We Had Panics Before 1913 Right?

[TortoiseDream]

How come? There was no federal reserve, for sure. Was it the free market then, and the federal reserve came and provided relative stability? Okay just kidding... Were there other government distortion/regulation causing the panics? I have a vague notion of these things, but I am looking for resources about pre-fed market distortion. Can anyone recommended books, articles, etc about these things (specifically online)? Thanks.

[noxagol]

Yes, these were also caused by government intervention. Suspension of specie is one big culprit.

I'd suggest going to lewrockwell.com and doing a search.

[catdd]

The point is that the Federal Reserve's entire reason for being was based on assuring us that there would never be another panic if they were in charge of the economy.
Now they have bankrupted us and there are still people out there insisting we need them.

[AlexMerced]

This should clear up your question:

YouTube - 5 Historical Misconceptions Cleared Up (http://www.youtube.com/watch?v=9YmEyZXHgoI)

[sailingaway]

How come? There was no federal reserve, for sure. Was it the free market then, and the federal reserve came and provided relative stability? Okay just kidding... Were there other government distortion/regulation causing the panics? I have a vague notion of these things, but I am looking for resources about pre-fed market distortion. Can anyone recommended books, articles, etc about these things (specifically online)? Thanks.

Short ones and due to bimetalism and fractional reserve banking. However, they were MUCH shorter.

[Stary Hickory]

Well the panics were due to fractional reserve banking. Which in itself is fraud. Banks would expand bank notes greater than the gold they held. This led to bank collapses when people called them on the fraud.

The problem always has been and remains fraud. At least when banks collapsed it liquidated the fraud locally and contained it from spreading. However after the FED and 1913 the banks were given a vehicle to defraud the people in a massive way.

1913 simply gave bankers the means to defraud on a level never before seen. That is why inflation...the outcome of banking is fraud in itself. People are led to believe a currency is worth more than it is....they are defrauded. The source of this fraud is fractional reserve banking, this existed before 1913...but it was locally liquidated periodically in bank panics, now we have a system where the fraud is never liquidated but transferred into the backed-by-force monetary system.

This is why our problems are much much more severe. We lost the ability to liquidate fraud before it got out of hand.

[AlexMerced]

Fractional Reserve banking true will always lead to business cycle, but the banking panics were caused by Unit Banking, you had much more liberal branching rules in canada and they didn't have near the same panic issues we had.

Fractional Reserve banking leads to malinvestment and the boom/bust cycle, but the seasonal banking panics pre-1913 was a different issue, and post 1913 what was a milder bank panic issue became a lager issue... banking failure.

Listen to the Charles Calomaris interview on EconTalk he actually retell sthe story of 1913 really well.

[Sentient Void]

Exactly - government regulations didn't allow banks to expand according to demand and diversify, so you may have had only one branch in a whole county or perhaps even a greater geographic area.

Canada did not have such regs, which is why it had virtually no banking failures, if i remember correctly.

I do have another thought though... don't we kinda *need* fractional reserve banking? Well, not *need* - but it is VERY beneficial to a capitalist economy... How else would you get banks to accumulate so much liquidity and be able to loan it out for entrepreneurs and other expansions in productivity? I imagine it would be much, MUCH slower without such a system.

[Andrew-Austin]

I do have another thought though... don't we kinda *need* fractional reserve banking? Well, not *need* - but it is VERY beneficial to a capitalist economy... How else would you get banks to accumulate so much liquidity and be able to loan it out for entrepreneurs and other expansions in productivity? I imagine it would be much, MUCH slower without such a system.

Isn't that one of the arguments in favor of central banking? The "liquidity first" argument. It isn't like loaning (and growth) would cease without FRBing, it would just be more cautious.

That said I'm not sure where I stand on the whole "is FRB fraud and should it be criminalized" debate, it might serve a role on a free market and people who insist on full reserve banks could also be satisfied.

[Stary Hickory]

Exactly - government regulations didn't allow banks to expand according to demand and diversify, so you may have had only one branch in a whole county or perhaps even a greater geographic area.

Canada did not have such regs, which is why it had virtually no banking failures, if i remember correctly.

