(Private currency history, thread #4: Canada's private currency system.) If you consider the black line on the chart () w/ which I ended my last thread (), you might be tempted to congratulate Canadian officials...
...for having had a well-regulated central banking system, by which bureaucrats carefully-regulated a monopolistically-supplied currency so as to make it "elastically" adjust to the nation's needs, long before the U.S. did. You might be tempted. You'd also be entirely wrong.
What Canada had was a competitive private currency in which several dozen banks-of-issue took part. Though they weren't "unregulated," those banks enjoyed crucial freedoms U.S. Nat'l banks lacked, including freedom to branch and to issue notes based on their general assets.
So what was "regulating" Canada's currency supply? Basically, competition itself, and particularly the tendency of banks to treat rivals' notes like so many checks, aggressively returning them for payment, while pushing their own notes.
The combination of nationwide branch banking and regional clearinghouses made for rapid re-absorption of unwanted currency. If you want details on how this worked I have just the book for you! oll.libertyfund.org/titles/selgin-… (Hint: the "real-bills doctrine has NOTHING to do w/ it.)
This private currency arrangement was remarkably stable--far more so than the U.S. system, though both rested on identical gold dollars, Canada almost entirely avoided the crisis that plagued the U.S. This once notorious fact is now sadly forgotten. alt-m.org/2015/07/29/the…
Like I said, Canada's banks weren't entirely unregulated. The main reg's were minimum capital req's and the need for a charter. At first, entry was reasonably generous, but over time the capital req's were stiffened, leading to gradual consolidation. alt-m.org/wp-admin/post.…
But there was no evidence of a "natural" monopoly. Instead, monopolization of currency came with the passage, in 1935, of the Bank of Canada Act. Aha! you are thinking: so Canada's system flunked the Great Depression!
Actually, no: there were in fact 0 Canadian bank failures between 1929 and 1935; and Canada's money stock contracted only 13%, (as opposed to the "great" U.S. monetary contraction of 33%), and that dues to reduced exports to the U.S. and a consequent gold outflow.
So why the Bank of Canada?, you ask. In a word: politics. Details here: nber.org/papers/w2079; if you want a first-hand (and more caustic) account, get your hands on the appropriate chapter of A.W.F. Plumptre's _Central Banking in the British Dominions."
Perhaps you are wondering: if Cannada's system was so darn good, and everyone new it, why didn't U.S. authorities try reform our own system along Canadian lines? The short answer is that they made over a dozen attempts to do so between 1893 and 1907.
This was the so-called "asset currency" movement, so-called because it sought repeal of the Nat'l bank currency's bond-backing requirement, so banks could use ordinary assets to back their notes. Remember, bond-backing was a legacy of the Civil War quest for funds.
Most plans also called for nationwide branch banking, to assure prompt redemption and absorption of of excess currency, and thereby give it "rubber band" as opposed to "chewing-gum" elasticity. On this overlooked but crucial currency reform component see jstor.org/stable/3117442…
Alas, nationwide branch banking then and for a century to come had powerful opponents. Ironically, while rural banks opposed it because they feared having to compete w/ branched of "Wall Street" banks, the other chief opponents of branching were...Wall Street banks!
You see, those big banks benefited tremendously from the correspondent balances they kept for other banks--the ones that counted toward National banks' reserve requirements but also contributed greatly to the system's instability.
For the "big 6" NYC banks, those balances exceeded their retail balances. Naturally they opposed any reform that would deprive them of them. Luckily they had a pal in Washington who saw to it that they had their way: Nelson Aldrich, powerful chair of the Senate Banking Committee.
That consummate crony capitalist scuttled all attempts to create a U.S. version of Canada's "asset currency" system. Because this helped pave the way to the Fed, some historians portrayed Aldrich as a hero deeply committed to monetary reform. Poppycock. barrons.com/articles/the-c…
Aldrich's concern was to keep the big 6 happy. After the severe '07 Panic, he could no longer do it by just blocking reform. So instead he made sure to control the reform agenda, as he did by establishing a National Monetary Commission. In fact the NMC was mostly just a facade.
The real action took place at the now notorious, secret Jekyll (then "Jeckyl") Island meeting Aldrich arranged, where representatives pf the big Wall Street banks themselves drafted "the commission's" reform plan, a.k.a. the Aldrich Plan. I know: conspiracy theory. But it's true!
Just how the Republican plan ended up becoming the basis for the Democrat's Federal Reserve Act is a long strange story I won't try to cover, except to say that it was all because Carter Glass' sons went to Washington and Lee. But I tell the story here: cato.org/publications/p…
So how did the Fed work out? Very badly. Instead of being corrected, the dangerous tendency for reserves to accumulate in NYC, where they financed call loans, got worse; and w/in 20 yrs the U.S. witnessed double-digit inflation, three severe recessions and 5 banking panics!
By extolling the virtues of Canada's pre-1935 private currency system, I fear I may have given you the impression that it was a one-off case. But that isn't so. In my last thread I'll briefly address the worldwide record of relatively competitive and free currency systems.
That last thread starts here:
