Addendum to threat #1: concerning market-based vs. regulatory sources of order in currency systems. https://twitter.com/GeorgeSelgin/status/1274367944802385926

I realize that before I move on to discuss the pre-Fed National Currency system, I should share some more general reflections about what I see as a common tendency to overlook the role, or potential role, of market forces in shaping orderly currency systems.

The counterpart of this tendency is a habit of seeking the source of any orderly system in some statute or government oversight, while attributing any disorder the lack of some corrective state action.

It's easy to see why this habit persists: after all, any perceived disorder probably _can_ be remedied by a simple new rule or regulation, though perhaps not w/out creating other (perhaps more serious) problems.

But to conclude from this that the original disorder must be due to "insufficient regulation" is a transparent non-sequitur. Alas, it's also extremely common. What too many experts fail to do is to dig deep for the specific causes of disorder.

Do that for U.S. banking history and, more often than not, you find the source in some misguided regulatory intervention of the past. I believe that misguided regulations have been the most important cause of monetary instability in the U.S. and elsewhere: https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1989/11/cj9n2-9.pdf

Calomiris and Haber take a similar view ( https://www.amazon.com/Fragile-Design-Political-Princeton-Economic/dp/0691155240), though their's is a more "fatalistic" view of things than mine: https://onlinelibrary.wiley.com/doi/10.1111/1468-2362.12060

But if many overlook the many regulatory sources of past financial disorder, still more fail to appreciate the market-based sources of order in relatively successful private currency arrangements of the past.

Consider New England's famous "Suffolk" system of 1825-1858 ( https://en.wikipedia.org/wiki/Suffolk_System). By most accounts, this was the most efficient and stable antebellum U.S. currency arrangement. Yet it involved hundreds of banks in 6 different states, each w/ its own bank regulatory regime.

The system was not only remarkably stable, relatively speaking. It was also the first to give rise to a perfectly uniform currency: by 1825, all New England banknotes traded at par throughout the region.

Some have attempted to attribute the Suffolk system's success to state government regulations. But this misses the forest for the trees: the source of order was an entirely private and voluntary centralized note-clearing arrangement to which gov'ts contributed next to nothing.

Note that "next to": of course governments did contribute by standing ready to enforce contracts, and by supplying courts and basic commercial rules to be followed by the purpose. Still, the key to the Suffolk's success lay in the actions of rival profit-maximizing bankers.

Of course regulations--and the prohibition of branch banking especially--played a part in the rise of the Suffolk System. But this hardly means that branch banking, had it been allowed, would have resulted in a less orderly outcome. Au contraire! On this, see my next thread.

(That next thread is here: https://twitter.com/GeorgeSelgin/status/1274695610147450881?s=20.)