I do have another thought though... don't we kinda *need* fractional reserve banking? Well, not *need* - but it is VERY beneficial to a capitalist economy... How else would you get banks to accumulate so much liquidity and be able to loan it out for entrepreneurs and other expansions in productivity? I imagine it would be much, MUCH slower without such a system.

Fraction reserve banking is fraudulent. If fraud is outlawed then so should fractional reserve banking. The bank panics could not happen had the banks not expanded credit larger than the gold reserves backing it. There is no way to defend this sort of practice.

There is no benefit in decieving people by manipulating their unit of accounting(money). Banks should never have been promising out property to two parties simotaneously. It's obvious how such practices will backfire and cause bank panics. And when you bail out the banks by using a central bank who can create more money and fraud you systemize fraud into the entire monetary system.

100% reserve requirement ought to be law, it's unlawful to sell two people the same car and therefore it should be unlawful to lend someone the property of another individual while at the same time saying you have their property on hand for them.

Fraud is very profitable for those that do it, but harmful to those decieved. The banks have been given special priviledge to defraud when everyone else cannot. The negative consequences of this fraud is now throughout the entire system......someone who is upside down on their house, stocks collapsing in price, inflation devaluing our money....these are all instances of the liqudiation of the fraud...but you can see innocent people are being made to pay the price for these fraudulent activities while the banking system and government profit.

[lx43]

http://en.wikipedia.org/wiki/List_of_stock_market_crashes


Govt had a hand in almost all the crashes that occurred.

[axiomata]

See French's Early Speculative Bubbles

http://mises.org/store/Early-Speculative-Bubbles-P578.aspx

http://mises.org/books/bubbles.pdf

[emazur]

The Creature from Jekyll Island is the book you need, chapters 15 through 19 in particular. Let me give you an excerpt (this is about the period after Andrew Jackson abolished the Second Bank of the United States, which was our last official central bank before the Federal Reserve, though Griffin describes the govt. regulation that came before the Fed as a halfway-house to central banking):
THE MIRAGE OF FREE BANKING (pg. 366-367)

There was a parallel development at this time called "free
banking." The name is an insult to truth. What was called free
banking was merely the conversion of banks from corporations to
private associations. Aside from no longer receiving a charter from
the state, practically every other aspect of the system remained the
same, including a multitude of government controls, regulations,
supports, and other blocks against the free market. George Selgin
reminds us that "permission to set up a bank was usually accompanied
by numerous restrictions, including especially required loans
to the state.,

The free banks were no less fraudulent than the chartered
banks. The old custom was revived of rushing gold coins from one
bank to another just ahead of the bank examiners, and of "putting a
ballast of lead, broken glass and (appropriately) ten-penny nails in
the box under a thinner covering of gold coins.,,1 When one such
free bank collapsed in Massachusetts, it was discovered that its
bank note circulation of $500,000 was backed by exactly $86.48.2
Professor Hans Sennholz writes:
Although economists disagree on many things, most see eye to
eye on their acceptance of political controL.. These economists
invariably point at American money and banking before the Civil War
which, in their judgment, confirms their belief. In particular, they cite
the "Free Banking Era" of 1838-1860 as a frightening example of
turbulent banking and, therefore, applaud the legislation that
strengthened the role of government.
In reality, the instability experienced during the Free Banking Era
was not caused by anything inherent in banking, but resulted from
extensive political intervention.... "Free banking" acts ... did not
repeal burdensome statutory provisions and regulatory directives. In
fact they added a few.

For banking to have been truly free, the states would have had
to do only two things: (1) enforce banking contracts the same as any
other contract, and then (2) step out of the picture. By enforcing
banking contracts, the executives of any bank which failed to
redeem its currency in specie would have been sent to prison, an
eventuality which soon would have put a halt to currency overissue.
By stepping out of the picture and dropping the pretense of
protecting the public with a barrage of rules, regulations, safety
funds, and guarantees, people would have realized that it was their
responsibility to be cautious and informed.

[Sentient Void]

Isn't that one of the arguments in favor of central banking? The "liquidity first" argument. It isn't like loaning (and growth) would cease without FRBing, it would just be more cautious.

