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okay so before we get into the presentation itself I've got a couple of announcements okay so the first is for those of you who attended in September and October the two-part series on the Great Depression we still don't have video it was we're gonna put up on Meetup and slides I think George is working diligently on the video but in the meantime the slides themselves I went ahead and grabbed a blog site and put the slides up and they're up right now it's Austrian money hopefully this is easy enough to remember Austrian money dot blog spot.com and this presentation that I'm gonna do tonight the slides are already up on that blog site and if my recording software works properly it'll be turned into a YouTube and I'll put the link for the recording as well on there okay the other announcement I want to make is housekeeping for Q&A so I suspect this audience you'll probably have a fair number of questions I've already gotten some even before the presentation starts and that's great but I'm gonna try to manage the questions so in the presentation there will be two stopping points where I'll take maybe two or three preferably the questions if you can direct the questions towards the material itself that was covered in the previous chapter if you have a more general question I'm happy to answer it but we'll save those until the end but we just want to keep things moving and for those of you who've never been here after the meetings we usually go across the street to overtime sports bar at Gary and six things right beside brothers barbecue so if you're too shy to ask question you're afraid you know people people will think it's not a good question just come on over and ask me okay I'll stay late there's nothing there's no one waiting in line to ask me questions or anything like that so just have a seat at the table and ask away I'll be happy to tell you whatever I know okay so um after this presentation went up I took a look at the name and I kind of thought maybe I should have changed it a little it's called the historical case against the Federal Reserve I probably should have named it a historical case against the Federal Reserve because there's a lot more in history than just in this presentation that makes the case that the Fed is probably not a benign institution for society and that it hasn't really achieved its policy goals even by its own standards so instead of it's going to be a and the case is going to be primarily as the name implies the regulatory origins of banking and the financial instability prior to the Federal Reserve what I want to address primarily here is a defense that we tend to hear about the Fed so anytime we criticize the Fed or you read about the Fed in the newspapers you will commonly hear this argument by Fed apologists saying well you know hey before the Fed the United States suffered from these frequent and highly disrupted financial crises and banking panics and that's all because we didn't have a central bank and if you want to get rid of the Fed then you were going to go back to those days there are all kinds of other arguments you hear they make although they promote price stability what about full employment all that which I think you can make an easy case that they haven't been successful there but I want to address this historical defense so as you can see here the standard refuges America was plagued by frequent and repeating financial crisis before the creation of the Fed and we've been hearing a lot of that in the last decade by the way the Fed apologists were pretty quiet prior to the financial crisis but when the financial crisis hit the public started paying closer attention to the Federal Reserve I don't know if any of you saw Ben Bernanke on 60 minutes I mean he felt like he had to make a PR statement about how great an organization is and thank goodness we're here aren't you glad we're here to save you and all that sort of stuff so there was a lot of fed criticism and the Profeta which is really powerful I mean it's the it's a majority of academics it's the big newspapers it's the big media outlets they really launched at least from what I saw because I read a lot of articles and watched a lot of material launched a really powerful counter-offensive that included this argument so in the last decade I've seen so many cases of this oh it was so bad before the Fed argument I should have saved some of the links because I've forgotten so many of them but I did go back and I found a few oh I'm getting a little ahead of myself I'm sorry here let me start with a disclaimer they are right these apologists that there were so that they're not making that up there were repeated financial panics and banking crises in the United States before 1914 by my count and it depends how you define a crisis there might be economists who disagree with me they might they might say I'm off by a couple here by my count there were 21 there have been 21 financial crises in American history three-quarters of which or almost three-quarters of which occurred before the Fed and I've defined the major crises here as those dates in the first bullet point forgot to bring my laser pointer 1797 in 1819 1837 with another crisis shortly thereafter 1873 93 in 1907 there were also some smaller incipient crises you'll notice the majority of those occur in the latter half of the nineteenth century there's a reason for that we're gonna get in that and then interestingly enough the Fed apologist don't like to talk about the crises that occurred after the Fed by the way so we had some some really some real doozies by the way especially during the Great Depression we had financial crises in 1920 30 31 33 37 and then more recently is anyone remember the S&L crisis in 1990 yeah and then we had our recent 2008 crisis if you count up to 1937 that's one two three four that's five crises in a quarter century so the feds record at least in the first quarter century is actually worse than in the previous 130 120 years although if you corner a Fed apologist they'll say well that was practice I mean they won't use that exact word but that's how they'll describe it well the