Wednesday, January 26, 2022

Applebaum's "Red Famine": 1919 Ukraine Politics Far From Dead

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3 MIN READ - Cautious Rockers may have caught on that the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff aspires to be a student of communist regimes, particularly the Soviet Union from Lenin through Stalin (1917-1953) and China under Mao Zedong through Deng Xiaoping (1949-1992).

With a present-day Russia/Ukraine crisis brewing, the Correspondent is coincidentally in the middle of Anne Applebaum’s “Red Famine,” a history of the Ukrainian Holodomor “terror famine” of 1932-33, when Joseph Stalin deliberately starved approximately four million Ukrainians to death—plus three to four million more in Kazakhstan, Azerbaijan, Armenia, Georgia, and Western Siberia—in a successful campaign to crush any resistance to occupation, Sovietization, and forced collectivization of agriculture.

Here's an excerpt from the chapter on 1919, when Vladimir Lenin first attempted to gain control over Ukraine using a divide-and-conquer form of class warfare that pitted “rich” peasant against “poor" peasant.

Although Ukrainian nationalist sentiment was strong enough to overcome the class warfare strategy, leading Stalin to starve the country into submission later instead, readers might notice the Soviets’ aborted 1919 approach is far from dead elsewhere in the modern world.

From Applebaum:

“[Bolshevik People’s Commissar of Food Collection in Ukraine Alexander] Shlikhter chose a more sophisticated form of violence. He created a new class system in the villages, first naming and identifying new categories of peasants, and then encouraging antagonism between them….”

“…The Bolsheviks, with their rigid Marxist training and hierarchical way of seeing the world, insisted on more formal markers. Eventually they would define three categories of peasant: kulaks, or wealthy peasants; seredniaks, or middle peasants; and bedniaks, or poor peasants. But at this stage they sought mainly to define who would be the victims of their revolution and who would be the beneficiaries…”

“…Very quickly, the kulaks became one of the most important Bolshevik scapegoats, the group blamed most often for the failure of Bolshevik agriculture and food distribution. While attacking the kulaks, Shlikhter simultaneously created a new class of allies through the institution of ‘poor peasants’…”

“…Under his direction, Red Army soldiers and Russian agitators moved from village to village, recruiting the least successful, least productive, most opportunistic peasants and offering them power, privileges, and land confiscated from their neighbours. In exchange, these carefully recruited collaborators were expected to find and confiscate the ‘grain surpluses’ of their neighbours. These mandatory grain collections – or prodrazvyorstka – created overwhelming anger and resentment, neither of which ever really went away.”

“These two newly created village groups defined one another as mortal enemies. The kulaks understood perfectly well that the komnezamy [‘poor peasant’ committees] had been set up to destroy them; the komnezamy equally understood perfectly well that their future status depended upon their ability to destroy the kulaks…”

“… Tasked with confiscating land from their wealthier neighbours, they unsurprisingly met with fierce resistance. In response, a handful of komnezam members formed an armed ‘revolutionary committee’, which, Nyzhnyk recalled, imposed immediate, drastic measures: ‘kulaks and religious groups were banned from holding meetings without the permission of the revolutionary committee, weapons were confiscated from kulaks, guards were placed around the village and secret surveillance of the kulaks was set up as well’”

“Not all of these measures were ordered or sanctioned from above. But by telling the poor peasants’ committees that their welfare depended on robbing the kulaks, Shlikhter knew that he was instigating a vicious class war. The komnezamy, he wrote later, were meant to ‘bring the socialist revolution into the countryside’ by ensuring the ‘destruction of the political and economic rule of the kulak’…”

“…At one of the low moments of the [Russian] civil war, in March 1918, Trotsky told a meeting of the Soviet and Trade Unions that food had to be ‘requisitioned for the Red Army at all costs’. Moreover, he seemed positively enthusiastic about the consequences: ‘If the requisition meant civil war between the kulaks and the poorer elements of the villages, then long live this civil war!’”

“A decade later Stalin would use the same rhetoric. But even in 1919 the Bolsheviks were actively seeking to deepen divisions inside the villages, to use anger and resentment to further their policy.”

Thursday, January 20, 2022

Free vs Regulated Banking: The United States—Crippled by Unit Bank Regulations (Part 3 of 3)

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff closes his miniseries on legal branch banking restrictions that destabilized America’s banking system, making it crisis-prone from the nation’s founding through the Great Depression. In this last installment we’ll find out what happened to those awful unit banking laws. (Hint: even the Great Depression wasn’t lesson enough for politicians to repeal them)

For those who missed unit banking's origins and perverse effects, Parts 1 and 2 are available at:


In the aftermath of the unmitigated disaster of the early 1930’s, virtually everyone in Congress knew that unit banking was a fatal weakness in America’s broken and uniquely overregulated financial system.

However even as the U.S. economy lay in ruins, unit banking forces were still strong enough to prevent meaningful reform. Instead of throwing out the destabilizing regulations, pro-unit bank politicians not only succeeded in preserving the broken framework, but even managed to pass additional unit bank protections at the federal level.

