ARE A BANKING CRISIS A FREE-MARKET PHENOMENON?

Abstract

In this paper, the author argues that the "conventional theory" on banking crises is not consistent with empirical facts. That theory asserts that fractional reserve banking is crisis-prone, and that modem central banks and their regulations are the best way to avoid such crises. In contrast, the author provides an alternative "legal restrictions" theory that puts the blame for the majority of financial crises on legal restrictions on the market mechanism and on errors of commission and ommission of monetary authorities. In his empirical analysis he argues that most economists rely on the U.S. and U.K. financial historical events, and that, even in these relatively narrow experiences, it is possible to show that the conventional theory does not explain the real causes of the several crises surveyed.