Thread by @GeorgeSelgin

Gorton and Zhang's highly eccentric interpretation of pre-Fed banking crises isn't just inaccurate: it's topsy-turvy. And, like many of their paper's historical claims, it is contradicted by a wealth of evidence from other banking systems. 1/2

https://twitter.com/GeorgeSelgin/status/1416945826748895242

The _fons errorum_ of this and many of GZ's other mistaken arguments is their assumption that private monies must be 100% backed by reserves or Treasurys, or otherwise fully guaranteed by the state, to be stable and to trade at par.

While such arrangements can contribute to stability, they are neither necessary nor sufficient. Indeed, the Treasurys-backing requirement for national bank notes, for example, was a fundamental _cause_ of instability under the pre-Fed national currency system.

Please understand: I am not making a bold claim here. I am only stating what practically all authorities have said about that arrangement. See, for example, this excellent paper by Bruce Champ and @1954swilliamson: jstor.org/stable/136217

I discuss the panics of that era and the part legal restrictions, including bon-backing requirements, played in them on some detail in my paper on the Fed's origins: cato.org/publications/p…

Once again, in pointing out GZ's errors, I don't mean to argue that we needn't regulate stablecoins. I just don't want the choice of regulations to be based on misinterpretations of the historical record. Bad history is a poor foundation for good policy.

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