Not New Jersey; old Jersey, in the Channel Islands. I recently read a paper by Brandon Dixon, an undergraduate economics student at the University of Chicago, that examines currency arrangements in the periphery of the United Kingdom. The paper should be issued in a month or two and I will post a link when it is, because the paper also discusses Scotland. One of the sources Dixon cites on the history of currency in Jersey is this summary by its government, which briefly discusses the island's free banking period (see pages 12-14). There were more than 100 note issuers by 1817, and even churches issued notes! Consolidation then set in. Later in the century, I gather in 1873 (the year of a worldwide financial panic), a number of banks failed. A subject for detailed research by somebody who can go and poke around local archives?
Kurt Schuler is an economist in the Office of International Affairs at the U.S. Treasury Department. In his spare time he edits Historical Financial Statistics (a free, noncommercial online data set) for the Center for Financial Stability. He has written a number of publications about the history of free banking and about other monetary systems. Because the Treasury Department discourages employees from commenting publicly on current policy issues within its purview, he refrains from discussing such issues here. His views represent no official Treasury Department position. As befits a bureaucrat, he has chosen to remain faceless, hence we have posted no photo of him.
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.
Free Banking systems: diversity in financial and economic growth
Dates: September 4 – 5, 2014
Venue: Lund University School of Economics and Management, Tycho Brahes väg 1, 22363 Lund, Room EC 1:134
Main organizer: Anders Ögren, Lund University, email@example.com
Travelling: There are frequent trains from Copenhagen Airport (Kastrup) to the city of Lund.
UPDATE: The conference Web site with links to papers and other features is now available: http://freebankingconference.wordpress.com/
Day 1: Thursday 4 September
10.30 – 10.45 Welcome
10.45 – 12.30 Session1: Empirical Cases of Free Banking I
Chair: Anders Ögren
“Free Banking in Belgium” Patrick Mardini (University of Balamand in Tripoli, Lebanon) & Kurt Schuler (Center for Financial Stability in New York)
“Private notes in the late Tokugawa Japan: the case of the Itami Brewery Guild” Keiichiro Kato (Kobe Ryutsu Kagaku University)
“Metallic Circulation and Fiduciary Circulation during the Free Banking Period in Colombia: 1865-1885” Andrés Álvarez (Universidad de los Andes, Colombia)
12.30 – 14 Lunch
14 – 15.45 Session 2: Free and Central Banking
Chair: Andres Alvarez
“A Tale of Two National Banking Systems: the United States and Japan” Masato Shizume (Waseda University) Co-authors: John A. James (University of Virginia), Masayoshi Tsurumi
(Hosei University) and David Weiman (Barnard College)
“Private bank notes, central banking and monetary policy. The case of Sweden” Anders Ögren (Lund University)
“Why did Italy leave free-banking? The rationale for central banking in the interwar years” Giandomenico Piluso (University of Siena) and Giuseppe Telesca (University of Florence and University of Reading)
15.45 – 16.15 Coffee
16.15 – 17.30 Session 3: Empirical Cases of Free Banking II
Chair: Masato Shizume
“Nature abhors a vacuum: the banking system in the United States from the removal of the Second Bank to the passage of the Legal Tender Act, 1832-1862” Ludovic Desmedt (Université de Bourgogne, LEDi) and Laurent Le Maux (Université de Brest, Economix)
“Integration of regional money markets in England, 18th and 19th centuries” Mina Ishizu (London School of Economics)
Day 2: Friday 5 September
9.30 – 11 Session 4: Empirical Cases of Free Banking III
Chair: Keiichiro Kato
“The Mexican Banking System, 1897-1907: A Networked Agent Based Modelling Approach” Fernando Arteaga González (George Mason University) and André L'Huillier Montalba (George Mason University)
“Free Banking and Economic Growth in Lower Canada, 1817–1851” Mathieu Bédard (Aix-Marseille Universite ́ and Tolouse School of Economics) and Vincent Geloso (London School of Economics)
“The Economics of Private Money: Private Bank Notes in Sweden, 1831 – 1906” Lars Jonung (Lund University)
11.30 – 12.40 Session 6: Free Banking in Theory
Chair: Lars Jonung
“Free Banking as a Money Demand Gauge” Eric Dennis (AIG)
“What ́s “Free” about Free Banking?” David Howden (St. Louis University – Madrid Campus)
12.40 – 14 Lunch
14 – 15.45 Session 5: Empirical Cases of Free Banking IV
Chair: Ludovic Desmedt
“The Role of the Bangkok agency of the HSBC in Southeast Asia before 1913” Takeshi Nishimura (Kansai University)
“Family Networks and the Emergence of a Financial Capital in Antioquia (Colombia)” Andrés Álvarez (Universidad de los Andes) César Mantilla (Institute for Advanced Study in Toulouse) Javier Mejía-Cubillos (Universidad de los Andes)
“Monthly Estimates of Narrow Money in the United Kingdom, 1841-70” Jason Lennard (Lund University) and Sean Kenny (Lund University)
15.45 – 16.15 Coffee
16.15 – 17.30 Banking, Free Banking and Research in the Future
Chairs: Anders Ögren, Andrés Álvarez and Masato Shizume
Suggested reading: “Establishing an International Data Archive on Free Banking” Kurt Schuler (Center for Financial Stability in New York)
In his generally thought-provoking blog The Grumpy Economist, John Cochrane refers to a recent paper and a paper earlier this year that he wrote. (The title of the blog, by the way, comes from the name his children teasingly gave him after hearing one too many of his dinner-table rants. I suspect it is how most children who have economists as parents think of them.)
