Quotes from Free Banking in Britain

By Lawrence White (1995)

• The whole point of engaging in note clearing was not simply to cancel equal reciprocal claims. It was rather to discover and settle the inequality between their reciprocal claims.#
  Banking
• Free banking thought has little in common with the sort of argument for a pseudo-gold standard that depicts stabilisation of the exchange rate between a distinct national currency and gold as the optimal rule for central bank policy. #
  EconomicsFree banking
• In an unregulated system one bank would choose to hold another’s notes as reserves in place of specie, assuming zero interest yield on both assets, only in the event that such extensive economies of scale characterised the issue of bank notes that the market for notes supported fewer firms than the market for deposits. #
  Free bankingEconomics
• It is hardly appropriate to use the supposed need for a lender of last resort as an argument for central banking if it is the legislation fostering central banking that creates the need.#
  EconomicsFree banking
• Free banking as a monetary regime thus comprises two conceptually distinct elements: (1) unregulated issue of transferable bank liabilities, and (2) unmanipulated supply of base money or basic cash.#
  EconomicsFree banking
• The currency principle, as formulated to apply to the nation as a whole, operated at an irrelevantly high level of aggregation.#
  Economics
• The type of transactions by which notes are put into circulation is irrelevant to the question of whether the stock of notes is excessive.#
  EconomicsMoney
• Linking the volume of money to a nominal magnitude such as the nominal quantity of bills offered for discount, itself a consequence of the volume of money via the price level, left the volume of money and the price level indeterminate.#
  EconomicsMoney
• In recommending that the Bank of England exercise discretion by distinguishing one case of adverse balances from the other and treating the two differently, Gilbart was in effect recommending that the Bank of England should act toward (e.g.) the Bank of France in the way that a competitive issuer acted toward its co-participants in a note-exchange system. Persistent reserve losses signalling a fundamentally excessive circulation should be met by contraction, but random week-to-week variations need not.#
  EconomicsBanking
• Imports and exports of gold bullion were not necessarily analogous to imports and exports of specie under a purely metallic currency. Gold bullion has non-monetary uses, so that some imports of bullion would not naturally affect the money stock. For the Bank of England to link its issues to international bullion movements would result in its over-issuing while gold flowed in, creating a boom, and later over-contracting when gold flowed out, creating a recessionary panic.#
  EconomicsMoney
• To suppose that competing banks could obey the currency principle, even were it a sound rule, was to suppose an impossible degree of collusion among them. Only a monopoly bank could act upon that sort of rule.#
  EconomicsBanking
• [The currency school’s] proposed rule for regulating the volume of a mixed currency would accomplish their stated aim of keeping the value of the monetary unit the same under a mixed currency as it would be under a purely metallic currency only under the supposition that the velocities of bank notes and specie were identical. #
  EconomicsMoney
• The primary weakness of any trade cycle theory invoking a ‘wave of optimism’ as its initiating impulse is that it begs the question of the origin of the wave of general optimism. Unless it answers that question it offers no account of why, from a state of equilibrium, there should occur a general shift in the demand curve for loanable funds, rather than simply a relative shift from declining to expanding industries. Secondly, it does not explain why such a shift would not simply raise the entire structure of interest rates – deposit as well as loan rates – in the market for loanable funds, leaving equilibrium in the market for currency balances undisturbed except insofar as the demands for currency and specie reserves are interest-elastic.#
  EconomicsBusiness cycle
• A monopoly supplier of currency must of necessity resort to ‘arbitrary assumptions and empirical expedients’, as ‘the elements necessary for the precise determination’ of its proper balance-sheet composition ‘are within no man’s reach’. #
  EconomicsFree banking
• It may be nearly costless to print up additional notes and to initiate their circulation through loans or purchases of commercial biills, but it is quite another matter to maintain their circulation in a competitive environment under redeemability.#
  Banking
• Rival banks of issue were correspondingly obliged to compete in cultivating public confidence in the redeemability of their notes. The creation and maintenance of that confidence was the production of a scarce good, subject like any other to limited economies of scale.#
  EconomicsBanking
• The function of an issuing bank was not so much to produce and sell money . . . Its function was rather to exchange recognised for unrecognised credit, or to provide a credit-certifying service based on its superior reputation. The substitution of bank notes for private bills of exchange as a circulating medium was to Scrope ‘a simple step in the division of labour’.#
  EconomicsBanking
• The issue of notes flowed naturally out of the business of receiving money in deposit and relending it. The great and widespread reputation of trustworthiness necessary to conduct that business made the banker’s promissory notes more generally acceptable in transactions than the commercial notes or bills of other merchants, thereby putting the banker in a position profitably to exchange his notes for commercial bills. #
  EconomicsBankingHistory
• That the Bank of England had the power (in the short run) to alter the total supply of credit at the margin, and thereby to disturb interest rates, does not mean that any firm drawing on the total pool of funds in London was explicitly or implicitly borrowing from the Bank of England.#
  HistoryBanking
• In the crisis of 1839 the Bank of England turned to the Bank of France for an emergency extension of credit, to meet severe liquidity needs that had brought the BOE close to suspending payments. The Bank also arranged for sizeable credits in Hamburg. Yet no one would say that the London banking system customarily ‘depended’ on the Bank of France, or the Hamburg market, as a lender of last resort. Still less would anyone say that the London banking system was a ‘satellite’ to the Paris centre.#
  HistoryEconomicsBanking
• If Scottish banks did not hold Bank of England liabilities, or deposits at London banks (which in turn held Bank of England liabilities) as reserves, then the Scottish money stock was not specifically geared to the quality of Bank of England liabilities. In the long run, Scotland’s money stock was determined by the quantity of money demanded at the given purchasing power of the monetary unit. The purchasing power of the monetary unit was in turn determined by global supply and demand for gold.#
  HistoryEconomicsMoney
• The English ‘one-reserve system’, whereby the Bank of England alone held substantial specie, was, as Bagehot explains, the product neither of conscious design nor of natural market evolution. It was instead ‘the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank’.#
  HistoryEconomicsBanking
• The larger the share of total circulation and deposits supplied by the expanding banks, the greater will be the role of the relatively disruptive process of external drain in bringing the expansion to an end.#
  EconomicsMoneyBanking
• [A] bank cannot make additional loans (acquire more bills) without either also attracting additional depositors or note-holders, or reducing its specie reserves.#
  Banking

Samuel Bailey, A Defence of Joint-Stock Banks and Country Issues (1840)

• No wisdom, short of omnipotence, could so well proportion the number and extent of these establishments to the wants of the community, as those principles of human nature which spontaneously work out the result.#
  EconomicsSpontaneous Order
• Any system which involves the necessity of any arbitrary, speculative, or deliberate adjustment of the sum total of a credit-note currency to the supposed commercial condition of the country is essentially wrong.#
  Economics

James William Gilbart, “The Currency: Banking” (1841)

• When a few more theories have been tried – a few more ”pressures” have been experienced – a few millions more of opulent families have been reduced to beggary, and our Union work-houses are thronged with starving artisans, then we may discover that all our attempts to regulate the currency have been productive of mischief, and we shall be willing to let the currency regulate itself.#
  EconomicsFree banking

Peter King, Thoughts on the Restriction of Payments in Specie (1804)

• When we consider the nature of the banking system, of all other branches of trade the most complex and delicate and deriving its very essence and existence from the confidence of the public, it will appear that there is no subject upon which legislative interference would be more improper or more pernicious.#
  EconomicsFree bankingBanking

Benjamin Klein, “Money, Wealth, and Seignorage” (1978)

• The major way in which monetary confidence is produced is successful past performance.#
  EconomicsBanking