The Ludwig von Mises Institute has an interesting question: Do we even need to have a Fed?
For all the Fed’s imposing grandeur, Ben Bernanke is running our third (albeit longest-running) try at a central bank. This country has lived without a central bank before and, if given the chance, could do so again. Most every American (led by Paul Krugman), though, would be horrified at the thought.
I don’t know that I would be “horrified,” but as someone who has never known a time without a central bank, this seems strange to even consider. Who would manage the money supply? Well, the Institute introduced me to the Suffolk System:
…private individuals acting outside the bounds of political control have proven entirely capable of providing much the same functions as a central bank, and at a far lower cost, no less.[1] Such was the case with the Suffolk banking system, operated out of Boston from 1824 to 1858.
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..a consortium of seven Boston banks formed the Suffolk banking system, and they invited every city and country bank within the New England area to join.
Operations commenced on March 24, 1824, with every member bank required to maintain a permanent, non–interest bearing account at Suffolk, along with an additional account with enough of a balance to clear all paper bank notes presented for redemption. Eventually (and much to the profit of Suffolk) the notes of member banks would be cleared against each other, and loans would be granted for “overdrafts.”[2] The system accepted paper notes from all member banks of good standing at par. All paper notes of nonmember banks were immediately sent back to the issuer for redemption in gold.
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There are some historians who claim Suffolk cannot be labeled a central bank, due to its “lack of quantitative control” over the money supply, but this is not correct.[4] The system most certainly did have control over the money supply; else it would have been entirely ineffective. Unlike the modern central banks, though, the Suffolk system was specifically designed to restrict excess circulation of paper bank notes.[5] The directors would frequently threaten any member bank with redemption of their paper notes for the promised gold if they believed that bank to be inflating beyond the bounds of safety. They were aware of an important economic truth — it is the quality rather than the quantity of money that matters.
It’s an interesting concept. Could we do this today? What would the effects of decentralizing our money management system do to the local and global markets? Without gold backing up each note, could we do what they did back in 1824?
I do not even claim to be smart enough to have answers to any of these questions. Doing anything to the money supply right now would be such a crap shoot that I don’t think anyone in power would be brave enough to suggest such a thing, much less get any bills passed. But the prospect of removing this source of power out of government hands is a tantalizing thought.
Tantalizing…but not to Krugman. His head would probably explode. Without the benefit of some splodeyhead doing it for him.
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