That said I'm not sure where I stand on the whole "is FRB fraud and should it be criminalized" debate, it might serve a role on a free market and people who insist on full reserve banks could also be satisfied.

Correct me if I'm wrong, but I'm pretty sure you don't need a central bank in order to practice FRB. We didn't have a central bank for much of the time we practiced FRB here in the US and elsewhere, right?

Also - how could banks possibly loan out money without using money deposited in them? Without money deposited, they wouldn't have any to loan out, invest, etc.

At that point it seems only individuals and other institutions could loan out only their own money - which seems like a much slower and inefficient method?

I understand and believed in the idea of FRB being pretty much fraudulent (however it wouldn't be if the bank states it's method as FRB), but even without a central bank, it seems to work quite well?

If I'm wrong on any of these, feel free to correct me obviously. I'm still learning.

[brandon]

Also - how could banks possibly loan out money without using money deposited in them? Without money deposited, they wouldn't have any to loan out, invest, etc.

At that point it seems only individuals and other institutions could loan out only their own money - which seems like a much slower and inefficient method?


There are different types of deposits. In a full reserve system, banks would be free to loan out time-based deposits. For example, if someone buys a 5 year CD from the bank then the bank could loan out that mount of money for a 5 year term. Banks would not be able to loan out "on-demand" deposits such as money in checking accounts.

I personally have no problem with fractional reserve banking. In fact, I think it's extremely beneficial to an economy. More credit available to help the economy grow, and free banking services provided to the people. How would you like to pay $200/year to keep a checking account open and an additional $1 every time you used your debit card? I mean the banks have to make money from somewhere, right?

I've always been baffled at why libertarians (Even Rothbard who seemed to be a pretty smart guy) are opposed to fractional reserve banking. What I am opposed to is public deposit insurance...but that's a whole 'nother ball of wax.

[Soca Taliban]

There are different types of deposits. In a full reserve system, banks would be free to loan out time-based deposits. For example, if someone buys a 5 year CD from the bank then the bank could loan out that mount of money for a 5 year term. Banks would not be able to loan out "on-demand" deposits such as money in checking accounts.

I personally have no problem with fractional reserve banking. In fact, I think it's extremely beneficial to an economy. More credit available to help the economy grow, and free banking services provided to the people. How would you like to pay $200/year to keep a checking account open and an additional $1 every time you used your debit card? I mean the banks have to make money from somewhere, right?

I've always been baffled at why libertarians (Even Rothbard who seemed to be a pretty smart guy) are opposed to fractional reserve banking. What I am opposed to is public deposit insurance...but that's a whole 'nother ball of wax.
Because FRB is fraud no matter how you slice it. Plain and simple.

[Sentient Void]

There are different types of deposits. In a full reserve system, banks would be free to loan out time-based deposits. For example, if someone buys a 5 year CD from the bank then the bank could loan out that mount of money for a 5 year term. Banks would not be able to loan out "on-demand" deposits such as money in checking accounts.

I personally have no problem with fractional reserve banking. In fact, I think it's extremely beneficial to an economy. More credit available to help the economy grow, and free banking services provided to the people. How would you like to pay $200/year to keep a checking account open and an additional $1 every time you used your debit card? I mean the banks have to make money from somewhere, right?

I've always been baffled at why libertarians (Even Rothbard who seemed to be a pretty smart guy) are opposed to fractional reserve banking. What I am opposed to is public deposit insurance...but that's a whole 'nother ball of wax.

Didn't think of the time-based deposits, so that's good point. At the same time, though, assuming the bank makes unsound investments/loans (too high a volume of highly speculative ones, for example, or the economy takes a downturn and even less speculative investments/loans don't work out), then the CD could still be gone. So even in a 100% reserve system, one could still lose their savings in a similar way it seems to FRB. So then it comes down to a question of risk assessment as to whether you have a FRB system or 100% reserve system, just how much risk does one want? Where do you draw the line? Is it a slippery slope in regards to banking/risks/investment/savings, no matter what?

Overall, I'm with you on the benefits of FRB (without a central bank), and still pose such a question to others who don't like it.

