The Mystery Of Banking
Page 28
2 Rothbard, “New Deal,” p. 52.
3 For a brief summary of the progressive breakdown of world currencies from the classical gold standard to the end of the Smithsonian agreement, see Murray N. Rothbard, What Has Government Done to Our Money? 2nd ed. (Santa Ana, Calif.: Rampart College, January 1974), pp. 50–62. On the two-tier gold market, see Jacques Rueff, The Monetary Sin of the West (New York: Macmillan, 1972).
4 That is only one of the two major problems confronting the Friedmanites: the other is what fixed rate should the Fed follow? Monetarist answers have ranged from 3 to 5 percent (with even higher rates allowed for a gradual transition period) and down to zero (for those Friedmanites who have noted that in recent years the demand for money has fallen by about 3 percent per year).
5 For an excellent critique of the question-begging nature of Friedmanite definitions of money, see Leland B. Yeager, “The Medium of Exchange,” in R. Clower, ed., Monetary Theory (London: Penguin Books, 1970), pp. 37–60.
6 Recently, however, Fed apologists are beginning to excuse the disconcertingly large increases in M-1 as “only” in NOW and ATS accounts.
7 Federal Reserve Bank of St. Louis, Monetary Trends (March 25, 1982), p. 1.
8For a summary and explanation of this plan, see Murray N. Rothbard, “To the Gold Commission,” The Libertarian Forum, XVI, 3 (April 1982), testimony delivered before the U.S. Gold Commission on November 12, 1981; and a brief abstract of the testimony in Report to the Congress of the Commission on the Role of Gold in the Domestic and International Monetary Systems (Washington, D.C., March 1982), vol. II, pp. 480–81. The only plan presented before the Commission (or anywhere else, as far as I know) similar in its sweep is that of Dr. George Reisman, in ibid., vol. II, pp. 476–77.
9 On the Lehrman, Laffer, and similar plans, see Joseph T. Salerno, “An Analysis and Critique of Recent Plans to Re-establish the Gold Standard” (unpublished manuscript, 1982). On Hayek’s plan to “denationalize money,” see Murray N. Rothbard, “Hayek’s Denationalized Money,” The Libertarian Forum XV, nos. 5–6 (August 1981–January 1982): 9.
Appendix: The Myth of Free Banking in Scotland
1On “wonderful” results, see White, Free Banking, p. xiii.
2 Ibid., p. 43.
3 Most of the White book, indeed, is devoted to another question entirely—a discussion and analysis of free-banking theorists in Britain during the first half of the nineteenth century. I shall deal with that part of his book subsequently.
4 Murray N. Rothbard, The Mystery of Banking (New York: Richardson & Snyder, 1983), pp. 185–87. Also see the report on a forthcoming Journal of Monetary Economics article by Milton Friedman and Anna Jacobson Schwartz in Fortune (March 31, 1986), p. 163. I did have grave preliminary doubts about his Scottish thesis in an unpublished comment on Professor White’s paper in 1981, but unfortunately, these doubts did not make their way into the Mystery of Banking.
5 Sydney G. Checkland, Scottish Banking: A History, 1695–1973 (Glasgow: Collins, 1975).
6In a footnote, Professor White grudgingly hints at this point, while not seeming to realize the grave implications of the facts for his own starry-eyed view of Scottish banking. Note, then, the unacknowledged implications of his hint that London was “Britain’s financial centre,” that the Scottish banks depended on funds from their correspondent banks and from sales of securities in London, and that Britain was an “optimal currency area.” White, Free Banking, p. 46 n. 12.
7 White, Free Banking, pp. 43–44, n. 9.
8 See Charles A. Malcolm, The Bank of Scotland, 1695–1945 (Edinburgh: R.&R. Clark, n.d.).
9 Checkland, Scottish Banking, p. 221.
10 Checkland, Scottish Banking, pp. 184–85.
11 Ibid., p. 186.
12 Frank W. Fetter, Development of British Monetary Orthodoxy, 1797–1875 (Cambridge, Mass.: Harvard University Press, 1965), p. 122. The anonymous pamphlet was A Letter to the Right Hon. George Canning (London, 1826), p. 45. Also see Charles W. Munn, The Scottish Provincial Banking Companies, 1747–1864 (Edinburgh: John Donald Pubs., 1981), pp. 140ff.
A similar practice was also prevalent at times in the “free-banking” system in the United States. After the “resumption” of 1817, obstacles and intimidation were often the fate of those who tried to ask for specie for their notes. In 1821, the Philadelphia merchant, economist and state Senator Condy Raguet perceptively wrote to David Ricardo:
You state in your letter that you find it difficult to comprehend why persons who had a right to demand coin from the Banks in payment of their notes, so long forebore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not in the interest of the first to press the banks and the rest are afraid. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society. (Quoted in Murray N. Rothbard, The Panic of 1819: Reactions and Policies, New York: Columbia University Press, 1962, pp. 10–11)
There is unfortunately no record of Ricardo’s side of the correspondence.