Within the 1933 Glass-Steagall Act’s many provisions, unit bankers got Regulation Q passed which prohibited banks from paying interest on deposits. The official rationale was that paying interest on deposits inclined banks to make higher yielding, riskier loans. 

But the real impetus was limiting competition. Unit banks with monopolies in local areas were becoming more worried about competition as the automobile was replacing the horse, making it easier for customers to do regular business with other banks at greater distances. Unit banks wanted to make neighboring banks two counties away less attractive by prohibiting the competitive tactic of paying interest to pick off customers.

More consequential was the establishment of federal deposit insurance, another provision of Glass-Steagall. 

Instead of protecting depositors by legalizing unrestricted branching and greater loan diversification, unit banks wished to avoid the prospect of new competition by preserving the fragile unit banking system but laying depositor risk at the feet of the FDIC instead. 

Indeed, according to Charles Calomiris at Columbia University, between 1880 and 1933 there had already been 150 attempts in Congress to pass federal deposit insurance legislation, nearly always introduced by representatives from unit banking states. Every proposal had failed, but the crisis atmosphere of the Great Depression finally delivered unit banks the legislative victory they had unsuccessfully sought for fifty years.

Deposit insurance is a complicated subject. Not only is deposit insurance unnecessary in an already stable, unrestricted system such as Canada's, it also introduces moral hazard since banks can offload responsibility for their depositors onto the insurance fund. Indeed, Canada had no deposit insurance until 1967 and never experienced a banking crisis.

However, given the weaknesses created by legal restrictions on branching in the United States, combined with the destabilizing machinations of the Federal Reserve, post-1933 federal deposit insurance did go a long way towards stemming future bank runs from nervous depositors. Milton Friedman and Anna Schwartz commented in their treatise that:

“Federal insurance of bank deposits was the most important structural change in the banking system to result from the 1933 panic, and, indeed in our view the structural change most conducive to monetary stability since state bank notes were taxed out of existence immediately after the Civil War.”

-A Monetary History of the United States, 1867-1960 (1963)

Unfortunately, although it was FDIC member banks that paid into the fund, not taxpayers, it was ultimately prudent banks that ended up subsidizing reckless banks when the latter failed. And the taxpayer was forced to fund deposit guarantees in the early 1990's when the FSLIC became insolvent during the S&L Crisis.

Therefore it should be no surprise to readers that the name Steagall in the Glass-Steagall Act belonged to Congressman Henry Steagall of Alabama, a unit banking state. 

Steagall’s primary interest when drawing up 1930’s banking “reform” was protecting the revenue stream of his own state’s legislature and protecting Alabama unit banks from outside and intrastate competition. From his powerful chairmanship on the House Committee on Banking and Currency he was able to not only save the unstable unit banking system, but bolster it as well with new anti-competitive and bailout measures.

Even Wikipedia understands Steagall's motives in its article on the 1933 Banking Act:

"...the Glass bill passed the Senate in an overwhelming 54-9 vote on January 25, 1933... In the House of Representatives, Representative Steagall opposed even the revised Glass bill with its limited permission for branch banking. Steagall wanted to protect unit banks, and bank depositors, by establishing federal deposit insurance..."


The dysfunctional unit banking system only began to fray slightly in the 1950’s as large banks attempted to use holding companies as workarounds to bypass interstate branching regulations. 

But once again unit banking political forces countered, getting the Bank Holding Act of 1956 passed which decreed bank holding companies headquartered in one state were banned from acquiring a bank in another state.

It was only during the inflation of the 1970’s that the regime finally began to unravel. Unable to pay interest on deposits due to Regulation Q of Glass-Stegall, banks began to lose customers as inflation reached high single and double-digit levels. This was the age when banks compensated for lack of interest on deposits by offering laughable gifts like toasters to open a new account. Faced with the existential threat to the industry Regulation Q was finally repealed under the Depository Institutions Deregulation and Monetary Control Act of 1980.

The political power of unit banking forces also waned in the latter 20th century as the United States became more urbanized. City dwellers weren’t as willing to put up with just one or two banks as rural residents, and the cities’ voters were by now outnumbering the countryside’s. At minimum more and more states were allowing wider intrastate competition (see progression to 1990 in attached chart).

The next nail in the coffin was ATM’s. In 1983 when Buffalo-based Marine Midland Bank installed a grocery store ATM that participated in an interstate ATM network, the Independent Bankers Association recognized the nascent threat and filed suit claiming the ATM violated intrastate and interstate branch banking laws. 

The case went to the Supreme Court which ruled, by a single vote, that an ATM is not a branch office and is therefore legal. Legally deemed “not a branch,” ATM’s began popping up everywhere, dispensing cash and accepting deposits on behalf of banks all over the country.

With the S&L Crisis of the 1980’s the federal government repealed certain interstate restrictions within the 1956 Bank Holding Act and states began allowing out-of-state banks to acquire their failing institutions in interstate reciprocal merging agreements. Between 1984 and 1988 thirty-eight states entered such agreements. 

The writing was on the wall for unit banking as the states themselves, having long since enacted their own income taxes, were prioritizing saving their banks and S&L’s over maintaining intrastate monopolies.

The last remaining vestiges of unit banking were finally repealed when the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was signed into law by President Bill Clinton, making nationwide branching fully legal. 

