Jeffrey A. Mironmiron@fas.harvard.edu
Related Freeman Articles
Drug Prohibition Is Deadly
JULY 09, 2010 by GEORGE C. LEEF
Is Eliminating Gun Ownership a Desirable Policy Goal?
JULY 06, 2010 by JEFFREY MIRON
APRIL 24, 2009 by JEFFREY MIRON
f banks can suspend convertibility, depositors know that runs merely precipitate suspension. This greatly reduces depositor incentive to panic and run. Allowing banks the right to suspend would probably not eliminate all runs, but it would plausibly limit them to banks that are insolvent rather than merely illiquid.The question, then, is whether a banking system with less regulation—no prohibition on suspension and no deposit insurance—might work better than current regulation—prohibitions on suspension, combined with deposit insurance and balance-sheet regulation.The evidence from the pre-1914 era suggests that the regime with less regulation has promise. Banks were not legally allowed to suspend convertibility during this era, but many did so anyway, sometimes with explicit approval of, or even encouragement from, regulators. This did not eliminate runs and panics, but the record suggests that suspension reduced contagion and failure in these episodes.