Fed was practicing and it took them 25 years and a Great Depression to finally figure out you know had to do their job properly so what you'll hear is that before the enlightened Fed the US banking system was basically an unregulated free market less a fair wildcat system where banks could do whatever they want they were they were so irresponsible and there was no oversight and the government unwisely stayed out of it and I'm gonna try to completely shoot down this narrative about free free-market Lizzie fair it's actually patently absurd when you see what kind of regulations were in place prior to the Fed okay so I wanted to dig up a few examples and I figured what conversation about Fed apologetics would be complete without our favorite economist Paul Krugman for those who don't know him Nobel laureate popular New York Times columnist and most importantly New Keynesian and I found this from a 2011 column where he says history tells us banking is subject to occasional destructive panics to wreak havoc with the economy Gilded Age America which is the late nineteenth century a land with minimal government and no fed was subject to panics roughly once every six years so crabman doesn't come out and sale is a fair this is kind of his MO he's very clever about how you word stuff you know he's obviously his readers are walking away believing that it was very close to less a fair in the late 19th century and that was the cause but if he's ever accused of of characterizing the late 19th century is free market can always say wide no I just said minimal government he does it's alive but you can tell what his readers are gonna walk away thinking and then I figured why let the New York Times have all the fun what about that other I want a glorious publication on what I'll call him The Washington Post okay so they have their own column called the horse trading the gay birth of the fed and after after insinuating the Angie Jackson should not have closed the second bank of the United States their columnist says with only loose regulation the system was decentralized in rudderless meaning we need an enlightened central power or riot to guide the banking system so the industrialized united states suffered a continual spate of financial panics bank runs money shortages and indeed full-blown depressions just a note I'd made sure to include their new motto of you guys seen democracy dies in darkness that's the Washington Post's motto yeah I agree with them not for the reasons they think okay Washington Post in my view is partly responsible for the darkness there their economics colonists are all Keynesian still in through and I guarantee you none of the stuff you see tonight is going to appear in The Washington Post I've got one here from the Seattle Times that actually says for most of the 19th and into the 20th century less a fair attitudes and minimal state regulation so now we've got the word lays a fair now I don't know who John Tolleson is I put a question mark here I'm assuming he's the nobody but at least all the Seattle Times readers and if he's a syndicated columnist who knows other papers are getting this idea that it was less a fair in the 19th century and then finally what apologetics would be complete without the Federal Reserve itself it has to justify its own existence I found this in a research paper from the San Francisco Federal Reserve stating that in the US the rate of banking crises declined markedly after the 1913 creation of the Federal Reserve that's not true again about the quarter century after the Fed okay it is true if you go from 1937 to today but after the creation of the Fed things actually got a lot worse okay by contrast ten significant banking crises occurred in the 19th century okay so this is my thesis that the absence of a central bank during that period acting as lender of last resort was not the cause of the panics and that this isn't just a theoretical challenge we have empirical evidence including that there were other countries that had no central bank during the same period and I'm gonna focus on Canada but Scotland is another example had no central bank and they were remarkably stable okay they had no crises or you could argue virtually no crises so it's gonna be both that it's gonna be a historical argument with some theory some theory added in about look at these how harmful these regulations are plus some in cases of empirical evidence of countries bitter successes without a lender of last resort and here's a list this is a not a complete list but it's a pretty good list of some of the distortive regulations that were in place during this period at times there may have only been one of these regulations at other times there were multiple regulations in place they are and I'll go through these one at a time state-level unit banking laws which I'll describe the antebellum central bank so we did have central banks in the early days the United States the Bank of the United States and the second bank of the United States the national banking system which was a set of federal regulations that effectively design and engineered a private banking system at the national level now one's very important because that's the system we were under as things got more and more unstable and ultimately led to the creation of the Fed and then two more that I don't think we're gonna have time to talk about they're not quite as important but they're still significant which is state bond holding requirement laws and bimetallism bimetallism meaning the defining the dollar is both the unit weight of silver and gold and then attempting to fix the ratios between the two which causes problems if the market values tend to deviate from those of those fixed ratios if anyone's curious about those we have time at the end of the presentation I'll talk about him hey come on in the bimetallism one in particular is interesting because while I don't think it contributed very directly to many panics themselves I know for a fact it was the major cause of one panic and it was a doozy I don't know if anyone here is familiar with the panic of 1893 get the panic and depression of 1893 were the worst depression in American