[Eliezer]

Are business cycles in the modern sense (unemployment that lasts for longer than six months) known to happen in the presence of free banking and absent a central bank? Actual question. It matters because we know how this happens when a central bank controls the currency supply and allows NGDP to drop. It's not obvious to me that this happens with free banking.

[danmaz74]

The US only got a central bank - and a pretty limited one at that - in 1913, exactly because the many panics that hit the US money markets were too severe without a lender of last resort to act as a moderator.

* https://en.wikipedia.org/wiki/Panic_of_1819 a U.S. recession with bank failures; culmination of U.S.'s first boom-to-bust economic cycle

* https://en.wikipedia.org/wiki/Panic_of_1837 a U.S. recession with bank failures, followed by a 5-year depression

and so on: https://en.wikipedia.org/wiki/List_of_economic_crises#19th_c...

[logicchains]

The question would then be, after the US got a central bank, have the recessions got less severe? The Great Depression was arguably greater than any of those prior to 1913.

[hyperpape]

Not sure how you weight the great depression, but I believe* the period after the great depression through the 2008 financial crisis featured less severe business cycles than prior to the central bank. The repeated crashes of the late 19th century really were very severe.

See also: https://en.wikipedia.org/wiki/Great_Moderation (though that's a shorter period).

* I know a little about this, but not that much. Take what I say with a big grain of salt.

[danmaz74]

In the 19th century, a panic in the US was limited to the US - it was still a peripheral economy compared to Europe. After WWI, the US had most of the gold reserves in the World, Europe was riddled with debt (to the US) and very slow to recover. The Great Depression was greater because it affected the whole World, given the centrality the US had assumed in World trade.

But, more importantly, between the Great Depression and the last crisis of 2008, the Western World never saw any panic as big as those of the 19th century: the Fed had learned much better how to be the World banker, and the US had learned that, after winning a war, rebuilding international trade was much important than collecting war debts.

[stephen_g]

Central banks don't 'control' the currency supply... Money creation by private bank lending is where most money in modern economies comes from, and adjusting interest rates is such a blunt instrument that they are really powerless to meaningfully control it. Central banks are important for a currency that is stable and usable long-term (if managed properly), but really should be working with the Government to control the money supply through the Government's fiscal measures (taxing and spending) and by prudential (lending) regulation, instead of the current ineffective Monetarist fantasy...

[nerdponx]

Isn't this exactly what happened in the US in the 1800s? A panic and a crash every few years.

[lend000]

Seems like it's completely unavoidable for there to be cycles; central banks and regulations intended to smooth the economy just seem to expand the cycles (longer booms and longer busts) and concentrate malinvestment in different areas (real estate debt in the last crash, for example).

[eesmith]

‘Fragile by Design: The Political Origins of Banking Crises and Scarce Credit’, by Charles Calomiris and Stephen Haber. Quoting http://press.princeton.edu/titles/10177.html :

> Why are banking systems unstable in so many countries—but not in others? The United States has had twelve systemic banking crises since 1840, while Canada has had none. The banking systems of Mexico and Brazil have not only been crisis prone but have provided miniscule amounts of credit to business enterprises and households.

> Analyzing the political and banking history of the United Kingdom, the United States, Canada, Mexico, and Brazil through several centuries, Fragile by Design demonstrates that chronic banking crises and scarce credit are not accidents. Calomiris and Haber combine political history and economics to examine how coalitions of politicians, bankers, and other interest groups form, why they endure, and how they generate policies that determine who gets to be a banker, who has access to credit, and who pays for bank bailouts and rescues.

Paper by the authors available from https://www.frbatlanta.org/-/media/documents/news/conference... .

> Canadian banks historically had balance sheets like other banks, and participated in complex global interbank networks since the early 19th century. Yet Canadian banks, throughout their history, avoided systemic banking crises – with the exception of two short-lived suspensions of convertibility in 1837 and 1839 in response to crises originating in the United States. Moreover, prudential regulation was absent for much of Canada’s history, as was a central bank (until 1935). According to the structural theory of crises, the exposure of Canadian banks to liquidity risk should have been higher than in many other countries, given that the Bank of Canada did not come into existence until 1935. According to the externalities theory and the myopia theory, the absence of activist prudential regulation in Canada during most of its history should have been associated with a higher frequency of banking crises, but it was not.

Note that you write "central banks and regulations intended to smooth the economy" but at that last quote points out, "prudential regulation was absent for much of Canada’s history", so something is incomplete in your understanding.

[JackFr]

Another way to look at this is that for most of the period under consideration, the Canadian economy was an order of magnitude smaller than both Britain and America. For the bulk of the period under consideration, Canadian currency was fixed to the pound Sterling, which had the Bank of England. Canada gained independence in 1867 and in 1871 passed the Bank Act (and for the bulk of the period under consideration was subject to English common law, and Canadian Acts could be voided by the House of Commons.)

That being said, I admit to not having read the paper. The authors' ultimate conclusion may stand, but that their exemplar is a British Dominion adds some confounding details.

[eesmith]

Their "happy six", defined as "free of systemic crises since 1970", are Australia, Canada, Hong Kong, Malta, New Zealand, and Singapore.

They do point out the connections to British rule. They give some other reasons as well.

A test for the importance of being fixed to the pound Sterling, etc., is to look to other regions under British rule, like Jamaica, Mauritius, Kenya, Gambia, and Cyprus, and evaluate their banking crises.

I know nothing about that history, just wanted to pointed out that it is, in principle, a testable prediction.

[lend000]

The major gap in your understanding: Bank insolvency != business cycle. Canada does indeed experience business cycles like every other significant economy. There are some examples in this article, if you don't believe me:

http://www.thecanadianencyclopedia.ca/en/article/business-cy...

[eesmith]

Does that meant that your comment had little or nothing to do with the "panic and a crash every few years" from the comment of nerdponx that you were replying to?

Because I thought they were connected, and was following that same topic of "panic and crash".

[lend000]

I do not know why you think "panic and crash" is specific to a run on the bank / forced bank restructuring. By the way, the original comment was about business cycles in general (that nerdponx replied to):

> Are business cycles in the modern sense (unemployment that lasts for longer than six months) known to happen in the presence of free banking and absent a central bank? Actual question. It matters because we know how this happens when a central bank controls the currency supply and allows NGDP to drop. It's not obvious to me that this happens with free banking.

Hope that clears everything up. I don't like arguing semantics for virtually no reason, but in this case it appears you legitimately misunderstood that the terms business cycle, market panics, and crashes are not specific to banks.

[neilwilson]

banks just settle business credit. That's their job. so business credit is free banking. Everybody can create money. The trick is getting somebody else to accept it.