FREE ELECTRONIC LIBRARY - Dissertations, online materials

Pages:     | 1 |   ...   | 15 | 16 || 18 |

«8 CENTRAL AND FREE BANKING THEORY T his chapter contains a theoretical analysis of the arguments raised for and against both central and free banking ...»

-- [ Page 17 ] --

The creation of fiduciary media also entails an increase in the money supply and a consequent decrease in the purchasing power of money. In this way banks collectively and almost imperceptibly “expropriate” the value of citizens’ monetary units. It certainly smacks of a bad joke to declare that the economic agents who suffer such expropriation are actually (voluntarily?) “saving.” It is not surprising that these doctrines have been defended by authors like Keynes, Tobin, Pointdexter and, in general, all who have justified inflationism, credit expansion and the “euthanasia of the rentier” for the sake of aggressive economic policies geared to insure an “adequate” level of “aggregate demand.” What is surprising, however, is that authors like Selgin and Horwitz, who belong (or at least belonged) to the Austrian School and thus should be more aware of the dangers involved, have had no alternative but to resort to this sort of argument in order to justify their “fractional-reserve free-banking” system.144 144As an additional advantage of the system he proposes, Selgin mentions that economic agents who maintain cash balances in the form of fiduciary media created in a free-banking system can obtain a financial yield on their money and use a series of banking facilities (payment, bookkeeping, cashier, etc.) “free of charge.” However Selgin fails to mention certain costs of fractional-reserve free banking, such as artificial booms, malinvestment of resources, and economic crises. He also fails to touch on what we definitely consider the highest cost: the harmful effects of the violation of legal principles in a free-banking system gives rise to a Central and Free Banking Theory


Neo-banking authors devote strong efforts to historical studies which they intend to support the thesis that a freebanking system would protect economies from cycles of boom and depression, owing to the “monetary equilibrium” mechanism. Nevertheless the empirical studies produced thus far have not focused on whether free-banking systems have prevented credit expansion, artificial booms and economic recessions. Instead they have centered on whether bank crises and runs have been more or less frequent and severe in this type of system than in a central-banking system (which is obviously quite a different issue).145 tendency toward the establishment of a central bank as a lender of last resort designed to support bankers and create the liquidity necessary to insure citizens the recovery of their deposits at any time. As for the supposed “advantage” of receiving interest on deposits and “free” cashier and bookkeeping services, there is no telling whether, in net terms, the interest economic agents would earn on funds truly saved and lent in a system with a 100-percent reserve requirement, less the cost of the corresponding deposit, cashier and bookkeeping services, would be equal to, higher than or lower than the real interest they currently receive on their demand checking accounts (minus the decline which chronically affects the purchasing power of money in the current banking system).

145To date, theorists have carefully examined around sixty free-banking

systems from the past. The conclusion they have generally drawn follows:

Bank failure rates were lower in systems free of restrictions on capital, branching and diversification (e.g., Scotland and Canada) than in systems restricted in these respects (England and the United States).

However this matter is irrelevant from the standpoint of our thesis, since the above studies do not specify whether cycles of expansion and economic recession were set in motion. See The Experience of Free Banking, Kevin Dowd, ed., pp. 39–46. See also Kurt Schuler and Lawrence H.

White, “Free Banking History,” The New Palgrave Dictionary of Money and Finance, Peter Newman, Murray Milgate and John Eatwell, eds. (London: Macmillan, 1992), vol. 2, pp. 198–200. The above excerpt appears on p. 108 of this last article.

Money, Bank Credit, and Economic Cycles In fact, in a recent study, George A. Selgin looks at the occurrence of bank runs in different historical free-banking systems versus certain systems controlled by a central bank and reaches the conclusion that bank crises were more numerous and acute in the second case.146 Moreover the main thesis of the main neo-banking book on free banking in Scotland consists entirely of the argument that the Scottish banking system, which was “freer” than the English one, was more “stable” and subject to fewer financial disturbances.147 However, as Murray N. Rothbard has indicated, the fact that, in relative terms, fewer banks failed in the Scottish freebanking system than in the English system does not necessarily mean the former was superior.148 Indeed bank failures have been practically eliminated from current central-banking systems, and this does not make such systems better than a free-banking system subject to legal principles. It actually makes them worse. For bank failures in no way indicate that a system functions poorly, but rather that a healthy, spontaneous reversion process has begun to operate in response to fractional-reserve banking, which is a legal privilege and an attack on the market. Therefore whenever a fractional-reserve free-banking system is not regularly accompanied by bank failures and suspensions of payments, we must suspect the existence of institutional factors which shield banks from the normal consequences of fractional-reserve banking and fulfill a role similar to the one the central bank currently fulfills as lender of last resort. In the case of Scotland, banks had so encouraged the use of their notes in economic transactions that practically no one demanded payment of them in gold, and those who occasionally requested specie at the window of their banks met with general disapproval and enormous pressure from 146George A. Selgin, “Are Banking Crises a Free-Market Phenomena?” a manuscript presented at the regional meeting of the Mont Pèlerin Society, Rio de Janeiro, September 5–8, 1993, pp. 26–27.

