In the comments to a post by Tyler Cowen, George Selgin describes the use and potential for free banking from a gradualist perspective:
The debate about whether the Fed has failed or not shouldn’t be confused with a debate about whether we should, were it possible to do so, want to flip a switch today that would shut the FOMC and discount window, leaving us with a frozen base, and then let private markets take charge from there.
Free banking isn’t what we’d have if we did that. Free banking is the sort of private market banking system that develops over time in the absence of special regulatory restrictions on banks. Our banking system hasn’t developed in that (I believe) healthy manner. It now has some features of free banking, like nationwide branching and market-based interest rates, that it was long denied. But in other respects, and especially that of being utterly dependent on explicit and implicit guarantees, it is less free than ever, and therefore less capable of standing on its own feet and of being able to reliably meet this country’s monetary needs without breaking down.
So I personally am too much a gradualist to want to flip that switch. I favor gradualist reforms that take account of the weakness of the present private banking system. Nevertheless, I think that free banking does offer a long-run ideal worth taking seriously in light of historical experience. And I also believe that continued attempts to reform our monetary and banking system without heeding the lessons of that experience, including attempts to shore up the system by expanding the Fed’s discretionary powers, while continuing to treat guarantees as a substitute for market discipline, are doomed to fail.
I’m not agreeing with Selgin’s argument, but many appeals against the Fed are wrapped in radical free market rhetoric, and it’s worth reading how one could cautiously support free banking and avoid calling for radical changes. One of my chief concerns is that even if free bankers are right and we can never count on the Fed for effective countercyclical monetary policy, if you remove the possibility for monetary policy it will not remove the demand for countercyclical policies. In a recession people will demand something be done, and this will leave only fiscal policy. However bad monetary policy is -if free banking critics are right- fiscal policy is worse.
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Friday ~ November 26th, 2010 at 2:59 pm
TomGrey
Fiscal policy of “more gov’t” is certainly worse.
But what about fiscal policy of “less gov’t”?
One based on rules?
eg: if unemployment for the last quarter is less than last year, and less than the 5 year avg., and less than 10 year avg, then there is an automatic tax holiday for the next 3 quarters on corp payroll taxes, to remain in effect each quarter until unemployment comes down (or at least reaches a plateau).
The reason most fiscal policy is terrible is because it lets gov’t folk pick winners, so they pick friends. Tax cuts allow the hard-working successful to enjoy MORE of their success, which typically leads them towards getting more success.
The rich get richer when they offer more workers jobs — if you want more workers to have jobs, you want more rich people to get richer.