However, in a cruel irony, buried within the legislation that finally closed the chapter on two centuries of destabilizing interstate banking restrictions lied a mandate that federally chartered banks must submit to Community Reinvestment Act (CRA) compliance reviews to receive permission to expand their branch networks or venture into other lines of business.

If federal regulators deemed a bank wasn’t making enough loans in low-income areas or to low-income borrowers, it denied that bank’s request to branch, effectively reverting back to the anti-branching arrangement they were supposed to end.

So Congress traded one destabilizing bank regulation for another destabilizing bank regulation, the latter being a major contributor to the 2008 financial crisis. By 2007 over $6 trillion in loan commitments were made by banks under Community Reinvestment Act mandates with over $1 trillion of actual money loaned out.


And if you think unit banking was bad enough for America, brace yourself. It was only one of a plethora of state and federal regulatory restrictions that weakened the nation’s banking system.

Stay tuned for the next Free vs Regulated Banking chapter where we’ll discuss America’s first two central banks—the abortive First and Second Banks of the United States—which spawned several banking panics themselves. 

And after that we’ll examine the federal government’s dreadful National Banking System of 1862-1913 which vaulted America into a dubious first place: the industrialized world’s undisputed champion of banking crises.

Wednesday, January 19, 2022

Energy Update from Britain: U.K. Power Regulator Approves 50% Rate Increase

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A British retail energy update from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

(Note: The Correspondent is aware that the U.K. is technically Great Britain plus Northern Ireland but uses the names interchangeably here. Apologies to U.K. readers over technical geographic errors)

Three months ago the Economics Correspondent reported that over a dozen British power suppliers had failed in just a month.

The problem? Wholesale oil and natural gas prices were rising, but British power regulator Ofgem (Office of Gas and Electricity Markets) had capped retail power rates, prohibiting utilities from raising prices to compensate for their higher input costs.

The dilemma closely paralleled California’s similar 2000 disaster when wholesale prices soared on California utilities but “deregulation” rules from Sacramento prevented them by law from raising prices on consumers.

California’s endgame? Rolling blackouts, the bankruptcy of Pacific Gas and Electric, and a last-minute government bailout to save Southern California Edison from failure.

If you missed it you can read more about Britain’s 2021 woes and California’s 2000 disaster on the Correspondent’s blogsite at:

Well now the news has improved slightly in Britain… slightly. The government has finally allowed power suppliers to raise prices by 50% and the number of households that will fall into the government’s definition of “fuel poverty” will triple.

You read that right. Triple. Read more details at:

So what could the good news possibly be?

With higher rates consumers will finally have an incentive to conserve, cold winter mass rolling blackouts will be avoided, and the rate of retail supplier failures will slow considerably if not stop.

(there were 23 British power supplier bankruptcies by late November, 2021 although more could have gone bust since then).

But what could be good for consumers themselves about their power bills going up 50%? 

Well in the short run it’s going to hurt. But soaring power bills are also going to give British consumers a tiny preview of what life will be like if the U.K. continues full throttle with its ongoing green energy initiatives. Prices are soaring because renewables can’t provide enough supply for the British winter, and the politically engineered scarcity of oil, gas, and coal is manifesting itself in the form of skyrocketing rates.

See this climate website bragging that renewables supplied more electricity than oil, gas, and coal combined in 2017. We feel so progressive fighting global warming… but also so cold!

Now that British household budgets are tasting winter under a semi-woke green energy power grid, maybe they’ll think twice about going totally woke green and reconsider the planned full cancellation of oil, gas, and coal—assuming they don’t want to see their power bills rise 100%, 200%, or 500% more in future winters to come.

Friday, January 14, 2022

Free vs Regulated Banking: The United States—Crippled by Unit Bank Regulations (Part 2 of 3)

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“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 in handling commodities as liquid as money or credit. A bank system without branches is on par with a city without waterworks or a country without a railroad so far as an equable distribution of credit is concerned.”

-E.L. Patterson—Canadian Bank of Commerce Superintendent—from his book “Banking Principles and Practice” (1917)

8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff discusses more perverse consequences of legal restrictions on branch banking that plagued the United States economy for over 150 years.

In Part 1 we reviewed late 18th and early 19th century America’s political origins of legal restrictions on interstate banking and the establishment of mandated “unit banks” which could only operate from a single office.

As we left off, the Economics Correspondent discussed five negative consequences of unit banking laws, particularly those that fomented frequent financial crises and widespread failures. 

To review go to:

In Part 2 we’ll cover six anti-competitive, anti-consumer repercussions of bank branching restrictions and measure up its performance against Canada’s unrestricted, nationally branched system.

While reading bear in mind this discussion takes place within the context of media and political accusations of U.S. banking being “laissez-faire” and “unregulated” during the 19th and early 20th centuries.


How do unit banking laws work against the interests of borrowers and consumers?

1) Lack of competition and underbanking.

It probably seems obvious that state governments drawing artificial lines around bank monopoly fiefdoms leads to less competition and it certainly did. However a specific example may illustrate just how underserved Americans were under such state restrictions.

