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Friday March 27 2009

I have spent a lot of today reading the first draft of the expanded, written version of Kevin Dowd’s Lecture about the banking crisis, the good news being that the public version will presumably be available Real Soon Now.  And a good thing too, because, the diagrams of how Dowd says the banks ought to be reorganised didn’t (through no fault of his) come out at all well in the video version of his lecture.  For that reason, and for other reasons besides like cut-and-pastability, I think a text will make a big difference to this ongoing argument.

My biggest problem with the talk is that I still can’t fully get my head round what happened in Scotland in the age of “free banking”.  To me, the phrase could mean two rather distinct things.  On the one hand, there is the matter of who is and is not allowed to issue currency in the first place.  And on the other, there is the matter of who looks after your money for you (nationalised or competing) and helps you to make payments with it and who receives payments into your bank account for you, pays you interest on what you have deposited, and so on.  There is the issuing - and maintaining the value of the - currency itself.  And there is all that “banking as the plumbing of the economy” that Dowd talked about.

My understanding is that in Scotland, the latter activity, the banking-as-plumbing, was a completely free market, and worked very well, in fact it lead the world into modern “high street” (i.e. banking-as-plumbing) banking.  But how free was the market in currencies in Scotland at that time?  What legal tender laws were there?  Was “the pound”, as issued by the Scottish banks, a literal pound weight of gold, the same for every bank, which was the only means anyone took seriously of storing and exchanging value?  And was “the pound”, in Scotland, a universally followed standard that was the outcome of a totally free market in currencies as well as in banking-as-plumbing, or in some way a legal imposition, however light and deft and rational compared with the much more statist arrangements imposed upon England by London’s politicians and central bankers?

This actually matters quite a lot, because it influences rather profoundly what kinds of changes we should be agitating for in the meantime.  I had the feeling, when listening to Dowd, that he was switching back and forth, both in his complaints about the status quo and in his recommendations for improvement, between (a) the claim that banking should not be a nationalised industry in any way whatsoever, currency or banking-as-plumbing, and (b) proposing various preferred ways of running the banking industry, given that it is now very much a nationalised industry which “we” consequently get dragged into arguing about the management of, because “we” own it, and we have to start from here, rather than only talk about alternative free market nirvana that we (as in libertarians) favour.

I put these ruminations here rather than anywhere more public (like Samizdata) because basically I am thinking allowed aloud (thinking definitely is allowed at Samizdata!) here, reminding myself of my own thoughts, rather than telling anyone else what to think.  I am very ready to believe that it is I who am in the muddle here, and am merely projecting my confusions upon Dowd’s lecture.  After all, when it comes to banking, whether free market or of any other kind, what do I know?  Only that I favour a free market, because markets work in all other economic areas, so why not banking?

I hope, some time soonish, to do a follow up recorded conversation with Professor Dowd, at which point I can ask him questions like these, and any other good questions that others may suggest between now and then.

Meanwhile, for those who miss the cat blogging that I used to do every Friday, here is a picture of the Dowd family cat which I took when I visited them in Sheffield a few weeks back, before the lecture was given:


In the foreground: crocuses, and some green shoots of recovery.

Funny you should ask because I am currently reading Murray Rothbard’s “The Mystery of Banking” which has as an appendix his essay “The Myth of Free Banking in Scotland”.

Which means I should be able to answer your question.  But, unfortunately, I can’t.  Frankly, I don’t care for Rothbard’s tone.  In the essay, that is.  In the book he’s fine.  And it’s an excellent tome and I hope to write about it in fuller detail some time.

So, I’m not quite sure but it seems that there have never been such things as genuinely free currencies.  The Scottish banks were issuing pounds.  (By the way the original pound was a pound of silver - hence sterling.  Then, I think, it was 240 grains of gold before - by a process of government debasement - ending up as 113 grains of gold by about 1800.)

In essence you would go to a bank deposit some gold and get a note in return.  That was the bank’s note.  Not a Bank of England one.

The note or notes would be in pounds but then again, why would it be in anything else?  It would be in the interests of all parties for the notes to be interoperable.

From what I can work out much the same situation prevailed south of the border except in the London area where only the Bank of England could issue notes.

Posted by Patrick Crozier on 28 March 2009

The Scottish banks were dealing with the same monetary standard Brian, but they were competing in terms of their note issue and terms of credit. Each issuing bank would attempt to cause a run on the others by buying up all their notes and presenting them for redemption in silver en masse. It was in this way that the newly opened Royal Bank of Scotland was able to force the old Bank of Scotland to close in 1727.

I am sure there are others more knowledgeable on this subject than I (Paul Marks for one), but Hayek’s proposal for competing commodity currencies is as good a theoretical exposition of private currencies as I have read. To my knowledge the historical record is only partially supportive, but perhaps I am wrong on that.

