Thursday, February 12, 2009

Economic History and the Banking Crisis

Some of the recent trouble in the Irish banking system might have been avoided if the warnings of one of Ireland's great economists had been heeded. Richard Cantillon (1680-1734) was likely referring to the Mississippi Bubble in France (1719-20), but he could have been writing about the current crisis. His "Essai Sur la Nature du Commerce en Général" ends with the following paragraph:

"It is then undoubted that a Bank with the complicity of a Minister is able to raise and support the price of public stock and to lower the rate of interest in the State at the pleasure of this Minister when the steps are taken discreetly, and thus pay off the State debt.

But these refinements which open the door to making large fortunes are rarely carried out for the sole advantage of the State, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation, because being used for the buying and selling of stock they do not serve for household expenses and are not changed into silver.

But if some panic or unforeseen crisis drove the holders to demand silver from the Bank the bomb would burst and it would be seen that these are dangerous operations."

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