In 1800 the four largest cities in America were New York, Philadelphia, Boston, and Baltimore with populations of roughly 72,000, 41,000, 27,000 and 25,000 each.

Due to restrictive banking laws each of those cities had only two banks at the time.

Canada had no commercial banks in 1800, but at the turn of the next century remote western Canada was spotted with tiny, disparate towns. The typical incorporated township of Alberta, Saskatchewan, Manitoba, or British Columbia averaged about 900 people. The same typical 900-resident township also averaged two competing bank branches (ie. two banks) operating from large headquarters in Toronto or Montreal.

Sadly for Americans, the average citizen of Medicine Hat, Alberta or Moose Jaw, Saskatchewan had as many banking choices in 1905 as Americans in New York City and Philadelphia in 1800, despite having only 2% or 3% of the population and even less commercial activity.

2) Immobility of investment capital.

Depositors in, say, Ohio may have been ardent savers, but due to interbank prohibitions their capital couldn’t fund booming railroads in Missouri. The savings of consumers in one state frequently sat unused while promising enterprises in other states starved for capital.

The Correspondent hasn’t found much material on this theory, but he suspects commercial interstate banking restrictions gave rise to the investment banking industry during the industrialized Gilded Age and made men like J.P. Morgan very wealthy. How a Gilded Age icon like Bethlehem Steel could have grown so dominant from Scranton, Pennsylvania when even intrastate capital movements were so restricted suggests the company likely sought funding from outside the commercial banking sector.

3) Geographically irregular interest rates.

Since large savings in one state were unavailable for industrial projects in other states, the United States became a patchwork of inconsistent interest rates where bank customers of one state paid several percentage points more than their neighbors across the border. Once again, in Canada where banks branched unrestricted throughout the entire country, interest rates were very comparable no matter what province the borrower lived in.

4) An inefficient, high-cost business model.

Branch banking is a very efficient system where primary functions such as accounting, loan processing, and collections can be centralized at a home office. In the 19th century branch offices were cheap to operate, needing only some specie, till cash, a teller, and perhaps a lending officer.

Under U.S. unit banking administrative functions had to be duplicated across thousands of disparate unit banks. This high cost of decentralization led to higher interest rates and less credit for consumers.

5) Depreciating private banknotes.

Under unit banking, a small local bank in Norfolk, VA would accept a gold or silver specie deposit and issue a banknote claim to its customer. As the banknote was spent, circulated through the economy, and moved further and further from Norfolk its value depreciated.

If the Bank of Norfolk's note was deposited at the Bank of St. Louis, the depositor might only get 90 cents on the dollar. The Bank of St. Louis had no idea if the Bank of Norfolk was a real institution, if it was still in business, if it had sufficient gold reserves to make good on the note, and there was a cost associated with sending the note back to Virginia and from there the gold coin back to Missouri.

Eventually innovative banknote gathering and redemption institutions such as the New England-based Suffolk Bank sprang up, going around the country and collecting disparate banknotes for over 99 cents on the dollar before delivering them to their bank of issuance for redemption.

But no Suffolk Bank was ever necessary in Canada where all banknotes were accepted virtually at par. A Bank of Toronto note issued in Ontario might find its way to deposit at the Bank of Halifax in Nova Scotia at which point it was accepted at 99 and more often 100 cents on the dollar.

Why so easy? Because the Bank of Toronto had a branch office in Halifax right across the street! And both banks had nationwide branch networks that allowed notes and reserves (both their own and their competitors') to move effortlessly throughout the country.

Large national branch networks made depositing even a Bank of Montreal note in Vancouver, BC the same as depositing it in Montreal, Quebec—much how we take effortlessly depositing a Bank of America check (headquartered in Charlotte, NC) at a Citibank branch in Los Angeles for granted in 2022.

6) Finally, there’s wildcat banking.

Wildcat banking is a favorite complaint of alleged deregulation for both New York Times columnist Paul Krugman and Joe Biden's Fed Vice Chair nominee Lael Brainard.

During a limited period of the 19th century new banks would spring up in more remote states and overissue notes, often sending their agents cross-country to eastern cities like New York and Boston to buy up assets. Wildcat bankers assumed, often correctly, that eastern banks wouldn’t go through the trouble of sending their notes long distances to the remote middle of nowhere for redemption.

Overissuance by wildcat banks has been exaggerated as a problem given that scholarly estimates place the total number of wildcat banks at “as low as several dozen and no higher than 173” (Selgin) out of some 2,450 banks chartered between 1790 and 1862.

Furthermore “wildcat banking” only plagued five states, in each case for only a couple of years, and uncoincidentally all five states were highly restricted or unit banking states.

Which leads to the one of the strongest of the many counterarguments debunking the “endemic wildcat banking problem” thesis: 

Far from being the consequence of deregulation it was precisely bad interstate banking legal restrictions that made wildcat banking attractive to shady operators to begin with. Had New York and Boston banks been allowed to branch out of state, any wildcat banknote they received would quickly find its way back to its origin demanding prompt redemption through their large branch networks.