Hell, as far as I know, even austrian economics approves of fractional reserve banking, without a central bank, in an unregulated banking market. Since interest rates would be decided on by the market, an FRB system should work very well - as it did in Canada even during the Great Depression (I think bank failures were virtually nil over there at the time under such a system)

[Sentient Void]

Because FRB is fraud no matter how you slice it. Plain and simple.

Except It's not fraud if the banks let the depositors know about the FRB system.

Also, the role of the FDIC could be taken on by market-based insurance agencies competing for such business.

[TheBlackPeterSchiff]

The Fractional-Reserve Banking Question

http://mises.org/daily/4499

[Sentient Void]

The Fractional-Reserve Banking Question

http://mises.org/daily/4499

I can see why austrians and people in general may raise a hairy eyeball to FRB, but I've read stuff by austrians who seem to advocate FRB (again, absent a central bank and govt regulation/intervention).

Peter Schiff is one of them. It seems the market can accurately and adequately determine appropriate interest rates to keep FRB sustainable. When excessive savings are raised they lower rates, and when savings start to dwindle, they naturally raise interest rates. This of course goes along with restricting lending from those who have risky ideas (speculative) or poor reputation for paying back loans (bad 'credit'). This is good business practice and risk management, and it's actually good for society. On the profit and risk motive, they actually benefit society by protecting them.

[AlexMerced]

well a FRB system is fine if there is real competition and risk, no deposit insurance or central bank will create the pressures to make sure they don't take on too much risk or lose depositors.

Although, FRB does allow a bank to destroy the wealth of it's depositors

If you had 100% reserve banking, you wouldn't lose liquidity, cause money would just increase in purchasing power so instead of a $300000 dollar loan to buy a house you'll get a $3000 dollar loan to get a house.

Also, they'd just create different vehicles for lending which they already do, it'd mostly be done through closed end or open ended funds, which is better cause now investors get to share more in the gains.

Overall 100% FRB to me sounds like the most logical solution in many ways, but it'd so shatter the estabishment it's unlikely.

[Koz]

I would much rather have the little panics than inflation and recessions/depressions

[justinc.1089]

Something I think should be pointed out, which I could be totally wrong about, is that fractional reserve banking would probably operate much more safely and cautiously without a central bank than with a central bank.

My thinking is with a central bank the interest rates will be pushed down to promote more loans.

Without a central bank the market would dictate correct interest rates and therefore promote the correct amount of loans.

So, in the first scenario banks would act unwisely even if they did not want to because of the nature of the market demanding more loans, and some other reasons.

But in the second scenario, the banks would act a bit wiser because they would not have quite as much incentive or quite as much ability to hold low reserves from loaning too much money out.

And I think in a free market there would probably be a kind of bank that would do fractional reserve banking, but in a safe way by holding a very large amount of reserves.


I personally have a feeling fractional reserve banking can work as a system, but I also feel that it would probably work best if banks limited themselves to hold a very large amount of reserves, and not an extremely small amount of reserves like they often do today. It would also need to be told to all customers so that it is not fraudulent.

But the truth is I really need to read a whole lot more about banking and economics before I really know what is best for this. I understand the general concepts, but I just don't know enough information about it all to know what the best system may be.

[Sentient Void]

Something I think should be pointed out, which I could be totally wrong about, is that fractional reserve banking would probably operate much more safely and cautiously without a central bank than with a central bank.

My thinking is with a central bank the interest rates will be pushed down to promote more loans.

Without a central bank the market would dictate correct interest rates and therefore promote the correct amount of loans.

So, in the first scenario banks would act unwisely even if they did not want to because of the nature of the market demanding more loans, and some other reasons.

But in the second scenario, the banks would act a bit wiser because they would not have quite as much incentive or quite as much ability to hold low reserves from loaning too much money out.

And I think in a free market there would probably be a kind of bank that would do fractional reserve banking, but in a safe way by holding a very large amount of reserves.


I personally have a feeling fractional reserve banking can work as a system, but I also feel that it would probably work best if banks limited themselves to hold a very large amount of reserves, and not an extremely small amount of reserves like they often do today. It would also need to be told to all customers so that it is not fraudulent.

