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Tuesday March 31 2009

imageWell done the IEA for doing a new edition of Lawrence White‘s Free Banking in Britain - Theory, Experience and Debate 1800-1845, and my thanks to Johnathan Pearce for flagging this up.  Here, quoted in its entirety below, is the Preface to the original 1984 edition, ocr-ed by me today so that others can copy and paste at will.  The IEA is giving away a crudely scanned-in but perfectly legible version of this for free on line, so there’s no way they are going to object to me recycling a chunk of it here.

Economists who today support open competition in other industries commonly balk at the prospect of unfettered competitive supply of currency. Theoretical concerns notwithstanding, this attitude may ultimately be an outgrowth of early 19th-century English experience. England was beset with notoriously unstable country banks whose instability was an indirect consequence of the Bank of England’s privileges. The seeming perniciousness of the competition among the country banks in England turned many English economists and policy-makers away from free trade in banking. The supposed inherent instability of unregulated banking provided the pretext for the Bank of England’s accumulation of centralising privileges and powers through legislation, culminating in the Bank Acts of 1844 and 1845.  It was as the result of legislative acts that the Bank of England came to play its central roles in the English monetary system; virtually the sole holder of gold reserves, guardian of the foreign exchange, lender of last resort, and banker to the state. Thereafter the English system, centred on the Bank of England, served as a model for national banking systems throughout the world. Today the triumph of central banking is largely taken for granted.

One of history’s great What If?s, in other words.  It’s the old statist one-two.  First wreck the free market, then get everyone blaming the free market for the resulting mess and wreck it some more.

Yet England might have moved in another direction in the second quarter of the 19th century. It might have allowed free banking, the unrestricted competitive issue of specie-convertible money . . .

Yes, I often read that phrase “specie-convertible” but am never entirely sure exactly what it means.  What, in particular, does “specie” mean?  I did a bit of googling but could only find circumstances where the phrase was used, rather than defined.  I think that specie-convertible money means being able to swap a bank note for stuff, but would like that confirmed, clairified or modified.  Anyone?

. . . by unprivileged private banks. In the banking system of Scotland the English had close at hand the example of a free banking system operating successfully for more than a century. The coronation of the Bank of England as a central bank in 1844 was not compelled by lack of a viable alternative. Nor did free banking lack cogent defenders.

This work re-examines free banking in Britain, both as it existed and as it was regarded by economists of the day. After building a theory of free banking, its central chapters explore the history of Scotland’s experience with free banking and the contemporary policy debate over the question of whether Parliament should allow free banking in London. The results begin to provide, we believe, a vindication of free banking in theory and in practice and a rehabilitation of the advocates of free banking. The resuscitation of the heretofore neglected Free Banking School in the British monetary controversies of the 1820-50 period yields, as an important by-product, a revised picture of those famous debates.

As the final chapter emphasises, the question of free banking or central banking need not be solely of antiquarian interest.  . . .

You can say that again, so I will: “. . . the question of free banking or central banking need not be solely of antiquarian interest.  . . .”.

Our recent banking turmoils have brought the free banking debate roaring back into the centre of our intellectual - if not quite yet our political - life.  Until a few months ago, there was a widespread if not universal consensus that banks had to be regulated, and that they were being regulated satisfactorily.  For die-hard statists, the lesson of the last few months and years is merely that the banks have been wholly unregulated by the state, and that the answer is lots of state regulation.  For other slightly less ferociously statist statists, i.e. for many of the current political leaders of the rich countries, banks have been state-regulated, yes, but wrongly and insufficiently, and there must now be more and better state regulations.  Think: Angela Merkel and John Redwood.

In the short run, this may be right.  It may be that practical politics only now allows a choice between bad regulation and not-such-bad regulation, and in such a world, not-such-bad regulation may be the sensible thing to argue for, if you are a politician grappling with the here-and-now within the bounds of what is politically possible now.  Analogy: suppose you lived in a world where railway nationalisation is a politically unchallengeable given.  You are choosing between having good signals, or bad signals.  You would choose good signals.

