In the comment thread of this post, Steve Horwtiz writes (in response to another commenter - not my initial post):
"There was no central bank in the 1890s, but that doesn't indict "free markets" because the US money supply process was still very much affected by the federal regulations of the National Banking System that made it difficult for national banks to respond to increased in the demand for money, especially those associated with harvest season or sectoral problems (e.g. the railroads in 1893). The panics of 1893 and 1907 were classic examples of government intervention (and in the name of financing the Civil War no less) gone bad."
I don't want to endorse his history because I'm no expert on the history of this period, and I don't want to "indict free markets" because of course I am a free market economist. But if we take this to be a reference to free banking, I do want to raise a question about institutional robustness. Since we only seem to be able to point to scattered, fleeting references to free banking, can you blame us non-free-bankers for raising concerns about how robust such a system would be? It's a bit like Communists who are never happy with the totalitarian systems that always seem to result from any attempt at making Communism a reality. There are lots of reasons to criticize Communism, but one quite natural criticism is that the only Communist society they've ever really been happy with survived for a grand total of two months.
I don't think - and have never claimed - central banking is perfect, but I think it works well enough to do the institutional job that we want it to do. We know central bankers learn from their mistakes and adapt the institution over time (just look at the history of the Fed). And we know these institutions are actually stable - we're coming up on the 100 year anniversary of the Fed, and the Bank of England has been going strong for centuries.
Steve is right in this comment - the 1890s were not a free banking era as free bankers understand the term. It's hard to find such an era, actually.
Those of us who care about institutional robustness and the actual functioning of our theoretical ideas in the real world should care about that, I think.
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