history before the Great Depression it was actually called the Great Depression before 1929 you guys here for the talk okay if you want feel free to grab a chair or there are there are a few chairs left as well sit down okay it's probably gonna be about 90 minutes yeah yes it's long talk so bimetallism alone is probably worth discussing just to explain what caused the panic and depression of 1893 and then after I cover these regulations and how they affected the banking system I'm going to talk about what happened to them after 1913 that's kind of interesting story as well okay so let's start with state-level unit banking laws okay now the term unit banking in my opinion it doesn't inspire great excitement I think it's one of the most boring sounding terms out there but it's incredibly important I'm not sure if y'all are aware of this but from the founding of the United States all the way up until in some form another 1994 there were laws prohibiting banks from branching at a minimum across state lines I'm gonna think if you're old enough to remember that okay I remember not being able to deposit my check from Texas at a Bank of America North Carolina back in the early 1990s but more importantly in the early days the United States banks were more commonly limited to branching only two very small geographic regions and most commonly they weren't even allowed to branch at all okay you could just open one little office and that was it if you wanted open another office in the next County the state law is said you couldn't do it I found an example here in Pennsylvania and by the way I think Pennsylvania was one of the more generous states in terms of allowing banks to branch in the ominous banking act of 1814 the the legislature if it's called that in Pennsylvania divvied up the state into 27 districts and only granted 41 Bank charters so if you were to evenly if you were to take averages net that means every district in Pennsylvania had an average of only 1.8 banks and many of them had only one bank that you could go to okay I'm not gonna worry about that Mouse anymore okay fact I think it took me back a few slides there all right yeah and as I mentioned earlier even more commonly in most states you couldn't even branch period now with even a certain region so you open one it's called a unit bank you open one unit bank in corn town Iowa or something and that's it that's all you're allowed to do okay now why did why did states impose these regulations well actually that I've never presented on this material so I can't participate which slides coming so I need to make another point first I'm sorry so the point of this slide is while we tend to think of nineteenth-century banks is looking like this okay these gigantic mega bank offices with you know wide geographically diverse branch networks the truth is most banks in the United States in the 19th century were kind of like this okay I'm not sure if they looked exactly like that but by the way I have seen some photos of like these old west banks that did look kind of like this okay but you know maybe they were not quite so modest but that's really it I'm that was the only business you could do is walk into that one bank and and the funds couldn't go really go anywhere outside of that city or outside of that County okay so why did bag states pass these restrictions okay well it all had to do with the founding of the country the states were looking for revenue and the Constitution kind of limited their options now I personally am wondering what did this day see in all this River for anyway back in the early days but if we put that aside for the moment the Constitution prevented States from printing money period okay that's article 1 section 10 ok so you have to deal only in gold and silver also if you want to lay tariffs and duties to to bring in revenue for your state guess what you can't do that Constitution numerate step power only the federal government
article 1 section 8 and this is this this has nothing by the way or I should say to say nothing about the income tax right most of us know there was no such thing as an income tax back in those days the federal government tried it many many times it was struck down in the late 19th century is unconstitutional over and over and they finally got it with the 16th amendment in 1913 so the state certainly don't have income taxes or sales taxes as a source of revenue so they're desperately looking for a way to bring in money and they went to they decided to go to banks for the money because it's the is the saying of the this famous bank robber I can't remember his name was asked why do you rob banks yeah you know his answer was Willie Sutton yeah yeah that's Frankie yeah as Willie Sutton said when he was asked why you rob banks he said that's because where the money is right and that's the way states viewed revenue back in those days so the states quickly cut a deal and this is kind of a busy slide I'm sorry but it may pay off if you pull the slides down later ok the states entered the bank chartering business they would enter deals with banks and say ok well we'll give you a chart or in exchange for you doing something for us and some of those some things included actually that's in the next bullet point let me talk about what the banks got first the banks themselves as part of this deal this bargain would get liability protection beyond paid in capital they would they would usually be treated as pet bank so they got to hold the government's deposits they received other type privileges in return the banks had made the states themselves partners banks tended to buy a stake in the bank itself and the dividends were a source of revenue quite often the banks didn't even have the money they had to borrow from the bank to buy the stake and then they would slowly pay off the loan with the dividend stream also the banks would agree to loan generously to state governments that were and/or hold their bonds a lot of times when the was up for renewal the state which charged a fee quote-unquote which is really this very very generous bribe I guess to get it so this the states had all kinds of ways of pulling in money from these bank