An Unnecessary Evil: How Canada Ended up Insuring Bank Deposits

George SelginI ' ve often drawn attention here tothe virtues of the Canadian banking system, especially as it was between the passage of Canada ' s first Bank Act in 1871 and the establishment of the Bank of Canada in 1935. Afterthe Scottish banking system that flourished between 1716 and 1845, it is generally regarded, by myself and other members of theModern Free Banking school, as the next closest thing to a genuinely " free " banking system. We also claim that such systems tended to be more stable than ones in which governments interfered more heavily.In Canada ' s case, this claim inevitably raises several questions. If Canada ' s relatively " free " banking system was so stable, why did the Canadian government establish the Bank of Canada in 1935? And why did it establish a Canadian Deposit Insurance Corporation (CDIC) some three decades later? According toDouglas Diamond and Phillip Dybvig, among others, central banks and deposit insurance are solutions to fractional reserve banking systems ' supposedly inherent instability. Why, then, should Canada have resorted to either unless it was because its banking system was far from being the paragon of stability free bankers claim it to have been?Mike Bordo and Angela Redishaddressed the question concerning the Bank of Canada decades ago. Instead of finding any support for the view that the Bank was established to serve as a lender of last resort to a banking system that had proven to be unstable without one, they conclude t...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs