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Books > History > History of specific subjects > Economic history
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Legislating Instability - Adam Smith, Free Banking, and the Financial Crisis of 1772 (Hardcover)
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Legislating Instability - Adam Smith, Free Banking, and the Financial Crisis of 1772 (Hardcover)
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From 1716 to 1845, Scotland's banks were among the most dynamic and
resilient in Europe, effectively absorbing a series of adverse
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. Eighteenth-century Scottish banks operated in a
regulatory vacuum: no central bank to act as lender of last resort,
no monopoly on issuing currency, no legal requirements for
maintaining capital reserves, and no formal limits on bank size.
These conditions produced a remarkably robust banking system, one
that was intensely competitive and served as a prime engine of
Scottish economic growth. Despite indicators that might have seemed
red flags-large speculative capital flows, a fixed exchange rate,
and substantial external debt-Scotland successfully navigated two
severe financial crises during the Seven Years' War. The exception
was a severe financial crisis in 1772, seven years after the
imposition of the first regulations on Scottish banking-the result
of aggressive lobbying by large banks seeking to weed out
competition. While these restrictions did not cause the 1772
crisis, Tyler Beck Goodspeed argues, they critically undermined the
flexibility and resilience previously exhibited by Scottish
finance, thereby elevating the risk that another adverse economic
shock, such as occurred in 1772, might threaten financial stability
more broadly. Far from revealing the shortcomings of unregulated
banking, as Adam Smith claimed, the 1772 crisis exposed the risks
of ill-conceived bank regulation.
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