See this new excellent interview with George Selgin. I think it is harder to find any bigger expert on Free Banking theory and Free Banking history than George. Great stuff – even though I do not agree with everything (yes, believe it of not – I do not agree with everything George is saying).
George in the interview recommends that the Fed should introduce a NGDP target rule as a second best to his preferred solution to abolish the Fed. George thinks that a NGDP target rule could be introduced as a Bitcoin style computer algorithm – similar to what he suggests in his recent paper on Quasi-Commodity money (in the paper he discuss a Free Baning solution rather than a central bank solution). I personally think that a Quasi-Commodity standard could be the future for Free Banking money, but I think Scott Sumner’s suggestion for a futures based NGDP targeting regime would work better as long as you maintain central banks.
Benjamin Cole
/ April 23, 2012Free banking is interesting–but it seems to me you can get wide scale banking collapses even with free banking, and with no Fed, that is a very risky proposition.
Consider USA housing in 2008—there had not been sustained declines in national housing prices since the Great Depression. Add on, the mortgages where pooled and rated AAA. What could be safer?
The private market said RMBS (and CMBS) were very safe.
Instead, they bombed. Banks bombed.
The proper powers of the sovereign include printing money, maintaining a military, securing public health (epidemics etc) and preserving civil and property rights.
Sovereigns have failed on all of these counts—but the answer is not to do away with sovereign power, but improve the use thereof. Should we have no military (a nice thought, I am mostly a pacifist)? Regrettably, we need a military.
I would hate to trust my civil rights to the private sector, have a private judicial system, or wage war through for-profit enterprises—or rely on private, for-profit banks to ensure a stable monetary path forward.
A last note: My impression of people attracted to the financial industries is that they are very smart—but ethics can be a mystery to them. You really want the Long-Term Capital Management guys, Enron guys, the Washington Mutuals, the Bear Stearns guys running your monetary system?
WM
/ April 24, 2012The financial crisis of 2007-2009 was caused by the mark-to-market rule imposed by the government, not private sector incompetence in valuing housing-derived securities. Despite the cheesy and simplistic stories you saw in the press at the time, every–EVERY–asset class fell, even commodities at a certain point even though the Fed was issuing money like there was no tomorrow. So that explodes your argument.
Printing money is not a proper function of government. It just isn’t. The Constitution allows it, but like slavery, that doesn’t mean it should be done.
Finally, your perception of anyone’s ethics is debatable and irrelevant. Banks would not be “running your monetary system” in the sense that you seem to imply. They would have no power to force anyone to use their currencies. You would be free to deal or not deal with anyone you like.
Lars Christensen
/ April 24, 2012VM, I will not interfere with your discussion with Benjamin about Free Banking. However, you are dead wrong regarding the causes of the Great Recession. It is not a financial crisis. It is a monetary policy. Why did asset prices fall? Well, because monetary policy became ÛBER tight in the US and Europe. Yes, the Federal Reserve increased the money base. However, it not enough to meet the increase in money demand – this was very visible in the value of the dollar. The dollar strengthen sharply in the later part of 2008. This is an clear indication of overly tight monetary policy. The Fed did not print enough money. That however is also the best argument for Free Banking. In a FB system the increase in money demand will always be met by an increase in the money. After all the banks can print their own money. They can not do that under a central banking.
tonidepoli
/ April 24, 2012“You really want the Long-Term Capital Management guys, Enron guys, the Washington Mutuals, the Bear Stearns guys running your monetary system?”
I do not. And that’s why I am against the Fed, which props up many such institutions, and which in effect allows their like (think especially of Goldman Sachs) to “run” the present U.S. monetary system! Benjamin, in other words, worries that reducing the Fed’s powers will enhance the influence of private financial Goliaths, whereas I am fully convinced–and I believe the historical record clearly suggests– that those Goliaths owe their present influence–if not their very existence–to the Fed’s presence.
Benjamin Cole
/ April 24, 2012Lars-
But in a declining economy, would banks print more money? Would customers want more money? It seems to me you would contractions, not expansions. People running for the hills. Barter economy etc.
WM: We have had busts in every markets all through history. It is the nature of man to become over-optimistic and then perhaps overly negative. Free markets and futures markets may even exacerbate these features of our psychology.
I still believe in free markets as the best way to improve man’s lot in life.
But just as we need government to protect your civil and property rights, you need government to protect citizens from market collapses. Markets will collapse, they have all throughout history. They will again. And collapses can breed collapses and fear and scaremongering (you ever listen to talk radio and gold nuts? We are doomed!).
Long Term Capital Management thought they could never bust. They had Phds, they had computers, they were the tops.
They busted. Enron busted. Sheesh, even Merrill Lynch busted.
The sentiment of “marking to market” at the bottom after a bust is worth pondering, Insurance companies can get cranked by this too (Fred Carr, if you are old enough to remember).
Of course, if assets are not marked to market, people say we are copying Japan and not recognizing losses.
tonidepoli
/ April 24, 2012Concerning Benjamin’s first comment, it is precisely because I don’t want Bear Stearns (or Goldman Sachs, or Citigroup) “running our monetary system” that I favor free banking over central banking.
Iakovos Alhadeff
/ February 25, 2014The Socialist Myth of the Greedy Banker & the Gold Standard
http://iakal.wordpress.com/2014/02/24/the-socialist-myth-of-the-greedy-banker-the-gold-standard/