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Two belated anniversaries

The centenary of the opening of the Federal Reserve System was November 16, 1914. The Federal Reserve Act was passed in December 1913 but the organization took nearly a year to open. Here is the Federal Reserve page on the event. Since it was not previously mentioned on this blog, I am bringing it up now.

As you can tell from the date, the Fed did not open until after World War I began. The financial troubles in the United States connected with the outbreak of the war were handled by the private sector and the Treasury Department. William Silber, a professor at New York University, wrote a book several years ago on the episode, When Washington Shut Down Wall Street. Among the subjects he discusses is the closure of the New York Stock Exchange for several months. With the NYSE closed, an unofficial market sprang up in New Street, which ran along the back side of the NYSE building. The establishment press refused to publish stock price data from New Street trading, but Silber found one paper that did so, perhaps because its usual focus was on horse racing and entertainment, hence it was not beholden to Wall Street for stories or advertising revenue. The paper stopped publishing data some weeks before the shutdown period ended, though. Recently two students at Johns Hopkins University filled in the remaining data using a previously untapped source and wrote a paper about it. More generally, I think much work remains to be done about what steps governments and the private sector might take under a free banking system when some catastrophic event occurs. The absence of a central bank does not remove the need to take some steps similar to what a central bank might do, but one hopes such steps could be undertaken with more reliance on voluntary consent.

This year is also the 30th anniversary of the publication of Larry White’s Free Banking in Britain (link is to the second edition, 1995). I have a slight personal connection to the book, having prepared the index to the first edition along with George Selgin. Vera Smith’s Rationale of Central Banking and Hayek’s Choice in Currency (later expanded and retitled Denationalisation of Money) were earlier, but to my mind Larry’s book marks the real start of contemporary free banking theory because it combined theory, economic history, and history of thought in an appealing way. Larry showed that the Scottish free banking system had worked well, and that its workings were both contrary to what was usually taught about laissez faire in money and banking textbooks and consonant with what is taught about markets in microeconomics textbooks. Vera Smith’s fine book was unfortunately neglected when it first appeared (1936, the same year as Keynes’s General Theory of Interest, Employment and Money). What could have been an intellectual movement was stillborn. Larry’s book has borne ample fruit intellectually, if not all that he has wished for in terms of policy.