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Contagious Bank Failures in a Free Banking System: A Persistent Misunderstanding

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  • Bédard Mathieu

    (Faculté d’économie et de gestion, Aix-Marseille Université, Aix-en-Provence, France Toulouse School of Economics, Université Toulouse 1 Capitole, Toulouse, France)

Abstract

A recurring citation in systemic risk literature reviews (P. Aghion, P. Bolton, and M. Dewatripont. 2000. “Contagious Bank Failures in a Free Banking System.” European Economic Review 44:713–18) offers a model where what they describe as a free banking system is vulnerable to contagious bank runs through clearinghouse loans. The paper ignores key contributions to both free banking and financial history literature, such that the paper is of little relevance to the understanding of the stability of both free banking systems and clearinghouse arrangements. Our criticism concentrates on the institutions of banking absent or misrepresented. It is argued that their conclusions are inapplicable to free banking.

Suggested Citation

  • Bédard Mathieu, 2014. "Contagious Bank Failures in a Free Banking System: A Persistent Misunderstanding," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 20(1), pages 71-78, July.
    • Handle: RePEc:bpj:jeehcn:v:20:y:2014:i:1:p:8:n:5
    DOI: 10.1515/jeeh-2014-0005
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    References listed on IDEAS

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    1. Gherity, James A, 1995. "The Option Clause in Scottish Banking, 1730-65: A Reappraisal," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 713-726, August.
    2. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1.
    3. Cowen, Tyler & Kroszner, Randall, 1989. "Scottish Banking before 1845: A Model for Laissez-Faire?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 221-231, May.
    4. George A. Selgin & Lawrence H. White, 1994. "How Would the Invisible Hand Handle Money?," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1718-1749, December.
    5. Gorton, Gary & Mullineaux, Donald J, 1987. "The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 457-468, November.
    6. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
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