperinflations of the last 250 years has occurred under central banking, or related monetary arrangements where the government treasury was the issuer of currency. Moreover, in all such cases the central bank or treasury was de jure or de facto not on a gold or silver standard, and in almost all cases was not on a foreign exchange standard either (in which the local currency was redeemable at a set rate in foreign currency). Evidence on that scale is the kind that can serve as the basis for generalizations. Single cases cannot.
