Today's Wall Street Journal has an interesting story about an ice cream parlor in Pittsburgh that operates a small "banking" business on the side. The shop owner, Ethan Clay, accepts deposits and offers 5.5% monthly interest, paid in the form of store credit, redeemable in ice cream, coffee, waffles, etc. He'll extend small loans for a flat rate and will cash checks. It's an honest business and his customers, are delighted to participate.
Naturally, the State of Pennsylvania is doing everything it can to shut him down. The Journal quotes Ed Novak, a spokesman for the Pennsylvania Department of Banking: "We are going to do something. You can't mess with people's money." It's hard to beat the irony of a banking regulator complaining about "messing with people's money." How, one wonders, would Mr. Novak describe what his overlords at the Federal Reserve have been doing? Flooding the market with dollars, artificially levitating the stock market and depressing interest rates -- does he imagine that none of this (all brought to you by the unelected mandarins at the Federal Reserve) has "messed" with the value of everybody's money?
As the Journal reports, the big problem is that the State isn't exactly sure how to shut down Mr. Clay. The article quotes Richard Sylla, financial historian at NYU, who observes that there is a common-law right to engage in banking. But private banks have fallen out of favor because they lack government-backed insurance. Fair enough, but if the customers are willing to take a chance in return for 5.5% monthly interest, payable in ice cream, why should the State intervene? Mr. Novak warns that a return to the "private banks" of the nineteenth century is too risky. "Banking in the 19th century was a hit-or-miss proposition," he says.
Worse than today? Consider this report from Cato, which examined the history of nineteenth century banking, in which both state-chartered and unchartered "free" banks issued their own banknotes without any central coordination from the federal government.
By 1860 there were more than 1,600 private corporations issuing banknotes and an estimated 8,370 varieties of notes "in form, color, size, and manner of security." . . . The U.S. economy grew at an average rate of 4.4 percent per annum over this period, while prices fell at an average annual rate of 0.1 percent. GDP was 20 times higher at the end of the period, while the price level remained roughly constant, indicating that competing banks provided neither too many nor too few notes during this period of strong economic growth.
One might argue that the economy could use more entrepreneurs like Mr. Clay "messing" with people's money.