In the earlier paper, “Toward a Run-Free Financial System,” Cochrane writes (page 4), “Our government should take over its natural monopoly position in supplying interest-paying money, just as it took over a monopoly position in supplying nineteenth-century bank notes, and for the same reason: to eliminate crises, which have the same fundamental source.”
Cochrane’s specialty is finance, not monetary economics, but I hold the University of Chicago to a higher standard here than such Podunk outfits as Berkeley (where Cochrane earned his Ph.D.) or Harvard. Even a Chicago professor whose specialty is elsewhere within economics should avoid gross errors of historical fact in American monetary history, given the many Chicago professors and students who have done so much to gather and interpret facts ignored by others.
First, government had no natural monopoly position in supplying bank notes. The federal government did not issue notes on a level playing field with privately issued notes and drive the private notes out of circulation. Rather, in 1863 the federal government passed a law requiring federally chartered banks to hold federal bonds as collateral against notes issued, and in 1865 and 1866 it passed acts imposing prohibitively high tax rates on notes issued by state-chartered banks and nonbank issuers. Even after ending the state bank and nonbank notes, federally issued “greenbacks,” gold certificates and silver certificates did not drive the notes of federally chartered banks out of circulation. They remained until finally prohibited by law from circulating further, in 1935.
Second, notes issued by the U.S. government in fact have historically had considerably higher risk of nonpayment than notes issued by U.S. banks. In 1933 the U.S. government defaulted on 100% of its notes with respect to the obligation to redeem them in gold. American citizens were not legally allowed to hold gold again no questions asked until 1975. In the meantime, the dollar had depreciated from $20.67 per troy ounce to nearly $200 per troy ounce.
Third, government control of the note supply was a cause of crisis in the United States, not a path to eliminating them. The “inelasticity” of the note supply in the late 19th century United States contributed to periodic financial crisis from 1873 to 1914. People wanted to convert deposits into notes, but government-imposed restrictions on note issue prevented them from doing so. The result, in those days when deposit accounts were much less widespread among the public, was a shortage of currency that prevented people from making payments and undertaking transactions they wanted to make, which were made by their counterparts in Canada and other countries that had looser restrictions on the ability of banks to convert deposits into notes. Even after the Federal Reserve began operations in November 1914, there was a note shortage during the Great Depression, as seen by the temporary increase, before further issues were outlawed, of notes issued by federally chartered banks. (Details about the regulations I have referred to are available in this old article I wrote.)
Enough of my own grumpiness for now. In a later post I will have some more general, ungrumpy comments on whether risk-free banking is really possible.
For the upcoming conference “Free Banking systems: diversity in financial and economic growth” at Lund University School of Economics and Management (Sweden), September 4–5, 2014 I have written a paper titled "Establishing an International Data Archive on Free Banking." The idea came from a post I wrote several months ago. Here is the abstract:
In the past 40 years, enough work has been done on historical cases of free banking to show that it was a widespread phenomenon. There has been no concerted effort, however, to draw all this material together. The Internet, which did not exist when the revival of interest in free banking began, offers the chance to create an open international research hub to bring together a mass of statistical, legal, and other material on the various cases of free banking. I describe the advantages of a research hub, what components it should include, and an existing research hub that provides a model.
Click here for the paper. Unfortunately I have a prior commitment to another conference, but my coauthor on another paper, Patrick Mardini, will be presenting the paper if the organizers wish to keep it on the schedule and he will relay comments from the conference to me. I welcome your reactions to the paper in the comment section below.
