Re: Free Banking

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

Dear Prath,

Thanks for an enlightening piece on the theoretical and practical
soundness of free banking. Given good regulation (and a slightly better
ethical standard among Indians, developed over a period of time) it might
indeed be the best system for India. I would like to link up research
related to free banking on the IP web page so that the debate can expand.

In the interim period, maybe the consensus should focus on independence of
the Reserve Bank while mentioning that we should work toward free banking
in the medium term.I think this is one topic that will be very difficult
to persuade to Indians at this stage who are used to the issue of currency
by the monarchs and the 'central' government. Our current banks also do
not inspire any confidence and as we know, currency is in a very serious
sense supported by confidence/ credibility.

SS

On Wed, 2 Sep 1998, PJShah wrote:

> Sorry for the delayed participation; i was traveling in small villages.
>
> There has been a lot of research done in the area of "free banking" or
> "laissez-faire banking" since 1978 when Hayek published
> "Denationalization of Money."  Larry White's book _Free Banking in
> Scotland_ provided the second boost to this area of research.  Now there
> are several books and scores of journal articles on the theory and
> history of free banking. (My own research, when i was wearing the
> academic cap, was also in this area.)
>
> The theoretical soundness of free banking is increasingly accepted.
> Historically, it has existed in Scotland, Canada, Sweden, China, USA
> before the civil war, etc.  Scotland is considered to be the best
> example of free banking system.  Many of the innovations came from
> Scotland: interest payments on deposits, overdraft facility, currency
> exchange, clearing house, etc.  Adam Smith however argued against it and
> so has Milton Friedman. Well, even geniuses are allowed a couple of
> mistakes!!  They both maintained that money is different from all other
> economic goods.
>
> Hong Kong's currency board system is not really free banking but comes
> close to it.  The issue of currency is limited to two banks, Hongkong
> Bank and Standard Chartered.  No open entry--against the principle of
> free banking.  (Bank of China doesn't issue currency.)
>
> I think free banking will be a far better system for all, including
> India.  Money is just like any other good and it should be left to the
> market to produce and regulate.
>
> parth-


----------------------------------------------------------------------------
This is a posting to India_Policy Discussion list:  debate@indiapolicy.org
Rules, Procedures, Archives:            ../debate/
---------------------------------------------------------------------------