But the truth is I really need to read a whole lot more about banking and economics before I really know what is best for this. I understand the general concepts, but I just don't know enough information about it all to know what the best system may be.

Agreed. As a matter of fact, if you and others read Peter Schiff's new book, "How an Economy Grows and Why it Crashes', he basically explains and advocates such a FRB system without a central bank and govt intervention.

As a side note, as far as I know, FRB is/was a *natural* market response to the demands of banking, clients and new businesses, and would probably be expected to happen even in an anarcho-capitalist system if you think about it. In the end, it seems to me that FRB is an efficient and effective way of maximizing investment and savings potential, absent govt force through intervention, regulation and a central bank.

Once again, I reference Canada's banking system during the Great Depression. AFAIK, they had no banking failures under a FRB system, and didn't have significant govt intervention nor a central bank. During the hardest financial times, they prospered under the FRB system.

Is a FRB system strange? Sure I'll give it that... but dubious and fraudulent in nature? I don't think so, as long as customers of such banks know how it works.

[Zippyjuan]

Back then, banks did not have reserve requirements. They could loan out as much money as they wanted- sometimes more than they had. Also without insurance, depositors were at risk of losing their life's savings if the bank got into trouble. If there was even a rumour of a bank being in trouble, you would want to get your cash out as quickly as possible to avoid losing your money. This made the banks even more unstable since a run could destroy even a good bank. Today, if a bank gets into trouble, they still have to try to fix their problems or go out of business but the risk of runs is taken away and fractional reserve requirements also helps insure that they have funds available for most withdrawl needs. If a bank screws up, they do get closed but the deposits and assets get sold or transfered to another institution instead of getting wiped out. A bank collapse back then could destroy the economy of the entire city/ county/ region. Now those collateral damages are greatly limited. They are not gone, certainly.

[Sentient Void]

Back then, banks did not have reserve requirements. They could loan out as much money as they wanted- sometimes more than they had. Also without insurance, depositors were at risk of losing their life's savings if the bank got into trouble. If there was even a rumour of a bank being in trouble, you would want to get your cash out as quickly as possible to avoid losing your money. This made the banks even more unstable since a run could destroy even a good bank. Today, if a bank gets into trouble, they still have to try to fix their problems or go out of business but the risk of runs is taken away and fractional reserve requirements also helps insure that they have funds available for most withdrawl needs. If a bank screws up, they do get closed but the deposits and assets get sold or transfered to another institution instead of getting wiped out. A bank collapse back then could destroy the economy of the entire city/ county/ region. Now those collateral damages are greatly limited. They are not gone, certainly.

True, but once again, I reference Canada's banking system during the Great Depression. Fractional Reserve Banking, no central bank, little govt regulation.

0 (ZERO) bank failures.

Good discussion going on here:
http://www.ronpaulforums.com/showthread.php?t=249780

[Zippyjuan]

The Canadians did not buy into the risky mortgage loans and mortgage backed securites sold against them. That is why they have not been hurt as much by the current mess- they just weren't as exposed as US financial institutions. They also had less debt (personal, business, and governmental) too.

From the Washington Times (a conservative newspaper):
http://www.washingtontimes.com/news/2010/may/31/sound-banking-saved-canada/

The ingredients of Canada's success are not secret or complicated: One is keeping conservative, even old-fashioned lending standards, such as requiring substantial down payments and proof of income for home loans. Canadian banks also set aside high levels of capital reserves — going beyond international banking standards — so they can weather losses on defaulting loans and recessionary storms from the south.

The IMF, in probing what made Canada's mortgage lending system so resilient during the crisis, concluded that it was "boring" compared with the complicated, sophisticated and expensive financing system in the U.S., but nevertheless effective and safe.

Canadian bank losses were so low, and their cushion of reserves so high, that the banks managed to post profits for months in the aftermath of the 2008 crisis while major U.S. banks were teetering on the brink of insolvency and getting $250 billion in Treasury bailouts to cover burgeoning losses on bad mortgage loans.

Canada's examples of lending principles were mostly shunned in the financial reform debate in Congress, despite the massive regulatory crackdowns on banks in House and Senate bills.

