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Not gold, restrictions on bank freedom

Two sharp economists whose blogs I enjoy reading were off-base last month on a common theme, which merits correction. Stephen Williamson said of Alan Greenspan’s 1966 essay "Gold and Economic Freedom" that Greenspan “thinks that the ‘golden’ age of monetary arrangements existed prior to the existence of the Federal Reserve System. Most monetary historians think of the National Banking era (1863-1913) as a period when the financial system of the United States was fatally flawed, as it produced repeated banking panics.”

James Hamilton similarly wrote, “The question should not be whether long-term growth occurred under the nineteenth-century gold standard, but instead whether the monetary system contributed to cyclical instability over that period. It is hard to make the case that it was helpful. The graph below plots short-term U.S. interest rates over the period 1857-1915. With some regularity, the cost of borrowing would spike up in dramatic financial events, as it did for example in the panics of 1857, 1873, 1893, 1896, and 1907.”

As some economists have known ever since the 1890s (see for instance L. Carroll Root, "Canadian Bank-Note Currency," in Sound Currency, v. 2, no. 2, December 15, 1894, starting on p. 310 of this compilation volume), the panics were not a result of the gold standard, but, to a large extent, of restrictions on note issue and branch banking. The restrictions made the American banking system far more fragmented and fragile than the systems of countries that had no such restrictions, such as Canada. Williamson, who attended university in Canada, has in fact written articles making precisely that point.


  1. This was clear to at least one economist who rigorously re-examined the issue in the 1930s as well. Vera Smith, in her The Rationale of Central Banking and the Free Banking Alternative [1990 [1936], 166], summed up the misguided effort to reform banking with creation of a central bank nicely:
    “A retrospective consideration of the background and circumstances of the foundations of the Federal Reserve System would seem to suggest that many, perhaps most, of the defects of American banking could, in principle, have been more naturally remedied otherwise than by the establishment of a central bank; that it was not the absence of a central bank per se that was at the root of the evil, … there remained certain fundamental defects which could not be entirely, or in any great measure, overcome by the Federal Reserve System.”

  2. Do you know what this post is missing?

    How in the world do we spread this to a wider audience?

    I think you're preaching to the converted here; those of us who haven't read every scrap of material related to free banking available to us without gate keys to various scholarly archives are at least aware that the 'free wheeling capitalism' of the 19th century was anything but in banking.

    There's a significant status quo being pushed back against by this thesis. How exactly do we move from blog posts on a website where the majority of visitors are merely confirming their biases to modifying public opinion — both that of the general public and that of the academic public?

    This is one of the most basic, easily empirically substantiated things the modern free banking school has. The banking system in the US prior to the establishment of the Federal Reserve was NOT a free banking system by any rational measure. It had freer entry, it had a kind of private note issue, but nothing like the imperfect, incomplete experiments in Canada or Scotland and certainly nothing at all like the theoretical model of a free banking system.

    But that's not how the general opinion looks back on things. Banking was 'unregulated' prior to the Federal Reserve and the New Deal. That's how most people think of it and they don't seem to want to change their opinions. Banking is a boring subject right until it's not and anyone who challenges the status quo when it's boring is ignored and anyone who challenges it when it's not is dismissed as a wacko.

    The body of knowledge built up by the modern free banking school is astounding. I'm absolutely sure of very few things. However, I'm as close as you can really get when it comes to loosening the system of controls and monopolies surrounding banking and it is thanks to all of you guys for the work you've done. But it's time to move from building a science and onto building a public relations campaign. Ron Paul was an OK start but he's definitely in the 'wacko' category for those portions of the majority whom have heard of him. This school needs a spokesperson, it needs an advertisement, it needs an image.

    How exactly to get that image is the real question.

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