Free Banking: Theory, History, and a Laissez-Faire Model

Free Banking: Theory, History, and a Laissez-Faire Model

Free Banking: Theory, History, and a Laissez-Faire Model

Free Banking: Theory, History, and a Laissez-Faire Model

Synopsis

Sechrest sets out a detailed and thorough case on behalf of free banking. New insights into both the theoretical and historical dimensions of the subject are found throughout the text. A formal model of free banking suitable for classroom use extends the work of earlier researchers. The relationship between free banking and Say's Law is discussed, as is also the proper goal of monetary policy. New evidence on the historical experiments with free banking in Scotland and the United States is provided, and a comparative review of free banking models is included as well.

Excerpt

Free banking is--or at least ought to be--one of the key economic issues of our time. There is mounting evidence that the monetary instability created by the Federal Reserve--persistent and often erratic inflation, the unpredictable shifts of Federal Reserve monetary policy, and the gyrating interest rates that accompany both inflation and the monetary policy that creates it--have inflicted colossal damage on the U.S. economy and on the fabric of American society more generally. Furthermore, much as the United States has suffered, less fortunate countries have suffered far more. Most of us have watched in horror, for example, as Russia has come out of more than seventy years of Communist misery only to slide now into the abyss of hyperinflation. Unlike some disasters, monetary instability is entirely avoidable, but to avoid it, we need to make sure that the monetary system is built on the right foundations--foundations we are very far from having. On top of these monetary problems, we also observe in the United States how ill-judged attempts to regulate the banking system and protect it from the (grossly exaggerated) danger of runs have spawned a massive apparatus of deposit insurance and regulatory control in the form of the FDIC, the now-bankrupt FSLIC, and a variety of other bureaucracies. These agencies were (ostensibly) set up to protect a banking system that, though weakened by legislative restrictions of various kinds and by misguided Federal Reserve policies in the 1930s, was still relatively strong, and yet they managed to convert that system into a chronic invalid made artificially dependent on the ultimately lethal drug of deposit insurance. In addition to gravely weakening the banking system and destroying much of it in the process, the deposit insurance system also accumulated staggering losses--losses of hundreds of billions of dollars and perhaps more--which it then passed back to the long-suffering federal taxpayer. Politicians and bureaucrats have responded with a series of . . .

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