The Senate specifically rejected amendments aimed at imposing more disciplined and conservative lending standards like those in Canada, although it did adopt an amendment to impose higher capital requirements on the biggest banks, which the financial industry and Obama administration are expected to fight in House-Senate conference.

"The Canadian experience showed that more prudent lending and borrowing played a big part in preventing the housing bubble that proved the near-undoing of the American banking sector," said Robert Elliott, a Canadian banking lawyer at Fasken Martineau.


Or were you talking about the Great Depression? The above concerns the current crisis.


http://en.wikipedia.org/wiki/Great_Depression_in_Canada

Canada was hit hard by the Great Depression. Between 1929 and 1939, the gross national product dropped 40% (compared to 37% in the US). Unemployment reached 28% at the depth of the Depression in 1933. Many businesses closed, as corporate profits of $396 million in 1929 turned into losses of $98 million in 1933. Canadian exports shrank by 50% from 1929 to 1933. Worst hit were areas dependent on primary industries such as farming, mining and logging, as prices fell and there were few alternative jobs. Families saw most or all of their assets disappear and their debts became heavier as prices fell.

Their biggest bank failure was the Home Bank in 1923 http://en.wikipedia.org/wiki/Home_Bank It had 82 branches throughout the country and until recently was one of the 25 biggest failures in history.

The Canadian National Railway, whose director Richard F. Gough was also a member of the bank's board, withdrew $1 million just before the collapse. The bank closed for good Aug 17, 1923. Ten officials from Home Bank were arrested on charges ranging from concurring with false returns to fraud on Oct 4, 1923 at a time when the bank's assets were estimated at $2.7 million and liabilities at $15.5 million. 60,000 prairie farmers and a substantial portion of Toronto's Catholic community lost their savings. In the panic that followed the bank's closure, the Ontario Government shored up the Dominion Bank with $1.5 million to stop a deposit run. Herbert Daly was unable to testify after a nervous breakdown and he died on October 22, 1923.

Cabinet secrecy rules protected politicians from any liability in the matter and, in a precedent setting bailout, the federal government agreed to pay $5,450,000 to depositors (Deposit Insurance was not enacted until 1967 in Canada), providing some settlement to the thousands who lost money as a result of the failure which, had the bank been liquidated or merged in 1916 or 1918 would have been without any loss to depositors.


After that, the banking regulations were severely tightened and reserve requirement raised to 25%.
http://faculty.marianopolis.edu/c.belanger/quebechistory/encyclopedia/BankinginCanada-CanadianBanks-CanadianHistory.html

As a result of the Home Bank failure in 1923, which demonstrated the inadequacy of the existing law respecting audits, the Act was amended in 1924 to provide for government inspection of the banks, which was one of the most important changes of this century, and which had been suggested fifty years earlier.

The most recent revision of the Bank Act took place in 1934. Many changes were made in the Act, but none was of major significance. Because of the con*current establishment of a central bank, certain changes had to be made in the Bank Act to bring it into conformity. Provision was made for the extinction of the note issue, so that by 1946 the banks will have a note issue equal to 25 per cent. of their paid-up capital.


The event also convinced them of the need for a central bank which was in place during the Great Depression so it would not be accurate to say they had no central bank during the Depression (it opened in 1935). From the same link above:

Early in 1929 it became evident from the action of the foreign exchange rates that there was not an unhampered ex*port of gold from Canada and that the gold standard, which had been re*established on July 1, 1926, was not being maintained. An analysis of this situation leads to the conclusion that operations under the Finance Act were responsible, that this Act had passed its usefulness, and that a central bank was needed. From this time on the discussion of a central bank grew in volume and importance - largely the result of current depression, it may be ventured - until during the parliamentary session of 1932-3 the government announced its intention of appointing a royal com*mission to investigate the problem.


