Is Government Regulation Necessary for a Stable Financial Industry? : A Possibility of Self Regulated Financial Industry. J.D. Han King’s College, UWO. 1. Free Banking: Free Entry and Self Regulated Note Issues. Historical Instances of Self-Regulated, or Free-Market Financial Industry
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King’s College, UWO
Historical Instances of Self-Regulated, or Free-Market Financial Industry
-> Yes, Scotland, Canada, Sweden and HK
-> “No”, U. S. A.
We would like to challenge the second part of Conventional Wisdom
-Banks could print out paper monies, or notes as long as they do not default on redemption request of the notes for species
-No government charter needed;
Self regulated, competitive (free market driven) supply of money and banking practices
Compared with the Contemporary British Banking Experience
-exception: Ayr Bank
1) Conventional Wisdom:”Bad”
-> Free Banks were called “Wildcat Banks”
2) Revisionist View:
by A. Rolnick and W. Weber
“Not So Bad in many states except for Minnesota, etc.”
In Three Categories (failure rate; years in business; loss for note holders):
New York: Fairly Good (8%; 8 years; 26 cents per dollar)
Wisconsin and Indiana: O. K.(26-31%; 4-3-2 years; 11-24 cents for dollar)
Minnesota: Bad (58%; NA; 70 cents per dollar)
Did the note holder really suffer such a great loss (70-75% of the face value of the note or paper money) due to Bankruptcy of Free Banks in Minnesota?
Their studies found that it was “Not Really” that bad at all. Why?
i) “The note holders had been well informed of the true value of the assets/notes from Minnesotan Free Banks.”
: Free Market is more efficient in propagating information than we expect
(Evidence: Well conversed the New York/Chicago Market Value of Government/Railway Bonds as Major Assets and Reserves of the Banks)
“The notes were issued with railroad bonds, which were traded below par. The bank notes were priced to reflect the value of their backing assets”
The value of the notes depends on the total value of the assets divided by the number of notes/shares”
*Evidence: Payment for the grading of a mile of railway was a lot larger in Minnesota than elsewhere in the U.S.
- Minnesotian Experiences with Free Banks were not too bad (given the time and the location)
Financial Industry may be Viable
and even be superior.
“ unregulated competitive production of money will lead to over-issue of money and thus an infinite price level”
(1) Informed Consumers’ Screening
No,as long as they are Distinguishable monies, and
“Brand Name Identification” is possible.
Financial Market is information efficient
(2) Incentive Compatibility of Private Money and Honesty
-Money demand is unique
-Consumer Confidence is built over a very long time in a ‘smart’ way.
-The present value of the bank’s non-deceiving “profit” stream will be larger than the benefits from deceiving scheme of printing bad monies and running away.
* The cost of counterfeit was more serious than the cost of private over-issue fraud and bank failures.
- Market confers Trust and Confidence, not Government
“Is Euro going to succeed?”
“Is Canada going to use U.S. dollars?”