operations now in addition to that the banks got one more privilege which is monopoly rents okay hey Jeff hmm if the state were to charter hundreds of banks and allow them to branch all over the state or have them forbidden branch outside the state there would be intense competition between banks which would mean lower profits so the states deliberately set up monopolistic fiefdom these regions or these unit banks state to say okay you can only operate in this area it'll be very profitable for you and therefore it's profitable for us the state because we're a partner as well now this brings us to interstate branching if you're Pennsylvania do you want to allow a New York or a Virginia or Maryland based bank to open branch offices in your state the answer is no because the competition they bring in any profit revenues or profits will go to that competing States Treasury not yours so every state quickly put up barriers to competing banks from other states saying okay you're not you're definitely not allowed to come into our territory and effectively every state I think there were no exceptions every single state at the beginning of the founding of the United States would not allow branching across state lines the most they would allow was branching just within these small regions within their own States I found here what this is this is by the way from Calomiris this book this is a reference at the end of your interest in reading more about it Charles Calomiris Charles Hebert have cited these three economists saying that many states at some point we're receiving up to 1/3 of all their revenue just from these banking agreements okay um I found this chart this is very interesting chart I know it's very busy as well this shows you just how prevalent these restrictions were even by the 20th century so this is a chart of all of the states and then I don't in the back and see this the first column is nineteen ten twenty nine thirty nine sixty one seventy nine and even nineteen ninety so we're getting the last couple of problems within our lifetimes and this is a very interesting itemization of which states restricted banking in what way and I focused on nineteen twenty nine here this is the eve of the Great Depression this explains by the way part of why the banking crisis was so bad during the Great Depression the dots mean unit banking only you can only have one office and that's it the larger diamond means you are allowed only to branch within a specific region within your state and then the big square meaning is the most generous means you're allowed to branch with no restrictions within the state but you can't go outside of the state or more importantly other states banks aren't allowed to come into my state so on the eve of the Great Depression of the 48 states that existed then 32 of them allowed no branching yoona banks only or only limited geographic areas within within the state okay only a third of states allowed unrestricted intrastate branching in zero States allow the interstate ranching a single example of a state that did allow full branching within its own borders as California and according to George telogen not a single bank in California failed that mininum had two doors closed during the banking holiday but they all reopen in business in California because California is a diversified economy and the banks were allowed to branch all over the state but if you were to look through these this list of states will move dots you'll find a lot of more dustbowl Midwestern type states as we all know we've heard about banking panics throughout the Midwest during the Great Depression the last bullet point this is me getting carried away I tend to do this when I create these slides because I just get so excited about this material but Nevada is an example of a state that allowed full intrastate branching and yet it still had a panic and this I don't have proof for this but my my intuition tells me I'm for example the Wingfield chain in 1932 I think they held like over half of all deposits Nevada they failed why because Nevada was not diversified it was so reliant on mining and mining was in minerals was one of the industries it was most heavily hit by the smoot-hawley Tariff so even banks with full intrastate ranching could be vulnerable if their economies weren't diversified enough okay here's another example of how how perverse the regulations were in 1914 the United States had twenty seven thousand three hundred forty nine banks yet ninety five percent of them had no branches they were unit banks okay and that the remaining five percent the average number of branches was only five this again is according to Callen Morrison Hebert who by the way I draw a lot on these two in my presentation now I'm gonna skip across the border here and show you a stark contrast there were never restrictions on branching in Canada starting from the very first charger bank in Canada the Bank of Montreal which went into business in 1817 and finally received his Charter in 1822 Canada was quickly characterized by instead of 27,000 banks it quickly became a smaller number let's say several dozen national banks that could expand all over the country and today by the way if anyone knows anything about Canadian banking you guys heard of the big five okay yeah yeah RBC let me see if I can remember him Royal Bank of Canada CIBC toronto-dominion bank of Montreal in Scotia right they still control a very very large share of the deposits in Canada this might be viewed as anti-competitive a smaller number of banks but actually it was a more competitive system as we'll see then our twenty seven thousand banks that we had in in nineteen fourteen in fact that is my last bullet point right several dozen nationally branch banks is a more competitive environment than 27,000 monopoly unit banks the analogy I always uses Airlines I mean he imagine if every airline had its own monopoly state it couldn't fly in out of that state okay that wouldn't be a very competitive environment but if someone said okay now we're gonna have five Airlines they can go anywhere they want you it's actually better for the consumer right then these 50 airline fiefdom