The Mystery of Banking

290
The Mystery of Banking
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White’s free bankers were themselves officials of private commercial
banks. Gilbart had been a bank official all his life and had long
been manager of the London & Westminster Bank. Bailey was
chairman of the Sheffield Banking Company. Consider, for exam-
ple, the newly founded 
Bankers’ Magazine
, which White lauds as
a crucial organ of free-banking opinion. White laments that a
writer in the June 1844 issue of 
Bankers’ Magazine
, while critical
of the currency principle and monopoly issues for the Bank of
England, yet approved the Peel Act as a whole for aiding the prof-
its of existing banks by prohibiting all new banks of issue. 
And yet, Professor White resists the realization that his entire
cherished free-banking movement—at least in its later inflationist
“need of trade” manifestation—was simply a special pleading on
behalf of the inflationary activities of the commercial banks. Strip
away White’s conflation of the earlier hard-money free-banking
theorists with the later inflationists, and his treasured free-bank-
ing movement turns out to be merely special pleaders for bank
chicanery and bank credit inflation. 
Appendix: The Myth of Free Banking in Scotland
291
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Appendix.qxp 8/4/2008 11:38 AM Page 292

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Austrian business cycle theory, 209
Bagehot, Walter, 133, 149, 185
Bailey, Samuel, 289–90
bailment, deposit banking and, 87
balance of payments, deficit in, 121
balance sheet, 76–83 
warehouse receipts appearing on, 87
bank cartels, free market incentives
against, 123
bank deposits. 
See
demand deposits
bank notes
fractional reserve banking and, 104 
monopoly privilege of issuing, 125,
181, 182, 187, 193, 235 
outlawing of small-denomination, 283
Bank of England
origin of, 177–83 
reform of, 186–89 
role in Scotland, 269–70
Bank of North America, 191–93
bank runs 
threat against credit expansion,
112–14
under central banking, 133
Banking School, 151n, 277–78
banking 
extent of, 112
branch, 216, 226
central 
100 percent reserve, 187 
bankers’ bank function of, 126 
coordinated credit expansion
under, 133–36 
determining total reserves of,
141–60 
gold standard and, 126, 132, 133 
history of, xv, xix
lender of last resort function of,
133, 149–53, 230 
limits on credit expansion
removed by, 125–39 
the National Banking System,
219–34 
operations of, xix
origins of, 177–90 
origins in the United States,
191–206 
process of bank credit expansion,
161–76 
proponents of, 232–34 
Treasury and, 170–76 
in the United States up to the
Civil War, 207–18
commercial, 98, 107 
deposit, 85–110 
100 percent reserve, 95, 187,
263–64, 280 
embezzlement and, 90–94 
law on, 91–93
free 
definition of, 111 
limits on bank credit inflation
under, 111–24 
school, 278, 283–91 
Scotland and, 183–86, 189–90,
269–91
in the United States, 197,
214–15, 276n
fractional reserve, 93, 94–103 
business cycle and, 103, 114,
120–22 
counterfeiting in, 98 
deflationary pressures on,
101–03
fight against, 214 
fraud in, 96–97 
gold coin standard vs., 103
inflationary, 97–98, 100–01, 210 
as mix of deposit and loan bank-
ing, 107–10 
money warehouse receipts and,
104–10 
time structure of assets under,
98–99
293
I
NDEX
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investment, commercial banking vs.,
107n
loan, 75–84 
bankruptcy in, 83 
workings of, 77–83
bankruptcy, under central banking, 132
banks
bailouts of, 273 
country banks, of England, 182, 184
culpability of, 266–67
failures of, 271 
limited clientele domestically, 114–20 
limited clientele internationally,
120–22
state banks, 196–98, 202, 204–06,
227–28, 231
Barnard, Frederick, 10n
barter, limitations of, 3–4
Biddle, Nicholas, 207–08
bimetallism, 9n, 210
Birmingham School, 285
Blackwood’s