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.
John Blundell has died at age 61 of cancer. As an earlier post mentioned, he was one of the attendees of the 1974 South Royalton, Vermont conference that marked the revival of the Austrian School of economics, and he recently wrote a reminiscence of the conference. Here is the Wikipedia article on him. In his roles as President of the Institute for Humane Studies, President of the Atlas Economic Research Foundation, and General Director of the Institute of Economic Affairs (London), he supported funding and publication of free banking ideas. Others who knew him better will have more to say in due course. Here is a tribute from the Atlas Economic Research Foundation.
I have only just become aware of the 2013 book Panic Scrip of 1893, 1907 and 1914: An Illustrated Catalog of Emergency Monetary Issues. The title refers to the U.S. financial panics of those years. The book is available in paper from the usual sources, and Google has a considerably cheaper e-book edition. Here is a review of the book.
Scrip is a circulating IOU issued by a person or corporation, often redeemable in kind, typically accepted widely within a limited area, and, in the context of panic issues, tolerated by the authorities although perhaps of dubious legality. During the U.S. panics listed in the title of the book, large local employers such as steel mills, companies that offered widely used goods or services such as tram lines, and in smaller towns well known local merchants such as those who owned general stores issued scrip as a substitute for banknotes that became quite scarce. The issuance of scrip can be seen as a kind of free banking: with the most trusted issuers restricted from further issuance of notes by certain provisions of federal law, other issuers stepped into the gap. The service that issuers of scrip performed was large, the losses from failures by issuers were small, and the episodes illustrated that there was no necessity to limit note issue to banks.
Among the economists to have written about the place of scrip in the U.S monetary system are Richard Timberlake, "The Significance of Unaccounted Currencies" (JSTOR, gated); William Roberds, "Lenders of the Next-to-Last Resort: Scrip Issue in Georgia during the Great Depression" (free, article starts on page 16); and Price Fishback, "Did Coal Miners 'Owe Their Soul to the Company Store'?" (JSTOR, gated; an article about the routine use of scrip in company towns; the title is a reference to this hit song of the 1950s).
Brooklyn College of the City University of New York recently refused a $10 million grant offer from the Charles G. Koch Foundation. The grant would have strengthened the college's business program sufficiently to allow it to obtain accreditation from the Association to Advance Collegiate Schools of Business. The dean of the School of Business apparently did not want to accept the money for fear of being contaminated with free-market ideas and inviting the unhinged leftist criticism that Charles and David Koch often attract.
I hereby invite the foundation to contact me for ideas about projects costing considerably less than $10 million that would achieve measurable, worthwhile scholarly results in economics and finance, and whose proposed recipients will assuredly not refuse the money. I won't take a penny for my advice. As you might expect, some of the ideas are related to topics that have been discussed on this site. Readers, as a service to philanthropy, I invite you to propose in the comments how you might spend the money in a vein somewhat related to that proposed for Brooklyn College.
We are just past the 40th anniversary of a conference in South Royalton, Vermont that marked the start of the revival of the Austrian School of economics. John Blundell and Richard Ebeling, who attended, have both offered reminiscences. Almost everyone who would be important in Austrian economics in the United States over the next half generation was there, and Milton Friedman stopped by to boot.
Ebeling notes that in a lecture on the Austrian theory of money, "Professor [Murray] Rothbard suggested three areas for possible future research: (1) how to separate the state from money; (2) the question of free banking vs. 100-percent-gold dollars; and (3) the defining of the supply of money." Rothbard saw the issues clearly; it is unfortunate that he was subsequently so closed to approaches other than his own. Monetary theory was in my view Rothbard's weakest area. His preferred master narrative of good guys versus bad guys is a poor fit for understanding monetary institutions, such as the gold standard, that are to a substantial extent not the result of intentional design.
The conference volume, The Foundations of Modern Austrian Economics, was the book that made me into an Austrian when I read it in 1978. Tom Palmer, who lived down the hall in my college dormitory, already as a sophomore had a large book collection that took up most of the double room he had all to himself. Tom's collection included all the important Austrian works published at the time, including the Foundations, which he lent me. I was so taken with it that I ordered my own copy to mark up. The topics and the analysis impressed me as the kind of thing that I wanted to do. The volume was edited by Edwin Dolan, who was also the conference director. I met Ed about 15 years later and thanked him for his role, the results of which had turned out to be so important to me.
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