1907 Banker's Panic - Free Market or Government Intervention?

A friend of mine uses the 1907 panic as justification of why the free market money failed and why we needed a central bank.

limitgov:

A friend of mine uses the 1907 panic as justification of why the free market money failed and why we needed a central bank.

Murray Rothbard blames the origins of the panic on monetary inflation instigated by the U.S. Treasury between 1905 and 1907.  I have, however, not read a dedicated "Austrian" explanation of the Panic of 1907 (my understanding of Rothbard's reasoning is from his book, A History of Money and Banking in the United States).  But, at the time there was no free-market in money: that was around the time when the "modern" gold-exchange standard was introduced, I believe, and there were still legal tender laws and whatnot.  Although I could see him making a case (even if it was ultimately wrong, it would still have greater merit) if he blamed it on a free-market in banking (even though, obviously, that is not true either, it is less blatantly false), blaming it on a free-market in money is completely ludicrous.

How was that a market failure?

Banks are money warehouses, and anything can be used as money.

We have problems with banks lending out too much money, printing money, accounting fraud, etc etc.

Why do we not have problems with other warehouses? Why don't warehouses operate on fractional reserve? Why don't corporations just print more stock whenever they need more capital?

Because its a government granted monopoly on fiat money. Before the federal reserve was established, states would grant banks these stupid powers the fed now has. Inflation is nothing new. They've been printing money forever. Fractional reserve banking is nothing new. Bank runs attest to this.

In summary, to say the free market would have a problem with banking is to say we have a problem with unregulated warehouses now. We don't. Free market wins, state loses. Goodbye.

It seems like these people always choose one little incident and define the rule by the exception.

Snowflake:

Before the federal reserve was established, states would grant banks these stupid powers the fed now has. Inflation is nothing new. They've been printing money forever. Fractional reserve banking is nothing new. Bank runs attest to this.

What powers did staes grant the banks?

Should fractional reserve banking be made illegal?  Or will people, if given true freedom keep it in check?

 

limitgov:

What powers did staes grant the banks?

wiki wildcat banking

limitgov:

Should fractional reserve banking be made illegal?  Or will people, if given true freedom keep it in check?

In the free market, if everyone paid in checks instead of gold, the checks would eventually be deposited in a bank somewhere. Even if its not, the long term holder of the check recognizes holding the check is a liability. Thus, to reduce their liabilities, the long term holder will convert the check into gold.

We don't have these problems with other types of warehouses..

 

There is another thread on the 1907 money panic:- http://mises.org/Community/forums/p/6931/270371.aspx#270371 The free market did fail, but that does not justify a central bank; the same people who engineered the panic also clamoured for a central bank.