Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772

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9780674088887: Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772

From 1716 to 1845, Scotland’s banks were among the most dynamic and resilient in Europe, effectively absorbing a series of adverse economic shocks that rocked financial markets in London and on the continent. Legislating Instability explains the seeming paradox that the Scottish banking system achieved this success without the government controls usually considered necessary for economic stability.

Eighteenth-century Scottish banks operated in a regulatory vacuum: no central bank to act as lender of last resort, no monopoly on issuing currency, no legal requirements for maintaining capital reserves, and no formal limits on bank size. These conditions produced a remarkably robust banking system, one that was intensely competitive and served as a prime engine of Scottish economic growth. Despite indicators that might have seemed red flags―large speculative capital flows, a fixed exchange rate, and substantial external debt―Scotland successfully navigated two severe financial crises during the Seven Years’ War.

The exception was a severe financial crisis in 1772, seven years after the imposition of the first regulations on Scottish banking―the result of aggressive lobbying by large banks seeking to weed out competition. While these restrictions did not cause the 1772 crisis, Tyler Beck Goodspeed argues, they critically undermined the flexibility and resilience previously exhibited by Scottish finance, thereby elevating the risk that another adverse economic shock, such as occurred in 1772, might threaten financial stability more broadly. Far from revealing the shortcomings of unregulated banking, as Adam Smith claimed, the 1772 crisis exposed the risks of ill-conceived bank regulation.

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Tyler Beck Goodspeed is a Junior Fellow in Economics at the University of Oxford.

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Tyler Goodspeed has written a marvelous account of a Scottish bank failure in 1772 that ramified from Edinburgh to London and to American plantations, where it helped to transform threatened Virginia debtors into the rebels of 1776. Goodspeed brilliantly upends the lessons that Adam Smith and subsequent analysts drew from their near-death experience: precisely the unregulated profusion of small banks and the unlimited liability assumed by bankers cushioned against systemic crisis. What a delightfully written challenge to the conventional wisdom after our own near financial shipwreck! (Charles S. Maier, Harvard University)

Goodspeed’s novel interpretation of the Ayr crisis revises the historical record and advances our understanding of the workings of unregulated banking. It is masterly. (George Selgin, Director, Center for Monetary and Financial Alternatives, The Cato Institute)

This is an original, scholarly, and important contribution to financial history, to the political economy of monetary institutions, and to Adam Smith studies. The prose is vivid, and it is a pleasure to read. (Lawrence H. White, George Mason University)

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Book Description HARVARD UNIVERSITY PRESS, United States, 2016. Hardback. Book Condition: New. Language: English . Brand New Book. From 1716 to 1845 Scotland s banks were among the most dynamic and resilient in Europe, effectively absorbing a series of economic shocks that rocked financial markets in London and on the continent. Legislating Instability explains the seeming paradox that the Scottish banking system achieved this success without the government controls usually considered necessary for economic stability. Scottish banks operated in a regulatory vacuum: no lender of last resort, no monopoly on currency, no capital reserve requirements, and no limits on bank size. These conditions produced a robust, competitive banking system. Despite large speculative capital flows, a fixed exchange rate, and substantial external debt, Scotland navigated two financial crises during the Seven Years War. The exception was a severe crisis in 1772, seven years after the imposition of the first regulations on banking-the result of lobbying by large banks to weed out competition. While these restrictions did not cause the crisis, Tyler Beck Goodspeed argues, they undermined the flexibility and resilience of Scottish finance, thereby elevating the risk that another economic shock might threaten financial stability more broadly. The crisis of 1772, far from revealing the shortcomings of unregulated banking, as Adam Smith claimed, exposed the risks of ill-conceived regulation. Bookseller Inventory # AAU9780674088887

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Book Description HARVARD UNIVERSITY PRESS, United States, 2016. Hardback. Book Condition: New. Language: English . Brand New Book. From 1716 to 1845 Scotland s banks were among the most dynamic and resilient in Europe, effectively absorbing a series of economic shocks that rocked financial markets in London and on the continent. Legislating Instability explains the seeming paradox that the Scottish banking system achieved this success without the government controls usually considered necessary for economic stability. Scottish banks operated in a regulatory vacuum: no lender of last resort, no monopoly on currency, no capital reserve requirements, and no limits on bank size. These conditions produced a robust, competitive banking system. Despite large speculative capital flows, a fixed exchange rate, and substantial external debt, Scotland navigated two financial crises during the Seven Years War. The exception was a severe crisis in 1772, seven years after the imposition of the first regulations on banking-the result of lobbying by large banks to weed out competition. While these restrictions did not cause the crisis, Tyler Beck Goodspeed argues, they undermined the flexibility and resilience of Scottish finance, thereby elevating the risk that another economic shock might threaten financial stability more broadly. The crisis of 1772, far from revealing the shortcomings of unregulated banking, as Adam Smith claimed, exposed the risks of ill-conceived regulation. Bookseller Inventory # AAU9780674088887

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Book Description Harvard University Press, 2016. Book Condition: New. From 1716 to 1845 Scottish banks were among the most dynamic and resilient in Europe, effectively absorbing economic shocks that rocked markets in London and on the continent. Tyler Beck Goodspeed explains the paradox that Scotland's banking system achieved this success without the regulations Adam Smith considered necessary for economic stability. Translator(s): Goodspeed, Tyler Beck. Num Pages: 210 pages. BIC Classification: HBLL; KCZ; KFFK. Category: (P) Professional & Vocational. Dimension: 235 x 156. . . 2016. Hardcover. . . . . . Bookseller Inventory # V9780674088887

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Book Description Harvard University Press. Book Condition: New. From 1716 to 1845 Scottish banks were among the most dynamic and resilient in Europe, effectively absorbing economic shocks that rocked markets in London and on the continent. Tyler Beck Goodspeed explains the paradox that Scotland's banking system achieved this success without the regulations Adam Smith considered necessary for economic stability. Translator(s): Goodspeed, Tyler Beck. Num Pages: 210 pages. BIC Classification: HBLL; KCZ; KFFK. Category: (P) Professional & Vocational. Dimension: 235 x 156. . . 2016. Hardcover. . . . . Books ship from the US and Ireland. Bookseller Inventory # V9780674088887

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