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Thread: In the paper he presented @BrookingsEcon back in August, the Bank of England's Andrew Bailey perpetuates myths about the role regulations play in achieving a uniform nationwide currency: https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/reinventing-the-wheel-with-more-automation-speech-by-andrew-bailey.pdf?la=en&hash=6B5DE50DC09345C4D88FA9BF6CC1F660CA742FD4
Mr. Bailey write that banks achieve reliable (par) values for their transferable liabilities "by giving the customer a money claim at par, supported by banks’ access to central bank facilities and extensive regulation of banks’ activities," including deposit insurance.
"It is these protections," he continues, "that prevent a return to the literal wild-west in which individual banks issued their own private currencies, which were worth different amounts depending on recipient’s assessment of the soundness of the issuing bank."
With all due respect to Mr. Bailey, the @bankofengland, and @BrookingsInst, these statements are demonstrably false.
First of all, there have been dozens of cases of private banking systems without central banks or deposit insurances, and many competing brands of private banknotes, where the notes circulated at par nationwide.
Mr. Bailey ought at least to have known about the famous Scottish system! Numerous Scottish banks issued notes denominated in pound sterling units, that the Scottish people even preferred to either Bank of England notes or gold itself, back when all were claims to gold.
Those who want details can find them in @lawrencehwhite1's 1994 book. If you consider yourself an expert on monetary economics, and haven't read it, please don't make generalizations about the implications of freedom in banking! http://www.iea.org.uk/sites/default/files/publications/files/upldbook115pdf.pdf
Another great example was Canada's pre-WWI banking and currency system. Same U.S. gold dollar, no central bank; no serious banking crises. Currency fully uniform by the early1890s. Some basic info on that here: https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/
Like I said, there are many other cases. Not all were as successful, but currencies generally commanded their par values in them.
Like all too many people who do not know enough monetary history to avoid being dangerous, Mr. Bailey imagines that the so-called "free banking" systems of the antebellum typify what happens when you let bankers loose in a setting without heavy regulation...
...and particularly w/ neither a central bank nor deposit insurance. By doing so he displays not only ignorance of other historical banking and currency arrangements, but a lack of sufficient knowledge of those antebellum U.S. systems themselves.
It can't be said often enough--and I've said it a million times myself--that those system suffered not from too little regulation but too much of it! https://www.alt-m.org/2015/07/23/real-pseudo-free-banking/
So-called "free" banks couldn't have ANY branches. And they had to back their notes with securities specified by state regulatory authorities. These regulatory provisions account both for the discounts on "free" bank notes and most free bank failures.
State regulators often required banks to buy bonds, including those of state or local governments, that turned into junk,. That was the main case of failures: https://www.sciencedirect.com/science/article/abs/pii/0304393284900448
As for discounts: the lack of nationwide branch facilities accounts for most discounts on current notes. https://www.jstor.org/stable/41353851
It was by letting its banks branch nationwide, and allowing them to set-up regional clearinghouses, that Canada achieved a uniform currency consisting of many banknote brands over an area as large as the U.S. and more sparsely populated.
Yet some Bank of Canada economists have managed to treat even Canadian experience as supplying grounds for heavy-handed regulating of modern private digital monies. They, too, are badly mistaken: https://www.alt-m.org/2017/03/16/wrong-lessons-from-canadas-private-currency-part-1/
