Do We Really Need a Central Bank?
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Jason Pappas - 12/20/2009
Mr. Horwitz, for a one hour summary that was a superb review of the harmful effects of central banking and banking regulation. There is one aspect, however, that I didn’t find clear.
You talked about the dynamics of fractional reserve banking in your proposed free banking regime. Naturally, the reserve level would be set by the market with those institutions that keep inadequate reserves taking undue risks to the point of ruin while those that keep too great a reserve-level suffering from uncompetitive returns. You claim that banks can find the optimum level. I’m not convinced. I’m convinced the FED will always do a worse job and in a coordinated manner. I'm with you on that.
Historically, what was the reserve level during the period that we should call “free-entry” in such places as New York between 1840 and 1860? Was it too stringent with lower returns but few failures? If the regulated reserve levels were too stringent this period should be a model for banking stability in states like New York. If the reserve levels were too low, from your arguments, banks would have maintained adequate levels just as they would if the level was zero, i.e. no reserve regulations.
Thus, we shouldn’t have seen coordinated failures in either case. This makes me wonder if we have any example of banks maintaining optimal reserve levels over several decades, with the resultant monetary stability. Can you comment?
Aeon J. Skoble - 12/11/2009