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

Tyler Beck Goodspeed

Hardcover

ISBN 10: 0674088883 ISBN 13: 9780674088887

Publisher: Harvard University Press, 2016

Synopsis

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.

About this title

Review:

"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

About the Author:

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

About this edition

• Publisher: Harvard University Press
• Publication date: 2016
• ISBN 10: 0674088883
• ISBN 13: 9780674088887
• Binding: Hardcover
• Number of pages: 224