Academic journal article Independent Review

The Law of National Guaranteed Banks in Argentina, 1887-1890: Free-Banking Failure or Regulatory Failure?

Academic journal article Independent Review

The Law of National Guaranteed Banks in Argentina, 1887-1890: Free-Banking Failure or Regulatory Failure?

Article excerpt

Empirical studies of historical cases of free banking have received renewed interest recently. Because financial crises have occurred when central banks have existed, a comparative analysis with free banking promises to be worthwhile. By reference or implication, the Law of National Guaranteed Banks in Argentina between 1887 and 1890 has been advanced as a case of free banking. An expression of this reading of events appears in the work of Gerardo della Paolera and Alan Taylor, who say that the Law of National Guaranteed Banks is "commonly referred to as the 'free banking law'" (2001, 240); a similar expression appears in the work of Vicente Vázquez- Presedo (1971, 37). Kurt Schuler, in a volume on free banking, states: "Argentina's currency during its free banking period consisted of fiat government notes and bank notes nominally backed by gold government bonds, but in reality unbacked" (1992b, 29, emphasis added).2 Roberto Cortés Conde says, when discussing the case of the national guaranteed banks, that the idea of "free banks" has antecedents in the United States (1989, 195-204). Lucas Llach maintains that "[I legislation for a system of free banking had been an option since [President Bartolomé] Mitre's times, favored by orthodox circles in Buenos Aires" (2007, 93, emphasis added). Pablo Gerchunoff, Fernando Rocchi, and Gaston Rossi maintain that President Juárez Celman (1886-90) found an opportunistic moment to embrace the theory of free banking that had been discussed during Mitre's presidency in the 186Os (2008, 84).3

A few exceptions to this general characterization of the Law of National Guaranteed Banks as free banking, however, can be found. Charles Hickson and John Turner (2004), for example, classify the Argentine case as one of a regulatory environment rather than free banking.4 M. C. Gómez, in his article "Free Banking in Argentina" (1994), studies the period between 1810 and 1881 rather than the system of guaranteed banks. This earlier period might be labeled more properly an instance of free banking because it preceded the national government's heavy involvement in money and banking.

The Law of National Guaranteed Banks in Argentina lasted only four years, from 1887 to 1890. Some studies (Cortés Conde 1989, 212-16; della Paolera and Taylor 2001, 106-13) have related the guaranteed banks' failure to the Baring Crisis of 1890. 5 If the guaranteed banks did indeed help to cause the Baring Crisis, then it is even more important to determine whether the system of guaranteed banks was a free-banking system or a regulated-banking system. Was this event a historical case of free-market failure, or did the regulations of the financial reform bear responsibility for the banking crisis?

In this article, I examine the structure and incentives that the Law of National Guaranteed Banks imposed on the market and on policies, and I conclude that the financial crisis that occurred was a consequence of the regulations rather than of free-banking instabilities. I first discuss what we should understand by the term free banking. I then describe the historical context preceding the Law of National Guaranteed Banks, the law itself, and the mechanisms and incentives of the underlying banking market. Finally, I discuss the main differences among the various mechanisms of free banking and conclude that the Law of National Guaranteed banks represents a historical case of regulatory failure, not market failure.

What Is Free Banking?

Analysts disagree as to what should be understood as free banking.6 Ignacio Briones and Hugh Rockoff (2005), for example, ask whether economists have reached a clear conclusion with regard to free-banking episodes. This ambiguity may exist because it is easier to say what should be absent in free banking than what particular form it should take. Free banking requires not simply the absence of a central bank, but also the absence of regulation. Nevertheless, a free market in money and banking can take different shapes. …

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