147White, Free Banking in Britain.

148Rothbard, “The Myth of Free Banking in Scotland,” Review of Austrian Economics 2 (1988): pp. 229–45, esp. p. 232.

Central and Free Banking Theory their bankers, who accused them of “disloyalty” and threatened to make it difficult for them to obtain loans in the future.

Furthermore, as Professor Sidney G. Checkland has shown,149 the Scottish fractional-reserve free-banking system still went through frequent, successive stages of credit expansion and contraction, which gave rise to economic cycles of boom and recession in 1770, 1772, 1778, 1793, 1797, 1802–1803, 1809–1810, 1810–1811, 1818–1819, 1825–1826, 1836–1837, 1839, and 1845–1847. In other words, even though in relative terms fewer bank runs occurred in Scotland than in England, the successive stages of boom and depression were equally severe, and despite its highly praised free-banking system, Scotland was not free from credit expansion, artificial booms and the subsequent stages of serious economic recession.150 The nineteenth-century Chilean financial system provides another historical illustration of the inadequacy of fractionalreserve free-banking systems to prevent artificial expansion and economic recessions. In fact during the first half of the nineteenth century, Chile had no central bank and implemented a 100-percent reserve requirement in banking. For several decades its citizens firmly resisted attempts to introduce a fractional-reserve banking system, and during those years they enjoyed great economic and financial stability. The situation began to change in 1853, when the Chilean government hired Jean-Gustav Courcelle-Seneuil (1813–1892), one of the most prominent French fractional-reserve free-banking theorists, as professor of economics at the University of Santiago de Chile.

149Sidney G. Checkland, Scottish Banking: A History, 1695–1973 (Glasgow: Collins, 1975). White himself recognizes in his book that Checkland’s is the definitive work on the history of the Scottish banking system.

150Though much work remains to be done, historical studies on fractional-reserve free-banking systems with very few (if any) legal restrictions and no central bank appear to confirm that these systems were capable of triggering significant credit expansion and provoking economic recessions. This is what took place, for instance, in Italian and Spanish financial markets in the fourteenth and sixteenth centuries (see chapter 2, section 3), as Carlo M. Cipolla and others have revealed, as well as in Scotland and Chile, as we indicate in the text.

Money, Bank Credit, and Economic Cycles Courcelle-Seneuil’s influence in Chile during the ten years he taught there was so great that in 1860 a law permitting the establishment of fractional-reserve free banking (with no central bank) was enacted. At this point the traditional financial stability of the Chilean system gave way to stages of artificial expansion (based on the concession of new loans), followed by bank failures and economic crises. The convertibility of the paper currency was suspended on several occasions (1865, 1867, and 1879), and a period of inflation and serious economic, financial and social maladjustment began. This period resides in the collective memory of Chileans and explains why they continue to mistakenly associate financial disturbances with the doctrinal economic liberalism of CourcelleSeneuil.151 151Albert O. Hirschman, in his article, “Courcelle-Seneuil, Jean-Gustav,” The New Palgrave: A Dictionary of Economics, John Eatwell, Murray Milgate, and Peter Newman (London: Macmillan, 1992), vol. 1, pp. 706–07), states that Chileans have even come to demonize Courcelle-Seneuil and to blame him for all the economic and financial evils which befell Chile in the nineteenth century. Murray N. Rothbard believes this demonization is unjust and stems from the fact that the poor functioning of the free-banking system Courcelle-Seneuil introduced in Chile also discredited the deregulating initiatives he launched in other areas (such as mining), when these efforts had a positive effect. See Murray N. Rothbard, “The Other Side of the Coin: Free Banking in Chile,” Austrian Economics Newsletter (Winter 1989): 1–4. George Selgin responds to Rothbard’s article on free banking in Chile in his paper, “Short-Changed in Chile: The Truth about the Free-Banking Episode,” Austrian Economics Newsletter (Spring–Winter, 1990): 5ff. Selgin himself acknowledges that the period of free banking in Chile from 1866 to 1874 was an “era of remarkable growth and progress,” during which “Chile’s railroad and telegraph systems were developed, the port of Valparaiso was enlarged and improved, and fiscal reserves increased by one-quarter.” According to the Austrian theory, all of these phenomena are actually symptoms of the substantial credit expansion which took place during those years and was ultimately bound to reverse in the form of a recession (as, in fact, occurred). However Selgin attributes the subsequent bank crises (but not the recessions) to the Chilean government’s maintenance of an artificial parity between gold and silver. When gold rose in value, this parity resulted in the massive outflow of gold reserves from the country (see Selgin, “Short-Changed in Chile,” pp. 5, 6 and footnote 3 on p. 7).

