The Mystery of Banking

Appendix: The Myth of Free Banking in Scotland
281
18
This policy conclusion is completely consistent with Mises’ objective:
“What is needed to prevent any further credit expansion is to place the
banking business under the general rules of commercial and civil laws com-
pelling every individual and firm to fulfill all obligations in full compliance
with the terms of the contract.” Mises, 
Human Action
, p. 443. For more on
fractional-reserve banking as embezzlement, see Rothbard, 
Mystery of Bank-
ing
, pp. 91–95. 
19
White, 
Free Banking
, pp. 71, 75, 135. Also see Marion R. Daugherty,
“The Currency-Banking Controversy, Part I,” 
Southern Economic Journal 
9
(October 1942), p. 147. 
Appendix.qxp 8/4/2008 11:38 AM Page 281

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table of currency-banking–free-banking school adherents (p.
135).
19
White might have avoided confusion if he had not, as in the
case of Scottish banking, apparently failed to consult Frank W.
Fetter’s 
Development of British Monetary Orthodoxy
, although
the book is indeed listed in his bibliography. Fetter notes that
Smith, in his parliamentary testimony, clearly enunciates the cur-
rency principle. Smith, he points out, was concerned about the
fluctuations of the commercial banks as well as of the Bank of
England and flatly declared his own currency school objective: “it
is desirable in any change in our existing system to approximate
as nearly as possible to the operation of a metallic currency; it is
desirable also to divest the plan of all mystery, and to make it so
plain and simple that it may be easily understood by all.”
20
Smith’s proposed solution was the scheme derived from Ricardo,
of creating a national bank for purposes of issuing 100 percent
reserve bank notes. 
The same course was taken, in his testimony, by Richard Cob-
den, the great leader of the Manchester laissez-faire movement.
Attacking the Bank of England and any idea of discretionary con-
trol over the currency, whether by the Bank or by private com-
mercial banks, Cobden declared: 
I hold all idea of regulating the currency to be an absurdity;
the very terms of regulating the currency and managing the
currency I look upon to be an absurdity; the currency
should regulate itself; it must be regulated by the trade and
commerce of the world; I would neither allow the Bank of
England nor any private banks to have what is called the
management of the currency. . . . I would never contemplate
any remedial measure, which left it to the discretion of indi-
viduals to regulate the amount of currency by any principle
or standard whatever.
21
282
The Mystery of Banking
20
Quoted in Fetter, 
Development
, p. 176. 
21
Ibid. 
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In short, the fervent desire of Richard Cobden, along with
other Manchesterians and most other currency school writers,
was to remove government or bank manipulation of money alto-
gether and to leave its workings solely to the free-market forces
of gold or silver. Whether or not Cobden’s proposed solution of
a state-run bank was the proper one, no one can deny the fervor
of his laissez-faire views or his desire to apply them to the diffi-
cult and complex case of money and banking. 
Let me now return to Professor White’s cherished free-bank-
ing writers and to his unfortunate conflation of the very different
hard-money and soft-money camps. The currency school and the
free bankers were both launched upon the advent of the severe
financial crisis of 1825, which, as usual, was preceded by a boom
fueled by bank credit. The crisis brought the widespread realiza-
tion that the simple return to the gold standard, as effected in
1821, was not enough and that something more had to be done
to eliminate the instability of the banking system.
22