Free Banking vanished as the Wild West faded into history. In return, we got a more secure and regulated world. But was something lost in the trade - freedom, experimentation, or the spirit of decentralization?

Salmon P. Chase’s National Banking System (1863) was born from Civil War needs: a unified currency and federal bond market. This system laid the foundation for the Federal Reserve in 1913.

What went wrong with the Free Banking system?
1️⃣ Currency values were inconsistent
2️⃣ Banks failed often
3️⃣ Economic benefits weren’t evenly distributed across regions

‘Free Banking’ in 19th-century USA: Meet state rules, hold government bonds, and issue your own currency. Your notes’ value? Entirely tied to your bank’s reputation and financial health. Risky, yet fascinating.

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6. Controlling Money Supply
Expands or contracts the money supply to ensure economic stability.
💰Example: Bank of Japan’s quantitative easing program (1990s).

5. Repurchase Agreements (Repos)
Provides short-term liquidity by buying assets with a promise to resell.
🔄 Example: Federal Reserve used repos heavily in 2019 to address cash shortages.

4. Changing Interest Rates
Adjusts rates to control inflation and stimulate growth.
📊 Example: Bank of England slashed rates to 0.1% during COVID-19 (2020).

3. Buying/Selling Government Bonds
Influences interest rates and liquidity.
📉 Example: ECB purchased bonds during the Eurozone debt crisis (2010).

2. Open Market Operations
Buys/sells its currency to stabilize exchange rates.
🌍 Example: Swiss National Bank intervened to weaken the Swiss franc in 2011.

What do modern central banks do?
1. Lender of Last Resort
Provides emergency funding to prevent bank failures.
🏦 Example: Federal Reserve saved U.S. banks during the 2008 financial crisis.

Oddly enough, first central banks (e.g. Bank of England established in 1694) appeared as private entities helping governments raise public funds (mainly to finance wars). They operated much like modern investment banks but had a unique advantage: the authority to issue official currency

#economics #france #centralbank #money #inflation #bubble

(6) Lesson: monetary expansion without economic growth is just feeding the beast with empty calories.
Or in other words: generate value in the reality not in your imagination

(5) Long story short: they created the Mississippi Bubble by issuing more and more money to help public buy more shares and thus inflating a share price. Outcome: inflation, eroded trust in the currency, and the collapse of both the Mississippi Company and the Banque Royale 💥

(4) France started talking its existing lenders into swapping the national debt for shares in the Mississippi Company.

(3) They decided to sell a ton of shares to the public, but the catch was that you could only buy them with the paper money the Banque Royale was printing. This way, he connected the new currency to the success of a supposedly "promising" company.

(2) Law also founded the Mississippi Company with a monopoly on trade with French colonies in North America and the West Indies. How to promote this new venture and also save French economy from the debt?

(1) John Law was, in modern terms, a Minister of Finance. In 1716, he established the Banque Générale, a private bank authorized to issue paper money. The following year, at Law's request, the bank was nationalized and renamed the Banque Royale, becoming France's central bank