# The Rationale of Central Banking Author: [[Vera Smith]] ## Review This book is old and started as a PhD thesis. It describes the discussion around free banking, central banking and the gold standard taking place in 19th century Germany, France, UK and the US. This is a fascinating book. It paints a clear picture for how politicians, economists and bankers through about banks, and their role in society, at the time. The most important point of the book is that banking was excluded from the free-market ideology made famous by Adam Smith. There were a number of misunderstandings and logical fallacies about how banks would operate in a free market. There was also often a pressing need for the government to finance itself, and this led to state intervention. The author has a great anecdote on Napolean. She holds up the Canadian, Suffolk and Scottish systems as the most free banking systems. She considers the US system somewhat free until the central bank was created in 1913 albeit with heavy restrictions. I would also put the National Currency Act from 1683 as a turning point for a less free american banking system. She discusses other interesting topics such as the impact of regulations in the US on the (in)stability of the banking system: Banks usually had more liquidity than required by minimum reserve requirements, but during bank runs when liquidity dropped below this arbitrary number they were forced to suspend withdrawals to maintain the level rather than use the reserves. The restrictions against branches also created liquidity problems. Country banks could not open branches elsewhere to use their capital effectively. It was parked in the cities. During harvest season these country banks had to pull their deposits creating financial crises in the cities! This research is a great compliment to the other books on banking I've read so far. It provides historical context that I have not read elsewhere (particularly on the continental european banking systems). ## Key Ideas ## Related