13 Checkland, Scottish Banking, p. 432. Also see S.G. Checkland, “Adam Smith and the Bankers,” in A. Skinner and T. Wilson, eds., Essays on Adam Smith (Oxford, England: Clarendon Press, 1975), pp. 504–23.
14 Vera C. Smith, The Rationale of Central Banking (London: P.S. King 8t Sons, 1936). This book was a doctoral dissertation under F.A. Hayek at the London School of Economics, for which Miss Smith made use of Hayek’s notes on the subject. See Pedro Schwartz, “Central Bank Monopoly in the History of Economic Thought: a Century of Myopia in England,” in P. Salin, ed., Currency Competition and Monetary Union (The Hague: Martinus Nijhoff, 1984), pp. 124–25.
15 After quoting favorably Thomas Tooke’s famous dictum that “free trade in banking is free trade in swindling,” Mises adds:
However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: “I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take banknotes any longer.” (Ludwig von Mises, Human Action: A Treatise on Economics, 3rd rev. ed., Chicago: Henry Regnery, 1966, p. 446)
16 Smith, Rationale, p. 101. Mises, after endorsing the idea of 100 percent reserves to gold of banknotes and demand deposits (the latter unfortunately overlooked by the currency school in Britain), decided against it because of the “drawbacks inherent in every kind of government interference with banking.” And again:
Government interference with the present state of banking affairs could be justified if its aim were to liquidate the unsatisfactory conditions by preventing or at least seriously restricting any further credit expansion. In fact the chief objective of present-day government interference is to intensify further credit expansion. (Mises, Human Action, p. 443, 448)
17 Victor Modeste, “Le Billet des banques d’emission est-il fausse monnaie?” [Are Bank Notes False Money?] Journal des economistes 4 (October 1866), pp. 77–78 (Translation mine). Also see Henri Cernuschi, Contre le billet de banque (1866).
18 This policy conclusion is completely consistent with Mises’ objective: “What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the terms of the contract.” Mises, Human Action, p. 443. For more on fractional-reserve banking as embezzlement, see Rothbard, Mystery of Banking, pp. 91–95.
19 White, Free Banking, pp. 71, 75, 135. Also see Marion R. Daugherty, “The Currency-Banking Contr
oversy, Part I,” Southern Economic Journal 9 (October 1942), p. 147.
20 Quoted in Fetter, Development, p. 176.
21 Ibid.
22 One measure of partial reform accomplished by the British government was the outlawing, in 1826, of small-denomination (under £5) bank notes (an edict obeyed by the Bank of England for over a century), which at least insured that the average person would be making most transactions in gold or silver coin. Even Adam Smith, the leading apologist for Scottish “free” banking, had advocated such a measure. But it is instructive to note, in view of Professor White’s admiration for Scottish banking, that political pressure by the Scottish Tories gained the Scottish banks an exemption from this measure. The Tory campaign was led by the eminent novelist, Sir Walter Scott. Hailing the campaign, the spokesman for Scottish High Toryism, Blackwood’s Edinburgh Magazine, published two articles on “The Country Banks and the Bank of England” in 1827–28, in which it wove together two major strains of archinflationism: going off the gold standard and praising the country banks. Blackwood’s also attacked the Bank of England as overly restrictionist (!), thus helping to inaugurate the legend that the trouble with the bank was that it was too restrictive instead of being itself the major engine of monetary inflation. In contrast, the Westminster Review, the spokesman for James Mill’s philosophic radicals, scoffed at the Scots for threatening “a civil war in defense of the privilege of being plundered” by the banking system. See Fetter, Development, pp. 123–24.
23 Professor White has performed a valuable service in rescuing Parnell’s work from obscurity. Parnell’s tract of 1827 was attacked from a more consistent hard-money position by the fiery populist radical, William Cobbett. Cobbett averred that “ever since that hellish compound Paper-money was understood by me, I have wished for the destruction of the accursed thing: I have applauded every measure that tended to produce its destruction, and censured every measure having a tendency to preserve it.” He attacked Parnell’s pamphlet for defending the actions of the country banks and for praising the Scottish system. In reply, Cobbett denounced the “Scottish monopolists” and proclaimed that “these ravenous Rooks of Scotland ... have been a pestilence to England for more than two hundred years.”
24 Fetter, Development, p. 22. Among his other sins, Sinclair, an indefatigable collector of statistics, in the 1790s published the 21-volume A Statistical Account of Scotland and actually introduced the words statistics and statistical into the English language.