Xand it's also a better service for the consumer as well okay so what are the disadvantages of unit banking I'm starting my first four aren't so much destabilizing they're just what makes it bad the next floor will be the disadvantages that make it a unit banking system inherently fragile okay the first is I've already talked about this you have monopoly rents so there's all these regions or even entire towns that are just a monopoly and since being a monopoly consumers and borrowers are gonna get less credit they're gonna get higher interest rates and Calomiris has done some work and discovered how during this period America was under banked Canadians actually had more access to credit which is particularly remarkable considering how large and spread out Canada is and they still got more credit per capita than Americans did and here's a great example I found now there's a century difference here but that actually doesn't matter as you'll see it really just comes down to banks and people so in 1800 America's four largest cities were New York Philadelphia Boston and Baltimore each of those four cities only had two banks okay because of these unit banking restrictions they got their own little kingdoms and as you can see here I have the populations I went back and found the populations is amazing how small they were right in 1800 so New York had 72,000 people and you had two banks you could choose from so by contrast in 1911 remote Western Canada I should have said can of not Canadian right Alberta British Columbia Saskatchewan Manitoba any of you guys ever been in these provinces okay okay outside of the big cities I mean just miles and miles of nothing right okay and even in 1911 it was worse by contrast your average incorporated town had 900 people and had two branch offices so if you do the math I did I do the percentages I didn't do the percentages but 72 thousand people in New York get to rent to banks and 900 people in Medicine Hat Alberta I get to banks okay it's a much better environment in Canada for consumers than we had in the United States ok the second problem with unit banking is a wasteful model okay which ultimately ends up leading to higher costs and scarce your credit as well why in a nationwide branch banking system you can centralize all of your administrative functions and headquarters I mentioned here accounting loan process and collections you name it we're and in the branch office you don't it's not very expensive all you need is some till cash or maybe some gold and silver coin and a teller and maybe you have a loan officer who interacts with the local community that's it but in a unit back you have to duplicate all those administrative functions 27,000 times if you have 27,000 banks so just in terms of operational efficiency the United States was a much more expensive banking system to run than the than the unrestricted Canadian system okay a third problem is immobility of capital when you deposit your money and nationwide into tiny little unit banks that are all split apart from one another how is capital accumulated through a financial intermediary and sent to a geographic region that needs a large amount of capital in the example I used here with Charles Schwab anyone know he is not the stock broker anyone know Charles Schwab the steel baron okay he founded Bethlehem Steel and and I don't have proof of this this is just this is just me guessing using intuition but Charles Schwab founded Bethlehem Steel in Scranton Pennsylvania now I was in spand a couple years ago there's still nothing there okay but back in the late 19th century it was so tiny a town if it only had one or two unit of banks whereas Charles Schwab get the enormous capital and the kind of loans he needs in order to feel a large industrial project you're just not gonna find it because you can't move the money you don't have branch networks where you can move the money across state lines between the next county you have to depend on that local unit bank I'd have to look into it but my guess is he probably got the money through Investment Banking and it would be interesting if someone's done a study investment banks didn't have these restrictions it would be interesting if unit banking is what made men like JP Morgan so powerful that that large industrial magnets couldn't rely on their local unit bank to get the capital they needed so they had to go somewhere else okay um by the way my last bullet point here is that in a branch network since capital can it's of course deposited all across the country but then the branching system sends the capital anywhere it needs to go in the nation to meet the the changing demands for for loans it leads to a geographic balancing of the supply and demand for credit and thus an equalization of interest rate and there was a disparity in interest rates the united states from one region to the next because again money could not move out of one region to another so if there was a supply demand imbalance there was there was no mitigating factor that could that could solve that okay then the fourth problem is depreciation of unit banknotes okay so is it is everyone here familiar with back in those days the bank's issued the money themselves if so there was no Fed to do it so you would you would deposit money and a small unit back and they would print a banknote promises to pay the gold or silver on demand and then their banknote would circulate throughout the economy well with thousands of banks for twenty seven thousand banks you can imagine all the different kinds of bank notes that we're circulating okay this by the way is a bad example this Bank this is a Bank of Sarasota banknote but it's actually from the wrong era I should have found one from before the national banking system but if we if we pretend for the moment this is this is a State Bank a unit bank that only has one location Sarasota issues a bank note and then that Bank Note rates hands throughout the economy and eventually finds its way all the way to Reno Nevada let's say and the holder of the bank notes is okay I want to go to my bank of Reno office and deposit this the Bank of Reno won't the officer or the teller would