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Bagehot’s engaging naiveté

Summary:
From Asad Zaman Chapter 2 of Goodhart’s “Evolution of Central Banks” cites in detail several arguments made by Bagehot (pronounce Badge-it) in favor of a free banking system without a Central Bank. After listing them, he notes that Bagehot is “engagingly naïve”, as a gentle critique. It is astonishing that a hard-nosed practical financial analyst like Bagehot would indulge in such visionary daydreams about a “free market” system. This testifies to the power of ideology to blind one to the faults of idolized system. Here are some of the “naïve” arguments advanced by Bagehot in favor of free banking: In a competitive free banking system, every bank would maintain adequate reserves, to create credibility. Also, in case of panics, they would lend to distressed banks, in order to protect

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from Asad Zaman

Chapter 2 of Goodhart’s “Evolution of Central Banks” cites in detail several arguments made by Bagehot (pronounce Badge-it) in favor of a free banking system without a Central Bank. After listing them, he notes that Bagehot is “engagingly naïve”, as a gentle critique. It is astonishing that a hard-nosed practical financial analyst like Bagehot would indulge in such visionary daydreams about a “free market” system. This testifies to the power of ideology to blind one to the faults of idolized system. Here are some of the “naïve” arguments advanced by Bagehot in favor of free banking:

  1. In a competitive free banking system, every bank would maintain adequate reserves, to create credibility.
  2. Also, in case of panics, they would lend to distressed banks, in order to protect the financial system.
  3. This system of multiple reserves (where each bank keeps its own reserves) would be superior to a centralized system, where only one bank keeps reserves., due to the benefits of competition over monopoly.

Goodhart shows that this starry-eyed idealization of free banking is contradicted by Bagehot’s own practical experience in context of the workings of the Central Banking system.  read more

Asad Zaman
Physician executive. All opinions are my personal. It is okay for me to be confused as I’m learning every day. Judge me and be confused as well.

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