Eventually the Suffolk Bank mitigated the wildcat banking problem, but as usual Krugman gets it completely backwards by blaming lack of government oversight. Deregulated Canada never had any meaningful wildcat banking problems. During most of its free banking era Canadian banks voluntarily agreed to accept each other’s notes at par precisely because they knew other banks had wide branch networks. Any distant bank that considered engaging in wildcat practices was aware that none of its notes would stay far away for very long, thanks to the extensive branch networks of its competitors.

In Canada there were no anti-branching laws to prevent reputable banks from keeping disreputable ones in check.


Unit banking reigned supreme in the United States from its founding, and the political alliance between local banks and state governments was a strong one for nearly two centuries. While it lasted it codified such a disparate and fragile system that the U.S. easily fell into panic during economic downturns—fifteen times from 1792 to 1933—while Canada never had a systemic crisis.

That’s worth repeating. From 1792 to 1933 the United States, bogged down by restrictive unit banking laws that kept banks tiny, weak, undercapitalized, and undiversified, experienced fifteen banking panics. Canada, with no bank branching restrictions and the industrialized world’s most deregulated system from 1845 to 1935, experienced zero systemic panics.

By the dawn of the Great Depression politically powerful unit banking forces even convinced Congress to pass the 1927 McFadden Act which cemented the ban on interstate bank branching at the federal level.

By 1929, 32 of America’s 48 states either restricted bank branching to a small, localized region or prohibited branch banking entirely. Only a third of states allowed unrestricted intrastate banking, and banking across state lines was prohibited by both 100% of states and the federal government.

Therefore it’s no surprise that the hardest hit states during the Great Depression’s banking panics were unit bank states. In California, a state that permitted unrestricted intrastate branching and the first state in the U.S. to reach more branches than bank companies, the incidence of failures of widely branched banks was less than one-fifth that of the entire country according to Carlson and Mitchener (2007). George Selgin of the University of Georgia has argued there were no California bank failures in the early 1930’s, but the Economics Correspondent has not yet corroborated that conclusion.

Also in the tumultuous early days of the Great Depression nearly 10,000 U.S. banks failed in the mother of all banking panics. Nearly all were unit banks and the tragedy occurred under the watch of America’s central bank, the Federal Reserve.

In Canada, where full nationwide branching was always legal, no central bank existed yet, and the country was hit every bit as hard by the depression, zero banks failed.

That’s also worth repeating:

USA: Unit bank and interstate bank restrictions + monopoly central bank of issue = nearly 10,000 bank failures.

Canada: Free, nearly laissez-fare deregulated banking industry and no central bank = zero bank failures.

In the next installment we’ll wrap up with what became of unit banking regulations after the Great Depression that they had such a large hand in creating.

Monday, January 10, 2022

Someone Took Away the Fed’s Snooze Button. Now It Might Cause an Accident Rushing Late to Work.

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Pre-pandemic Federal Open Market Committee meeting

3 MIN READ – It’s no secret that the Fed was at least nine months behind the inflation curve in 2021, insisting for far too long that inflationary pressures were “transitory” even as it pushed the money supply, as measured by M2, up another 13% during the calendar year.

However the Cautious Optimism Correspondent for Economic Affairs and Other Egghead stuff is... well, cautiously optimistic that the Fed has finally woken up, now takes the inflation problem at least halfway seriously, and that a repeat of the 1970’s stagflation decade is extremely unlikely.

Recent notes from the December Federal Open Market Committee meeting reveal members considering raising “the federal funds rate sooner or at a faster pace than participants had earlier anticipated.” (from

And “some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate.”

Note they’re no longer talking about "tapering asset purchases" which is effectively expanding the balance sheet albeit at a slower pace than before. The conversation has changed to "reduce the size of the balance sheet" which means selling assets, a complete reversal of the FOMC's policy of the previous two years.

How quickly things have changed.

Accelerating rate hikes in 2022 is also a big turnaround given since mid-2020 the Fed has been saying interest rates will stay at zero through at least the end of 2022.

Even as recently as March of 2021 the Fed was signaling zero or near-zero interest rates through 2023.

Again, how quickly things have changed… now that they’ve woken up.

And what about a repeat of the 1970’s?

For those old enough to have memories of the “stagflation” decade, when one dollar in 1971 retained only 38 cents of purchasing power by 1983, it’s important to remember that the Arthur Burns and G. William Miller Feds were both full-throttle Keynesian—guided by that macroeconomic school that dominated government policy for nearly half a century (1936-1980).

Following their Keynesian playbook the 1970’s Fed deliberately printed money faster and faster every year, even in the face of rising inflation, in the belief that higher inflation was a good thing that would usher in full employment and faster economic growth "any moment now."

It famously failed, with Americans’ pocketbooks paying the price for their mistake.

So the 1970’s inflation wasn’t about being nine months slow waking up to the consequences of keeping a crisis-policy in place for too long. It was a decade-plus-long deliberate act, even in the face of consistently high-single digit and low-double-digit inflation, all in the Keynesian belief that “inflation might be high, but just a little more will fix all our problems... any moment now.”

Paul Volcker put an end to the insanity in 1981 when he was forced to raise interest rates to 21% to kill the monster of the Fed’s own creation.

The Economics Correspondent believes the Jerome Powell Fed is not the Arthur Burns or G William Miller Fed of the 1970’s.