not give you a hundred cents on the dollar for the note they don't know who the Bank of Sarasota is they don't know if it's still in business there's a reliable they are they don't know there's a cost associated getting the gold if they want to retrieve the go to get it moved that far right so you're typically looking at getting ninety five cents on the dollar ninety three cents on the dollar back in those days this again it's not a so much a destabilizing factor as much as it is an anti-consumer factor now by contrast if you have a nationwide branching system like they had in Canada and the bank of Toronto which is a banknote and it circulates through the economy and eventually finds its way to this is Nova Scotia by the way that that is still pretty far I checked it's a thousand miles away okay if a customer of the Bank of Nova Scotia brought their bank of Toronto banknote in this case ten dollars and deposit it do you think the Bank of Nova Scotia would honor it at a hundred cents on the dollar and the answer is yes and why if first of all they knew who the bank of Toronto was but more importantly there was a bank of Toronto branch right across the street even in Halifax okay very very easy you know it's reliable you can get the money very cheap very cheaply low-cost you have to go all the way across the country okay so more more unit banking problems and now we're getting into Howard East it starts to destabilize the system I think this one is probably self-evident you can't diversify your loans this was probably the biggest problem so if you're a unit bank in corn town Iowa your fate rests on the price of corn if the price of corn
osedives on you you're in trouble because that's all you have okay or if you're in a railroad Junction town like I don't know what's that pass in Montana cover just assume a small town that's heavily reliant on railroads and that's it railroads many of them famously went bankrupt in the late 19th century it happened all the time it was a boom bust industry that will bring your bank down if you're on the border and your town is have your your bank is heavily dependent on cross Canadian US trade and then the abomination the tariff of abominations has passed or the McKinley tariff is passed or the smoot-hawley tariff has passed it's gonna sink your loan portfolio as well and as we know if you have a few unit bank failures in a region it can psychologically start to affect the public they begin get worried that maybe their bank isn't sound it can became a self-fulfilling prophecy right where they run to their bank and start trying to pull their money out however if you're nationally branch you have a network of branch offices all the way across the country your loan portfolio is going to be highly diversified you're not going to be worried about just that geography so if you're in Canada you're in mining you're in agriculture you're in I don't know if can't have forgotten to steal a shipping you name it okay a banking very easily invest in a whole variety of industries and if one or two industries have a bad day it doesn't really affect the bank that badly um what's not is self-evident you also have no diversification of depositors so if you're a small unit bank in corn town Iowa and there's one or two very rich people who deposit their money with you and they represent a large fraction of your deposits you have to constantly be worried what if they pull their money out if you're nationally branched you have thousands of thousands of depositors many of whom are rich no one or two depositors is going to cause you to change your lending habits but if you're just in Sterling Colorado just think of a small town I visited okay if you just in Sterling Colorado there's one or two rich guys there even if even if they're good customers and they intend to leave the money there the banker always had in the back of their mind to be worried if I issue too much credit will I be able to meet my depositor claimant withdrawal demands if the rich guy comes one day and decides you want all this money and this leads to a scarcity of credit as well okay or destabilization right if they actually come and pull the money out now your banks really in trouble right because you may not have all the money there or if you do have enough money but now your reserves if dwindle due to the withdrawal you have to contract credit okay a third problem is immobility of reserves and response to distress this is somewhat along the lines of immobility of capital it's a little bit different so if you experience a bank on your unit bank you're on your own okay you either have the money if you don't or you know and if you run out of reserves because of a panic you close your doors and you fail but if you're a nationwide branch Network and let's say you see a large amount of withdrawals coming out of the corn belt or whatever but you have all kinds of reserves as well from the shipbuilding business which is booming or the railroad business which is booming before a panic even ensues you simply shift the reserves over to those branch banks and eventually the public sees that the withdrawals are going very orderly nobody's failing and the whole and the whole thing basically the crisis is averted before it can even get started and a unit banking scenario you don't have that option like say your stand or fall on that one office and then finally with unit banking banks are unable or it's very difficult for them to coordinate a response to a crisis I think I heard was it Leo mentioned the clearing houses was it was it you okay so in Canada you had a few dozen large nationwide branch Thanks they frequently communicated with one another I guess in this day and age the antitrust people would call it collusion or maybe the Russian Muller we call it collusion okay but this is actually a good collusion the same kind of collusion by the way and I keep going back to Airlines I used to work for an airline when airlines agreed to honor each other's tickets in case of a flight cancellation right it's pro-consumer when they cooperate in Canada likewise the banks cooperated as well they had their own private clearing houses if they felt that