Econlib is featuring the 1936 Ph.D. dissertation of Vera C. Smith which was directed by F. A. Hayek. In The Rationale of Central Banking and the Free Banking Alternative, she discusses the rise of central banking as a thoroughly political phenomenon: Notes issued under this system [free banking] would be "promises to pay," and such obligations must be met on demand in the generally accepted medium which we will assume to be gold. No bank would have the right to call on the Government or on any other institution for special help in time of need. No bank would be able to give its notes forced currency by declaring them to be legal tender for all payments, and it is unlikely that the public would accept inconvertible notes of any such bank except at a discount varying with the prospect of their again becoming convertible.
A general abandonment of the gold standard is inconceivable under these conditions, and with a strict interpretation of the bankruptcy laws any bank suspending payments would at once be put into the hands of a receiver. A central bank, on the other hand, being founded with the aid either direct or indirect of the Government, is able to fall back on the Government for protection from the disagreeable consequences of its acts. The central bank, which cannot meet its obligations, is allowed to suspend payment and to go off the gold standard, while its notes are given forced currency. The history of central banks is full of such legalised bankruptcies.