Now that the mystery of whether the Fed will wake up and act seems to be answered, the pressing question of the next phase is:

1) Will the Fed have to make up for lost time and hike so aggressively that it precipitates a recession? Like the worker who oversleeps and speeds to work, causing an accident?

2) Or will the Fed be so worried about rate hikes creating a recession that it only taps the brakes a little, allowing inflation to keep running well above 2%?

Either way, by hitting the snooze button so many times the Fed has created quite a predicament for itself. It now faces the delicate task of slowing down its own inflation without tanking the economy in the process.

And if the Fed can’t find a way to thread that needle perfectly, then either persistent inflation or a recession will fall right into the Biden administration’s lap which in turn will get most of the political blame.

The consequences won’t entirely be the Biden White House's fault. It’s still mostly, but not all, the Fed’s.

But plenty of previous Republican presidents have also fallen victim to the same Fed missteps including Ronald Reagan who had to eat the 1981-82 Volcker recession (when unemployment peaked at 11.0%) and George H. W. Bush when Fed rate hikes produced the early 1990’s recession that, along with breaking his "no new taxes" pledge, cost him a second term.

Another Fed rate-hike campaign burst the 2000 dot-com tech bubble and handed George W Bush a recession just as he entered office, and an even more aggressive series of rate hikes burst the housing bubble triggering the inevitable financial crisis right before he left.

Meanwhile Bill Clinton entered office right as the Fed had cut rates and left them low for nearly eight years. And Barack Obama got the same benefit with zero interest rates at the start of his tenure which stayed near zero for both of his terms.

So sooner or later the law of averages was bound to catch up to a Democratic president who has to eat bad Fed policy too. The last one was Jimmy Carter in 1980.

(see St. Louis Federal Reserve Fed Funds chart for history of interest rates and recessions)

Thursday, January 6, 2022

Free vs Regulated Banking: The United States—Crippled by Unit Bank Regulations (Part 1 of 3)

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff launches an analysis of the history and destructive impact of destabilizing regulations in American banking, starting with the nation's founding.

Unit vs Branch Banking (click to enlarge)

Since the 2008 financial crisis America’s newspapers, news networks, and most elected officials and academics have cited the debacle as a reminder to the public: Deregulating banks leads to destabilization and panic while government regulation promotes smoothly functioning finance.

Aside from the problem that in the three decades prior to 2008 American banks were subject to four new government regulations for every one removed or rewritten (Horwitz, Boettke - 2010), the real fallacy from the experts is they seem completely unaware that the entire history of North American banking demonstrates precisely the opposite.

Namely, during the second half of the 19th and early 20th centuries the United States operated the industrialized world’s most regulated banking system while its northern neighbor Canada possessed the second freest (1817-1844) and then most laissez-faire banking system (1845-1935).

The results were the opposite of what the “experts” causally assume: During Canada’s 118-year “free banking" era the United States endured at least thirteen bona fide banking crises while Canada had zero.

History provides firm and easily understood reasons for this contrast, but you’ll never hear our politicians or the New York Times mention it. So read on to learn more about why America’s most regulated banking system was also the world’s most crisis prone.


“At the start of the [20th] century, virtually all states maintained unit banking laws, which restricted banks from opening subsidiary offices called branches.”

-Russell Settle, “The Impact of Banking and Fiscal Policies on State-level Economic Growth.” (1999)

In America’s early days banking was an infantile industry. The Constitution didn’t grant the federal government authority to charter banks, therefore that function fell to the states.

Furthermore, there was no income tax and the Constitution granted exclusive power to levy tariffs to the federal government, so from the very beginning the states were pressed to find a reliable source of revenue.

These two constitutional restrictions led the states to zero in on an obvious revenue target: banks. By the 1790’s legislatures were imposing rules and restrictions on America’s handful of banks to guarantee a flow of funds into their government coffers.

The first step was to demand financial favors from banks in exchange for permission to open as a limited liability enterprise. To secure a new charter, banks paid handsome fees to state legislatures. 

Charters were also granted on a temporary basis by design. To renew a charter, banks then had to pay a hefty fee or “bonus.”

Banks also agreed to lend plentifully to state legislatures at reduced interest rates. One mechanism for realizing this arrangement was a common restriction that banks were prohibited from issuing paper currency unless fully backed by state government bonds—an arrangement the federal government would duplicate during the Civil War with truly disastrous results to be covered in a future article.

State governments also secured revenue by becoming bank shareholders. As legislatures were typically short of money they passed laws requiring banks to lend them the investment funds which were plowed right back into shares of bank stock. The loan was then slowly repaid over time out of dividend payouts.

By the 1830's the states were collectively receiving one-third of their revenue from these crony bank/government arrangements (Sylla, Ledger, Wallis - 1987).

These business-government partnerships may already sound like fertile ground for corruption and they were, but how did all these regulations lead to banking instability?

With the states’ financial interests now aligned with those of the banks, legislatures had strong incentives to keep in-state banking highly profitable and free from competition.

Thus began the rise of interstate banking restrictions and unit banking laws.

Every state in the USA, from its early days to well into the mid-20th century, adopted interstate banking restrictions that prohibited any bank incorporated in one state from opening a branch office in another state.