Central and Free Banking Theory Moreover the fact that various historical studies appear to indicate that fewer bank runs and crises arose in free-banking systems than in central-banking systems does not mean the former were completely free of such episodes. Selgin himself mentions at least three instances in which acute bank crises devastated free-banking systems: Scotland in 1797, Canada in 1837, and Australia in 1893.152 If Rothbard is correct, and in the rest of the cases institutional restrictions played the role of central bank to at least some extent, then the number of bank crises might have been much larger in the absence of these restrictions.153 At any rate we must not consider the elimination of bank crises to be the definitive criterion for determining which banking system is the best. If this were the case, even the most radical fractional-reserve free-banking theorists would be obliged to admit that the best banking system is that which requires the maintenance of a 100 percent reserve, since by definition this is the only system which in all circumstances prevents bank crises and runs.154 In short, historical experience does not appear to support the thesis of modern fractional-reserve free-banking theorists.

Bank credit expansion gave rise to cycles of boom and depression in even the least controlled free-banking systems, which were not free from bank runs and failures. The recognition of this fact has led certain neo-banking authors, such as Stephen Horwitz, to insist that though historical evidence against their views is of some significance, it does not serve to refute the theory that fractional-reserve free banking produces only 152Selgin, “Are Banking Crises a Free-Market Phenomena?” Table 1(b), p. 27.

153Raymond Bogaert appears to confirm Rothbard’s thesis. According to Bogaert, we have documented proof that of 163 banks created in Venice starting at the end of the Middle Ages, at least 93 failed. Raymond Bogaert, Banques et banquiers dans les cités grecques, p. 392 footnote 513.

154Thus Selgin himself recognizes: “A 100-percent reserve banking crisis is an impossibility.” See George A. Selgin, “Are Banking Crises a Free-Market Phenomena?” p. 2.

Money, Bank Credit, and Economic Cycles benign effects, since strictly theoretical procedures must be used to refute this theory.155


Theorists of fractional-reserve banking tend to exclude legal considerations from their analysis. They fail to see that the study of banking issues must be chiefly multidisciplinary, and they overlook the close theoretical and practical connection between the legal and economic aspects of all social processes.

Pages:     | 1 |   ...   | 15 | 16 || 18 |

Similar works:

«Page 1 of 9 Watershed Vol. 3 No. 1 July October 1997 Land Rights: The Challenge for 'Ratanakiri's Indigenous Communities By Sara Colm The northeast of Cambodia is opened up for development, the lands, forests and livelihoods of its indigenous peoples are coming under increasing pressure. Land rights is becoming a key issue in determining the future of communities and forests in Ratanakiri province. The ancestral lands and traditional livelihoods of indigenous groups in Ratanakiri province in...»

«SOVEREIGN WEALTH FUND PORTFOLIOS Alexander Dyck, University of Toronto, Rotman School of Management Adair Morse*, University of Chicago, Booth School of Business December, 2011 ABSTRACT This paper examines objectives driving Sovereign Wealth Fund (SWF) investments using a novel, handcollected dataset of their investments in public equities, private firms, and real estate. SWF public statements suggest two primary objectives: a financial portfolio investor objective, seeking to maximize risk...»

«Performance Measurement 2000 – Past, Present and Future A PROCESS FOR DEVELOPING STRATEGICALLY RELEVANT MEASURES OF INTELLECTUAL CAPITAL Michael Shulver Warwick Business School, University of Warwick, Coventry, CV4 7AL, UK Gavin Lawrie & Henrik Andersen 2GC Active Management, Albany House, Market St., Maidenhead, SL6 8BE, UK Abstract Intellectual capital measures must have relevance to the organisation to which they relate, such relevance being obtained through linking intellectual capital...»

