2011-NOV-21
Pile of money On the twenty-seventh of February, 1818, [the Suffolk Bank] was organized which was destined to exert upon the currency of New England an influence little dreamed of by its projectors, but so wholesome that it gave uniformity and stability to the circulation [currency], reduced the discount [rate for redemption of paper notes] to a minimum, and by holding [over-issuing of paper money] in check tended to keep [the American economy] in a sound and healthy condition. ~David R Whitney
It has long been held that the only way to achieve a “stable” currency is to have a national central bank which issues and regulates said currency. Such a central bank will issue trustworthy money – not too much and never too little – that every citizen can use and, as a result, the economy should grow and thrive because of its solid monetary foundation. This is the ideal.
It is an ideal, however, which remains historically false.
Take a look at the current situation in the European Union, for instance. Officially established in 1999, the European Central Bank held the responsibility to issue one, common currency – the euro – for all participating European nations to use in order to provide a platform for economic growth, trade, travel, and (most importantly) peace.
Almost 12 years later, however, the euro is appearing less and less solid. Why? Because the ECB has failed to fulfill its true mandate. It has over-issued the euro by purchasing too much sovereign debt from European banks who were unceasingly buying said debt from over-spending European nations. Now Europe has 1) debts it can never repay, 2) banks which will never be recapitalised, and 3) a currency which will never regain its economic prominence.
The ideal fails again.
So what’s the alternative? Simple: free-market banking. It worked marvelously in the past; and it will work the same today. For example, in 1818, the Suffolk Bank of Boston, Massachusetts was established to, like every other bank of its time, issue its own bills, receive money on deposit, and draft loans. But it did not stop there. In fact, its most despised (by its competitor banks) and most demanded service (by its customers) was its “redemption system.”
The system was simple yet genius: Suffolk Bank would force other banks to either pay-up or go bankrupt. In other words, in a time when banks lacked regulation by the federal government, “country” banks were notorious for consistently over-issuing their paper notes (i.e., money) relative to the specie (that is, gold and silver bullion or coins) that was in their vaults. The reason why these “wildcat” banks were inclined to over-issue so loosely was because they realised that their paper notes would move to the cities and, thus, there was no real concern of the paper notes ever coming back to the banks to be redeemed for their denominated gold or silver. Thus, eastern cities were awash with “country” bank paper money that was constantly losing value because a) the paper notes were not trusted and b) most persons who had accepted the money had not the means to take it to the “country” bank that issued the paper note in order to redeem it.
The Suffolk Bank, however, did have the means – and the objective to do so. Thus, the Suffolk Bank had a regular practice of accepting paper notes from unheard-of banks and then sending these notes with a courier to the issuing “country” bank in order to redeem the specie that was due. The result: “wildcat” banks were astonished that their paper notes were showing up at their doors and, in consequence, the banks had to pay-up or close-up.
A bank commissioner in Maine remarked on the system:
The Suffolk system, though not recognized in banking law, has proved to be a great safeguard to the public; whatever objections may exist to the system in theory, its practical operation is to keep the circulation of our banks within the bounds of safety.
Now this sounds like a good system.