But such unsatisfactory policy dilemmas are inevitably making the keenest young minds of the next generation, the ones who don’t know what the ideal monetary regime would consist of but who want to know, to ponder one of the proposed ideal answers: a free market in money.  I don’t claim that such thoughts dominate the minds of the next thinking generation.  But I do say that such thoughts are being thought by enough of them to make a decisive difference to the intellectual atmosphere in the medium-term future, and thus potentially also to decision making in the long run.

Back to 1984:

F. A. Hayek (1978) is foremost among those trying to make it a live issue once again. Whatever the chances of political success for “denationalisation of money” in the near future (they admittedly seem to be small), it is necessary to consider the feasibility of free banking in order to gain a proper perspective on the role of central banking in a market economy. If the market process is competent to evolve a stable and self-regulating monetary order in the absence of a privileged central bank, as seen in Scotland, then central banking cannot be regarded as a necessary framework without which a free market economy would collapse. It must instead become evident that centralbanks exist for a different reason, principally that central governments have sponsored them as an effective source of revenue through money creation.

An unintended consequence of central bank activity, one stressed by economists beginning with the Free Banking School and moving on to Mises (1912; 1928) and Hayek (1935) and on still farther to Friedman (1960) and Lucas (1981), is the creation of monetary instability and business cycles. The severity and recurrence of business cycles in modem industrial economies should be viewed as evidence of endemic fumbling not on the part of the market order’s invisible hand, but on the part of the non market institutions of monetary authority. This point of view has been put forth strongly by Hayek (1978, p. 97):

‘The supposed chief weakness of the market order, the recurrence of periods of mass unemployment, is always pointed out by . . . critics as an inseparable and unpardonable defect of capitalism.  It proves in fact wholly to be the result of government preventing private enterprise from working freely and providing itself with a money that would secure stability.’

It may seem odd that a work on free banking by an American economist does not examine the well-known American experience and debates over free banking. It became evident early in the research stage that this work could not cover both American and British free banking in adequate depth. The choice was made to focus on Britain for three reasons. Firstly, the trial of free banking in Scotland was both longer and more indisputably free of significant government regulation than the various trials of free banking in American states. Scotland made a clearer case study. Secondly, the debates over free banking in Britain show a higher overall degree of sophistication than the American debates. Thirdly, and most importantly, the fact that Britain both experienced and debated free banking on a major scale is far less well known at least to American economists - than the fact that the United States went through a period of controversy over and experimentation with free banking. There remain for other works the interesting tasks of reinterpreting the American experience and debate, and contrasting them with the British experience and debate explored here.

I see that my earlier posting on free market money and free market banking has stimulated some refreshingly basic thoughts about money and about how governments intervene in and control money from Patrick Crozier.

Yes, it can be jolly difficult to find out what specie means.  I take it to mean stuff especially gold stuff and at least that way I don’t get any contradictions.

Posted by Patrick Crozier on 01 April 2009

I hope this helps…

Specie is the commodity standard against which the value of a currency is established, e.g. a pound weight of gold.

That does not necessarily mean you can always exchange bank notes for actual specie at the issuing bank.

For one thing, since exchanging bank notes for specie was usually done for purposes of international trade (i.e. for making purchases in territories where the issuing bank’s notes were not accepted), it was more efficient for the bank to simply hold a reserve of various popular foreign currencies and use these instead of actual specie.

For another thing the specie does not need to be a single item such as gold or silver. Specie can be a combined number of commodities such as timber, oil, coal and so forth. In this case it would be nonsensical and unnecessary for the bank to actually hold specie ready for exchange.

This is because the function of specie is merely to act as a standard of value against which to maintain the purchasing power of the currency. Here is a link to Hayek’s ‘Denationalisation Of Money’ - which is a free download from the IEA. You’ll find an illustration of what I’m talking about on page 61.

If that’s no help, well sorry - best I can do for now.

Posted by mike on 01 April 2009


Thanks for promoting the book!

Specie as I understand the term is simply precious metal in coined form.

Posted by Lawrence H. White on 03 April 2009


You’re welcome.  Hope you are well.  I have now purchased the new IEA edition so I can read it when out and about in London.  Next step: read it.  Next step after that: review it for Samizdata.  Don’t hold your breath.

Posted by Brian Micklethwait on 03 April 2009
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