Central Banking and the Heavy Hand of the State

by Alexander William Salter
The American Institute for Economic Research

The evolution of the banking system, as I previously described it, was “ideal-typical.” The description’s purpose was to get at the essence of how monetary institutions work. Clearly, the circumstances of time and place affected the development of historical banking systems such that they differed from how they looked in the story. Nevertheless, this simplified analysis conveys important lessons about the economic mechanisms at work. Furthermore, the theoretical description does have historical evidence supporting it. In many times and places, so-called “free banking systems”—monetary arrangements where there are no special legal restrictions on banking—did arise, and worked well.

But in other times and places, banking systems didn’t grow up this way. The heavy hand of the state is something we cannot afford to ignore if we want to understand money and banking, especially in the United States. Today, in almost all developed economies, there are numerous legal restrictions specifically on money, banking, and finance.

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