something resembling a crisis might be on the horizon they would they would enter to an agreements where they would agree not to redeem one another's banknotes they would hold on to him and not redeem until the crisis was over now way every bank could hold on to its reserves they also acted as emergency lenders the big five would oftentimes this is kind of a Fed function would make emergency loans to smaller still solvent but maybe distressed for liquidity small banks in Canada and sometimes they would simply buy out a smaller bank that was in distress by contrast in the United States when you have 27,000 unit banks how do you 27,000 banks enter into an agreement okay Clearing House agreement for all 27,000 banks coordinating their bank note redemptions for to cross 27,000 banks and for that matter I put a question at the bottom here I don't know the answer but with a legal restriction how can a healthy bank in Chicago rescue or even buy out a distressed bank in Tucson if you have interstate branching prohibitions and for all I know maybe some states did allow that but my guess is that it was at a minimum it had to be very difficult if not impossible back in those days okay so if someone says to you oh well that Canadian system yeah that's great and all but you know what that's just one example it's just a freak accident you can't possibly replicate that anywhere else it just so happens there is another there is a parallel right across the Atlantic Ocean and I'm not gonna spend as much time on Scotland because I'm focusing on the Federal Reserve here not the Bank of England but in Scotland we had a similar arrangement in England you had highly restrictive and almost unit banking it's a little bit different but kind of the thing principal and in Scotland you had unrestricted nationwide banking and this all started trying to keep this short this all started in 1694 with the chartering of the Bank of England does anyone here know why the Bank of England was originally chartered okay that's a really good guess you know and normally I would say yes and it probably eventually came to that but initially it only served one purpose I'm not saying a few years later the Easton you may have had something to do with it got me curious might want to read on read about that at war yeah it was fun it was it was it was chartered to lend generously to Parliament and the king to fight what would turn out to be 120 continuous years of war with France okay now Parliament wanted to make sure that the Bank of England remained the preeminent lender they didn't want other private banks drawing deposits away and refusing to lend to to the government so they passed in 1708 shortly afterwards these I don't think this is the official name of the legislation but it's called the six partner rule and basically they said any bank that any chartered bank cannot have more than six partners who contribute paid in capital and this included joint stock banks the equivalent of like today a publicly traded bank so can you imagine if if like a Bank of America wanted to go into business they said okay we want it we want to raise capital if they were only allowed to go to six people that's it okay as opposed to the tens of thousands of individual shareholders and institutions today okay so this rule was passed to keep competing banks small what bank was exempted from this rule the Bank of England right okay the Bank of England branched all interesting enough it didn't really go very far outside London because it figured that's where the money is okay with the bank of Lincoln was allowed to open an unlimited number of ranches these are the private banks there was no technical limit on how many branches you can open but if you only have six partners worth the paid in capital you're going to stay small which was the idea so the English countryside was spotted with all these small towns like unit banks unit banks as well very highly unstable environment and as if that wasn't enough oh I'm sorry I shouldn't say if that wasn't enough eventually the six partner rule was loosened in 1826 so some historians will say yeah yeah well that rule only lasted 118 years by now you know Napoleon is gone right the Battle of Waterloo but even then there was a restriction of within 65 miles of London you still could not have more than six partners so the idea was again not to compete with the Bank of England eventually the Bank of England becomes the monopoly issue or a banknotes in 1844 now this is going to lead to a very unstable environment whereas by contrast in Scotland Scotland is for the most part left alone and I know George asked me several months ago well how did they get away with that right and I have I have learned since then if you want I can tell you over over a couple of drinks at over time all right but Scotland was left free to develop their own banking system they also played a little interference by the way that the Bank of Scotland which was the first chartered bank in Scotland it was chartered in 1895 one year after the Bank of England was chartered Scottish skyla had its own Parliament back then they they quickly passed a law of making it illegal for any charter bank to lend to the British government that has something so I think they were anticipating right what was gonna happen right and it kind of made it's like what is the porcupine makes a very uninviting lunch kind of principle right the the the English Parliament and the King William the 3rd he just kind of looked over and said it's not worth it okay there's more than I'll tell you over drinks okay so the SCADA system being free to develop on its own and look at these innovations these are things we take for granted now but these originated in Scotland under there nationally branch competitive private banking system a line of credit okay that did not exist before the Scottish system they came up with that on their own paying interest on your deposits okay that wasn't done before before the this the Scottish got or the Scottish which before the Scots okay before the Scots came up with it for those guy was talking fraction reserve banking with some people here in the room before we started some