Abstract
In the standard approach to the above question, as evidenced, for example, by the papers by Fama (1980) and Tobin (1985), the emphasis has been placed on the special (monetary) features of bank liabilities. Particularly in the American literature, a commercial bank is often regarded as an otherwise standard portfolio manager of a set of securities, with the peculiarity, however, that these security holdings are funded by capital-certain monetary liabilities. Consequently, because bank deposits are redeemable into outside high-powered money at par on a first come first served basis, any doubts about the solvency of the commercial bank, i.e. whether the value of its portfolio is sufficient to repay the claims of its depositors, can lead to a run on the bank — a contagious panic. If, however, the value of that portfolio could be ascertained with certainty it is arguable that some simple reforms could virtually prevent the likelihood either for such a panic to develop or for an insolvency to ensue, in the course of which the depositors might lose some part of the ‘capital certain’ value of their deposits.
My thanks are due to my discussants, Leslie Pressnell and Geoffrey Wood, for their helpful comments and criticisms; and to George Benston for his persistently acute and stimulating contributions and suggestions. That I continue to make errors is not their fault.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Similar content being viewed by others
References
ANDREW, A. P. (1908) ‘Substitutes for Cash in the Panic of 1907’, Quarterly Journal of Economics (August).
ASPINWALL, R. C., et al. (1989) Shadow Fiancial Regulatory Committee, ‘An Outline of a Program for Deposit Insurance and Regulatory Reform’, Statement No. 41 (mimeo, 13 February).
BENSTON, G. J. and KAUFMAN, G. G. ‘Risk and Solvency Regulation of Deposit Institutions: Past Policies and Current Options’, Salomon Brothers Center for the Study of Financial Institutions, Monograph Series in Finance and Economics, Monograph 1988–1.
BENSTON, GG. J., R. D. BRUMBAUGH Jr., J. M. GUTTENTAG, R. J. HERRING, G. G. KAUFMAN, R. E. LITAN and K. E. SCOTT (1989) ‘Restructuring America’s Financial Institutions’, pamphlet Washington DC The Brookings Institution.
DIAMOND, D. W. (1984) ‘Financial Intermediation and Delegated Monitoring’, Review of Economic Studies, Vol. 51, No. 3. pp. 393–414.
DOWD, K. (1988) ‘Option Clauses and the Stability of a Laisser Faire Monetary System’, Journal of Financial Services Research, No. 1, pp. 319–33.
FAMA, E. (1980) ‘Banking in the Theory of Finance’, Journal of Monetary Economics, 6, No. 1, pp. 39–57.
FRIEDMAN, M. and SCHWARTZ, A. J. (1963) A Monetary History of the United States, 1867–1960, National Bureau of Economic Research (Princeton, NJ Princeton University Press).
GALE, D and M. HELLWIG (1985) ‘Incentive-compatible Debt Contracts: The One-Period Problem’, Review of Economic Studies, Vol. 52, No. 4.
GOODHART, C. A. E. (1989) ‘Review of Selgin’s, The Theory of Free Banking’, Economic Affairs. Vol. 9, No. 6.
KAREKEN, J. and WALLACE, N. (1978) ‘Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition’, The Journal of Business, Vol. 51, No. 3 (July).
KAUFMAN, G. G. (1987) ‘The Truth About Bank Runs’, Staff Memoranda, Federal Reserve Bank of Chicago, SM-87-3 (April).
KEYNES, J. M. (1931) ‘The Consequences to the Banks of the Collapse of Money Values’, in Essays in Persuasion, Vol. IX of the Collected Writing of John Maynard Keynes (Macmillan for the Royal Economic Society).
LAIDLER, D. E. W. (1988) ‘British Monetary Orthodoxy in the 1870s’, Oxford Economic Papers, Vol. 40, pp. 74–109.
MATTHEWS, R. C. O. (1954) A Study in Trade-Cycle History: Economic Fluctuations in Great Britain, 1833–1842 (Cambridge: Cambridge University Press).
MILES, D. K. (1989) ‘Some Economic Issues in the Regulation of Financial Markets’, London School of Economics Financial Markets Group, Special Paper #13 (mimeo, March).
MURPHY, A. E. (1972) ‘The Nature of Money — with Particular Reference to the Irish Bank Closure’, Trinity College, Dublin (mimeo).
RICARDO, D. (1816/1951) ‘Proposals for an Economical and Secure Currency, 1816’, in The Works and Correspondence of David Ricardo, ed. P. Sraffa, Vol. IV, pp. 43–141. (Cambridge: Cambridge University Press).
RICARDO, D. (1824/1951 ‘Plan for the Establishment of a National Bank’, in The Works and Correspondence of David Ricardo, ed. P. Sraffa, Vol. IV, pp. 271–300 (Cambridge: Cambridge University Press.
