I am very grateful to the IEA for making Private Money available as a free download on the web. On looking back over it – it was written and published in 1988 - I am struck by how little has changed but also by how much.
Its core messages – the superiority of free banking and the prima facie case for free banking as a special case of the general argument for free trade; the moral hazards and other problems associated with central banking and state meddling in the financial system; the dangers of politicised money; and the need to replace monetary policy with a sound monetary standard – are as true now as they ever were. Indeed, I would go so far as to say that the argument for free banking is self-evident to anyone who takes the trouble to think about it.
Shortly after the book came out, I recall being at the Cato annual monetary conference in DC in February 1989. I remember the date well, as I had got married a couple of days earlier: funny how one remembers these things. One speaker claimed that the free bankers had won the argument and no-one (including the various senior Federal Reserve officials present) demurred. I recall thinking ‘We’ve won: that was easy’ and wondered what interesting problems to turn to next. How naïve I was!
The reality was that this Hobart Paper and the subject it addressed failed to have much impact. For the most part, the UK academic and (less surprisingly) central banking establishments simply refused to discuss the issue. Even my students – whom one might have expected to be more willing to think radically, fired up perhaps by the resurgence in interest in free market ideas – were by and large uninterested. (Needless to say, this might be testimony to my teaching skills, taking cohort after cohort through the inconsistencies of the Diamond-Dybvig model whilst failing to get them engaged in the higher level issues, but that is another story.) And it was ‘politically unrealistic’.
Fast forward almost a quarter century and how much has changed! The underlying problem, state intervention, has got much worse. We have seen an enormous growth in hideous and parasitic systems of financial regulation: think of the Financial Services Authority, Basel and so on. These have achieved nothing at all, other than to confirm the truths of public choice theory – of self-serving bureaucrats captured by powerful interest groups. We have seen an enormous expansion in central banking itself: the boring, solid, conservative central bankers of old (how one misses them!) have been replaced by an ultra-activist new breed of central bankers who are willing to bet everything on a roll of the dice: zero interest rates, QE, unprecedented stimulus-and-never-mind-all-that-debt, bail-out-everything-that-breathes – not to mention macroprudential regulation, even more regulatory bodies and associated nonsense. We know that we shouldn’t really be doing all this but let’s keep trying anyway as we are out of our depth and out of ideas.
Well guys, how about private money?
But I suppose one shouldn’t expect - Canadian readers please insert the definite article here - turkeys to vote for Christmas.
Fortunately, it is not all bad news. It is heartening to see how the ideas of private money have taken hold amongst younger people today, especially in Eastern Europe. These days I am more likely to encounter the reaction ‘This is all obvious’ than the usual old reaction of ‘You’re mad’. It is also gratifying to see how the younger generation of free bankers is now making inroads into academia. One thing that Keynes was right about is that in the longer term it is ideas and not vested interests that count; the fact that these ideas are at last taking hold is therefore extremely encouraging – and I hope decisive in the longer term.
But what about being ‘politically realistic’? Well, to state the obvious: what is politically realistic depends on the climate of opinion amongst the intelligentsia, and the whole point is to change that thinking. Many previous Hobart Papers were dismissed on the exact same grounds - those advocating privatisation, the abolition of exchange controls, private healthcare and so on – all of which were regarded as ultra radical in their time and have long since entered the political mainstream. So there is no law of nature to indicate that free banking could not also become mainstream. Or, I should say, mainstream again: there were times and places when free banking was simply taken for granted – but you need to read the book.
One thing we can be sure about: had we had free banking we certainly wouldn’t have been in the dreadful mess we are in today.
The question is not whether free banking is politically realistic – whatever that might mean. The question is whether there is any realistic alternative.
Professor Kevin Dowd is the author of Private Money: The Path to Monetary Stability.