Laissez-Faire Banking

Laissez-Faire Banking

Laissez-Faire Banking

Laissez-Faire Banking

Synopsis

The idea of free (or laissez-faire) banking has enjoyed a revival in recent years. It is a novel idea that challenges much accepted banking wisdom by championing free market ideas and opposing government intervention in the banking system.

Excerpt

The idea of free (or laissez-faire) banking has enjoyed a remarkable renaissance in recent times, and there are few economists by now who are still unaware of it. Yet it was not so long ago that ‘respectable’ economists would have dismissed it as more or less obvious nonsense—many did—and most people today still seem to find the idea of free banking somewhat mystifying. It is a novel idea that challenges too much of what most people still take for granted—that banking is inherently unstable, that the banking system needs a lender of last resort or deposit insurance to defend it in a crisis, and that the government has to protect the value of the currency, to mention only the most obvious of such beliefs. Many economists have invested a great deal of human capital getting to grips with the theory that lies behind these claims, and they are understandably reluctant to throw that capital away and rethink their views on money and banking over again from scratch. Yet, as Lawrence H. White has aptly observed, free banking itself is ‘an obvious and simple idea’ (1989:1), and one would have thought it intuitively appealing to economists who believe that markets are better able to allocate scarce resources than politicians and government officials.

The argument for free banking is also very simple. If markets are generally better at allocating resources than governments are, then what is ‘different’ about ‘money’ and the industry that provides it, the banking industry, to lead one to conclude that money and banking are an exception to the general rule? Each industry is different, of course, but the fact that the clothing industry differs in some ways from the footwear industry does not lead me to believe that a different public policy stance is appropriate to each, or that either is an exception to the general rule that free trade

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