Posted by mike on 29 March 2009

So, mike, the Scottish banks were not allowed to issue other currencies.  Right?

Posted by Brian Micklethwait on 29 March 2009

I think the point is why would they want to?  Why would you issue francs when everyone uses pounds?  They’d be useless.  Or, at least, very difficult and inconvenient to use.

Don’t forget this is a time when the pound is defined as a weight of gold.  To issue notes for different weights would make about as much sense as adopting metric when everyone else is using imperial.

The competition is in the notes.  Who’s notes are the best?  Who’s are less likely to be forged?  Who’s are most likely to be redeemed?

It’s not unlike going to the butcher.  You don’t go to the butcher because of the measurement system he is using.  You go to the butcher because of the quality of the meat.

Incidentally, I once went into an off-licence in Northern Ireland.  They would accept notes from First Trust, UlsterBank, Bank of Ireland, Bank of Scotland, Royal Bank of Scotland, Clydesdale and 2 or 3 others.  The only British notes they would not accept were Bank of England ones.  Which is bizarre because BoE notes are the basis of all the others.  The reason was that BoE notes were too easily forged.

I hope that makes sense.  I jolly well hope so because I have had to make the same journey.

Posted by Patrick Crozier on 29 March 2009

So in other words, “the pound”, like a system of weights and measures, was a universal but voluntary standard, like IBM compatibility only more so.

This is quite important, because if that’s right, what it means is that a totally free market in currencies is likely to be uncomplicated and universal (rather than a mad maelstrom of baffling and stress-inducing alternatives).

The crucial question is: Did they refrain from issuing truly competing currencies because they were forbidden to, or merely because it would have been daft, like trying to establish an alternative system of weights and measures, or Esperanto, or some such silliness?  If they could, but mere didn’t (but might have if for some reason pounds stopped working well), then that strengthens the case for total currency freedom.

Posted by Brian Micklethwait on 29 March 2009

The answer to your crucial question is that I don’t know.  But it does beg the question: what do we mean by currency?  I suppose we mean the money typically accepted in a certain geographical area.  The point being that it has to be accepted.

I was going to make a point about acceptance trumping issuance.  But it occurs to me that’s not true.  Government coinage and hence issuance is central. 

And now I am starting to ramble.  So, I’ll stop.

Posted by Patrick Crozier on 30 March 2009

By the way, I had an email yesterday from LA Editorial Director Nigel Meek asking about using one of my Kevin Dowd photos, saying he’s finishing the publication of the text of the lecture.  So that will indeed soon be available to read, link to, argue about, etc.

Posted by Brian Micklethwait on 30 March 2009

I am not sure about the legal status of whether the banks were allowed or not allowed to issue other commodity currencies (i.e. other than silver Sterling). It may have been voluntary although it seems likely legal tender laws would have all but necessitated a common monetary standard.

Why would anyone want to offer a different currency? Because it might be better! Prices in currencies backed by silver or gold could still fluctuate considerably with movements in the price of the bullion. Prices in a currency which was backed by several commodities at once would be less prone to fluctuations brought on by changes in supply or demand of any single one of those commodities. Hence a more stable money than even gold or silver.

Posted by mike on 30 March 2009

I think the existence of a standard currency makes sense, with competition in the provision of it. There is nothing to stop say, the First Bank of West Hampstead from offering a groat for every 240 grains of 0.999 fine gold, while the Third Bank of Swiss Cottage offered a ducat of 113 grains of 0.999 fine gold.

But in practice, traders would value each differently.

The Scottish silver-backed pound would simply be a question of standardisation.

On the English situation before 1844, I believe the Bank of England monopoly was enforced against any bank having its headquarters within 50 miles of London.

BTW “specie” is simply a term to distinguish from credit notes (bank notes), but it would also distinguish a sovereign from a modern pound coin. A “proper” coin is one that has the correct weight of metal for its value = specie (although there is “seniorage” = what you’re prepared to pay for the coin over a random lump of metal).

Posted by Antoine Clarke on 02 April 2009

I thought the Bank of Ireland (Northern Irish) notes were prettier, but had to be distinguished from the Bank of Ireland (Irish Republic) ones.

The only way to tell between them if you didn’t know the designs (now there’s the euro so all Bank of Ireland notes are British) was to check if they were issued in Dublin or Belfast.

The only reliable way to spot a non-forged Bank of England note in recent years has been to feel the ribbed lettering “Bank of England” on the top left hand side of the note’s face, and the paper is often easy to tell by feel.

I’m curious to know, given the ludicrous amount of dollar printing going on in America, whether the Nigerian forged $100 note is going to become MORE valuable than the real thing: it must be less devalued by now.

Posted by Antoine Clarke on 02 April 2009
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