Jonathan Finegold Catalán on Free Banking and ABCT

I direct readers to this interesting post by Jonathan Finegold Catalán, which I welcome, where he attempts to answer my charge that free banking would, under the logic of the Austrian business cycle theory (ABCT), lead to perpetual Austrian business cycles:

Jonathan Finegold Catalán, “Fiduciary Cycles,” Economic Thought, 14 May, 2012..

I will post a proper response to this tomorrow, but some quick thoughts. I welcome the idea that the number of anti-fractional reserve banking Austrians is “dwindling ... [sc. and] more and more ... [sc. Austrians] are simply switching to supporting free banking.”

However, I am taken to task with the accusation that my question is “an illustration of just how poorly LK understands both the Austrian theory of industrial fluctuations and the theory of free banking.” That is surprising. Catalán seems to imply he will dispute my assertion that “Mises’ and Hayek’s work in the area was to show how fiduciary expansion leads to business cycles.”

Yet only a few paragraphs we read:

“In Hayek’s early writing (I have in mind his 1933 [1929] article “Monetary Theory and the Trade Cycle;” specifically, chapter four), he does actually believe that fractional reserve banking leads to recurrent business cycles.”

It is like watching someone proclaim that they are going to walk down a flight of stairs with elegance and grace - only to trip over and fall head over heels to the bottom.

Nor do I find the White/Selgin model of fractional reserve banking, and how it will supposedly stop cycles, very convincing. Many nations had approximations of free banking in the 19th century, e.g., Australia. In this case, a system of banks under a gold standard, no central bank and very light regulation (that was mostly ignored anyway) produced a credit boom that blew a huge asset bubble in property. The familiar debt deflationary depression followed.

Anyway, more on this tomorrow.

More on Goldsmiths’ Notes and the Act of 1704

In the Promissory Notes Act of 1704, the British parliament defined the legal status of bankers’ or goldsmiths’ notes, and granted to them the same status as bills of exchange:

“Bank notes are frequently referred to in our Acts of Parliament, as ‘Bankers’ or Goldsmiths’ notes.’—In the Act of 1704, which removed all ‘doubts’ as to their legality, they are mentioned as ‘notes made and signed by any person or persons, body public or corporate, or by the servant or agent of any corporation, banker, goldsmith, merchant, or trader.’ Even the notes issued in Ireland were called goldsmiths’ notes. By an Act of the Irish Parliament passed in 1709, ‘notes issued by any banker, goldsmith, merchant, or trader, whether payable to order or bearer, were rendered assignable and indorsable over as inland bills of exchange.’ ....

After the establishment of the Bank of England in the year 1694, the notes of that corporation superseded the goldsmiths’. The business of banking, too, became gradually separated from that of a goldsmith, though we learn from a speech delivered in Parliament, in the year 1746, that most of the Loudon bankers were at that time members of the Goldsmiths’ Company.” (Gilbart 1854: 290).

BIBLIOGRAPHY

Allen, L. 2009. The Encyclopedia of Money (2nd edn.), ABC-CLIO, Santa Barbara, Calif. and Oxford, England. 179-180.

Commons, John R. 1968. [1924] Legal Foundations of Capitalism, University of Wisconsin Press, Madison.

Gilbart, J. W. 1854. “The Laws of the Currency, as exemplified in the Circulation of Country Bank Notes in England, since the Passing of the Act of 1844,” Journal of the Statistical Society of London 17 (December): 289-321.

Rogers, James Steven. 2004. The Early History of the Law of Bills and Notes: A Study of the Origins of Anglo-American Commercial Law, Cambridge University Press, Cambridge.