The fiscal logic was sound: Why allow an out-of-state bank onto your turf? Their profits will be redirected to another state treasury. And the added competition will lower your own banks’ profits and therefore your state government’s as well.

Many states went further and restricted branching even within their own borders.

Two venerable banks, both of which claim to be the nation’s oldest still in operation—the Bank of New York (today Bank of New York Mellon Corporation) and the Bank of Massachusetts (today part of Bank of America)—opened in 1784 and were granted state-sanctioned monopolies within New York and Boston respectively.

A broader example is Pennsylvania’s 1814 Omnibus Banking Act which divided the state into 27 regions and allowed 41 bank charters, each region being limited to just one or two banks.

From the politician’s standpoint, why allow too much banking competition even inside your own state? It will only water down profits and deplete payments to your treasury.

But many states went even further than Pennsylvania and became “unit bank” states, meaning by law a bank could only have one office and no branches whatsoever. Statutory language often specifically mandated “no more than one building” allowed for a bank’s operations. Thus entire states were dotted with dozens and eventually hundreds of local bank monopolies.

Unit bankers liked this rent-seeking arrangement too. Why not pay the politicians off if they grant you a local monopoly? You never have to worry about another bank moving into your market and stealing your customers.

Far from the laissez-faire mythology portrayed by today’s media and uninformed intellectuals, American banking began as an exercise in mercantilism writ large, not surprising considering it was during this same period that England was blocking its own banks from growing too large or branching.

But as the U.S. was about to learn, unit banking comes with huge liabilities and downsides.


The name “unit banking” may sound unexciting and fall short of inspiring great interest, but it’s hard to understate the strain these laws placed upon the U.S. banking system for over 150 years.

Unit banking’s legal restrictions fomented multiple stability and commercial development problems for the nation..

In his study on the subject the Economics Correspondent has unveiled eleven in particular, although there could be more. Five promote instability and panics while six simply retard economic growth and work to the detriment of consumers.

To wrap up this column we’ll discuss the five destabilizing problems and save the remainder for the next installment.

1. No loan diversification.

This may be the most self-evident. If a bank has only one office in a local town and is forbidden from branching then its fate lies entirely with the local economy. Unit banks all across Iowa can easily fail if the price of corn plummets, banks on the Canadian border can fail if a new tariff reduces bilateral trade, or banks throughout mining towns can collapse if the demand for the local ore falls.

In Canada, where unit banking restrictions didn’t exist and banks quickly branched across the country, loan portfolios were highly diversified and risk was spread across geographic regions which in turn promoted systemic resilience.

2. No deposits diversification.

A unit bank in a small town could be heavily dependent on one or two wealthy locals for its deposit base. During a downturn one large withdrawal could ruin the bank unless it held an oversized silver/gold reserve. And taking that precaution meant less lending and an underbanked community whose economic development was stunted.

Widely branched banks in Canada collected deposits from vastly more customers from across the country.

3. Talent and regulators spread too thin

In Marcus Nadler and Jules Bogen’s “The Banking Crisis: The End of an Epoch,” unit banking is criticized as fundamentally lacking since "No country boasts enough talented banking management to supply several thousand individual institutions with able direction." 

It’s a lot harder to find competent presidents and executives for 20,000 banks than a few hundred banks or a few dozen.

Moreover, to the extent one supports government regulation of banks, unit banking makes that task extremely difficult. As Nadler and Bogen point out, overseeing 20,000 unit banks "is in practice an impossible task for the regulatory authorities.” Fraud and shenanigans are much more likely to be overlooked when regulators have to track thousands of firms.

4. Immobility of reserves during financial distress

In times of turmoil unit banks experiencing deposit runs lived or died on their own reserve base, and frequently failed. But a widely branched bank, as was common in Canada, could easily move reserves from a prosperous part of the country to a distressed one.

If depositors in Manitoba worried they might not be able to withdraw specie as the falling price of wheat and nonperforming farm loans stressed local banks, a nationally branched bank could transfer reserves from its branches in a booming shipping area like Nova Scotia. After a few days customers would notice withdrawals proceeding smoothly without bank closings, regain their confidence, and redeposit their money. A crisis was averted.

No such accommodation was possible under U.S. unit banking and bank runs often led to bank failures or at minimum widespread suspension of withdrawals.

5. Lack of coordination between banks during financial distress

Canada’s smaller number of large, nationally branched banks participated in a mutual clearinghouse system and communicated regularly. If one bank experienced liquidity issues, other banks would often agree to make emergency loans or even acquire the bank. This was in all their interests to stem a wider panic, and if the troubled bank was still solvent such an emergency loan or buyout could even be profitable.

Was interbank communication as good in the United States?

Consider that in 1914, coincident with the establishment of the Federal Reserve System, the United States had over 27,000 banks of which 95% had no branches (!) and the remainder had an average of only five branches (!), the product of unit banking regulations.

Under such a fractured and divided system not only was it impossible to coordinate emergency lending among thousands of banks, buyouts and large-scale capital were also impeded from crossing state lines. It was virtually impossible for a larger, healthy commercial bank in New York City to rescue or acquire a small, distressed bank in Nebraska which in turn failed.

