d63edbdf_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 29:55
In a free banking system, mid-18th century to 1845, in that world, what is restraining the bank from opportunistic behavior? Loss of reputation and ability to run their bank? Loss of capital. Many had unlimited liability, so owners' personal property was exposed. Common before the Fed to have capital that was 30% of liabilities. Central Banks are substitutes for capital in the eyes of depositors--if you have a lender of last resort you don't need that kind of capital. That's why bank capital has to be regulated today--we've gotten rid of all the natural incentives for depositors to insist that they do. Why do we think that the Scottish "experiment" was killed? What happened was the careless extension of legislation adopted for England being extended to Scotland. Peale's Act; England had a central bank, subjected currency component of the money stock to strict limits. Implemented by trying to impose strict limits on the note issue of the Bank of England; and also capped the note issues of other banks and made them subject to 100% reserve requirements. Gave Bank of England complete monopoly and didn't solve the problems. Extended to Scottish banks. That's why today there are only two Scottish banks of issue whose notes outstanding at least until the recent crisis have still been at the upper limits set by Peale's Act.
Selgin on Free Banking | EconTalk | Library of Economics and Liberty