SELGIN, G. A. (1988) The Theory of Free Banking (Totowa, N. J: Rowan and Littlefield).
SHADOW FINANCIAL REGULATORY COMMITTEE (1989); Messrs. Aspinwall, Benston, et al. ‘An Outline of a Program for Deposit Insurance and Regulatory Reform’, Statement No. 41 (mimeo, 13 February).
TIMBERLAKE, R. (1978),, The Origins of Central Banking in the United States (Cambridge, Mass: Harvard University Press).
TIMBERLAKE, R. (1984) ‘The Central Banking Role of Clearinghouse Associations’, Journal of Money, Credit and Banking, Vol. 16, No. 1, pp. 1–15.
TOBIN, J. (1985) ‘Financial Innovation and Deregulation in Perspective’, Bank of Japan Monetary and Economic Studies, Vol. 3, No. 2.
WHITE, L. H. (1984) Free Banking in Britain: Theory, Experience, and Debate, 1800–1845 (Cambridge: Cambridge University Press).
BAGEHOT, W. (1862) ‘Limited Liability in Banking — I’ The Economist, 17 May 1862, reprinted in The Collected Works of Walter Bagehot, ed. Norman St John-Stevas, London, 1978, Vol. IX.
BAGEHOT, W. (1873) Lombard Street (London: John Murray).
BAGEHOT, W. (1875) Evidence to the Select Committee on Banks of Issue, British Parliamentary Papers 1875, Vol. IX, reprinted in Collected Works, Vol. XI.
BANK OF ENGLAND (1988a) Report, 1987–88, ‘Banking Act 1987’.
BANK OF ENGLAND (1988b) Quarterly Bulletin, February, The financial behaviour of industrial and commercial companies, 1970–86’.
FINANCIAL STATISTICS (1989). Her Majesty’s Stationery Office, London, for the Central Statistical Office, issue for May 1989.
GOODHART, C. A. E. (1972) The Business of Banking, 1891–1914 (London: Allen & Unwin).
MUNN, C. W. (1981) The Scottish Provincial Banking Companies, 1747–1864 (Edinburgh: John Donald).
PRESSNELL, L. S. (1956) Country Banking in the Industrial Revolution (Oxford: Clarendon Press).
ROCKOFF, Hugh (1986) ‘Walter Bagehot and the Theory of Central Banking’, in Capie, F. and Wood, G. E. (eds.), Financial Crises and the World Banking System (London: Macmillan).
THOMAS, W. A. (1978) The Finance of British Industry 1918–1976 (London: Methuen).
TOFT, K. S. (1970) ‘A mid-nineteenth century attempt at banking control’, Revue internationale d’histoire de la banque, Geneva.
WELBY, T. (1878) Welby Papers, Vol. 8 (British Library of Political and Economic Science).
WHITE, Lawrence H. (1984) Free Banking in Britain (Cambridge: Cambridge University Press).
ANDREW, A. P. (1908) ‘Substitutes for Cash in the Panic of 1907’, QJE, August.
BAGEHOT, W. (1873) Lombard Street (London: John Murray).
BENSTON, G. J. and KAUFMAN, G. (1988) Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options, Salomon Brothers Center for the Study of Financial Institutions, New York University. Monograph Series in Finance and Economics, Monograph 1988–1.
FRIEDMAN, M. and SCHWARTZ, A. J. (1986) ‘Has Government any Role in Money?’, JME, 17, pp. 37–62.
GILBERT, A. and WOOD, G. E. (1986) ‘Coping with Bank Failures: Some lessons from the United States and the United Kingdom’, FR Bank of St Louis Review, December, pp. 5–14.
HODGMAN, Donald R. (1963) Commercial Bank Loan and Investment Behaviour, Bureau of Economic and Business Research (University of Illinois Champaign, Illinois).
HORSEFIELD, J. K. (1941) ‘The Duties of a Banker’, Economica, February.
HUERTAS, T. (1985) Citibank 1812–1970 (Harvard UP).
MURPHY, A. E. (1972) ‘The Nature of Money — with Particular Reference to the Irish Bank Closure’, Trinity College, Dublin (Mimeo).
SAYERS, R. S. (1957) Central Banking after Bagehot (Oxford: Clarendon Press).
WILLIS, H. PARKER, and CHAPMAN, JOHN M. 1934) The Banking Situation (New York: Columbia University Press).
Editor information
Editors and Affiliations
Copyright information
© 1991 Forrest Capie and Geoffrey E. Wood
About this chapter
Cite this chapter
Goodhart, C.A.E. (1991). Are Central Banks Necessary?. In: Capie, F., Wood, G.E. (eds) Unregulated Banking. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-11398-9_1
Download citation
DOI: https://doi.org/10.1007/978-1-349-11398-9_1
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-11400-9
Online ISBN: 978-1-349-11398-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)