A few months after my April 2018 Soho debate with him concerning whether fractional reserve banking is damaging to an economy’s health, Bob Murphy gave a lecture on “Rothbardians vs. ‘Free Bankers’ on Fractional Reserve Banking.”
Bob devotes a substantial chunk of that lecture to elaborating upon what he considers shortcomings of my particular arguments in favor of free banking. Though he is generous enough to allow that my theoretical arguments are not quite a cinch to refute, he thinks rather less of the empirical evidence I offer in support of those arguments. In particular, he calls the evidence supporting my claim that the Scottish and the Canadian free banking systems were quite stable “very weak.”
So far as the Scottish episode is concerned, Bob’s claim rests mainly on the fact that, between 1797 and 1821, Scottish banks followed the Bank of England’s example, though without the statutory permission Parliament had granted it, of temporarily “restricting” specie payments. So far as he’s concerned, their having done so is ipso-facto proof of their having run roughshod over their creditors’ rights and reduced their welfare. In truth the story of the Scottish bank restriction, and the correct lessons to be drawn from it, are far less straightforward than Bob supposes. Having already devoted three longish posts to explaining what happened (here, here, and here), I leave it to my readers to decide whether the evidence I assemble in those posts suffices to exonerate the Scottish bankers, as I believe to be the case. I also continue to look forward to Bob’s own response to that evidence.
The Canadian Case
According to Bob, Canada’s experience also contradicts my claim that past free banking systems were “remarkably stable.” Here Bob’s chief — and sole — evidence consists of a fragment, shown below as it appeared on one of his PowerPoint slides, of the table of contents of Roeliff Morton Breckenridge’s splendid 1894 book, The Canadian Banking System, 1817 – 1890.
In case the original is too small to read, here is what the fragment says:
CHAPTER VIII. —BANKING UNDER THE CONFEDERATION, 1867-1889
§43.—The Expansion between 1867 and 1873
§44.— Depression, 1874-1879
§45.—Bank Failures and Losses, 1874-1879
§46.—The Bank Act Revision of 1880
§47.—Dominion Note Legislation, 1872-1880
§49.—Bank Failures, 1883-1889
To refute my claim, Bob considers it enough to note that Breckenridge is my own favorite authority on 19th-century Canadian banking, and to then read the listed section headings, with their references to “Expansion,” “Depression,” and “Bank Failures” out loud and in his best comic manner. To judge from from the guffaws he elicits from his audience by so doing (at 6:55), they agree.
But is it really enough? That ought surely to depend on what Breckenridge actually says in the sections of his book that Bob and his audience consider so funny. So, let’s see.
The Expansion between 1867 and 1873
This period in Canadian history was indeed, Breckenridge says, “one of growth, great apparent prosperity and general expansion” particularly in “manufacture, transportation, and exchange,” in which overspeculation played a part. “All sorts of manufacture,” he says, “were pushed to bounds, which, in 1875, were acknowledged to have been unreasonable.” What’s more, Breckenridge says that Canada’s banks “shared in this expansion.”
Bad news for us free bankers? Not if you believe what Breckenridge goes on to say some paragraphs later. “From the mass of evidence examined,” he writes,
I cannot conclude that a greater part in furthering the expansion of the period must be attributed to the banks than to any other important members of the organization of production and exchange. The commerce of Canada was under the influence of much the same tendencies as were acting throughout the civilized world; the returns show that the banks followed rather than stimulated the upward movement. … The extension of banking was not out of proportion to the growth of export and import trade, or to the development of the internal commerce of Canada, and the means of conducting it, or to the apparent increase of accumulation, as indicated by the total deposits in the chartered banks.
Breckenridge notes, furthermore, that despite Canada’s close commercial ties to the U.S., which suffered one of its most serious financial panics ever in 1873, “no panic, in the accepted sense of the term, occurred” there. “Nor is it easy,” he adds, “to discover the phenomenon designated by the broader expression ‘commercial crisis.’” On the contrary: despite the U.S. crisis, “confidence in the [Canadian] banks” remained “strong”:
except for a slight but rapid decline in bank stocks in September, and a small run on two or three of the banks, no critical features appeared in the situation, and the country escaped the evils of a banking panic.
Canada did suffer hard times, including many commercial failures, between 1874-1876. Nor were its bankers spared. The period from January to March 1875 in particular was one of “real stringency” for them. Still the banks succeeded in handling the heavy demands for payment they confronted by calling on their English correspondents, retrieving funds they’d invested in the U.S., and issuing new stock. The episode therefore passed “without exciting the public or precipitating bank suspensions.”
