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This is a pretty thorough write up of the history of free banking (Carter has been focusing on stablecoins for a while).
I particularly enjoyed this description Carter quotes from a World Bank working paper:
The Royal Bank of Scotland, for example, would attempt to gather up as much of the outstanding note issue as possible from its rival, the Bank of Scotland. The bank hired people called “note pickers” to collect the rival’s notes, some of whom might even offer a little reward to individuals who would exchange their Bank of Scotland notes for the Royal Bank’s notes. The note pickers would then simultaneously converge upon the Bank of Scotland and demand: “redeem these notes as you promised, give us the gold now.” Because of this market mechanism – which could be thought of as runs on a bank – these banks, which were moving toward a fractional reserve system, could not reduce their reserves by too much (because of the threat of a redemption attack by their rivals). This mechanism was used by both large and small banks. Competitive rivalry thus had the salubrious effect of forcing rivals to maintain reasonable reserve ratios. And this important aspect of market discipline emerged naturally.
Carter has an excellent comparison of free banking and stablecoins at the end of the piece. His conclusion is that the comparison is not apt:
Stablecoins are much more comparable to money market mutual funds, and even within that cohort, they are on the more secure side.
I couldn't quite tell if Carter goes as far as George Selgin (he does provide this quote):
In this case the history is a red herring because the issues are different, the assets are different, the analogies that we have been offered are unreliable both because the old stuff has been misrepresented, and because the new stuff is much more heterogeneous than it has been presented to be. Trying to make stablecoins fit into wildcat or antebellum free banking as an analog – or money market funds for that matter – is not a good way to proceed. These things should be examined on their current merits.
123 sats \ 0 replies \ @siggy47 23h
Nic is a smart guy. He's working to make sure stablecoins are healthy so all his shitcoins can prosper.
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I recall reading about the cat and mouse game between note pickers and banks in the Wildcat period.
Maybe this is part of what was misrepresented, but it was fun reading about banks being intentionally located in hard to reach places to make redemption more difficult.
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Only read parts but the message at the end is powerful. This article's legit! Good share.
But it remains the case that central bankers, academics, and politicians are tempted by the specious parallels between stablecoins and wildcat banks, as sometimes unreliable private issuers of notes into circulation. I don’t strictly blame them because the similarities are apparent on the surface level. However, in so doing, they rely on a fictionalized history of free banking, one that omits the very real success stories in Scotland and Canada, confuses the root causes for the instability of the American episode, and overstates the significance and prevalence of “wildcat” banks. Genuine laissez-faire banking is worth studying as a testament to the power of markets and incentives to create stable financial conditions with no central authority. Everyone in the crypto sector should be aware of it. And central bankers, though they may not like the implications of the historical record, have no excuse.
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Now that the ETFs a will allow in-kind redemptions this idea of “note pickers” sounds like a good idea to stress test the ETFs. This type of attack could be done by whales or other entities buying into the ETFs and, like the note pickers, redeem it for Bitcoin.
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Really appreciate this write-up a great mix of historical context and modernpreference. The bit about "note pickers" is wild… almost feels like physical mempool sniping. 😅 but still It’s fascinating how free banking enforced reserve discipline through direct competition something stablecoins don’t face in the same way. I liked Carter’s comparison to money market funds, especially with the emphasis on how different today’s assets and architectures are. The Selgin quote really nails it: maybe instead of forcing neat historical analogies, we need frameworks that reflect how structurally unique stablecoins actually are.
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