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Free banking in Belgium

That is the new title of a paper I wrote with the Lebanese economist Patrick Mardini. Patrick did the bulk of the work, and he will be presenting the paper at the conference in Lund, Sweden on free banking history later this week (see the previous post). Here is the abstract:

Belgium had a somewhat free banking system from 1835 to 1850. The country had two major banks in Brussels, the Société Générale and the Banque de Belgique; several smaller banks in the provinces; and many private bankers. The system had restrictions on note issue and legal barriers to entry. Belgium suffered from a bank run in 1838 triggered by the threat of war with the Netherlands. The Banque de Belgique had invested its resources in illiquid assets and did not know how or when to reduce its note issue. It was bailed out by the government but knew that another failure would spell its end. This led the bank to reform its activity, deleverage, and hedge the remaining risk. The Société Générale was not seriously threatened in 1838 and continued as before. In 1848, the French revolution of that year and France’s suspension of convertibility induced another crisis. This time it was the turn of the Société Générale to falter, for the same reasons as the Bank de Belgique in 1838. The government intervened through fiat money, suspension of convertibility and permission to monetize liabilities. The free banking system ended with the creation of a central bank on January 2, 1851.


  1. I find banking history like this fascinating. Do you know of a paper describing the histories surrounding the creations of each of the world's central banks (other than the BoE and FR)?

    1. There are at least three good books on the subject: Charles Conant, A History of Modern Banks of Issue (several editions in the late 19th and early 20th centuries; some are online free via the Internet Archive); Charles Goodhart, The Evolution of Central Banks (1988; takes arguments for free banking seriously though he rejects them, whereas most writing on central banking doesn't even consider other options); and Forrest Capie and others, editors, The Future of Central Banking: The Tercentenary Symposium of the Bank of England (1994).

    1. No. One case is not proof of any general statement, as my coauthor and I specifically state in the paper. Any competent economist, or researcher in any other field, knows this. Now that I have told you, you should know it too. On 100% gold reserve banking, see George Selgin's posts "The State and 100 Percent Reserve Banking" and "Banknotes Are Not, and Have Never Pretended to Be, Warehouse Receipts."

  2. The paper is very instructive and goes in dept. Of special interest to me was the discussion on strategies the Banque de Belgique could have followed to avoid runs/deter runs/wind down its circulation.

    I'm wondering about whether it is correct to label this case as free banking though. Page 6, discussing the Société Générale: "the bank’s activities were obscure since it constantly refused any type of examination from the Court of Auditors and its financial statements were kept in absolute secrecy." That a bank could survive without publishing financial statements is probably a sign of the extent of its privileges. It makes me skeptic about the paragraph in the conclusion about how competitive the Belgian free banking system was. Wouldn't it be more accurate to call it a case of two competing 'monopolies' of emission?

  3. Patrick Mardini and I describe the system as "somewhat free," not as simply free: see the first sentence of our abstract and the first sentence of the paper itself. We also describe in some detail what restrictions existed. Belgium was obviously not a central banking system, and as Patrick Mardini and I argue, competition between the Société Générale and the Banque de Belgique was strong. so I consider our characterization accurate. Remember that there were also other banks, though much smaller than the big two.

    Two banks cannot be a monopoly; at most they can be a duopoly. We found no evidence that the two banks colluded. Indeed, the the Société Générale pushed the Banque de Belgique to the brink of extinction in 1838.

    That the Société Générale was able to avoid disclosing its balance sheet is partly explicable by the greater emphasis on secrecy by banks generally in those days. Banks were reluctant to disclose information even to their shareholders. The Société Générale continued not to disclose its balance sheet until well after central banking started.

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