The episode did not, however, leave Canada’s banking industry unscathed. Instead it went through a subsequent period of retrenchment, culminating in 1879, during which various banks reduced their capital, merged with stronger rivals, voluntarily closed, or, in several instances, either suspended payments temporarily or failed outright. Among the failures was that of The Mechanics’ Bank — said by Breckenridge to have been “a blot on the Canadian banking system for years” that “died at last because it was too corrupt to live.”
Yet the losses Canadian bank customers suffered from these failures, though they exceeded those endured at any other time during Canada’s free-banking episode, amounted to but a tiny fraction of the value of all outstanding Canadian bank liabilities at the time. And though that loss was nonetheless regrettable, the “general effect” of the failures behind it must, Breckenridge says, “be regarded as hygienic and highly salutary.”
While the late ’70s saw the purging of Canada’s weakest, if not corrupt, banks, most of Canada’s banks, having entered the period in a solid condition, survived it fully intact. While some of them also faced brief runs, according to Breckenridge those runs “were cordially met, and in one way and another a bank panic was again averted.”
Bank Failures, 1883-1889
I pass over the next three sections of Breckenridge’s book, as these presumably aren’t among those that earned a laugh from Bob’s listeners, and turn instead to the last one shown on Bob’s supposedly damnatory slide.
As the title of that section suggests, the period it concerns witnessed a second round of Canadian bank failures. It’s not necessary for my purpose to delve into the details of these failures, especially since I’ve already done so elsewhere on Alt-M. Instead I’ll simply note that once again the banks that failed were all both small and either poorly managed or corrupt. The details are, after all, far less relevant to the matter at hand than Breckenridge’s own assessment of the broad lessons to be drawn from the full record of Canadian bank failures between the Act of Confederation and his book’s appearance:
If any conclusion may be drawn from the study, it is that the disasters have been due to faults of practice, rather than defects in the system. It is clear that legislation, scientifically framed, has not prevented poor management, bad management, or fraud. No one, probably, ever expected it would. … The security of a group of banks, however, must be judged, not by the losses of their proprietors, but by those of their creditors. We may see now how well the Canadian system has minimized the creditor’s risks. Out of the 56 chartered banks, some time in operation in Canada since the 1st July, 1867, just 38 survive. Ten of those gone before have failed. But the total loss of principal inflicted during twenty-seven years on note holder, depositor, Government, or creditor whomsoever, has not exceeded $2,000,000, or less than one per cent. of the total liabilities of Canadian banks.
If you think that’s not evidence of stability, consider that during roughly the same period in the U.S., 330 national banks failed, leaving 64 percent of almost $100 million of their liabilities unpaid, and that another 1,234 state banks also failed, leaving another $120,541,262 (out of $220,629,988) in unpaid debts.*
The Genuine Greatness of the Canadian System
Despite the relatively small losses Canadians suffered from bank failures, and despite what Bob suggests in his lecture, the superiority of Canada’s banking system did not consist solely of the fact that holders of Canadian bank notes and deposits generally “got their money back.” Had Bob actually read Breckenridge’s book with care, instead of just glancing at its table of contents, he would have noted that its last chapter, on “The Present Working of the System,” includes a lengthy catalogue of the system’s advantages. Here again, a detailed summary isn’t necessary, for we have Breckenridge’s own listing of those advantages in his book’s final paragraph. With the help of a little reading between the lines, that paragraph can also be taken to represent Breckenridge’s personal verdict on Canada’s free banking system.
How the Canadian banks economize capital; how they utilize and distribute it; what is the security, convertibility and elasticity of the circulating medium they supply; how thoroughly are their creditors protected against loss; how low and how nearly equal are the rates of interest in different parts of the country; how cheaply are other banking services sold; how easy of access are banking facilities; what support have worthy customers in critical times, and how far does the system promote the stability of commercial confidence: these are questions to which, perhaps, this chapter forms an answer. According to the true response, the merits of the Canadian Banking System must be judged. If the present answer be sufficient, the reader may draw his own conclusions.
There are two, actually; and I hope those who have heard or plan to listen to Bob’s lecture will take each of them to heart. The first is that you can’t judge a book by its table of contents. The second is that you should never let a little fooling interfere with your education.
*Available evidence also shows that the ratio of Canada’s stock of bank money (commercial banknotes and demand deposits) to its high-powered money stock (gold and Dominion notes) was extremely stable — and far more so than the U.S. bank-money – to – base-money ratio. Besides being consistent with the stabilizing properties of free banking I describe in The Theory of Free Banking, it suggests that any monetary contributions to Canada’s business cycles were due to changes in either its stock of gold or in the government-controlled stock of Dominion notes, rather than to destabilizing changes in Canadian bank reserve ratios.