The Rationale of Central Banking and the Free Banking Alternative is a very important work on the rise of central banking, one that proves that it was driven by politics and the supposed needs of the state. It was written as a dissertation under F.A. Hayek and first appeared in 1936, at a time when the author had begun to serve as economic assistant at the Imperial Economic Committee.
A central bank, she shows, is founded with the aid, either direct or indirect, of government, and is able to fall back on the government for protection from the consequences of its acts. Its profits are privatized and its losses socialized. The central bank, which cannot meet its obligations, is allowed to suspend payment.
She also sets a high standard for what should qualify as free banking. Obligations must be met on demand in the generally accepted medium. No bank would have the right to call on the government or on any other institution for special help in time of need. No bank would be able to give its notes forced currency by declaring them to be legal tender for all payments, and it is unlikely that the public would accept inconvertible notes of any such bank except at a discount varying with the prospect of their again becoming convertible.
The introduction is by Leland Yeager, who writes: "Academic discussion of radical, private enterprise-oriented monetary ideas has become respectable again. Public discussion and political feasibility may follow in time. Vera Smith's scholarly review and judicious assessments of the experience and theory that bear on the issues of free banking and central banking should play a prominent role in the ongoing discussions."
ISBN 0-86597-087-4
softcover: 216 pgs.
See also
The Theory of Money and Credit