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World War I and free banking

The 100th anniversary of the start of World War I was two days ago. Earlier this year I skimmed through a number of New York newspapers from just before the war and during its first few months. It is apparent how great a shock it was. The Christian great powers of Europe had been mostly at peace for nearly a century (though they had been gnawing at the Ottoman Empire), and suddenly they were embroiled in a vast continental war over a matter that from their perspective should have had little importance.

World War I began a rapid decline in free banking. None of the belligerents had free banking in 1914. In the United States, which did not become a belligerent until 1917, 1914 saw the Federal Reserve replace the previous system of government issue of currency alongside heavily regulated issue of notes by banks. The war and its aftereffects also disrupted the monetary systems of countries with free banking such that most adopted arrangements that gave governments a good deal more discretionary control over the monetary system.

There is a hole in free banking theory with respect to war. Free banking, like free trade more generally, is inherently a peacetime system. The question for its political durability is whether, like trade, it can be bent during wartime but prove sufficiently elastic to return to something like its old shape afterwards. If free banking is a peacetime-only system, politically it cannot persist, because war is an unfortunate reality of human existence.

  • Paul Marks

    In major wars governments spend a lot of money. Not as much money as many modern governments spend on their Welfare States (the attempt by the state to take over all the basic functions of Civil Society), but still a lot of money.

    The money spent by governments on major wars could be raised by taxation – but this would push taxes up to a level where their might be resistance (I say "might" because taxes are right now, due to the Welfare States, at a level where previous generations of thinkers assumed their would be revolt and civil war – and such things are not taking place).

    Or governments could finance major wars, in part, by debasement of the coinage (the old Roman method – although also used in modern times) and various other forms of monetary expansion – i.e. the expansion of credit-money not really representing physical gold or silver (or whatever the commodity used as money is supposed to be).

    The attitude of "Free Bankers" seems (sadly) to be all to favourable to allowing the government to use monetary expansion – for example there was little opposition from "Free Bankers" to monetary expansion in Chile during (or AFTER – the key point) its war with Bolivia and Peru.

    Why was this?

    Why not at least AFTER the war was there not the cry "let the monetary expansion stop now"?

    Perhaps the answer is that (certain forms of) "Free Bankers" actually rely on THE STATE.

    Whose courts allow "suspension of cash payments" (payments of the commodity the bankers have contractually promised) and "bank holidays" and so on……?

    A banker who really has the commodity (the gold, the silver – or whatever it is) they have promised, does NOT need the state – but a banker who does NOT really have the commodity (who is, basically, engaged in a con game – a deception) does need the state.

    And so will go along with the state – not just in wartime, but during peacetime also.

    Sadly most systems of "Free Banking" have (historically) been dominated by bankers who do NOT really have the commodity they have promised – by people who are, therefore, dependent on the "protection" of the state (against their own customers).

  • Paul Marks

    Of course a banker ("Free" or otherwise) will not tend to use open language – they will not tend to say "I am engaged in a con game (a deception), I do not really have the commodity-money I promise to people, indeed this amount of commodity-money DOES NOT EVEN EXIST", the banker has no chance at all of getting the commodity to back up their credit money because IT {this amount of the commodity] DOES NOT EXIST).

    Instead the banker ("Free" or otherwise) will use euphemisms for fraud (or what most ordinary people would call fraud) such as – "I help make the money supply elastic" or hide in technical language and mathematics.

  • You can look at it differently too. If you have a system that does not depend on the state's benevolence, the state cannot fund wars and there are thus no wars. This just out yesterday:

  • Archie Dean

    To my mind the comment from Peter Surda above 'hits the spot' exactly: –

    "If the government were obliged to come to the people for money instead of vice-versa, the people would keep government under control and operate their economy satisfactorily with prosperity and peace resulting. The peoples of the nations do not make war. For them peace is the natural and permanent order. Wars are planned and perpetrated by politicians and their diplomats; and the money power of government is the means by which the people are maneuvered into wars."


    "As long as we cling to the superstition that we must look to government for money supply, instead of requiring it to look to us, just so long must we remain the subjects of government and it is vain to follow this or that policy or party or ism in the hope of salvation. We can control government and our own destiny only through our money power and until we exert that power it is useless for us to debate the pros and cons of political programs."

    Both quotes from E. C. Riegel