Let's by all means see if history can teach us anything about the merits of private vs gov't currencies, digital or otherwise. But doing so means knowing that history--not just the bogus myths that circulate (so to speak) concerning it!
https://twitter.com/rch371/status/1409161373163134977
Of antebellum currency-issuing banks, Robert writes, "If you liked this sort of thing – you wouldn’t – you called the banks ‘free banks’ and their currencies ‘free banknotes.’ ...If you were more sensible... you called the banks ‘wildcats’ and their notes ‘wildcat currencies’."
That dichotomy misleads in all sorts of ways. First, it misleads by confusing antebellum banks in general with (so called) "free banks." Second, it misleads by confusing "free banks" with "wildcat banks."
All told, from 1790 until 1861, 2450 state banks of all kinds were established. Most were "chartered" banks, meaning that each had to be separately voted into existence by some state's legislative assembly. Keep that number in mind.
872 of those 2450 banks, or about 35% only, were so-called "free" banks, based under "free banking" laws that were similar to general incorporation laws. These laws may have eased entry, but they never made banks "free" of regulation, as is sometimes wrongly implied.
Those laws, adopted by 18 states at some point, always involved various regulatory requirements. Two of these were very important: (1) free banks were absolutely prohibited from having branches ("unit" banking), and (2) they had to back their notes with specified securities.
So, this wasn't "laissez faire" banking. Though some "free banking" systems succeeded better than others, no economists, including ones (like myself and @lawrencehwhite1) who favor "free banking" in the more literal sense, have ever favored them ideal. alt-m.org/2015/07/23/rea…
So I have no idea who Robert has in mind when he says "If you liked this sort of thing...you called the banks ‘free banks’ and their currencies ‘free banknotes’." But I suspect it's writers like us--in which case its a calumny. And if not us, who?
Now how 'bout Wildcat banks. These are generally understood to have been short-lived firms that were never real banks, but managed to get their notes into circulation in exchange for valuable stuff before vanishing altogether, leaving the notes' holders with heavy losses.
All authorities agree that all wildcat banks were "free" banks. So they could never have been typical of all state banks. In fact, wildcats were rare even _among_ free banks. Depending on what criteria one uses, there were no more than 175 or so in all, and perhaps not 75. Ever!
That's right: only _between 3 and 7 percent_ of all antebellum banks were wildcats! Yet were led to believe that they _all_ were! That's, um, not helpful history. It's only helpful misleading rhetoric.
Most of the wildcats were also concentrated in just a few places. One batch popped up Michigan, which passed the very 1st ill-fated "free banking" law in 1837. The wildcats sprang up and quickly died off. Another was Illinois after 1857. Indiana had the last big batch.
Wildcat banks were much of a problem elsewhere. Indeed, Michigan' was the only really notorious case. Almost the stories about kegs of nails disguised with a layer of gold coins etc. come from the one case. But some want you to think this happened with 1000s of banks!
Don't get me wrong: there were plenty of problems with antebellum banks. But outright swindling was not the main one. The failure of honest banks was more important, as was the discounting of banknotes of all sorts--which Robert wrongly associates with wildcat banking.
In fact, instead of being due to lax regulation, or being an inevitable consequence of allowing private firms to supply currency, both these problems were largely consequences of misguided state government regulatory policies, including unit banking and bond backing requirements.
Unit banking restrictions prevented all free banks, and many chartered ones, from diversifying geographically. That itself made them very vulnerable to local shocks. Bond backing requirements only made things worse, by forcing "free" banks to invest in limited sets of securities.
Some state authorities were very irresponsible in deciding which securities to make eligible to secure banks notes. Too often they were tempted to include the state gov'ts own bonds, however junky. Risky railroad bonds were another bad choice.
But the biggest blunder was that of several Midwestern states that had their banks to hold bonds of southern states. When shots were fired at Ft. Sumner, the banks were doomed. Call it bad regulation. Or call it bad luck. But please don't call it what happens under laissez faire!
And what about state banknotes variable values? Robert attributes them to the fact that "Different banks at different times in different locations were differently reliable." But this, too, is mostly a myth.
Though reputation was sometimes a factor, the main determinant of deviations of antebellum banknotes' worth from their face value was something much more prosaic: the distance they'd traveled from the office of the bank were they could be presented for redemption in specie.
If banks were going to have to incur costs to ship rival banks' notes back for redemption, they would have to cover that cost, as well as any possible risk of having notes refused. So if they accepted non-local notes at all, they took them at some discount.
Professional note "brokers" did the same, with the difference that they'd even accept notes of "broken" banks, albeit at very heavy discounts, on the chance of getting a share of the failed issuers' liquidation proceeds.
