I've recently been reading a bit about the "free banking era" in the United States. While there were admitted problems with some states' implementation of free banking, it seemed that it was by-and-large successful to allow each bank to issue their own currencies (which were redeemable for precious metals). New York State was a good example of a free banking system that worked very well.
Obviously, there are issues with fractional reserve banking in general, but I think that this system was far superior to the current system in the US. Competing currencies would allow the market to choose which money succeeded or failed.
I wonder what people on this forum think of this sort of monetary system. I also wonder if it would be possible to return to it, given how entangled the government is with the Federal Reserve Bank.
It was definitely superior as banks did not have the central bank that can steal their money to bail out their friends. The issue with this was that the states made their own banking regulations that prevented a lot of interstate banking competition. A lot of this regulation still exists and of course it has negative consequences.
The lesson of state regulated banking in the USA should make the people afraid of central government run health care which is a super regulator on top of the state regulations. Of course the people using health care get the worst of this mess and those who live in states with the most regulations unnecessarily pay the most for their healthcare.
I had this discussion with my professor in my money and banking class. He is pro-neoclassical...
I always like to cite this: http://www.fame.org/pdf/viera_Texas_Law.pdf
The biggest problem that people see with it is that bank credit expansion is not uniform. When people got word that bank A's balance sheet was bunk, then they would flee to bank B and a panci would ensue on bank A. The gold standard meant that people had a measure of what they were losing when they banks made poor investments/loans.
I'd like to see hayek and rothbard's concepts in play. Allow for redemption 100% and let the banks lie to their depositors. It will oust the bad banks and those kinds of people will not want to manage reserve banks.
I've also thought there might be a way to ensure fractional reserve always is represented by something. If we backed savings with gold we could have a fractional reserve by using silver to collateralize debt. Or insert any two commodities. Loans and interest would be paid in silver. That way the banks would know the possible loss value in advance. If i depost 100 ounces of gold, and the market is okay with a 4:1 fractional reserve [let's say], then the bank could convert 75 ounces of gold into that proportion of silver. Of that, they could value the silver as if it was gold in the form of credit for loans. This allows for a decent amount of expansionary credit while at the same time not allowing the loans to EVER be reduced to zero only what ever the market (which would be crazy) for silver could bare (which i can only assume would never be zero).
In this way the banks can, at some level, plan for default, and more importantly, plan around them. This will lessen the length of hiccups on lending because the market knows going into it that the silver is over valued by a certain amount. The market has plenty of checks if only the banks and FED and government would not hide certain pieces of information.
Eating Propaganda
What do you mean i don't care how your day was?!
It's hard to say if it was better or worse. They faced the same problems. Fractional reserve banking was endorsed by the state banks. I'd say it's about the same.
Yes, I am a huge Dodgers fan.
Anti-state since I learned about the Cuban Revolution and why my dad had to flee the country.
Beer, Guns and Baseball My blog
That was my feeling as well.
I can think of tons of alternatives to the Federal Reserve when it comes to issuing money, but I don't know how to get the US out of the hole that it's in.
Really, the best system I can think of is just exchanging bits of metal - no middle-man is really required. The market would choose which metal worked the best at any particular time, and anyone could produce coins. Is it really that much more convenient to carry paper than it is to carry coins? You can buy a house with a brick of gold, after all.
Paper money is just a fancy form of IOU. Generally speaking, any paper currency that is backed up with real productivity or wealth is more valuable than a currency that is not.
There were always more bank notes in circulation than gold/silver coins to redeem them. They did the same as the Fed, only on a smaller scale
William Gouge, A Short History of paper money and banking (1833)
http://www.yamaguchy.com/library/gouge/gouge_index.html