The best the U.S. could do was rely on investment bankers, who weren’t bound to commercial bank rules, to coordinate what rescues and buyouts they could as J.P. Morgan did famously during the great Panics of 1893 and 1907.

However even J.P. Morgan couldn’t coordinate rescues among 27,000 banks in times of distress. It was just too many institutions and sets of books to pore over in the heat of an emergency.

In the next installment we’ll review the six remaining problems created by unit banking and its macroeconomic consequences.

Monday, January 3, 2022

Free vs Regulated Banking: Introduction to the United States vs Canada

Click here to read the original Cautious Optimism Facebook post with comments

3 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff reopens his series on free versus regulated banking, this time focusing on the contrasting financial histories and banking systems of the United States and Canada.

Last year the Economics Correspondent posted several articles challenging the widely assumed view that very lightly regulated or even unregulated banking systems are inherently unstable and crisis-prone, while regulations and government interventions promote banking stability.

By “very lightly regulated” or “unregulated banking” the Correspondent means:

-No monopoly central bank

-No government-controlled fiat money

-No government-granted bank privileges

-No government backstops or bailout loans

-No government restrictions on banknote issuance

-No government restrictions on number of bank shareholders or partners

-No government restrictions on bank branching

-No government bondholding requirements 

-No low-income lending mandates

-No government sponsored enterprises (GSE’s) buying, repackaging, and guaranteeing private loans

-No compulsive government deposit insurance

As evidence the Economics Correspondent produced histories chronicling Scotland’s nearly 100% deregulated “free banking” era of 1716-1845, under which that country experienced zero systemic crises, and England’s heavily regulated system which included the privileged and later monopoly Bank of England and endured at least ten systemic crises during the same period.

Great Britain during Scottish free banking (1716-1845):

-English crises: 1721, 1745, 1772, 1783, 1793, 1797, 1810, 1815, 1825, 1837

-Scottish crises: None

(readers interested in more details on the English and Scottish experiences can find links to the archived articles in the comments section)

Starting this January we’ll examine the parallel experience of North America when Canada, whose banking industry was very lightly regulated and had no central bank until 1935, experienced zero banking panics during its own “free banking” era of 1817-1935. Within the same period the United States, with a slew of perverse bank regulations and three central banks (1791-1811, 1816-1836, 1914-present), endured at least thirteen systemic crises.

North America during Canadian free banking (1817-1935):

-U.S. crises: 1819, 1837, 1839, 1857, 1873, 1884, 1890, 1893, 1896, 1907, 1930, 1931, 1933

-Canadian crises: None

Furthermore, prior to the 1817 founding of Canada’s first commercial bank, the Bank of Montreal, the United States suffered two more bona fide crises in 1792 and 1797 and has endured two more crises since 1933: the 1980’s S&L Crisis and the 2008 Great Financial Crisis, bringing its total to seventeen.

Some economists argue the United States also suffered from banking crises in 1861, 1901, and 1921, but the impact of those disruptions on the financial system was more limited.

But surely, according to Paul Krugman of the New York Times and Modern Monetary Theorists such as Warren Mosler and Mike Norman, America’s lousy record of banking panics can't be blamed on regulation. Rather the problem had to be that antiquated, unstable gold standard.

Well, aside from the problem that Canada and Scotland also operated on the gold standard during their crisis-free, free banking eras, the entire world has been far more unstable in the modern era of fiat money and government central banks than under gold.

During the classical gold standard period of 1875-1913, the most honest gold standard ever allowed by most governments, a total of ten financial crises occurred worldwide in five countries. Unsurprisingly, seven of them were in the heavily regulated United States (5) and Great Britain (2).

In the four decades since the end of the Bretton Woods international gold standard (1971-2010), where fiat money has reigned supreme while governments and their central banks regulate financial systems more than ever before, the world has entered an unprecedented era of crisis with 107 financial crises in 83 countries (Calomiris, Columbia University).

Classical gold standard era (1875-1913): 10 crises in 5 countries.

Fiat money, central bank era (1971-2010): 107 crises in 83 countries.

Finally, during the most tumultuous years of the Great Depression (1929-1933) the United States, with a regulatory “lender of last resort” central bank—the Federal Reserve System, was decimated by nearly 10,000 bank failures. In Canada, which had no central bank and scant few regulations and whose economy was hit just as hard as the United States, zero banks failed.

The United States and its banking history will be discussed first in forthcoming columns.


To read the Economics Correspondent’s histories of the crisis-prone English and remarkably stable Scottish banking systems, go to:

-Free vs Regulated Banking: Introduction and Orthodoxy

-England Part 1: The Bank of England's founding and Six Partner Rule restrictions

-England Part 2: Post-Napoleonic Wars banking reform and Peel's Act of 1844

-England Part 3: England finally achieves financial stability under Bagehot's Dictum

-England Addendum: Bagehot’s Dictum and modern central bankers

-Scotland Part 1: Scottish free banking’s origins, competition, and innovation

-Scotland Part 2: Risk, stability, and economic development under free banking

-Scotland Part 3: Regulation and the end of Scottish free banking

-Scotland Part 4: The controversy of Scotland's 1797 suspension