As the Canadian prime minister had indicated even before the report was made public that he was in favour of a central bank, there was little doubt that the recommendation would be accepted. Upon publication of the report, the government so announced, and indicated that legislation to this end would be introduced. When the bill was brought into the House of Commons it was clear that it was based on the "suggestions" in the appendix. The main features of the Act provide that the shares of the bank shall be owned by private individuals, who elect the directors, who in turn appoint the managing officers, subject to the approval of the government. (The first set of officers, however, were appointed directly by the government.) The Central Bank must keep in gold a reserve equal to 25 per cent. of its liabilities, and it has the usual powers given to a central bank. It is to have the right of note issue, and the chartered banks are to retire their issues. It is to act as the government's banker, and manage the public debt. The commercial banks are to keep with it a minimum reserve, in the form of central bank notes, or a deposit, equal to 5 per cent. of their liabilities to the public of Canada. The bank took over the government note issue and the gold held against it, and the discrepancy between these two was made up by the government with 3 per cent. bonds. These, in brief, are the main provisions of the Act, which was passed after some opposition on detail and on the form of ownership. The Opposition groups in the House advocated public ownership of the bank, but this view did not prevail. The deputy minister of Finance, however, is an ex-officio member of the board of directors.



So they were highly regulated, had a central bank, and Fractional Reserve Banking after the Home Bank collapse in 1923.

[Zippyjuan]

A little more Canadian banking history: http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1ARTA0000504


Many of Canada's first bankers, eg, Samuel Zimmerman, who was involved in the Great Southern Railway swindle, were not examples of probity, and until the 1920s banks in Canada were generally unstable. Between 1867 and 1914 the failure rate of Canadian banks was 36% as opposed to 22.5% in the US, costing Canadian shareholders 31.2 times more than was lost to American shareholders; of the 26 failures in this period, 19 resulted in criminal charges against bank officers or employees. Improved bank regulation reversed these failure rates and Canada has had only 2 bank failures since 1923 while the US has had over 17 000. The structural organization of the Canadian banks followed the English model of allowing unlimited branches and, as one historian notes, "it was the model least suited to promoting industrial development in the colony." Regional growth suffered as well. For example, by 1912, in one area of the Maritimes, only 5 cents of every dollar deposited in the bank were loaned locally and 95 cents were transferred to central Canada.



One thing that Canada DID have that the US did not was branch banking- this spread the banks around over different geographic areas which in turn helped spread the risks. A problem at one branch would not bring down the entire bank.

http://www.nber.org/reporter/2008number4/calomiris.html

The U.S. Panic of 1907 (the last of a series of similar U.S. events, including 1857, 1873, 1884, 1890, 1893, and 1896) precipitated the creation of the Federal Reserve System in 1913 as a means of enhancing systemic liquidity, reducing the probability of systemic depositor runs, and mitigating the costs of such events.7 This innovation was specific to the United States (other countries either had established central banks long before, often with other purposes in mind, or had not established central banks), and reflected the unique U.S. experience with panics - a phenomenon that the rest of the world had not experienced since 1866, the last British banking panic.

For example, Canada did not suffer panics like those of the United States and did not establish a central bank until 1935. Canada's early decision to permit branch banking throughout the country ensured that banks were geographically diversified and thus resilient to large sectoral shocks (like those to agriculture in the 1920s and 1930s), able to compete through the establishment of branches in rural areas (because of low overhead costs of establishing additional branches), and able to coordinate the banking system's response in moments of confusion to avoid depositor runs (the number of banks was small, and assets were highly concentrated in several nationwide institutions). Outside the United States, coordination among banks facilitated systemic stability by allowing banks to manage incipient panic episodes to prevent widespread bank runs. In Canada, the Bank of Montreal occasionally would coordinate actions by the large Canadian banks to stop crises before the public was even aware of a possible threat.8

The United States, however, was unable to mimic this behavior on a national or regional scale. U.S. law prohibited nationwide branching, and most states prohibited or limited within-state branching. U.S. banks, in contrast to banks elsewhere, were numerous (for example, numbering more than 29,000 in 1920), undiversified, insulated from competition, and unable to coordinate their behavior to prevent panics.

The structure of U.S. banking explains why the United States uniquely had banking panics in which runs occurred despite the health of the vast majority of banks. The major U.S. banking panics of the postbellum era (listed above) all occurred at business cycle peaks, and were preceded by spikes in the liabilities of failed businesses and declines in stock prices; indeed, whenever a sufficient combination of stock price decline and rising liabilities of failed businesses occurred, a panic always resulted.9 Owing to the U.S. banking structure, panics were a predictable result of business cycle contractions that, in other countries, resulted in an orderly process of financial readjustment.