25 Quoted in White, Free Banking, p. 124.
26 The interchange between Peel and Gilbart may be found in the important article by Boyd Hilton, “Peel: A Reappraisal,” Historical Journal 22 (September 1979), pp. 593–94. Hilton shows that Peel (far from being the unprincipled opportunist he had usually been portrayed as by historians) was a man of increasingly fixed classical liberal principles, devoted to minimal budgets, free trade, and hard money. Not understanding economics, however, Hilton characteristically brands Peel’s questioning of Gilbart as “inept” and sneers at Peel for scoffing at Gilbart’s patent dodge of lacking “personal knowledge.”
Moreover, not being a classical liberal, Hilton ridicules Sir Robert Peel’s alleged inflexible dogmatism on behalf of laissez-faire. It is most unfortunate that White, in his eagerness to censure Peel’s attack on inflationary bank credit, praises Hilton’s “insightful account of Peel’s little-recognized dogmatism on matter of monetary policy” (p. 77n). Does White also agree with Hilton’s denunciation of Peel’s “dogmatism” on free trade?
27 Quoted in Fetter, Development, p. 193.
28 Neither is the example of James Wilson reassuring. Wilson, founding editor of the new journal, The Economist, was dedicated to laissez-faire and to the gold standard. He entered the monetary debate quite late, in spring 1845, becoming one of the major leaders of the banking school. Though of all the banking school, Wilson was one of the friendliest to free banking and to the Scottish system, he also claimed that the Bank of England could never overissue notes in a convertible monetary system. And though personally devoted to the gold standard, Wilson even made the same damaging concession as Gilbart, though far more clearly and candidly. For, of all the major banking school leaders, Wilson was the only one who stated flatly and clearly that no banks could ever overissue notes if they were backed by short-term, self-liquidating real bills, even under an inconvertible fiat standard. See Lloyd Mints, A History of Banking Theory in Great Britain and the United States (Chicago: University of Chicago Press, 1945), p. 90.
INDEX
A | B | C | D | E
F | G | H | I | J
K | L | M | N | O
P | Q | R | S | T
U | V | W
A
Austrian business cycle theory, 209
B
Bagehot, Walter, 133, 149, 185
Bailey, Samuel, 289–90
bailment, deposit banking and, 87
balance of payments, deficit in, 121
balance sheet, 76–83
warehouse receipts appearing on, 87
bank cartels, free market incentives against, 123
bank deposits. See demand deposits
bank notes
fractional reserve banking and, 104
monopoly privilege of issuing, 125, 181, 182, 187, 193, 235
outlawing of small-denomination, 283
Bank of England
origin of, 177–83
reform of, 186–89
role in Scotland, 269–70
Bank of North America, 191–93
bank runs
threat against credit expansion, 112–14
under central banking, 133
Banking School, 151n, 277–78
banking
extent of, 112
branch, 216, 226
central
100 percent reserve, 187
bankers’ bank function of, 126
coordinated credit expansion under, 133–36
determining total reserves of, 141–60
gold standard and, 126, 132, 133
history of, xv, xix
lender of last resort function of, 133, 149–53, 230
limits on credit expansion removed by, 125–39
the National Banking System, 219–34
operations of, xix
origins of, 177–90
origins in the United States, 191–206
process of bank credit expansion, 161–76
proponents of, 232–34
Treasury and, 170–76
in the United States up to the Civil War, 207–18
commercial, 98, 107
deposit, 85–110
100 percent reserve, 95, 187, 263–64, 280
embezzlement and, 90–94
law on, 91–93
free
definition of, 111
limits on bank credit inflation under, 111–24
school, 278, 283–91
Scotland and, 183–86, 189–90, 269–91
in the United States, 197, 214–15, 276n
fractional reserve, 93, 94–103
business cycle and, 103, 114, 120–22
counterfeiting in, 98
deflationary pressures on, 101–03
fight against, 214
fraud in, 96–97
gold coin standard vs., 103
inflationary, 97–98, 100–01, 210
as mix of deposit and loan banking, 107–10
money warehouse receipts and, 104–10
time structure of assets under, 98–99
investment, commercial banking vs., 107n
loan, 75–84
bankruptcy in, 83
workings of, 77–83
bankruptcy, under central banking, 132
banks
bailouts of, 273
country banks, of England, 182, 184
culpability of, 266–67
failures of, 271
limited clientele domestically, 114–20
limited
clientele internationally, 120–22
state banks, 196–98, 202, 204–06, 227–28, 231
Barnard, Frederick, 10n
barter, limitations of, 3–4
Biddle, Nicholas, 207–08
bimetallism, 9n, 210
Birmingham School, 285
Blackwood’s Edinburgh Magazine, 283n
bookkeeping, double-entry, 76
Bosanquet, J.W., 288
Bretton Woods system, 250–51
business calculation
money as solution to, 5–6