Discounts on notes of banks that were still going concerns were yet another thing made far worse by unit banking> To that extent they, also, shouldn't be seen as results of lax regulation. When banks have branches, the branches serve as additional note redemption points.
If all or most banks have nationwide branch networks, discounts will tend to disappear entirely as the networks grow, with no need for gov't interference. That is what happened in most countries: unit banking was a uniquely US affliction!
Canada, with its large area, much smaller population, and far inferior transportation networks, managed to have a uniform national currency by the 1890s, consisting entirely of private banknotes of various kinds. Uniform--and _stable_. alt-m.org/2015/07/29/the…
Even despite unit banking, considerable improvements in U.S. transportation, including the construction of many railroad miles, along with the establishment of private bank clearinghouses, brought state banknote discounts down considerably by the Civil War.
And I mean _way_ down. By October 1863, if some fool had paid face value (in greenbacks) for every non_confederate state banknotes in the country, and then sold the lot to a NYC or Chicago broker at market, the fool's total loss would have amounted to
< 1% of the sum invested!
< 1% of the sum invested!
That sum is of course less than what merchants today routinely give up in accepting credit card payments. In short, discounts weren't nearly as big a problem as Robert's story of store clerks having to "assign varying discounts to varying dollars from par" suggests.
So, why did the Federal government wipe out private (state bank) notes and establish a "national currency" Robert says that "Governments that prosecute wars have to purchase supplies and pay soldiers" and that "a commercial exchange economy needs stable means of exchange."
But while the Union was indeed desperate for supplies, the problem wasn't that state bank notes were "unstable"! It was that the Union's coffers were empty! It first tried borrowing. But that was very costly. So (to simplify some a more involved story) it took two further steps,
First, it resorted to issuing its own irredeemable paper money or "U.S. Treasury Notes," aka "greenbacks. It ultimately issued about $400 million worth. Then it began establishing new "national" banks, allowing them to issue notes it styled"national currency."
(Robert conflates these separate currencies when he writes that "These so-called ‘National Banks’... issued ‘Greenbacks.’" The national banking system was actually modeled on those despised state "free banking" laws! The twist was that national currency had to be secured by...
You guessed it: Union government bonds! More nat'l banks = more bond sales = more money in he Union's coffers. In short, these changes weren't motivated by the North's sudden wartime discovery that state banknotes were no good. The motive was entirely fiscal.
In fact, state notes were so far from being NG that, to the Fed's dismay, most state banks didn't rush to become national banks. For starters, they didn't want their names changed to "1st National Bank of Peoria" and so on. Bad banks don't usually worry about brand name capital.
The gov't tried amending the law, allowing old banks to incorporate their old names int the new ones, among other things, but it was still mostly no go. It was _only_ then that the gov't resorted to placing a prohibitive 10% tax on all state bank notes.
Please think about that. If consumers hated state bank notes, new (de novo) national banks would have put the state banks' backs against the wall. No such thing happened.
Instead, the 10% tax arguably made consumers worse off. It also had many more serious adverse consequences, including the contribution it made to the overall "inelasticity" of the post-Civil War national currency system. details here: Details are here: onlinelibrary.wiley.com/doi/abs/10.111…
Still, it can't be denied that, soon after the 10% tax took effect, in August 1866, the U.S. had a uniform national currency: banknote discounts gone forever. But what many don't know is how the gov't accomplished this! Or rather, they know how, but what they know just ain't so!
Most people suppose that national banknotes always traded at par because they were all backed by the same gov't bonds, making them equally (and fully) secure. But that view is based on the false idea that banknote discounts were mainly a f'n of banks soundness.
As I explained, the real problem was the cost of returning notes to their sources, which, owing to unit banking, could be expensive. But wait! National banks were also unit banks! So, how were the costs of returning _them_ for payment covered?
Great question! The answer is: they weren't! So why didn't national banknotes, which were still distinctly liabilities of specific banks, by the way, circulated at some modest discount went far away from their source? Well, they might have, had it not been for...
...the 1864 revision of the National Currency Act. Buried in it was a new requirement, presumably motivated by the discovery that national banks were discounting each other's notes. The requirement was that _every nat'l bank had to receive every other nat'l banks notes at par_!
So, Hey Presto! Uniform currency. Note how this had absolutely NOTHING to do with the quality of the notes. The same rule, applied to state banks, would have achieved the same result--even in 1838!!!!
In fact, by making it impossible for banks to regularly return rival banks' notes for redemption, the 1864 requirement undermined one of the most important sources of banknote market discipline, further contributing to the instability of the post-bellum system.
.@lawrencehwhite1 and I have a paper all about this: jstor.org/stable/3117442. Suffice to say that the government's "easy" path to a uniform currency caused many worse problems than the one it solved.
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