

Bob Murphy on Free Banking in Canada

A few months after my April 2018 Soho debate with him concerning whether fractional reserve banking is damaging to an economy's health, Bob Murphy gave a lecture on "Rothbardians vs. 'Free Bankers' on Fractional Reserve Banking."


So far as the Scottish episode is concerned, Bob's claim rests mainly on the fact that, between 1797 and 1821, Scottish banks followed the Bank of England's example, though without the statutory permission Parliament had granted it, of temporarily "restricting" specie payments. So far as he's concerned, their having done so is ipso-facto proof that they ran roughshod over their creditors' rights and reduced their welfare. In truth the story of the Scottish bank restriction, and the correct lessons to be drawn from it, are far less straightforward than Bob supposes. Having already devoted three longish posts to explaining what happened (here, here, and here), I leave it to my readers to decide whether those posts exonerate the Scottish bankers. I also continue to look forward to Bob's response to that evidence.

The Canadian Case

According to Bob, Canada's experience also contradicts my claim that past free banking systems were "remarkably stable." Here Bob's chief—and sole—evidence consists of a fragment, shown below as it appeared on one of his PowerPoint slides, of the table of contents of Roeliff Morton Breckenridge's splendid 1894 book, The Canadian Banking System, 1817 – 1890.


§43.—The Expansion between 1867 and 1873
§44.— Depression, 1874-1879
§45.—Bank Failures and Losses, 1874-1879
§46.—The Bank Act Revision of 1880
§47.—Dominion Note Legislation, 1872-1880
§49.—Bank Failures, 1883-1889

To refute my claim, Bob considers it enough to note that Breckenridge is my own favorite authority on 19th-century Canadian banking, and to then read the listed section headings, with their references to "Expansion," "Depression," and "Bank Failures" out loud and in his best comic manner. To judge from from the guffaws he elicits from his audience by so doing (at 6:55), they agree.

But is it really enough? That ought surely to depend on what Breckenridge actually says in the sections of his book that Bob and his audience consider so funny. So, let's see.

The Expansion between 1867 and 1873

This period in Canadian history was indeed, Breckenridge says, "one of growth, great apparent prosperity and general expansion" particularly in "manufacture, transportation, and exchange," in which overspeculation played a part. "All sorts of manufacture," he says, "were pushed to bounds, which, in 1875, were acknowledged to have been unreasonable." What's more, Breckenridge says that Canada's banks "shared in this expansion."

Bad news for us free bankers? Not if you believe what Breckenridge goes on to say some paragraphs later. "From the mass of evidence examined," he writes,


Breckenridge notes, furthermore, that despite Canada's close commercial ties to the U.S., which suffered one of its most serious financial panics ever in 1873, "no panic, in the accepted sense of the term, occurred" there. "Nor is it easy," he adds, "to discover the phenomenon designated by the broader expression 'commercial crisis.'" On the contrary: despite the U.S. crisis, "confidence in the [Canadian] banks" remained "strong":


Depression, 1874-1879

Canada did suffer hard times, including many commercial failures, between 1874-1876. Nor were its bankers spared. The period from January to March 1875 in particular was one of "real stringency" for them. Still the banks succeeded in handling the heavy demands for payment they confronted by calling on their English correspondents, retrieving funds they'd invested in the U.S., and issuing new stock. The episode therefore passed "without exciting the public or precipitating bank suspensions."

The episode did not, however, leave Canada's banking industry unscathed. Instead it went through a subsequent period of retrenchment, culminating in 1879, during which various banks reduced their capital, merged with stronger rivals, voluntarily closed, or, in several instances, either suspended payments temporarily or failed outright. Among the failures was that of The Mechanics' Bank—said by Breckenridge to have been "a blot on the Canadian banking system for years" that "died at last because it was too corrupt to live."

Yet the losses Canadian bank customers suffered from these failures, though they exceeded those endured at any other time during Canada's free-banking episode, amounted to but a tiny fraction of the value of all outstanding Canadian bank liabilities at the time.  And though that loss was nonetheless regrettable, the "general effect" of the failures behind it must, Breckenridge says, "be regarded as hygienic and highly salutary."

While the late '70s saw the purging of Canada's weakest, if not corrupt, banks, most of Canada's banks, having entered the period in a solid condition, survived it fully intact. While some of them also faced brief runs, according to Breckenridge those runs "were cordially met, and in one way and another a bank panic was again averted."

Bank Failures, 1883-1889

I pass over the next three sections of Breckenridge's book, as these presumably aren't among those that earned a laugh from Bob's listeners, and turn instead to the last one shown on Bob's supposedly damnatory slide.

As the title of that section suggests, the period it concerns witnessed a second round of Canadian bank failures. It's not necessary for my purpose to delve into the details of these failures, especially since I've already done so elsewhere on Alt-M. Instead I'll simply note that once again the banks that failed were all both small and  either poorly managed or corrupt. The details are, after all, far less relevant to the matter at hand than Breckenridge's own assessment of the broad lessons to be drawn from the full record of Canadian bank failures between the Act of Confederation and his book's appearance:


If you think that's not evidence of stability, consider that during roughly the same period in the U.S., 330 national banks failed, leaving 64 percent of almost $100 million of their liabilities unpaid, and that another 1,234 state banks also failed, leaving another $120,541,262 (out of $220,629,988) in unpaid debts.*

The Genuine Greatness of the Canadian System

Despite the relatively small losses Canadians suffered from bank failures, and despite what Bob suggests in his lecture, the superiority of Canada's banking system did not consist solely of the fact that holders of Canadian bank notes and deposits generally "got their money back." Had Bob actually read Breckenridge's book with care, instead of just glancing at its table of contents, he would have noted that its last chapter, on "The Present Working of the System," includes a lengthy catalogue of the system's advantages. Here again, a detailed summary isn't necessary, for we have Breckenridge's own listing of those advantages in his book's final paragraph. With the help of a little reading between the lines, that paragraph can also be taken to represent Breckenridge's personal verdict on Canada's free banking system.


The Moral

There are two, actually; and I hope those who have heard or plan to listen to Bob's lecture will take each of them to heart. The first is that you can't judge a book by its table of contents. The second is that you should never let a little fooling interfere with your education.


*Available evidence also shows that the ratio of Canada's stock of bank money (commercial banknotes and demand deposits) to its high-powered money stock (gold and Dominion notes) was extremely stable—and far more so than the U.S. bank-money – to – base-money ratio. Besides being consistent with the stabilizing properties of free banking I describe in The Theory of Free Banking, it suggests that any monetary contributions to Canada's business cycles were due to changes in either its stock of gold or in the government-controlled stock of Dominion notes, rather than to destabilizing changes in Canadian bank reserve ratios.