Scottish banks learn to to create contracts where if they suspended Redemption on bank notes the bank note actually said the bank has the option to redeem immediately or to redeem however many months later but with interest okay so they would they would reimburse the depositor if they weren't able to redeem right away all those we'll find out later there weren't really that many cases where the banks were not able to redeem nationwide branching was a Scott Scottish invention I want to be very clear though nationwide is the key word because there was branching there had to be branching going on before Scotland because I remember reading about them at the Medici family opening like one branch office in England but that's not nationwide branching so the idea of expanding across the entire country to serve a wide consumer base is something that began in Scotland so by 1845 Scotland has 19 banks issuing banknotes with 363 branches remember Scotland is pretty small has a pretty small population back then that comes out to one branch per 6600 people versus in England one branch per ninety four hundred people or the united states one branch per sixteen thousand people so this small very rural country is again offering more banking services and more banking per capita to its citizens than the United States or England and something I just learned recently is very interesting this system was very beneficial in 1755 Scotland's GDP per capita was half that of England and by 1845 that was equal to England's GDP per capita I had no idea till I started researching this just I guess it's part of the Scottish enlightenment to how it came about just how quickly the Scottish economy admit how much faster didn't dust realized in England did in in part large part due to their banking system and they had contemporary of observers as well David Hume wrote about the the impressive innovations that you know he was he was Scottish that he saw popping up in his country in Adam Smith even wrote about these Scottish free banking system in the wealth of nations he was marveling at the discipline that had imposed competition imposed on Brent on banks not to over issue because they always had to be worried about other banks hoarding those notes and coming back and and and offering him for redemption all at once so there's a lot of literature from famous contemporaries at the time about that system okay if we go back to Canada by the late basically by the turn of the century the United States is the only country left with this peculiar unit banking system and by the way in the late 19th early 20th century the United States is the only industrialized country left also that is having these sorts of panics and bank runs okay every other country has solved the problem except the US and this Canadian banker I don't know how important it is I tried to figure out like what bank he ran but I couldn't but he made this interest can come in a 1917 that quote practically every country in the world except the United States has recognized the utility if not the absolute necessity of the branch system of banking and handling commodities as liquid as money or credit the bank system without branches is on par with a city without waterworks or a country without a railroad so far as the equable and you can say equable and that equitable distribution of credit is concerned okay so that's the end of state unit banking and this will stop for our first Q&A if anyone has any questions about the unit banking issue I'll take two or three ok George got one the regulations to limit banking within your state it reminded me quite a bit of what we have now what would happen with health care and the inability to get insurance outside your own state different try to okay so so for the recording the question is do we see parallels between the restrictions on banks branching across straight lines and health insurance companies branching across state lines I haven't researched it I have given I have given some thought to that question by the way and I haven't given a lot of thought to it but I think the most obvious one is anti-competitive Ryan that if you don't have if you have large insurance networks that are allowed to compete with one another in the same state the consumer might see some benefit in terms of lower premiums although I'd also know that in the health insurance business the vast majority of their cost is claims themselves I mean it's at the margins I don't know if you guys have heard the margins are thin net margins for insurance are thin but in terms of like a network being unstable and leading the panics or something I haven't really I mean it doesn't gonna be a clear parallel but they can't build that Network it's possible but those restrictions existed before Obamacare so I think we can probably blame Obamacare itself more for those failures that it's true if they had if the restrictions were loosened maybe it would have given some wiggle room to some companies that they would survive it but the change was about was Obamacare itself okay all right one more yeah in the back yeah that's an excellent observation if you look at the chart by the time you see 1990 it's mostly squares so the trend here is particularly after the Great Depression the states did start loosening up at least within their own borders and when I get to the last chapter about what happened after the Fed will see a little bit of history about how branch banking started these laws the the prohibitions with the the national government and technology by the w
y started chipping away at these restrictions but I think the Great Depression itself did expose the fallacy of the unit bank system and ironically it was the unit bankers themselves that were the most resistance resistant to opening up their state to unrestricted intrastate banking and they were very powerful political force so we will touch on that so you're anticipating one of my next slides so George I'm gonna if you can hang on to that till the end I'm gonna keep moving because I'm looking at the clock I'll sit here I'm sorry I realize that but I'm looking at the clock I'm gonna I don't want to keep here people here too late okay
