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Source link: http://archive.mises.org/10327/a-free-market-in-money/

A Free Market in Money?

July 21, 2009 by

Can the monetary system regulate itself, or does it require oversight by government regulators? One tradition of thought says yes to the first question and no to the second. FULL ARTICLE


steve July 21, 2009 at 11:06 am

It is true that Scottish (and No. Irish) banks issue their own banknotes. However, since the process is nowadays overseen by the Bank of England (the UK equivalent of the Fed), little of interest can be drawn from this fact. I don’t disagree with Carden’s thesis, but he needs to be careful with the supporting evidence he cites.

Marcus July 21, 2009 at 11:47 am

And one of this Bank in Scotland is the Royal Bank of Scotland , which is in trouble.

Chris Cook July 21, 2009 at 12:13 pm

To expand (from Scotland) on steve’s caveat, in fact Scottish banks are obliged – during the working week – to keep reserves of sterling pound for pound against notes they issue. Over the weekend, and bank holidays, they don’t – so they get to keep the seignorage in respect of the note issue about 110 days a year on average.

This probably covers the costs of issue, and they get marketing thrown in.

The UK Treasury’s threat last year to grab this income


has apparently not (yet) been carried through.

There is a wider point here, and that is that as Hong Kong demonstrates, there is no need for Central banks at all. Although HK does have a Monetary Authority overseeing conventional private bank operations, one of the beneficial effects has been that HK banks (eg HSBC) have tended to be more prudent in the absence of a lender of last resort.

In my view there is no need for ANY credit intermediary (and especially not the State), and I advocate credit clearing of credit issued “Peer to Peer” – subject to a mutual guarantee backed by provisions made by sellers and buyers into a “Pool” held by a custodian.

The logic of the direct instantaneous connections of the Internet is for disintermediation, and credit intermediaries are no more necessary than are (say) record companies in the face of online music file sharing

The consequences of this disintermediation are interesting.



Dick Fox July 21, 2009 at 12:53 pm

Another consideration is federalism. Usually when we talk of free banking we assume that the state government will not interfere, but history shows that this is not the case. If there is no national bank you end up with a situatino like the “pet’ banks of the early 19th Century where currency was sometimes issued with no requirement to be backed by specie.

Also while branch banking was a contributing factor to US bank runs during the Great Depression Benjamin Anderson gives the primary reason there were bank runs.

One bank declared a banking holiday only allowing depositors to withdraw 5% per day of their deposit balance. Depositors naturally always withdrew 5% every chance they had because of the restriction even those who had no reason to withdraw anything. Within two weeks the banks would find that 50% of their deposits had been withdrawn. But once a state declared a bank holiday, neighboring states also declared bank holidays to prevent runs on their state banks. Bank closings snowballed each imposing the same 5% rule without realizing the result.

Anderson reports that a banker retired to Florida came out of retirement to explain what had been done in earlier situations with the banks (nothing could be withdrawn but checks could be written to pay bills. Banks did not go under and confidence was restored) but it was too late. The damage had already been done by awful state government policy.

David Spellman July 21, 2009 at 4:52 pm

The problem with government intervention in the money system is the legal tender laws. If people were free to transact business in any fiduciary medium, they would use whatever they found useful. Legal tender laws force people to accept fiat currency which can be devalued to nothingness. The key to monetary stability is to repeal the legal tender laws and keep the government out of the money business.

Dick Fox July 22, 2009 at 6:08 am

I am curious. Do people here believe in a federal law to restrict states from chartering banks with no requirement? How about a federal law or constitutional amendment to prevent legal tender laws?

I am not sure this is as easy as some think. You cannot just wave a magic wand.

Billy Bush July 22, 2009 at 8:00 am

Anytime the government forces a monopoly, it will become inefficient, lazy, and abusive of power. It is a natural digression for an institution with no ‘public’ to answer to. The power could at least be bridled with the elimination of a fiat system and a return to the gold standard, if for no other reason than to separate political power from monetary policy as Mises himself advocated.

George July 22, 2009 at 8:53 am

The problem with government intervention in the money system is the legal tender laws.

No, it’s much more than that. Say there weren’t legal tender laws.

You sell some IBM stock and get ownership of an account, say accounted for in gold grams. And some small coins.

What about the sales tax on “buying” the coins?

Next you buy something and pay with a gold coin. The IRS is going to want the “income tax” on the change in value of the gold coin from when
you obtained it to when you spent it.

Michael A. Clem July 22, 2009 at 12:06 pm

You cannot just wave a magic wand.
The same complaint over and over again, that without government regulation, the free market would run amuck and businesses would run roughshod over consumers. Except that any voluntary transaction is just that: voluntary on both sides. Businesses that tried to run roughshod over their consumers would quickly go out of business, or at least have losses instead of profits. This would be true of “free” banks as well as any other business. It requires coercion or fraud to force people to engage involuntarily in exchanges. Guess who carries the biggest stick when it comes to coercion?

newson July 23, 2009 at 5:15 am

…Adam Smith and David Hume. Both believed that the price mechanism would prevent money shortages.”

that the monetary equilibrium camp still believe in money shortages is remarkable, and just goes to show that bad ideas never die, just get recycled.

steve July 23, 2009 at 3:23 pm

Yes, RBS is effectively bankrupt and under govt. control. So is Bank of Scotland (now part of Lloyds). In fact, these were the two worst hit of the British banks. Only one Scottish issuer – Clydesdale, now part of National Australia Bank – is still solvent. All in all, hardly a good advertisement for the Scottish system.

The point about the Hong Kong banks is interesting, however. It would be good to back up their reportedly more prudent approach with some empirical data specific to Hong Kong, since both HSBC and Standard Chartered have worldwide operations, which might mask the Hong Kong situation.

gilad July 23, 2009 at 4:16 pm

correct me if i’m mistaken, but isn’t the only reason there are bank runs is because the court/state effectively suspended property rights when it came to banks?
fractional reserve is an abomination, let alone depositing isn’t “trust” but it’s not even debt in the conventional sense of the word.
the simple fact that the state interfered with property rights when it came to banks is enough to disregard any argument regarding bank runs imho.

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