«WP/10/134 On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries Andrew Berg, Rafael Portillo, and D. Filiz Unsal © 2010 International Monetary Fund WP/10/134 IMF Working Paper Research Department On the Optimal Adherence to Money Targets in a New -Keynesian Framework: An Application to Low-Income Countries Prepared by Andrew Berg, Rafael Portillo, and D. Filiz Unsal June 2010 Abstract Many low-income countries continue to describe...»

«Hum Nat (2010) 21:355–370 DOI 10.1007/s12110-010-9100-6 Watching the Hourglass Eye Tracking Reveals Men’s Appreciation of the Female Form Barnaby J. Dixson & Gina M. Grimshaw & Wayne L. Linklater & Alan F. Dixson Received: 23 December 2009 / Accepted: 30 April 2010 / Published online: 18 November 2010 # Springer Science + Business Media, LLC 2010 Abstract Eye-tracking techniques were used to measure men’s attention to backposed and front-posed images of women varying in waist-to-hip ratio...»

«Approved 26 April 2016 Minutes of a Meeting of the Finance and Performance Committee Held on Tuesday, 22 March 2016 in the Boardroom, Blackpool CCG Present: David Edmundson, Lay Member (Chairman) Roy Fisher, CCG Chairman David Bonson, Chief Operating Officer Gary Raphael, Chief Finance Officer Dr Marie Williams, GP Member Dr Cruz Augustine, GP Member (arrived during Item 5) In Attendance: Lesley Anderson-Hadley, Deputy Chief Nurse Pat Crawford, Interim Deputy Chief Finance Officer Helen...»

«CHAPTER 82 HOUSING FINANCE Latest Revision 1994 82.01 INTRODUCTION In 1982 the Ohio Constitution was amended to allow the state to assist in providing single family first time home buyer housing and multi-family housing for the elderly. Following the passage of this constitutional amendment, legislation created the Ohio Housing Finance Agency (OHFA) that was responsible for the administration of these programs. Under the terms of this 1982 amendment, local governments were not authorized to...»

«faculty of economicsand operations business Societal Impact of Wireless Revolution in the Netherlands and Possible Measures Authors (RuG): Prof.dr.ir. J.C. Wortmann, Drs. J.B. van Meurs, Dr. Ir. F.B.E. van.Blommestein, Prof. dr. G.B. Huitema With support of TNO: Dr. Ir. M. Djurica, Ir R. Hensbroek, Ir E.F. Matthijssen Groningen, 10 March 2014. Societal Impact of Wireless Revolution in the Netherlands and Possible Measures › 2 Contents 1. Introduction 5 2. Developments in wireless...»

«NBER WORKING PAPER SERIES HOUSEHOLD FINANCE OVER THE LIFE-CYCLE: WHAT DOES EDUCATION CONTRIBUTE? Russell Cooper Guozhong Zhu Working Paper 20684 http://www.nber.org/papers/w20684 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 2014 We are grateful to the NSF for financial support. Participants at seminars at Pennsylvania State University, SUFE and SED 2014 provided helpful questions and comments. Thanks to David Lander and Qi Wu for detailed comments...»

«PRELIMINARY READING LIST INTERNATIONAL HOUSING FINANCE PROGRAM, JUNE 1-11, 2015 Teachers: Marja Hoek-Smit (The Wharton School), Michael Lea (San Diego State University), Haluk Ünal (University of Maryland), Steve Butler, Luis Madrazo Lajous (Government of Mexico), Fred Cooper (Toll Brothers), Soula Proxenos (International Housing Solutions), Todd Sinai (The Wharton School), The World Bank, Richard Herring (The Wharton School), Jack Guttentag (The Wharton School), Ken Dorph ( Sag Harbor...»

«Company Management, Administration, and Ground Support II – at the times of Air America Part 1: 1959-1973 by Dr. Joe F. Leeker First published on 24 August 2015, last updated on17 June 2016 IV) Widening operations: The CAT-Air America-Air Asia complex (April 1959-1973) As has been shown in the first part of this file, the CIA, as the owner of CAT Incorporated (renamed Air America Inc. in 1959), controlled the Company by committees that met at Washington or New York and whose decisions had to...»

«Two millennia of socio-cultural development in Luwu, South Sulawesi, Indonesia F. David Bulbeck and Bagyo Prasetyo Abstract The Origins of Complex Society in South Sulawesi project has recorded some 50 sites contemporary with the meteoric rise of the Bugis chiefdom of Luwu, Indonesia, between AD 1300 and 1600. Six earlier sites, dated between 2000 and 900 years ago, trace the first importation of glass beads and other exotic goods, the discovery of Luwu’s sources of highgrade iron ore, and...»

<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.