Banking and the state.

Author:O'Driscoll, Gerald P., Jr.
  1. Introduction

    The three papers in this symposium were originally presented at a session at the 2013 APEE meetings, titled "Banking and the State: Is Divorce Possible?" It was inspired by discussions at a September 2013 Liberty Fund colloquium, "Central Banking, Free Banking, and the Gold Standard." Along with slavery and the tariff, the monetary system was one of the major, contentious political issues of nineteenth-century America. The authors together cover both the monetary and banking parts along with the financial system more broadly.

    The Hamiltonian and Federalist impulse was to craft a national economic policy in which a national bank would support national economic endeavors (especially the promotion of manufacturing). The Jeffersonians and later the Jacksonians preferred a more laissezfaire approach to economic development. They also opposed a national bank. Twice the Hamiltonians maneuvered to create a national bank (The First and Second Banks of the United States), and twice their opponents euthanized it by denying renewal of its charter. "Divorce" between banking and the state was their goal.

    At the 2013 APEE meetings, I asked whether divorce would be possible again.

    Hans Eicholz introduces us to some of the history. He captures the Weltanschauung of Hamilton and his followers. Hamilton's "efforts moved exactly contrary to the core contribution of Adam Smith" (Eicholz 2014, p. 43). That contribution was the recognition of the invisible hand and the spontaneous order it produced. Hamilton favored "the time-honored rules of mercantile policies" like protective tariffs for manufactures (Eicholz 2014, p. 45).

    Eicholz presents an interesting twist on intellectual history. As he observes, we are accustomed to being told of German intellectual influences on America. What Eicholz details, however, is how Hamilton's ideas migrated to Germany and became embedded in the German Historical School. Then the ideas migrated back to America. Today, intellectual inheritors of the German Historical School have discovered a kindred spirit in Alexander Hamilton. "Hamilton's ideas had come home to interpret Hamilton" (Eicholz 2014, p. 55). The article contributes to our understanding of Hamilton and the migration of ideas. It also neatly sets up the topic of the symposium.

    Mark Calabria examines "whether a free-market, or even a less-regulated, banking system is feasible within the United States" (Calabria 2014, p. 11). To do this, he looks at economic and financial freedom globally. He employs the indices of economic and political freedom for his empirical measures. Not surprisingly, he finds a high correlation between a broad measure of business freedom and one of financial freedom (Calabria 2014, p. 12), so countries with an ideology of freedom are more likely to have less-regulated financial institutions. Still, he observes that "banking does appear special, at least in terms of its relationship to government" (Calabria 2014, p. 13). The ghost of Hamilton stalks the world. He observes that the trend globally is for more regulation of financial services: think of the Dodd-Frank Act in the United States. Calabria ends on a cautiously optimistic note, however.

    Thomas Cargill summarizes the state's role in money. "The State from the beginning has assumed some role in the financial and monetary regime, but from the beginning of the twentieth century to the present, the State's influence has rapidly increased," he writes (Cargill 2014, pp. 29-30). The State's increasing role in the financial system results in "an inefficient allocation of capital over time" and "financial and economic crises" (Cargill 2014, p. 30). Market failures exist, which in principle, might justify state intervention. But, empirically, "any role of market failure pales in comparison to the role of State policy failure in the monetary and financial regime" (Cargill 2014, p. 33). Federal Reserve policy resulting in inflationary episodes has resulted in multiple financial crises. Monetary and regulatory policies interact in housing markets so as to cause crises. (Cargill 2014, p. 35) "Divorce is not in the future" (Cargill 2014, p. 38). He places some hope in education to constrain...

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