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Banking on Selgin

Here’s a letter of mine that appears in today’s Wall Street Journal:

By portraying central banks as necessary to prevent banking crises, John Steele Gordon misreads banking history ("A Short Banking History of the United States," op-ed, Oct. 10). It’s true that between 1836 and 1914 (when the Federal Reserve was created) the U.S. had no central bank. It’s also true that during those years Americans suffered several banking crises. But the reason had nothing to do with the absence of a central bank and much to do with ill-considered regulations — such as state prohibitions on branch banking, and Uncle Sam’s requirement that national banks hold federal-government securities as reserves.

Canada’s history is instructive. That country allowed branch banking; Canadian banks could issue currency free of regulations common in the U.S.; and, significantly, that country had no central bank until 1935. A happy result of this system of free banking is described by one of the world’s pre-eminent banking historians, George Selgin: "It allowed Canada to avoid the bewildering assortment of bank notes, recurring currency shortages, and waves of bank failures that beset the United States."

Donald J. Boudreaux
George Mason University
Fairfax, Va.

The quotation from George Selgin can be found by going to this page and downloading Selgin’s article.