A "free market" monopoly with a "free market Fed like clearing-house" is in no way related to free markets.
A clearinghouse is used by banks, which accept each other’s money as payments, to re-exchange the other banks money for their own. It is very much a part of any fractional reserve market in money; as such it also serves to prevent an individual bank from issuing too much credit. A monopoly is a natural consequence of certain types of markets and is entirely consistent with free market outcomes, a central clearinghouse is one of those markets where a natural monopoly may prevail, but this clearinghouse provides banking services, i.e. they have no power.
This situation existed, pre-Fed, in early American history, with competing banks each offering their own currency. The value of each currency fluctuated constantly, and due to the lack of fast electronic communication the value of each currency declined the more distant you were from the bank of issue.
That a number of currencies existed, certainly more than might be expected, was largely the result of banking restrictions such as charters and the prohibition on branch banking. The US, historically, is generally regarded has having a very restrictive banking system.
This situation turns "Gresham's law" on its head where good money drive out bad. Gresham's so called law only applies where there are legal tender laws requiring fixed exchange rates.
That isn’t standing Gresham’ law on its head – that is a correct statement of Graham’s law. Many people misquote Gresham and say that bad money drives out good, but good money allows drives out bad.
In that era, precious metal money was alway preferred as its value was more stable and it would appreciate in value, in tandem with increases in societal wealth, without the need to deposit it in a bank to "earn interest".
We have been over this in the past. The gold standard was not that stable in the short-run. Certainly, more stable than the fiat currencies of the 70’s, but you can find many historical examples of gold discoveries changing the marginal value of gold and thereby changing the purchasing power of money. It typically took 20 years for the effects of gold flow disturbances to dissipate.
Why did this situation change? The business community argued that prosperity depends upon voluminous credit and money creation.
The business community? No, the populist movement more likely. Check out William Jennings Bryan, "Cross of Gold" speech, of 9 July 1896. |
