Free Banking: An Introduction

Over the next number of posts, I will be discussing the subject of 'free banking', the idea espoused by Ron Paul. I had the privilege to be taught a graduate course on money and banking by Lawrence H. White (George Mason University), the leading exponent of free banking. You can get Larry’s books on monetary theory and free banking here and here.

Free bankers are Austrian economists. That doesn't mean that they are from Vienna, but it refers to the fact that the founding fathers of Austrian economics (Carl Menger, Eugen Böhm-Bawerk, Ludwig von Mises, Frederick Hayek etc.) all came from Austria. The Austrian School emphasises methodological individualism, laissez-faire policy, the primacy of the price mechanism and economic liberty. You can learn more about Austrian economics by clicking here. See also a previous post on Keynes vs Hayek.

Free bankers believe that governments play no role in the money supply; rather money should be supplied by banks operating in competition with one another. Banks in such a system would issue money backed by a commodity such as gold. This, of course, means that there is no need for central banks. I remember a former student stating in his Bank of England interview that he was a free banker. Guess what? He didn’t get the job!

Here are some of the questions I hope to address over the next few posts:

1. Why do free bankers hold these views?

2. Has free banking been successful historically?

3. Why do we have central banks? Do we still need them?

4. Why does government-issued or fiat money have value?

5. Would a free-banking system prevent future financial crises?

The Economics of Global Warming

The Berkeley Earth Project , an independent study of global warming, has found that the earth has become a degree warmer over the past half century. However, the statistical uncertainty surrounding pre-1920 estimates makes it very hard to say much about long-term trends - click here for graph . This is one of my concerns with the global warming debate - we simply don't have trustworthy long-run data which looks at temperature changes over the last millennium (or two). My second concern with the global warming debate is that it is very hard to prove any sort of casual link between global warming and human activity. The scientists may be able to show correlation between global warming and our production of carbon dioxides etc., but correlation is not causation. My third concern with the debate is that those who are sceptical or agnostic are stereotyped as flat-earthers or intellectually-challenged crackpots. This only stifles debate and the progress of science itself.

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Finance: Past, Present and Future

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