The United States, however, was not the only economy to experience occasional waves of bank failures before World War I. Nor did it experience the highest bank failure rates, or banking system losses of that era. None of the U.S. banking panics of the pre-World War I era saw nationwide banking distress (measured by the negative net worth of failed banks relative to annual GDP) greater than the 0.1 percent loss of 1893. Losses were generally modest elsewhere, but Argentina in 1890 and Australia in 1893, the most severe cases of banking distress during the 1875-1913 era, suffered losses of roughly 10 percent of GDP. Losses in Norway in 1900 were roughly 3 percent of GDP and in Italy in 1893 roughly 1 percent of GDP. With the possible exception of Brazil (for which data have yet to be collected to measure losses), there were no other cases in 1875-1913 in which banking loss exceeded 1 percent of GDP.

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The Canadians did not buy into the risky mortgage loans and mortgage backed securites sold against them. That is why they have not been hurt as much by the current mess- they just weren't as exposed as US financial institutions. They also had less debt (personal, business, and governmental) too.

From the Washington Times (a conservative newspaper):
http://www.washingtontimes.com/news/2010/may/31/sound-banking-saved-canada/


Or were you talking about the Great Depression? The above concerns the current crisis.


http://en.wikipedia.org/wiki/Great_Depression_in_Canada


Their biggest bank failure was the Home Bank in 1923 http://en.wikipedia.org/wiki/Home_Bank It had 82 branches throughout the country and until recently was one of the 25 biggest failures in history.


After that, the banking regulations were severely tightened and reserve requirement raised to 25%.
http://faculty.marianopolis.edu/c.belanger/quebechistory/encyclopedia/BankinginCanada-CanadianBanks-CanadianHistory.html


The event also convinced them of the need for a central bank which was in place during the Great Depression so it would not be accurate to say they had no central bank during the Depression (it opened in 1935). From the same link above:




So they were highly regulated, had a central bank, and Fractional Reserve Banking after the Home Bank collapse in 1923.


I was not talking about the current crisis in Canada.

I also never said the Great Depression didn't happen in Canada, nor that the FRB system in Canada prevented a Great Depression. Merely that *during* the Great Depression, Canada had *no* bank failures.

However, I guess I should have been more specific - as what I meant is that they had *no* bank failures pertaining to their fractional reserve banking system.

The Home bank failure was not a failure of FRB. That specific institution failed because it continuously engaged in *legitimately* fraudulent activity and 'questionable lending practices', as it says about the wikipedia link you provided on 'banking in canada'.

I don't see any proof that they were 'highly regulated' (ie were not run by the national govt nor had a central bank at the time), nor did I ever say there was no regulation anyways, however their regulations were still much looser than that of the US, is my point (one problem being the lack of branching due to federal law in the US). And again, the link you provided is dead, please find the correct one, or another altogether.

As for Canada prior to 1913/1914, I'm not familiar with how their system was structured, but my point is - they still maintained a FRB system, without a central bank, prior to and during much of the Great Depression, without any failures during this time. They did *not* create their Central Bank because of any alleged 'failure of their FRB system', and there is literally no evidence to support this claim.

On the contrary, the Central bank of Canada was created for the sole purpose of nationalizing and monopolizing the monetary system so that they could debase their currency to pay national government debts:

http://en.wikipedia.org/wiki/Bank_of_Canada

As for the boldened text about Canada bank failures between 1867 and 1914, the fact is is that during that time there were bank regulations, and after that time there were bank regulations - but afterwards it says they were improved. This doesn't tell the whole story. Were there too many banking regulations during the time of such significant failures, and they were cut down or streamlined during the years afterwards? I would like to know more details of this - but it doesnt mean that 'regulations saved the system'. Previous regulations may have simply unnecessarily distorted the system. We'll need more information on this if we would go on about that - but in the end, the fact is that I have been talking about the lack of bank failures during the Great Depression, in Canada, while they did not have a Central Bank. These are the facts, and show how a FRB system in and of itself is not bad and can be very stable even during horrible economic times.